News Column

NATIONAL BANK HOLDINGS CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

February 27, 2014

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 years ended December 31, 2013, 2012, and 2011, and with the other financial and statistical data presented in this annual report. 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" and "Risk Factors" and should be read herewith. Readers are cautioned that meaningful comparability of current period financial information to prior periods may be limited. Following our Hillcrest Bank acquisition on October 22, 2010, we completed three additional acquisitions: Bank Midwest on December 10, 2010, Bank of Choice on July 22, 2011 and Community Banks of Colorado on October 21, 2011. As a result, our operating results are limited to the periods since these acquisitions, and the comparability of periods is compromised due to the timing of these acquisitions. Additionally, in accordance with Accounting Standards Codification ("ASC") Topic 805, Business Combinations, the assets acquired and liabilities assumed were recorded at fair value at their respective dates of acquisition. The comparability of data is also compromised by the FDIC loss sharing agreements in place that cover a portion of losses incurred on certain assets acquired in the Hillcrest Bank and the Community Banks of Colorado acquisitions. In May 2012, we changed the name of Bank Midwest, N.A. to NBH Bank, N.A. ("NBH Bank" or the "Bank") and all references to NBH Bank, N.A. should be considered synonymous with references to Bank Midwest, N.A. prior to the name change. Overview National Bank Holdings Corporation is a bank holding company formed in 2009. Through our subsidiary, NBH Bank, N.A., we provide a variety of banking products to both commercial and consumer clients through a network of 97 banking centers, with the majority of those banking centers located in the greater Kansas City area and Colorado and through online and mobile banking products. We operate under the following brand names: Bank Midwest in Kansas and Missouri, Community Banks of Colorado in Colorado, and Hillcrest Bank in Texas. In just over three years, we have completed the acquisition and integration of four troubled or failed banks, three of which were FDIC-assisted. We have transformed these four banks into one collective banking operation with steadily increasing organic growth, prudent underwriting, and meaningful market share with continued opportunity for expansion. Our long-term business model utilizes our organic development infrastructure, low-risk balance sheet, continuous operational development and a disciplined acquisition strategy to create value and provide attractive returns. As of December 31, 2013, we had $4.9 billion in assets, $1.9 billion in loans, $3.8 billion in deposits and $0.9 billion in equity. We believe that our established presence positions us well for growth opportunities in our current and complementary markets. Our focus is on building strong banking relationships with small to mid-sized businesses and consumers, while maintaining a low risk profile designed to generate reliable income streams and attractive returns. Through our acquisitions, we have established a solid core financial services franchise with a sizable presence for deposit gathering and client relationship building necessary for growth. Operating Highlights and Key Challenges Our operations and strategy execution resulted in the following highlights as of and for the year ended December 31, 2013: Strategy execution Expanded product offerings - launched the NBH Capital Finance lending group, and a Government and Non-Profit Specialty Banking unit. Accelerating organic growth - increased loan originations by 64.4% over the prior year. Opportunistic capital management - repurchased 7.4 million shares at attractive prices.



Banking center rationalization - exited four out-of-market California

banking centers and integrated 32 limited-service retirement center locations into our existing banking center network.



Operational streamlining - back-office realignment, vendor consolidation,

continuous efficiency realization. Product enhancements - added consumer and commercial interest rate swap product capabilities.



Loan portfolio During the third quarter of 2013, we reached an important loan balance

inflection point where total loan balances increased as originations

began outpacing acquired troubled loan resolution. 39

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Strategic loans increased 34.0% over the prior year, ending the year at $1.5 billion.



Organic loan originations totaled $714.0 million for 2013, representing

a 64.4% increase from 2012.

During 2013, our non-strategic loan balances decreased $360.6 million,

or 50.7%, as we successfully worked out non-strategic loans acquired in

our FDIC-assisted transactions.

Credit quality Non 310-30 loans Credit quality of the non 310-30 loan portfolio continued to improve with non-performing non 310-30 loans to total non 310-30 loans improving to 1.51% at December 31, 2013 from 4.04% at December 31, 2012. Originated loans within the non 310-30 portfolio continued to show strong credit quality and finished the year with total net charge offs of 0.03% and non-performing loans of 0.42%.



Net charge-offs on all non 310-30 loans were 0.27% during 2013.

ASC 310-30 loans

Increased client cash flow estimates resulted in a net addition of $73.7 million to accretable yield for the loans accounted for under ASC 310-30 during 2013, complemented by $1.3 million in provision reversals within that portfolio. One commercial and industrial loan pool accounted for under ASC 310-30, totaling $14.8 million at December 31, 2013 and covered by a loss sharing agreement, was put on non-accrual status during 2013. Loss-share coverage As of December 31, 2013, 16.7%, or $309.4 million, of our total loans (by dollar amount) were covered by loss sharing agreements with the FDIC. As of December 31, 2013, 55.4%, or $38.8 million, of our total other real estate owned (by dollar amount) was covered by loss sharing agreements with the FDIC.



Client deposit funded balance sheet As of December 31, 2013, total deposits and client repurchase agreements

made up 98.0% of our total liabilities. Transaction accounts improved to 61.0% of total deposits as of December 31, 2013 from 58.3% at December 31, 2012.



Average transaction account deposit balances grew 2.0% from December 31,

2012 to December 31, 2013.

As of December 31, 2013, we did not have any brokered deposits.

Revenues and expenses Our yield on our loan portfolio was 7.92% during 2013 compared to 8.37%

during 2012. Cost of deposits improved 23 basis points to 0.41% during 2013, from 0.64% during 2012, due to the continued emphasis on our commercial and consumer relationship banking strategy and lower cost transaction accounts. Net interest margin was 3.81% during 2013 and 3.98% during 2012, and continues to be driven by the attractive yields on loans accounted for under ASC 310-30 loan pools and lower cost of deposits.



Non-interest income totaled $20.2 million, decreasing $17.2 million, or

46.0% from 2012, driven by increased amortization of our FDIC indemnification asset as covered assets have continued to perform well. Problem loan/OREO workout expenses totaled $16.6 million during 2013, decreasing $12.2 million, or 42.4%, from 2012.



Operating expenses before the banking center closure charges, problem

loan/OREO workout expenses, and the fair value changes to the warrant

liability, decreased $11.0 million, or 6.3%, during 2013 compared to 2012, when 2012 is adjusted for the aforementioned items and IPO expenses incurred during 2012. Strong capital position As of December 31, 2013, our tier 1 leverage ratio was 16.6% and our tier 1 risk-based capital ratio was 38.9%.



The after-tax accretable yield on ASC 310-30 loans plus the after-tax

yield on the FDIC indemnification asset, net, in excess of 4.5%, an approximate yield on new loan originations, and discounted at 5%, adds



$0.75 per share to our tangible book value per share as of December 31,

2013. 40

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Tangible common book value per share was $18.27 before consideration of

the excess accretable yield value of $0.75 per share. During 2013, we repurchased 7,421,179 shares, representing a 14.2% reduction in total shares outstanding, at a weighted average price of $19.77 per share.



On January 23, 2014, the Board of Directors approved a new authorization

to repurchase up to $50.0 million of the Company's common stock through

December 31, 2014.

We have worked to actively grow our financial services franchise through the implementation of a strong sales culture with consistent, prudent lending policies and a technology and operating infrastructure designed to support our organic growth and acquisition strategies, while continuously seeking operational efficiencies. This included the implementation of a scalable data processing and operating platform and hiring key personnel to execute our relationship banking strategy and expanding our product lines. Key Challenges There are a number of significant challenges confronting us and our industry. We face a variety of challenges in implementing our business strategy, including being a new entity, the challenges of acquiring distressed franchises and rebuilding them, deploying our remaining capital on quality acquisition targets, low interest rates and low demand from borrowers and intense competition for loans. General economic conditions have been modestly improving in recent quarters. However, continued uncertainty about the strength of the recovery remains and has hindered the pace and advancement of an economic recovery, both nationally and in our core markets. Residential real estate values have largely recovered from their lows, and we continue to consider this with guarded optimism. Commercial real estate values have been recovering slightly slower than residential real estate, and it is difficult to determine how strong this recovery is and how long it will last. 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. Our total loan balances increased $21.4 million during 2013, or 1.2%. Despite originations of $714.0 million during 2013, the marginal increase in total loans was the result of the downward pressure on loan balances from our active resolution of problem and non-strategic loans acquired in our FDIC-assisted transactions. While we believe we have hit our loan growth inflection point, whereby total originations have begun outpacing problem loan resolution, interest rates remain low and intense loan competition has been limiting the yields we have been able to obtain on interest earning assets. For example, our acquired loans generally have produced higher yields than our originated loans due to the recognition of accretion of fair value adjustments and accretable yield. As a result, we expect the yields on our loans to decline as our acquired loan portfolio pays down or matures and we expect downward pressure on our interest income to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans. Increased regulation, such as the rules and regulations promulgated under the Dodd-Frank Act and potential higher required capital ratios, is adding costs and uncertainty to all U.S. banks and could reduce our competitiveness as compared to other financial service providers or lead to industry-wide decreases in profitability. While certain external factors are out of our control and may provide obstacles during the implementation of our business strategy, we believe we are prepared to deal with these challenges. We seek to remain flexible, yet methodical and proactive, in our strategic decision making so that we can quickly respond to market changes and the inherent challenges and opportunities that accompany such changes. Performance Overview As a financial institution, we routinely evaluate and review our consolidated statements of financial condition and results of operations. We evaluate the levels, trends and mix of the statements of financial condition and statements of operations line items and compare those levels to our budgeted expectations, our peers, industry averages and trends. Within our statements of financial condition, we specifically evaluate and manage the following: Loan balances - We monitor our loan portfolio to evaluate loan originations, payoffs, and profitability. We forecast loan originations and payoffs within the overall loan portfolio, and we work to resolve problem loans and OREO in an expeditious manner. We track the runoff of our covered assets as well as the loan relationships that we have identified as "non-strategic" and put particular emphasis on the buildup of "strategic" relationships. Asset quality - We monitor the asset quality of our loans and OREO through a variety of metrics, and we work to resolve problem assets in an efficient manner. Specifically, we monitor the resolution of problem loans through payoffs, pay downs and foreclosure activity. We marked all of our acquired assets to fair value at the date of their respective acquisitions, taking into account our estimation of credit quality. 41 -------------------------------------------------------------------------------- Many of the loans that we acquired in the Hillcrest Bank, Bank of Choice and Community Banks of Colorado acquisitions had deteriorated credit quality at the respective dates of acquisition. These loans are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. This guidance is described more fully below under "-Application of Critical Accounting Policies" and in note 2 in our consolidated financial statements. Our evaluation of traditional credit quality metrics and the allowance for loan losses ("ALL") levels, especially when compared to industry averages or to other financial institutions, takes into account that any credit quality deterioration that existed at the date of acquisition was considered in the original valuation of those assets on our balance sheet. Additionally, many of these assets are covered by loss sharing agreements. All of these factors limit the comparability of our credit quality and ALL levels to peers or other financial institutions. Deposit balances - We monitor our deposit levels by type, market and rate. Our loans are funded through our deposit base, and we seek to optimize our deposit mix in order to provide reliable, low-cost funding sources. Liquidity - We monitor liquidity based on policy limits and through projections of sources and uses of cash. In order to test the adequacy of our liquidity, we routinely perform various liquidity stress test scenarios that incorporate wholesale funding maturities, if any, certain deposit run-off rates and access to borrowings. We manage our liquidity primarily through our balance sheet mix, including our cash and our investment security portfolio, and the interest rates that we offer on our loan and deposit products, coupled with contingency funding plans as necessary. Capital - We monitor our capital levels, including evaluating the effects of share repurchases and potential acquisitions, to ensure continued compliance with regulatory requirements and with the OCC Operating Agreement that we entered into in connection with our Bank Midwest acquisition, which is described under "Supervision and Regulation." We review our tier 1 leverage capital ratios, our tier 1 risk-based capital ratios and our total risk-based capital ratios on a regular basis. Within our consolidated results of operations, we specifically evaluate the following: Net interest income - Net interest income represents the amount by which interest income on interest earning assets exceeds interest expense incurred on interest bearing liabilities. We generate interest income through interest and dividends on loans, investment securities and interest bearing bank deposits. Our acquired loans have generally produced higher yields than our originated loans due to the recognition of accretion of fair value adjustments and accretable yield and, as a result, we expect downward pressure on our interest income to the extent that the runoff of our acquired loan portfolio is not replaced with comparable high-yielding loans. We incur interest expense on our interest bearing deposits and repurchase agreements and would also incur interest expense on any future borrowings, including any debt assumed in acquisitions. We strive to maximize our interest income by acquiring and originating loans and investing excess cash in investment securities. Furthermore, we seek to minimize our interest expense through low-cost funding sources, thereby maximizing our net interest income. Provision for loan losses - The provision for loan losses includes the amount of expense that is required to maintain the ALL at an adequate level to absorb probable losses inherent in the loan portfolio at the balance sheet date. Additionally, we incur a provision for loan losses on loans accounted for under ASC 310-30 as a result of a decrease in the net present value of the expected future cash flows during the periodic remeasurement of the cash flows associated with these pools of loans. The determination of the amount of the provision for loan losses and the related ALL is complex and involves a high degree of judgment and subjectivity to maintain a level of ALL that is considered by management to be appropriate under GAAP. Non-interest income - Non-interest income consists primarily of service charges, bank card fees, gains on sales of investment securities, OREO related write-ups and other income and other non-interest income. Also included in non-interest income is FDIC indemnification asset amortization and other FDIC loss sharing income, which consists of reimbursement of costs related to the resolution of covered assets, and amortization of our clawback liability. For additional information, see "-Application of Critical Accounting Policies-Acquisition Accounting Application and the Valuation of Assets Acquired and Liabilities Assumed" and note 2 in our consolidated financial statements. Due to fluctuations in the amortization rates on the FDIC indemnification asset and the amortization of the clawback liability and due to varying levels of expenses and income related to the resolution of covered assets, the FDIC loss sharing income is not consistent on a period-to-period basis and, absent additional acquisitions with FDIC loss sharing agreements, is expected to decline over time as covered assets are resolved. Non-interest expense - The primary components of our non-interest expense are salaries and benefits, occupancy and equipment, professional fees and data processing and telecommunications. Any expenses related to the resolution of covered assets are also included in non-interest expense. These expenses are dependent on individual resolution circumstances and, as a result, are not consistent from period to period. We seek to manage our non-interest expense in order to maximize efficiencies. 42 -------------------------------------------------------------------------------- Net income - We utilize traditional industry return ratios such as return on average assets, return on average tangible assets, return on average equity, return on average tangible equity and return on risk-weighted assets to measure and assess our returns in relation to our balance sheet profile. 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. Most significant of these estimates relate to the fair value determination of assets acquired and liabilities assumed in business combinations and the application of acquisition accounting, the accounting for acquired loans and the related FDIC indemnification asset, the determination of the ALL, and the valuation of stock-based compensation. These critical accounting policies and estimates are summarized below, and are further analyzed with other significant accounting policies in note 2, "Summary of Significant Accounting Policies" in the notes to the consolidated financial statements for the year ended 2013. Valuation of Assets Acquired and Liabilities Assumed and Acquisition Accounting Application We account for business combinations under the acquisition method of accounting in accordance with ASC 805 Business Combinations. Assets acquired and liabilities assumed are measured and recorded at fair value at the date of acquisition, including any identifiable intangible assets. The initial fair values are determined in accordance with the guidance provided in ASC 820, Fair Value Measurements and Disclosures. If the fair value of net assets acquired exceeds the fair value of consideration paid, a bargain purchase gain is recognized at the date of acquisition. Conversely, if the consideration paid exceeds the fair value of the net assets acquired, goodwill is recognized at the acquisition date. The determination of fair value requires the use of estimates and significant judgment is required. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Any change in the acquisition date fair value of assets acquired and liabilities assumed may materially affect our financial position, results of operations and liquidity. The determination of the fair value of loans acquired takes into account credit quality deterioration and probability of loss; therefore, the related ALL is not carried forward. We segregate loans based on the accounting treatment into (a) loans accounted for under ASC 310-30 and (b) loans excluded from ASC 310-30, which also includes our originated loans. We further segregate total loans into two separate categories: (a) loans receivable-covered and (b) loans receivable-non-covered, both of which are more fully described below. OREO is recorded at fair value, less estimated selling costs. The fair value of OREO property is generally estimated using both market and income approach valuation techniques incorporating observable market data to formulate an opinion of the estimated fair value. When current appraisals are not available, judgment is used based on managements' experience for similar properties. Identifiable intangible assets are recognized separately if they arise from contractual or other legal rights or if they are separable (i.e., capable of being sold, transferred, licensed, rented, or exchanged separately from the entity). Deposit liabilities and the related depositor relationship intangible assets, known as the core deposit intangible assets, may be exchanged in observable exchange transactions. As a result, the core deposit intangible asset is considered identifiable, because the separability criterion has been met. The fair value of core deposit intangible assets is determined based on a discounted cash flow methodology that considers primary asset attributes such as expected client runoff rates, cost of the deposit base, and reserve requirements. An FDIC indemnification asset is recognized when the FDIC contractually indemnifies, in whole or in part, us for a particular uncertainty. The recognition and measurement of an indemnification asset is based on the related indemnified items. We recognize an indemnification asset at the same time that the indemnified item is recognized and we measure it on the same basis as the indemnified items, subject to collectability or contractual limitations on the indemnified amounts. Under FDIC loss sharing agreements, we may be required to return a portion of cash received from the FDIC at acquisition in the event that losses do not reach a specified threshold, based on the initial discount less cumulative servicing amounts for the covered assets acquired. Such liabilities are referred to as clawback liabilities and are considered to be contingent consideration as they require the return of a portion of the initial consideration in the event that certain contingencies are met. We recognize clawback liabilities that represent contingent consideration at fair value at the date of acquisition. The clawback liabilities are included in due to FDIC in the accompanying consolidated statements of financial condition, and are periodically re-measured. Any changes in value are reflected in both the carrying amount of the clawback liability and the related amortization that is recognized through FDIC loss sharing income in the consolidated statements of operations until the contingency is resolved. 43 -------------------------------------------------------------------------------- Accounting for Acquired Loans and the Related FDIC Indemnification Asset Included in our loan portfolio are covered loans, which consist of loans acquired in the Hillcrest Bank and Community Banks of Colorado transactions that are covered by FDIC loss sharing agreements, and non-covered loans, which consist of originated and acquired loans that are not covered by loss sharing agreements. The covered loan portfolio has significantly different risk characteristics due to the financial statement implications, which are summarized below. The estimated fair values of acquired loans are based on a discounted cash flow methodology that considers various factors, including the type of loan or pool of loans with similar characteristics, and related collateral, classification status, fixed or variable interest rate, maturity and any prepayment terms of loan, whether or not the loan is amortizing, and a discount rate reflecting our assessment of risk inherent in the cash flow estimates. The determination of the fair value of acquired loans, including covered loans, takes into account credit quality deterioration and probability of loss, and as a result, the related allowance for loan losses is not carried forward at the time of acquisition. A significant portion of the loans acquired in the Hillcrest Bank, Bank of Choice, and Community Banks of Colorado acquisitions had deteriorated credit quality at the date of acquisition and management accounted for all loans acquired through these acquisitions under ASC 310-30 (with the exception of loans with revolving privileges which were outside the scope of ASC 310-30). These loans are grouped based on purpose and/or type of loan, geography and risk rating, and take into account the sources of repayment and collateral, and each such grouping is treated as a pool. Each pool is accounted for as a single loan for which the integrity is maintained throughout the life of the asset. When a pool exhibits evidence of credit deterioration since origination and it is probable at the date of acquisition that we will not collect all principal and interest payments in accordance with the terms of the loan agreement, the expected shortfall in the expected future cash flows compared to the contractual amount due is recognized as a non-accretable difference. Any excess of the expected future cash flows over the acquisition date fair value is known as the accretable discount, or accretable yield, and through accretion, is recognized as interest income over the remaining life of each pool. Contractual fees not expected to be collected are not included in ASC 310-30 contractual cash flows. Should fees be subsequently collected, the cash flows are accounted for as non 310-30 fee income in the period they are received. Loans that meet the criteria for non-accrual of interest at the time of acquisition may be considered performing upon and subsequent to acquisition, regardless of whether the client is contractually delinquent, if the timing and expected cash flows on such loans can be reasonably estimated and if collection of the new carrying value of such loans is expected. If the timing and expected cash flows of a pool can not be reasonably estimated, that pool may be placed on non-accrual status, the accretion of income will cease, and interest income will be recognized on a cash basis. Loan pools accounted for under ASC 310-30 are periodically remeasured to determine expected future cash flows. In determining the expected cash flows, we evaluate the credit profile, contractual interest rates, collateral values and expected prepayments of the loan pools. Prepayment assumptions are based on statistical models that take into account factors such as the loan interest rate, credit profile of the borrowers, the years in which the loans were originated, and whether the loans were fixed or variable rate loans. Decreases to the expected future cash flows in the applicable pool generally result in an immediate provision for loan losses charged to the consolidated statements of operations. Conversely, subsequent increases in the expected future cash flows result in a transfer from the non-accretable difference to the accretable yield, which is then accreted as a yield adjustment over the remaining life of the pool once any previously recorded impairment expense has been recouped. These cash flow estimations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. Loans outside the scope of ASC 310-30 are accounted for under ASC 310, Receivables. Discounts created when the loans are recorded at their estimated fair values at acquisition are accreted over the remaining life of the loan as an adjustment to the related loan's yield. Similar to originated loans, the accrual of interest income is discontinued on acquired loans that are not accounted for under ASC 310-30 when the collection of principal or interest, in whole or in part, is doubtful. Interest is not accrued on loans 90 days or more past due unless they are well secured and in the process of collection. The fair value of covered loans and covered OREO does not include the estimated fair value of the expected reimbursement of cash flows from the FDIC for the losses on these covered assets, as those cash flows are measured and recorded separately in the FDIC indemnification asset. The indemnification assets were recorded at fair value on the respective dates of acquisition, and considered the estimated fair value of anticipated reimbursements from the FDIC for expected losses on covered assets, subject to the loss thresholds and any contractual limitations in the loss sharing agreements. Fair value was estimated using the net present value of projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. These cash flows are discounted to reflect the uncertainty of the timing of the loss sharing reimbursement from the FDIC and the discount is amortized using the effective interest method in connection with the expected speed of reimbursements and is limited to the lesser of the contractual term of the indemnification agreement or the remaining life of the indemnified assets. This amortization is included in FDIC indemnification asset amortization in the consolidated statements of operations. The expected indemnification asset cash flows are re-estimated in conjunction with the 44 -------------------------------------------------------------------------------- periodic re-estimation of cash flows on covered loans and covered OREO. Improvements in cash flow expectations on covered loans and covered OREO generally result in a related decline in the expected indemnification cash flows from the FDIC and are recognized immediately in earnings to the extent that they relate to a reversal of a previously recorded valuation allowance related to the covered assets. Any remaining decreases in expected cash flows are reflected prospectively as a negative yield adjustment on the indemnification asset consistent with the approach taken to recognize increases in expected cash flows on the covered loans accounted for under ASC 310-30. Conversely, declines in cash flow expectations on covered loans and covered OREO generally result in an increase in the expected indemnification asset cash flows from the FDIC and are reflected as both a decrease in the FDIC indemnification asset amortization and an increase to the balance of the indemnification asset in the current period. As indemnified assets are resolved, the indemnification asset is reduced by the amount claimed by us from the FDIC and a corresponding claim receivable is recorded in other assets in the consolidated statements of financial condition until cash is received from the FDIC. Allowance for Loan Losses The determination of the ALL, which represents management's estimate of probable losses inherent in our loan portfolio at the balance sheet date, including acquired and covered loans to the extent necessary, involves a high degree of judgment and complexity. The determination of the ALL takes into consideration, among other matters, the estimated fair value of the underlying collateral, economic conditions, particularly as such conditions relate to the market areas in which we operate historical net loan losses and other factors that warrant recognition. Any change in these factors, or the rise of any other factors that we, or our regulators, may deem necessary to consider when estimating the ALL, may materially affect the ALL and provisions for loan losses. For further discussion of the ALL, see "-Financial Condition-Asset Quality" and "-Financial Condition-Allowance for Loan Losses" and notes 2 and 8 to our consolidated financial statements. Stock-based Compensation We utilize a Black-Scholes option pricing model to measure the expense associated with stock option awards and a Monte Carlo simulation model to measure the expense associated with market-vesting portions of restricted shares. These models require inputs of highly subjective assumptions with regard to expected stock price volatility, forfeiture and dividend rates and option life. These subjective input assumptions materially affect the fair value estimates and the associated stock-based compensation expense. One of the key inputs to the Black-Scholes option pricing model is expected volatility. As a private entity, volatility was estimated using the calculated value method, whereby the expected volatility was calculated based on 17 comparable companies that were publicly traded. NBHC became a publicly traded company on September 20, 2012 and upon becoming a public entity, the Company was subject to a change in accounting policy under the provisions of ASC 718 Compensation-Stock Compensation, whereby expected volatility of grants, modifications, repurchases or cancellations that occur subsequent to the Company becoming a public entity are calculated using a time-based weighted migration of the Company's own stock price volatility coupled with those of the peer group. The weighting will become increasingly dependent on our own stock-price volatility as time passes, until such time that our stock has historical volatility equal to that of the expected term of the awards being measured. Grants of stock-based awards that existed prior to the Company becoming a public entity will not be re-measured under the public-company provisions unless those grants are subsequently modified, repurchased, or cancelled. This change in accounting policy may have a material effect on the valuation of future grants of stock-based compensation. See note 17 to our consolidated financial statements for more information on stock-based compensation. The valuation methodologies employed in determining the expense associated with stock-based compensation vary widely, as do the award types and the subjective assumptions used in those valuation methodologies. As a result, these differences in practice can have a material impact on the financial performance of us or our peers, and can limit meaningful comparisons between our performance over different periods and the performance results of our peers. Acquisition Activity An integral component of our foundation and growth strategy has been to capitalize on market opportunities and acquire financial services franchises. Our primary focus has been on markets that we believe are characterized by some or all of the following: (i) attractive demographics with household income and population growth above the national average; (ii) concentration of business activity; (iii) high quality deposit bases; (iv) an advantageous competitive landscape that provides opportunity to achieve meaningful market presence; (v) a substantial number of financial institutions, including troubled financial institutions; (vi) lack of consolidation in the banking sector and corresponding opportunities for add-on transactions; and (vii) markets sizeable enough to support our long-term growth objectives. We structured our business strategy around these criteria because we believed they would provide the best long-term opportunities for growth. 45 -------------------------------------------------------------------------------- With these criteria in mind, and consistent with our growth strategy, we completed two acquisitions during the fourth quarter of 2010 and two acquisitions in 2011. Through our acquisition of Hillcrest Bank from the FDIC in October 2010, we acquired 8 banking centers, along with 32 retirement center locations (which we closed on December 31, 2013), which were predominantly in the greater Kansas City region, but also included six retirement centers in Colorado and two banking centers and six retirement centers in Texas. We acquired approximately $1.4 billion in assets and approximately $1.2 billion in non-brokered deposits with a loss sharing agreement that covers losses incurred on commercial loans, single family residential loans and OREO, and the FDIC made a cash contribution of approximately $183 million to us as part of the transaction. Through our Bank Midwest transaction in December 2010, we acquired approximately $2.4 billion in assets and approximately $2.4 billion in non-brokered deposits, and 39 banking centers throughout Missouri and eastern Kansas. In July 2011, we expanded our footprint with the acquisition of Greeley, Colorado-based Bank of Choice. The acquisition of Bank of Choice added 16 banking centers in Colorado, which included banking centers along the fast-growing Front Range of the Rocky Mountains. We acquired $949.5 million in assets and assumed $760.2 million of non-brokered deposits from Bank of Choice at a $171.6 million asset discount in a no loss sharing structure from the FDIC. In October 2011, we broadened our Colorado presence with the acquisition of the Community Banks of Colorado from the FDIC. Through this acquisition, we added 36 banking centers in Colorado and four banking centers in California (which we closed as of December 31, 2013), along with selected assets and selected liabilities of the former Community Banks of Colorado. We acquired approximately $1.2 billion in assets and approximately $1.2 billion in deposits with the Community Banks of Colorado acquisition at a discount of approximately $113.5 million, which includes a $15.5 million discount on two specific loan pools, and with a commercial loss sharing agreement that covers losses incurred on certain loans and OREO, the majority of which are commercial in nature. All of our acquisitions were accounted for under the acquisition method of accounting, and accordingly, all assets acquired and liabilities assumed were recorded at their respective acquisition date fair values and the fair value discounts on loans are being accreted over the lives of the loans as an adjustment to yield, with the exception of any non-accretable difference, as is described in our application of critical accounting policies. Additionally, as of the date of acquisition, 99.6% of the loans and all of the OREO acquired in the Hillcrest Bank transaction were covered by FDIC loss sharing agreements, and 61.8% of loans and 83.5% of OREO in the Community Banks of Colorado transaction were covered by loss sharing agreements with the FDIC. Both the application of the acquisition method of accounting and the loss sharing agreements with the FDIC are discussed in more detail below and in the notes to the consolidated financial statements. We have invested in our infrastructure and technology through the implementation of an efficient, industry-leading, scalable platform that we believe supports our risk management activities and our potential for significant future growth and new product offerings. We have centralized many of our operational functions in Kansas City, which has desirable cost and labor market characteristics. We have built enterprise wide finance and risk management capabilities that we expect will afford efficiencies as we grow. We intend to continue our growth organically and through acquisitions. In addition to broadening our greater Kansas City and Colorado footprints, we may also consider acquisitions in additional complementary markets and complementary business segments, including asset generating and fee income businesses, through conservatively structured transactions to capitalize on market opportunities. We may utilize our stock in addition to cash as consideration in future acquisitions. Financial Condition Total assets at December 31, 2013 were $4.9 billion compared to $5.4 billion at December 31, 2012, a decrease of $0.5 billion. The decrease in total assets was driven by a $0.6 billion decrease in cash and cash equivalents, as we utilized cash to repurchase $146.7 million of our common stock. Also contributing to the decrease in cash was the run-off of $0.3 billion of time deposits, as many of these clients were single-service, highly rate-sensitive clients of the problem banks we acquired. We also utilized available cash and purchased $945.8 million of investment securities during 2013. Total non-strategic loan balances decreased $360.6 million, which was a reflection of our workout progress on acquired troubled loans (many of which were covered). We also originated $714.0 million loans during 2013, which offset normal client payments and grew the loan balances in our strategic portfolio at an annualized rate of 34.0%. As a result, total loan balances increased $21.4 million, after having reached an important loan balance inflection point during the third quarter of 2013, whereby total loan balances began growing for the first time in our Company's short history, as organic loan originations began outpacing the resolution of acquired troubled loans. Our FDIC indemnification asset decreased $22.5 million during 2013 as a result of $17.6 million of payments from and claims submitted to the FDIC for reimbursement on continued workout progress on our covered loans and OREO. The actual and expected cash flows increased on covered assets, and resulted in a net reclassification of $73.7 million of non-accretable difference to accretable yield during the period, which is being accreted to income over the remaining life of the loans. Total deposits decreased $362.4 million, driven by a $257.0 million decline in time deposits, as we sought to retain only those 46 -------------------------------------------------------------------------------- depositors who were interested in market-rate deposits and developing a banking relationship and as we continued our focus on migrating toward a client-based deposit mix with higher concentrations of lower cost demand, savings and money market ("transaction") deposits. Also contributing to the decline in total deposits was our exit of four California banking centers and 32 limited-service retirement centers during the fourth quarter. Shareholders' equity declined $192.8 million during 2013 and was primarily impacted by the repurchase of 7.4 million of our shares outstanding, or 14.2%, at a weighted average price of $19.77. Also contributing to the decrease in total equity was a $47.3 million decline in accumulated other comprehensive income (loss), net of tax, as a result of market value fluctuations. Total assets at December 31, 2012 were $5.4 billion compared to $6.4 billion at December 31, 2011, a decrease of $1.0 billion. The decrease in total assets was largely driven by a decrease in non-strategic loan balances of $478.0 million, which was a reflection of our workout progress on acquired troubled loans (many of which were covered) that we acquired with our various acquisitions. We also originated $434.3 million of loans during 2012, which offset normal client payments and sustained the loan balances in our strategic portfolio. We coupled the overall loan balance decrease of $435.7 million with an $862.3 million decrease in total deposits, as we sought to retain only those depositors who were interested in deposits at market rate and developing a banking relationship and continued our focus on migrating toward a client-based deposit mix with higher concentrations of lower cost demand, savings and money market ("transaction") deposits. We also utilized available cash and purchased $1.1 billion of investment securities during 2012. Our FDIC indemnification asset decreased $136.5 million during 2012 as a result of $135.2 million of payments from and claims submitted to the FDIC for reimbursement on continued workout progress on our acquired problem loans and OREO coupled with an increase in actual and expected cash flows on our covered assets. These increases in cash flows also contributed to a net reclassification of $47.5 million of non-accretable difference to accretable yield during the period, which is being accreted to income over the remaining life of those loans. Investment Securities Available-for-sale Total investment securities available-for-sale were $1.8 billion at December 31, 2013, compared to $1.7 billion at December 31, 2012, an increase of $0.1 billion, or 3.9%. During 2013, we purchased $694.0 million of available-for-sale mortgage backed securities, which was largely funded by $550.0 million of maturities and paydowns. Total investment securities available-for-sale were $1.7 billion at December 31, 2012, compared to $1.9 billion at December 31, 2011, a decrease of $0.2 billion, or 7.8%. During the year ended 2012, we also purchased $1.1 billion of available-for-sale securities, which was partially offset by $493.2 million of maturities and paydowns. The purchases included U.S. Treasury securities, mortgage backed securities and asset backed securities. Our available-for-sale investment securities portfolio is summarized as follows for the periods indicated (in thousands): December 31, 2013 December 31, 2012 Weighted Weighted Amortized Fair Percent of Average Amortized Fair Percent of Average Cost Value Portfolio Yield Cost Value Portfolio Yield



U.S. Treasury securities $ - $ - 0.00 %

0.00 % $ 300$ 300 0.02 % 0.13 % Asset backed securities

4,534 4,537 0.26 % 0.61 % 89,881 90,003 5.24 % 0.61 % Mortgage-backed securities ("MBS"): Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises 490,321 494,990 27.72 % 2.22 % 658,169 678,017 39.46 % 2.03 % Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises 1,320,998 1,285,582 72.00 % 1.83 % 931,979 949,289 55.26 % 2.13 % Other securities 419 419 0.02 % 0.00 % 419 419 0.02 % 0.00 % Total investment securities available-for-sale $ 1,816,272$ 1,785,528 100.00 %



1.94 % $ 1,680,748$ 1,718,028 100.00 % 2.01 %

As of December 31, 2013, approximately 99.7% of the available-for-sale investment portfolio was backed by mortgages as compared to 94.7% at December 31, 2012. The residential mortgage pass-through securities portfolio is comprised of both fixed rate and adjustable rate Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA") and Government National Mortgage Association ("GNMA") securities. The other mortgage-backed securities are comprised of securities backed by FHLMC, FNMA and GNMA securities. At December 31, 2013 and December 31, 2012, adjustable rate securities comprised 7.8% and 11.6%, respectively, of the available-for-sale MBS portfolio. The remainder of the portfolio was comprised of fixed rate securities with 10 to 30 year maturities, with a weighted average coupon of 2.2% per annum and 2.8% per annum, at December 31, 2013 and December 31, 2012, respectively. 47 -------------------------------------------------------------------------------- The available-for-sale investment portfolio included $30.7 million of net unrealized losses and $37.3 million of net unrealized gains, at December 31, 2013 and December 31, 2012, respectively, inclusive of $18.4 million of unrealized gains and $321 thousand of unrealized losses, for the aforementioned periods. The change from a net unrealized gain at December 31, 2012 to a net unrealized loss at December 31, 2013 was primarily driven by rising interest rates during the period. We do not believe that any of the securities with unrealized losses were other-than-temporarily-impaired. The table below summarizes the contractual maturities of our available-for-sale investment portfolio as of December 31, 2013 (in thousands): Due after one year



through Due after five years

Due in one year or less five years through ten years Due after ten years Other securities Total Weighted Weighted Weighted Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield Value Yield Value Yield Asset backed securities $ 953 0.56 % $ 3,584 0.62 % $ - 0.00 % $ - 0.00 % $ - 0.00 % $ 4,537 0.61 % Mortgage-backed securities ("MBS"): Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises - 0.00 % 8 1.48 % 183,172 1.49 % 311,810 2.67 % - 0.00 % 494,990 2.22 % Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises - 0.00 % - 0.00 % 11,723 2.94 % 1,273,859 1.82 % - 0.00 % 1,285,582 1.83 % Other securities - 0.00 % - 0.00 % - 0.00 % - 0.00 % 419 0.00 % 419 0.00 % Total investment securities available-for-sale $ 953 0.56 % $ 3,592 0.62 % $ 194,895 1.58 % $ 1,585,669 1.99 % $ 419



0.00 % $ 1,785,528 1.94 %

The estimated weighted average life of the available-for-sale MBS portfolio as of December 31, 2013 and December 31, 2012 was 3.9 years and 3.4 years, respectively, the extension of which was largely due to slower expected prepayment speeds in response to the higher interest rate environment at December 31, 2013 compared to December 31, 2012. This estimate is based on various assumptions, including repayment characteristics, and actual results may differ. As of December 31, 2013, the duration of the total available-for-sale investment portfolio was 3.6 years and the asset-backed securities portfolio within the available-for-sale investment portfolio had a duration of 0.3 year. As of December 31, 2012, the duration of the total available-for-sale investment portfolio was 3.1 years and the asset-backed securities portfolio within the available-for-sale investment portfolio had a duration of 0.5 year.



Held-to-maturity

At December 31, 2013, we held $641.9 million of held-to-maturity investment securities, compared to $577.5 million at December 31, 2012, an increase of $64.4 million or 11.2%. During 2013, we purchased $251.8 million of held-to-maturity securities. As previously discussed, during the first quarter of 2012, we re-evaluated the securities in our available-for-sale investment portfolio and identified securities that we now intend to hold until maturity. We transferred residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored agencies with a collective amortized cost of approximately $715.2 million and unrealized gains of approximately $38.9 million on the date of transfer. These securities were classified as available-for-sale at December 31, 2011. During the year ended December 31, 2012, we also purchased $2.2 million of held-to-maturity mortgage-backed securities. Held-to-maturity investment securities are summarized as follows as of the date indicated (in thousands): December 31, 2013 Amortized Fair Percent of Weighted Cost Value Portfolio Average Yield Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises $ 513,090$ 511,489 79.93 % 3.31 % Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises 128,817 124,916 20.07 % 1.70 % Total investment securities held-to-maturity $ 641,907$ 636,405 100.00 % 2.99 % 48

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December 31, 2012 Amortized Fair Percent of Weighted Cost Value Portfolio Average Yield Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises $ 577,486$ 584,551 100.00 % 3.60 % Total investment securities held-to-maturity $ 577,486$ 584,551 100.00 % 3.60 % The residential mortgage pass-through and other residential MBS held-to-maturity investment portfolios are comprised of fixed rate FHLMC, FNMA and GNMA securities. At December 31, 2013 and December 31, 2012, the fair value of the held-to-maturity investment portfolio was $636.4 million and $584.6 million, respectively, inclusive of $5.5 million of unrealized losses, net and $7.1 million of unrealized gains, for the aforementioned periods. The table below summarizes the contractual maturities, as of the last scheduled repayment date, of our held-to-maturity investment portfolio as of December 31, 2013 (in thousands): Weighted Amortized Average Cost Yield Due in one year or less $ - 0.00 % Due after one year through five years - 0.00 % Due after five years through ten years 18,319 2.03 % Due after ten years 623,588 3.02 % Other securities - 0.00 % Total $ 641,907 2.99 % The estimated weighted average life of the held-to-maturity investment portfolio was 3.8 years as of both December 31, 2013 and December 31, 2012, respectively. As of December 31, 2013, the duration of the total held-to-maturity investment portfolio was 3.5 years and the duration of the entire investment securities portfolio was 3.6 years. At December 31, 2012, the duration of the total held-to-maturity investment portfolio was 3.6 years and the duration of the entire investment securities portfolio was 3.2 years. Non-marketable securities Non-marketable securities include Federal Reserve Bank stock and FHLB stock. At December 31, 2013 and December 31, 2012, we held $25.0 million of Federal Reserve Bank stock and at December 31, 2013 and December 31, 2012 we also held $6.6 million and $8.0 million of FHLB stock, respectively. We hold these securities in accordance with debt and regulatory requirements. These are restricted securities which lack a market and are therefore carried at cost. Loans Overview Our loan portfolio at December 31, 2013 was comprised of loans that were acquired in connection with our four acquisitions to date, in addition to new loans that we have originated. The majority of the loans acquired in the Hillcrest Bank and Community Banks of Colorado transaction are covered by loss sharing agreements with the FDIC. As discussed in note 2 to our consolidated financial statements, in accordance with applicable accounting guidance, all acquired loans are recorded at fair value at the date of acquisition, and an allowance for loan losses is not carried over with the loans but, rather, the fair value of the loans encompasses both credit quality and market considerations. Loans that exhibit signs of credit deterioration at the date of acquisition are accounted for in accordance with the provisions of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). Management accounted for all loans acquired in the Hillcrest Bank, Bank of Choice and Community Banks of Colorado acquisitions under ASC 310-30, with the exception of loans with revolving privileges which were outside the scope of ASC 310-30. In our Bank Midwest transaction, we did not acquire all of the loans of the former Bank Midwest but, rather, selected certain loans based upon specific criteria of performance, adequacy of collateral, and loan type that were performing at the time of acquisition. As a result, none of the loans acquired in the Bank Midwest transaction are accounted for under ASC 310-30. Consistent with differences in the accounting, the loan portfolio is presented in two categories: (i) ASC 310-30 loans and (ii) non 310-30 loans. The portfolio is further stratified based on (i) loans covered by FDIC loss sharing agreements, or "covered loans," and (ii) loans that are not covered by FDIC loss sharing agreements, or "non-covered loans." Additionally, inherent in 49 -------------------------------------------------------------------------------- the nature of acquiring troubled banks, only certain of our acquired clients conform to our long-term business model of in-market, relationship-oriented banking clients. We have developed a management tool to evaluate the progress of working out the troubled loans acquired in our FDIC-assisted acquisitions and the progress of organic loan growth, whereby we have designated loans as "strategic" or "non-strategic." Strategic loans include all originated loans in addition to those acquired loans inside our operating markets that meet our credit risk profile. Identification as strategic for acquired loans was made at the time of acquisition. Criteria utilized in the designation of a loan as "strategic" include (a) geography, (b) total relationship with borrower and (c) credit metrics commensurate with our current underwriting standards. At December 31, 2013, strategic loans totaled $1.5 billion and had strong credit quality as represented by a non-performing loans ratio of 0.60%. We believe this presentation of our loan portfolio provides a meaningful basis to understand the underlying drivers of changes in our loan portfolio balances. Due to the unique structure and accounting treatment in our loan portfolio, we utilize four primary presentations to analyze our loan portfolio, depending on the purpose of the analysis. Those are: To analyze: We look at: Loan growth and production efforts Strategic balances and loan originations Workout efforts of our purchased non-strategic portfolio Non-strategic balances and accretable yield Risk mitigants of our non-performing FDIC loss-share coverage and fair value loans marks Interest income ASC 310-30 and non 310-30 yields and accretable yield For information regarding the loan portfolio composition and the breakdown of the portfolio between ASC 310-30 loans, non 310-30 loans, along with the amounts that are covered and non-covered, see note 7.

Strategic loans comprised 81.1% of the total loan portfolio at December 31, 2013, compared to 61.2% at December 31, 2012. The table below shows the loan portfolio composition categorized between strategic and non-strategic at the respective dates (in thousands): December 31, 2013 December 31, 2012 Strategic Non-Strategic Total Strategic Non-Strategic Total Commercial $ 411,589$ 71,906$ 483,495$ 163,193$ 107,395$ 270,588 Commercial real estate 333,651 240,569 574,220 278,907 526,092 804,999 Agriculture 154,811 5,141 159,952 160,963 12,444 173,407 Residential real estate 570,455 29,469 599,924 474,769 58,608 533,377 Consumer 33,599 2,904 36,503 44,266 6,065 50,331 Total $ 1,504,105$ 349,989$ 1,854,094$ 1,122,098$ 710,604$ 1,832,702 Total loans increased $21.4 million from December 31, 2012, ending at $1.9 billion at December 31, 2013. The 1.2% increase in total loans was primarily driven by a $382.0 million increase in strategic loans, partially offset by a $360.6 million decrease in our non-strategic loan portfolio. Our enterprise-level, dedicated special asset resolution team successfully worked out non-strategic loans acquired in our FDIC-assisted transactions, coupled with the repayment of non-strategic loans that do not conform to our business model of in-market, relationship-oriented loans with credit metrics commensurate with our current underwriting standards. The increase in strategic loans of $382.0 million, or 34.0%, at December 31, 2013 compared to December 31, 2012, was driven by strong loan originations. We successfully increased our balances in our strategic commercial and residential real estate portfolios as we continued to generate new relationships with individuals and small to mid-sized businesses. Our loan origination strategy involves lending primarily to clients within our markets; however, our acquired loans include clients in various geographies. The table below shows the geographic breakout of our loan portfolio at December 31, 2013 and December 31, 2012, based on the domicile of the borrower or, in the case of collateral-dependent loans, the geographic location of the collateral (in thousands): 50

-------------------------------------------------------------------------------- December 31, 2013 December 31, 2012 Percent of Percent of Loan balance loan portfolio Loan balance loan portfolio Colorado $ 710,967 38.3 % $ 694,468 37.9 % Missouri 537,267 29.0 % 540,699 29.5 % Kansas 194,044 10.5 % 119,541 6.6 % Texas 186,870 10.1 % 170,890 9.3 % California 45,370 2.4 % 61,363 3.3 % Florida 13,529 0.7 % 52,982 2.9 % Other 166,047 9.0 % 192,759 10.5 % Total $ 1,854,094 100.0 % $ 1,832,702 100.0 % 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. New loan originations of $714.0 million were up $279.7 million, or 64.4% from the same period of the prior year as a result of the deployment of bankers, the introduction of new products and the continued development of our market presence. The following table represents new loan originations during 2013 and 2012 (in thousands): Fourth quarter Third quarter Second quarter First quarter Total 2013 2013 2013 2013 2013 Commercial $ 159,931 $ 80,833 $ 24,982 $ 15,150$ 280,896 Commercial real estate 20,959 50,081 31,553 36,749 139,342 Agriculture 23,610 5,689 22,901 9,446 61,646 Residential real estate 36,113 51,749 86,161 45,808 219,831 Consumer 3,594 3,326 3,157 2,211 12,288 Total $ 244,207 $ 191,678$ 168,754$ 109,364$ 714,003 Fourth quarter Third quarter Second quarter First quarter Total 2012 2012 2012 2012 2012 Commercial $ 30,988 $ 25,640$ 10,799$ 20,102$ 87,529 Commercial real estate 20,993 11,135 6,816 18,546 57,490 Agriculture 28,978 24,328 22,444 7,570 83,320 Residential real estate 52,778 60,320 40,123 33,016 186,237 Consumer 6,025 6,505 4,057 3,155 19,742 Total $ 139,762$ 127,928$ 84,239$ 82,389$ 434,318 51

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The tables below show the contractual maturities of our loans for the dates indicated (in thousands):

December 31, 2013 Due within Due after 1 but Due after 1 Year within 5 Years 5 Years Total Commercial $ 128,368 $ 297,120 $ 58,007$ 483,495 Commercial real estate 156,055 277,885 140,280 574,220 Agriculture 32,258 80,681 47,013 159,952 Residential real estate 36,085 52,079 511,760 599,924 Consumer 14,284 15,281 6,938 36,503 Total loans $ 367,050 $ 723,046 $ 763,998$ 1,854,094 Covered $ 175,452 $ 96,216 $ 37,729$ 309,397 Non-covered 191,598 626,830 726,269 1,544,697 Total loans $ 367,050 $ 723,046 $ 763,998$ 1,854,094 December 31, 2012 Due within Due after 1 but Due after 1 Year within 5 Years 5 Years Total Commercial $ 83,093 $ 147,356 $ 40,139$ 270,588 Commercial real estate 403,179 277,625 124,195 804,999 Agriculture 41,205 77,683 54,519 173,407 Residential real estate 62,712 73,941 396,724 533,377 Consumer 23,842 17,668 8,821 50,331 Total loans $ 614,031 $ 594,273 $ 624,398$ 1,832,702 Covered $ 350,339 $ 198,373 $ 59,510$ 608,222 Non-covered 263,692 395,900 564,888 1,224,480 Total loans $ 614,031 $ 594,273 $ 624,398$ 1,832,702 52

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The interest rate sensitivity of non 310-30 loans with maturities over one year is as follows at the dates indicated (in thousands):

December 31, 2013 Fixed Variable Total Weighted Weighted Weighted Balance average rate Balance average rate Balance average rate Commercial $ 76,521 4.36 % $ 248,795



3.79 % $ 325,316 3.93 % Commercial real estate 152,357 4.67 % 115,170 3.91 %

267,527 4.35 % Agriculture 68,701 5.02 % 35,898 4.47 % 104,599 4.83 % Residential real estate 316,083 3.49 % 208,361 3.64 % 524,444 3.55 % Consumer 10,683 6.24 % 4,617 4.20 % 15,300 5.63 % Total loans with > 1 year maturity $ 624,345 4.11 % $ 612,841 3.80 % $ 1,237,186 3.96 % Covered $ 11,044 3.74 % $ 7,057 5.97 % $ 18,101 4.54 % Non-covered 613,301 4.11 % 605,784 3.78 % 1,219,085 3.95 % Total loans with > 1 year maturity $ 624,345 4.11 % $ 612,841 3.80 % $ 1,237,186 3.96 % December 31, 2012 Fixed Variable Total Weighted Weighted Weighted Balance average rate Balance average rate Balance average rate Commercial $ 30,601 4.97 % $ 103,677



3.79 % $ 134,278 4.07 % Commercial real estate 93,881 5.61 % 65,778 4.61 %

159,659 5.20 % Agriculture 53,316 5.15 % 38,558 5.43 % 91,874 5.27 % Residential real estate 226,079 3.88 % 192,412 3.85 % 418,491 3.86 % Consumer 11,689 6.50 % 5,560 4.82 % 17,249 5.96 % Total loans with > 1 year maturity $ 415,566 4.60 % $ 405,985 4.12 % $ 821,551 4.36 % Covered $ 7,161 4.95 % $ 30,724 5.25 % $ 37,885 5.19 % Non-covered 408,405 4.60 % 375,261 4.02 % 783,666 4.32 %



Total loans with > 1 year maturity $ 415,566 4.60 % $ 405,985 4.12 % $ 821,551 4.36 %

Accretable Yield At December 31, 2013, the accretable yield balance was $130.6 million compared to $133.6 million at December 31, 2012. We re-measure the expected cash flows of all 27 remaining accruing loan pools accounted for under ASC 310-30 utilizing the same cash flow methodology used at the time of acquisition. During 2013 and 2012, we reclassified $73.7 million, and $47.5 million, net, from non-accretable difference to accretable yield, respectively, as a result of these re-measurements. The accretable yield balance at December 31, 2013 includes $1.6 million of accretable yield related to a loan pool that was put on non-accrual status during 2013. This accretable yield is not being accreted to income and the recognition has been deferred until full recovery of the carrying value of this pool is realized. During 2013, several of the loan pools accounted for under ASC 310-30 paid-off early. The early pay-off of one of these pools resulted in an immediate recognition of $2.5 million of accretion on loans accounted for under ASC 310-30. 53 -------------------------------------------------------------------------------- In addition to the accretable yield on loans accounted for under ASC 310-30, the fair value adjustments on loans outside the scope of ASC 310-30 are also accreted to interest income over the life of the loans. At December 31, 2013 and 2012, our total remaining accretable yield and fair value mark was as follows (in thousands): December 31,



2013 December 31, 2012 Remaining accretable yield on loans accounted for under ASC 310-30

$ 130,624 $ 133,585 Remaining accretable fair value mark on loans not accounted for under ASC 310-30 10,755 19,434



Total remaining accretable yield and fair value mark $ 141,379 $

153,019 Loss-Share Coverage We have two loss sharing agreements with the FDIC for the assets related to the Hillcrest Bank acquisition and a separate loss sharing agreement that covers certain assets related to the Community Banks of Colorado acquisition, whereby the FDIC will reimburse us for a portion of the losses incurred as a result of the resolution and disposition of the covered assets of these banks. The categories, and the respective loss thresholds and coverage amounts related to the Hillcrest Bank loss sharing agreement are as follows (in thousands): Commercial Single family Loss-Coverage Loss-Coverage Tranche Loss Threshold Percentage Tranche Loss Threshold Percentage 1 Up to $295,592 60% 1 Up to $4,618 60% 2 $295,593-405,293 0% 2 $4,618-8,191 30% 3 >$405,293 80% 3 >$8,191 80% The categories, and the respective loss thresholds and coverage amounts related to the Community Banks of Colorado loss sharing agreement are as follows (in thousands): Tranche Loss Threshold Loss-Coverage Percentage 1 Up to $204,194 80% 2 $204,195-308,020 30% 3 >$308,020 80% Under the Hillcrest Bank and Community Banks of Colorado loss sharing agreements, the reimbursable losses from the FDIC are based on the book value of the related covered assets as determined by the FDIC at the date of acquisition, and the FDIC's book value does not necessarily correlate with our book value of the same assets. This difference is primarily because we recorded the loans at fair value at the date of acquisition in accordance with applicable accounting guidance. As of December 31, 2013, we had incurred $201.3 million of losses on our Hillcrest Bank covered assets since the beginning of the loss sharing agreement as measured by the FDIC's book value, substantially all of which were related to the commercial assets. Additionally, as of December 31, 2013, we had incurred approximately $138.4 million of losses related to our Community Banks of Colorado loss sharing agreement. From the beginning of the loss sharing agreements, we have received approximately $123.0 million and $110.8 million of net loss share payments from the FDIC for losses on covered assets related to Hillcrest Bank and Community Banks of Colorado, respectively. As of December 31, 2013, we project future FDIC loss share billings of $44.7 million. The loss sharing agreement related to Hillcrest Bank covers single-family mortgage loans for a period of 10 years and commercial loans, including OREO, for a period of five years from the date of receivership. The loss sharing agreement related to Community Banks of Colorado covers a large majority of commercial loans and OREO for a term of five years from the date of receivership. The loss claims filed are subject to review and approval, including extensive audits, by the FDIC or its assigned agents for compliance with the terms in the loss sharing agreements. 54 -------------------------------------------------------------------------------- Asset Quality All of the assets acquired in our acquisitions were marked to fair value at the date of acquisition, and the fair value adjustments to loans included a credit quality component. We utilize traditional credit quality metrics to evaluate the overall credit quality of our loan portfolio; however, our credit quality ratios are limited in their comparability to industry averages or to other financial institutions because: 1. Any asset quality deterioration that existed at the date of acquisition was considered in the original fair value adjustments; and 2. 57.5% of our non-performing assets (by dollar amount) at December 31, 2013 were covered by loss sharing agreements with the FDIC. Asset quality is fundamental to our success. Accordingly, for the origination of loans, we have established a credit policy that allows for responsive, yet controlled lending with credit approval requirements that are scaled to loan size. Within the scope of the credit policy, each prospective loan is reviewed in order to determine the appropriateness and the adequacy of the loan characteristics and the security or collateral prior to making a loan. We have established underwriting standards and loan origination procedures that require appropriate documentation, including financial data and credit reports. For loans secured by real property, we require property appraisals, title insurance or a title opinion, hazard insurance and flood insurance, in each case where appropriate. Additionally, we have implemented procedures to timely identify loans that may become problematic in order to ensure the most beneficial resolution to the Company. Asset quality is monitored by our credit risk management department and evaluated based on quantitative and subjective factors such as the timeliness of contractual payments received. Additional factors that are considered, particularly with commercial loans over $250,000, 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. Our internal risk rating system uses a series of grades which reflect our assessment of the credit quality of covered and non-covered loans based on an analysis of the borrower's financial condition, liquidity and ability to meet contractual debt service requirements. Loans that are perceived to have acceptable risk are categorized as "pass" loans. "Special mention" loans represent loans that have potential credit weaknesses that deserve 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 service 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" have a well-defined credit weakness and are inadequately protected by the current paying capacity of the obligor or of the collateral pledged, if any. Although these loans are identified as potential problem loans, they may never become non-performing. Substandard loans have a distinct possibility of loss if the deficiencies are not corrected. "Doubtful" loans are loans that management believes that collection of payments in accordance with the terms of the loan agreement are highly questionable and improbable. Doubtful loans are deemed impaired and put on non-accrual status. 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 "troubled debt restructurings" in accordance with ASC 310-40 Troubled Debt Restructurings by Creditors. Under this guidance, modifications to loans that fall within the scope of ASC 310-30 are not considered troubled debt restructurings, regardless of otherwise meeting the definition of a troubled debt restructuring. 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 lower of the related loan balance or the fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged to the ALL and any subsequent declines in carrying value charged to impairments on OREO. Non-performing Assets Non-performing assets consist of covered and non-covered non-accrual loans, accruing loans 90 days or more past due, troubled debt restructurings, OREO and other repossessed assets. However, loans and troubled debt restructurings accounted for under ASC 310-30, as described below, may be excluded from our non-performing assets to the extent that the cash flows of the loan pools are still estimable. Our non-performing assets included $22.6 million and $11.1 million of covered loans at December 31, 2013 and December 31, 2012, respectively, and $38.8 million and $45.5 million of covered OREO at December 31, 2013 and December 31, 2012, respectively. In addition to being covered by loss sharing agreements, these assets 55 -------------------------------------------------------------------------------- were marked to fair value at the time of acquisition, mitigating much of our loss potential on these non-performing assets. As a result, the levels of our non-performing assets are not fully comparable to those of our peers or to industry benchmarks. Loans accounted for under ASC 310-30 were recorded at fair value based on cash flow projections that considered the deteriorated credit quality and expected losses. These loans are accounted for on a pool basis and any non-payment of contractual principal or interest is considered in our periodic re-estimation of the expected future cash flows. To the extent that we decrease our cash flow projections, we record an immediate impairment expense through the provision for loan losses. We recognize any increases to our cash flow projections on a prospective basis through an increase to the pool's yield over its remaining life once any previously recorded impairment expense has been recouped. As a result of this accounting treatment, these pools may be considered to be performing, even though some or all of the individual loans within the pools may be contractually past due. During 2013, we identified one covered commercial and industrial loan pool accounted for under ASC 310-30 with a balance of $14.8 million at December 31, 2013, for which the cash flows were no longer reasonably estimable. In accordance with the guidance in ASC 310-30, this pool was put on non-accrual status. As a result, we have ceased recognition of accretable yield to interest income on this loan pool. Income is now recognized on this pool only after full recovery of the carrying value of the pool. Since placing this loan pool on non-accrual status, we have reduced the carrying balance of this pool by $4.7 million primarily as a result of principal payments, interest collections and payoffs. This pool is now considered a non-performing asset and represents 41.1% of total non-performing loans at December 31, 2013. All other loans accounted for under ASC 310-30 were classified as performing assets at December 31, 2013 and December 31, 2012, as the carrying values of the respective loan or pool of loans cash flows were considered estimatable and probable of collection. Therefore, interest income, through accretion of the difference between the carrying value of the loans in the pool and the pool's expected future cash flows, is being recognized on all other acquired loans accounted for under ASC 310-30. 56 --------------------------------------------------------------------------------



The following table sets forth the non-performing assets as of the dates presented (in thousands):

December 31, 2013



December 31, 2012

Non-Covered Covered Total Non-Covered Covered Total Non-accrual loans: Commercial $ 1,009$ 15,098$ 16,107$ 1,466$ 3,034$ 4,500 Commercial real estate 1,696 296 1,992 10,216 1,453 11,669 Agriculture 153 - 153 207 44 251 Residential real estate 4,468 1,377 5,845 4,894 1,514 6,408 Consumer 247 - 247 291 - 291 Total non-accrual loans 7,573 16,771 24,344 17,074 6,045 23,119 Loans past due 90 days or more and still accruing interest: Commercial - 115 115 - - - Commercial real estate - - - - - - Agriculture - - - - - - Residential real estate - - - 22 - 22 Consumer 14 - 14 3 - 3 Total accruing loans 90 days past due 14 115 129 25 - 25 Accruing restructured loans (1) 5,891 5,714 11,605 12,673 5,047 17,720 Total non-performing loans 13,478 22,600 36,078 29,772 11,092 40,864 OREO 31,300 38,825 70,125 49,297 45,511 94,808 Other repossessed assets 784 302 1,086 800 531 1,331 Total non-performing assets $ 45,562$ 61,727$ 107,289$ 79,869$ 57,134$ 137,003 Allowance for loan losses $ 12,521$ 15,380 Total non-performing loans to non-covered, covered, and total loans, respectively 0.87 % 7.30 % 1.95 % 2.43 % 1.82 % 2.23 % Total non-performing assets to total assets 2.18 % 2.53 % Allowance for loan losses to non-performing loans 34.71 % 37.64 %



(1) Includes restructured loans less than 90 days past due and still accruing.

OREO of $70.1 million at December 31, 2013 includes $4.2 million of participant interests in OREO in connection with our repossession of collateral on loans for which we were the lead bank and we have a controlling interest. We have recorded a corresponding payable to those participant banks in other liabilities. The $70.1 million of OREO at December 31, 2013 excludes $10.6 million of minority interest in participated OREO in connection with the repossession of collateral on loans for which we were not the lead bank and we do not have a controlling interest. These properties have been repossessed by the lead banks and we have recorded our receivable due from the lead banks in other assets as minority interest in participated OREO. During 2013, $40.0 million of OREO was foreclosed on or otherwise repossessed and $61.3 million of OREO was sold. The OREO sales resulted in $1.2 million of non-covered gains and $5.7 million of covered gains that are subject to reimbursement to the FDIC at the applicable loss-share coverage percentage. OREO write-downs of $10.3 million were recorded during 2013, of which $6.8 million, or 66.2%, were covered by FDIC loss sharing agreements. OREO balances decreased $24.7 million during 2013 to $70.1 million, 55.4% of which was covered by FDIC loss sharing agreements, compared to OREO balances of $94.8 million at December 31, 2012, $45.5 million, or 48.0%, of which was covered by FDIC loss sharing agreements. During 2012, $87.8 million of OREO was foreclosed on or otherwise repossessed and $93.4 million of OREO was sold, including $2.9 million of non-covered gains and $6.7 million of covered gains that are subject to reimbursement to the FDIC at the applicable loss share coverage percentage. OREO write-downs of $20.2 million were recorded during the year, of which $14.2 million, or 70.2%, were covered by FDIC loss sharing agreements. OREO balances decreased $25.8 million during the 57 --------------------------------------------------------------------------------



year to $94.8 million, 48.0% of which was covered by FDIC loss sharing agreements, compared to OREO balances of $120.6 million at December 31, 2011, $77.1 million, or 63.9 %, of which was covered by the FDIC loss sharing agreement.

OREO at December 31, 2012 includes $5.3 million of participant interests in OREO, in connection with our repossession of collateral on loans for which we were the lead bank and we have a controlling interest. We have recorded a corresponding payable to those participant banks in other liabilities. The $94.8 million of OREO at December 31, 2012 excludes $10.6 million of minority interest in participated OREO in connection with the repossession of collateral on loans for which we were not the lead bank and we do not have a controlling interest. The following tables represents the carrying value of our accruing and non-accrual loans compared to the unpaid principal balance ("UPB") as of December 31, 2013 (in thousands): Accruing Non-accrual Total Unpaid Unpaid Unpaid principal Carrying principal Carrying Carrying principal



Carrying

balance Carrying value value/UPB balance value value/UPB balance Carrying value value/UPB Non 310-30 loans Commercial $ 424,625$ 420,704 99.1 % $ 1,537$ 1,280 83.3 % $ 426,162$ 421,984 99.0 % Commercial real estate 284,530 281,030 98.8 % 3,278 1,992 60.8 % 287,808 283,022 98.3 % Agriculture 133,671 132,799 99.3 % 172 153 89.0 % 133,843 132,952 99.3 % Residential real estate 535,354 531,068 99.2 % 6,830 5,845 85.6 % 542,184 536,913 99.0 % Consumer 28,096 28,096 100.0 % 264 247 93.6 % 28,360 28,343 99.9 % Total non 310-30 loans 1,406,276 1,393,697 99.1 % 12,081 9,517 78.8 % 1,418,357 1,403,214 98.9 % Covered non 310-30 loans 49,811 48,089 96.5 % 2,301 1,944 84.5 % 52,112 50,033 96.0 % Non-covered non 310-30 loans 1,356,465 1,345,608 99.2 % 9,780 7,573 77.4 % 1,366,245 1,353,181 99.0 % Total non 310-30 loans 1,406,276 1,393,697 99.1 % 12,081 9,517 78.8 % 1,418,357 1,403,214 98.9 % Loans accounted for under ASC 310-30 Commercial 63,948 46,684 73.0 % 24,539 14,827 60.4 % 88,487 61,511 69.5 % Commercial real estate 393,647 291,198 74.0 % - - - % 393,647 291,198 74.0 % Agriculture 32,482 27,000 83.1 % - - - % 32,482 27,000 83.1 % Residential real estate 79,380 63,011 79.4 % - - - % 79,380 63,011 79.4 % Consumer 16,982 8,160 48.1 % - - - % 16,982 8,160 48.1 % Total loans accounted for under ASC 310-30 586,439 436,053 74.4 % 24,539 14,827 60.4 % 610,978 450,880 73.8 % Covered loans accounted for under ASC 310-30 338,637 244,537 72.2 % 24,539 14,827 60.4 % 363,176 259,364 71.4 % Non-covered loans accounted for under ASC 310-30 247,802 191,516 77.3 % - - - % 247,802 191,516 77.3 % Total loans accounted for under ASC 310-30 586,439 436,053 74.4 % 24,539 14,827 60.4 % 610,978 450,880 73.8 % Total loans $ 1,992,715$ 1,829,750 91.8 % $ 36,620$ 24,344 66.5 % $ 2,029,335$ 1,854,094 91.4 % Total covered $ 388,448$ 292,626 75.3 % $



26,840 $ 16,771 62.5 % $ 415,288$ 309,397 74.5 % Total non-covered 1,604,267

1,537,124 95.8 % 9,780 7,573 77.4 % 1,614,047 1,544,697 95.7 % Total loans $ 1,992,715$ 1,829,750 91.8 % $ 36,620$ 24,344 66.5 % $ 2,029,335$ 1,854,094 91.4 % 58

-------------------------------------------------------------------------------- Past Due Loans Past due status is monitored as an indicator of credit deterioration. Covered and non-covered 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 and not accounted for under ASC 310-30 are put on non-accrual status unless the loan is well secured and in the process of collection. Pooled loans accounted for under ASC 310-30 that are 90 days or more past due and still accreting are included in loans 90 days or more past due and still accruing interest and are generally considered to be performing as is further described above under "Non-Performing Assets." The one covered loan pool accounted for under ASC 310-30 that was put on non-accrual during 2013 is included in non-accrual loans. The table below shows the past due status of loans accounted for under ASC 310-30 and loans not accounted for under ASC 310-30, based on contractual terms of the loans as of December 31, 2013 and December 31, 2012 (in thousands): December 31, 2013 December 31, 2012 ASC 310-30 Non ASC Total ASC 310-30 Non ASC Total Loans 310-30 Loans Loans Loans 310-30 Loans Loans Loans 30-89 days past due and still accruing interest $ 11,245$ 2,854$ 14,099$ 18,412$ 4,581$ 22,993 Loans 90 days past due and still accruing interest 55,864 129 55,993 146,761 25 146,786 Non-accrual loans 14,827 9,517 24,344 - 23,119 23,119 Total past due and non-accrual loans $ 81,936$ 12,500$ 94,436$ 165,173$ 27,725$ 192,898 Total covered loans $ 63,603$ 2,284$ 65,887$ 130,350$ 6,172$ 136,522 Total past due and non-accrual loans to total ASC 310-30 loans, total non 310-30 loans and total loans, respectively 18.17 % 0.89 % 5.09 % 20.09 % 2.74 % 10.53 % Total non-accrual loans to total ASC 310-30 loans, total non 310-30 loans, and total loans, respectively 3.29 % 0.68 % 1.31 % 0.00 % 2.29 % 1.26 % % of total past due and non-accrual loans that carry fair value adjustments 100.00 % 52.23 % 93.68 % 100.00 % 57.78 % 93.93 % % of total past due and non-accrual loans that are covered by FDIC loss sharing agreements 77.63 % 18.27 % 69.77 %



78.92 % 22.26 % 70.77 %

During 2013, total past due and non-accrual loans decreased for loans accounted for under ASC 310-30 to 18.17% at December 31, 2013 from 20.09% of total loans accounted for under ASC 310-30 at December 31, 2012. Total past due and non-accrual loans not accounted for under ASC 310-30 improved significantly to 0.89% at December 31, 2013 from 2.74% at December 31, 2012 driven by a decline in non-accrual loans. Total loans 30 days or more past due and still accruing interest and non-accrual loans represented 5.09% of total loans as of December 31, 2013 compared to 10.53% at December 31, 2012. Loans 30-89 days past due and still accruing interest decreased $8.9 million at December 31, 2013 compared to December 31, 2012. Loans 90 days or more past due and still accruing interest decreased $90.8 million at December 31, 2013 compared to December 31, 2012. The collective decrease in past due loans of $99.7 million is reflective of improved credit quality in the broader loan portfolio and the successful workout strategies employed by our special assets division during the period. Non-accrual loans increased just $1.2 million from December 31, 2012 to December 31, 2013 primarily due to the addition of the covered commercial and industrial loan pool accounted for under ASC 310-30, totaling $14.8 million, to non-accrual status during the period. Non-accrual loans not accounted for under ASC 310-30 decreased $13.6 million during the period primarily due to resolution of certain assets and foreclosures during the period. The non-accrual loans are primarily secured by real estate both in and outside of our market areas. At December 31, 2012, total loans 30 days or more past due and still accruing interest and non-accrual loans represented 10.5% of total loans compared to 13.2% at December 31, 2011. Loans 30-89 days past due and still accruing interest decreased $63.5 million at December 31, 2012 compared to December 31, 2011. Loans 90 days or more past due and still accruing interest decreased $28.2 million at December 31, 2012 compared to December 31, 2011. The decreases in past due loans is reflective of improved credit quality and the successful workout strategies employed by our special assets division during 2012. Additionally, of the $146.8 million of loans 90 days or more past due and still accruing interest, all but $25 thousand were accounted for under ASC 310-30 and continued to accrete interest and 79.6% of the aforementioned $146.8 million of loans 90 59 -------------------------------------------------------------------------------- days or more past due and still accruing interest were covered by FDIC loss sharing agreements. Non-accrual loans decreased $14.7 million from December 31, 2011 to December 31, 2012, primarily due to resolution of certain assets and foreclosures during the period. Allowance for Loan Losses The ALL represents the amount that we believe is necessary to absorb probable losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. Determination of the ALL is based on an evaluation of the collectability of loans, the realizable value of underlying collateral and, to the extent applicable, prior loss experience. The ALL is critical to the portrayal and understanding of our financial condition, liquidity and results of operations. The determination and application of the ALL 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. In accordance with the applicable guidance for business combinations, acquired loans were recorded at their acquisition date fair values, which were based on expected future cash flows and included an estimate for future loan losses, therefore no ALL was recorded as of the acquisition date. Any estimated losses on acquired loans that arise after the acquisition date are reflected in a charge to the provision for loan losses. Losses incurred on covered loans are reimbursable at the applicable loss share percentages in accordance with the loss sharing agreements with the FDIC. Accordingly, any provision for loan losses relating to covered loans is partially offset by a corresponding increase to the FDIC indemnification asset and FDIC loss sharing income in non-interest income. Loans accounted for under the accounting guidance provided in ASC 310-30 have been grouped into pools based on the predominant risk characteristics of purpose and/or type of loan. The timing and receipt of expected principal, interest and any other cash flows of these loans are periodically re-estimated and the expected future cash flows of the collective pools are compared to the carrying value of the pools. To the extent that the expected future cash flows of each pool is less than the book value of the pool, an allowance for loan losses will be established through a charge to the provision for loan losses and, for loans covered by loss sharing agreements with the FDIC, a related adjustment to the FDIC indemnification asset for the portion of the loss that is covered by the loss sharing agreements. If the re-estimated expected future cash flows are greater than the book value of the pools, then the improvement in the expected future cash flows is accreted into interest income over the remaining expected life of the loan pool. During 2013 and 2012, these re-estimations resulted in overall increases in expected cash flows in certain loan pools, which, absent previous valuation allowances within the same pool, is reflected in increased accretion as well as an increased amount of accretable yield and is recognized over the expected remaining lives of the underlying loans as an adjustment to yield. For all loans not accounted for under ASC 310-30, the determination of the ALL follows a process to determine the appropriate level of ALL that is designed to account for changes in credit quality. This process provides an ALL consisting of a specific allowance component based on certain individually evaluated loans and a general allowance component based on estimates of reserves needed for all other loans, segmented based on similar risk characteristics. Impaired loans less than $250,000 are included in the general allowance population. Impaired loans over $250,000 are subject to individual evaluation on a regular basis to determine the need, if any, to allocate a specific reserve to the impaired loan. 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;

the impact current economic conditions may have on the borrower's

financial condition and liquidity or the value of the collateral.

In evaluating the loan portfolio for an appropriate ALL level, unimpaired loans are grouped into segments based on broad characteristics such as primary use and underlying collateral. We have identified five primary loan segments that are further stratified into 10 loan classes to provide more granularity in analyzing loss history and to allow for more definitive qualitative adjustments based upon specific factors affecting each loan class. Following are the loan classes within each of the five primary loan segments: 60 --------------------------------------------------------------------------------



Residential

Commercial Commercial real estate Agriculture real estate Consumer Total commercial Construction

Total agriculture Senior lien Total consumer Acquisition and development Junior lien Multi-family Owner-occupied Non-owner occupied



Appropriate ALL levels are determined by segment and class utilizing risk ratings, loss history, peer loss history and qualitative adjustments. The qualitative adjustments consider the following risk factors: economic/external conditions;

loan administration, loan structure and procedures;

risk tolerance/experience;

loan growth; trends; concentrations; other Historical loss data is categorized by segment and class and a loss rate is applied to loan balances. The loss rates are based on loan segment and class and utilize a credit risk rating migration analysis. Due to our relatively short historical loss history, we incorporate not only our own historical loss rates since the beginning of 2012, but we also utilize peer historical loss data based on a 12-quarter historical average net charge-off ratio on each loan type, relying on the Uniform Bank Performance Reports compiled by the Federal Financial Institutions Examinations Council ("FFIEC"). While we use our own loss history and peer loss history for both purchased and originated loans, we assign a higher portion of our own loss history to our purchased loans, because those loans are more seasoned and more of the actual losses in the portfolio have historically been in the purchased portfolio. For originated loans, we assign a higher portion of the peer loss history, as we believe that this is likely more indicative of losses inherent in the portfolio. The collective resulting ALL for loans not accounted for under ASC 310-30 is calculated as the sum of the specific reserves and the general reserves, described above. While these amounts are calculated by individual loan or segment and class, the entire ALL is available for any loan that, in our judgment, should be charged-off. Non 310-30 ALL During 2013, we recorded $3.5 million of provision for loan losses for loans not accounted for under ASC 310-30, as we provided for $3.0 million of net loan charge-offs and loan growth. During the year, $1.5 million, $0.5 million, and $0.4 million, of the $3.0 million of net charge-offs were from the commercial, residential real estate, and commercial real estate segments, respectively. At December 31, 2013, there were eight impaired loans that carried specific reserves totaling $0.9 million. During 2012, we recorded $9.0 million of provision for loan losses for loans not accounted for under ASC 310-30 and recorded $8.4 million of non 310-30 charge-offs. Of the $8.4 million of non 310-30 charge-offs, $2.4 million was related to one commercial and industrial loan, which was a result of fraudulent collateral accepted by the acquired institution and we do not believe is indicative of expected future charge-offs. At December 31, 2012, there were ten impaired loans that carried specific reserves totaling $1.9 million. 310-30 ALL The ALL for ASC 310-30 loans totaled $1.3 million at December 31, 2013, compared to $4.7 million at December 31, 2012. During 2013, loans accounted for under ASC 310-30 and associated with the commercial real estate and consumer loan pools that had previous valuation allowances of $1.3 million were reversed as a result of increases in expected cash flows. In addition, loans associated with the commercial, agriculture, and residential real estate pools experienced net impairments of $2.1 million as a result of decreases in expected cash flows. The aforementioned activity resulted in a net of provision of $0.8 million during 2013 for loans accounted for under ASC 310-30. Additionally, $4.1 million of 310-30 loans were charged-off during 2013, $2.8 million of which was from the commercial real estate segment. During 2012, we recorded a provision for loan losses of $19.0 million for loans accounted for under ASC 310-30, primarily as a result of net decreases in expected cash flow on certain loan pools. Additionally, we charged off $16.6 million, net of 61 -------------------------------------------------------------------------------- recoveries, of loans accounted for under ASC 310-30 during 2012, $15.3 million of which was from the commercial real estate segment. This resulted in an ending ALL for ASC 310-30 loans of $4.7 million at December 31, 2012. After considering the abovementioned factors, we believe that the ALL of $12.5 million and $15.4 million was adequate to cover probable losses inherent in the loan portfolio at December 31, 2013 and December 31, 2012, respectively. However, it is likely that future adjustments to the ALL will be necessary and any changes to the assumptions, circumstances or estimates used in determining the ALL could adversely affect the Company's results of operations, liquidity or financial condition. The following schedule presents, by class stratification, the changes in the ALL during the twelve months ended December 31, 2013 and 2012 (in thousands): December 31, 2013 December 31, 2012 ASC 310-30 Loans Non 310-30 Loans Total ASC 310-30 Loans Non 310-30 Loans Total Beginning allowance for loan losses $ 4,652 $ 10,728 $ 15,380 $ 2,188 $ 9,339 $ 11,527 Charge-offs: Commercial (496 ) (1,654 ) (2,150 ) (216 ) (3,140 ) (3,356 ) Commercial real estate (2,801 ) (943 ) (3,744 ) (15,578 ) (2,605 ) (18,183 ) Agriculture (221 ) - (221 ) (144 ) (8 ) (152 ) Residential real estate (623 ) (882 ) (1,505 ) (872 ) (1,132 ) (2,004 ) Consumer - (1,001 ) (1,001 ) (19 ) (1,502 ) (1,521 ) Total charge-offs (4,141 ) (4,480 ) (8,621 ) (16,829 ) (8,387 ) (25,216 ) Recoveries - 1,466 1,466 275 799 1,074 Net charge-offs (4,141 ) (3,014 ) (7,155 ) (16,554 ) (7,588 ) (24,142 ) Provision for loan loss 769 3,527 4,296 19,018 8,977 27,995 Ending allowance for loan losses $ 1,280 $ 11,241 $ 12,521 $ 4,652 $ 10,728 $ 15,380 Ratio of net charge-offs to average total loans during the period, respectively 0.67 % 0.27 % 0.41 % 1.56 % 0.79 % 1.20 % Ratio of allowance for loan losses to total loans outstanding at period end, respectively 0.28 % 0.80 % 0.68 % 0.57 % 1.06 % 0.84 % Ratio of allowance for loan losses to total non-covered loans outstanding at period end, respectively 0.67 % 0.83 % 0.81 % 1.58 % 1.15 % 1.26 % Ratio of allowance for loan losses to total non-performing loans at period end, respectively 8.63 % 52.90 % 34.71 % 0.00 % 26.25 % 37.64 % Ratio of allowance for loan losses to total non-performing, non-covered loans at period end, respectively 0.00 % 83.41 % 92.90 % 0.00 % 36.03 % 51.66 % Total loans $ 450,880$ 1,403,214$ 1,854,094 $ 822,021 $ 1,010,681$ 1,832,702 Average total loans outstanding during the period $ 620,709$ 1,128,545$ 1,749,254$ 1,058,092 $ 962,147 $ 2,020,239 Total non-covered loans $ 191,516$ 1,353,181$ 1,544,697 $ 294,073 $ 930,407 $ 1,224,480 Total non-performing loans $ 14,828 $ 21,250 $ 36,078 $ - $ 40,864 $ 40,864 Total non-performing, covered loans $ 14,827 $ 7,773 $ 22,600 $ - $ 11,092 $ 11,092 62

-------------------------------------------------------------------------------- The following table presents the allocation of the ALL and the percentage of the total amount of loans in each loan category listed as of the dates presented (in thousands): December 31, 2013 % of total Related Total loans loans ALL % of ALL Commercial $ 483,495 26.1 % $ 4,258 34.0 % Commercial real estate 574,220 31.0 % 2,276 18.2 % Agriculture 159,952 8.6 % 1,237 9.9 % Residential real estate 599,924 32.3 % 4,259 34.0 % Consumer and overdrafts 36,503 2.0 % 491 3.9 % Total $ 1,854,094 100.0 % $ 12,521 100.0 % December 31, 2012 % of total Related Total loans loans ALL % of ALL Commercial $ 270,588 14.8 % $ 2,798 18.2 % Commercial real estate 804,999 43.9 % 7,396 48.1 % Agriculture 173,407 9.5 % 592 3.8 % Residential real estate 533,377 29.1 % 4,011 26.1 % Consumer and overdrafts 50,331 2.7 % 583 3.8 % Total $ 1,832,702 100.0 % $ 15,380 100.0 % During 2013, the ALL allocated to commercial real estate declined from 48.1% to 18.2% largely due to changes in our 310-30 portfolio, as we experienced $2.8 million in charge-offs across our commercial real estate loan pools, coupled with provision recoupment of $1.2 million as previously recorded impairments were recaptured in connection with an improvement in estimated cash flows. Exclusive of the ALL allocated to the 310-30 loans, ALL allocations remained relatively stable for the agriculture, residential real estate and consumer and overdrafts categories, and the commercial category increased from 26% of the total non 310-30 ALL at December 31, 2012 to 36% at December 31, 2013 as a result of improved credit quality and fewer loans being individually evaluated that did not require specific reserves. The ALL allocation for non 310-30 commercial real estate loans decreased from 28% at December 31, 2012 to 18% at December 31, 2013 as a result of improved credit metrics of this segment during 2013. FDIC Indemnification Asset and Clawback Liability At December 31, 2013, the FDIC indemnification asset was $64.4 million, compared to $86.9 million at December 31, 2012. The $64.4 millionFDIC indemnification asset at December 31, 2013 was comprised of $44.7 million in projected future FDIC loss-share billing and $19.7 million representing increased client cash flows. In 2013, we recognized $19.0 million of amortization on the FDIC indemnification asset as the performance of our covered assets improved. The amortization resulted from an increase in actual and expected cash flows on the underlying covered assets, resulting in lower expected reimbursements from the FDIC. The increase in expected cash flows from these underlying assets is reflected in increased accretion rates on covered loans as well as an increased amount of accretable yield on our covered loans accounted for under ASC 310-30 and is being recognized over the expected lives of the underlying covered loans as an adjustment to yield. The carrying value of the FDIC indemnification asset was further reduced by $17.6 million during 2013 as a result of claims filed with the FDIC. During 2013, we received $77.0 million in loss-share payments from the FDIC. The loss claims filed are subject to review and approval, including extensive audits, by the FDIC or its assigned agents for compliance with the terms in the loss sharing agreements. During 2012, we recognized $13.8 million of amortization related to the FDIC indemnification asset as a result of improved performance of our covered assets. We also reduced the carrying value of the FDIC indemnification asset by $135.2 million as a result of claims filed with the FDIC during 2012. During 2012, we received $75.9 million from the FDIC related to losses incurred during the fourth quarter of 2011 and the first and second quarters of 2012. 63 -------------------------------------------------------------------------------- Within 45 days of the end of each of the loss sharing agreements with the FDIC, we may be required to reimburse the FDIC in the event that our losses on covered assets do not reach the second tranche in each related loss sharing agreement, based on the initial discount received less cumulative servicing amounts for the covered assets acquired. At December 31, 2013 and December 31, 2012, this clawback liability was carried at $32.5 million and $31.3 million, respectively, and is included in Due to FDIC in our consolidated statements of financial condition. Other Assets Significant components of other assets were as follows as of the periods indicated (in thousands): December 31, 2013 December 31, 2012 FDIC indemnification-claimed $ - $ 59,291 Minority interest in participated other real estate owned 10,627 10,627



Accrued interest on interest bearing bank deposits and investment securities

5,221 5,585 Accrued interest on loans 6,134 7,088 Accrued income taxes receivable and deferred tax asset 54,032 7,274 Other assets 10,533 10,158 Total other assets $ 86,547 $ 100,023 Other assets decreased $13.5 million, or 13.5%, during 2013. The decrease was largely attributable to a $59.3 million decline in FDIC indemnification-claimed, as the 2012 claims were paid and no billings were outstanding at December 31, 2013. Accrued income taxes receivable and the deferred tax assets increased $46.8 million from December 31, 2012 to December 31, 2013 primarily as a result of unrealized losses on our available-for-sale securities portfolio, the decline in the FDIC indemnification-claimed asset and the deferral of deductions for certain costs into future periods in accordance with applicable tax laws. Other assets increased $61.2 million in 2012, largely because the FDIC indemnification-claimed increased $59.3 million during the year in connection with the loss share claims submitted to the FDIC that remained unpaid as of December 31, 2012. Also contributing to the increase in other assets was $10.6 million of minority interest in participated OREO that we recorded in connection with the repossession of collateral on loans for which we were not the lead bank and we do not have a controlling interest. These properties have been repossessed by the lead banks and we have recorded our receivable due from the lead banks in other assets as minority interest in participated OREO. The other receivable due from FDIC decreased $11.2 million as settlement items related to the Community Banks of Colorado acquisition in the fourth quarter of 2011 were settled with FDIC. Other Liabilities Significant components of other liabilities were as follows as of the dates indicated (in thousands): December 31, 2013 December 31, 2012 Participant interest in other real estate owned $ 4,243 $ 5,321 Accrued income taxes payable - 4,972 Accrued interest payable 3,058 4,239 Accrued expenses 15,425 12,263 Warrant liability 6,281 5,461 Other liabilities 7,578 2,285 Total other liabilities $ 36,585 $ 34,541 Other liabilities increased $2.0 million during 2013. Included in total other liabilities is accrued income taxes payable which decreased by $5.0 million, primarily due to tax payments made during the period. During 2013, we continued to lower the interest rates paid on our deposits, coupled with the shift from higher-cost time deposits to lower cost transaction accounts. The lower cost mix of deposits resulted in a decrease in accrued interest payable of $1.2 million during the period. 64 -------------------------------------------------------------------------------- Accrued expenses ended December 31, 2013 at $15.4 million and increased $3.2 million, or 25.8%, from December 31, 2012, primarily due to expenses accrued in connection with our announcement to integrate 32 limited-service retirement center locations (acquired in our 2010 purchase of Hillcrest Bank) and exit of four banking centers in Northern California (acquired in our 2011 purchase of Community Banks of Colorado). We have outstanding warrants to purchase 830,750 shares of our common stock, which are classified as a liability and included in other liabilities in our consolidated statements of financial condition. We revalue the warrants at the end of each reporting period using a Black-Scholes model and any change in fair value is reported in the statements of operations as "loss (gain) from change in fair value of warrant liability" in non-interest expense in the period in which the change occurred. The warrant liability increased $0.8 million during 2013 to $6.3 million. The value of the warrant liability, and the expense that results from an increase to this liability, is correlated to our stock price. Accordingly, an increase in our stock price results in an increase in the warrant liability and the associated expense. More information on the accounting and measurement of the warrant liability can be found in notes 2 and 18 in our consolidated financial statements. Other liabilities decreased $50.1 million during 2012, largely due to a $40.1 million decrease in accrued and deferred taxes payable. Accrued and deferred income taxes payable decreased $40.1 million from $45.1 million during the year ended 2012 primarily as a result of tax payments paid during that period which included the taxes due on our $60.5 million bargain purchase gain realized in 2011 in connection with our Bank of Choice acquisition. During 2012, we continued to lower the interest rates on our deposits, coupled with the shift from higher-cost time deposits to lower cost transaction accounts. The lower cost mix of deposits resulted in a decrease in accrued interest payable of $6.8 million during 2012. Offsetting these decreases was the $5.3 million of participant interests in other real estate owned that we recorded which represents participant banks' interests in properties that we have repossessed. These participant interests are also reflected in our other real estate owned balances. 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 December 31, 2013 and 2012 (in thousands): December 31, 2013 December 31, 2012 % of total % of total Balance deposits Balance deposits Non-interest bearing demand deposits $ 674,989 17.6 % $ 677,985 16.1 % Interest bearing demand deposits 386,762 10.1 % 529,996 12.6 % Savings accounts 198,444 5.1 % 187,339 4.5 % Money market accounts 1,082,427 28.2 % 1,052,681 25.1 % Total transaction deposits 2,342,622 61.0 % 2,448,001 58.3 % Time deposits < $100,000 971,431 25.3 % 1,121,757 26.7 % Time deposits > $100,000 524,256 13.7 % 630,961 15.0 % Total time deposits 1,495,687 39.0 % 1,752,718 41.7 % Total deposits $ 3,838,309 100.0 % $ 4,200,719 100.0 % During 2013, our total deposits decreased $362.4 million. Since the acquisition of the four problem banks, we have continued to focus our deposit base on clients who are interested in market rate deposits and developing a banking relationship, rather than the highly rate-sensitive time deposit clients of the predecessor banks. As a result, our time deposits decreased $257.0 million, or 14.7%, during 2013. At December 31, 2013, the mix of transaction deposits to total deposits improved to 61.0% from 58.3% at December 31, 2012. At December 31, 2013 and December 31, 2012, we had $1.0 billion and $1.2 billion, respectively, of time deposits that were scheduled to mature within 12 months. Of the $1.0 billion in time deposits scheduled to mature within 12 months of December 31, 2013, $0.3 billion of which were in denominations of $100,000 or more, and $0.7 billion of which were in denominations less than $100,000. Note 13 to the consolidated financial statements provides a maturity schedule and weighted average rates of time deposits outstanding at December 31, 2013 and December 31, 2012. During 2012, our total deposits decreased $862.3 million. We assumed a significant amount of deposits with our acquisitions in the fourth quarter of 2010 and in 2011, and we have actively worked to restructure our deposit base and as a result, our time 65 -------------------------------------------------------------------------------- deposits decreased $1.0 billion in 2012. At December 31, 2012, the mix of transaction deposits to total deposits improved to 58.3% from 45.0% at the end of the prior year. In connection with our FDIC-assisted bank acquisitions, the FDIC provided Bank of Choice, Hillcrest Bank and Community Banks of Colorado depositors with the right to redeem their time deposits at any time during the life of the time deposit, without penalty, unless the depositor accepts new terms. At December 31, 2013 and December 31, 2012, the Company had approximately $68.5 million and $164.3 million, respectively, of time deposits that were subject to the penalty-free withdrawals. Regulatory Capital Our subsidiary bank and the holding company are subject to the regulatory capital adequacy requirements of the Federal Reserve Board, the FDIC and the OCC, as applicable. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly further discretionary actions by regulators that could have a material adverse effect on us. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital requirements that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Through these judgments, assets are risk weighted according to the perceived risk they pose to capital on a scale of 0% to 100%, with 100% risk-weighted assets signifying higher risk assets that warrant higher levels of capital. While many non-covered assets (particularly loans and OREO) typically fall in to 50% or 100% risk-weighted classifications, our covered assets are all considered to be 20% risk-weighted for risk-based capital calculations. Typically, banks are required to maintain a tier 1 risk-based capital ratio of 4.00%, a total risk-based capital ratio of 8.00% and a tier 1 leverage ratio of 4.00% in order to meet minimum, adequately capitalized regulatory requirements. To be considered well-capitalized (under prompt corrective action provisions), banks must maintain minimum capital ratios of 6.00% for tier 1 risk-based capital, 10.00% for total risk-based capital and 5.00% for the tier 1 leverage ratio. In connection with the approval of the de novo charters for Hillcrest Bank and NBH Bank, we agreed with our regulators to maintain capital levels of at least 10% tier 1 leverage ratio, 11% tier 1 risk-based capital ratio and 12% total risk-based capital ratio at our subsidiary bank. Following the merger of Hillcrest Bank into NBH Bank in November 2011, only NBH Bank remains subject to these capital ratio requirements. In October 2013, NBH Bank, N.A. received approval and a waiver from the OCC under the OCC Operating Agreement to permanently reduce the bank's capital by $313.0 million. As a result, the bank paid a $313.0 million cash dividend to the Company. At December 31, 2013 and at December 31, 2012, our subsidiary bank and the consolidated holding company exceeded all capital ratio requirements under prompt corrective action and other regulatory requirements, as further detailed in note 15 of our consolidated financial statements. 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 and FDIC loss sharing income. Our primary operating expenses, aside from interest expense, consist of salaries and benefits, professional fees, occupancy costs, and data processing expense. Overview of Results of Operations Year ended 2013 We recorded net income of $6.9 million during 2013, compared to a net loss of $0.5 million during 2012. Net interest income declined $25.3 million from 2012 to 2013, which resulted from the lower purchased loan balances as non-strategic loans were paid off or paid down, coupled with lower yields earned on the non 310-30 loan portfolio and on the investment portfolio. Provision for loan loss expense was $4.3 million during 2013 compared to $28.0 million during 2012, a decrease of $23.7 million. The decrease in provision was due to lower impairment charges on the ASC 310-30 loan pools due to gross cash flow improvements resulting from the Company's re-measurement of expected future cash flows on those underlying pools, coupled with improved credit quality metrics in the non 310-30 portfolio. Non-interest income was $20.2 million during 2013 compared to $37.4 million in 2012. The decrease of $17.2 million during 2013 was largely due to a $14.4 million decrease in collective FDIC indemnification asset amortization and FDIC-related loss share income as a result of lower covered OREO expenses and 66 -------------------------------------------------------------------------------- higher amortization of the FDIC indemnification asset, coupled with a $3.0 million decrease in gain on previously charged-off acquired loans, and a $0.7 million decrease in gain on sale of securities. Non-interest expense totaled $184.0 million during 2013 compared to $209.6 million during 2012, a decrease of $25.6 million. Operating expense, which excludes problem loan/OREO workout expenses, warrant liability changes, IPO related expenses in 2012, and banking center closure charges in 2013, decreased $11.0 million during 2013. The year-over-year decrease in operating expenses was primarily due to lower professional fees of $7.4 million, lower salaries and benefits of $4.1 million, and lower telecommunications and data processing expenses of $1.8 million, as management continues to realize efficiencies in the business. Occupancy and equipment increased $4.1 million from 2012 to 2013 primarily because of the settlement of premises and equipment purchased from the FDIC in the first half of 2012 related to our Bank of Choice and Community Banks of Colorado acquisitions. OREO and problem loan expenses decreased $12.2 million during 2013. The expenses have been steadily trending downward due to the resolution of purchased troubled assets throughout the year. The increase in the warrant liability expense of $2.2 million was primarily attributable to the increase in our stock price during 2013. Years ended 2012 and 2011 We recorded a net loss of $0.5 million during the year ended December 31, 2012, inclusive of initial public offering related expenses of $8.0 million, which represents our first full year with the operations of all of our acquisitions. These results reflect the increased revenues and expenses associated with our acquisitions of Bank of Choice and Community Banks of Colorado in the second half of 2011, in addition to the further build-out of our business development and operational functions that support our lending activities and the continued integration of our acquisitions. We completed the integration of Community Banks of Colorado in May 2012 and the integration of Bank of Choice in July 2012. During 2012, we continued to benefit from the strong yields on our loan portfolio while our dedicated workout group actively worked to resolve our acquired troubled assets. The activity in this resolution process is evidenced by the elevated levels of OREO related expenses and problem loan expenses. During 2012, in addition to net transfers of $47.5 million of non-accretable difference to accretable yield to be recognized in the future, we recorded $19.0 million of provision for loan losses, approximately $14.9 million of which was attributable to covered loans. The FDIC coverage of these impairments is reflected in the estimated cash flows underlying the FDIC indemnification asset. During 2011, we recorded net income of $42.0 million. The primary driver of net income during 2011 was the pre-tax gain on the bargain purchase of $60.5 million in connection with our Bank of Choice acquisitions. Meaningful comparability to prior periods is limited due to the Community Banks of Colorado acquisition in October 2011 and the Bank of Choice acquisition in July 2011. 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. The following tables present the components of net interest income for the periods indicated. The tables include: (i) the average daily balances of interest earning assets and interest bearing liabilities; (ii) the average daily balances of non-interest earning assets and non-interest bearing liabilities; (iii) the total amount of interest income earned on interest earning assets; (iv) the total amount of interest expense incurred on interest bearing liabilities; (v) the resultant average yields and rates; (vi) net interest spread; and (vii) net interest margin, which represents the difference between interest income and interest expense, expressed as a percentage of interest earning assets. 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. Non-accrual and restructured loan balances are included in the average loan balances; however, the forgone interest on non-accrual and restructured loans is not included in the dollar amounts of interest earned. All amounts presented are on a pre-tax basis. 67 --------------------------------------------------------------------------------



The table below presents the components of net interest income for the years ended December 31, 2013, 2012 and 2011 (in thousands):

For the year ended December 31, 2013 For the year ended December 31, 2012 For the year ended December 31, 2011 Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Interest earning assets: ASC 310-30 loans $ 620,709$ 76,661 12.35 % $ 1,058,092$ 100,407 9.49 % $ 823,598$ 63,618 7.72 % Non 310-30 loans(1)(2) 1,133,895 62,387 5.50 % 968,345 69,249 7.15 % 837,898 70,451 8.41 % Investment securities available-for-sale 1,951,039 35,460 1.82 % 1,785,785 42,590 2.38 % 1,846,483 59,313 3.21 % Investment securities held-to-maturity 597,920 18,485 3.09 % 516,490 17,752 3.44 % 410 10 2.44 % Other securities 32,135 1,559 4.85 % 31,796 1,535 4.83 % 20,071

1,132 5.64 % Interest earning deposits and securities purchased under agreements to resell 362,854 923 0.25 % 770,328 1,952 0.25 % 1,042,871 2,635 0.25 % Total interest earning assets $ 4,698,552$ 195,475 4.16 % $ 5,130,836$ 233,485 4.55 % $ 4,571,331$ 197,159 4.31 % Cash and due from banks 60,922 69,129 100,210 Other assets 428,426 599,327 497,411 Allowance for loan losses (12,690 ) (12,531 ) (3,616 ) Total assets $ 5,175,210$ 5,786,761$ 5,165,336 Interest bearing liabilities: Interest bearing demand, savings and money market deposits $ 1,719,507$ 4,271 0.25 % $



1,691,645 $ 5,482 0.32 % $ 1,219,191 $

5,986 0.49 % Time deposits 1,607,676 12,122 0.75 % 2,192,469 23,643 1.08 % 2,382,637 35,588 1.49 % Securities sold under agreements to repurchase 84,354 121 0.14 % 52,385 109 0.21 % 31,727 96 0.30 % Federal Home Loan Bank advances - - 0.00 % - - 0.00 % $ 1,669 $ 26 1.56 % Total interest bearing liabilities $ 3,411,537$ 16,514 0.48 % $ 3,936,499$ 29,234 0.74 % $ 3,635,224$ 41,696 1.15 % Demand deposits 660,254 641,890 365,461 Other liabilities 64,666 114,374 118,029 Total liabilities 4,136,457 4,692,763 4,118,714



Shareholders'

equity 1,038,753 1,093,998 1,046,622 Total liabilities and shareholders' equity $ 5,175,210$ 5,786,761$ 5,165,336 Net interest income $ 178,961$ 204,251$ 155,463 Interest rate spread 3.68 % 3.81 % 3.17 % Net interest earning assets $ 1,287,015$ 1,194,337$ 936,107 Net interest margin 3.81 % 3.98 % 3.40 % Ratio of average interest earning assets to average interest bearing liabilities 137.73 % 130.34 % 125.75 %



(1) Originated loans are net of deferred loan fees, less costs, which are

included in interest income over the life of the loan.

(2) Non 310-30 loans include loans held-for-sale. Average balances of loans

held-for-sale during 2013, 2012 and 2011 were $5.4 million, $6.2 million and

$3.3 million, and interest income was $329 thousand, $368 thousand and $179

thousand for the same periods, respectively.

Net interest income totaled $179.0 million, $204.3 million, $155.5 million for the years ended 2013, 2012, and 2011, respectively. The net interest margin narrowed 17 basis points from the same period in the prior year from 3.98% to 3.81% and the interest rate spread narrowed 13 basis points to 3.68%. The year-over-year narrowing of the net interest margin was the result of lower yields on earning assets, and was partially offset by a lower average cost of interest bearing liabilities. The yield on interest earning assets declined 39 basis points in 2013 compared to 2012 due to lower balances on the higher-yielding purchased portfolios as loans originated during the current low interest rate environment continue to make up a larger portion of the loan portfolio coupled with lower reinvestment yields earned on the investment portfolio. 68 -------------------------------------------------------------------------------- Average loans comprised $1.8 billion, or 37.3%, of total average interest earning assets during 2013, compared to $2.0 billion, or 39.5%, during 2012, and $1.7 billion, or 36.3%, during 2011. Average loan balances increased from 2011 to 2012 due to acquisitions. The decline in average balances from 2012 to 2013 is reflective of our exit strategy of the non-strategic loans. The yield on the ASC 310-30 loan portfolio was 12.35% during the 2013, compared to 9.49% during 2012 and 7.72% during 2011. The increases were attributable to the effects of the favorable life-to-date transfers of non-accretable difference to accretable yield that are being accreted to interest income over the remaining life of these loans, coupled with the early payoff of one loan pool during 2013, which resulted in an immediate recognition of $2.5 million of accretable yield during 2013, and benefited the net interest margin by 0.05%. Included in the 2013 average non 310-30 loan balance are originated loans with an average balance of $734.0 million, interest income of $33.6 million, and a yield of 4.57%. Average investment securities comprised 54.2% of total interest earning assets during the 2013, compared to 44.9% during 2012, and 40.4% during 2011, as we have steadily reinvested excess cash into our investment securities portfolio. The continued low interest rate environment and lower re-investment yields have resulted in a 50 basis point decline in yields earned on the total investment portfolio during 2013 compared to 2012. Average balances of interest bearing liabilities declined $525.0 million from 2012 to 2013, driven by a $584.8 million decrease in average time deposits and partially offset by a $46.2 million increase in transaction deposits. During 2013, total interest expense related to interest bearing liabilities was $16.5 million, compared to $29.2 million during 2012 and $41.7 million during 2011. The average cost of interest bearing liabilities continues to decrease from 1.15% during 2011, to 0.74% during 2012, and 0.48% during 2013. The decline was largely due to decreases in the average cost of deposits that totaled 1.05% during 2011, 0.64% during 2012, and 0.41% during 2013, as we continued our strategy of transitioning high-priced time deposits to lower-cost transaction accounts. The largest component of interest expense in each period was related to time deposits, which carried an average rate of 0.75%, 1.08%, and 1.49% during 2013, 2012, and 2011, respectively. The following table summarizes the changes in net interest income by major category of interest earning assets and interest bearing liabilities, identifying changes related to volume and changes related to rates for the years 2013 compared to 2012 (in thousands): For the year ended December 31, 2013 compared to the year ended December 31, 2012 Increase (decrease) due to Volume Rate (3) Net Interest income: ASC 310-30 loans $ (54,019 )$ 30,273$ (23,746 ) Non 310-30 loans (1)(2) 9,109 (15,971 ) (6,862 ) Investment securities available-for-sale 3,003 (10,133 ) (7,130 ) Investment securities held-to-maturity 2,517 (1,784 ) 733 Other securities 16 8 24 Interest earning deposits and securities purchased under agreements to resell (1,037 ) 8 (1,029 ) Total interest income $ (40,411 )$ 2,401$ (38,010 ) Interest expense: Interest bearing demand, savings and money market deposits $ 69 $ (1,280 )$ (1,211 ) Time deposits (4,409 ) (7,112 ) (11,521 ) Securities sold under agreements to repurchase 46 (34 ) 12 Total interest expense (4,294 ) (8,426 ) (12,720 ) Net change in net interest income $ (36,117 ) $



10,827 $ (25,290 )

(1) Originated loans are net of deferred loan fees, less costs, which are

included in interest income over the life of the loan.

(2) Non 310-30 loans include loans held-for-sale.

(3) Includes changes for difference in number of days due to the leap year in

2012. Our acquired banks had deposit rates, particularly time deposit rates, higher than market at the time we acquired them. We have been steadily lowering deposit rates as we shift towards a more consumer-based banking strategy and focusing on lower cost 69 --------------------------------------------------------------------------------



transaction accounts. We have done this through a particular emphasis on lowering the cost of time deposits. Below is a breakdown of deposits and the average rates paid during the periods indicated (in thousands):

For the three months ended:

December 31, 2013 September 30, 2013 June 30, 2013 March 31, 2013 December 31, 2012 Average Average Average Average Average Average Rate Average Rate Average Rate Average Rate Average Rate Balance Paid Balance Paid Balance Paid Balance Paid Balance Paid Non-interest bearing demand $ 676,959 0.00 % $ 668,400 0.00 %



$ 649,323 0.00 % $ 645,904 0.00 % $ 662,763

0.00 % Interest bearing demand 379,052 0.09 % 460,971 0.14 % 478,922 0.15 % 486,015 0.17 % 484,178 0.18 % Money market accounts 1,097,009 0.32 % 1,088,084 0.32 % 1,052,590 0.32 % 1,057,847 0.32 % 1,033,350 0.34 % Savings accounts 191,592 0.12 % 195,650 0.11 % 196,248 0.11 % 194,548 0.13 % 176,209 0.13 % Time deposits 1,544,223 0.70 % 1,561,552 0.73 % 1,628,332 0.77 % 1,698,801 0.82 % 1,832,790 0.85 % Total average deposits $ 3,888,835 0.38 % $ 3,974,657 0.40 % $ 4,005,415 0.42 % $ 4,083,115 0.45 % $ 4,189,290 0.48 % Provision for Loan Losses The provision for loan losses represents the amount of expense that is necessary to bring the ALL to a level that we deem appropriate to absorb probable losses inherent in the loan portfolio as of the balance sheet date. The ALL is in addition to the remaining purchase accounting marks of $10.8 million on purchased non 310-30 loans that were established at the time of acquisition. The determination of the ALL, and the resultant provision for loan losses, is subjective and involves significant estimates and assumptions. Losses incurred on covered loans are reimbursable at the applicable loss share percentages in accordance with the loss sharing agreements with the FDIC. Accordingly, any provisions made that relate to covered loans are partially offset by a corresponding increase to the FDIC indemnification asset and FDIC loss sharing income in non-interest income. Below is a summary of the provision for loan losses for the periods indicated (in thousands): For the years ended



December 31,

2013 2012



2011

Provision for impairment on loans accounted for under ASC 310-30 $ 769$ 19,018$ 5,011 Provision for loan losses 3,527 8,977 14,991 Total provision for loan losses $ 4,296 $



27,995 $ 20,002

During 2013, 2012, and 2011 we recorded $0.8 million, $19.0 million, and $5.0 million, respectively, of provision for impairment of loans accounted for under ASC 310-30 in connection with our periodic re-measurements of expected cash flows. The net provision for impairment on loans accounted for under ASC 310-30 during 2013 reflect $1.3 million of provision reversals as a result of increased cash flows primarily across several commercial real estate and residential real estate pools. Decreases in expected future cash flows, which result in a charge to the provision for loan losses, were experienced by certain commercial, residential real estate, and agriculture pools and totaled $2.1 million. The provision recoupment of $1.3 million, when coupled with the impairment of $2.1 million related to decreased expected future cash flows, resulted in the net provision of $0.8 million for 2013. Of the $19.0 million in provision for impairment on loans accounted for under 310-30 in 2012, $14.9 million was covered by loss sharing agreements with the FDIC. These impairments were primarily driven by land and development, commercial real estate, and commercial construction pools. One land pool contributed $6.9 million, or 36.2%, of the total impairment for 2012 and one commercial real estate pool contributed $6.2 million, or 32.8%, of the total impairment for 2012. 70 -------------------------------------------------------------------------------- Non-Interest Income The table below details the components of non-interest income during 2013, 2012, and 2011 respectively (in thousands): For the years ended



December 31,

2013 2012



2011

FDIC indemnification asset amortization (18,960 ) $ (13,820 )$ (6,132 ) FDIC loss sharing income 2,811 12,069 1,410 Service charges 15,955 17,392 16,810 Bank card fees 9,956 9,699 7,611 Bargain purchase gain - - 60,520 Gain on sale of mortgages, net 1,358 1,214



1,103

Gain (loss) on sale of securities, net - 674 (645 ) Gain on previously charged-off acquired loans 1,339 4,298



5,902

OREO related write-ups and other income 4,817 2,941 545 Other non-interest income 2,901 2,912 2,362 Total non-interest income $ 20,177$ 37,379$ 89,486 Year ended 2013 Non-interest income for 2013 totaled $20.2 million compared to $37.4 million during 2012. We recognized amortization of $19.0 million during 2013 related to the FDIC indemnification asset. The amortization resulted from an increase in actual and expected cash flows on the underlying covered assets, resulting in lower expected reimbursements from the FDIC. The increase in expected cash flows from these underlying assets is reflected in increased accretion rates on covered loans and is being recognized over the remaining expected lives of the underlying covered loans as an adjustment to yield. FDIC loss sharing income represents the income recognized in connection with the actual reimbursement of costs/recoveries of resolution of covered assets from the FDIC. FDIC loss sharing income activity during 2013, 2012, and 2011 is as follows (in thousands): For the years ended December 31, 2013 2012 2011 Clawback liability amortization $ (1,259 )$ (1,377 )$ (845 ) Clawback liability remeasurement 65 100 (2,778 ) Reimbursement to FDIC for gain on sale of and income from covered OREO (5,235 ) (3,457 ) (1,130 ) Reimbursement to FDIC for recoveries (87 ) (3 ) (1,227 ) FDIC reimbursement of covered asset resolution cost 9,327 16,806 7,390 Total $ 2,811$ 12,069$ 1,410 Other FDIC loss sharing income in our statement of operations was primarily comprised of FDIC reimbursements of costs of resolution of covered assets of $9.3 million during 2013, offset with reimbursements to the FDIC for gains on sales of and income from covered OREO of $5.2 million. The activity in the FDIC loss sharing income line fluctuates based on specific loan and OREO workout circumstances and may not be consistent from period to period. Service charges represent various fees charged to clients for banking services, including fees such as non-sufficient funds ("NSF") charges and service charges on deposit accounts. Service charges decreased $1.4 million, or 8.3%, during 2013 compared to 2012. The decrease was largely due to declines in NSF charges as a result of the implementation of various risk mitigation strategies with respect to our checking account products. Bank card fees are comprised primarily of interchange fees on the debit cards that we have issued to our clients. Bank card fees totaled $10.0 million during 2013, as compared to $9.7 million during 2012. Gain on previously charged-off acquired loans represents recoveries on loans that were previously charged-off by the predecessor bank prior to takeover by the FDIC. During 2013 these gains totaled $1.3 million, compared to $4.3 million during the same period in the prior year. 71 -------------------------------------------------------------------------------- OREO related write-ups and other income include rental income and insurance proceeds received on OREO properties and write-ups to the fair-value of collateral that exceeded the loan balance at the time of foreclosure. During 2013, OREO related write-ups and other income totals $4.8 million compared to $2.9 million during 2012. The primary reason for the increase was a $1.9 million increase in collective rent income and insurance proceeds. Years ended 2012 and 2011 Non-interest income totaled $37.4 million and $89.5 million for the years ended 2012 and 2011, respectively. A significant component of non-interest income during 2011 was the bargain purchase gain of $60.5 million resulting from the Bank of Choice acquisition. We recognized amortization of $13.8 million during 2012 and $6.1 million during 2011, related to the FDIC indemnification asset. The amortization during the periods resulted from an increase in actual and expected cash flows on the underlying covered assets, resulting in lower expected reimbursements from the FDIC. Other FDIC loss sharing income in our statement of operations was primarily comprised of FDIC reimbursements of costs of resolution of covered assets of $16.8 million and $7.4 million during 2012 and 2011, respectively, offset with reimbursements to the FDIC for gains on sales of and income from covered OREO of $3.5 million and $1.1 million, coupled with the clawback liability remeasurement and clawback liability amortization of $1.3 million and $3.6 million, for the aforementioned periods. The activity in the FDIC loss sharing income line fluctuates based on specific loan and OREO workout circumstances and may not be consistent from period to period. Service charges of $17.4 million during 2012 represented the largest component of non-interest income at 46.5%. Service charges increased $0.6 million from 2011 to 2012, primarily due to the addition of Bank of Choice and Community Banks of Colorado in the last half of 2011. Bank card fees totaled $9.7 million and $7.6 million during 2012 and 2011, respectively. The increase was primarily due to the acquisitions of Bank of Choice and Community Banks of Colorado. Other bankcard fees include merchant services fees and credit card fees. Non-Interest Expense Our operating strategy is to capture the efficiencies available by consolidating the operations of our acquisitions and several of our key operating objectives affect our non-interest expense. We completed the conversion of Bank Midwest and Hillcrest Bank to our new data processing platform during the second and fourth quarters of 2011, respectively. The conversions of Community Banks of Colorado and Bank of Choice acquisitions to our data processing platform were completed in May 2012 and July 2012, respectively. The table below details non-interest expense for the periods presented (in thousands): 72 --------------------------------------------------------------------------------

For the years ended December 31, 2013 2012 2011 Salaries and benefits $ 90,002$ 94,111$ 67,480 Occupancy and equipment 24,700 20,558 17,975 Professional fees 3,734 11,156 14,250 Telecommunications and data processing 13,073 14,857 12,905 Marketing and business development 5,280 5,540 6,034 Supplies and printing 1,575 2,967 1,387 Other real estate owned expenses 10,957 20,313 7,064 Problem loan expenses 5,644 8,532 4,389 Intangible asset amortization 5,346 5,344 4,359 FDIC deposit insurance 4,122 4,731 4,550 ATM/debit card expenses 4,262 4,269 2,892 Banking center closure related expenses 3,389 - - Initial public offering related expenses - 7,974 - Acquisition related costs - 870 4,935 Loss (gain) from change in fair value of warrant liability 820 (1,385 ) (56 ) Other non-interest expense 11,061 9,761 7,374 Total non-interest expense $ 183,965$ 209,598$ 155,538 Year ended 2013 The largest component of non-interest expense is salaries and benefits. Salaries and benefits totaled $90.0 million during 2013, compared to $94.1 million for 2012. The 4.4% decrease is primarily due to an $8.2 million decrease in stock-based compensation expense during 2013 compared to 2012. Stock-based compensation expense during 2012 was elevated because we incurred $4.9 million of stock-based compensation expense related to our initial public offering. Occupancy and equipment expense totaled $24.7 million for 2013, an increase of $4.1 million over 2012. The increase was driven by an increase in depreciation expense as a result of the purchase and subsequent depreciation of the premises and equipment purchased from the FDIC in the first half of 2012 related to our Bank of Choice and Community Banks of Colorado acquisitions. Professional fees totaled $3.7 million during 2013 and decreased $7.4 million from 2012. Professional fees were elevated during 2012 primarily due to professional fees incurred in conjunction with our acquisitions of Bank of Choice in the third quarter of 2011 and Community Banks of Colorado during the fourth quarter of 2011. Additionally, we have outsourced fewer professional functions as we have built out our internal management functions. Telecommunications and data processing expense totaled $13.1 million during 2013, compared to $14.9 million for 2012, a decrease of $1.8 million. During 2012, telecommunications and data processing expense was elevated due to the conversions of Bank of Choice and Community Banks of Colorado to our data processing platforms. Significant components of our non-interest expense are our problem loan expenses and OREO related expenses. We incur these expenses in connection with the resolution process of our acquired troubled loan portfolios. During 2013, we incurred $11.0 million of OREO related expenses and $5.6 million of problem loan expenses. Of the collective OREO and problem loan expenses incurred during 2013, $10.3 million were covered by loss sharing agreements with the FDIC. The losses on covered assets that are reimbursable from the FDIC are based on the book value of the related covered assets as determined by the FDIC at the date of acquisition, and the FDIC's book value does not necessarily correlate with our book value of the same assets. This difference is primarily because we recorded the OREO at fair value at the date of acquisition in accordance with applicable accounting guidance. Any losses recorded after the acquisition date are recorded at the full-loss value in other non-interest expense, and any related reimbursement from the FDIC is recorded in non-interest income as FDIC loss sharing income. On September 30, 2013, the Company announced plans to integrate 32 limited-service retirement center locations and exit four banking centers as of December 31, 2013. Included in the 2013 operating results are $3.4 million of expenses in connection with the closures, including $3.3 million related to facilities expense. Valuation adjustments to banking center properties and 73 -------------------------------------------------------------------------------- fixed assets account for $2.5 million of the facilities expense and $0.8 million of the facilities expense relates to lease costs. The Company anticipates expense savings of approximately $2.4 million as a result of the closures. Years ended 2012 and 2011 Operating results for 2012 included non-interest expense of $209.6 million, compared to $155.5 million for 2011. The primary reason for the increase in non-interest expense was the recognition of a full year of non-interest expenses, during 2012, related to Bank of Choice and Community Banks of Colorado, after the acquisitions of these banks during the second half of 2011. In addition, during 2012, we incurred certain expenses in connection with our initial public offering that significantly impacted our earnings. We did not sell new shares in our initial public offering, and as a result, none of those expenses were offset against any proceeds, but were expensed. Such expenses included underwriting discounts and related fees, listing fees on the New York Stock Exchange and related registration and filing fees, legal and account expenses. These expenses totaled approximately $8.0 million during 2012. Additionally, we incurred stock-based compensation on awards that had a public listing vesting requirement. As discussed below, during 2012, we incurred $4.9 million of stock-based compensation that had previously been deferred. Exclusive of stock-based compensation expense noted below, salaries and benefits totaled $81.0 million and $54.9 million in 2012 and 2011, respectively. Increases reflect staff added as part of the Bank of Choice and Community Banks of Colorado acquisitions in the second half of 2011 along with the further build out of sales teams and corporate and operating functions during 2011 and 2012. Salaries and benefits included $13.1 million and $12.6 million of stock-based compensation expense during 2012 and 2011, respectively. The expense associated with stock-based compensation is recognized by tranche over the requisite service period. Occupancy and equipment expense totaled $20.6 million for 2012, and increased $2.6 million over 2011. The increase was driven by the impact of our Bank of Choice and Community Banks of Colorado acquisitions in the second half of 2011 and was primarily the result of increased depreciation expense on the premises and equipment associated with those acquisitions. Professional fees totaled $11.2 million during 2012 and decreased $3.1 million from 2011. Professional fees for 2011 included expenses related to the accounting and administration of the FDIC loss share agreements, the creation of the new operating platform and the merger of Hillcrest Bank into NBH Bank. The decrease in professional fees between 2012 and 2011 was also the result of adding full-time staff to perform some of the functions that were being performed by consultants. Telecommunications and data processing expense totaled $14.9 million for the year ended 2012, compared to $12.9 million during the year ended 2011, an increase of $2.0 million. These increases were primarily due to the impact of our Bank of Choice and Community Banks of Colorado acquisitions in the second half of 2011. Telecommunications and data processing expenses contain both fixed costs and volume-based components driven by the number of client accounts. While there is a cost associated with each additional account, additional efficiencies are available due to a lower incremental cost per account at higher levels of account volume. During 2012, we incurred $20.3 million of OREO related expenses and $8.5 million of problem loan expenses, compared to $7.1 million of OREO related expenses and $4.4 million of problem loan expenses during 2011. These increases were primarily due to acquisitions of problem loans and OREO from Bank of Choice and Community Banks of Colorado in the second half of 2011. Of the $28.8 million in collective OREO and problem loan expenses incurred during 2012, $15.0 million was covered by loss sharing agreements with the FDIC. During 2011, primarily all of the collective $11.5 million OREO and problem loan expenses were covered by loss sharing agreements with the FDIC. Income taxes Income taxes are accounted for in accordance with ASC 740, Income Taxes. Under this guidance, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. ASC 740 requires the establishment of a valuation allowance against the net deferred tax asset unless it is more-likely-than-not that the tax benefit of the deferred tax asset will be realized. For purposes of projecting whether the deferred tax asset will be realized, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results, or the ability to implement tax planning strategies varies, adjustments to the carrying value of the deferred tax assets may be required. ASC 740 also requires the projected realization of tax benefits related to uncertain tax positions to be evaluated based upon the likelihood of successfully defending those positions. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Interest and penalties on uncertain tax positions are recognized as a 74 -------------------------------------------------------------------------------- component of income tax expense. If our assessment of whether a tax position meets or no longer meets the more likely than not threshold were to change, adjustments to income tax benefits may be required. Income tax expense totaled $4.0 million for 2013, as compared to $4.6 million for 2012, and $27.4 million for 2011. These amounts equate to effective tax rates of 36.3%, 113.4%, and 39.5% for the respective periods. The decrease in the effective tax rate for 2013 compared to 2012 is primarily attributable to the non-deductibility of $8.0 million of initial public offering related charges incurred in 2012. Additional information regarding income taxes can be found in note 21 of our consolidated financial statements. The increase in the effective tax rate for 2012 compared to 2011 is primarily attributable to $8.0 million of expenses associated with the initial public offering of our stock, which were non-deductible for income tax purposes. These expenses had a substantial impact on our net loss for 2012 and, given that no income tax benefit was recorded against these expenses, income tax expense as a percentage of income before income taxes in 2012 is significantly higher than in 2011. Our marginal tax rate (the rate we pay on each incremental dollar of earnings) is approximately 39%. However, our effective tax rate (income tax expense divided by income before income taxes) for a given period is driven largely by income and expense items that are non-taxable or non-deductible in the calculation of income tax expense. Due to the impact of the non-deductible expenses discussed above, our effective tax rate of 113.4% at December 31, 2012 is inflated and therefore not comparable to prior years. We expect our effective tax rate to be more consistent with our marginal tax rate in future years. In September 2013, the Internal Revenue Service enacted final guidance regarding the deduction and capitalization of expenditures related to tangible property ("tangible property regulations"). The tangible property regulations clarify and expand sections 162(a) and 263(a) of the Internal Revenue Code which relate to amounts paid to acquire, produce, or improve tangible property. Additionally, the tangible property regulations provide final guidance under section 167 of the Internal Revenue Code regarding accounting for, and retirement of, depreciable property and regulations under section 168 relating to the accounting for property under the Modified Accelerated Cost Recovery System. The tangible property regulations affect all taxpayers that acquire, produce, or improve tangible property, which includes the Company, and generally apply to taxable years beginning on or after January 1, 2014, which will impact the Company's year ending December 31, 2014. The Company has evaluated the tangible property regulations and has determined the regulations will not have a material impact on the Company's financial condition or results of operations. 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. Liquidity is represented by our cash and cash equivalents, securities purchased under agreements to resell and pledgeable investment securities, and is detailed in the table below as of December 31, 2013 and December 31, 2012 (in thousands): December 31, 2013 December 31, 2012 Cash and due from banks $ 67,420 $ 90,505 Due from Federal Reserve Bank of Kansas City 107,894 579,267 Interest bearing bank deposits 14,146 99,408 Pledgeable investment securities, at fair value 2,177,239 2,084,046 Total $ 2,366,699 $ 2,853,226 Total on-balance sheet liquidity decreased $486.5 million during 2013, but remained very strong at $2.4 billion at December 31, 2013. The decrease was largely due to a decrease in balances at the Federal Reserve Bank, offset by purchases of mortgage-backed securities. Aside from the deployment of our capital and cash received from acquisitions, our primary sources of funds are deposits from clients, prepayments and maturities of loans and investment securities, the sale of investment securities, reimbursement of covered asset losses from the FDIC and the funds provided from operations. During 2013, we entered into a master repurchase agreement with a large financial institution and we anticipate that, through this agreement, we would have access to a significant amount of liquidity. Additionally, 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. 75 -------------------------------------------------------------------------------- Our primary uses of funds are loan originations, investment security purchases, withdrawals of deposits, settlement of repurchase agreements, capital expenditures, operating expenses, debt payments, particularly subsequent to acquisitions and share repurchases. For additional information regarding our operating, investing, and financing cash flows, see our consolidated statements of cash flows in the accompanying consolidated financial statements. Exclusive from the investing activities related to acquisitions, our primary investing activities are originations and pay-offs and pay downs of loans and sales and purchases of investment securities. At December 31, 2013, pledgeable investment securities represented our largest 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 $2.4 billion at December 31, 2013 inclusive of pre-tax net unrealized losses of $30.7 million on the available-for-sale securities portfolio. Additionally, our held-to-maturity securities portfolio had $5.5 million of unrealized losses at December 31, 2013. The gross unrealized losses are detailed in note 5 of our consolidated financial statements for 2013. As of December 31, 2013, 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, and prime auto asset-backed securities. 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. Our capital outlays were $6.8 million during 2013, which was primarily for the build out of our corporate headquarters in Greenwood Village, Colorado, and the purchase of software that will aid our associates as we grow our business. During 2012, the $41.1 million of capital outlays were related to the development and implementation of our new operating platform and the purchase of banking center assets from the FDIC subsequent to our acquisitions. At present, financing activities primarily consist of changes in repurchase agreements and deposits, in addition to the payment of dividends and the repurchase of our common stock. Maturing time deposits represent a potential use of funds, as these depositors have the option to move the funds without penalty. As of December 31, 2013, $1.0 billion 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, we expect to replace a significant portion of those maturing time deposits with transaction deposits and market-rate time deposits. In July 2011, we joined the FHLB of Des Moines and since have purchased $6.7 million of FHLB stock as is required by the membership agreement. Through this relationship, we have pledged qualifying loans and can obtain additional liquidity through FHLB advances. NBH Bank is subject to specific dividend restrictions pursuant to the Operating Agreement with the OCC. Since the fourth quarter of 2013, the OCC Operating Agreement has permitted us to seek the OCC's non-objection to reduce capital levels at the Bank and to pay dividends to the holding company. In October 2013, NBH Bank received approval and a waiver from the OCC under the Operating Agreement to permanently reduce the bank's capital through a $313.0 million cash dividend that was paid to the holding company. At December 31, 2013, the holding company sources of funds were limited to cash and cash equivalents on hand, which totaled $252.8 million. See note 27 of our consolidated financial statements for additional information. The holding company may seek to borrow funds and raise capital in the future, the success and terms of which will be subject to market conditions and other factors. Our shareholders' equity is impacted by the retention of earnings, changes in unrealized gains on securities, net of tax, share repurchases and the payment of dividends. We have agreed to maintain capital levels of at least 10% tier 1 leverage ratio, 11% tier 1 risk-based capital ratio and 12% total risk-based capital ratio at NBH Bank under the OCC Operating Agreement. At December 31, 2013 and December 31, 2012, NBH Bank and the consolidated holding company exceeded all capital requirements to which they were subject. Given our high capital levels and the market price of our stock at varying times during the year, during 2013, we opportunistically repurchased 7,421,179 shares, representing a 14.2% reduction of our total shares outstanding. These repurchases were made under two different repurchase authorizations and through privately negotiated transactions at a weighted average price of $19.77 per share. Upon repurchase, 1,114,628 of these shares were retired and 6,306,551 were placed into treasury shares. On January 23, 2014, the Board of Directors authorized a new program to repurchase up to $50.0 million of our common stock through December 31, 2014. This authorization replaced any remaining repurchase authorization under previous plans. Under the new program, the shares will be acquired from time to time either in the open market or in privately negotiated transactions in accordance with applicable regulations of the SEC. Additionally, on February 27, 2014, our Board of Directors declared a quarterly dividend of $0.05 per share, payable on March 21, 2014 to shareholders of record on March 11, 2014. We believe that our repurchases could serve to offset any future share issuances for future acquisitions. 76 -------------------------------------------------------------------------------- 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 from direction of the Board of Directors. The Asset Liability Committee meets monthly to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use 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 December 31, 2013. During 2013, we decreased our asset sensitivity as a result of the declines in cash balances relative to the size of the balance sheet, however barring any significant changes in our balance sheet, we are anticipating this to level-out as we are no longer carrying the high levels of cash as a result of increases in loan and investment balances, the share repurchases made during 2013 and the run-off of time deposits. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 50 basis point decrease in interest rates on net interest income based on the interest rate risk model at December 31, 2013 and December 31, 2012: Hypothetical Shift in Interest % Change in Projected Net Interest Income Rates (in bps) December 31, 2013 December 31, 2012 200 4.09% 12.84% 100 2.32% 7.43% -50 -1.11% -2.88% 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. The federal funds rate is the basis for overnight funding and the market expectations for changes in the federal funds rate influence the yield curve. The federal funds rate is currently at 0.25% and has been since December 2008. Should interest rates decline further, net interest margin and net interest income would be compressed given the current mix of rate sensitive assets and liabilities. As part of the asset/liability management strategy to manage primary market risk exposures expected to be in effect in future reporting periods, management has emphasized the origination of shorter duration loans as well as variable rate loans to limit the negative exposure to a rate increase. The strategy with respect to liabilities has been to emphasize transaction accounts, particularly non-interest or low interest bearing non-maturing deposit accounts which are less sensitive to changes in interest rates. In response to this strategy, non-maturing deposit accounts have been steadily increasing and totaled 61.0% of total deposits at December 31, 2013 compared to 58.3% at December 31, 2012. We currently have no brokered time deposits and 77 -------------------------------------------------------------------------------- intend to continue to focus on our strategy of increasing non-interest or low interest bearing non-maturing deposit accounts and accordingly, we have no current plans to use brokered deposits in the near future. 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 December 31, 2013 and December 31, 2012, we had loan commitments totaling $383.9 million and $300.3 million, respectively, and standby letters of credit that totaled $5.9 million and $10.7 million, respectively. Unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon. We do not anticipate any material losses arising from commitments or contingent liabilities and we do not believe that there are any material commitments to extend credit that represent risks of an unusual nature. Contractual Obligations In addition to the financing commitments detailed above under "Off-Balance Sheet Activities," in the normal course of business, we enter into contractual obligations that require future cash settlement. The following table summarizes the contractual cash obligations as of December 31, 2013 and the expected timing of those payments (in thousands): Less than 1



More than 5

year 1-3 years 3-5 years years Total



Long-term debt obligations $ - $ - $ -

$ - $ - Capital lease obligations - - - - - Operating lease obligations 3,745 6,596 4,605 11,871 26,817 Purchase obligations 7,524 10,703 4,027 - 22,254 Time deposits 1,022,960 428,390 38,881 5,456 1,495,687 Clawback liability - - - 32,465 32,465 Total $ 1,034,229$ 445,689$ 47,513$ 49,792$ 1,577,223 Impact of Inflation and Changing Prices The primary impact of inflation on our operations is reflected in increasing operating costs and is reflected in non-interest expense. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, changes in interest rates have a more significant impact on our performance than do changes in the general rate of inflation and changes in prices. Interest rate changes do not necessarily move in the same direction, nor have the same magnitude, as changes in the prices of goods and services. Although not as critical to the banking industry as many other industries, inflationary factors may have some impact on our ability to grow, total assets, earnings, and capital levels. We do not expect inflation to be a significant factor in the near future.


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