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| GBNK > SEC Filings for GBNK > Form 10-K on 13-Feb-2009 | All Recent SEC Filings |
13-Feb-2009
Annual Report
This section should be read in conjunction with the disclosure regarding "Forward-Looking Statements and Factors that Could Affect Future Results" set forth in the beginning of Part I of this report, as well as the discussion set forth in "Item 1A. Risk Factors" and "Item 8. Financial Statements and Supplementary Data."
We are a bank holding company providing banking and other financial services throughout our targeted Colorado markets to consumers and to small- and medium-sized businesses, including the owners and employees of those businesses. We offer an array of banking products and services to the communities we serve, including accepting time and demand deposits and originating commercial loans (including energy loans), real estate loans, Small Business Administration guaranteed loans and consumer loans. We derive our income primarily from interest received on real estate related loans, commercial loans and leases and consumer loans and, to a lesser extent, interest on investment securities, fees received in connection with servicing loan and deposit accounts and fees from trust services. Our major operating expenses are the interest we pay on deposits and borrowings and general operating expenses. We rely primarily on locally generated deposits to provide us with funds for making loans.
We are subject to competition from other financial institutions and our operating results, like those of other financial institutions operating exclusively or primarily in Colorado, are significantly influenced by economic conditions in Colorado, including the strength of the real estate market. In addition, both the fiscal and regulatory policies of the federal government and regulatory authorities that govern financial institutions and market interest rates also impact our financial condition, results of operations and cash flows.
As detailed in Item 1-Business, Centennial Bank Holdings, Inc. became Guaranty Bancorp effective May 12, 2008. Guaranty Bancorp has a single bank subsidiary, Guaranty Bank and Trust Company. This structure is a result of a combination of four separate acquisitions and two divestitures as follows:
Acquisitions Date of
Entity Completion
Centennial Bank Holdings, Inc. July 16,
(Predecessor) 2004
- Centennial Bank of the West
(merged into Guaranty Bank on
January 1, 2008)
Guaranty Corporation December 31,
2004
- Guaranty Bank and Trust
Company
- First National Bank of
Strasburg (merged into
Guaranty Bank on April 14,
2005)
- Collegiate Peaks Bank
(divested on November 1,
2006)
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Acquisitions Date of
Entity Completion
First MainStreet Financial, Ltd. October 1,
2005
- First MainStreet Bank, N.A.
(merged into Centennial Bank
of the West)
- First MainStreet
Insurance, Ltd. (divested on
March 1, 2006)
Foothills Bank (merged into Guaranty November 1,
Bank) 2005
Divestitures
Entity
First MainStreet Insurance, Ltd. March 1,
(asset sale) 2006
Collegiate Peaks Bank November 1,
2006
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Application of Critical Accounting Policies and Accounting Estimates
Our accounting policies are integral to understanding the financial results reported. Our most complex accounting policies require management's judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and consistently applied from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies that we believe are critical or involve significant management judgment.
Allowance for Loan Losses
The loan portfolio is the largest category of assets on our balance sheet. We determine probable incurred losses inherent in our loan portfolio and establish an allowance for those losses by considering factors including historical loss rates, expected cash flows and estimated collateral values. In assessing these factors, we use organizational history and experience with credit decisions and related outcomes. The allowance for loan losses represents our best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. We evaluate our allowance for loan losses quarterly. If our underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for loan losses is adjusted.
We estimate the appropriate level of allowance for loan losses by separately evaluating impaired and nonimpaired loans. A specific allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used to assign an allowance to a nonimpaired loan is more subjective. Generally, the allowance assigned to nonimpaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics, adjusted for qualitative factors including the volume and severity of identified classified loans, changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets. Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is continually assessed and adjusted when appropriate. Notwithstanding these procedures, there still exists the possibility that our assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for loan losses would be required.
We estimate the appropriate level of loan loss allowance by conducting a detailed review of a number of smaller portfolio segments that comprise our loan portfolios. We segment the loan portfolio
into as many components as practical. Each component would normally have similar characteristics, such as risk classification, past due status, type of loan, industry or collateral. The risk profile of certain segments of the loan portfolio may be improving, while the risk profile of others may be deteriorating. As a result, changes in the appropriate level of the allowance for different segments may offset one another. Adjustments to the allowance represent the aggregate impact from the analysis of all loan segments.
Other Real Estate Owned and Foreclosed Assets
Other real estate owned or other foreclosed assets acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest income.
Investment in Debt and Equity Securities
We classify our investments in debt and equity securities as either held-to-maturity or available-for-sale in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Securities classified as held-to-maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows. If the estimated value of investments is less than the cost or amortized cost, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and we determine that the impairment is other-than-temporary, we expense the impairment of the investment in the period in which the event or change occurred.
Deferred Income Tax Assets/Liabilities
Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based on the historical level of our taxable income, estimates of our future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on our future profitability. If we were to experience net operating losses for tax purposes in a future period, the realization of our deferred tax assets would be evaluated for a potential valuation reserve. Although we had a loss for financial reporting purposes in 2007 and 2008, for income tax purposes the Company reported taxable income and paid federal and state income tax.
Additionally, the Company reviews its uncertain tax positions annually under FASB Interpretation 48, Accounting for Uncertainty in Income Taxes. An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount actually recognized is the largest amount of tax
benefit that is greater than 50% likely to be recognized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. A significant amount of judgment is applied to determine both whether the tax position meets the "more likely than not" test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.
Impairment of Goodwill and Intangible Assets
Core deposit and customer relationships, which are intangible assets with a finite life, are recorded on our balance sheets. These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated useful lives of up to 15 years. Core deposit intangible assets, with finite lives will be tested for impairment when changes in events or circumstances indicate that its carrying amount may not be recoverable. Core deposits were tested for impairment during 2008 and 2007, as part of the goodwill impairment test and no impairment was deemed necessary.
As a result of our acquisition activity, goodwill, an intangible asset with an indefinite life, was reflected on our balance sheet in prior periods. Goodwill was evaluated for impairment annually, unless there were factors present that indicated a potential impairment, in which case, the goodwill impairment test was performed more frequently than annually.
This discussion has highlighted those accounting policies that we consider to be critical to our financial reporting process. However, all the accounting policies are important, and therefore you are encouraged to review each of the policies included in Note 2 to "Notes to Consolidated Financial Statements" in Item 8, "Financial Statements and Supplementary Data", to gain a better understanding of how our financial performance is measured and reported.
RESULTS OF OPERATIONS
The following table presents certain key aspects of our performance. The comparability of these financial measures is impacted by the 2006 divestiture of Collegiate Peaks Bank.
Table 1
Change - Increase
Year Ended December 31, (Decrease)
2008 2007 2006 2008 v 2007 2007 v 2006
(In thousands, except share data and ratios)
Results of Operations:
Interest income $ 121,312 $ 163,689 $ 173,781 $ (42,377 ) $ (10,092 )
Interest expense 41,750 61,440 57,584 19,690 (3,856 )
Net interest income 79,562 102,249 116,197 (22,687 ) (13,948 )
Provision for loan losses 33,775 24,666 4,290 (9,109 ) (20,376 )
Net interest income after
provision for loan losses 45,787 77,583 111,907 (31,796 ) (34,324 )
Noninterest income 10,620 10,696 12,717 (76 ) (2,021 )
Noninterest expense 319,656 226,556 90,908 (93,100 ) (135,648 )
Income (loss) before income
taxes (263,249 ) (138,277 ) 33,716 (124,972 ) (171,993 )
Income tax expense (6,513 ) (185 ) 11,286 6,328 11,471
Income (loss) from continuing
operations (256,736 ) (138,092 ) 22,430 (118,644 ) (160,522 )
Income from discontinued
operations, net of tax - - 1,988 - (1,988 )
Net income (loss) $ (256,736 ) $ (138,092 ) $ 24,418 $ (118,644 ) $ (162,510 )
Share Data:
Basic earnings (loss) per
share $ (5.03 ) $ (2.60 ) $ 0.42 $ (2.43 ) $ (3.02 )
Diluted earnings (loss) per
share $ (5.03 ) $ (2.60 ) $ 0.42 $ (2.43 ) $ (3.02 )
Average shares outstanding 51,044,372 53,109,307 57,539,996 (2,064,935 ) (4,430,689 )
Diluted average shares
outstanding 51,044,372 53,109,307 57,636,355 (2,064,935 ) (4,527,048 )
Selected Ratios:
Total risk based capital 10.61 % 10.87 % 11.17 % (0.26 )% (0.30 )%
Nonperforming assets to total
assets 2.63 % 0.98 % 1.25 % 1.65 % (0.27 )%
Allowance for loan losses to
nonperforming loans 82.06 % 129.62 % 84.91 % (47.56 )% 44.71 %
Allowance for loan losses to
loans, net of unearned
discount 2.46 % 1.44 % 1.43 % 1.02 % 0.01 %
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2008 Compared to 2007
There was a net loss of $256.7 million for the year ended December 31, 2008 compared to a net loss of $138.1 million for the same period in 2007. Both years were affected by goodwill impairment charges of $250.7 million and $142.2 million in 2008 and 2007, respectively. Other changes in net income were a $22.7 million decrease in net interest income, primarily as a result of the Company being asset sensitive and interest rates being significantly lower in 2008 as compared to 2007. The increase in provision for loan losses of $9.1 million was primarily due to the increase in non-performing loans and the deterioration of the economic conditions during 2008 as compared to 2007. This is highlighted by a 102 basis point increase in our allowance for loan losses to loans, net to 2.46% at December 31, 2008 as compared to 1.44% at December 31, 2007. Without the goodwill impairment charges in both years, noninterest expense was $68.9 million and $84.3 million in 2008 and 2007, respectively. The decrease in noninterest expense, excluding goodwill impairment charges, is primarily a result of an $8.1 million decrease in salaries and employee benefits, as well as a $6.5 million decrease in other general and administrative expenses, as discussed below under noninterest expense.
Our goodwill and other intangible asset balances caused a proportional reduction in our return on average assets and return on average equity when compared to entities with minimal intangible asset balances.
Goodwill and other intangible assets have always been excluded from regulatory capital, and therefore had no impact on total risk based capital year over year. The ending total risk capital ratio decreased by 26 basis points to 10.61% at December 31, 2008 as compared to 10.87% at December 31, 2007. This decrease is a result of the significant provision for loan losses taken in 2008, as well as a $44.7 million increase in loans, net of unearned discount during 2008.
2007 Compared to 2006
The Company had a net loss of $138.1 million for the year ended December 31, 2007 compared to net income of $24.4 million for the year ended December 31, 2006. The primary reasons for the decrease in net income year-over-year were due to a $142.2 million goodwill impairment charge, as well as a $20.4 million increase to the provision for loan losses. Additionally, there was a $6.5 million charge recorded in 2007 for the settlement of a lawsuit, as discussed under noninterest expense below.
Net Interest Income and Net Interest Margin
Net interest income is our primary source of income and represents the difference between income on interest-earning assets and expense on interest-bearing liabilities.
The following table summarizes the Company's net interest income and related spread and margin for the periods indicated:
Table 2
Year Ended December 31,
2008 2007 2006
(Dollars in thousands)
Net interest income $ 79,562 $ 102,249 $ 116,197
Interest rate spread 3.35 % 3.94 % 4.48 %
Net interest margin 4.05 % 4.93 % 5.35 %
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The following table presents, for the years indicated, average assets, liabilities and stockholders' equity, as well as the net interest income from average interest-earning assets and the resultant yields expressed in percentages. Non-accrual loans are included in the calculation of average loans and leases while non-accrued interest thereon, is excluded from the computation of yields earned.
Table 3
Year Ended December 31,
2008 2007
Interest Average Interest Average
Average Income or Yield or Average Income or Yield or
Balance Expense Cost Balance Expense Cost
(Dollars in thousands)
ASSETS:
Interest-earning assets:
Gross loans, net of
unearned fees(1)(2)(3) $ 1,797,357 $ 112,844 6.28 % $ 1,871,703 $ 153,214 8.19 %
Investment securities(1)
Taxable 53,215 2,991 5.62 % 52,166 2,515 4.82 %
Tax-exempt 69,830 3,404 4.88 % 104,592 5,193 4.97 %
Bank Stocks(4) 31,503 1,647 5.23 % 32,091 1,853 5.78 %
Other earning assets 14,763 426 2.89 % 13,017 914 7.02 %
Total interest-earning
assets 1,966,668 121,312 6.17 % 2,073,569 163,689 7.89 %
Non-earning assets:
Cash and due from banks 36,846 48,283
Other assets 291,594 490,121
Total assets $ 2,295,108 $ 2,611,973
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LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Deposits:
Interest-bearing
demand $ 150,210 $ 763 0.51 % $ 157,806 $ 1,009 0.64 %
Money market 507,610 9,968 1.96 % 638,295 23,583 3.69 %
Savings 70,243 397 0.56 % 77,602 602 0.78 %
Time certificates of
deposit 514,362 21,434 4.17 % 562,075 28,400 5.05 %
Total
interest-bearing
deposits 1,242,425 32,562 2.62 % 1,435,778 53,594 3.73 %
Borrowings:
Repurchase agreements 18,698 390 2.09 % 29,104 1,346 4.62 %
Federal funds
purchased 6,181 137 2.21 % 741 44 5.93 %
Subordinated
debentures 41,239 3,328 8.07 % 41,239 3,756 9.11 %
Borrowings 170,038 5,333 3.14 % 47,895 2,700 5.64 %
Total
interest-bearing
liabilities 1,478,581 41,750 2.82 % 1,554,757 61,440 3.95 %
Noninterest bearing
liabilities:
Demand deposits 440,359 476,876
Other liabilities 19,522 28,808
Total liabilities 1,938,462 2,060,441
Stockholders' Equity 356,646 551,532
Total liabilities and
stockholders' equity $ 2,295,108 $ 2,611,973
Net interest income $ 79,562 $ 102,249
Net interest margin 4.05 % 4.93 %
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º (2)
º The loan average balances include nonaccrual loans.
º (3)
º Net loan fees of $3.4 million and $5.2 million for the year ended
December 31, 2008 and 2007 are included in the yield computation.
º (4)
º Includes Bankers' Bank of the West stock, Federal Agricultural Mortgage
Corporation (Farmer Mac) stock, Federal Reserve Bank stock and Federal Home
Loan Bank stock.
The following table presents the dollar amount of changes in interest income
and interest expense for the major categories of our interest-earning assets and
interest-bearing liabilities. Information is provided for each category of
interest-earning assets and interest-bearing liabilities with respect to
(i) changes attributable to changes in volume (i.e., changes in average balances
multiplied by the prior-period average rate) and (ii) changes attributable to
rate (i.e., changes in average rate multiplied by prior-period average
balances). For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.
Table 4
Year Ended December 31, 2008
Compared to
Year Ended December 31, 2007
Net Change Rate Volume
(In thousands)
Interest income:
Gross Loans, net of unearned fees $ (40,370 ) $ (34,491 ) $ (5,879 )
Investment Securities
Taxable 476 424 52
Tax-exempt (1,789 ) (93 ) (1,696 )
Bank Stocks (206 ) (173 ) (33 )
Other earning assets (488 ) (632 ) 144
Total interest income (42,377 ) (34,965 ) (7,412 )
Interest expense:
Deposits:
Interest-bearing demand (246 ) (199 ) (47 )
Money market (13,615 ) (9,475 ) (4,140 )
Savings (205 ) (152 ) (53 )
Time certificates of deposit (6,966 ) (4,693 ) (2,273 )
. . .
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