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| GBNK > SEC Filings for GBNK > Form 10-Q on 31-Jul-2009 | All Recent SEC Filings |
31-Jul-2009
Quarterly Report
This MD&A should be read together with our unaudited Condensed Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report, Part II, Item 1A of this Report, and Items 1, 1A, 6, 7, 7A and 8 of our 2008 Annual Report on Form 10-K. Also, please see the disclosure in the "Forward-Looking Statements and Factors that Could Affect Future Results" section in this Report for certain other factors that could cause actual results or future events to differ materially from those anticipated in the forward-looking statements included in this Report or from historical performance.
Overview
Guaranty Bancorp is a bank holding company with its principal business to serve as a holding company to its bank subsidiary. Unless the context requires otherwise, the terms "Company," "us," "we," and "our" refers to Guaranty Bancorp on a consolidated basis. References to the "Bank" refer to Guaranty Bank and Trust Company, our bank subsidiary.
On May 6, 2008, the stockholders of the Company approved the proposal to change the name of the holding company from Centennial Bank Holdings, Inc. to Guaranty Bancorp. This name change was effective on May 12, 2008.
In May 2009, the Company signed definitive agreements to sell up to $60 million of capital in the form of preferred stock, subject to stockholder and regulatory approvals and customary closing conditions. At a Special Meeting of Stockholders held on June 29, 2009, our stockholders approved: (1) the issuance of up to 60,000 shares of 9% mandatorily convertible preferred stock and (2) our proposed Second Amended and Restated Certificate of Incorporation, which would increase the total authorized number of shares of our common stock from 100,000,000 to 150,000,000 and establish a class of non-voting stock. On July 27, 2009, each of the principal investors obtained the necessary regulatory approvals or non-objections. The closing is expected to occur on or about the week of August 10, 2009, subject to the remaining customary closing conditions.
Through our banking subsidiary, we provide 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. These banking products and services include accepting time and demand deposits, originating commercial loans including energy loans, real estate loans, including construction loans, Small Business Administration guaranteed loans and consumer loans. We derive our income primarily from interest, including loan origination fees, received on real estate-related loans, commercial loans and leases and consumer loans and, to a lesser extent, interest on investment securities and other fees received in connection with servicing loan and deposit accounts. 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.
Earnings Summary
Table 1 summarizes certain key financial results for the periods indicated:
Table 1
Three Months Ended June 30, Six Months Ended June 30,
Change - Change -
Favorable Favorable
2009 2008 (Unfavorable) 2009 2008 (Unfavorable)
(In thousands, except share data and ratios)
Results of Operations:
Interest income $ 24,775 $ 30,216 $ (5,441 ) $ 49,635 $ 63,619 $ (13,984 )
Interest expense 8,915 9,825 910 18,057 21,578 3,521
Net interest income 15,860 20,391 (4,531 ) 31,578 42,041 (10,463 )
Provision for loan
losses 18,605 900 (17,705 ) 21,110 1,775 (19,335 )
Net interest income
after provision for loan
losses (2,745 ) 19,491 (22,236 ) 10,468 40,266 (29,798 )
Noninterest income 2,627 3,132 (505 ) 5,542 5,647 (105 )
Noninterest expense 17,714 19,697 1,983 33,195 38,407 5,212
Income (loss) before
income taxes (17,832 ) 2,926 (20,758 ) (17,185 ) 7,506 (24,691 )
Income tax expense (6,975 ) 901 7,876 (6,764 ) 2,236 9,000
Net income (loss) $ (10,857 ) $ 2,025 $ (12,882 ) $ (10,421 ) $ 5,270 $ (15,691 )
Share Data:
Basic earnings (loss)
per share $ (0.21 ) $ 0.04 $ (0.25 ) $ (0.20 ) $ 0.10 $ (0.30 )
Diluted earnings (loss)
per share $ (0.21 ) $ 0.04 $ (0.25 ) $ (0.20 ) $ 0.10 $ (0.30 )
Average shares
outstanding 51,339,542 51,004,472 335,070 51,312,847 50,996,350 316,497
Diluted average shares
outstanding 51,339,542 51,091,042 248,500 51,312,847 51,086,578 226,269
Change -
June 30, December 31, Favorable
2009 2008 (Unfavorable)
Selected Balance Sheet Ratios:
Total risk based capital 10.73 % 10.61 % 0.12 %
Nonperforming loans to loans, net of
unearned discount 3.34 % 3.00 % (0.34 )%
Allowance for loan losses to loans, net
of unearned discount 2.61 % 2.46 % 0.15 %
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The $10.9 million second quarter 2009 net loss is $12.9 million lower than the second quarter 2008 net income of $2.0 million, primarily due to a $17.7 million increase in the provision for loan losses, as well as a $4.5 reduction in net interest income. These items were partially offset by a $7.9million reduction in tax expense and a $2.0 million reduction in noninterest expense. The causes for these changes are discussed below.
Net interest income decreased by $4.5 million for the second quarter 2009 as compared to the same period in 2008 mostly due to lower rates attributable to a greater than 200 basis point decrease in the targeted federal funds rate by the Federal Open Markets Committee (FOMC) of the Federal Reserve Board since the beginning of the second quarter 2008. The targeted federal funds rate was 2.25% at April 1, 2008 and fell to between 0% and 0.25% on December 16, 2008, where it remains today.
The provision for loan losses is the amount required to maintain the allowance for loan losses at a level that, in our judgment, is adequate to absorb probable incurred loan losses in the loan portfolio. The increase in the provision for loan losses in the second quarter 2009 as compared to the same period in 2008 is primarily a result of the increase in net charge-offs and the impact of continued stress on commercial real estate values and performance on our general component of the allowance for loan losses, which in turn increased the amount required to maintain the allowance for loan losses at an appropriate level.
Noninterest expense declined from the second quarter 2008 primarily as a result of a major effort announced in mid-2008 to better align our expenses with the current size of our business. This effort resulted in a decline in the number of full-time equivalent employees from 441 at June 30, 2008 to 380 at June 30, 2009.
On a year-to-date basis in 2009, the Company reported a net loss of $10.4 million as compared to net income of $5.3 million for the same period in 2008. The primary cause for the decrease over 2008 is a $19.3 million increase in the provision for loan losses and $10.5 million reduction in net interest income, partially offset by lower noninterest and tax expense. The primary causes for these changes are described in the respective sections below.
Net Interest Income and Net Interest Margin
Net interest income, which is our primary source of income, represents the difference between interest earned on assets and interest paid on liabilities. The interest rate spread is the difference between the yield on our interest-bearing assets and liabilities. Net interest margin is net interest income expressed as a percentage of average interest-earning assets.
The following table summarizes the Company's net interest income and related spread and margin for the current quarter and prior four quarters:
Table 2
Quarter Ended
June 30, March 31, December 31, September 30, June 30,
2009 2009 2008 2008 2008
(Dollars in thousands)
Net interest income $ 15,860 $ 15,718 $ 17,679 $ 19,842 $ 20,391
Interest rate spread 2.77 % 2.62 % 2.92 % 3.37 % 3.50 %
Net interest margin 3.38 % 3.26 % 3.55 % 4.02 % 4.20 %
Net interest margin, fully tax
equivalent 3.46 % 3.34 % 3.64 % 4.11 % 4.28 %
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Second quarter 2009 net interest income of $15.9 million declined by $4.5 million from the second quarter 2008. This decrease is a result of a $2.4 million unfavorable rate variance and a $2.1 million unfavorable volume variance. (see Table 5).
The $2.4 million unfavorable rate variance from the prior year second quarter is primarily attributable to lower yields on earnings assets, and in particular loans. The yield on earning assets declined by 94 basis points from 6.22% for the second quarter 2008 to 5.28% for the second quarter 2009. The FOMC decreased the target federal funds rate by a total of greater than 200 basis points since the beginning of the second quarter 2008. The targeted federal funds rate was 2.25% at April 1, 2008 and fell to between 0% and 0.25% on December 16, 2008, where it remains today. Similarly, the prime rate decreased by 200 basis points from April 2008 to the end of 2008.
Interest income decreased by $5.4 million from $30.2 million in the second quarter 2008 to $24.8 million in the second quarter 2009. Approximately 59% of the Company's outstanding loan balances are variable rate loans and are tied to indices such as prime or LIBOR. As a result of the decline in rates discussed above, the average yield on loans for the Company decreased by 95 basis points from 6.32% for the quarter ended June 30, 2008 to 5.37% for the same period in 2009. The Company remains asset sensitive at the end of the second quarter 2009 and expects that as interest rates rise, net interest income will also increase.
Rates paid on interest-bearing liabilities also declined during this same period by 21 basis points, for a net decrease in the net interest spread of 73 basis points over this same period. Overall net interest margin declined by 82 basis points. The cause for the larger impact on net interest margin as compared to the interest rate spread is that the benefit from noninterest bearing deposits had a smaller impact in 2009 compared to 2008 due to the extremely low interest rate environment.
The $2.1 million unfavorable volume variance is mostly attributable to a $72.1 million decrease in average total earning assets for the second quarter 2009 as compared to the same period in 2008. The average balance of loans decreased from the same period in the prior year by $55.4 million.
On a linked quarter basis, net interest margin increased from 3.26% for the first quarter 2009 to 3.38% in the second quarter 2009. Although there were no changes in the federal funds rate or prime rates during this time, the results of management efforts to address falling interest rates in 2008 began to take effect through higher yields on loans due to the utilization of loan floors and higher minimum pricing on renewed and new loans. These efforts
resulted in an overall increase of $0.1 million in net interest income in the second quarter 2009 as compared to the first quarter 2009 despite a $73.4 million decrease in average earning assets.
Table 3
Six Months Ended
June 30, June 30,
2009 2008
Net interest income $ 31,578 $ 42,041
Interest rate spread 2.69 % 3.54 %
Net interest margin 3.32 % 4.31 %
Net interest margin, fully tax equivalent 3.40 % 4.41 %
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For the six-month period ended June 30, 2009, net interest income decreased by $10.5 million, or 24.9%, as compared to the same period in 2008. This decrease is due to an $8.0 million unfavorable rate variance and a $2.5 million unfavorable volume variance (see Table 5).
The unfavorable rate variance for year-to-date 2009 is mostly due to a decrease in the yield on earning assets by 130 basis points to 5.22% for the six months ended June 30, 2009 from 6.52% for the same period in 2008. The FOMC decreased the target federal funds rate seven times by a total of greater than 400 basis points during 2008. Similarly, the prime rate decreased by 400 basis points from January 2008 to the end of 2008. These rate decreases also impacted the Bank's cost of funds. The cost of interest-bearing liabilities was 2.53% for the first six months of 2009 as compared to 2.98% for the same period in 2008.
The unfavorable volume variance is mostly a result of lower average earning assets. Average earning assets decreased by $43.4 million for the year-to-date 2009 as compared to the same period in 2008.
The following table presents, for the periods indicated, average assets, liabilities and stockholders' equity, as well as the net interest income from average interest-earning assets and the resultant annualized yields and costs expressed in percentages. Nonaccrual loans are included in the calculation of average loans while accrued interest thereon is excluded from the computation of yields earned.
Table 4
Quarter Ended June 30,
2009 2008
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) $ 1,733,168 $ 23,208 5.37 % $ 1,788,603 $ 28,107 6.32 %
Investment securities
(1)
Taxable 45,645 590 5.18 % 56,151 779 5.58 %
Tax-exempt 65,146 765 4.71 % 73,552 877 4.80 %
Bank Stocks (4) 21,440 198 3.70 % 32,590 435 5.36 %
Other earning assets 16,175 14 0.33 % 2,738 18 2.67 %
Total
interest-earning
assets 1,881,574 24,775 5.28 % 1,953,634 30,216 6.22 %
Non-earning assets:
Cash and due from
banks 28,947 37,456
Other assets 100,793 359,331
Total assets $ 2,011,314 $ 2,350,421
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LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Deposits: Interest-bearing demand $ 146,802 $ 90 0.25 % $ 153,220 $ 180 0.47 % Money market 275,598 676 0.98 % 540,735 2,491 1.85 % Savings 72,085 57 0.32 % 70,532 98 0.56 % Time certificates of deposit 708,622 6,087 3.44 % 431,511 4,642 4.33 % Total interest-bearing deposits 1,203,107 6,910 2.30 % 1,195,998 7,411 2.49 % Borrowings: Repurchase agreements 14,243 31 0.88 % 19,406 98 2.04 % Federal funds purchased (5) 248 - 0.54 % 7,849 47 2.40 % Subordinated debentures 41,239 662 6.45 % 41,239 852 8.31 % Borrowings 166,504 1,312 3.16 % 190,063 1,417 3.00 % Total interest-bearing liabilities 1,425,341 8,915 2.51 % 1,454,555 9,825 2.72 % Noninterest bearing liabilities: Demand deposits 410,517 452,315 Other liabilities 10,472 18,802 Total liabilities 1,846,330 1,925,672 Stockholders' Equity 164,984 424,749 Total liabilities and stockholders' equity $ 2,011,314 $ 2,350,421 Net interest income $ 15,860 $ 20,391 Net interest margin 3.38 % 4.20 % |
(2) The loan average balances and rates include nonaccrual loans.
(3) Net loan fees of $1.1 million and $1.0 million for the three months ended June 30, 2009 and 2008 are included in the yield computation.
(4) Includes Bankers Bank of the West stock, Federal Agricultural Mortgage Corporation (Farmer Mac) stock, Federal Reserve Bank stock and Federal Home Loan Bank stock.
(5) The interest expense related to federal funds purchased for the second quarter 2009 rounded to zero.
Six Months Ended June 30,
2009 2008
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) $ 1,770,738 $ 46,284 5.27 % $ 1,778,098 $ 59,147 6.69 %
Investment securities
(1)
Taxable 47,286 1,316 5.61 % 53,480 1,463 5.50 %
Tax-exempt 64,483 1,532 4.79 % 75,027 1,770 4.75 %
Bank Stocks (4) 24,838 486 3.95 % 32,528 905 5.59 %
Other earning assets 10,704 17 0.31 % 22,267 334 3.02 %
Total
interest-earning
assets 1,918,049 49,635 5.22 % 1,961,400 63,619 6.52 %
Non-earning assets:
Cash and due from
banks 29,445 39,157
Other assets 90,853 362,942
Total assets $ 2,038,347 $ 2,363,499
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LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Deposits: Interest-bearing demand $ 143,487 $ 178 0.25 % $ 154,560 $ 461 0.60 % Money market 286,432 1,306 0.92 % 561,136 6,273 2.25 % Savings 71,108 112 0.32 % 70,855 212 0.60 % Time certificates of deposit 714,081 12,439 3.51 % 450,251 10,260 4.58 % Total interest-bearing deposits 1,215,108 14,035 2.33 % 1,236,802 17,206 2.80 % Borrowings: Repurchase agreements 15,617 68 0.88 % 18,110 218 2.42 % Federal funds purchased 266 1 0.71 % 4,973 64 2.57 % Subordinated debentures 41,239 1,320 6.46 % 41,239 1,644 8.02 % Borrowings 169,161 2,633 3.14 % 155,273 2,446 3.17 % Total interest-bearing liabilities 1,441,391 18,057 2.53 % 1,456,397 21,578 2.98 % Noninterest bearing liabilities: Demand deposits 421,239 462,564 Other liabilities 11,294 20,893 Total liabilities 1,873,924 1,939,854 Stockholders' Equity 164,423 423,645 Total liabilities and stockholders' equity $ 2,038,347 $ 2,363,499 Net interest income $ 31,578 $ 42,041 Net interest margin 3.32 % 4.31 % |
(2) The loan average balances and rates include nonaccrual loans.
(3) Net loan fees of $1.9 million and $1.8 million for the six months ended June 30, 2009 and 2008 are included in the yield computation.
(4) 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 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 5
Three Months Ended June 30, 2009 Six Months Ended June 30, 2009
Compared to Three Months Ended Compared to Six Months Ended
June 30, 2008 June 30, 2008
Net Change Rate Volume Net Change Rate Volume
(In thousands)
Interest income:
Gross Loans, net of
unearned fees $ (4,899 ) $ (4,050 ) $ (849 ) $ (12,863 ) $ (12,619 ) $ (244 )
Investment Securities
Taxable (189 ) (51 ) (138 ) (147 ) 26 (173 )
Tax-exempt (112 ) (13 ) (99 ) (238 ) 13 (251 )
Bank Stocks (237 ) (112 ) (125 ) (419 ) (233 ) (186 )
Other earning assets (4 ) 1 (5 ) (317 ) (201 ) (116 )
Total interest income (5,441 ) (4,225 ) (1,216 ) (13,984 ) (13,014 ) (970 )
Interest expense:
Deposits:
Interest-bearing
demand (90 ) (83 ) (7 ) (283 ) (252 ) (31 )
Money market (1,815 ) (886 ) (929 ) (4,967 ) (2,719 ) (2,248 )
Savings (41 ) (43 ) 2 (100 ) (101 ) 1
. . .
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