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| GBNK > SEC Filings for GBNK > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-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.
On August 11, 2009, the Company issued 59,053 shares of Series A Convertible Preferred Stock, par value $0.001 per share, at a price of $1,000 per share. The Company received $57.9 million, net of expense, from the issuance of these shares, which significantly increased our capital. As a result of this issuance, the Company contributed $40.0 million of capital into its bank subsidiary.
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 September 30, Nine Months Ended September 30,
Change - Change -
Favorable Favorable
2009 2008 (Unfavorable) 2009 2008 (Unfavorable)
(In thousands, except share data and ratios)
Results of Operations:
Interest income $ 23,469 $ 29,719 $ (6,250 ) $ 73,104 $ 93,338 $ (20,234 )
Interest expense 8,558 9,877 1,319 26,615 31,455 4,840
Net interest income 14,911 19,842 (4,931 ) 46,489 61,883 (15,394 )
Provision for loan
losses 20,000 30,750 10,750 41,110 32,525 (8,585 )
Net interest income
after provision for
loan losses (5,089 ) (10,908 ) 5,819 5,379 29,358 (23,979 )
Noninterest income 2,450 2,707 (257 ) 7,992 8,354 (362 )
Noninterest expense 17,409 265,882 248,473 50,604 304,289 253,685
Loss before income
taxes (20,048 ) (274,083 ) 254,035 (37,233 ) (266,577 ) 229,344
Income tax benefit (3,147 ) (8,254 ) (5,107 ) (9,911 ) (6,018 ) 3,893
Net loss $ (16,901 ) $ (265,829 ) $ 248,928 $ (27,322 ) $ (260,559 ) $ 233,237
Share Data:
Basic loss per share $ (0.33 ) $ (5.21 ) $ 4.88 $ (0.53 ) $ (5.11 ) $ 4.58
Diluted loss per share $ (0.33 ) $ (5.21 ) $ 4.88 $ (0.53 ) $ (5.11 ) $ 4.58
Average shares
outstanding 51,416,909 51,067,439 349,470 51,347,916 51,020,220 327,696
Diluted average shares
outstanding 51,416,909 51,067,439 349,470 51,347,916 51,020,220 327,696
September 30, December 31, Percent
2009 2008 Change
Selected Balance Sheet Ratios:
Total risk based capital to risk weighted
assets 13.42 % 10.61 % 26.48 %
Loans, net of unearned discount to
deposits 97.23 % 107.52 % (9.57 )%
Allowance for loan losses to loans, net
of unearned discount 3.09 % 2.46 % 25.61 %
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The $16.9 million third quarter 2009 net loss is $248.9 million lower than the third quarter 2008 net loss of $265.8 million. Excluding the goodwill impairment charge in the prior year of $250.7 million, the net loss for the third quarter 2009 is $1.8 million greater than the same quarter in 2008. The primary reasons for this increase in net loss, exclusive of the 2008 goodwill impairment, are a $4.9 million decrease in net interest income, as well as a $5.0 million charge for a valuation allowance related to deferred tax assets. These decreases were offset mostly by a $10.8 million reduction in the provision for loan losses. The causes for these changes are discussed below.
Net interest income decreased by $4.9 million for the third quarter 2009 as compared to the same period in 2008 mostly due to lower rates attributable to a greater than 175 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 third quarter 2008. The targeted federal funds rate was 2.00% at July 1, 2008 and fell to between 0% and 0.25% on December 16, 2008, where it remains today.
In the quarter ended September 30, 2009, a $5.0 million valuation allowance was established related to deferred tax assets. See "Income Taxes" below for further discussion of this valuation allowance.
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 allowance for loan losses increased to 3.09% of total loans at September 30, 2009, as compared to 2.46% at September 30, 2008. The provision for loan losses was $20.0 million for the third quarter 2009, as compared to $30.8 million for the same quarter in 2008. It remained high in the third quarter of 2009 primarily due to an increase in nonperforming assets and related charge-offs.
Noninterest expense decreased by $248.5 million in the third quarter 2009 as compared to the same quarter in 2008 primarily as a result of $250.7 million goodwill impairment charge in 2008. Excluding the 2008 goodwill impairment charge, noninterest expense increased by $2.3 million. This increase, net of goodwill impairment charge, is due primarily to a $0.6 million increase in salaries and employee benefits and a $2.3 million increase in other general and administrative expense. The $0.6 million increase in salaries and employee benefits in the third quarter 2009 as compared to the same quarter 2008 is due mostly to the impact of a $2.6 million reversal of equity-based compensation in the third quarter of 2008. This cumulative reversal of equity-based compensation expense was a result of a determination that performance-based shares were no longer expected to meet their performance target prior to their expiration date. Excluding the impact of this 2008 reversal of expense, salaries and benefits in the third quarter of 2009 decreased by $2.0 million from the third quarter of 2008 due to 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 393 at September 30, 2008 to 368 at September 30, 2009. The $2.3 million increase in the other general and administrative expense category in the third quarter 2009 from third quarter 2008 is mostly due to a $1.0 million increase in FDIC insurance assessments, a $1.1 million net increase in write-downs of other real estate owned and a $0.3 million increase in other collection-related expenses.
On a year-to-date basis in 2009, the Company reported a net loss of $27.3 million as compared to a net loss of $260.6 million for the same period in 2008. The primary cause for the decrease in net loss in 2009, as compared to 2008, is that there was no goodwill impairment charge in 2009, as compared to the $250.7 million goodwill impairment charge recorded during the third quarter 2008. Other differences for the nine months ended September 30, 2009 as compared to the same period in 2008 include a $15.4 million reduction in net interest income due to lower rates and a decrease in earning assets, an $8.6 million increase to the provision for loan losses and a $5.0 million charge to establish a valuation allowance for deferred tax assets. These decreases to net income were partially offset by a $2.9 million reduction in noninterest expense, excluding the goodwill impairment charge, for the first nine months of 2009 as compared to the same period in 2008.
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
September 30, June 30, March 31, December 31, September 30,
2009 2009 2009 2008 2008
(Dollars in thousands)
Net interest income $ 14,911 $ 15,860 $ 15,718 $ 17,679 $ 19,842
Interest rate spread 2.65 % 2.77 % 2.62 % 2.92 % 3.37 %
Net interest margin 3.14 % 3.38 % 3.26 % 3.55 % 4.02 %
Net interest margin, fully tax
equivalent 3.23 % 3.46 % 3.34 % 3.64 % 4.11 %
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Third quarter 2009 net interest income of $14.9 million declined by $4.9 million from the third quarter 2008. This decrease is a result of a $1.6 million unfavorable rate variance and a $3.4 million unfavorable volume variance. (see Table 5).
The $1.6 million unfavorable rate variance from the prior year third quarter is primarily attributable to lower yields on earnings assets, and in particular loans. The yield on earning assets declined by 107 basis points from 6.02% for the third quarter 2008 to 4.95% for the third quarter 2009. The FOMC decreased the target federal funds rate by a total of greater than 175 basis points since the beginning of the third quarter 2008. The targeted federal funds rate was 2.00% at July 1, 2008 and fell to between 0% and 0.25% on December 16, 2008, where it remains today. Similarly, the prime rate decreased by 175 basis points from July 2008 to the end of 2008.
Interest income decreased by $6.3 million from $29.7 million in the third quarter 2008 to $23.5 million in the third quarter 2009. Approximately 56% 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 80 basis points from 6.09% for the quarter ended September 30, 2008 to 5.29% for the same period in 2009. The Company believes that it remains asset sensitive at the end of the third quarter 2009 over the long term in a risking rate environment, and therefore, 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 35 basis points, for a net decrease in the net interest spread of 72 basis points over this same period. Overall net interest margin declined by 88 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 $3.4 million unfavorable volume variance is mostly attributable to an $81.9 million decrease in average total earning assets for the third 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 $180.3 million, primarily as a result of management's efforts to reduce overall risk in the loan portfolio.
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 and decreased to 3.14% in the third 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. The decrease in net interest margin and net interest spread in the third quarter 2009, as compared to the second quarter 2009, is primarily a result of a significant increase to the Company's short-term liquidity position as reflected by an $85.4 million increase in average cash equivalents, which only earned 0.24% during the quarter. Excluding these low-yielding cash equivalents, the Company's net interest margin would have been 17 basis points higher in the third quarter 2009. This increase in short-term liquidity was a result of a $106.1 million decrease in quarterly average loan balances coupled with a net increase to capital during the quarter as a result of the issuance of preferred stock in August 2009. A portion of this additional liquidity was invested in our securities portfolio, which increased by $84.3 million during the third quarter 2009. Management continues to evaluate alternatives for the utilization of this additional liquidity to improve our future margin, including a combination of purchasing new investment securities, making new loans and not renewing certain maturing time deposits.
The following table summarizes the Company's net interest income and related spread and margin for the year-to-date periods presented:
Table 3
Nine Months Ended
September 30, September 30,
2009 2008
Net interest income $ 46,489 $ 61,883
Interest rate spread 2.68 % 3.48 %
Net interest margin 3.26 % 4.21 %
Net interest margin, fully tax equivalent 3.34 % 4.31 %
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For the nine-month period ended September 30, 2009, net interest income decreased by $15.4 million, or 24.9%, as compared to the same period in 2008. This decrease is due to an $9.1 million unfavorable rate variance and a $6.3 million unfavorable volume variance (see Table 5).
The unfavorable rate variance of $9.1 million for year-to-date 2009 is mostly due to a decrease in the yield on earning assets by 122 basis points to 5.13% for the nine months ended September 30, 2009 from 6.35% 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 2.45% for the first nine months of 2009 as compared to 2.87% for the same period in 2008. The cost of interest-bearing liabilities did not decrease as significantly due to fixed rate costs on our time deposits and borrowings. Overall time deposit costs did decline by 96 basis points, but the Company continued to hold higher cost time deposits throughout 2009. In the fourth quarter 2009, approximately $271.9 million of time deposits with an average rate of 3.46% will mature.
The unfavorable volume variance is mostly a result of lower average earning assets. Average earning assets decreased by $55.5 million for the year-to-date 2009 as compared to the same period in 2008. This is primarily due to a $65.6 million decline in average loans and a $16.7 million decline in average investments for this period. During the latter part of the third quarter 2009, the Company did increase its investment securities by approximately $84.3 million. Investment securities at September 30, 2009 were $209.3 million, as compared to average investment securities of $153.7 million for the third quarter 2009 and average investment securities of $142.4 million for the year-to-date period ended September 30, 2009. These declines in average earnings assets were partially offset by a $26.8 million increase in other earnings assets, which primarily consists of federal funds sold and interest bearing deposits at banks. These other earning assets only earned 0.25% for the nine-months ended September 30, 2009 as compared to 2.98% for the same period in 2008. As these are primarily overnight or short-term investments, the yield is close to the targeted federal funds rate, which declined by 400 basis points throughout 2008 to between 0 and .25% in December 2008. At September 30, 2009, the Company had $119.7 million of other earnings assets.
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.
Table 4
Quarter Ended September 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) $ 1,627,066 $ 21,710 5.29 % $ 1,807,325 $ 27,675 6.09 %
Investment securities
(1)
Taxable 72,773 751 4.10 % 53,273 749 5.59 %
Tax-exempt 64,474 763 4.70 % 69,272 846 4.86 %
Bank Stocks (4) 16,410 184 4.44 % 32,714 441 5.37 %
Other earning assets 101,585 61 0.24 % 1,662 8 1.87 %
Total interest-earning
assets 1,882,308 23,469 4.95 % 1,964,246 29,719 6.02 %
Non-earning assets:
Cash and due from banks 25,396 35,770
Other assets 114,975 351,897
Total assets $ 2,022,679 $ 2,351,913
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LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Deposits: Interest-bearing demand $ 149,994 $ 96 0.25 % $ 148,536 $ 177 0.47 % Money market 324,686 690 0.84 % 517,001 2,343 1.80 % Savings 72,514 58 0.32 % 70,512 99 0.56 % Time certificates of deposit 712,557 5,737 3.19 % 484,706 4,835 3.97 % Total interest-bearing deposits 1,259,751 6,581 2.07 % 1,220,755 7,454 2.43 % Borrowings: Repurchase agreements 12,796 29 0.89 % 20,317 105 2.05 % Federal funds purchased (5) 22 0 0.15 % 9,981 55 2.21 % Subordinated debentures 41,239 625 6.01 % 41,239 778 7.50 % Borrowings 164,434 1,323 3.19 % 192,088 1,485 3.08 % Total interest-bearing liabilities 1,478,242 8,558 2.30 % 1,484,380 9,877 2.65 % Noninterest bearing liabilities: Demand deposits 345,831 426,128 Other liabilities 12,120 17,838 Total liabilities 1,836,193 1,928,346 Stockholders' Equity 186,486 423,567 Total liabilities and stockholders' equity $ 2,022,679 $ 2,351,913 Net interest income $ 14,911 $ 19,842 Net interest margin 3.14 % 4.02 % |
(2) The loan average balances and rates include nonaccrual loans.
(3) Net loan fees of $0.6 million and $0.9 million for the three months ended September 30, 2009 and 2008, respectively, 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 third quarter 2009 rounded to zero.
Nine Months Ended September 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) $ 1,722,321 $ 67,994 5.28 % $ 1,787,912 $ 86,822 6.49 %
Investment securities
(1)
Taxable 55,875 2,067 4.95 % 53,411 2,212 5.53 %
Tax-exempt 64,480 2,295 4.76 % 73,094 2,616 4.78 %
Bank Stocks (4) 21,998 670 4.07 % 32,590 1,346 5.52 %
Other earning assets 42,133 78 0.25 % 15,348 342 2.98 %
Total interest-earning
assets 1,906,807 73,104 5.13 % 1,962,355 93,338 6.35 %
Non-earning assets:
Cash and due from
banks 27,279 38,020
Other assets 98,983 359,209
Total assets $ 2,033,069 $ 2,359,584
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LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Deposits: Interest-bearing demand $ 145,680 $ 274 0.25 % $ 152,537 $ 639 0.56 % Money market 299,323 1,996 0.89 % 546,317 8,615 2.11 % Savings 71,582 169 0.32 % 70,740 311 0.59 % Time certificates of deposit 713,567 18,177 3.41 % 461,820 15,095 4.37 % Total interest-bearing deposits 1,230,152 20,616 2.24 % 1,231,414 24,660 2.67 % . . . |
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