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 ~~September~~June 30, ~~2020~~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 ~~November 3, 2020,~~August 2, 2021, the registrant had outstanding ~~30,604,461~~30,800,985 shares of Class A voting common stock, each with $0.01 par value per share, excluding ~~161,503~~153,690 shares of restricted Class A common stock issued but not yet vested.


		Page
Part I. Financial Information

Item 1.	Financial Statements (Unaudited)	5

	Consolidated Statements of Financial Condition as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020	5

	Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020	6

	Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020	7

	Consolidated Statements of Changes in Shareholders’ Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020	8

	Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020	9

	Notes to Consolidated Financial Statements	10

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6866

Item 4.	Controls and Procedures	6866

Part II. Other Information

Item 1.	Legal Proceedings	6967

Item 1A.	Risk Factors	6967

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7067

Item 5.	Other Information	7067

Item 6.	Exhibits	7068

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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 aany potential government ~~shutdown;~~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;

● 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;

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

● continued consolidation in the financial services industry;

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

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

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

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

position;

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

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

● technological changes;

● the timely development and acceptance of new products and services, including in the digital technology space, and perceived overall value of these products and services by our clients;

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

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

● regulatory limitations on dividends from our bank subsidiary;

● changes in estimates of future ~~loan~~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;

● 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)


	September 30, 2020		December 31, 2019		June 30, 2021		December 31, 2020
ASSETS
Cash and due from banks	$	444,603	$	109,690	$	1,003,993	$	605,065
Interest bearing bank deposits		500		500		500		500
Cash and cash equivalents		445,103		110,190		1,004,493		605,565
Investment securities available-for-sale (at fair value)		572,523		638,249		605,798		661,955
Investment securities held-to-maturity (fair value of $324,720 and $183,741 at September 30, 2020 and December 31, 2019, respectively)		320,001		182,884
Investment securities held-to-maturity (fair value of $687,145 and $381,691 at June 30, 2021 and December 31, 2020, respectively)						687,635		376,615
Non-marketable securities		29,598		29,751		14,741		16,493
Loans		4,556,121		4,415,406		4,300,757		4,353,726
Allowance for credit losses		(60,979)		(39,064)		(49,030)		(59,777)
Loans, net		4,495,142		4,376,342		4,251,727		4,293,949
Loans held for sale		273,003		117,444		134,805		247,813
Other real estate owned		4,590		7,300		5,124		4,730
Premises and equipment, net		108,860		112,151		95,019		106,982
Goodwill		115,027		115,027		115,027		115,027
Intangible assets, net		15,017		11,361		22,360		17,928
Other assets		221,812		194,813		199,399		212,893
Total assets	$	6,600,676	$	5,895,512	$	7,136,128	$	6,659,950
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing demand deposits	$	1,533,676	$	1,184,945	$	2,437,328	$	2,111,045
Interest bearing demand deposits		976,133		738,496		555,865		514,286
Savings and money market		2,079,585		1,755,538		2,240,359		2,064,769
Time deposits		1,027,066		1,058,153		924,501		986,132
Total deposits		5,616,460		4,737,132		6,158,053		5,676,232
Securities sold under agreements to repurchase		23,904		56,935		22,957		22,897
Federal Home Loan Bank advances		—		207,675
Other liabilities		160,955		126,850		103,252		140,130
Total liabilities		5,801,319		5,128,592		6,284,262		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; 30,594,412 and 31,176,627 shares outstanding at September 30, 2020 and December 31, 2019, respectively		515		515
Common stock, par value $0.01 per share: 400,000,000 shares authorized; 51,487,907 and 51,487,907 shares issued; 30,800,985 and 30,634,291 shares outstanding at June 30, 2021 and December 31, 2020, respectively						515		515
Additional paid-in capital		1,010,145		1,009,223		1,011,200		1,011,362
Retained earnings		202,238		164,082		260,821		223,175
Treasury stock of 20,714,662 and 20,189,082 shares at September 30, 2020 and December 31, 2019, respectively, at cost		(424,621)		(408,962)
Treasury stock of 20,535,572 and 20,686,986 shares at June 30, 2021 and December 31, 2020, respectively, at cost						(422,365)		(424,127)
Accumulated other comprehensive income, net of tax		11,080		2,062		1,695		9,766
Total shareholders’ equity		799,357		766,920		851,866		820,691
Total liabilities and shareholders’ equity	$	6,600,676	$	5,895,512	$	7,136,128	$	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

For the nine months ended

September 30,

September 30,

2020

2019

2020

2019
Interest and dividend income:

Interest and fees on loans
$
47,974

$
55,708

$
150,672

$
164,478
Interest and dividends on investment securities

4,037

5,080

12,918

16,627
Dividends on non-marketable securities

221

417

945

1,299
Interest on interest-bearing bank deposits

70

167

179

581
Total interest and dividend income

52,302

61,372

164,714

182,985
Interest expense:

Interest on deposits

5,491

7,974

18,904

22,238
Interest on borrowings

96

1,613

1,420

5,305
Total interest expense

5,587

9,587

20,324

27,543
Net interest income before provision for loan losses

46,715

51,785

144,390

155,442
Provision for loan losses

1,200

5,690

17,630

10,463
Net interest income after provision for loan losses

45,515

46,095

126,760

144,979
Non-interest income:

Service charges

3,742

4,617

10,962

13,479
Bank card fees

4,039

3,752

11,206

10,946
Mortgage banking income

34,943

14,702

79,246

32,037
Bank-owned life insurance income

597

431

1,776

1,276
Other non-interest income

1,136

1,230

3,608

4,585
OREO-related income

75

27

103

147
Total non-interest income

44,532

24,759

106,901

62,470
Non-interest expense:

Salaries and benefits

38,614

33,522

108,251

92,079
Occupancy and equipment

6,878

6,825

20,854

20,428
Telecommunications and data processing

2,270

2,133

6,790

6,547
Marketing and business development

696

985

1,992

2,811
FDIC deposit insurance

409

58

744

1,049
Bank card expenses

1,275

1,288

3,334

3,521
Professional fees

714

743

2,082

2,598
Other non-interest expense

2,793

2,958

8,362

8,570
Problem asset workout

1,064

602

2,341

2,450
Gain on OREO sales, net

(119)

(6,514)

(25)

(7,200)
Core deposit intangible asset amortization

295

295

887

887
Banking center consolidation-related expense

432

898

2,140

898
Total non-interest expense

55,321

43,793

157,752

134,638
Income before income taxes

34,726

27,061

75,909

72,811
Income tax expense

6,833

5,419

14,487

11,965
Net income
$
27,893

$
21,642

$
61,422

$
60,846
Earnings per share—basic
$
0.91

$
0.69

$
1.99

$
1.95
Earnings per share—diluted

0.90

0.69

1.97

1.93
Weighted average number of common shares outstanding:

Basic

30,756,116

31,281,970

30,881,325

31,133,982
Diluted

30,924,223

31,508,999

31,070,997

31,537,334


	For the three months ended				For the six months ended
	June 30,				June 30,
	2021		2020		2021		2020
Interest and dividend income:
Interest and fees on loans	$	43,892	$	49,171	$	88,830	$	102,698
Interest and dividends on investment securities		4,121		4,250		8,021		8,881
Dividends on non-marketable securities		209		310		419		724
Interest on interest-bearing bank deposits		228		13		393		109
Total interest and dividend income		48,450		53,744		97,663		112,412
Interest expense:
Interest on deposits		3,576		6,087		7,563		13,413
Interest on borrowings		6		329		11		1,324
Total interest expense		3,582		6,416		7,574		14,737
Net interest income before provision for loan losses		44,868		47,328		90,089		97,675
Provision (release) expense for loan losses		(5,850)		10,271		(9,425)		16,430
Net interest income after provision for loan losses		50,718		37,057		99,514		81,245
Non-interest income:
Service charges		3,568		3,094		7,042		7,220
Bank card fees		4,614		3,654		8,687		7,167
Mortgage banking income		13,979		30,630		36,358		44,303
Bank-owned life insurance income		553		589		1,101		1,179
Other non-interest income		2,552		870		5,404		2,472
OREO-related income		—		—		35		28
Total non-interest income		25,266		38,837		58,627		62,369
Non-interest expense:
Salaries and benefits		31,439		36,457		64,962		69,637
Occupancy and equipment		6,131		7,078		12,681		13,976
Telecommunications and data processing		2,315		2,255		4,652		4,520
Marketing and business development		570		600		1,022		1,296
FDIC deposit insurance		456		411		900		335
Bank card expenses		1,330		1,033		2,474		2,059
Professional fees		649		759		1,391		1,368
Other non-interest expense		2,348		2,479		4,824		5,569
Problem asset workout		294		629		732		1,277
Loss on OREO sales, net		221		55		192		94
Core deposit intangible asset amortization		296		296		592		592
Banking center consolidation-related expense		294		1,708		1,589		1,708
Total non-interest expense		46,343		53,760		96,011		102,431
Income before income taxes		29,641		22,134		62,130		41,183
Income tax expense		5,441		4,429		11,118		7,654
Net income	$	24,200	$	17,705	$	51,012	$	33,529
Earnings per share—basic	$	0.78	$	0.57	$	1.65	$	1.08
Earnings per share—diluted		0.77		0.57		1.63		1.08
Weighted average number of common shares outstanding:
Basic		30,947,206		30,731,758		30,888,062		30,944,617
Diluted		31,226,351		30,857,606		31,182,584		31,128,084

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)


	For the three months ended				For the nine months ended				For the three months ended				For the six months ended
	September 30,				September 30,				June 30,				June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Net income	$	27,893	$	21,642	$	61,422	$	60,846	$	24,200	$	17,705	$	51,012	$	33,529
Other comprehensive (loss) income, net of tax:
Other comprehensive income (loss), net of tax:
Securities available-for-sale:
Net unrealized (losses) gains arising during the period, net of tax benefit (expense) of $290 and ($574) for the three months ended September 30, 2020 and 2019, respectively; and net of tax expense of $3,021 and $4,760 for the nine months ended September 30, 2020 and 2019, respectively		(925)		1,828		9,627		15,150
Less: amortization of net unrealized holding gains to income, net of tax benefit of $60 and $78 for the three months ended September 30, 2020 and 2019, respectively; and net of tax benefit of $191 and $249 for the nine months ended September 30, 2020 and 2019, respectively		(190)		(247)		(609)		(788)
Other comprehensive (loss) income		(1,115)		1,581		9,018		14,362
Net unrealized gains (losses) arising during the period, net of tax expense of $423 and $9 for the three months ended June 30, 2021 and 2020, respectively; and net of tax benefit (expense) of $2,409 and ($3,311) for the six months ended June 30, 2021 and 2020, respectively										1,361		30		(7,757)		10,551
Less: amortization of net unrealized holding gains to income, net of tax benefit of $47 and $64 for the three months ended June 30, 2021 and 2020, respectively; and net of tax benefit of $98 and $131 for the six months ended June 30, 2021 and 2020, respectively										(151)		(202)		(314)		(418)
Other comprehensive income (loss)										1,210		(172)		(8,071)		10,133
Comprehensive income	$	26,778	$	23,223	$	70,440	$	75,208	$	25,410	$	17,533	$	42,941	$	43,662

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(In thousands, except share and per share data)


	For the three months ended September 30,												For the three months ended June 30,
									Accumulated												Accumulated
			Additional						other						Additional						other
	Common		paid-in		Retained		Treasury		comprehensive				Common		paid-in		Retained		Treasury		comprehensive
	stock		capital		earnings		stock		income (loss), net		Total		stock		capital		earnings		stock		(loss) income, net		Total
Balance, June 30, 2019	$	515	$	1,006,008	$	135,210	$	(409,322)	$	1,506	$	733,917
Balance, March 31, 2020													$	515	$	1,009,478	$	168,984	$	(427,890)	$	12,367	$	763,454
Net income		—		—		21,642		—		—		21,642		—		—		17,705		—		—		17,705
Stock-based compensation		—		1,441		—		—		—		1,441		—		1,616		—		—		—		1,616
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $373, net		—		179		—		552		—		731
Cash dividends declared ($0.19 per share)		—		—		(5,986)		—		—		(5,986)
Other comprehensive income		—		—		—		—		1,581		1,581
Balance, September 30, 2019	$	515	$	1,007,628	$	150,866	$	(408,770)	$	3,087	$	753,326

Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $621, net														—		(2,321)		—		2,837		—		516
Cash dividends declared ($0.20 per share)														—		—		(6,152)		—		—		(6,152)
Other comprehensive loss														—		—		—		—		(172)		(172)
Balance, June 30, 2020	$	515	$	1,008,773	$	180,537	$	(425,053)	$	12,195	$	776,967	$	515	$	1,008,773	$	180,537	$	(425,053)	$	12,195	$	776,967
Balance, March 31, 2021													$	515	$	1,010,798	$	243,446	$	(423,254)	$	485	$	831,990
Net income		—		—		27,893		—		—		27,893		—		—		24,200		—		—		24,200
Stock-based compensation		—		1,189		—		—		—		1,189		—		1,353		—		—		—		1,353
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $157, net		—		183		—		432		—		615
Cash dividends declared ($0.20 per share)		—		—		(6,192)		—		—		(6,192)
Other comprehensive loss		—		—		—		—		(1,115)		(1,115)
Balance, September 30, 2020	$	515	$	1,010,145	$	202,238	$	(424,621)	$	11,080	$	799,357
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $1,654, net														—		(951)		—		889		—		(62)
Cash dividends declared ($0.22 per share)														—		—		(6,825)		—		—		(6,825)
Other comprehensive income														—		—		—		—		1,210		1,210
Balance, June 30, 2021													$	515	$	1,011,200	$	260,821	$	(422,365)	$	1,695	$	851,866


	For the nine months ended September 30,													For the six months ended June 30,
										Accumulated												Accumulated
			Additional							other						Additional						other
	Common		paid-in		Retained			Treasury		comprehensive				Common		paid-in		Retained		Treasury		comprehensive
	stock		capital		earnings			stock		(loss) income, net		Total		stock		capital		earnings		stock		income (loss), net		Total
Balance, December 31, 2018	$	515	$	1,014,399	$	106,990		$	(415,623)	$	(11,275)	$	695,006
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		—		—		60,846			—		—		60,846		—		—		33,529		—		—		33,529
Stock-based compensation		—		3,325		—			—		—		3,325		—		2,839		—		—		—		2,839
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $6,106, net		—		(10,096)		—			6,853		—		(3,243)
Cash dividends declared ($0.55 per share)		—		—		(17,226)			—		—		(17,226)
Cumulative effect adjustment⁽¹⁾		—		—		256			—		—		256
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $1,035, net															—		(3,289)		—		3,385		—		96
Repurchase of 734,117 shares															—		—		—		(19,476)		—		(19,476)
Cash dividends declared ($0.40 per share)															—		—		(12,451)		—		—		(12,451)
Other comprehensive income		—		—		—			—		14,362		14,362		—		—		—		—		10,133		10,133
Balance, September 30, 2019	$	515	$	1,007,628	$	150,866		$	(408,770)	$	3,087	$	753,326

Balance, December 31, 2019	$	515	$	1,009,223	$	164,082		$	(408,962)	$	2,062	$	766,920
Balance, June 30, 2020														$	515	$	1,008,773	$	180,537	$	(425,053)	$	12,195	$	776,967
Balance, December 31, 2020														$	515	$	1,011,362	$	223,175	$	(424,127)	$	9,766	$	820,691
Net income		—		—		61,422	��		—		—		61,422		—		—		51,012		—		—		51,012
Stock-based compensation		—		4,028		—			—		—		4,028		—		2,483		—		—		—		2,483
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $1,192, net		—		(3,106)		—			3,817		—		711
Repurchase of 734,117 shares		—		—		—			(19,476)		—		(19,476)
Cash dividends declared ($0.60 per share)		—		—		(18,643)			—		—		(18,643)
Cumulative effect adjustment⁽²⁾		—		—		(4,623)			—		—		(4,623)
Other comprehensive income		—		—		—			—		9,018		9,018
Balance, September 30, 2020	$	515	$	1,010,145	$	202,238		$	(424,621)	$	11,080	$	799,357
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $3,187, net															—		(2,645)		—		1,762		—		(883)
Cash dividends declared ($0.43 per share)															—		—		(13,366)		—		—		(13,366)
Other comprehensive loss															—		—		—		—		(8,071)		(8,071)
Balance, June 30, 2021														$	515	$	1,011,200	$	260,821	$	(422,365)	$	1,695	$	851,866



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

See accompanying notes to the consolidated interim financial statements.

Table of Contents

NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	For the nine months ended				For the six months ended
	September 30,				June 30,
	2020		2019		2021		2020
Cash flows from operating activities:
Net income	$	61,422	$	60,846	$	51,012	$	33,529
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		17,630		10,463
Provision (release) for mortgage loan repurchases		604		(639)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision (release) expense for loan losses						(9,425)		16,430
Provision (release) expense for mortgage loan repurchases						(102)		320
Depreciation and amortization		11,804		11,112		7,692		7,600
Current income tax receivable		2,394		3,498
Deferred income taxes		1,251		7,431
Net excess tax expense (benefit) on stock-based compensation		120		(2,162)
Change in current income tax receivable						(3,563)		1,852
Change in deferred income taxes						2,710		1,059
Net excess tax (benefit) expense from stock-based compensation						(392)		128
Discount accretion, net of premium amortization on securities		1,983		1,483		2,570		1,208
Loan accretion		(9,687)		(12,291)		(3,179)		(6,821)
Gain on sale of mortgages, net		(76,397)		(30,086)		(33,326)		(43,315)
Origination of loans held for sale, net of repayments		(1,703,208)		(946,576)		(1,064,145)		(984,452)
Proceeds from sales of loans held for sale		1,626,392		820,905		1,213,796		941,153
Bank-owned life insurance income		(1,776)		(1,276)		(1,101)		(1,179)
Gain on the sale of other real estate owned, net		(25)		(7,200)
Loss on the sale of other real estate owned, net						192		94
Originations of mortgage serving rights		(6,627)		(26)		(5,949)		(3,189)
Impairment of mortgage servicing rights		847		453
(Recovery) impairment of mortgage servicing rights						(707)		1,102
Impairment on other real estate owned		423		872		—		26
Impairment on fixed assets related to banking center consolidations		1,631		898		1,552		1,631
Gain on sale of fixed assets						(2,315)		(55)
Stock-based compensation		4,028		3,325		2,483		2,839
Operating lease payments		(4,092)		(4,209)		(2,620)		(2,778)
Change in other assets		(33,877)		(7,273)		11,503		(27,474)
Change in other liabilities		43,447		29,848		(36,524)		46,964
Net cash used in operating activities		(61,713)		(60,604)
Net cash provided by (used in) operating activities						130,162		(13,328)
Cash flows from investing activities:
Purchase of FHLB stock		(447)		(13,422)		(3)		(437)
Proceeds from redemption of FHLB stock		600		13,700		1,755		—
Proceeds from maturities of investment securities held-to-maturity		58,099		44,090		64,762		34,150
Proceeds from maturities of investment securities available-for-sale		191,846		146,316		131,113		110,102
Proceeds from sales of investment securities available-for-sale		—		20,378
Purchase of investment securities held-to-maturity		(196,736)		—		(377,687)		(67,361)
Purchase of investment securities available-for-sale		(114,735)		(18,005)		(86,199)		(69,571)
Net increase in loans		(142,133)		(305,450)
Purchases of premises and equipment, net		(4,498)		(7,743)
Net decrease (increase) in loans						52,462		(379,420)
Sales (purchases) of premises and equipment, net						9,102		(3,515)
Proceeds from sales of other real estate owned		3,498		11,508		936		1,835
Net cash used in investing activities		(204,506)		(108,628)		(203,759)		(374,217)
Cash flows from financing activities:
Net increase in deposits		879,328		198,239		481,821		676,757
Net (decrease) increase in repurchase agreements and other short-term borrowings		(33,031)		6,688
Net increase (decrease) in repurchase agreements and other short-term borrowings						60		(32,431)
Advances from FHLB		947,431		1,199,492		—		947,431
FHLB repayments		(1,155,106)		(1,207,255)		—		(1,140,106)
Issuance of stock under purchase and equity compensation plans		(570)		(6,079)		(2,424)		(936)
Proceeds from exercise of stock options		1,213		2,780		1,506		1,006
Payment of dividends		(18,657)		(17,270)		(13,438)		(12,505)
Repurchase of common stock		(19,476)		—		—		(19,476)
Net cash provided by financing activities		601,132		176,595		467,525		419,740
Increase in cash, cash equivalents and restricted cash⁽¹⁾		334,913		7,363		393,928		32,195
Cash, cash equivalents and restricted cash at beginning of the year⁽¹⁾		120,190		119,556		615,565		120,190
Cash, cash equivalents and restricted cash at end of period⁽¹⁾	$	455,103	$	126,919	$	1,009,493	$	152,385
Supplemental disclosure of cash flow information during the period:
Cash paid for interest	$	21,433	$	25,050	$	9,581	$	15,535
Net tax payment		13,673		5,547		9,464		7,923
Supplemental schedule of non-cash activities:
Loans transferred to other real estate owned at fair value	$	1,186	$	2,488	$	1,522	$	1,146
(Decrease) increase in loans purchased but not settled		(6,119)		2,526
Increase (decrease) in loans purchased but not settled						2,000		(16,351)
Loans transferred from loans held for sale to loans		2,346		725		3,317		798
Lease right-of-use assets obtained		—		(30,474)


(1)		Included in restricted cash at June 30, 2021 and 2020 is $5.0 million and $10.0 million, ~~placed~~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 at September 30, 2020 and 2019~~.condition.

See accompanying notes to the consolidated interim financial statements.

Table of Contents

NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~September~~June 30, ~~2020~~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 ~~100~~82 banking centers, as of ~~September~~June 30, ~~2020,~~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, ~~2019~~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. During the first quarter of 2020, the Company updated the loan classifications in its allowance for credit losses model and loans previously referred to as “310-30” were reclassified to “acquired loans”. Certain loan classifications within the consolidated financial disclosures have been updated to reflect this change. The prior period presentations have been reclassified to conform to the current period presentations. Refer to note 4 for further discussion. The results of operations for the interim period isare not necessarily indicative of the results that may be expected for the full year or any other interim period. All amounts are in thousands, except share data, or as otherwise noted.

~~General~~While general economic conditions ~~declined during 2020 as a result of~~have been improving, the COVID-19 pandemic ~~which has~~ caused substantial disruption to the communities we serve and has changed the way we live and work. The length of the pandemic, the impact of new variants of the virus, the efficacy and public acceptance of vaccines and other treatment for COVID-19, and the ~~efficacy~~potential for reinstitution of government measures to curb the spread of the ~~extraordinary government-mandated measures that have been put into place to~~virus and address ~~it are still unknown, but~~the resulting economic effects have already had, and are likely to continue to have, a significant impact to the financial condition and operations of the Company.

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

The Company's significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in note 2 of the audited financial statements and notes for the year ended December 31, ~~2019~~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, ~~2019, except for the following:~~2020.

~~Allowance for credit losses (“ACL”)—The Company adopted ASU 2016-13,~~ ~~Measurement of Credit Losses on Financial Instruments~~, effective January 1, 2020. This update replaced the current incurred loss methodology for recognizing credit losses with a Current Expected Credit Loss model (“CECL”), which requires a lifetime loss measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.

~~Table of Contents~~

~~Loans~~

The ACL represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified 4 primary loan segments that are further stratified into 11 loan classes to provide more granularity in analyzing loss history based upon specific loss drivers and risk factors affecting each loan class. Generally, the underlying risk of loss for each of these loan classes will follow certain norms/trends in various economic environments. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Those loans include loans on non-accrual status, loans in bankruptcy, and troubled debt restructurings (“TDRs”) described below. If a specific allowance is warranted based on the borrower’s overall financial condition, the specific allowance is calculated based on discounted expected cash flows using the loan’s initial contractual effective interest rate or the fair value of the collateral less selling costs for collateral-dependent loans.

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

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

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

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

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

~~Table of Contents~~

~~Unfunded loan commitments~~

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

~~Investment securities~~

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

Note 2 Recent Accounting Pronouncements

~~Financial Instruments~~ - ~~Credit Losses—In June 2016, the FASB issued ASU 2016-13,~~ ~~Measurement of Credit Losses on Financial Instruments~~. This update replaces the current incurred loss methodology for recognizing credit losses with a CECL model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This amendment broadens the information that an entity must consider in developing its expected credit loss estimates. Additionally, the update amends the accounting for credit losses for available-for-sale debt securities and purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. This update requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s loan portfolio. We adopted ASU 2016-13 on January 1, 2020 using a modified retrospective approach. Results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Upon adoption, the Company recognized a $5.8 million increase in the allowance for credit losses with a corresponding reduction to retained earnings, net of tax, of $4.6 million. Since the investment securities portfolio was comprised of mortgage-backed securities issued by government sponsored entities as of January 1, 2020, 0 credit loss allowance was required upon adoption. See CECL loan related financial statement disclosures included within note 1 and note 4 of the consolidated financial statements.

~~Other Pronouncements~~—The Company has not adopted ~~ASU 2018-13,~~ ~~Fair Value Measurement~~ ~~(Topic 820):~~ ~~Disclosure Framework-Changes~~any recent accounting pronouncements in addition to those disclosed in our Annual Report on Form 10-K for the ~~Disclosure Requirements for Fair Value Measurement~~ ~~and ASU 2017-04~~~~, Intangibles - Goodwill and Other~~ ~~(Topic 350):~~ ~~Simplifying the Test for Goodwill Impairment~~ ~~with no material impact on its financial statements~~.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 ~~$0.9~~$1.3 billion at ~~September~~June 30, ~~2020~~2021 and included $0.6 billion of available-for-sale securities and ~~$0.3~~$0.7 billion of held-to-maturity securities. At December 31, ~~2019,~~2020, investment securities totaled ~~$0.8~~$1.0 billion and included ~~$0.6~~$0.6 billion of available-for-sale securities and ~~$0.2~~$0.4 billion of held-to-maturity securities.

1210

Table of Contents

Available-for-sale

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


	June 30, 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	$	217,026	$	2,182	$	(2,977)	$	216,231
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		384,751		5,809		(3,988)		386,572
Municipal securities		362		9		—		371
Corporate debt		2,000		155		—		2,155
Other securities		469		—		—		469
Total investment securities available-for-sale	$	604,608	$	8,155	$	(6,965)	$	605,798


	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 six months ended June 30, 2021 and 2020, purchases of available-for-sale securities totaled $86.2 million and $69.6 million, respectively. Maturities and paydowns of available-for-sale securities during the six months ended June 30, 2021 and 2020 totaled $131.1 million and $110.1 million, respectively. There were no sales of available-for-sale securities during the six months ended June 30, 2021 or 2020.

At June 30, 2021 and December 31, 2020, the Company’s available-for-sale investment portfolio was primarily comprised of mortgage-backed securities backed by government sponsored enterprises 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”).

Table of Contents

~~Available-for-sale~~

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

September 30, 2020


Amortized

Gross

Gross


cost

unrealized gains

unrealized losses

Fair value
Mortgage-backed securities (“MBS”):

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

$
90,022

$
2,870

$
—

$
92,892
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

466,648

10,114

(112)

476,650
Municipal securities

495

14

—

509
Corporate debt

2,000

3

—

2,003
Other securities

469

—

—

469
Total investment securities available-for-sale

$
559,634

$
13,001

$
(112)

$
572,523

December 31, 2019


Amortized

Gross

Gross


cost

unrealized gains

unrealized losses

Fair value
Mortgage-backed securities:

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

$
93,770

$
1,497

$
(11)

$
95,256
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

543,275

3,818

(5,056)

542,037
Municipal securities

495

—

(8)

487
Other securities

469

—

—

469
Total investment securities available-for-sale

$
638,009

$
5,315

$
(5,075)

$
638,249

At September 30, 2020 and December 31, 2019, 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:


	September 30, 2020												June 30, 2021
	Less than 12 months				12 months or more				Total				Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses		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													$	157,105	$	(2,977)	$	—	$	—	$	157,105	$	(2,977)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	26,992	$	(90)	$	2,394	$	(22)	$	29,386	$	(112)		131,255		(3,978)		2,274		(10)		133,529		(3,988)
Total	$	26,992	$	(90)	$	2,394	$	(22)	$	29,386	$	(112)	$	288,360	$	(6,955)	$	2,274	$	(10)	$	290,634	$	(6,965)

~~Table of Contents~~


	December 31, 2019												December 31, 2020
	Less than 12 months				12 months or more				Total				Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses		value		losses		value		losses		value		losses
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	10,413	$	(7)	$	1,421	$	(4)	$	11,834	$	(11)	$	26,878	$	(42)	$	1	$	—	$	26,879	$	(42)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		41,983		(281)		254,380		(4,775)		296,363		(5,056)		95,888		(328)		2,138		(16)		98,026		(344)
Municipal securities		—		—		372		(8)		372		(8)
Corporate debt														1,998		(2)		—		—		1,998		(2)
Total	$	52,396	$	(288)	$	256,173	$	(4,787)	$	308,569	$	(5,075)	$	124,764	$	(372)	$	2,139	$	(16)	$	126,903	$	(388)

Management evaluated all of the available-for-sale securities in an unrealized loss position at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. The portfolio included 1229 securities, which were in an unrealized loss position at ~~September~~June 30, ~~2020,~~2021, compared to 6722 securities at December 31, ~~2019.~~2020. The unrealized losses in the Company's investment portfolio at ~~September~~June 30, ~~2020~~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 ~~$401.6~~$404.9 million and ~~$352.3~~$385.8 million at ~~September~~June 30, ~~2020~~2021 and at December 31, ~~2019,~~2020, respectively. The Bank may also pledge available-for-sale investment securities as collateral for Federal Home Loan Bank (“FHLB”) advances. NaN securities were pledged for this purpose at ~~September~~June 30, ~~2020, and securities totaling $13.6 million were pledged as collateral at the FHLB at~~2021 or December 31, ~~2019.~~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 ~~September~~June 30, ~~2020, the entire~~2021, municipal securities ~~portfolio~~ with an amortized cost and fair value of ~~$0.5~~$0.1 million ~~was~~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 cost 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 ~~September~~June 30, ~~2020,~~2021, have no stated contractual maturity date.

As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019, AIR~~2020, accrued interest receivable (“AIR”) from available-for-sale investment securities totaled ~~$1.6~~$0.9 million and ~~$1.5~~$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:~~

September 30, 2020




Gross

Gross


Amortized

unrealized

unrealized

cost

gains

losses

Fair value
Mortgage-backed securities:

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

$
250,790

$
4,358

$
(116)

$
255,032
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

69,211

477

—

69,688
Total investment securities held-to-maturity

$
320,001

$
4,835

$
(116)

$
324,720

1412

Table of Contents

December 31, 2019




Gross

Gross


Amortized

unrealized

unrealized

cost

gains

losses

Fair value
Mortgage-backed securities:

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

$
127,560

$
1,239

$
(29)

$
128,770
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

55,324

82

(435)

54,971
Total investment securities held-to-maturity

$
182,884

$
1,321

$
(464)

$
183,741

Held-to-maturity

~~There were 6~~Held-to-maturity investment securities are summarized as follows as of the dates indicated:


	June 30, 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	$	337,831	$	3,629	$	(3,419)	$	338,041
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		349,804		638		(1,338)		349,104
Total investment securities held-to-maturity	$	687,635	$	4,267	$	(4,757)	$	687,145


	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 six months ended June 30, 2021 and 2020, purchases of held-to-maturity securities totaled $377.7 million and $67.4 million, respectively. Maturities and paydowns of held-to-maturity securities totaled $64.8 million and $34.2 million during the six months ended June 30, 2021 and 2020, respectively.

The held-to-maturity portfolio included 34 securities which were in an unrealized loss position as of ~~September~~June 30, ~~2020,~~2021, compared to 139 securities at December 31, ~~2019.~~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:


	September 30, 2020												June 30, 2021
	Less than 12 months				12 months or more				Total				Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses		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	$	59,053	$	(116)	$	—	$	—	$	59,053	$	(116)	$	231,551	$	(3,419)	$	—	$	—	$	231,551	$	(3,419)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises														147,039		(1,338)		—		—		147,039		(1,338)
Total	$	59,053	$	(116)	$	—	$	—	$	59,053	$	(116)	$	378,590	$	(4,757)	$	—	$	—	$	378,590	$	(4,757)

December 31, 2019

Less than 12 months

12 months or more

Total


Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

value

losses

value

losses

value

losses
Mortgage-backed securities:

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

$
10,478

$
(26)

$
338

$
(3)

$
10,816

$
(29)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

3,925

(9)

28,554

(426)

32,479

(435)
Total

$
14,403

$
(35)

$
28,892

$
(429)

$
43,295

$
(464)

Table of Contents


	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 ~~$146.3~~$147.0 million and ~~$144.2~~$140.6 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The Bank ~~had 0~~may also pledge held-to-maturity investment securities ~~pledged~~ as collateral for FHLB ~~advances at September 30, 2020 and $4.0 million of~~advances. NaN held-to-maturity investment securities were pledged for this purpose at ~~the FHLB at~~June 30, 2021 or December 31, ~~2019.~~2020.

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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, AIR from held-to-maturity investment securities totaled ~~$0.6~~$1.0 million and ~~$0.5~~$0.7 million, respectively, and was included within other assets on the statements of financial condition.

~~Table of Contents~~

Note 4 Loans

The loan portfolio is comprised of loans originated by the Company and loans that were acquired in connection with the Company’s acquisitions. During the first quarter of 2020, the Company updated its loan classifications to include energy loans within the commercial and industrial loan class and present municipal and non-profit loans as their own class within the commercial segment. In addition, as the concept of impaired loans does not exist under CECL, disclosures that related solely to impaired loans have been removed.

The tables below show the loan portfolio composition including carrying value by segment as of the dates shown. The carrying value of loans is net of discounts, fees, costs and fair value marks of ~~$22.3~~$15.8 million and ~~$21.9~~$16.2 million as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Included in commercial loans are fully-guaranteed loans originated as part of the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) of which ~~$348.3~~$129.6 million and $176.1 million, net of fees and costs, ~~are~~were outstanding at ~~September~~June 30, 2021 and December 31, 2020, ~~which are fully guaranteed by the SBA.~~respectively.


	September 30, 2020			June 30, 2021
	Total loans		% of total	Total loans		% of total
Commercial	$	3,217,406	70.6%	$	2,981,926	69.4%
Commercial real estate non-owner occupied		617,087	13.5%		637,620	14.8%
Residential real estate		700,927	15.4%		662,929	15.4%
Consumer		20,701	0.5%		18,282	0.4%
Total	$	4,556,121	100.0%	$	4,300,757	100.0%

December 31, 2019

Total loans

% of total
Commercial
$
2,992,307

67.8%
Commercial real estate non-owner occupied

630,906

14.3%
Residential real estate

770,417

17.4%
Consumer

21,776

0.5%
Total
$
4,415,406

100.0%

Table of Contents


	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 ~~are~~is shown in the following tables at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


	September 30, 2020												June 30, 2021
			Greater												Greater
	30-89 days		than 90 days				Total past						30-89 days		than 90 days				Total past
	past due and		past due and		Non-accrual		due and						past due and		past due and		Non-accrual		due and
	accruing		accruing		loans		non-accrual		Current		Total loans		accruing		accruing		loans		non-accrual		Current		Total loans
Commercial:
Commercial and industrial	$	970	$	—	$	7,395	$	8,365	$	1,592,426	$	1,600,791	$	1,319	$	361	$	2,269	$	3,949	$	1,398,150	$	1,402,099
Municipal and non-profit		—		—		—		—		883,641		883,641		—		—		—		—		861,099		861,099
Owner occupied commercial real estate		1,845		—		3,539		5,384		511,031		516,415		377		—		6,650		7,027		512,694		519,721
Food and agribusiness		472		—		551		1,023		215,536		216,559		177		—		76		253		198,754		199,007
Total commercial		3,287		—		11,485		14,772		3,202,634		3,217,406		1,873		361		8,995		11,229		2,970,697		2,981,926
Commercial real estate non-owner occupied:
Construction		—		—		—		—		77,361		77,361		—		—		—		—		72,608		72,608
Acquisition/development		—		—		8		8		26,003		26,011		—		—		2		2		21,838		21,840
Multifamily		—		—		—		—		69,925		69,925		—		—		—		—		98,014		98,014
Non-owner occupied		2,633		—		20		2,653		441,137		443,790		—		245		132		377		444,781		445,158
Total commercial real estate		2,633		—		28		2,661		614,426		617,087		—		245		134		379		637,241		637,620
Residential real estate:
Senior lien		506		161		6,625		7,292		611,971		619,263		195		161		4,260		4,616		596,481		601,097
Junior lien		154		—		697		851		80,813		81,664		21		—		485		506		61,326		61,832
Total residential real estate		660		161		7,322		8,143		692,784		700,927		216		161		4,745		5,122		657,807		662,929
Consumer		7		—		47		54		20,647		20,701		9		—		7		16		18,266		18,282
Total loans	$	6,587	$	161	$	18,882	$	25,630	$	4,530,491	$	4,556,121	$	2,098	$	767	$	13,881	$	16,746	$	4,284,011	$	4,300,757


	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

Table of Contents


	June 30, 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	$	2,269	$	—	$	2,269
Municipal and non-profit		—		—		—
Owner occupied commercial real estate		4,803		1,847		6,650
Food and agribusiness		76		—		76
Total commercial		7,148		1,847		8,995
Commercial real estate non-owner occupied:
Construction		—		—		—
Acquisition/development		2		—		2
Multifamily		—		—		—
Non-owner occupied		132		—		132
Total commercial real estate		134		—		134
Residential real estate:
Senior lien		3,546		714		4,260
Junior lien		485		—		485
Total residential real estate		4,031		714		4,745
Consumer		7		—		7
Total loans	$	11,320	$	2,561	$	13,881


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

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Non-accrual loans include non-accrual loans and troubled debt restructurings (“TDRs”) on non-accrual status. There was 0 interest income recognized from non-accrual loans during the three or six months ended June 30, 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.

Table of Contents

September 30, 2020

Non-accrual loans

Non-accrual loans

with a related

with no related

allowance for

allowance for

Non-accrual

credit loss

credit loss

loans
Commercial:

Commercial and industrial
$
4,664

$
2,731

$
7,395
Municipal and non-profit

—

—

—
Owner occupied commercial real estate

633

2,906

3,539
Food and agribusiness

178

373

551
Total commercial

5,475

6,010

11,485
Commercial real estate non-owner occupied:

Construction

—

—

—
Acquisition/development

8

—

8
Multifamily

—

—

—
Non-owner occupied

20

—

20
Total commercial real estate

28

—

28
Residential real estate:

Senior lien

4,429

2,196

6,625
Junior lien

697

—

697
Total residential real estate

5,126

2,196

7,322
Consumer

47

—

47
Total loans
$
10,676

$
8,206

$
18,882

December 31, 2019

Greater

30-89 days

than 90 days

Total past

past due and

past due and

Non-accrual

due and

accruing

accruing

loans

non-accrual

Current

Total loans
Commercial:

Commercial and industrial

$
2,252

$
879

$
10,330

$
13,461

$
1,398,070

$
1,411,531
Municipal and non-profit

226

—

—

226

837,300

837,526
Owner occupied commercial real estate

595

630

2,264

3,489

486,633

490,122
Food and agribusiness

190

—

317

507

252,621

253,128
Total commercial

3,263

1,509

12,911

17,683

2,974,624

2,992,307
Commercial real estate non-owner occupied:

Construction

—

—

—

—

77,733

77,733
Acquisition/development

187

—

416

603

26,276

26,879
Multifamily

—

—

—

—

55,808

55,808
Non-owner occupied

438

65

43

546

469,940

470,486
Total commercial real estate

625

65

459

1,149

629,757

630,906
Residential real estate:

Senior lien

2,101

9

7,597

9,707

668,955

678,662
Junior lien

245

79

731

1,055

90,700

91,755
Total residential real estate

2,346

88

8,328

10,762

759,655

770,417
Consumer

116

—

50

166

21,610

21,776
Total loans

$
6,350

$
1,662

$
21,748

$
29,760

$
4,385,646

$
4,415,406

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Non-accrualThe amortized cost basis for all loans ~~include non-accrual loans and TDRs on non-accrual status. There was 0 interest income recognized from non-accrual loans during~~as determined by the ~~nine months ended September 30, 2020 or 2019.~~

~~The~~ Company’s internal risk rating system ~~uses a series~~and year of ~~grades, which reflect our assessment~~origination is shown in the following tables as of ~~the credit quality of loans based on an analysis of the borrower's financial condition, liquidity~~June 30, 2021 and ability to meet contractual debt service requirements and are categorized as “Pass”, “Special mention”, “Substandard” and “Doubtful”. For a description of the general characteristics of the risk grades, refer to note 1 Basis of Presentation.December 31, 2020:


	June 30, 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	$	291,810	$	187,178	$	193,434	$	157,743	$	76,346	$	23,665	$	430,813	$	5,928	$	1,366,917
Special mention		—		—		2,163		6,085		4,182		5,973		2,260		—		20,663
Substandard		205		21		338		835		11,288		723		675		—		14,085
Doubtful		—		—		—		79		195		131		29		—		434
Total commercial and industrial		292,015		187,199		195,935		164,742		92,011		30,492		433,777		5,928		1,402,099
Municipal and non-profit:
Pass		58,209		90,275		85,838		120,463		152,649		350,024		3,641		—		861,099
Total municipal and non-profit		58,209		90,275		85,838		120,463		152,649		350,024		3,641		—		861,099
Owner occupied commercial real estate:
Pass		48,904		93,663		104,223		78,789		47,001		103,023		2,710		165		478,478
Special mention		—		—		1,744		12,085		1,469		16,542		—		—		31,840
Substandard		—		1,193		1,729		1,847		236		3,400		—		—		8,405
Doubtful		—		389		574		—		—		35		—		—		998
Total owner occupied commercial real estate		48,904		95,245		108,270		92,721		48,706		123,000		2,710		165		519,721
Food and agribusiness:
Pass		7,758		27,464		7,773		17,668		5,930		28,307		102,986		12		197,898
Special mention		—		—		—		—		—		219		—		—		219
Substandard		—		—		—		—		271		619		—		—		890
Total food and agribusiness		7,758		27,464		7,773		17,668		6,201		29,145		102,986		12		199,007
Total commercial		406,886		400,183		397,816		395,594		299,567		532,661		543,114		6,105		2,981,926
Commercial real estate non-owner occupied:
Construction:
Pass		3,965		7,058		57,375		—		226		—		3,984		—		72,608
Total construction		3,965		7,058		57,375		—		226		—		3,984		—		72,608
Acquisition/development:
Pass		1,887		386		1,925		1,830		8,096		7,638		—		51		21,813
Substandard		—		—		—		—		—		27		—		—		27
Total acquisition/development		1,887		386		1,925		1,830		8,096		7,665		—		51		21,840
Multifamily:
Pass		1,488		29,660		11,678		16,261		204		38,310		—		—		97,601
Special mention		—		—		—		—		—		413		—		—		413
Total multifamily		1,488		29,660		11,678		16,261		204		38,723		—		—		98,014
Non-owner occupied
Pass		25,552		60,076		88,050		18,697		98,020		120,940		3,483		—		414,818
Special mention		—		—		5,742		5,748		9,866		3,970		100		—		25,426
Substandard		—		—		—		750		—		4,164		—		—		4,914
Total non-owner occupied		25,552		60,076		93,792		25,195		107,886		129,074		3,583		—		445,158
Total commercial real estate non-owner occupied		32,892		97,180		164,770		43,286		116,412		175,462		7,567		51		637,620
Residential real estate:
Senior lien
Pass		129,600		119,075		51,646		28,401		35,867		210,099		20,266		507		595,461
Special mention		—		—		—		—		—		476		—		—		476
Substandard		—		196		796		19		308		3,841		—		—		5,160
Total senior lien		129,600		119,271		52,442		28,420		36,175		214,416		20,266		507		601,097
Junior lien
Pass		401		2,952		3,470		2,239		1,406		4,295		45,961		198		60,922
Special mention		—		—		—		—		—		21		343		—		364
Substandard		8		20		108		66		102		223		—		19		546
Total junior lien		409		2,972		3,578		2,305		1,508		4,539		46,304		217		61,832
Total residential real estate		130,009		122,243		56,020		30,725		37,683		218,955		66,570		724		662,929
Consumer
Pass		4,600		6,748		2,219		1,037		253		697		2,683		36		18,273
Substandard		—		—		—		1		—		8		—		—		9
Total consumer		4,600		6,748		2,219		1,038		253		705		2,683		36		18,282
Total loans	$	574,387	$	626,354	$	620,825	$	470,643	$	453,915	$	927,783	$	619,934	$	6,916	$	4,300,757

Table of Contents

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


	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

September 30, 2020

Revolving

Revolving

loans

loans

Origination year

amortized

converted

2020

2019

2018

2017

2016

Prior

cost basis

to term

Total
Commercial:

Commercial and industrial:

Pass

$
488,391

$
231,994

$
217,190

$
98,442

$
16,130

$
19,820

$
478,080

$
2,290

$
1,552,337
Special mention

871

1,327

5,849

5,018

6,098

824

4,073

1,019

25,079
Substandard

27

1,284

1,317

12,709

6

4,786

2,145

—

22,274
Doubtful

—

—

—

403

—

674

24

—

1,101
Total commercial and industrial

489,289

234,605

224,356

116,572

22,234

26,104

484,322

3,309

1,600,791
Municipal and non-profit:

Pass

116,484

95,749

133,050

158,834

132,527

246,993

4

—

883,641
Special mention

—

—

—

—

—

—

—

—

—
Substandard

—

—

—

—

—

—

—

—

—
Doubtful

—

—

—

—

—

—

—

—

—
Total municipal and non-profit

116,484

95,749

133,050

158,834

132,527

246,993

4

—

883,641
Owner occupied commercial real estate:

Pass

67,503

114,301

95,751

54,320

33,105

103,895

1,396

53

470,324
Special mention

1,581

2,996

2,612

548

5,912

19,496

—

—

33,145
Substandard

—

2,342

6,231

255

102

4,016

—

—

12,946
Doubtful

—

—

—

—

—

—

—

—

—
Total owner occupied commercial real estate

69,084

119,639

104,594

55,123

39,119

127,407

1,396

53

516,415
Food and agribusiness:

Pass

21,695

9,417

31,671

7,366

9,874

28,770

105,873

167

214,833
Special mention

—

—

—

—

—

370

—

—

370
Substandard

—

—

—

308

—

970

69

—

1,347
Doubtful

—

—

—

—

—

1

8

—

9
Total food and agribusiness

21,695

9,417

31,671

7,674

9,874

30,111

105,950

167

216,559
Total commercial

696,552

459,410

493,671

338,203

203,754

430,615

591,672

3,529

3,217,406
Commercial real estate non-owner occupied:

Construction:

Pass

13,778

37,496

17,144

4,097

—

—

4,563

—

77,078
Special mention

283

—

—

—

—

—

—

—

283
Substandard

—

—

—

—

—

—

—

—

—
Doubtful

—

—

—

—

—

—

—

—

—
Total construction

14,061

37,496

17,144

4,097

—

—

4,563

—

77,361
Acquisition/development:

Pass

3,781

2,030

1,951

8,503

4,569

4,653

43

—

25,530
Special mention

—

—

—

35

—

253

—

—

288
Substandard

—

—

—

—

—

193

—

—

193
Doubtful

—

—

—

—

—

—

—

—

—
Total acquisition/development

3,781

2,030

1,951

8,538

4,569

5,099

43

—

26,011
Multifamily:

Pass

21,492

13,743

138

7,273

19,516

5,380

—

—

67,542
Special mention

—

—

—

—

—

2,383

—

—

2,383
Substandard

—

—

—

—

—

—

—

—

—
Doubtful

—

—

—

—

—

—

—

—

—
Total multifamily

21,492

13,743

138

7,273

19,516

7,763

—

—

69,925
Non-owner occupied

Pass

32,026

96,992

27,884

110,225

28,868

121,540

1,761

49

419,345
Special mention

—

—

5,912

9,869

3,966

3,698

100

—

23,545
Substandard

—

—

66

—

—

834

—

—

900
Doubtful

—

—

—

—

—

—

—

—

—
Total non-owner occupied

32,026

96,992

33,862

120,094

32,834

126,072

1,861

49

443,790
Total commercial real estate non-owner occupied

71,360

150,261

53,095

140,002

56,919

138,934

6,467

49

617,087
Residential real estate:

��

Senior lien

Pass

95,390

95,318

46,063

54,423

102,307

192,309

25,377

327

611,514
Special mention

—

—

—

—

—

452

—

—

452
Substandard

96

359

20

1,530

562

4,730

—

—

7,297

Table of Contents

September 30, 2020

Revolving

Revolving

loans

loans

Origination year

amortized

converted

2020

2019

2018

2017

2016

Prior

cost basis

to term

Total
Doubtful

—

—

—

—

—

—

—

—

—
Total senior lien

95,486

95,677

46,083

55,953

102,869

197,491

25,377

327

619,263
Junior lien

Pass

3,731

4,767

3,387

1,963

1,433

4,397

60,327

508

80,513
Special mention

—

—

—

—

—

21

347

—

368
Substandard

—

114

103

196

57

313

—

—

783
Doubtful

—

—

—

—

—

—

—

—

—
Total junior lien

3,731

4,881

3,490

2,159

1,490

4,731

60,674

508

81,664
Total residential real estate

99,217

100,558

49,573

58,112

104,359

202,222

86,051

835

700,927
Consumer

Pass

9,195

4,529

2,086

636

422

732

3,030

24

20,654
Special mention

—

—

—

—

—

—

—

—

—
Substandard

—

20

—

—

19

8

—

—

47
Doubtful

—

—

—

—

—

—

—

—

—
Total consumer

9,195

4,549

2,086

636

441

740

3,030

24

20,701
Total loans

$
876,324

$
714,778

$
598,425

$
536,953

$
365,473

$
772,511

$
687,220

$
4,437

$
4,556,121

Loans evaluated individually

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

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Management individually evaluates collateral-dependent loans with an amortized cost basis of $250 thousand or more and includes collateral-dependent loans less than $250 thousand within the general allowance population. The amortized cost basis of collateral-dependent loans over $250 thousand was as follows at ~~September~~June 30, 2021 and December 31, 2020:


	September 30, 2020						June 30, 2021
					Total amortized						Total amortized
	Real property		Business assets		cost basis		Real property		Business assets		cost basis
Commercial
Commercial and industrial	$	7,936	$	4,441	$	12,377	$	3,956	$	1,910	$	5,866
Owner-occupied commercial real estate		6,396		284		6,680		4,667		284		4,951
Food and agribusiness		372		86		458
Total Commercial		14,704		4,811		19,515		8,623		2,194		10,817
Commercial real estate non owner-occupied
Acquisition/development		253		—		253		1,272		—		1,272
Multifamily		1,935		—		1,935
Non-owner occupied		556		—		556
Total commercial real estate		2,744		—		2,744		1,272		—		1,272
Residential real estate
Senior lien		2,196		—		2,196		1,970		—		1,970
Total residential real estate		2,196		—		2,196		1,970		—		1,970
Total loans	$	19,644	$	4,811	$	24,455	$	11,865	$	2,194	$	14,059


	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.

Table of Contents

The CARES Act afforded financial institutions the option to modify loans within certain parameters in response to the COVID-19 pandemic without requiring the modifications to be classified as troubled debt restructurings under ASC Topic 310 if the borrower has been adversely impacted by COVID-19 and was current on their loan payments as of December 31, 2019. During the three and nine months ended September 30, 2020, the Company modified 20 and 483 loans totaling $7.1 million and $499.5 million, respectively, due to the effects of the COVID-19 pandemic, that were not classified as TDRs. Loans with COVID-related modifications during the nine months ended September 30, 2020 totaled 11.6% of the total loan portfolio at September 30, 2020. Of those loans, $334.3 million have resumed making principal or interest payments or paid in full as of September 30, 2020. Modified loans that remained on a payment deferral plan at ~~September~~June 30, ~~2020~~2021 totaled ~~$165.2~~$108.6 million, or ~~3.6%~~2.5% of the total loan ~~portfolio, of which 84.0% were a second modification.~~portfolio. Of those loans, principal payment deferrals totaled ~~$155.1~~$102.3 million and full payment deferrals totaled ~~$10.1 million~~. $6.3 million. At June 30, 2021, 0.9% of loan modifications related to COVID-19 were a subsequent modification. All ~~COVID~~COVID-19 modified loans were classified as performing as of ~~September~~June 30, ~~2020.~~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 a subsequent modification.

During the three months ended ~~September~~June 30, ~~2020,~~2021, the Company restructured 70 loans ~~with an amortized cost basis of $0.8 million~~ to facilitate repayment that are considered TDRs. During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, the Company restructured 213 loans with an amortized cost basis of ~~$18.6~~$1.6 million to facilitate repayment that are considered TDRs. ~~Included in the total TDR balance as of September 30, 2020 were loans totaling $4.4 million previously accounted for under ASC 310-30.~~ Loan modifications were a reduction of the principal payment, a reduction in interest rate, or an extension of term. The tables below provide additional information related to accruing TDRs at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


	September 30, 2020								June 30, 2021
	Amortized		Average year-to-date		Unpaid		Unfunded commitments		Amortized		Average year-to-date		Unpaid		Unfunded commitments
	cost basis		amortized cost basis		principal balance		to fund TDRs		cost basis		amortized cost basis		principal balance		to fund TDRs
Commercial	$	14,903	$	15,394	$	15,527	$	157	$	6,809	$	7,393	$	7,215	$	150
Commercial real estate non-owner occupied		5,076		4,938		7,001		—		2,075		2,120		3,417		—
Residential real estate		1,807		1,851		2,630		12		2,960		2,994		3,784		35
Consumer		—		—		—		—		—		—		—		—
Total	$	21,786	$	22,183	$	25,158	$	169	$	11,844	$	12,507	$	14,416	$	185


	December 31, 2019								December 31, 2020
	Recorded		Average year-to-date		Unpaid		Unfunded commitments		Amortized		Average year-to-date		Unpaid		Unfunded commitments
	investment		recorded investment		principal balance		to fund TDRs		cost basis		amortized cost basis		principal balance		to fund TDRs
Commercial	$	5,615	$	5,788	$	5,714	$	—	$	9,387	$	9,544	$	9,978	$	150
Commercial real estate non-owner occupied		141		172		192		—		2,400		2,351		4,105		—
Residential real estate		1,129		1,178		1,206		12		2,121		2,185		2,922		12
Consumer		—		—		—		—		37		37		37		—
Total	$	6,885	$	7,138	$	7,112	$	12	$	13,945	$	14,117	$	17,042	$	162

The following table summarizes the Company’s carrying value of non-accrual TDRs as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


	September 30, 2020		December 31, 2019		June 30, 2021		December 31, 2020
Commercial	$	1,590	$	1,891	$	2,623	$	3,397
Commercial real estate non-owner occupied		—		410		123		1,644
Residential real estate		3,069		2,553		1,896		3,156
Consumer		—		—		—		—
Total non-accruing TDRs	$	4,659	$	4,854	$	4,642	$	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 02 TDRs totaling $49 thousand that were modified within the past 12 months and had defaulted on their restructured terms during the ~~nine~~six months ended ~~September~~June 30, 2021. During the six months ended June 30, 2020, ~~or 2019.~~the Company had 2 TDRs totaling $0.4 million that were modified within the past 12 months and had defaulted on their restructured terms. For purposes of this disclosure, the Company considers “default” to mean 90 days or more past due on principal or interest. The allowance for credit losses related to TDRs on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status, which are not classified as TDRs.

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Note 5 Allowance for Credit Losses

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


	Three months ended September 30, 2020										Three months ended June 30, 2021
			Non-owner										Non-owner
			occupied										occupied
			commercial		Residential								commercial		Residential
	Commercial		real estate		real estate		Consumer		Total		Commercial		real estate		real estate		Consumer		Total
Beginning balance	$	33,142	$	12,314	$	14,525	$	484	$	60,465	$	28,085	$	15,054	$	11,546	$	372	$	55,057
Charge-offs		(499)		—		(16)		(104)		(619)		(781)		—		—		(144)		(925)
Recoveries		104		—		4		25		133		128		—		37		33		198
Provision		(1,576)		1,467		1,000		109		1,000
Provision expense (release) for loan losses												1,208		(3,867)		(2,732)		91		(5,300)
Ending balance	$	31,171	$	13,781	$	15,513	$	514	$	60,979	$	28,640	$	11,187	$	8,851	$	352	$	49,030


	Nine months ended September 30, 2020										Six months ended June 30, 2021
			Non-owner										Non-owner
			occupied										occupied
			commercial		Residential								commercial		Residential
	Commercial		real estate		real estate		Consumer		Total		Commercial		real estate		real estate		Consumer		Total
Beginning balance	$	30,442	$	4,850	$	3,468	$	304	$	39,064	$	30,376	$	17,448	$	11,492	$	461	$	59,777
Cumulative effect adjustment⁽¹⁾		(1,299)		1,666		5,314		155		5,836
Charge-offs		(1,411)		—		(56)		(502)		(1,969)		(942)		—		(22)		(263)		(1,227)
Recoveries		370		—		24		121		515		257		6		44		73		380
Provision		3,069		7,265		6,763		436		17,533
Provision (release) expense for loan losses												(1,051)		(6,267)		(2,663)		81		(9,900)
Ending balance	$	31,171	$	13,781	$	15,513	$	514	$	60,979	$	28,640	$	11,187	$	8,851	$	352	$	49,030


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


	Six months ended June 30, 2020
			Non-owner
			occupied
			commercial		Residential
	Commercial		real estate		real estate		Consumer		Total
Beginning balance	$	30,442	$	4,850	$	3,468	$	304	$	39,064
Cumulative effect adjustment⁽¹⁾		(1,299)		1,666		5,314		155		5,836
Charge-offs		(912)		—		(40)		(397)		(1,349)
Recoveries		263		—		20		97		380
Provision expense for loan losses		4,648		5,798		5,763		325		16,534
Ending balance	$	33,142	$	12,314	$	14,525	$	484	$	60,465


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

Three months ended September 30, 2019

Non-owner

occupied

commercial

Residential


Commercial

real estate

real estate

Consumer

Total
Beginning balance

$
30,823

$
5,067

$
3,851

$
341

$
40,082
Charge-offs

(6,760)

(1)

(77)

(263)

(7,101)
Recoveries

2

—

3

34

39
Provision

5,730

(11)

(214)

185

5,690
Ending balance

$
29,795

$
5,055

$
3,563

$
297

$
38,710

Nine months ended September 30, 2019




Non-owner






occupied

commercial

Residential

Commercial

real estate

real estate

Consumer

Total
Beginning balance

$
27,137

$
4,406

$
3,800

$
349

$
35,692
Charge-offs

(6,841)

(1)

(124)

(696)

(7,662)
Recoveries

31

11

32

143

217
Provision

9,468

639

(145)

501

10,463
Ending balance

$
29,795

$
5,055

$
3,563

$
297

$
38,710

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

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upon qualitative risk factors including asset quality, loss trends, lending management, portfolio growth and loan review/internal audit results.

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Net charge-offs on loans during the three and six months ended ~~September~~June 30, ~~2020~~2021 were ~~$0.5 million. Provision~~ $0.7 million and $0.8 million, respectively. The Company recorded total provision release of $5.9 million for ~~loan losses for funded loans of $1.0 million was recorded during~~ the three months ended ~~September~~June 30, ~~2020.~~2021, which included a provision release of $5.3 million for funded loans and a provision release of $0.6 million for unfunded loan commitments. During the six months ended June 30, 2021, the Company recorded total provision release of $9.4 million, which included a provision release of $9.9 million for funded loans and a provision expense of $0.5 million for unfunded loan commitments. Provision release was driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast.

Net charge-offs on loans during the ~~nine~~three and six months ended ~~September~~June 30, 2020 were ~~$1.5 million. Provision~~$0.6 million and $1.0 million, respectively. The Company recorded total provision expense of$10.3 million for ~~loan losses~~the three months ended June 30, 2020, which included a provision expense of $10.1 million for funded loans and a provision expense of ~~$17.5~~$0.2 million for unfunded loan commitments. During the six months ended June 30, 2020, the Company recorded total provision expense of $16.4 million, which included a provision expense of $16.5 million for funded loans and a provision release of $0.1 million for unfunded loan commitments. Provision expense was recorded ~~during the nine months ended September 30, 2020~~ to provide coverage for the impact of deteriorating economic conditions as a result of COVID-19 and to support ~~net charge-offs.~~

~~Provision for loan losses totaled $5.7 million and $10.5 million for the three and nine months ended September 30, 2019, respectively, to support~~non-PPP originated loan ~~growth and net charge-offs.~~growth.

The Company has elected to exclude AIR from the allowance for credit losses calculation. As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, AIR from loans totaled ~~$20.6~~$15.0 million and ~~$17.2~~$16.7 million, respectively.

Note 6 Other Real Estate Owned

A summary of the activity in ~~OREO~~other real estate owned (“OREO”) during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 is as follows:


	For the nine months ended September 30,				For the six months ended June 30,
	2020		2019		2021		2020
Beginning balance	$	7,300	$	10,596	$	4,730	$	7,300
Transfers from loan portfolio, at fair value		1,186		2,488		1,522		1,146
Impairments		(423)		(872)		—		(26)
Sales		(3,473)		(4,308)		(1,128)		(1,929)
Ending balance	$	4,590	$	7,904	$	5,124	$	6,491

During the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, the Company sold OREO properties with net book balances of ~~$3.5~~$1.1 million and ~~$4.3~~$1.9 million, respectively. Sales of OREO properties resulted in net OREO ~~gains~~losses of ~~$0.1~~$0.2 million and ~~$6.5~~$0.2 million, which were included in the consolidated statements of operations for the three and six months ended ~~September~~June 30, ~~2020 and 2019,~~2021, respectively. Net OREO ~~gains~~losses of ~~$25 thousand~~$0.1 million and ~~$7.2~~$0.1 million were included in the consolidated statements of operations for the ~~nine~~three and six months ended ~~September~~June 30, 2020, ~~and 2019,~~ respectively.

Note 7 Goodwill and Intangible Assets

Goodwill and core deposit intangible

In connection with our acquisitions, the Company recorded goodwill of $115.0 million. Goodwill is measured as the excess of the fair value of consideration paid over the fair value of net assets acquired. NaN goodwill impairment was recorded during the three or ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 or the year ended December 31, ~~2019.~~2020.

The gross carrying amount of the core deposit intangibles and the associated accumulated amortization at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, are presented as follows:

September 30, 2020

December 31, 2019

June 30, 2021

December 31, 2020

Gross

Net

Gross

Net

Gross

Net

Gross

Net

carrying

Accumulated

carrying

Accumulated

carrying

Accumulated

carrying

Accumulated

carrying

amount

amortization

amount

amortization

amount

amortization

amount

amortization

amount

Core deposit intangible

48,834

(40,990)

7,844

48,834

(40,103)

8,731

48,834

(41,877)

6,957

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

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~~The Company is amortizing~~amortization expense of $0.3 million and $0.6 million during the ~~core deposit intangibles from acquisitions on a straight-line basis over~~ 7~~-10 years from~~three and six months ended June 30, 2021, respectively. During the ~~date of~~three and six months ended June 30, 2020, 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 ~~$0.9~~$0.6 million, ~~during the three and nine months ended September 30, 2020, respectively, and $0.3 million and $0.9 million during the three and nine months ended September 30, 2019,~~ respectively.

The following table shows the estimated future amortization expense for the core deposit intangibles as of ~~September~~June 30, ~~2020:~~2021:


Years ending December 31,		Amount		Amount
For the three months ending December 31, 2020	$	296
For the year ending December 31, 2021		1,183
For the six months ending December 31, 2021			$	592
For the year ending December 31, 2022		1,127		1,127
For the year ending December 31, 2023		1,048		1,048
For the year ending December 31, 2024		1,048		1,048
For the year ending December 31, 2025				1,048

Mortgage servicing rights

~~MSRs~~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~~intangible assets in the consolidated statements of financial condition. Mortgage loans serviced for others were ~~$985.3 million~~$1.9 billion and ~~$334.5 million~~$0.6 billion at ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

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


	For the nine months ended September 30,				For the six months ended June 30,
	2020		2019		2021		2020
Beginning balance	$	2,630	$	3,556	$	10,380	$	2,630
Originations		6,627		26		5,949		3,189
Impairment		(847)		(453)
Recovery (impairment)						707		(1,102)
Amortization		(1,237)		(578)		(1,632)		(682)
Ending balance		7,173		2,551		15,404		4,035
Fair value of mortgage servicing rights	$	7,653	$	2,551	$	18,685	$	4,173

The fair value of MSRs was determined based upon a discounted cash flow analysis. The cash flow analysis included assumptions for discount rates and prepayment speeds. Discount rates ranged from 9.5% to 10.5%, and the constant prepayment speed ranged from ~~18.0%~~11.4% to ~~21.8%~~18.7% for the ~~September~~June 30, ~~2020~~2021 valuation. Discount rates ranged from 9.5% to 10.5%, and the constant prepayment speed ranged from ~~17.9%~~18.3% to ~~26.7%~~21.3% for the ~~September~~June 30, ~~2019~~2020 valuation. Included in mortgage banking income in the consolidated statements of operations ~~were service fees~~was servicing income of ~~$0.5~~$1.1 million and ~~$1.0~~$2.1 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively, and ~~$0.2~~$0.3 million and ~~$0.7~~$0.5 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~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 ~~September~~June 30, ~~2020:~~2021:


Years ending December 31,		Amount		Amount
For the three months ending December 31, 2020	$	396
For the year ending December 31, 2021		1,507
For the six months ending December 31, 2021			$	955
For the year ending December 31, 2022		1,215		1,793
For the year ending December 31, 2023		980		1,573
For the year ending December 31, 2024		790		1,381
For the year ending December 31, 2025				1,212

Note 8 Borrowings

The Company enters into repurchase agreements to facilitate the needs of its clients. As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company sold securities under agreements to repurchase totaling ~~$23.9~~$23.0 million and ~~$56.9~~$22.9 million, respectively. The Company pledged mortgage-backed securities with a fair value of approximately $26.1 million and $27.7 million as of June 30, 2021 and December 31,

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~~Company pledged mortgage-backed securities with a fair value of approximately $28.8 million and $65.6 million as of September 30,~~ 2020, ~~and December 31, 2019,~~ respectively, for these agreements. The Company monitors collateral levels on a continuous basis and may be required to provide additional collateral based on the fair value of the underlying securities. As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company had ~~$4.2~~$3.1 million and ~~$7.0~~$4.8 million, respectively, of excess collateral pledged for repurchase agreements.

As a member of the FHLB, the Bank has access to a line of credit and term financing from the FHLB with total available credit of ~~$1.0~~$0.9 billion at ~~September~~June 30, ~~2020.~~2021. The Bank may utilize its FHLB line of credit as a funding mechanism for originated loans and loans held for sale. At ~~September~~June 30, 2021 and December 31, 2020, the Bank had 0 outstanding borrowings from the FHLB. At December 31, 2019, the Bank had $192.7 million in line of credit advances from the FHLB that matured within a day and one term advance totaling $15.0 million with a fixed interest rate of 2.33% and a maturity date in October ~~2020.~~

The Bank may ~~have~~pledge investment securities and loans ~~pledged~~ as collateral for FHLB advances. There were 0 investment securities pledged at ~~September~~June 30, ~~2020. At~~2021 or December 31, ~~2019, investment securities totaling $17.6 million were pledged as collateral for FHLB advances.~~2020. Loans pledged were $1.3 billion ~~at September 30, 2020~~ and ~~$1.5~~$1.2 billion at June 30, 2021 and December 31, ~~2019. Interest~~2020, respectively. There was 0 interest expense related to FHLB advances and other short-term borrowings ~~totaled $0.1 million and $1.3 million~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020, respectively, and $1.4~~2021, compared to $0.3 million and ~~$4.8~~$1.2 million ~~for~~during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively.

Note 9 Regulatory Capital

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

Under the Basel III requirements, at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company and the Bank met all capital ~~requirements including the capital conservation buffer of 2.5%, which was fully phased in on January 1, 2019.~~requirements. The Bank had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as detailed in the tables below:


	September 30, 2020									June 30, 2021
				Required to be			Required to be						Required to be			Required to be
				well capitalized under			considered						well capitalized under			considered
				prompt corrective			adequately						prompt corrective			adequately
	Actual			action provisions			capitalized			Actual			action provisions			capitalized
	Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount
Tier 1 leverage ratio:
Consolidated	10.6%	$	673,622	N/A		N/A	4.0%	$	254,180	10.6%	$	733,666	N/A		N/A	4.0%	$	277,579
NBH Bank	9.2%		586,217	5.0%	$	317,605	4.0%		254,084	9.0%		624,289	5.0%	$	346,699	4.0%		277,359
Common equity tier 1 risk based capital:
Consolidated	14.3%	$	673,622	N/A		N/A	7.0%	$	330,905	15.3%	$	733,666	N/A		N/A	7.0%	$	335,348
NBH Bank	12.4%		586,217	6.5%	$	307,342	7.0%		330,984	13.1%		624,289	6.5%	$	310,925	7.0%		334,842
Tier 1 risk based capital ratio:
Consolidated	14.3%	$	673,622	N/A		N/A	8.5%	$	401,813	15.3%	$	733,666	N/A		N/A	8.5%	$	407,208
NBH Bank	12.4%		586,217	8.0%	$	378,267	8.5%		401,909	13.1%		624,289	8.0%	$	382,677	8.5%		406,594
Total risk based capital ratio:
Consolidated	15.4%	$	728,166	N/A		N/A	10.5%	$	496,358	16.3%	$	779,207	N/A		N/A	10.5%	$	503,021
NBH Bank	13.6%		640,760	10.0%	$	472,834	10.5%		496,476	14.0%		669,829	10.0%	$	478,346	10.5%		502,263

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	December 31, 2019									December 31, 2020
				Required to be			Required to be						Required to be			Required to be
				well capitalized under			considered						well capitalized under			considered
				prompt corrective			adequately						prompt corrective			adequately
	Actual			action provisions			capitalized			Actual			action provisions			capitalized
	Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount
Tier 1 leverage ratio:
Consolidated	11.0%	$	640,440	N/A		N/A	4.0%	$	231,950	10.7%	$	696,311	N/A		N/A	4.0%	$	260,370
NBH Bank	9.1%		528,028	5.0%	$	289,926	4.0%		231,940	9.2%		600,622	5.0%	$	325,447	4.0%		260,358
Common equity tier 1 risk based capital:
Consolidated	13.2%	$	640,440	N/A		N/A	7.0%	$	405,912	14.7%	$	696,311	N/A		N/A	7.0%	$	331,632
NBH Bank	10.9%		528,028	6.5%	$	376,903	7.0%		405,896	12.7%		600,622	6.5%	$	307,631	7.0%		331,295
Tier 1 risk based capital ratio:
Consolidated	13.2%	$	640,440	N/A		N/A	8.5%	$	412,620	14.7%	$	696,311	N/A		N/A	8.5%	$	402,696
NBH Bank	10.9%		528,028	8.0%	$	387,701	8.5%		411,932	12.7%		600,622	8.0%	$	378,623	8.5%		402,287
Total risk based capital ratio:
Consolidated	14.1%	$	682,645	N/A		N/A	10.5%	$	509,707	15.8%	$	749,899	N/A		N/A	10.5%	$	497,448
NBH Bank	11.8%		570,233	10.0%	$	484,626	10.5%		508,857	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.

Bank card fees

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

Gain on OREO sales, net

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

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The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, and non-interest expense in-scope of Topic 606 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended June 30,				For the six months ended June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Non-interest income
In-scope of Topic 606:
Service charges and other fees	$	4,246	$	5,112	$	12,453	$	14,822	$	4,415	$	3,543	$	8,367	$	8,208
Bank card fees		4,039		3,752		11,206		10,946		4,614		3,654		8,687		7,167
Non-interest income (in-scope of Topic 606)		8,285		8,864		23,659		25,768		9,029		7,197		17,054		15,375
Non-interest income (out-of-scope of Topic 606)		36,247		15,895		83,242		36,702		16,237		31,640		41,573		46,994
Total non-interest income	$	44,532	$	24,759	$	106,901	$	62,470	$	25,266	$	38,837	$	58,627	$	62,369
Non-interest expense
In-scope of Topic 606:
Gain on OREO sales, net	$	119	$	6,514	$	25	$	7,200
Loss on OREO sales, net									$	(221)	$	(55)	$	(192)	$	(94)
Total revenue in-scope of Topic 606	$	8,404	$	15,378	$	23,684	$	32,968	$	8,808	$	7,142	$	16,862	$	15,281

Contract acquisition costs

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

Note 11 Stock-based Compensation and Benefits

The Company provides stock-based compensation in accordance with shareholder-approved ~~plans. In 2014, shareholders approved the 2014 Omnibus Incentive Plan (the "2014 Plan"). The 2014 Plan replaces the NBH Holdings Corp. 2009 Equity Incentive Plan (the "Prior Plan"), pursuant~~plans and is authorized to which the Company granted equity awards prior to the approval of the 2014 Plan. Pursuant to the 2014 Plan, the Compensation Committee of the Board of Directors has the authority to grant, from time to time,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.

The following table summarizes stock option activity for the six months ended June 30, 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	80,615		40.16
Exercised	(72,497)		27.61
Forfeited	(24,853)		27.47
Outstanding at June 30, 2021	751,394	$	27.68	6.86	$	7,759
Options exercisable at June 30, 2021	494,874		26.33	5.85		5,675
Options vested and expected to vest	724,144		27.52	6.77		7,568

Stock option expense is a component of salaries and benefits in the consolidated statements of operations and totaled $0.5 million and $0.6 million for the three and six months ended June 30, 2021, respectively, and $0.5 million and $0.7 million for the three and six

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~~The following table summarizes stock option activity for the nine~~ months ended ~~September 30, 2020:~~

Weighted


average

Weighted

remaining

average

contractual

Aggregate

exercise

term in

intrinsic

Options

price

years

value
Outstanding at December 31, 2019

657,114

$
26.69

6.41

$
5,626
Granted

225,936

23.13

Exercised

(63,558)

19.77

Forfeited

(17,038)

29.00

Outstanding at September 30, 2020

802,454

26.18

7.01

2,474
Options exercisable at September 30, 2020

447,461

25.35

5.43

1,791
Options vested and expected to vest

764,282

26.17

6.90

2,390

~~Stock option expense is a component of salaries and benefits in the consolidated statements of operations and totaled $0.1 million and $0.2 million for the three months ended September~~June 30, 2020, ~~and 2019, respectively, and $0.8 million and $0.5 million for the nine months ended September 30, 2020 and 2019,~~ respectively. At ~~September~~June 30, ~~2020,~~2021, there was ~~$0.9~~$0.6 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 ~~1.3~~2.4 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. ~~Historically,~~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 iswill 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 ~~the nine months ended September 30, 2020~~2021 was ~~$28.43~~$40.16 and ~~$24.58,~~$33.11, respectively. The initial weighted-average performance price for the TSR target portion granted during 2021 was $33.04. During the ~~nine~~six months ended ~~September~~June 30, ~~2020 was $35.95. During the nine months ended September 30, 2020,~~2021, the Company awarded an additional ~~17,852~~30,024 units due to final performance results related to performance stock units granted in ~~2017.~~2018.

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The following table summarizes restricted stock and performance stock unit activity during the ~~nine~~six months ended ~~September~~June 30, ~~2020:~~2021:


		Weighted				Weighted		Weighted				Weighted
	Restricted	average grant-		Performance		average grant-	Restricted	average grant-		Performance		average grant-
	stock shares	date fair value		stock units		date fair value	stock shares	date fair value		stock units		date fair value
Unvested at December 31, 2019	122,198	$	34.19	158,874	$	31.19
Unvested at December 31, 2020							166,630	$	27.42	184,837	$	29.21
Granted	120,132		23.58	68,498		26.74	81,481		40.07	52,526		37.01
Net adjustment due to performance	—		—	17,852		33.22
Adjustment due to performance							—		—	30,024		30.38
Vested	(53,995)		34.40	(53,540)		33.22	(77,679)		28.56	(90,016)		30.38
Forfeited	(9,502)		29.94	(6,032)		29.37	(19,082)		29.20	(16,977)		28.96
Unvested at September 30, 2020	178,833	$	27.22	185,652	$	29.22
Unvested at June 30, 2021							151,350	$	33.42	160,394	$	31.36

As of ~~September~~June 30, ~~2020,~~2021, the total unrecognized compensation cost related to the non-vested restricted stock awards and performance stock units totaled ~~$2.6~~$3.6 million and ~~$3.1~~$3.3 million, respectively, and is expected to be recognized over a weighted average period of approximately ~~2.0~~2.3 years and ~~1.9~~2.1 years, respectively. Expense related to non-vested restricted stock awards totaled ~~$0.7~~$0.6 million and ~~$0.7~~$1.2 million during the three and six months ended ~~September~~June 30, ~~2020 and 2019,~~2021, respectively, and ~~$1.9~~$0.7 million and ~~$1.6~~$1.2 million during the ~~nine~~three and six months ended ~~September~~June 30, 2020, ~~and 2019,~~ respectively. Expense related to non-vested performance stock units totaled ~~$0.4~~$0.2 million and ~~$0.5~~$0.7 million during the three and six months ended ~~September~~June 30, ~~2020 and 2019,~~2021, respectively, and ~~$1.3~~$0.4 million and ~~$1.2~~$0.9 million during the ~~nine~~three and six months ended ~~September~~June 30, 2020, ~~and 2019,~~ respectively. Expense related to non-vested restricted stock awards and units is a component of salaries and benefits in the Company’s consolidated statements of operations.

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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 ~~302,876~~293,905 was available for issuance at ~~September~~June 30, ~~2020.~~2021.

Under the ESPP, employees purchased ~~23,212~~8,971 shares and ~~16,556~~8,890 shares during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

Note 12 Common Stock

The Company had ~~30,594,412~~30,800,985 and ~~31,176,627~~30,634,291 shares of Class A common stock outstanding at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Additionally, the Company had ~~178,833~~151,350 and ~~122,198~~166,630 shares outstanding at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~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 ~~26, 2020,~~24, 2021, the Company’s Board of Directors authorized a new ~~share~~program to repurchase ~~program for~~ up to ~~$50.0~~$75.0 million of the Company’s stock from time to time in either the open market or through privately negotiated transactions. ~~During~~The new program of $75.0 million replaces the ~~first quarter of~~previously authorized $50.0 million stock repurchase program announced in February 2020 ~~the Company repurchased 734,117 shares for $19.5 million. Of those repurchases, $12.6 million were part of the previous authorization from August 2016. That authorization has been completed.~~in its entirety. The remaining authorization under the new program as of ~~September~~June 30, ~~2020~~2021 was ~~$43.1~~$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 11.

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The Company had ~~30,594,412~~30,800,985 and ~~31,169,086~~30,569,011 shares of Class A common stock outstanding as of ~~September~~June 30, ~~2020~~2021 and ~~2019,~~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 and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

The following table illustrates the computation of basic and diluted earnings per share for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


	For the three months ended				For the nine months ended				For the three months ended				For the six months ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019		June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Net income	$	27,893	$	21,642	$	61,422	$	60,846	$	24,200	$	17,705	$	51,012	$	33,529
Less: income allocated to participating securities		(36)		(25)		(96)		(69)		(33)		(37)		(67)		(61)
Income allocated to common shareholders	$	27,857	$	21,617	$	61,326	$	60,777	$	24,167	$	17,668	$	50,945	$	33,468
Weighted average shares outstanding for basic earnings per common share		30,756,116		31,281,970		30,881,325		31,133,982		30,947,206		30,731,758		30,888,062		30,944,617
Dilutive effect of equity awards		168,107		227,029		189,672		403,352		279,145		125,848		294,522		183,467
Weighted average shares outstanding for diluted earnings per common share		30,924,223		31,508,999		31,070,997		31,537,334		31,226,351		30,857,606		31,182,584		31,128,084
Basic earnings per share	$	0.91	$	0.69	$	1.99	$	1.95	$	0.78	$	0.57	$	1.65	$	1.08
Diluted earnings per share		0.90		0.69		1.97		1.93		0.77		0.57		1.63		1.08

The Company had ~~802,454~~751,394 and ~~661,467~~825,031 outstanding stock options to purchase common stock at weighted average exercise prices of ~~$26.18~~$27.68 and ~~$26.73~~$26.11 per share at ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, which have time-vesting criteria, and as such, any dilution is

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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 ~~364,485~~311,744 and ~~295,619~~335,560 unvested restricted shares and performance stock units issued as of ~~September~~June 30, ~~2020~~2021 and ~~2019,~~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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~

2020. Information about the valuation methods used to measure fair value is provided in note 16.


		Asset derivatives fair value					Liability derivatives fair value					Asset derivatives fair value					Liability derivatives fair value
	Balance Sheet	September 30,		December 31,		Balance Sheet	September 30,		December 31,		Balance Sheet	June 30,		December 31,		Balance Sheet	June 30,		December 31,
	location	2020		2019		Location	2020		2019		location	2021		2020		Location	2021		2020
Derivatives designated as hedging instruments:
Interest rate products	Other assets	$	—	$	1,171	Other liabilities	$	45,279	$	13,537	Other assets	$	42	$	—	Other liabilities	$	21,670	$	38,884
Total derivatives designated as hedging instruments		$	—	$	1,171		$	45,279	$	13,537		$	42	$	—		$	21,670	$	38,884

Derivatives not designated as hedging instruments:
Interest rate products	Other assets	$	21,287	$	9,004	Other liabilities	$	21,371	$	9,021	Other assets	$	11,640	$	18,149	Other liabilities	$	11,661	$	18,176
Interest rate lock commitments	Other assets		11,769		1,499	Other liabilities		440		141	Other assets		2,950		7,001	Other liabilities		414		298
Forward contracts	Other assets		191		16	Other liabilities		1,006		299	Other assets		63		—	Other liabilities		301		2,622
Total derivatives not designated as hedging instruments		$	33,247	$	10,519		$	22,817	$	9,461		$	14,653	$	25,150		$	12,376	$	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 ~~September~~June 30, ~~2020,~~2021, the Company had interest rate swaps with a notional amount of ~~$395.3~~$339.2 million, which were designated as fair value hedges of interest rate risk. As of December 31, ~~2019,~~2020, the Company had interest rate swaps with a notional amount of ~~$403.7~~$387.1 million that were designated as fair value hedges. These interest rate swaps were associated with ~~$398.4~~$339.3 million and ~~$405.9~~$389.9 million of the Company’s fixed-rate loans as of June 30, 2021 and December 31, 2020, respectively, before a gain of $26.7 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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019, respectively, before a gain of $46.9 million and $13.9 million from the fair value hedge adjustment in the carrying amount.~~2020.

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.

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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 ~~September~~June 30, 2021, the Company had matched interest rate swap transactions with an aggregate notional amount of $414.2 million related to this program. As of December 31, 2020, the Company had matched interest rate swap transactions with an aggregate notional amount of ~~$492.3 million related to this program. As of December 31, 2019, the Company had matched interest rate swap transactions with an aggregate notional amount of $478.9~~$456.0 million.

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

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value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying assets. The fair value of 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 ~~$457.9~~$182.0 million and forward contracts with a notional value of ~~$516.4~~$244.4 million at ~~September~~June 30, ~~2020.~~2021. At December 31, ~~2019,~~2020, the Company had interest rate lock commitments with a notional value of ~~$99.8~~$258.8 million and forward contracts with a notional value of ~~$181.5~~$375.3 million.

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Effect of derivative instruments on the consolidated statements of operations

The tables below present the effect of the Company’s derivative financial instruments in the consolidated statements of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


	Location of gain (loss)	Amount of gain (loss) recognized in income on derivatives								Location of gain (loss)	Amount of (loss) gain recognized in income on derivatives
Derivatives in fair value	recognized in income on	For the three months ended September 30,				For the nine months ended September 30,				recognized in income on	For the three months ended June 30,				For the six months ended June 30,
hedging relationships	derivatives	2020		2019		2020		2019		derivatives	2021		2020		2021		2020
Interest rate products	Interest and fees on loans	$	5,043	$	5,809	$	1,310	$	(11,791)	Interest and fees on loans	$	(28,100)	$	31,037	$	(7,228)	$	(3,733)
Total		$	5,043	$	5,809	$	1,310	$	(11,791)		$	(28,100)	$	31,037	$	(7,228)	$	(3,733)


	Location of gain (loss)	Amount of (loss) gain recognized in income on hedged items								Location of gain (loss)	Amount of gain (loss) recognized in income on hedged items
	recognized in income on	For the three months ended September 30,				For the nine months ended September 30,				recognized in income on	For the three months ended June 30,				For the six months ended June 30,
Hedged items	hedged items	2020		2019		2020		2019		hedged items	2021		2020		2021		2020
Interest rate products	Interest and fees on loans	$	(4,993)	$	(3,313)	$	(2,869)	$	11,604	Interest and fees on loans	$	23,726	$	(31,654)	$	5,157	$	2,124
Total		$	(4,993)	$	(3,313)	$	(2,869)	$	11,604		$	23,726	$	(31,654)	$	5,157	$	2,124


	Location of gain (loss)	Amount of gain (loss) recognized in income on derivatives								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 September 30,				For the nine months ended September 30,				recognized in income on	For the three months ended June 30,				For the six months ended June 30,
as hedging instruments	derivatives	2020		2019		2020		2019		derivatives	2021		2020		2021		2020
Interest rate products	Other non-interest expense	$	8	$	(198)	$	(65)	$	(761)	Other non-interest expense	$	4	$	(50)	$	10	$	(73)
Interest rate lock commitments	Mortgage banking income		3,243		522		14,174		2,290	Mortgage banking income		(1,029)		3,428		(5,101)		10,931
Forward contracts	Mortgage banking income		1,558		348		(532)		49	Mortgage banking income		(3,698)		3,617		2,384		(2,090)
Total		$	4,809	$	672	$	13,577	$	1,578		$	(4,723)	$	6,995	$	(2,707)	$	8,768

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 ~~September~~June 30, ~~2020,~~2021, the termination value of derivatives in a net liability position related to these agreements was ~~$69.3~~$34.6 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 ~~September~~June 30, ~~2020,~~2021, the Company had posted ~~$76.3~~$36.8 million

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in eligible collateral. If the Company had breached any of these provisions at ~~September~~June 30, ~~2020,~~2021, it could have been required to settle its obligations under the agreements at the termination value.

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.

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Total unfunded commitments at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:


	September 30, 2020		December 31, 2019		June 30, 2021		December 31, 2020
Commitments to fund loans	$	280,496	$	249,914	$	455,362	$	311,237
Unfunded commitments under lines of credit		557,464		600,407		539,580		537,325
Commercial and standby letters of credit		8,862		11,929		9,162		7,320
Total unfunded commitments	$	846,822	$	862,250	$	1,004,104	$	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 and ~~nine~~six months ended ~~September~~June 30, 2021 and 2020 ~~totaling $214 thousand and $397 thousand, respectively,~~ were ~~primarily~~ driven by early ~~payoffs.~~payoffs and repurchases. The ~~Company recorded a~~ repurchase reserve ~~of $2.8 million and $2.6 million at September 30, 2020 and December 31, 2019, respectively, which~~ is included in other liabilities on the consolidated statements of financial condition.

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

For the three months ended September 30,

For the nine months ended September 30,

2020

2019

2020

2019
Beginning balance

$
2,725

$
2,633

$
2,589

$
3,286
Provision charged to (released from) operating expense, net

285

(111)

604

(639)
Charge-offs

(214)

(24)

(397)

(149)
Ending balance

$
2,796

$
2,498

$
2,796

$
2,498

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	For the three months ended June 30,				For the six months ended June 30,
	2021		2020		2021		2020
Beginning balance	$	2,620	$	2,790	$	2,741	$	2,589
Provision (released from) charged to operating expense, net		(106)		41		(102)		320
Charge-offs		(116)		(106)		(241)		(184)
Ending balance	$	2,398	$	2,725	$	2,398	$	2,725

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 ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, there were 0 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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~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.

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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 exposure offset by marketable collateral posted, if any. Certain derivative transactions are executed with counterparties who are large

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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 ~~87.0%~~87.6% 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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 on the consolidated statements of financial condition utilizing the hierarchy structure described above:


	September 30, 2020								June 30, 2021
	Level 1		Level 2		Level 3		Total		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	$	—	$	92,892	$	—	$	92,892	$	—	$	216,231	$	—	$	216,231
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		—		476,650		—		476,650		—		386,572		—		386,572
Municipal securities		—		394		—		394		—		314		—		314
Corporate debt		—		2,003		—		2,003		—		2,155		—		2,155
Loans held for sale		—		273,003		—		273,003		—		134,805		—		134,805
Interest rate swap derivatives		—		21,287		—		21,287		—		11,682		—		11,682
Mortgage banking derivatives		—		—		11,960		11,960		—		—		3,013		3,013
Total assets at fair value	$	—	$	866,229	$	11,960	$	878,189	$	—	$	751,759	$	3,013	$	754,772
Liabilities:
Interest rate swap derivatives	$	—	$	66,650	$	—	$	66,650	$	—	$	33,331	$	—	$	33,331
Mortgage banking derivatives		—		—		1,446		1,446		—		—		715		715
Total liabilities at fair value	$	—	$	66,650	$	1,446	$	68,096	$	—	$	33,331	$	715	$	34,046

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December 31, 2019


Level 1

Level 2

Level 3

Total
Assets:

Investment securities available-for-sale:

Mortgage-backed securities:

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

$
—

$
95,256

$
—

$
95,256
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises

—

542,037

—

542,037
Municipal securities

—

372

—

372
Loans held for sale

—

117,444

—

117,444
Interest rate swap derivatives

—

10,175

—

10,175
Mortgage banking derivatives

—

—

1,515

1,515
Total assets at fair value

$
—

$
765,284

$
1,515

$
766,799
Liabilities:

Interest rate swap derivatives

$
—

$
22,558

$
—

$
22,558
Mortgage banking derivatives

—

—

440

440
Total liabilities at fair value

$
—

$
22,558

$
440

$
22,998


	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 ~~nine~~six months ended ~~September~~June 30, ~~2020:~~2021:


		Mortgage banking		Mortgage banking
		derivatives, net		derivatives, net
Balance at December 31, 2019	$	1,075
Balance at December 31, 2020			$	4,081
Gain included in earnings, net		13,642		(2,717)
Fees and costs included in earnings, net		(4,203)		934
Balance at September 30, 2020	$	10,514
Balance at June 30, 2021			$	2,298

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

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

Individually evaluated loans—The Company records individually evaluated loans based on the fair value of the collateral when it is probable that the Company will be unable to collect all contractual amounts due in accordance with the terms of the loan agreement. The Company relies on third-party appraisals and internal assessments, utilizing a discount rate in the range of 3%0% - 26% with a weighted average discount rate of ~~14.5%~~9.2%, 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 ~~September~~June 30, 2021, the Company recorded a specific reserve of $1.4 million related to 7 loans with a carrying balance of $5.7 million. At June 30, 2020, the Company recorded a specific reserve of ~~$1.1~~$1.3 million related to 6 loans with a carrying balance of ~~$4.6 million. At September 30, 2019, the Company recorded a specific reserve of $1.8 million related to 8 loans with a carrying balance of $5.9~~$4.4 million.

OREO—OREO is recorded at the fair value of the collateral less estimated selling costs using a range of 6% to 10% with a weighted average discount rate of ~~9.6%~~8.5%. The estimated fair values of OREO are updated periodically and further write-downs may be taken to reflect a new basis. The Company recognized ~~$423 thousand~~0 OREO impairment during the six months ended June 30, 2021 and ~~$872~~$26 thousand of OREO ~~impairments~~impairment during the six months ended June 30, 2020 in its consolidated statements of ~~operations during the nine months ended September 30, 2020 and 2019, respectively.~~operations. The fair values of OREO are derived from third-party price opinions or appraisals that generally use an income approach or a market value approach. If reasonable comparable appraisals are not available, ~~then~~ the Company may use internally developed models to determine fair values. The inputs used to determine the fair value of OREO properties are considered level 3 inputs in the fair value hierarchy.

Mortgage servicing rights—MSRs represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates ranging from 9.5% to 10.5% with a weighted average rate of 9.5% at ~~September~~June 30, ~~2020~~2021 and prepayment speed assumption ranges of ~~18.0%~~11.4% to ~~21.8%~~18.7% with a weighted average rate of ~~18.1%~~11.7% at ~~September~~June 30, ~~2020 as inputs.~~2021. The weighted average MSRs are ~~subject to impairment testing. The carrying values of these MSRs are reviewed quarterly for impairment based upon the~~

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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 type and note term. If the valuation model reflects a value less than the carrying value, MSRs are adjusted to fair value through a valuation allowance and the adjustment is included in mortgage banking income on the consolidated statements of operations. There was $0.7 million of recovery on MSRs during the six months ended June 30, 2021, compared to $1.1 million of impairment during the six months ended June 30, 2020. The inputs used to determine the fair values of MSRs are considered level 3 inputs in the fair value hierarchy.

Premises and equipment—During the ~~second~~first quarter of ~~2020,~~2021, the Company approved plans to consolidate 127 banking ~~centers throughout the Community Banks of Colorado, Bank Midwest and Hillcrest Bank markets.~~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, ~~and~~ the judgment of the sales agent and often involves obtaining third-party appraisals from certified real estate appraisers. These fair value measurements are classified as level 3. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. ~~The~~As of June 30, 2021, the Company recognized $1.6 million of ~~impairments~~impairment in its ~~unaudited~~ consolidated statements of operations related to premises and equipment classified as held-for-sale totaling ~~$8.0 million during the nine months ended September 30, 2020.~~$6.0 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 ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


	September 30, 2020				June 30, 2021
	Total		Losses from fair value changes		Total		Losses from fair value changes
Individually evaluated loans	$	33,603	$	1,969	$	20,807	$	1,227
Other real estate owned		4,590		423
Premises and equipment		8,024		1,631		6,032		1,552
Mortgage servicing rights		7,173		847
Total	$	53,390	$	4,870	$	26,839	$	2,779


	September 30, 2019				June 30, 2020
	Total		Losses from fair value changes		Total		Losses from fair value changes
Individually evaluated loans	$	37,002	$	7,571	$	33,075	$	1,349
Other real estate owned		7,904		872
Premises and equipment		3,385		898		8,024		1,631
Mortgage servicing rights		2,879		453		4,035		1,102
Total	$	51,170	$	9,794	$	45,134	$	4,082

The Company did not record any liabilities measured at fair value on a non-recurring basis during the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are set forth below:


	Level in fair value	September 30, 2020				December 31, 2019				Level in fair value	June 30, 2021				December 31, 2020
	measurement	Carrying		Estimated		Carrying		Estimated		measurement	Carrying		Estimated		Carrying		Estimated
	hierarchy	amount		fair value		amount		fair value		hierarchy	amount		fair value		amount		fair value
ASSETS
Cash and cash equivalents	Level 1	$	445,103	$	445,103	$	110,190	$	110,190	Level 1	$	1,004,493	$	1,004,493	$	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		92,892		92,892		95,256		95,256	Level 2		216,231		216,231		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		476,650		476,650		542,037		542,037	Level 2		386,572		386,572		462,779		462,779
Municipal securities available-for-sale	Level 2		394		394		372		372	Level 2		314		314		318		318
Municipal securities available-for-sale	Level 3		115		115		115		115	Level 3		57		57		57		57
Corporate debt	Level 2		2,003		2,003		—		—	Level 2		2,155		2,155		1,998		1,998
Other available-for-sale securities	Level 3		469		469		469		469	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		250,790		255,032		127,560		128,770	Level 2		337,831		338,041		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		69,211		69,688		55,324		54,971	Level 2		349,804		349,104		70,428		70,761
Non-marketable securities	Level 2		29,598		29,598		29,751		29,751	Level 2		14,741		14,741		16,493		16,493
Loans receivable	Level 3		4,556,121		4,723,757		4,415,406		4,481,209	Level 3		4,300,757		4,384,071		4,353,726		4,511,357
Loans held for sale	Level 2		273,003		273,003		117,444		117,444	Level 2		134,805		134,805		247,813		247,813
Accrued interest receivable	Level 2		22,852		22,852		19,157		19,157	Level 2		17,156		17,156		18,795		18,795
Interest rate swap derivatives	Level 2		21,287		21,287		10,175		10,175	Level 2		11,682		11,682		18,149		18,149
Mortgage banking derivatives	Level 3		11,960		11,960		1,515		1,515	Level 3		3,013		3,013		7,001		7,001
LIABILITIES
Deposit transaction accounts	Level 2		4,589,394		4,589,394		3,678,979		3,678,979	Level 2		5,233,552		5,233,552		4,690,100		4,690,100
Time deposits	Level 2		1,027,066		1,036,192		1,058,153		1,058,354	Level 2		924,501		928,221		986,132		993,070
Securities sold under agreements to repurchase	Level 2		23,904		23,904		56,935		56,935	Level 2		22,957		22,957		22,897		22,897
Federal Home Loan Bank advances	Level 2		—		—		207,675		207,890
Accrued interest payable	Level 2		8,219		8,219		9,328		9,328	Level 2		4,755		4,755		6,762		6,762
Interest rate swap derivatives	Level 2		66,650		66,650		22,558		22,558	Level 2		33,331		33,331		57,060		57,060
Mortgage banking derivatives	Level 3		1,446		1,446		440		440	Level 3		715		715		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 and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~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 ~~2018~~ and ~~2017.~~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 ~~September~~June 30, ~~2020,~~2021, we had ~~$6.6~~$7.1 billion in assets, ~~$4.6~~$4.3 billion in loans, ~~$5.6~~$6.2 billion in deposits and ~~$0.8~~$0.9 billion in equity.

~~Recent Events~~

The COVID-19 pandemic has caused substantial disruption to the communities we serve and has changed the way we live and work. We continue to remain committed to ensuring our associates, clients, and communities are receiving the support they need during these challenging times. All of our banking centers remain operational through our drive-thru services and on an appointment-only basis in the lobbies. We have 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. The length of the pandemic and the efficacy of the extraordinary government-mandated measures that have been put into place to address it are unknown, but have already had, and are likely to continue to have, a significantly negative impact to the U.S. labor market, consumer spending and business operations.

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

Operating Highlights and Key Challenges

Profitability and returns


●		Net income totaled ~~$61.4~~$51.0 million, or ~~$1.97~~$1.63 per diluted share, for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to net income of ~~$60.8~~$33.5 million, or ~~$1.93~~$1.08 per diluted share, for the same period in the prior year. Net income during the nine months ended September 30, 2020 included $1.6 million, after tax, of expenses related to banking center consolidations. Adjusting for these expenses, net income would have been $63.1 million, or $2.03 per diluted share. Net income during the nine months ended September 30, 2019 included $0.7 million, after tax, of expenses related to banking center consolidations. Adjusting for these expenses, net income would have been $61.5 million, or $1.95 per diluted share.
●		The nine months ended September 30, 2020 included a $17.6 million loan loss provision from the CECL model, driven by deteriorating economic conditions caused by the impact of COVID-19, compared to a loan loss provision of $10.5 million for the nine months ended September 30, 2019.
●		The return on average tangible assets was ~~1.36%~~1.53% for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~1.45%~~1.14% for the same period in the prior year. ~~Adjusting for the banking center consolidation-related expense, the return on average tangible assets for the nine months ended September 30, 2020 and 2019 was 1.39% and 1.46%, respectively.~~

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●

The return on average tangible common equity was ~~12.47%~~14.29% for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~13.43%~~10.38% for the same period in the prior year. ~~Adjusting for the banking center consolidation-related expense, the return on average tangible common equity for the nine months ended September 30, 2020 and 2019 was 12.80% and 13.58%, respectively.~~

Strategic execution


●		~~Continue to pro-actively address~~Excluding PPP loans, loan originations during the ~~impacts~~three months ended June 30, 2021 more than doubled the first quarter of ~~the COVID-19 pandemic through executing on our priorities as detailed in the “Recent Events” section above.~~2021 loan originations, increasing $189.0 million, or 109.2%.
●		~~Funded $358.9 million in SBA Paycheck Protection Program loans for 2,164 clients and are actively assisting through~~Completed the ~~forgiveness process.~~
●		Aspreviously announced plans to consolidate seven banking centers during 2021 as part of our continued focus on improving operating efficiencies and investing in digital solutions for our clients, during the second quarter of 2020, we approved plans to consolidate 12 banking centers throughout the Community Banks of Colorado, Bank Midwest and Hillcrest Bank markets. Consolidation-relatedclients. Banking center consolidation-related expense of ~~$2.1~~$1.6 million was recorded to non-interest expense during the ~~nine~~six months ended ~~September~~June 30, ~~2020. The consolidations are expected to be substantially complete by year end.~~2021.
●		~~Maintain~~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. The Company has no direct exposure to other industries highly impacted, including aviation, cruise lines, energy services, auto manufacturing/dealer floor plans, hedge funds, gaming and casinos, convention centers, malls and taxi/ride share companies. Furthermore, we have no exposure to consumer credit card, indirect auto finance or car leasing.

Loan portfolio


●		Total loans ended the quarter at ~~$4.6~~$4.3 billion and ~~increased $140.7~~decreased $53.0 million, or ~~3.2%,~~2.5% annualized, since December 31, ~~2019, primarily driven by~~2020. Excluding PPP loans, ~~originated during the second quarter of 2020.~~total loans decreased by $6.5 million, or 0.3% annualized.
●		~~We are taking a very careful approach to extending new credit as well as continuing an intense focus on managing credit risk and yield.~~ Total loan originations during the ~~nine~~three months ended ~~September~~June 30, ~~2020~~2021 were ~~$887.4 million,~~$362.1 million. New loan originations over the trailing 12 months totaled $1.1 billion, led by ~~PPP loans of $358.9 million and~~ commercial loan originations ~~excluding~~of $649.3 million, including PPP ~~loans,~~loan originations of ~~$271.2~~$121.3 million.

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●

COVID-related loan modifications are handled individually on a relationship basis. As of ~~September~~June 30, ~~2020, $165.2~~2021, $108.6 million, or ~~3.6%~~2.5%, of total loans were on a COVID-related modification plan.

Credit quality


●		~~Provision~~Allowance for ~~loan~~credit losses totaled ~~$17.6~~1.14% of total loans at June 30, 2021, compared to 1.37% at December 31, 2020. Excluding PPP loans, the ACL totaled 1.18% of total loans at June 30, 2021, compared to 1.43% at December 31, 2020.
●		The Company recorded total provision release of $9.4 million ~~during~~for the ~~nine~~six months ended ~~September~~June 30, ~~2020, including~~2021, which included a ~~$0.1~~provision release of $9.9 million for funded loans and a provision expense of $0.5 million for unfunded loan ~~commitment reserves, to provide coverage~~commitments, driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast. During the six months ended June 30, 2020, the Company recorded total provision expense of $16.4 million, which included a provision expense of $16.5 million for ~~the impact~~funded loans and a provision release of $0.1 million for unfunded loan commitments, driven by deteriorating economic conditions ~~as a result~~caused by the impact of COVID-19.
●		Net charge-offs to average total loans for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 totaled 0.04%, annualized, compared to ~~0.19%~~0.06% for the full year ended December 31, ~~2019.~~2020.
●		Credit quality remained strong, as non-performing loans (comprised of non-accrual loans and non-accrual TDRs) improved to ~~0.41%~~0.32% of total loans, compared to ~~0.49%~~0.47% at December 31, ~~2019.~~2020. Non-performing assets to total loans and OREO improved to ~~0.51%~~0.44% at ~~September~~June 30, ~~2020,~~2021, compared to ~~0.66%~~0.58% at December 31, ~~2019.~~2020. Excluding PPP loans, non-performing loans to total loans were ~~0.45%~~0.33%, and non-performing assets to total loans and OREO were ~~0.56%~~0.46% at ~~September~~June 30, ~~2020.~~
●		Allowance for credit losses increased by 56.1% from December 31, 2019 to September 30, 2020 due to the adoption of CECL on January 1, 2020 and to provide coverage for the economic impact of the COVID-19 pandemic. The allowance for credit losses totaled 1.34% of total loans compared to 0.88% at December 31, 2019. Excluding PPP loans, the allowance for credit losses totaled 1.45% of total loans at September 30, 2020.2021.

Client deposit funded balance sheet


●		Average ~~non-interest bearing demand~~transaction deposits ~~increased $210.8 million, or 18.3% during~~for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021 totaled $5.0 billion, increasing 28.0%, compared to ~~the same period in the prior year. Our clients used their core operating accounts~~$3.9 billion for ~~PPP funds and~~

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		~~economic stimulus checks, which aided the strong deposit growth. Average transaction deposits increased $510.3 million during the nine months ended September 30, 2020, compared to~~ the same period in the prior year.
●		~~Total~~Average total deposits ~~averaged $5.1~~totaled $5.9 billion during the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, increasing ~~10.3%~~20.0%, compared to ~~$4.7~~$4.9 billion for ~~the same period in the prior year.~~
●		~~Time deposits averaged $1.0 billion during the nine months ended September 30, 2020, decreasing $30.4 million, or 2.8%, from~~ the same period in the prior year.
●		The mix of transaction deposits to total deposits improved ~~405 basis points~~ to ~~81.7%~~85.0% at ~~September~~June 30, ~~2020,~~2021, compared to ~~77.7%~~82.6% at December 31, ~~2019.~~2020.
●		Cost of deposits totaled ~~0.49%~~0.26% during the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, decreasing 1519 basis points ~~compared to the year ended~~from December 31, ~~2019. The cost of funds totaled 0.69% during the nine months ended September 30, 2020, decreasing 27 basis points compared to the year ended December 31, 2019.~~2020.

Revenues


●		Fully taxable equivalent (“FTE”) net interest income totaled ~~$148.2~~$92.6 million during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and decreased ~~$11.0~~$7.6 million, or ~~6.9%~~7.6%, compared to the same period in the prior year primarily due to ~~the decline in short-term~~ interest ~~rates as a result of monetary policy~~rate actions taken by the Federal ~~Reserve.~~Reserve during 2020 and lower non-PPP originated loan balances.
●		The FTE net interest margin narrowed 5070 basis points to ~~3.48%~~2.92% for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, as compared to the same period in the prior year due to lower earning asset yields. The yield on earning assets decreased 71100 basis points, led by the remix of assets into lower-yielding cash balances and an 8318 basis point decrease in the originated loan portfolio ~~yields due to the decline in short-term interest rates.~~yields. The cost of funds decreased 2720 basis points to ~~0.69%.~~0.26% for the six months ended June 30, 2021.
●		Non-interest income totaled ~~$106.9~~$58.6 million during the ~~nine~~six months ended ~~September~~June 30, ~~2020, increasing $44.4~~2021, decreasing $3.7 million, or ~~71.1%~~6.0%, from the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, primarily driven by a decrease in mortgage banking ~~income.~~income ~~Service charges and bank card fees decreased a combined $2.3 million due to changes in consumer behavior due to the COVID-19 pandemic.~~.

Expenses


●		Non-interest expense totaled ~~$157.8~~$96.0 million during the ~~nine~~six months ended ~~September~~June 30, 2021, representing a decrease of $6.4 million, or 6.3%, compared to the six months ended June 30, 2020, ~~representing an increase of $23.1 million, or 17.2%, from~~driven by lower mortgage-related compensation as well as the ~~nine months ended September 30, 2019. Salaries and benefits increased $16.2 million due~~Company’s strategic efforts to higher mortgage banking commissions. Banking center consolidation-related expense totaling $2.1 million was incurred during the nine months ended September 30, 2020, compared to $0.9 million during the same period in the last year. Additionally, included in the prior period were net gains on the sale of OREO of $7.2 million, compared to minimal net gains on the sale of OREO recorded in 2020.improve operating efficiency.
●		Income tax expense totaled ~~$14.5 million and $12.0~~$11.1 million during the ~~first nine~~six months ofended June 30, 2021, compared to $7.7 million during the six months ended June 30, 2020 ~~and 2019, respectively. Included in~~driven by 2021’s higher pre-tax income ~~tax expense was $0.1 million of expense~~ during the first ~~nine months of 2020 and $2.2 million of benefit during the first nine months of 2019 from stock compensation activity. Adjusting for stock compensation activity, the~~six months. The effective tax rate for the ~~first nine~~six months ~~of 2020~~ended June 30, 2021 was ~~18.9%~~18.5%, adjusted for stock compensation activity, compared to ~~19.4% in~~19.0% for the ~~prior period. The lower rate compared to the statutory rate reflects the continued success of our tax strategies and tax exempt income.~~full year 2020.

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Strong capital position


●		Capital ratios continue to be strong ~~and~~as our capital position remains in excess of federal bank regulatory ~~agency “well capitalized”~~ thresholds. As of ~~September~~June 30, ~~2020,~~2021, our consolidated tier 1 leverage ratio was ~~10.60%~~10.57%, and our common equity tier 1 and consolidated tier 1 risk based capital ratios were ~~14.25%~~both 15.31%.
●		The Bank maintains ample liquidity with ~~excess cash liquidity of $400 million and~~ access to ~~$2.3~~$2.6 billion in readily available funds.
●		At ~~September~~June 30, ~~2020,~~2021, common book value per share was ~~$26.13.~~$27.66. The tangible common book value per share increased ~~$1.51~~$0.92 to ~~$22.40~~$24.01 at ~~September~~June 30, ~~2020,~~2021 compared to December 31, ~~2019, as the~~2020, primarily due to earnings, net of dividends paid and ~~positive fair market value adjustments in the available-for-sale securities portfolio outpaced the share repurchases, dividends and CECL cumulative effect adjustment.~~lower accumulated other comprehensive income.

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Key Challenges

There are a number of significant challenges confronting us and our industry. We face continual challenges implementing our business strategy, 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~~interest rate actions taken by the Federal Reserve.

~~General economic conditions~~The COVID-19 pandemic has caused disruption and is likely to continue to ~~decline as a result of the COVID-19 pandemic. While we~~present challenges to our business. We continue to ~~respond quickly and prudently~~remain committed to ~~minimize any disruptions to~~ensuring our ~~business, our~~associates, clients and communities continue to face significant changes and disruption. The markets in which we do business were subject to shelter-in-place or safe at home orders, which forced non-essential businesses to close temporarily. Our markets are in varying phases of reopening plans and are subject to varying state and local mandates that are continually changing, and many businesses continue to be impacted by these actions. U.S. COVID-19 cases are hitting record daily highs and, as winter approaches, it is possible state and local shelter-in-place orders will return.receiving the support they need. Our banking centers ~~remain open by appointment-only~~are fully operational, and ~~through drive-thru services. We~~we continue 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 ~~Participation~~Protection Program, including assistance with PPP loan forgiveness applications, and loan modifications, as needed. ~~The~~While access to vaccines in the United States has increased, the efficacy and public acceptance of those vaccines, the impact of the new variants of the virus, and the length of time that the ~~pandemic and the efficacy of the extraordinary~~ government-mandated measures ~~that have been put into~~must remain in place or potentially be reinstituted to address itCOVID-19 are ~~still unknown, but have already~~unknown. The pandemic has had ~~and are likely to continue to have,~~ a significantly negative impact to the U.S. labor market, consumer spending and business ~~operations.~~operations, and it is not clear to what degree new outbreaks of COVID-19 cases will have further negative impact.

Our markets have historically outperformed the national averages on many key indicators; however, the economic impact from the COVID-19 pandemic ~~is continuing to cause~~has caused economic strain nationally and across all of our markets. We are encouraged by the positive signs of economic recovery we are seeing throughout our markets. We are focused on growing our loan portfolio while taking a ~~very~~ careful approach to extending new credit ~~as well as continuing an intense focus on managing credit risk~~ and ~~yield.~~adhering to our established underwriting standards and self-imposed concentration limits. A significant portion of our loan portfolio is secured by real estate and any deterioration in real estate values or credit quality or elevated levels of non-performing assets would ultimately have a negative impact on the quality of our loan portfolio.

As of ~~September~~June 30, ~~2020,~~2021, the Company had low exposure to industries highly impacted by the COVID-19 pandemic. Within the commercial loan segment, restaurants were ~~4.6%~~5.4%, retailers ~~2.6%~~3.1%, hospital/medical ~~4.7%~~5.9% and oil and gas 0.7% of total loans. Within the commercial real estate non-owner occupied loan segment, hotel and lodging was ~~4.0%~~4.4%, multifamily ~~1.6%~~2.3% and retail 1.2% of total loans. The Company had no direct exposure to other industries and loan types more highly impacted by the pandemic including aviation, cruise lines, energy services, auto manufacturing/dealer floor plans, hedge funds, ~~gaming and casinos,~~ convention centers, credit cards, malls and taxi/ride share businesses. Furthermore, the Company had no consumer credit card, indirect auto or car leasing exposure.

The agriculture industry iscontinues to be impacted by volatility in ~~the sixth year of depressed~~ commodity prices ~~and is also being impacted~~as well as supply chain issues driven by the COVID-19 pandemic. Our food and agribusiness portfolio is only ~~4.8%~~4.6% of total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent ~~1.1%~~0.9% 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 $1.0 billion as of June 30, 2021 and have increased $398.9 million from December 31, 2020 and $862.1 million from June 30, 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 ~~outstanding portfolio at September~~and other high-quality earning assets such as investment securities. Investment securities totaled $1.3 billion as of June 30, ~~2020 totaled $4.6 billion, representing an increase of $140.7~~2021 and increased $253.1 million, or ~~3.2%~~24.0%, compared to December 31, ~~2019, led by~~2020. As of June 30, 2021, our loans outstanding totaled $4.3 billion,

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decreasing $53.0 million, or 1.2%, compared to December 31, 2020 due largely to a decrease in PPP loans totaling ~~$348.3~~$46.5 million ~~that were partially offset by lower commercial and industrial loans~~as a result of ~~$159.0 million, or 11.3%.~~PPP loan forgiveness. During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, our weighted average rate on new loans funded at the time of origination was ~~3.13%~~3.27%, compared to the weighted average yield of our originated loan portfolio of ~~4.01%~~3.97% (FTE). ~~Future growth in our~~Our net interest income ~~will ultimately be dependent on our ability to continue to generate sufficient volumes of high-quality originated loans and other high-quality earning assets as well as~~has been impacted by interest rate actions taken by the Federal Reserve 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 competition as non-bank payment businesses, including ~~fintechs,~~FinTechs, are expanding into traditional banking products. While certain external factors are out of our control and may provide obstacles to our business strategy, we are prepared to deal with these ~~challenges.~~challenges and expand our offerings in digital technology where appropriate. We seek to remain flexible, yet methodical and proactive, in our strategic decision making so that we can quickly respond to market changes and the inherent challenges and opportunities that accompany such changes.

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Performance Overview

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

As of and for the three months ended

As of and for the nine months ended

September 30,

December 31,

September 30,

September 30,

September 30,

2020

2019

2019

2020

2019
Key Ratios⁽¹⁾

Return on average assets

1.71%

1.31%

1.46%

1.32%

1.40%
Return on average tangible assets⁽²⁾

1.76%

1.35%

1.51%

1.36%

1.45%
Return on average tangible assets, adjusted^(2)(10)

1.78%

1.35%

1.56%

1.39%

1.46%
Return on average equity

14.00%

10.13%

11.44%

10.53%

11.16%
Return on average tangible common equity⁽²⁾

16.49%

12.07%

13.68%

12.47%

13.43%
Return on average tangible common equity, adjusted^(2)(10)

16.69%

12.07%

14.11%

12.80%

13.58%
Loan to deposit ratio (end of period)

81.12%

93.21%

92.99%

81.12%

92.99%
Non-interest bearing deposits to total deposits (end of period)

27.31%

25.01%

26.13%

27.31%

26.13%
Net interest margin⁽³⁾

3.13%

3.68%

3.81%

3.39%

3.89%
Net interest margin FTE^(2)(3)(9)

3.21%

3.77%

3.91%

3.48%

3.98%
Interest rate spread FTE^(2)(5)(9)

3.04%

3.49%

3.61%

3.27%

3.71%
Yield on earning assets⁽³⁾

3.50%

4.35%

4.52%

3.87%

4.58%
Yield on earning assets FTE^(2)(4)(9)

3.59%

4.44%

4.61%

3.96%

4.67%
Cost of interest bearing liabilities⁽⁴⁾

0.55%

0.95%

1.00%

0.69%

0.96%
Cost of deposits

0.40%

0.64%

0.67%

0.49%

0.64%
Non-interest income to total revenue FTE⁽²⁾

48.13%

28.19%

31.82%

41.90%

28.18%
Non-interest expense to average assets

3.39%

3.09%

2.96%

3.39%

3.10%
Non-interest expense to average assets, adjusted^(1)(2)(10)

3.37%

3.09%

2.90%

3.34%

3.08%
Efficiency ratio⁽²⁾

60.30%

64.82%

56.83%

62.42%

61.38%
Efficiency ratio FTE⁽²⁾⁽⁹⁾

59.47%

63.66%

55.90%

61.48%

60.33%
Efficiency ratio FTE, adjusted^(2)(9)(10)

59.01%

63.66%

54.75%

60.64%

59.93%

Total Loans Asset Quality Data^(6)(7)(8)

Non-performing loans to total loans

0.41%

0.49%

0.58%

0.41%

0.58%
Non-performing loans to total loans excluding PPP loans

0.45%

0.49%

0.58%

0.45%

0.58%
Non-performing assets to total loans and OREO

0.51%

0.66%

0.76%

0.51%

0.76%
Non-performing assets to total loans and OREO excluding PPP loans

0.56%

0.66%

0.76%

0.56%

0.76%
Allowance for credit losses to total loans

1.34%

0.88%

0.88%

1.34%

0.88%
Allowance for credit losses to total loans excluding PPP loans

1.45%

0.88%

0.88%

1.45%

0.88%
Allowance for credit losses to non-performing loans

322.95%

179.62%

152.41%

322.95%

152.41%
Net charge-offs to average loans

0.04%

0.07%

0.65%

0.04%

0.23%

Key Ratios⁽¹⁾


	As of and for the three months ended			As of and for the six months ended
	June 30,	December 31,	June 30,	June 30,	June 30,
	2021	2020	2020	2021	2020
Return on average assets	1.38%	1.63%	1.13%	1.49%	1.11%
Return on average tangible assets⁽²⁾	1.41%	1.67%	1.16%	1.53%	1.14%
Return on average equity	11.51%	13.27%	9.23%	12.26%	8.72%
Return on average tangible common equity⁽²⁾	13.41%	15.55%	10.98%	14.29%	10.38%
Loan to deposit ratio (end of period)	69.84%	76.70%	88.34%	69.84%	88.34%
Non-interest bearing deposits to total deposits (end of period)	39.58%	37.19%	27.76%	39.58%	27.76%
Net interest margin⁽³⁾	2.74%	3.16%	3.30%	2.84%	3.53%
Net interest margin FTE^(2)(3)(4)	2.82%	3.24%	3.39%	2.92%	3.62%
Interest rate spread FTE⁽⁴⁾⁽⁵⁾	2.66%	3.05%	3.19%	2.75%	3.40%
Yield on earning assets⁽⁶⁾	2.96%	3.47%	3.75%	3.08%	4.06%
Yield on earning assets FTE^(2)(4)(6)	3.04%	3.55%	3.84%	3.16%	4.16%
Cost of interest bearing liabilities	0.38%	0.50%	0.65%	0.41%	0.76%
Cost of deposits	0.24%	0.33%	0.47%	0.26%	0.55%
Non-interest income to total revenue FTE⁽⁴⁾	35.38%	40.11%	44.40%	38.76%	38.35%
Non-interest expense to average assets	2.63%	2.90%	3.42%	2.80%	3.38%
Efficiency ratio	65.66%	58.76%	62.05%	64.16%	63.63%
Efficiency ratio FTE⁽²⁾⁽⁴⁾	64.48%	57.87%	61.13%	63.08%	62.63%

Total Loans Asset Quality Data^(7)(8)(9)
Non-performing loans to total loans	0.32%	0.47%	0.42%	0.32%	0.42%
Non-performing loans to total loans excluding PPP loans	0.33%	0.49%	0.45%	0.33%	0.45%
Non-performing assets to total loans and OREO	0.44%	0.58%	0.55%	0.44%	0.55%
Non-performing assets to total loans and OREO excluding PPP loans	0.46%	0.60%	0.60%	0.46%	0.60%
Allowance for credit losses to total loans	1.14%	1.37%	1.26%	1.14%	1.26%
Allowance for credit losses to total loans excluding PPP loans	1.18%	1.43%	1.36%	1.18%	1.36%
Allowance for credit losses to non-performing loans	353.22%	293.21%	302.34%	353.22%	302.34%
Net charge-offs to average loans	0.07%	0.11%	0.05%	0.04%	0.04%


(1)		Ratios are annualized.
(2)		Ratio represents non-GAAP financial measure. See non-GAAP reconciliations below.
(3)		Net interest margin represents net interest income, including accretion income on interest earning assets, as a percentage of average interest earning assets.
(4)		~~Interest earning assets include assets that earn interest/accretion or dividends. Any market value~~Presented on an FTE basis using the statutory rate of 21% for all periods presented. The taxable equivalent adjustments ~~on investment securities or loans~~included above are ~~excluded from interest earning assets.~~$1,279, $1,260 and $1,301 for the three months ended June 30, 2021, December 31, 2020 and June 30, 2020, respectively. The taxable equivalent adjustments included above are $2,547 and $2,568 for the six months ended June 30, 2021 and June 30, 2020, respectively.
(5)		Interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average cost of interest bearing liabilities.
(6)		Interest earning assets include assets that earn interest/accretion or dividends. Any market value adjustments on investment securities are excluded from interest earning assets.
(7)		Non-performing loans consist of non-accruing loans and restructured loans on non-accrual.
~~(7)~~(8)		Non-performing assets include non-performing loans and OREO.
~~(8)~~(9)		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 $1,275, $1,290 and $1,264 for the three months ended September 30, 2020, December 31, 2019 and September 30, 2019, respectively. The taxable equivalent adjustments included above are $3,843 and $3,775 for the nine months ended September 30, 2020 and September 30, 2019, respectively.
~~(10)~~		~~Ratios are adjusted for banking center consolidation-related expense. See non-GAAP reconciliations below.~~

Table of Contents

About Non-GAAP Financial Measures

Certain of the financial measures and ratios we present, including “tangible assets,” “return on average tangible assets,” “return on average tangible common equity,” “tangible common book value,” “tangible common book value per share,” “tangible common equity,” “tangible common equity to tangible assets,” “adjusted non-interest expense,” “adjusted non-interest expense to average assets,” “adjusted net income,” “adjusted earnings per share - diluted,” “adjusted return on average tangible assets,” “adjusted return on average tangible common equity,” and “fully taxable ~~equivalent (FTE)”~~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


	September 30,		December 31,		September 30,		June 30,		December 31,		June 30,
	2020		2019		2019		2021		2020		2020
Total shareholders’ equity	$	799,357	$	766,920	$	753,326	$	851,866	$	820,691	$	776,967
Less: goodwill and core deposit intangible assets, net		(122,871)		(123,758)		(124,054)		(121,983)		(122,575)		(123,166)
Add: deferred tax liability related to goodwill		8,927		8,241		8,012		9,612		9,155		8,698
Tangible common equity (non-GAAP)	$	685,413	$	651,403	$	637,284	$	739,495	$	707,271	$	662,499

Total assets	$	6,600,676	$	5,895,512	$	5,990,050	$	7,136,128	$	6,659,950	$	6,385,431
Less: goodwill and core deposit intangible assets, net		(122,871)		(123,758)		(124,054)		(121,983)		(122,575)		(123,166)
Add: deferred tax liability related to goodwill		8,927		8,241		8,012		9,612		9,155		8,698
Tangible assets (non-GAAP)	$	6,486,732	$	5,779,995	$	5,874,008	$	7,023,757	$	6,546,530	$	6,270,963

Tangible common equity to tangible assets calculations:
Total shareholders' equity to total assets		12.11%		13.01%		12.58%		11.94%		12.32%		12.17%
Less: impact of goodwill and core deposit intangible assets, net		(1.54)%		(1.74)%		(1.73)%		(1.41)%		(1.52)%		(1.61)%
Tangible common equity to tangible assets (non-GAAP)		10.57%		11.27%		10.85%		10.53%		10.80%		10.56%

Tangible common book value per share calculations:
Tangible common equity (non-GAAP)	$	685,413	$	651,403	$	637,284	$	739,495	$	707,271	$	662,499
Divided by: ending shares outstanding		30,594,412		31,176,627		31,169,086		30,800,985		30,634,291		30,569,011
Tangible common book value per share (non-GAAP)	$	22.40	$	20.89	$	20.45	$	24.01	$	23.09	$	21.67

Tangible common book value per share, excluding accumulated other comprehensive income calculations:
Tangible common equity (non-GAAP)	$	685,413	$	651,403	$	637,284	$	739,495	$	707,271	$	662,499
Accumulated other comprehensive income, net of tax		(11,080)		(2,062)		(3,087)		(1,695)		(9,766)		(12,195)
Tangible common book value, excluding accumulated other comprehensive income, net of tax (non-GAAP)		674,333		649,341		634,197		737,800		697,505		650,304
Divided by: ending shares outstanding		30,594,412		31,176,627		31,169,086		30,800,985		30,634,291		30,569,011
Tangible common book value per share, excluding accumulated other comprehensive income, net of tax (non-GAAP)	$	22.04	$	20.83	$	20.35	$	23.95	$	22.77	$	21.27

Table of Contents

Return on Average Tangible Assets and Return on Average Tangible Equity


	As of and for the three months ended						As of and for the nine months ended				As of and for the three months ended						As of and for the six months ended
	September 30,		December 31,		September 30,		September 30,		September 30,		June 30,		December 31,		June 30,		June 30,		June 30,
	2020		2019		2019		2020		2019		2021		2020		2020		2021		2020
Net income	$	27,893	$	19,519	$	21,642	$	61,422	$	60,846	$	24,200	$	27,169	$	17,705	$	51,012	$	33,529
Add: impact of core deposit intangible amortization expense, after tax		226		225		224		680		674		228		228		227		455		454
Net income adjusted for impact of core deposit intangible amortization expense, after tax	$	28,119	$	19,744	$	21,866	$	62,102	$	61,520	$	24,428	$	27,397	$	17,932	$	51,467	$	33,983

Average assets	$	6,483,016	$	5,924,459	$	5,865,785	$	6,222,442	$	5,807,689	$	7,056,894	$	6,635,490	$	6,318,596	$	6,907,022	$	6,090,724
Less: average goodwill and core deposit intangible asset, net of deferred tax liability related to goodwill		(114,122)		(115,665)		(116,188)		(114,406)		(116,481)		(112,552)		(113,594)		(114,631)		(112,698)		(114,779)
Average tangible assets (non-GAAP)	$	6,368,894	$	5,808,794	$	5,749,597	$	6,108,036	$	5,691,208	$	6,944,342	$	6,521,896	$	6,203,965	$	6,794,324	$	5,975,945

Average shareholders' equity	$	792,358	$	764,694	$	750,314	$	779,491	$	728,901	$	843,116	$	814,483	$	771,593	$	838,930	$	772,986
Less: average goodwill and core deposit intangible asset, net of deferred tax liability related to goodwill		(114,122)		(115,665)		(116,188)		(114,406)		(116,481)		(112,552)		(113,594)		(114,631)		(112,698)		(114,779)
Average tangible common equity (non-GAAP)	$	678,236	$	649,029	$	634,126	$	665,085	$	612,420	$	730,564	$	700,889	$	656,962	$	726,232	$	658,207

Return on average assets		1.71%		1.31%		1.46%		1.32%		1.40%		1.38%		1.63%		1.13%		1.49%		1.11%
Return on average tangible assets (non-GAAP)		1.76%		1.35%		1.51%		1.36%		1.45%		1.41%		1.67%		1.16%		1.53%		1.14%
Return on average equity		14.00%		10.13%		11.44%		10.53%		11.16%		11.51%		13.27%		9.23%		12.26%		8.72%
Return on average tangible common equity (non-GAAP)		16.49%		12.07%		13.68%		12.47%		13.43%		13.41%		15.55%		10.98%		14.29%		10.38%

Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin


	As of and for the three months ended						As of and for the nine months ended				As of and for the three months ended						As of and for the six months ended
	September 30,		December 31,		September 30,		September 30,		September 30,		June 30,		December 31,		June 30,		June 30,		June 30,
	2020		2019		2019		2020		2019		2021		2020		2020		2021		2020
Interest income	$	52,302	$	59,616	$	61,372	$	164,714	$	182,985	$	48,450	$	53,288	$	53,744	$	97,663	$	112,412
Add: impact of taxable equivalent adjustment		1,275		1,290		1,264		3,843		3,775		1,279		1,260		1,301		2,547		2,568
Interest income FTE (non-GAAP)	$	53,577	$	60,906	$	62,636	$	168,557	$	186,760	$	49,729	$	54,548	$	55,045	$	100,210	$	114,980

Net interest income	$	46,715	$	50,388	$	51,785	$	144,390	$	155,442	$	44,868	$	48,556	$	47,328	$	90,089	$	97,675
Add: impact of taxable equivalent adjustment		1,275		1,290		1,264		3,843		3,775		1,279		1,260		1,301		2,547		2,568
Net interest income FTE (non-GAAP)	$	47,990	$	51,678	$	53,049	$	148,233	$	159,217	$	46,147	$	49,816	$	48,629	$	92,636	$	100,243

Average earning assets	$	5,944,790	$	5,438,041	$	5,385,407	$	5,690,884	$	5,344,494	$	6,561,588	$	6,108,513	$	5,766,672	$	6,400,651	$	5,562,538
Yield on earning assets		3.50%		4.35%		4.52%		3.87%		4.58%		2.96%		3.47%		3.75%		3.08%		4.06%
Yield on earning assets FTE (non-GAAP)		3.59%		4.44%		4.61%		3.96%		4.67%		3.04%		3.55%		3.84%		3.16%		4.16%
Net interest margin		3.13%		3.68%		3.81%		3.39%		3.89%		2.74%		3.16%		3.30%		2.84%		3.53%
Net interest margin FTE (non-GAAP)		3.21%		3.77%		3.91%		3.48%		3.98%		2.82%		3.24%		3.39%		2.92%		3.62%

Table of Contents

Efficiency Ratio

As of and for the three months ended

As of and for the nine months ended

September 30,

December 31,

September 30,

September 30,

September 30,

2020

2019

2019

2020

2019
Net interest income

$
46,715

$
50,388

$
51,785

$
144,390

$
155,442
Add: impact of taxable equivalent adjustment

1,275

1,290

1,264

3,843

3,775
Net interest income, FTE (non-GAAP)

$
47,990

$
51,678

$
53,049

$
148,233

$
159,217

Non-interest income

$
44,532

$
20,282

$
24,759

$
106,901

$
62,470

Non-interest expense

$
55,321

$
46,107

$
43,793

$
157,752

$
134,638
Less: core deposit intangible asset amortization

(295)

(296)

(295)

(887)

(887)
Non-interest expense, adjusted for core deposit intangible asset amortization

$
55,026

$
45,811

$
43,498

$
156,865

$
133,751

Non-interest expense, adjusted for core deposit intangible asset amortization

$
55,026

$
45,811

$
43,498

$
156,865

$
133,751
Banking center consolidation-related expense

(432)

—

(898)

(2,140)

(898)
Adjusted non-interest expense (non-GAAP)

$
54,594

$
45,811

$
42,600

$
154,725

$
132,853

Efficiency ratio

60.30%

64.82%

56.83%

62.42%

61.38%
Efficiency ratio FTE (non-GAAP)

59.47%

63.66%

55.90%

61.48%

60.33%
Adjusted efficiency ratio FTE (non-GAAP)

59.01%

63.66%

54.75%

60.64%

59.93%


	As of and for the three months ended						As of and for the six months ended
	June 30,		December 31,		June 30,		June 30,		June 30,
	2021		2020		2020		2021		2020
Net interest income	$	44,868	$	48,556	$	47,328	$	90,089	$	97,675
Add: impact of taxable equivalent adjustment		1,279		1,260		1,301		2,547		2,568
Net interest income, FTE (non-GAAP)	$	46,147	$	49,816	$	48,629	$	92,636	$	100,243

Non-interest income	$	25,266	$	33,357	$	38,837	$	58,627	$	62,369

Non-interest expense	$	46,343	$	48,425	$	53,760	$	96,011	$	102,431
Less: core deposit intangible asset amortization		(296)		(296)		(296)		(592)		(592)
Non-interest expense, adjusted for core deposit intangible asset amortization	$	46,047	$	48,129	$	53,464	$	95,419	$	101,839

Efficiency ratio		65.66%		58.76%		62.05%		64.16%		63.63%
Efficiency ratio FTE (non-GAAP)		64.48%		57.87%		61.13%		63.08%		62.63%

~~Table of Contents~~

~~Adjusted Financial Results~~

As of and for the three months ended

As of and for the nine months ended

September 30,

December 31,

September 30,

September 30,

September 30,

2020

2019

2019

2020

2019
Adjustments to net income:

Net income

$
27,893

$
19,519

$
21,642

$
61,422

$
60,846
Adjustments⁽¹⁾

331

—

689

1,641

689
Adjusted net income (non-GAAP)

$
28,224

$
19,519

$
22,331

$
63,063

$
61,535

Adjustments to earnings per share:

Earnings per share - diluted

$
0.90

$
0.62

$
0.69

$
1.97

$
1.93
Adjustments⁽¹⁾

0.01

—

0.02

0.06

0.02
Adjusted earnings per share - diluted (non-GAAP)

$
0.91

$
0.62

$
0.71

$
2.03

$
1.95

Adjustments to return on average tangible assets:

Adjusted net income (non-GAAP)

$
28,224

$
19,519

$
22,331

$
63,063

$
61,535
Add: impact of core deposit intangible amortization expense, after tax

226

225

224

680

674
Net income adjusted for impact of core deposit intangible amortization expense, after tax

28,450

19,744

22,555

63,743

62,209
Average tangible assets (non-GAAP)

6,368,894

5,808,794

5,749,597

6,108,036

5,691,208
Adjusted return on average tangible assets (non-GAAP)

1.78%

1.35%

1.56%

1.39%

1.46%

Adjustments to return on average tangible common equity:

Net income adjusted for impact of core deposit intangible amortization expense, after tax

$
28,450

$
19,744

$
22,555

$
63,743

$
62,209
Average tangible common equity (non-GAAP)

678,236

649,029

634,126

665,085

612,420
Adjusted return on average tangible common equity (non-GAAP)

16.69%

12.07%

14.11%

12.80%

13.58%

Adjustments to non-interest expense:

Non-interest expense

$
55,321

$
46,107

$
43,793

$
157,752

$
134,638
Adjustments⁽¹⁾

432

—

898

2,140

898
Adjusted non-interest expense (non-GAAP)

54,889

46,107

42,895

155,612

133,740
Non-interest expense to average assets, adjusted (non-GAAP)

3.37%

3.09%

2.90%

3.34%

3.08%

(1) Adjustments:

Non-interest expense adjustments:

Banking center consolidation-related expense

$
432

$
—

$
898

$
2,140

$
898
Tax expense impact

(101)

—

(209)

(499)

(209)
Adjustments (non-GAAP)

$
331

$
—

$
689

$
1,641

$
689

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

~~Table of Contents~~

Future Accounting Pronouncements

~~The Company is still evaluating~~In March 2020, the ~~impact from~~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 ~~has reviewed~~is evaluating the impact from ASU ~~2019-12,~~ ~~Income Taxes~~ ~~(Topic 740):~~ ~~Simplifying the Accounting for Income Taxes~~2020-04, and any related updates, and does not expect the adoption of ~~that pronouncement~~ASU 2020-04 to have a material impact on its financial statements.

Financial Condition

Total assets ~~increased to $6.6~~were $7.1 billion at ~~September~~June 30, ~~2020 from $5.9~~2021, compared to $6.7 billion at December 31, ~~2019. Total loans increased 3.2%~~2020, an increase of $476.2 million, or ~~$140.7 million, cash~~7.1%. Cash and cash equivalents increased ~~303.9%~~$398.9 million, or ~~$334.9 million.~~65.9%, from December 31, 2020, and investment securities increased $253.1 million, or 24.0%. Total loans as of June 30, 2021 decreased $53.0 million, or 1.2%, and included a decrease in PPP loans of $46.5 million, or 26.4%, compared to December 31, 2020. The allowance for credit losses ~~increased 56.1% or $21.9~~decreased $10.7 million to $49.0 million at ~~September~~June 30, ~~2020 from $39.1 million at December 31, 2019, and included a CECL adoption day 1 increase of $5.8 million, partially offsetting the increase in total assets.~~2021.

During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, lower cost demand, savings, and money market deposits (“("transaction ~~deposits”~~deposits") increased ~~$910.4~~$543.5 million, or ~~33.1%~~23.4% annualized, compared to December 31, ~~2019,~~2020, as we ~~benefited from~~received cash inflows ~~resulting~~ from ~~the CARES Act~~ 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 and pay down short-term borrowings.~~loans.

Table of Contents

Investment securities

Available-for-sale

~~At September 30, 2020, available-for-sale~~Total investment securities available-for-sale decreased ~~$65.7 million, or 10.3%, compared to December 31, 2019. For~~8.5% during the ~~nine~~six months ended ~~September~~June 30, ~~2020, maturities and paydowns totaled $191.8 million and were partially offset by purchases totaling $114.7 million. For the nine months ended September 30, 2019, maturities and paydowns~~2021 to $0.6 billion. Purchases of available-for-sale securities during the six months ended June 30, 2021 and 2020 totaled ~~$146.3~~$86.2 million and ~~purchases~~$69.6 million, respectively. Paydowns and maturities totaled ~~$18.0 million.~~$131.1 million and $110.1 million during the six months ended June 30, 2021 and 2020, respectively.

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


	September 30, 2020						December 31, 2019						June 30, 2021						December 31, 2020
						Weighted						Weighted						Weighted						Weighted
	Amortized		Fair		Percent of	average	Amortized		Fair		Percent of	average	Amortized		Fair		Percent of	average	Amortized		Fair		Percent of	average
	cost		value		portfolio	yield	cost		value		portfolio	yield	cost		value		portfolio	yield	cost		value		portfolio	yield
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	90,022	$	92,892	16.2%	1.89%	$	93,770	$	95,256	14.9%	2.59%	$	217,026	$	216,231	35.6%	1.43%	$	193,424	$	196,334	29.6%	1.36%
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		466,648		476,650	83.3%	1.49%		543,275		542,037	84.9%	2.13%		384,751		386,572	63.8%	1.58%		454,345		462,779	69.9%	1.45%
Municipal securities		495		509	0.1%	3.60%		495		487	0.1%	3.60%		362		371	0.1%	3.45%		362		375	0.1%	3.46%
Corporate debt		2,000		2,003	0.3%	5.83%		—		—	—	—		2,000		2,155	0.4%	5.81%		2,000		1,998	0.3%	5.83%
Other securities		469		469	0.1%	0.00%		469		469	0.1%	0.00%		469		469	0.1%	0.00%		469		469	0.1%	0.00%
Total investment securities available-for-sale	$	559,634	$	572,523	100.0%	1.57%	$	638,009	$	638,249	100.0%	2.20%	$	604,608	$	605,798	100.0%	1.54%	$	650,600	$	661,955	100.0%	1.44%

As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~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.

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Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average life of the available-for-sale mortgage-backed securities portfolio was ~~2.3~~4.5 years and ~~2.9~~2.7 years at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. This estimate is based on assumptions and actual results may differ. At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the duration of the total available-for-sale investment portfolio was ~~2.2~~3.6 years and ~~2.7~~2.6 years, respectively.

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, adjustable rate securities comprised ~~2.9%~~2.2% and ~~2.8%~~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 ~~2.24%~~1.79% per annum and ~~2.40%~~2.00% per annum at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

The available-for-sale investment portfolio included ~~$13.0~~$8.2 million and ~~$5.3~~$11.7 million of unrealized gains and ~~$0.1~~$7.0 million and ~~$5.1~~$0.4 million of unrealized losses at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~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.

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Held-to-maturity

~~At September 30, 2020, held-to-maturity~~Held-to-maturity investment securities increased ~~$137.1 million, or 75.0%, compared to December 31, 2019. For~~82.6% during the ~~nine~~six months ended ~~September~~June 30, ~~2020, purchases of held-to-maturity securities totaled $196.7 million. There were no purchase of held-to-maturity securities~~2021 to $0.7 billion. Purchases during the ~~nine~~six months ended ~~September~~June 30, ~~2019. Maturities~~2021 and ~~paydowns of held-to-maturity securities~~2020 totaled ~~$58.1~~$377.7 million and ~~$44.1~~$67.4 million, respectively. Paydowns and maturities totaled $64.8 million and $34.2 million during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

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


	September 30, 2020						December 31, 2019						June 30, 2021						December 31, 2020
						Weighted						Weighted						Weighted						Weighted
	Amortized		Fair		Percent of	average	Amortized		Fair		Percent of	average	Amortized		Fair		Percent of	average	Amortized		Fair		Percent of	average
	cost		value		portfolio	yield	cost		value		portfolio	yield	cost		value		portfolio	yield	cost		value		portfolio	yield
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	250,790	$	255,032	78.4%	1.65%	$	127,560	$	128,770	69.7%	3.19%	$	337,831	$	338,041	49.1%	1.57%	$	306,187	$	310,930	81.3%	1.39%
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		69,211		69,688	21.6%	0.65%		55,324		54,971	30.3%	1.90%		349,804		349,104	50.9%	1.24%		70,428		70,761	18.7%	0.41%
Total investment securities held-to-maturity	$	320,001	$	324,720	100.0%	1.43%	$	182,884	$	183,741	100.0%	2.80%	$	687,635	$	687,145	100.0%	1.40%	$	376,615	$	381,691	100.0%	1.21%

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 ~~$4.8~~$4.3 million and ~~$1.3~~$5.3 million of unrealized gains and ~~$0.1~~$4.8 million and ~~$0.5~~$0.3 million of unrealized losses at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 was ~~2.3~~4.0 years and 2.4 years,

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respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity investment portfolio was ~~2.2~~3.8 years and ~~2.3~~2.4 years as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Loans overview

At ~~September~~June 30, ~~2020,~~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.

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


					September 30, 2020 vs.					June 30, 2021 vs.
					December 31, 2019					December 31, 2020
	September 30, 2020		December 31, 2019		% Change	June 30, 2021		December 31, 2020		% Change
Originated:
Commercial:
Commercial and industrial	$	1,228,550	$	1,380,248	(11.0)%	$	1,253,745	$	1,248,530	0.4%
Municipal and non-profit		883,065		833,707	5.9%		860,740		870,410	(1.1)%
Owner-occupied commercial real estate		460,487		414,477	11.1%		479,286		464,417	3.2%
Food and agribusiness		210,818		245,320	(14.1)%		195,095		205,189	(4.9)%
PPP loans(1)		348,257		—	100.0%		129,643		176,106	(26.4)%
Total commercial		3,131,177		2,873,752	9.0%		2,918,509		2,964,652	(1.6)%
Commercial real estate non-owner occupied		515,415		505,479	2.0%		570,252		542,642	5.1%
Residential real estate		614,449		651,656	(5.7)%		600,124		581,555	3.2%
Consumer		20,196		21,030	(4.0)%		17,942		18,581	(3.4)%
Total originated		4,281,237		4,051,917	5.7%		4,106,827		4,107,430	(0.0)%

Acquired:
Commercial:
Commercial and industrial		23,984		31,284	(23.3)%		18,710		22,102	(15.3)%
Municipal and non-profit		576		3,819	(84.9)%		359		381	(5.8)%
Owner-occupied commercial real estate		55,929		75,645	(26.1)%		40,435		51,821	(22.0)%
Food and agribusiness		5,740		7,807	(26.5)%		3,913		5,108	(23.4)%
Total commercial		86,229		118,555	(27.3)%		63,417		79,412	(20.1)%
Commercial real estate non-owner occupied		101,672		125,426	(18.9)%		67,368		89,354	(24.6)%
Residential real estate		86,478		118,762	(27.2)%		62,805		77,105	(18.5)%
Consumer		505		746	(32.3)%		340		425	(20.0)%
Total acquired		274,884		363,489	(24.4)%		193,930		246,296	(21.3)%
Total loans	$	4,556,121	$	4,415,406	3.2%	$	4,300,757	$	4,353,726	(1.2)%


(1)		PPP loan balances are net of fees and costs and include principal totaling $134,632 and $179,531 as of June 30, 2021 and December 31, 2020, respectively.

The Company maintains a granular and well-diversified loan portfolio with self-imposed concentration limits. Our loan portfolio ~~increased $140.7~~decreased $53.0 million, or ~~3.2%, since~~2.5% annualized, from December 31, ~~2019. We are taking a careful approach to extending credit and focusing on managing credit risk and yield and saw elevated levels~~2020. Excluding PPP loans, total loans decreased by $6.5 million, or 0.3% annualized. During the three months ended June 30, 2021, loan originations totaled $362.1 million, led by commercial loan originations of ~~paydowns and payoffs~~$247.3 million. Excluding PPP loans, loan originations in the second quarter of 2021 more than doubled loan originations in the first quarter of 2021, increasing $189.0 million, or 109.2%. Originations during the ~~quarter. Year-to-date loan originations through September~~six months ended June 30, ~~2020~~2021 totaled ~~$887.4~~$656.3 million, including ~~$358.9~~$121.1 million of PPP loan ~~originations, which were offset by elevated levels of paydowns and payoffs.~~originations. PPP loans forgiven totaled $203.8 million during the six months ended June 30, 2021.

Our commercial and industrial loan portfolio is comprised of diverse industry segments. At ~~September~~June 30, ~~2020,~~2021, these segments included finance and financial services, primarily lender finance loans, of ~~$267.0~~$164.9 million, hospital/medical loans of ~~$213.4~~$255.7 million, manufacturing-related loans of ~~$113.3~~$106.1 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 ~~$216.6~~$199.0 million and were ~~29.7%~~25.5% of the Company’s risk based capital. Crop and livestock loans represent ~~1.1%~~0.9% of total loans.

Non-owner occupied CRE loans were ~~84.7%~~81.8% of the Company’s risk based capital, or ~~13.5%~~14.8% of total loans, and no specific property type comprised more than ~~4.0%~~5.0% of total loans. The Company maintains very little exposure to retail properties. Total exposure to retailers as well as non-owner occupied retail properties ~~comprising 3.8%~~totaled 4.3% of total loans. Multi-family loans totaled ~~$71.5~~$99.1 million, or ~~1.6%~~2.3% of total loans as of ~~September~~June 30, ~~2020.~~

The Company maintains a granular and well-diversified loan portfolio with self-imposed concentration limits. In light of the strain placed on certain industries by the COVID-19 pandemic, the Company has carefully evaluated and continues to closely monitor our entire loan portfolio. Within the commercial loan segment, certain highly impacted industries are noted as follows: restaurants were 4.6%, retailers 2.6%, hospital/medical 4.7% and oil and gas 0.7% of total loans. Within the commercial real estate non-owner

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occupied loan segment, hotel and lodging was 4.0%, multifamily 1.6% and retail 1.2% of total loans. The Company had no direct exposure to other industries more highly impacted by the pandemic including aviation, cruise lines, energy services, auto manufacturing/dealer floor plans, hedge funds, gaming and casinos, convention centers, credit cards, malls and taxi/ride share businesses. Furthermore, the Company had no consumer credit card, indirect auto or car leasing exposure.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~~$1.1 billion over the past 12 months, led by commercial loan originations of ~~$812.6~~$649.3 million, which included PPP loan originations of ~~$358.9~~$121.3 million. Originations are defined as ~~closed end~~closed-end funded

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loans and revolving lines of credit advances, net of any current period paydowns. Management utilizes this more conservative definition of originations to better approximate the impact of originations on loans outstanding and ultimately net interest income.

The following table represents new loan originations ~~during 2020 and 2019:~~for the periods presented:


	Third quarter		Second quarter		First quarter		Fourth quarter		Third quarter		Second quarter		First quarter		Fourth quarter		Third quarter		Second quarter
	2020		2020		2020		2019		2019		2021		2021		2020		2020		2020
Commercial:
Commercial and industrial	$	11,354	$	(8,726)	$	118,999	$	69,048	$	144,554	$	147,030	$	23,390	$	96,625	$	11,354	$	(8,726)
Municipal and non-profit		6,083		49,679		13,968		46,114		31,482		25,131		7,999		25,348		6,083		49,679
Owner occupied commercial real estate		23,758		22,078		37,372		46,965		16,149		48,225		27,093		36,085		23,758		22,078
Food and agribusiness		13,876		(10,480)		(6,787)		20,348		(4,894)		26,956		(10,104)		19,191		13,876		(10,480)
PPP loans		122		358,798		—		—		—		—		121,141		—		122		358,798
Total commercial		55,193		411,349		163,552		182,475		187,291		247,342		169,519		177,249		55,193		411,349
Commercial real estate non-owner occupied		24,937		18,992		80,792		41,256		79,929		58,532		49,195		52,018		24,937		18,992
Residential real estate		49,786		29,024		46,273		43,493		49,022		53,962		74,145		41,355		49,786		29,024
Consumer		2,980		2,206		2,320		2,315		2,986		2,267		1,353		1,858		2,980		2,206
Total	$	132,896	$	461,571	$	292,937	$	269,539	$	319,228	$	362,103	$	294,212	$	272,480	$	132,896	$	461,571

Included in originations are net fundings (paydowns) under revolving lines of credit of $59,520, ($26,395), $50,982, ($27,899), and ($55,826)~~, $48,789, $1,756, and $37,062~~ as of the second and first quarters of 2021 and the fourth, third ~~quarter~~and second quarters of 2020, ~~second quarter 2020, first quarter 2020, fourth quarter 2019 and third quarter 2019,~~ respectively.

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


	September 30, 2020								June 30, 2021
	Due within		Due after 1 but		Due after				Due within		Due after 1 but		Due after
	1 year		within 5 years		5 years		Total		1 year		within 5 years		5 years		Total
Commercial:
Commercial and industrial	$	90,393	$	938,291	$	223,850	$	1,252,534	$	135,959	$	937,015	$	199,482	$	1,272,456
Municipal and non-profit		52,517		144,504		686,620		883,641		29,701		162,436		668,962		861,099
Owner occupied commercial real estate		19,575		166,512		330,329		516,416		33,960		158,159		327,602		519,721
Food and agribusiness		73,525		117,726		25,307		216,558		86,234		93,532		19,241		199,007
PPP loans		—		348,257		—		348,257		8,133		121,510		—		129,643
Total commercial		236,010		1,715,290		1,266,106		3,217,406		293,987		1,472,652		1,215,287		2,981,926
Commercial real estate non-owner occupied		78,754		389,109		149,224		617,087		113,941		389,514		134,165		637,620
Residential real estate		22,123		39,976		638,828		700,927		9,406		32,659		620,864		662,929
Consumer		4,773		12,567		3,361		20,701		5,142		10,075		3,065		18,282
Total loans	$	341,660	$	2,156,942	$	2,057,519	$	4,556,121	$	422,476	$	1,904,900	$	1,973,381	$	4,300,757


	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

5049

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December 31, 2019


Due within

Due after 1 but

Due after


1 year

within 5 years

5 years

Total
Commercial:

Commercial and industrial

$
137,396

$
1,013,753

$
260,382

$
1,411,531
Municipal and non-profit

26,009

126,634

684,883

837,526
Owner occupied commercial real estate

18,663

170,092

301,367

490,122
Food and agribusiness

57,159

168,827

27,142

253,128
Total commercial

239,227

1,479,306

1,273,774

2,992,307
Commercial real estate non-owner occupied

85,188

377,850

167,868

630,906
Residential real estate

27,251

49,818

693,348

770,417
Consumer

6,600

11,978

3,198

21,776
Total loans

$
358,266

$
1,918,952

$
2,138,188

$
4,415,406

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


	September 30, 2020									June 30, 2021
	Fixed			Variable			Total			Fixed			Variable			Total
			Weighted			Weighted			Weighted			Weighted			Weighted			Weighted
	Balance		average rate	Balance		average rate	Balance		average rate	Balance		average rate	Balance		average rate	Balance		average rate
Commercial
Commercial and industrial	$	299,592	4.77%	$	862,550	3.07%	$	1,162,142	3.51%	$	340,680	4.55%	$	795,818	3.29%	$	1,136,498	3.67%
Municipal and non-profit⁽¹⁾		802,638	3.58%		28,486	2.94%		831,124	3.55%		806,468	3.52%		24,930	2.82%		831,398	3.50%
Owner occupied commercial real estate		261,718	4.83%		235,122	3.88%		496,840	4.51%		279,641	4.77%		206,120	3.72%		485,761	4.46%
Food and agribusiness		59,053	5.03%		83,981	3.46%		143,034	4.12%		45,800	5.10%		66,973	3.96%		112,773	4.42%
PPP loans		348,257	1.00%		—	0.00%		348,257	1.00%		121,510	1.00%		—	—		121,510	1.00%
Total commercial		1,771,258	3.53%		1,210,139	3.25%		2,981,397	3.42%		1,594,099	3.85%		1,093,841	3.40%		2,687,940	3.67%
Commercial real estate non-owner occupied		242,424	4.67%		295,909	3.51%		538,333	4.04%		241,484	4.44%		282,195	3.47%		523,679	3.92%
Residential real estate		299,878	3.64%		378,926	4.19%		678,804	3.95%		339,809	3.47%		313,714	4.06%		653,523	3.75%
Consumer		13,130	4.86%		2,797	3.48%		15,927	4.62%		10,632	4.70%		2,508	3.59%		13,140	4.48%
Total loans with > 1 year maturity	$	2,326,690	3.67%	$	1,887,771	3.48%	$	4,214,461	3.58%	$	2,186,024	3.86%	$	1,692,258	3.54%	$	3,878,282	3.72%


	December 31, 2019									December 31, 2020
	Fixed			Variable			Total			Fixed			Variable			Total
			Weighted			Weighted			Weighted			Weighted			Weighted			Weighted
	Balance		average rate	Balance		average rate	Balance		average rate	Balance		average rate	Balance		average rate	Balance		average rate
Commercial
Commercial and industrial	$	294,406	4.95%	$	979,730	4.39%	$	1,274,136	4.52%	$	320,745	4.68%	$	840,301	3.11%	$	1,161,046	3.54%
Municipal and non-profit⁽¹⁾		779,293	3.60%		32,224	3.60%		811,517	3.60%		803,350	3.55%		25,219	2.83%		828,569	3.53%
Owner occupied commercial real estate		235,337	4.87%		236,122	4.79%		471,459	4.99%		261,406	4.82%		230,323	3.88%		491,729	4.51%
Food and agribusiness		50,287	5.19%		145,682	4.61%		195,969	4.76%		57,360	5.02%		72,246	3.67%		129,606	4.27%
PPP loans											176,106	1.00%		—	—		176,106	1.00%
Total commercial		1,359,323	4.22%		1,393,758	4.46%		2,753,081	4.34%		1,618,967	3.79%		1,168,089	3.29%		2,787,056	3.58%
Commercial real estate non-owner occupied		243,201	4.75%		302,516	4.46%		545,717	4.59%		253,879	4.65%		305,631	3.42%		559,510	3.98%
Residential real estate		326,210	3.66%		416,955	4.54%		743,165	4.15%		298,759	3.60%		341,332	4.14%		640,091	3.89%
Consumer		12,156	5.52%		3,020	4.94%		15,176	5.40%		11,384	4.92%		2,455	3.50%		13,839	4.66%
Total loans with > 1 year maturity	$	1,940,890	4.20%	$	2,116,249	4.48%	$	4,057,139	4.34%	$	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 ~~$395,345~~$339,182 and ~~$403,700~~$387,105 that have been swapped to variable rates at current market pricing at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Included in the municipal and non-profit segment are tax exempt loans totaling ~~$706,844~~$727,979 and ~~$701,825~~$711,582 with a weighted average rate of 3.34% and ~~3.41%~~3.33% at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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Asset quality

Asset quality is fundamental to our success and remains a strong point, driven by our disciplined adherence to our self-imposed concentration limits across industry sector and real estate property type. Accordingly, for the origination of loans, we have established a credit policy that allows for responsive, yet controlled lending with credit approval requirements that are scaled to loan size. Within the scope of the credit policy, each prospective loan is reviewed in order to determine the appropriateness and the adequacy of the loan characteristics and the security or collateral prior to making a loan. We have established underwriting standards and loan origination procedures that require appropriate documentation, including financial data and credit reports. For loans secured by real property, we require property appraisals, title insurance or a title opinion, hazard insurance and flood insurance, in each case where appropriate.

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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 ~~ALL~~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 and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$0.3~~$0.2 million and ~~$0.9~~$0.5 million, respectively, and $0.3 million and ~~$1.2~~$0.6 million during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively.

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

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


	September 30, 2020		December 31, 2019		June 30, 2021		December 31, 2020
Non-accrual loans:
Non-accrual loans, excluding restructured loans	$	14,224	$	16,894	$	9,239	$	12,190
Restructured loans on non-accrual		4,658		4,854		4,642		8,197
Non-performing loans		18,882		21,748		13,881		20,387
OREO		4,590		7,300		5,124		4,730
Other repossessed assets						—		17
Total non-performing assets	$	23,472	$	29,048	$	19,005	$	25,134

Loans 30-89 days past due and still accruing interest	$	6,587	$	6,350	$	2,098	$	968
Loans 90 days or more past due and still accruing interest		161		1,662		767		162
Non-accrual loans		18,882		21,748		13,881		20,387
Total past due and non-accrual loans	$	25,630	$	29,760	$	16,746	$	21,517
Accruing restructured loans	$	21,786	$	11,359	$	11,844	$	13,945
Allowance for credit losses		60,979		39,064		49,030		59,777
Non-performing loans to total loans		0.41%		0.49%		0.32%		0.47%
Non-performing loans to total loans excluding PPP loans		0.45%		0.49%		0.33%		0.49%
Total 90 days past due and still accruing interest and non-accrual loans to total loans		0.42%		0.53%		0.34%		0.47%
Total non-performing assets to total loans and OREO		0.51%		0.66%		0.44%		0.58%
Total non-performing assets to total loans and OREO, excluding PPP loans		0.56%		0.66%		0.46%		0.60%
ACL to non-performing loans		322.95%		179.62%		353.22%		293.21%

During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, total non-performing loans decreased ~~$2.9~~$6.5 million, or ~~13.2%~~31.9%, from December 31, ~~2019. During the nine months ended September 30, 2020, accruing TDRs increased $10.4 million.~~2020.

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Loans 30-89 days past due and still accruing interest ~~increased $0.2 million from~~were 0.05% and 0.02% of total loans at June 30, 2021 and December 31, ~~2019 to September 30,~~ 2020, ~~and loans~~respectively. Loans 90 days or more past due and still accruing interest ~~decreased $1.5 million from~~were 0.02% and 0.01% of total loans at June 30, 2021 and December 31, ~~2019 to September 30,~~ 2020, ~~for a collective decrease in total past due loans of $1.3 million.~~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 ~~troubled debt restructurings~~TDRs under ASC Topic 310 if the borrower has been adversely impacted by COVID-19 and was current on their loan ~~payments as of December 31, 2019. During~~payments. The Company modified 13 loans totaling $4.6 million during the ~~three and nine~~six months ended ~~September~~June 30, 2021 and 463 loans totaling $492.4 million during the six months ended June 30, 2020, due to the ~~Company has executed COVID-related loan modifications totaling $7.1 million and $499.5 million, respectively.~~ ~~Loans with COVID-related modifications during the nine months ended September 30, 2020 totaled 11.6%~~effects of the ~~total loan portfolio. Of those loans, $334.3 million have resumed making principal or interest payments or paid in full~~COVID-19 pandemic, that were not classified as ~~of September 30, 2020.~~TDRs. Modified loans that remained on a payment deferral plan at ~~September~~June 30, ~~2020~~2021 totaled ~~$165.2~~$108.6 million, or ~~3.6%~~2.5% of the total loan ~~portfolio,~~portfolio. Of those loans, principal payment deferrals totaled $102.3 million and full payment deferrals totaled $6.3 million. At June 30, 2021, 0.9% of ~~which 84.0%~~loan modifications related to COVID-19 were a ~~second modification~~.subsequent modification. All ~~COVID~~COVID-19 modified loans were classified as performing as of ~~September~~June 30, ~~2020.~~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 a subsequent modification.

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

September 30, 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

$
2,869,149

63.0%

$
22,922

0.8%

$
—

$
2,497

$
17,117

$
1,839

$
1,469
Commercial real estate non-owner occupied

617,087

13.5%

137,912

22.3%

—

87

135,328

—

2,497
Residential real estate

700,927

15.4%

4,318

0.6%

—

43

—

472

3,803
Consumer

20,701

0.5%

25

0.1%

9

—

8

4

4
Total excluding PPP loans

$
4,207,864

92.4%

$
165,177

3.9%

$
9

$
2,627

$
152,453

$
2,315

$
7,773
PPP loans

348,257

7.6%

—

0.0%

—

—

—

—

—
Total loans

$
4,556,121

100.0%

$
165,177

3.6%

$
9

$
2,627

$
152,453

$
2,315

$
7,773


	June 30, 2021
	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	$	2,852,283	66.4%	$	6,141	0.2%	$	—	$	—	$	—	$	3,132	$	3,009
Commercial real estate non-owner occupied		637,620	14.8%		102,302	16.0%		—		—		102,302		—		—
Residential real estate		662,929	15.4%		206	0.0%		45		—		—		—		161
Consumer		18,282	0.4%		—	0.0%		—		—		—		—		—
Total excluding PPP loans	$	4,171,114	97.0%	$	108,649	2.6%	$	45	$	—	$	102,302	$	3,132	$	3,170
PPP loans		129,643	3.0%		—	0.0%		—		—		—		—		—
Total loans	$	4,300,757	100.0%	$	108,649	2.5%	$	45	$	—	$	102,302	$	3,132	$	3,170

~~Table of Contents~~


	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 ~~probable~~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 DCF model allows for individual, life of loan, cash flow modeling using loan specific interest rates and scheduled repayment rates. The model incorporates national economic forecasts of certain macroeconomic factors which drive correlated PD and LGD rates. PD and LGD rates, along with prepayment rates and loss recovery time delays, are determined at a loan class level making use of both peer loss rate data and internal historical data. The ACL is calculated as the difference between the amortized cost basis and the projections from the DCF ~~analysis and includes qualitative adjustments and reserves for individually evaluated loans.~~analysis. The DCF model allows for individual life of loan cash flow modeling, excluding extensions and renewals, using ~~loan specific~~loan-specific interest rates and ~~scheduled~~ repayment ~~rates. The model incorporates forecasted national macro-economic data for unemployment, GDP, retail sales, and home price index, which drive correlated PD and LGD rates. PD and LGD rates along with~~schedules including estimated prepayment rates and loss recovery ~~time delays~~timing delays. The model incorporates forecasts of certain national macro-economic 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 ~~determined at a loan class level making use of both peer loss rate data and internal historical data.~~

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

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We measure expected credit losses for loans on a pooled basis when similar risk characteristics exist. We have identified four primary loan segments within the ~~allowance for credit losses~~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

~~Table of Contents~~

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.

Net charge-offs on loans during the three and six months ended ~~September~~June 30, ~~2020~~2021 were ~~$0.5 million. Provision for loan losses for funded loans of $1.0~~$0.7 million and $0.8 million, respectively. The Company recorded total provision ~~for unfunded loan commitments~~release of ~~$0.2~~$5.9 million ~~was recorded during~~for the three months ended ~~September~~June 30, ~~2020. PPP~~2021, which included a provision release of $5.3 million for funded loans ~~have no related ACL as they are fully guaranteed~~and a provision release of $0.6 million for unfunded loan commitments. During the six months ended June 30, 2021, the Company recorded total provision release of $9.4 million, which included a provision release of $9.9 million for funded loans and a provision expense of $0.5 million for unfunded loan commitments. Provision release was driven by strong asset quality and an improved outlook in the ~~SBA.~~CECL model’s underlying economic forecast. Specific reserves on loans totaled $1.4 million at June 30, 2021.

Net charge-offs on loans during the ~~nine~~three and six months ended ~~September~~June 30, 2020 were ~~$1.5 million. Provision~~$0.6 million and $1.0 million, respectively. The Company recorded total provision expense of $10.3 million for ~~loan losses~~the three months ended June 30, 2020, which included a provision expense of $10.1 million for funded loans and a provision expense of ~~$17.5~~$0.2 million ~~and provision~~ for unfunded loan ~~commitments~~commitments. During the six months ended June 30, 2020, the Company recorded total provision expense of $16.4 million, which included a provision expense of $16.5 million for funded loans and a provision release of $0.1 million for unfunded loan commitments. Provision expense was recorded ~~during the nine months ended September 30, 2020~~ to provide coverage for the impact of deteriorating economic conditions as a result of COVID-19 and to support ~~net charge-offs.~~non-PPP originated loan growth. Specific reserves on loans totaled ~~$1.1~~$1.3 million at ~~September~~June 30, 2020.

During the three and nine months ended September 30, 2019, provision for loan losses of $5.7 million and $10.5 million, respectively, was recorded to support originated loan growth and cover net charge-offs. Net charge-offs were $7.1 million, or 0.65%, annualized, and specific reserves on individually evaluated loans totaled $1.8 million at September 30, 2019.

The Company has elected to exclude AIR from the ~~allowance for credit losses~~ACL calculation. When a loan is placed on non-accrual, any recorded AIR is reversed against interest income. As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, AIR from loans totaled ~~$20.6~~$15.0 million and ~~$17.2~~$16.7 million, respectively.

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Total ACL

After considering the above mentioned factors, we believe that the ACL of ~~$61.0~~$49.0 million is adequate to cover estimated lifetime losses inherent in the loan portfolio at ~~September~~June 30, ~~2020.~~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 ~~impacts of COVID-19 on~~changes in the underlying macro-economic forecast, used in determining the ACL, could ~~adversely~~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				As of and for the three months ended
	September 30, 2020		September 30, 2019		June 30, 2021		June 30, 2020
	Total loans		Total loans		Total loans		Total loans
Beginning allowance for credit losses	$	60,465	$	40,082	$	55,057	$	50,956
Charge-offs:
Commercial		(499)		(6,760)		(781)		(694)
Commercial real estate non owner-occupied		—		(1)		—		—
Residential real estate		(16)		(77)		—		(12)
Consumer		(104)		(263)		(144)		(146)
Total charge-offs		(619)		(7,101)		(925)		(852)
Recoveries		133		39		198		236
Net charge-offs		(486)		(7,062)		(727)		(616)
Provision for loan loss		1,000		5,690
Provision (release) expense for loan losses						(5,300)		10,125
Ending allowance for credit losses	$	60,979	$	38,710	$	49,030	$	60,465
Ratio of annualized net charge-offs to average total loans during the period		0.04%		0.65%		0.07%		0.05%
Average total loans outstanding during the period	$	4,677,630	$	4,329,590	$	4,312,128	$	4,794,466
Average total loans outstanding, excluding PPP loans during the period		4,329,458		4,329,590
Average total loans outstanding excluding, PPP loans during the period						4,112,172		4,512,010

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	As of and for the nine months ended				As of and for the six months ended
	September 30, 2020		September 30, 2019		June 30, 2021		June 30, 2020
	Total loans		Total loans		Total loans		Total loans
Beginning allowance for loan losses	$	39,064	$	35,692
Beginning balance					$	59,777	$	39,064
Cumulative effect adjustment⁽¹⁾		5,836		—		—		5,836
Charge-offs:
Commercial		(1,411)		(6,841)		(942)		(912)
Commercial real estate non-owner occupied		—		(1)		—		—
Residential real estate		(56)		(124)		(22)		(40)
Consumer		(502)		(696)		(263)		(397)
Total charge-offs		(1,969)		(7,662)		(1,227)		(1,349)
Recoveries		515		217		380		380
Net charge-offs		(1,454)		(7,445)		(847)		(969)
Provision for loan loss		17,533		10,463
Provision (release) expense for loan losses						(9,900)		16,534
Ending allowance for credit losses	$	60,979	$	38,710	$	49,030	$	60,465
Ratio of annualized net charge-offs to average total loans during the period		0.04%		0.23%		0.04%		0.04%
Ratio of ACL to total loans outstanding at period end		1.34%		0.88%		1.14%		1.26%
Ratio of ACL to total loans outstanding, excluding PPP loans at period end		1.45%		0.88%		1.18%		1.36%
Ratio of ACL to total non-performing loans at period end		322.95%		152.41%		353.22%		302.34%
Total loans	$	4,556,121	$	4,401,917	$	4,300,757	$	4,782,383
Average total loans outstanding during the period		4,628,319		4,249,952		4,294,900		4,603,393
Average total loans outstanding, excluding PPP loans during the period		4,417,606		4,249,952		4,105,571		4,462,165
Non-performing loans		18,882		25,398		13,881		19,999


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

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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:


	September 30, 2020						June 30, 2021
						ACL as a %						ACL as a %
	Total loans		% of total loans	Related ACL		of total ACL	Total loans		% of total loans	Related ACL		of total ACL
Commercial	$	2,869,149	63.0%	$	31,171	51.2%	$	2,852,283	66.4%	$	28,640	58.4%
PPP loans⁽¹⁾		348,257	7.6%		—	0.0%		129,643	3.0%		—	0.0%
Commercial real estate non-owner occupied		617,087	13.5%		13,781	22.6%		637,620	14.8%		11,187	22.8%
Residential real estate		700,927	15.4%		15,513	25.4%		662,929	15.4%		8,851	18.1%
Consumer		20,701	0.5%		514	0.8%		18,282	0.4%		352	0.7%
Total	$	4,556,121	100.0%	$	60,979	100.0%	$	4,300,757	100.0%	$	49,030	100.0%


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


	December 31, 2019						December 31, 2020
						ALL as a %						ACL as a %
	Total loans		% of total loans	Related ALL		of total ALL	Total loans		% of total loans	Related ACL		of total ACL
Commercial	$	2,992,307	67.8%	$	30,442	77.9%	$	2,867,959	66.0%	$	30,376	50.8%
PPP loans⁽¹⁾								176,106	4.0%		—	0.0%
Commercial real estate non-owner occupied		630,906	14.3%		4,850	12.4%		631,996	14.5%		17,448	29.2%
Residential real estate		770,417	17.4%		3,468	8.9%		658,659	15.1%		11,492	19.2%
Consumer		21,776	0.5%		304	0.8%		19,006	0.4%		461	0.8%
Total	$	4,415,406	100.0%	$	39,064	100.0%	$	4,353,726	100.0%	$	59,777	100.0%


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

~~Table of Contents~~

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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


							Increase (decrease)									Increase (decrease)
	September 30, 2020			December 31, 2019			Amount		% Change	June 30, 2021			December 31, 2020			Amount		% Change
Non-interest bearing demand deposits	$	1,533,676	27.3%	$	1,184,945	25.0%	$	348,731	29.4%	$	2,437,328	39.6%	$	2,111,045	37.1%	$	326,283	15.5%
Interest bearing demand deposits		976,133	17.4%		738,496	15.6%		237,637	32.2%		555,865	9.0%		514,286	9.1%		41,579	8.1%
Savings accounts		608,783	10.8%		542,531	11.5%		66,252	12.2%		717,453	11.7%		646,829	11.4%		70,624	10.9%
Money market accounts		1,470,802	26.2%		1,213,007	25.6%		257,795	21.3%		1,522,906	24.7%		1,417,940	25.0%		104,966	7.4%
Total transaction deposits		4,589,394	81.7%		3,678,979	77.7%		910,415	24.7%		5,233,552	85.0%		4,690,100	82.6%		543,452	11.6%
Time deposits < $250,000		854,922	15.2%		894,459	18.9%		(39,537)	(4.4)%		768,858	12.5%		820,229	14.5%		(51,371)	(6.3)%
Time deposits > $250,000		172,144	3.1%		163,694	3.4%		8,450	5.2%		155,643	2.5%		165,903	2.9%		(10,260)	(6.2)%
Total time deposits		1,027,066	18.3%		1,058,153	22.3%		(31,087)	(2.9)%		924,501	15.0%		986,132	17.4%		(61,631)	(6.2)%
Total deposits	$	5,616,460	100.0%	$	4,737,132	100.0%	$	879,328	18.6%	$	6,158,053	100.0%	$	5,676,232	100.0%	$	481,821	8.5%

Table of Contents

The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to $250,000 as of ~~September~~June 30, ~~2020:~~2021:


	September 30, 2020		June 30, 2021
Three months or less	$	26,112	$	38,749
Over 3 months through 6 months		18,073		29,594
Over 6 months through 12 months		54,248		40,837
Thereafter		73,711		46,463
Total time deposits > $250,000	$	172,144	$	155,643

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, time deposits that were scheduled to mature within 12 months totaled ~~$631.3~~$677.2 million and ~~$726.9~~$659.5 million, respectively. Of the time deposits scheduled to mature within 12 months at ~~September~~June 30, ~~2020, $98.4~~2021, $109.2 million were in denominations of $250,000 or more, and ~~$532.9~~$568.0 million were in denominations less than $250,000.

Other borrowings

As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Bank sold securities under agreements to repurchase totaling ~~$23.9~~$23.0 million and ~~$56.9~~$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 ~~$1.0~~$0.9 billion at ~~September~~June 30, ~~2020.~~2021. The Bank ~~utilizes~~may utilize its FHLB line of credit as a funding mechanism for originated loans and loans held for sale. At ~~September~~June 30, 2021 and December 31, 2020, the Bank had no outstanding borrowings ~~with~~from the FHLB. At December 31, 2019, the Bank had $192.7 million in line of credit advances from the FHLB that matured within a day and one term advance totaling $15.0 million with a fixed interest rate of 2.33% and a maturity date in October 2020. The Bank may pledge investment securities and loans as collateral for FHLB advances. There were no investment securities pledged at ~~September~~June 30, ~~2020. At~~2021 or December 31, ~~2019, investment securities pledged totaled $17.6 million.~~2020. Loans pledged were $1.3 billion ~~at September 30, 2020~~ and ~~$1.5~~$1.2 billion at June 30, 2021 and December 31, ~~2019. Interest~~2020, respectively. There was no interest expense related to FHLB advances and other short-term borrowings ~~totaled $0.1 million and $1.3 million~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020, respectively, and $1.4~~2021, compared to $0.3 million and ~~$4.8~~$1.2 million ~~for~~during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~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.~~mortgages. 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.

~~Table of Contents~~

Overview of results of operations

We recorded net income of ~~$27.9~~$24.2 million and ~~$61.4~~$51.0 million, or ~~$0.90~~$0.77 and ~~$1.97~~$1.63 per diluted share, during the three and ~~nine~~six months ended ~~September~~June 30, 2020, respectively. Adjusting for the banking center consolidation-related expense, net income was $28.2 million and $63.1 million, or $0.91 and $2.03 per diluted share, during the three and nine months ended September 30, 2020,2021, respectively.

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we recorded net income of ~~$21.6~~$17.7 million and ~~$60.8~~$33.5 million, or ~~$0.69~~$0.57 and ~~$1.93~~$1.08 per diluted share, respectively. Net income adjusted for banking center consolidation-related expense was $22.3 million and $61.5 million, or $0.71 and $1.95 per diluted share, during the three and nine months ended September 30, 2019, respectively.

Net interest income

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

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The table below presents the components of net interest income on a FTE basis for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~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					For the three months ended					For the three months ended
	September 30, 2020					September 30, 2019					June 30, 2021					June 30, 2020
	Average balance		Interest		Average rate	Average balance		Interest		Average rate	Average balance		Interest		Average rate	Average balance		Interest		Average rate
Interest earning assets:
Originated loans FTE^(1)(2)(3)	$	4,343,335	$	40,973	3.75%	$	3,886,503	$	46,736	4.77%	$	4,077,142	$	40,036	3.94%	$	4,432,725	$	42,440	3.85%
Acquired loans		284,653		6,593	9.21%		425,079		8,907	8.31%		211,126		3,923	7.45%		312,723		6,722	8.65%
Loans held for sale		230,390		1,683	2.91%		139,281		1,328	3.78%		159,068		1,213	3.06%		157,887		1,310	3.34%
Investment securities available-for-sale		559,330		2,784	1.99%		687,989		3,696	2.15%		638,039		2,397	1.50%		607,132		3,050	2.01%
Investment securities held-to-maturity		242,511		1,253	2.07%		199,519		1,384	2.77%		572,534		1,723	1.20%		189,360		1,201	2.54%
Other securities		29,640		221	2.98%		27,227		418	6.14%		15,079		209	5.54%		30,087		310	4.12%
Interest earning deposits and securities purchased under agreements to resell		254,931		70	0.11%		19,809		167	3.34%		888,600		228	0.10%		36,758		12	0.13%
Total interest earning assets FTE⁽²⁾	$	5,944,790	$	53,577	3.59%	$	5,385,407	$	62,636	4.61%	$	6,561,588	$	49,729	3.04%	$	5,766,672	$	55,045	3.84%
Cash and due from banks	$	73,274				$	76,866				$	78,148				$	76,041
Other assets		525,324					443,724					472,142					532,867
Allowance for credit losses		(60,372)					(40,212)					(54,984)					(56,984)
Total assets	$	6,483,016				$	5,865,785				$	7,056,894				$	6,318,596
Interest bearing liabilities:
Interest bearing demand, savings and money market deposits	$	2,957,604	$	1,990	0.27%	$	2,438,399	$	3,609	0.59%	$	2,789,681	$	1,572	0.23%	$	2,719,433	$	1,951	0.29%
Time deposits		1,038,983		3,501	1.34%		1,073,140		4,365	1.61%		937,579		2,004	0.86%		1,048,772		4,136	1.59%
Securities sold under agreements to repurchase		22,667		10	0.18%		65,722		204	1.23%		19,891		6	0.12%		23,485		18	0.31%
Federal Home Loan Bank advances		1,141		86	29.99%		231,926		1,409	2.41%		—		—	0.00%		163,263		311	0.77%
Total interest bearing liabilities	$	4,020,395	$	5,587	0.55%	$	3,809,187	$	9,587	1.00%	$	3,747,151	$	3,582	0.38%	$	3,954,953	$	6,416	0.65%
Demand deposits	$	1,515,058				$	1,193,357				$	2,368,810				$	1,436,671
Other liabilities		155,205					112,927					97,817					155,379
Total liabilities		5,690,658					5,115,471					6,213,778					5,547,003
Shareholders' equity		792,358					750,314					843,116					771,593
Total liabilities and shareholders' equity	$	6,483,016				$	5,865,785				$	7,056,894				$	6,318,596
Net interest income FTE⁽²⁾			$	47,990				$	53,049				$	46,147				$	48,629
Interest rate spread FTE⁽²⁾					3.04%					3.61%					2.66%					3.19%
Net interest earning assets	$	1,924,395				$	1,576,220				$	2,814,437				$	1,811,719
Net interest margin FTE⁽²⁾					3.21%					3.91%					2.82%					3.39%
Average transaction deposits	$	4,472,662				$	3,631,756				$	5,158,491				$	4,156,104
Average total deposits		5,511,645					4,704,896					6,096,070					5,204,876
Ratio of average interest earning assets to average interest bearing liabilities		147.87%					141.38%					175.11%					145.81%


(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 ~~$1,275~~$1,279 and ~~$1,264~~$1,301 for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.
(3)		Loan fees included in interest income totaled ~~$3,703~~$4,695 and ~~$1,663~~$2,611 for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

Net interest income totaled ~~$46.7~~$44.9 million and ~~$51.8~~$47.3 million during the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The yield on earning assets decreased ~~102~~80 basis points, ~~led~~driven by ~~a decrease in~~ the ~~originated portfolio yields due to monetary policy~~remix of assets into lower-yielding cash balances and interest rate actions taken by the Federal ~~Reserve. The~~Reserve during 2020. During the three months ended June 30, 2021, the cost of funds decreased 4525 basis points, compared to the three months ended ~~September~~June 30, ~~2019, to 0.55%.~~2020.

Average loans comprised ~~$4.6~~$4.3 billion, or ~~77.8%~~65.4%, of total average interest earning assets during the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$4.3~~$4.7 billion, or ~~80.1%~~82.3%, during the three months ended ~~September~~June 30, ~~2019.~~2020. The ~~increase~~decrease in average loan balances was

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~~was~~ primarily driven by ~~an increase in average PPP loans. During the quarter, we took a very~~our careful approach to extending new credit, ~~as well as continuing an intense~~a focus on managing credit risk and ~~yield. This led to~~yield and a decrease in PPP loan ~~originations of $132.9 million, during~~balances. Average PPP loans for the three months ended ~~September~~June 30, ~~2020, which were more than offset by higher levels of paydowns and payoffs. We continue~~2021 decreased $82.5 million, or 29.2%, to maintain a granular and well diversified loan portfolio with self-imposed concentration limits. In light of the strain placed on industries by the COVID-19 pandemic, we have carefully evaluated and continue$200.0 million, compared to closely monitor our entire loan portfolio. Higher deposits, loan paydowns and loan payoffs, combined with lower loan originations, drove a higher average cash and cash equivalent balance of $328.2 million during the three months ended ~~September~~June 30, ~~2020, compared to an average balance of $96.7 million during the three months ended September 30, 2019.~~2020.

Average investment securities comprised ~~13.5%~~18.4% and ~~16.5%~~13.8% of total interest earning assets during the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The ~~decrease~~increase in the investment portfolio was driven by strategic decisions to deploy a ~~result of scheduled paydowns and reflects the re-mixing~~portion of the ~~interest earning assets.~~excess liquidity into investment securities.

Average balances of interest bearing liabilities ~~increased $211.2~~decreased $207.8 million during the three months ended ~~September~~June 30, ~~2020,~~2021, compared to the three months ended ~~September~~June 30, ~~2019.~~2020. The ~~increase~~decrease was driven by ~~interest~~strong non-interest bearing ~~demand, savings~~deposit inflows, which were utilized, in part, to pay off our outstanding FHLB advances in 2020. Average FHLB advances decreased $163.3 million, and ~~money market~~time deposits ~~of $519.2 million. The~~decreased $111.2 million between the two periods. Those decreases were partially offset by an increase in average ~~deposit balances was used to pay off FHLB borrowings~~interest-bearing transaction deposits of ~~$230.8~~$70.2 million. ~~Time~~The cost of deposits decreased ~~$34.2 million and securities sold under agreements~~23 basis points to ~~repurchase decreased $43.1 million. Total interest expense related to interest bearing liabilities was $5.6 million and $9.6 million~~0.24% during the three months ended ~~September~~June 30, ~~2020 and 2019, respectively, at an average cost of 0.55% and 1.00%~~2021, compared to 0.47% during the three months ended ~~September~~June 30, 2020 and 2019, respectively. Additionally, the cost of deposits decreased 27 basis points to 0.40% during the three months ended September 30, 2020, compared to 0.67% during the three months ended September 30, 2019, due to the decline in short-term interest rates as a result of monetary policy actions by the Federal Reserve.2020.

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The table below presents the components of net interest income on a fully taxable equivalent basis for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


	For the nine months ended					For the nine months ended					For the six months ended					For the six months ended
	September 30, 2020					September 30, 2019					June 30, 2021					June 30, 2020
	Average				Average	Average				Average	Average				Average	Average				Average
	balance		Interest		rate	balance		Interest		rate	balance		Interest		rate	balance		Interest		rate
Interest earning assets:
Originated loans FTE^(1)(2)(3)	$	4,273,332	$	128,392	4.01%	$	3,782,765	$	137,036	4.84%	$	4,041,268	$	79,596	3.97%	$	4,237,946	$	87,419	4.15%
Acquired loans		313,555		22,194	9.45%		465,165		28,467	8.18%		224,722		9,051	8.12%		328,165		15,601	9.56%
Loans held for sale		163,980		3,929	3.20%		90,143		2,750	4.08%		195,094		2,730	2.82%		130,411		2,246	3.46%
Investment securities available-for-sale		597,654		9,229	2.06%		737,744		12,059	2.18%		662,250		4,882	1.47%		617,027		6,445	2.09%
Investment securities held-to-maturity		207,107		3,689	2.37%		214,696		4,568	2.84%		497,245		3,139	1.26%		189,211		2,436	2.57%
Other securities		29,826		945	4.22%		27,513		1,299	6.30%		15,446		419	5.43%		29,920		724	4.84%
Interest earning deposits and securities purchased under agreements to resell		105,430		179	0.23%		26,468		581	2.93%		764,626		393	0.10%		29,858		109	0.73%
Total interest earning assets FTE⁽²⁾	$	5,690,884	$	168,557	3.96%	$	5,344,494	$	186,760	4.67%	$	6,400,651	$	100,210	3.16%	$	5,562,538	$	114,980	4.16%
Cash and due from banks	$	74,694				$	76,863				$	79,692				$	75,412
Other assets		510,941					424,271					483,617					503,669
Allowance for credit losses		(54,077)					(37,939)					(56,938)					(50,895)
Total assets	$	6,222,442				$	5,807,689				$	6,907,022				$	6,090,724
Interest bearing liabilities:
Interest bearing demand, savings and money market deposits	$	2,725,572	$	6,829	0.33%	$	2,426,136	$	10,176	0.56%	$	2,717,983	$	3,224	0.24%	$	2,608,281	$	4,839	0.37%
Time deposits		1,048,116		12,075	1.54%		1,078,549		12,062	1.50%		952,431		4,339	0.92%		1,052,732		8,574	1.64%
Securities sold under agreements to repurchase		30,322		125	0.55%		61,313		519	1.13%		20,630		11	0.11%		34,192		115	0.68%
Federal Home Loan Bank advances		127,456		1,295	1.36%		258,348		4,786	2.48%		—		—	0.00%		191,308		1,209	1.27%
Total interest bearing liabilities	$	3,931,466	$	20,324	0.69%	$	3,824,346	$	27,543	0.96%	$	3,691,044	$	7,574	0.41%	$	3,886,513	$	14,737	0.76%
Demand deposits	$	1,363,556				$	1,152,718				$	2,267,900				$	1,286,972
Other liabilities		147,929					101,724					109,148					144,253
Total liabilities		5,442,951					5,078,788					6,068,092					5,317,738
Stockholders' equity		779,491					728,901					838,930					772,986
Total liabilities and shareholders’ equity	$	6,222,442				$	5,807,689				$	6,907,022				$	6,090,724
Net interest income FTE⁽²⁾			$	148,233				$	159,217				$	92,636				$	100,243
Interest rate spread FTE⁽²⁾					3.27%					3.71%					2.75%					3.40%
Net interest earning assets	$	1,759,418				$	1,520,148				$	2,709,607				$	1,676,025
Net interest margin FTE⁽²⁾					3.48%					3.98%					2.92%					3.62%
Average transaction deposits	$	4,089,128				$	3,578,854				$	4,985,883				$	3,895,253
Average total deposits		5,137,244					4,657,403					5,938,314					4,947,985
Ratio of average interest earning assets to average interest bearing liabilities		144.75%					139.75%					173.41%					143.12%


(1)		Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.
(2)		Presented on a fully taxable equivalent basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are ~~$3,843~~$2,547 and ~~$3,775~~$2,568 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.
(3)		Loan fees included in interest income totaled ~~$8,137~~$9,238 and ~~$4,587~~$4,434 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

Net interest income totaled ~~$144.4~~$90.1 million and ~~$155.4~~$97.7 million during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The yield on earnings assets decreased 71100 basis points, led by the remix of assets into lower-yielding cash balances, an 18 basis point decrease in the originated portfolio yields due to ~~the decline in short-term~~ interest ~~rates as a result of monetary policy~~rate actions taken by the Federal ~~Reserve.~~

~~Average loans comprised $4.6 billion, or 80.6%, of total average interest earning assets~~Reserve during 2020. During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, the cost of funds decreased 31 basis points, compared to ~~$4.2 billion, or 79.5%, of total average interest earning assets during~~ the ~~nine~~six months ended ~~September~~June 30, ~~2019. The $339.0 million increase in average loan balances was primarily driven by commercial loan growth, excluding PPP loans, of $350.3 million and average PPP loan originations of $210.7 million.~~

2020.

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Average loans comprised $4.3 billion, or 66.6%, of total average interest earning assets during the six months ended June 30, 2021, compared to $4.6 billion, or 82.1%, of total average interest earning assets during the six months ended June 30, 2020. The $300.1 million decrease in average loan balances was primarily driven by lower PPP loan balances and the Company’s careful approach to extending new credit and focus on managing credit risk and yield. Year-to-date loan originations through June 30, 2021 totaled $656.3 million, including $121.1 million of PPP loan originations.

Average investment securities comprised ~~14.1%~~18.1% and ~~17.8%~~14.5% of total interest earning assets during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The ~~decrease~~increase in the investment portfolio was driven by strategic decisions to deploy a ~~result~~portion of ~~scheduled paydowns and reflects the re-mixing of the interest earning assets.~~excess liquidity into investment securities.

Average balances of interest bearing liabilities ~~increased $107.1~~decreased $195.5 million during the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The ~~increase~~decrease was driven by ~~interest~~strong non-interest bearing ~~demand, savings~~deposit inflows, which were utilized, in part, to pay off our outstanding FHLB advances in 2020. Average FHLB advances decreased $191.3 million, and ~~money market~~time deposits ~~of $299.4 million. These increases~~decreased $100.3 million between the two periods. Those decreases were partially offset by ~~decreases~~an increase in ~~FHLB advances of $130.9 million, time~~average interest-bearing transaction deposits of ~~$30.4 million and securities sold under agreements to repurchase of $31.0~~$109.7 million. Total interest expense related to interest bearing liabilities was $20.3 million and $27.5 million during the nine months ended September 30, 2020 and 2019, respectively, at an average cost of 0.69% and 0.96% during the nine months ended September 30, 2020 and 2019, respectively. Additionally, theThe cost of deposits decreased 1529 basis points to ~~0.49%~~0.26% during the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to 0.55% during the ~~nine~~six months ended ~~September~~June 30, ~~2019, due to the decline in short-term interest rates as a result of monetary policy actions by the Federal Reserve.~~2020.

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The following table summarizes the changes in net interest income on aan FTE basis by major category of interest earning assets and interest bearing liabilities, identifying changes related to volume and changes related to rates for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to the three and ~~nine~~six months ended ~~September~~June 30, ~~2019:~~2020:


	Three months ended September 30, 2020						Nine months ended September 30, 2020						Three months ended June 30, 2021						Six months ended June 30, 2021
	compared to						compared to						compared to						compared to
	Three months ended September 30, 2019						Nine months ended September 30, 2019						Three months ended June 30, 2020						Six months ended June 30, 2020
	Increase (decrease) due to						Increase (decrease) due to						Increase (decrease) due to						Increase (decrease) due to
	Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net
Interest income:
Originated loans FTE^(1)(2)(3)	$	4,310	$	(10,073)	$	(5,763)	$	14,739	$	(23,383)	$	(8,644)	$	(3,492)	$	1,088	$	(2,404)	$	(3,874)	$	(3,949)	$	(7,823)
Acquired loans		(3,252)		938		(2,314)		(10,731)		4,458		(6,273)		(1,888)		(911)		(2,799)		(4,166)		(2,384)		(6,550)
Loans held for sale		666		(311)		355		1,769		(590)		1,179		9		(106)		(97)		905		(421)		484
Investment securities available-for-sale		(640)		(272)		(912)		(2,163)		(667)		(2,830)		116		(769)		(653)		333		(1,896)		(1,563)
Investment securities held-to-maturity		222		(353)		(131)		(135)		(744)		(879)		1,153		(631)		522		1,945		(1,242)		703
Other securities		18		(215)		(197)		73		(427)		(354)		(208)		107		(101)		(393)		88		(305)
Interest earning deposits and securities purchased under agreements to resell		65		(162)		(97)		134		(536)		(402)		219		(3)		216		378		(94)		284
Total interest income	$	1,389	$	(10,448)	$	(9,059)	$	3,686	$	(21,889)	$	(18,203)	$	(4,091)	$	(1,225)	$	(5,316)	$	(4,872)	$	(9,898)	$	(14,770)
Interest expense:
Interest bearing demand, savings and money market deposits	$	349	$	(1,968)	$	(1,619)	$	750	$	(4,097)	$	(3,347)	$	40	$	(419)	$	(379)	$	130	$	(1,745)	$	(1,615)
Time deposits		(115)		(749)		(864)		(351)		364		13		(238)		(1,894)		(2,132)		(457)		(3,778)		(4,235)
Securities sold under agreements to repurchase		(19)		(175)		(194)		(128)		(266)		(394)		(1)		(11)		(12)		(7)		(97)		(104)
Federal Home Loan Bank advances		(17,395)		16,072		(1,323)		(1,330)		(2,161)		(3,491)		—		(311)		(311)		—		(1,209)		(1,209)
Total interest expense		(17,180)		13,180		(4,000)		(1,059)		(6,160)		(7,219)		(199)		(2,635)		(2,834)		(334)		(6,829)		(7,163)
Net change in net interest income	$	18,569	$	(23,628)	$	(5,059)	$	4,745	$	(15,729)	$	(10,984)	$	(3,892)	$	1,410	$	(2,482)	$	(4,538)	$	(3,069)	$	(7,607)


(1)		Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.
(2)		Presented on an FTE basis using the statutory tax rate of 21% for ~~the three and nine months ended September 30, 2020 and 2019.~~all periods presented. The taxable equivalent adjustments included above are ~~$1,275~~$1,279 and ~~$1,264~~$1,301 for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The taxable equivalent adjustments included above are ~~$3,843~~$2,547 and ~~$3,775~~$2,568 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.
(3)		Loan fees included in interest income totaled ~~$3,703~~$4,695 and ~~$1,663~~$2,611 for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Loan fees included in interest income totaled ~~$8,137~~$9,238 and ~~$4,587~~$4,434 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

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


	For the three months ended						For the nine months ended						For the three months ended						For the six months ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019			June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
			Average			Average			Average			Average			Average			Average			Average			Average
	Average		rate	Average		rate	Average		rate	Average		rate	Average		rate	Average		rate	Average		rate	Average		rate
	balance		paid	balance		paid	balance		paid	balance		paid	balance		paid	balance		paid	balance		paid	balance		paid
Non-interest bearing demand	$	1,515,058	0.00%	$	1,193,357	0.00%	$	1,363,556	0.00%	$	1,152,718	0.00%	$	2,368,810	0.00%	$	1,436,671	0.00%	$	2,267,900	0.00%	$	1,286,972	0.00%
Interest bearing demand		961,468	0.21%		683,309	0.26%		875,871	0.24%		689,214	0.22%		560,591	0.21%		923,721	0.27%		551,371	0.22%		832,602	0.25%
Money market accounts		1,390,747	0.34%		1,221,258	0.80%		1,271,499	0.44%		1,194,521	0.77%		1,509,395	0.26%		1,212,620	0.35%		1,469,344	0.28%		1,211,220	0.50%
Savings accounts		605,389	0.18%		533,832	0.53%		578,202	0.24%		542,401	0.53%		719,695	0.16%		583,092	0.19%		697,268	0.17%		564,459	0.28%
Time deposits		1,038,983	1.34%		1,073,140	1.61%		1,048,116	1.54%		1,078,549	1.50%		937,579	0.86%		1,048,772	1.59%		952,431	0.92%		1,052,732	1.64%
Total average deposits	$	5,511,645	0.40%	$	4,704,896	0.67%	$	5,137,244	0.49%	$	4,657,403	0.64%	$	6,096,070	0.24%	$	5,204,876	0.47%	$	5,938,314	0.26%	$	4,947,985	0.55%

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 $5.3 million of provision release for funded loans and $0.6 million of provision release for unfunded loan commitment reserves, during the three months ended June 30, 2021 driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast. During the three months ended June 30, 2020, provision for loan loss expense of $10.3

6361

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~~During the three months ended September 30, 2020, the Company recorded~~million, including a $0.1 million provision ~~for loan losses of $1.2 million, which included a $0.2 million provision~~expense for unfunded loan commitment ~~reserves. Provision of $5.7 million was recorded under the prior incurred loss model during the three months ended September 30, 2019 to support originated loan growth and cover net charge-offs.~~

~~Provision for loan losses of $17.6 million~~reserves, was recorded under the CECL model ~~during~~to provide coverage for the ~~nine~~impact of deterioration in the macro-economic environment as a result of COVID-19.

The Company recorded total provision release of $9.4 million for the six months ended ~~September~~June 30, ~~2020, including~~2021, which included a ~~$0.1~~provision release of $9.9 million for funded loans and a provision expense of $0.5 million for unfunded loan ~~commitment reserves,~~commitments, driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast. During the six months ended June 30, 2020, the Company recorded total provision expense of $16.4 million, which included a provision expense of $16.5 million for funded loans and a provision release of $0.1 million for unfunded loan commitments, to provide coverage for the impact of deteriorating economic conditions as a result of COVID-19 and to ~~cover net charge-offs. Provision of $10.5 million was recorded under the prior incurred loss model during the nine months ended September 30, 2019 to~~ support non-PPP originated loan ~~growth and net charge-offs.~~growth. The allowance for credit losses totaled ~~1.34%~~1.14% of total loans at ~~September~~June 30, ~~2020,~~2021, compared to ~~0.88%~~the allowance for credit losses of 1.26% at ~~December 31, 2019, and included a CECL adoption day 1 increase of $5.8 million.~~June 30, 2020. Excluding PPP loans, the allowance for credit losses totaled ~~1.45%~~1.18% and 1.36% of total loans at ~~September~~June 30, ~~2020.~~2021 and 2020, respectively.

Non-interest income

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


	For the three months ended September 30,				For the nine months ended September 30,				Three months			Nine months			For the three months ended June 30,				For the six months ended June 30,				Three months			Six months
									Increase (decrease)			Increase (decrease)											Increase (decrease)			Increase (decrease)
	2020		2019		2020		2019		Amount		% Change	Amount		% Change	2021		2020		2021		2020		Amount		% Change	Amount		% Change
Service charges	$	3,742	$	4,617	$	10,962	$	13,479	$	(875)	(19.0)%	$	(2,517)	(18.7)%	$	3,568	$	3,094	$	7,042	$	7,220	$	474	15.3 %	$	(178)	(2.5)%
Bank card fees		4,039		3,752		11,206		10,946		287	7.6 %		260	2.4 %		4,614		3,654		8,687		7,167		960	26.3 %		1,520	21.2 %
Mortgage banking income		34,943		14,702		79,246		32,037		20,241	137.7 %		47,209	147.4 %		13,979		30,630		36,358		44,303		(16,651)	(54.4)%		(7,945)	(17.9)%
Bank-owned life insurance income		597		431		1,776		1,276		166	38.5 %		500	39.2 %		553		589		1,101		1,179		(36)	(6.1)%		(78)	(6.6)%
Other non-interest income		1,136		1,230		3,608		4,585		(94)	(7.6)%		(977)	(21.3)%		2,552		870		5,404		2,472		1,682	193.3 %		2,932	118.6 %
OREO-related income		75		27		103		147		48	177.8 %		(44)	(29.9)%		—		—		35		28		—	—		7	25.0 %
Total non-interest income	$	44,532	$	24,759	$	106,901	$	62,470	$	19,773	79.9 %	$	44,431	71.1 %	$	25,266	$	38,837	$	58,627	$	62,369	$	(13,571)	(34.9)%	$	(3,742)	(6.0)%

Non-interest income totaled ~~$44.5~~$25.3 million and ~~$106.9~~$58.6 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively, compared to ~~$24.8~~$38.8 million and ~~$62.5~~$62.4 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively. ~~Mortgage banking income reached a quarterly record of $34.9 million, increasing $20.2 million, or 137.7%, and $47.2 million, or 147.4%, during~~During the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, mortgage banking income decreased $16.7 million and $7.9 million, respectively, compared to the same periods in the prior ~~year. The mortgage banking income increase was driven by higher loan production~~year due to lower ~~prevailing interest rates. During the three and nine months ended September 30, 2020, service~~refinance activity. Service charges and bank card fees ~~decreased~~increased a combined ~~$0.6~~$1.4 million and ~~$2.3~~$1.3 million during the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year, due to changes in consumer ~~behavior as a result~~behavior. Other non-interest income increased $1.7 million and $2.9 million during the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year largely due to $0.8 million and $2.4 million of gains on fixed assets sales from the ~~COVID-19 pandemic.~~banking center consolidations.

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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 September 30,				For the nine months ended September 30,				Three months			Nine months			For the three months ended June 30,				For the six months ended June 30,				Three months			Six months
									Increase (decrease)			Increase (decrease)											Increase (decrease)			Increase (decrease)
	2020		2019		2020		2019		Amount		% Change	Amount		% Change	2021		2020		2021		2020		Amount		% Change	Amount		% Change
Salaries and benefits	$	38,614	$	33,522	$	108,251	$	92,079	$	5,092	15.2 %	$	16,172	17.6 %	$	31,439	$	36,457	$	64,962	$	69,637	$	(5,018)	(13.8)%	$	(4,675)	(6.7)%
Occupancy and equipment		6,878		6,825		20,854		20,428		53	0.8 %		426	2.1 %		6,131		7,078		12,681		13,976		(947)	(13.4)%		(1,295)	(9.3)%
Telecommunications and data processing		2,270		2,133		6,790		6,547		137	6.4 %		243	3.7 %		2,315		2,255		4,652		4,520		60	2.7 %		132	2.9 %
Marketing and business development		696		985		1,992		2,811		(289)	(29.3)%		(819)	(29.1)%		570		600		1,022		1,296		(30)	(5.0)%		(274)	(21.1)%
FDIC deposit insurance		409		58		744		1,049		351	605.2 %		(305)	(29.1)%		456		411		900		335		45	10.9 %		565	168.7 %
Bank card expenses		1,275		1,288		3,334		3,521		(13)	(1.0)%		(187)	(5.3)%		1,330		1,033		2,474		2,059		297	28.8 %		415	20.2 %
Professional fees		714		743		2,082		2,598		(29)	(3.9)%		(516)	(19.9)%		649		759		1,391		1,368		(110)	(14.5)%		23	1.7 %
Other non-interest expense		2,793		2,958		8,362		8,570		(165)	(5.6)%		(208)	(2.4)%		2,348		2,479		4,824		5,569		(131)	(5.3)%		(745)	(13.4)%
Problem asset workout		1,064		602		2,341		2,450		462	76.7 %		(109)	(4.4)%		294		629		732		1,277		(335)	(53.3)%		(545)	(42.7)%
Gain on OREO sales, net		(119)		(6,514)		(25)		(7,200)		6,395	(98.2)%		7,175	(99.7)%
Loss on OREO sales, net																221		55		192		94		166	301.8 %		98	104.3 %
Core deposit intangible asset amortization		295		295		887		887		—	0.0 %		—	0.0 %		296		296		592		592		—	—		—	0.0 %
Banking center consolidation-related expense		432		898		2,140		898		(466)	(51.9)%		1,242	138.3 %		294		1,708		1,589		1,708		(1,414)	(82.8)%		(119)	(7.0)%
Total non-interest expense	$	55,321	$	43,793	$	157,752	$	134,638	$	11,528	26.3 %	$	23,114	17.2 %	$	46,343	$	53,760	$	96,011	$	102,431	$	(7,417)	(13.8)%	$	(6,420)	(6.3)%

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During the three and six months ended ~~September~~June 30, 2021, non-interest expense decreased $7.4 million, or 13.8%, and $6.4 million, or 6.3%, respectively, compared to the three and six months ended June 30, 2020. The decrease was primarily driven by lower mortgage-related compensation as well as the Company’s strategic efforts to improve operating efficiency. Salaries and benefits decreased $5.0 million and $4.7 million during the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020 largely due to lower mortgage banking related compensation. Occupancy and equipment decreased $0.9 million and $1.3 million, during the three and six months ended June 30, 2021, largely due to efficiencies gained from the completion of the previously announced banking center consolidations. Banking center consolidation-related expense decreased $1.4 million and $0.1 million during the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020. Problem asset workout expenses decreased $0.3 million and $0.5 million.

During the three and six months ended June 30, 2020, non-interest expense increased ~~$11.5~~$7.3 million, or ~~26.3%~~15.7%, ~~compared to the same period in the prior year.~~and $11.6 million, or 12.8%, respectively. The increase in 2020 was primarily driven by higher mortgage banking ~~compensation-related expense included in salaries and benefits.~~ ~~The consolidations of 12 banking centers were announced in the second quarter of 2020 and are expected to be substantially completed by year end~~.

During the nine months ended September 30, 2020, non-interest expense increased $23.1 million, or 17.2%, compared to the same period in the prior year. The primary drivers of the increase were higher mortgage banking commissions ~~of $12.9 million~~ included in salaries and benefits, banking center consolidation expense and higher gains on OREO sales during the prior period.

Income taxes

Income tax expense ~~attributable to income before income taxes~~ was ~~$6.8~~$5.4 million and ~~$14.5~~$11.1 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively. Income tax expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was ~~$5.4~~$4.4 million and ~~$12.0~~$7.7 million, respectively. The effective tax rate for the three and six months ended ~~September~~June 30, ~~2020~~2021 was ~~19.7%~~18.4% and 17.9%, respectively, compared to 20.0% and 18.6% for the same ~~period~~periods in the prior year. Income tax expense included $0.2 million and $0.4 million of benefit from stock compensation activity during the three and six months ended June 30, 2021, respectively. Income tax expense included $0.1 million and $0.1 million of expense ~~during the nine months ended September 30, 2020 and $2.2 million of benefit during the nine months ended September 30, 2019~~ from stock compensation ~~activity.~~activity during the three and six months ended June 30, 2020, respectively. Adjusting for stock compensation activity, the effective tax rate for the ~~nine~~three and six months ended ~~September~~June 30, ~~2020~~2021 was ~~18.9%~~19.1% and 18.5%, compared to ~~19.4%~~19.6% and 18.3% for the same ~~period~~periods in the prior year. The effective tax rate is lower than the federal statutory rate primarily due to interest income from tax-exempt lending, bank-owned life insurance income, and the relationship of these items to pre-tax income. The Company forecasts the full year estimated effective tax rate in accordance with ASC Topic 740; as a result, the relationship between pre-tax income and tax-exempt income within each reporting period can create fluctuations in the effective tax rate from period-to-period.

Additional information regarding income taxes can be found in note 19 of our audited consolidated financial statements in our ~~2019~~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

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liquidity is represented by our cash and cash equivalents, and unencumbered investment securities, and is detailed in the table below as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


	September 30, 2020		December 31, 2019		June 30, 2021		December 31, 2020
Cash and due from banks	$	444,603	$	109,690	$	1,003,993	$	605,065
Interest bearing bank deposits		500		500		500		500
Unencumbered investment securities, at fair value		345,388		324,918		739,190		513,945
Total	$	790,491	$	435,108	$	1,743,683	$	1,119,510

Total on-balance sheet liquidity increased ~~$355.4~~$624.2 million at ~~September~~June 30, ~~2020,~~2021, compared to December 31, ~~2019, primarily driven by strong deposit growth.~~2020. The increase was due to $225.2 million in unencumbered available-for-sale and held-to-maturity securities balances and higher cash and due from banks of $398.9 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 ~~September~~June 30, ~~2020. At~~2021 or December 31, ~~2019, investment securities totaling $17.6 million were pledged as collateral for FHLB advances.~~2020. The Bank had loans pledged as collateral for FHLB advances of $1.3 billion ~~at September 30, 2020~~ and ~~$1.5~~$1.2 billion at June 30, 2021 and December 31, ~~2019.~~2020, respectively. FHLB advances, lines of credit and other short-term borrowing availability totaled ~~$1.0~~$0.9 billion at ~~September~~June 30, ~~2020.~~2021. The Bank can obtain additional liquidity through the FHLB facility, if required, and also has access to the Paycheck Protection Program Liquidity Facility (“PPPLF”) and federal funds lines of credit with correspondent banks.

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

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

Exclusive from the investing activities related to acquisitions, our primary investing activities are originations and pay-offs and paydowns of loans and purchases and sales of investment securities. At ~~September~~June 30, ~~2020,~~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 ~~$0.9~~$1.3 billion at ~~September~~June 30, ~~2020,~~2021, inclusive of pre-tax net unrealized gains of ~~$12.9~~$1.2 million on the available-for-sale securities portfolio. Additionally, our held-to-maturity securities portfolio had ~~$4.7~~$0.5 million of pre-tax net unrealized ~~gains~~losses at ~~September~~June 30, ~~2020.~~2021. The gross unrealized gains and losses are detailed in note 3 of our consolidated financial statements. As of ~~September~~June 30, ~~2020,~~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 ~~September~~June 30, ~~2020, $631.3~~2021, $677.2 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 ~~September~~June 30, ~~2020,~~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.

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

On February ~~26, 2020,~~24, 2021, the Company’s Board of Directors authorized a new ~~share~~program to repurchase up to $75.0 million of the Company’s stock which replaces the previously authorized $50.0 million stock repurchase program ~~for up to $50.0 million from time to time~~announced in ~~either the open market or through privately negotiated transactions. This authorization was~~February 2020 in addition to the $12.6 million remaining for share repurchase that was previously approved by the Board on August 5, 2016. During the first quarter of 2020, the Company repurchased 734,117 shares for $19.5 million. This completed the previous authorization approved in August 2016.its entirety. The remaining authorization under the new program ~~approved in February 2020~~as of June 30, 2021 was ~~$43.1 million at September 30, 2020.~~$75.0 million.

On ~~November 5, 2020,~~August 4, 2021, our Board of Directors declared a quarterly dividend of ~~$0.20~~$0.22 per common share, payable on ~~December~~September 15, ~~2020~~2021 to shareholders of record at the close of business on ~~November~~August 27, ~~2020.~~2021.

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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.

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 ~~with~~from direction ~~from~~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 ~~September~~June 30, ~~2020.~~2021. During the ~~three~~six months ended ~~September~~June 30, ~~2020,~~2021, our asset sensitivity ~~increased~~decreased slightly for a rising rate environment as a result of the balance sheet mix. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 and a 25 basis point decrease in interest rates on net interest income based on the interest rate risk model at ~~September~~June 30, ~~2020:~~2021:


Hypothetical
shift in interest	% change in projected net interest income		% change in projected net interest income
rates (in bps)	September 30, 2020	December 31, 2019	June 30, 2021	December 31, 2020
200	11.29%	6.16%	12.09%	14.22%
100	6.01%	3.13%	5.96%	7.46%
(25)	(0.58)%	(0.54)%	(0.23)%	(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.

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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 ~~a balanced approach to loan~~the origination ~~with an emphasis on shorter~~of longer duration ~~loans as well as variable rate loans given the current low rate environment.~~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 ~~81.7%~~85.0% of total deposits at ~~September~~June 30, ~~2020,~~2021, compared to ~~77.7%~~82.6% at December 31, ~~2019.~~2020. We currently have no brokered time deposits.

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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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we had loan commitments totaling ~~$838.0~~$994.9 million and ~~$850.3~~$848.6 million, respectively, and standby letters of credit that totaled ~~$8.9~~$9.2 million and ~~$11.9~~$7.3 million, respectively. Unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon.

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 ~~September~~June 30, ~~2020.~~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 ~~September~~June 30, ~~2020.~~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

~~The following discussion supplements~~There have been no material changes to the ~~discussion of~~ risk factors ~~affecting the Company~~disclosed in ~~Part I,~~ Item 1A: Risk Factors in our Annual Report on Form 10-K for the year ended December 31 ~~2019, and Quarterly Reports on~~ ~~Form 10-Q~~ ~~for the periods ended March 31, 2020 and June 30,~~ 2020. The discussion of risk factors, as so supplemented, set forth the material risk factors that could affect our financial condition and operations. Readers should not consider any descriptions of such factors to be a complete set of all potential risks that could affect the Company.

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

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

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

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

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


					Maximum						Maximum
				Total number of	approximate dollar					Total number of	approximate dollar
				shares purchased	value of shares					shares purchased	value of shares
				as part of publicly	that may yet be					as part of publicly	that may yet be
	Total number	Average price		announced plans	purchased under the		Total number	Average price		announced plans	purchased under the
Period	of shares purchased	paid per share		or programs	plans or programs ⁽¹⁾		of shares purchased	paid per share		or programs	plans or programs ⁽²⁾
July 1 - July 31, 2020	—	$	—	—	$	43,101,943
August 1 - August 31, 2020	—		—	—		43,101,943
September 1 - September 30, 2020	—		—	—		43,101,943
April 1 - April 30, 2021⁽¹⁾							23,560	$	40.54	—	$	75,000,000
May 1 - May 31, 2021⁽¹⁾							5,529		39.70	—		75,000,000
June 1 - June 30, 2021⁽¹⁾							—		—	—		75,000,000
Total	—	$	—	—	$	43,101,943	29,089	$	40.38	—	$	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 ~~26, 2020,~~24, 2021, the Company’s Board of Directors authorized ~~the~~a new program to repurchase of up to ~~an additional $50.0~~$75.0 million of common stock. Under this authorization, ~~$43,101,943~~$75.0 million remained available for purchase at ~~September~~June 30, ~~2020.~~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



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

Date: ~~November 5, 2020~~August 4, 2021

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