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GBNK > SEC Filings for GBNK > Form 10-Q on 30-Apr-2013All Recent SEC Filings

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Form 10-Q for GUARANTY BANCORP


30-Apr-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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, 7, 7A and 8 of our 2012 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 Colorado-based bank subsidiary. Unless the context requires otherwise, the terms "Company," "us," "we," and "our" refer to Guaranty Bancorp on a consolidated basis. References to the "Bank" refer to Guaranty Bank and Trust Company, our bank subsidiary.

Through the Bank, we provide banking and other financial services throughout our targeted Colorado markets to consumers and primarily 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, private banking loans and consumer loans. Through its wealth management division, the Bank provides investment management, financial planning, personal trust administration, and estate settlement services. We derive our income primarily from interest (including loan origination fees) received on loans and, to a lesser extent, interest on investment securities and other fees received in connection with servicing loan and deposit accounts, personal trust and investment management services. Our major operating expenses include 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.

In addition to building growth through our existing branches, we seek opportunities to acquire small to medium-sized banks or specialty finance companies that will allow us to expand our franchise in a manner consistent with our community-banking focus. Ideally, the financial institutions we seek to acquire will be in or contiguous to the existing footprint of the current branch network of our Bank, which would allow us to consolidate duplicative costs and administrative functions and to rationalize operating expenses. We believe that by streamlining the administrative and operational functions of an acquired financial institution, we are able to substantially lower operating costs, improve performance and quickly integrate the acquired financial institution while maintaining the stability of our franchise as well as that of the financial institution we acquire. We also seek opportunities which will allow us to further diversify our noninterest income base, including adding to our wealth management platform.

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 impact our financial condition, results of operations and cash flows.


Table of Contents

Earnings Summary

Table 1 summarizes certain key financial results for the periods indicated:

Table 1



                                                        Three Months Ended March 31,
                                                                                     Change
                                                                                    Favorable
                                                 2013               2012          (Unfavorable)
                                                (In thousands, except share data and ratios)
Results of Operations:
Interest income                             $       17,330     $       17,692    $          (362 )
Interest expense                                     1,952              2,392                440
Net interest income                                 15,378             15,300                 78
Provision for loan losses                                -              1,000              1,000
Net interest income after provision for
loan losses                                         15,378             14,300              1,078
Noninterest income                                   2,950              3,099               (149 )
Noninterest expense                                 15,192             14,482               (710 )
Income before income taxes                           3,136              2,917                219
Income tax expense                                     864                  -               (864 )
Net income                                  $        2,272     $        2,917    $          (645 )

Common Share Data:
Basic earnings per common share             $         0.02     $         0.03    $         (0.01 )
Diluted earnings per common share           $         0.02     $         0.03    $         (0.01 )

Average common shares outstanding              104,221,919        103,892,827            329,092
Diluted average common shares
outstanding                                    104,588,467        104,097,706            490,761

Average equity to average assets                     10.36 %            10.37 %             (0.1 )%
Return on average equity                              4.88 %             6.78 %            (28.0 )%
Return on average assets                              0.51 %             0.70 %            (27.1 )%




                                               March 31,    March 31,     Percent
                                                 2013         2012        Change
Selected Balance Sheet Ratios:
Total risk-based capital to risk-weighted
assets                                             15.20 %      16.18 %       (6.1 )%
Leverage ratio                                     11.41 %      12.43 %       (8.2 )%
Loans, net of unearned discount to deposits        81.85 %      82.89 %       (1.3 )%
Allowance for loan losses to loans, net of
unearned discount                                   2.04 %       2.71 %      (24.7 )%
Allowance for loan losses to nonperforming
loans                                              76.33 %      97.17 %      (21.4 )%
Classified assets to allowance and Tier 1
capital (1)                                        23.78 %      35.64 %      (33.3 )%
Noninterest bearing deposits to total
deposits                                           36.05 %      34.96 %        3.1 %
Time deposits to total deposits                    13.09 %      14.15 %       (7.5 )%



(1) Based on Bank only Tier 1 capital

The $0.6 million decline in net income in the first quarter 2013 compared to the same quarter in 2012 was primarily due to an increase in tax expense of $0.9 million, partially offset by a $0.2 million increase in income before income taxes. The increase in pre-tax income in the first quarter 2013 was mostly due to a decrease in provision for loan losses of $1.0 million, partially offset by a decline in noninterest income of $0.1 million and an increase in noninterest expense of $0.7 million as compared to the same quarter last year.

The decline in noninterest income was related to $0.6 million in gains on sales of securities in the first quarter 2012, partially offset by a $0.3 million improvement in investment advisory fees in the first quarter 2013. The increase in noninterest expense in the first quarter 2013 as compared to the same quarter in the prior year was related to increases in salary and employee benefits of $0.6 million, professional fees of $0.3 million, and the prepayment penalty of $0.6 million incurred on the early redemption of $15.0 million in trust preferred securities ("TruPS") and the related subordinated debentures during the first quarter of 2013. These increases were partially offset by declines in occupancy expense of $0.4 million and insurance and assessments of $0.2 million as compared to the first quarter 2012.


Table of Contents

During the first quarter 2012, no income tax expense was recorded due to the Company's deferred tax asset valuation allowance. This deferred tax asset valuation allowance was fully reversed during the second quarter of 2012 based on the Company's determination that it is more likely than not that the entire deferred tax asset would be realized. Subsequent to the reversal of the deferred tax asset valuation allowance, the Company began recording income tax expense.

Net Interest Income and Net Interest Margin

Net interest income, which is the Company's 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



                                                               Three Months Ended
                                   March 31,      December 31,      September 30,      June 30,      March 31,
                                     2013             2012              2012             2012          2012
                                                             (Dollars in thousands)
Net interest income               $    15,378    $       15,217    $        14,511    $   15,383    $    15,300
Interest rate spread                     3.35 %            3.21 %             3.15 %        3.53 %         3.62 %
Net interest margin                      3.61 %            3.48 %             3.46 %        3.86 %         3.93 %
Net interest margin, fully tax
equivalent                               3.72 %            3.57 %             3.55 %        3.95 %         4.03 %

Net interest income increased $0.2 million from $15.2 million in the fourth quarter 2012 to $15.4 million in the first quarter 2013 and increased $0.1 million as compared to $15.3 million for the first quarter 2012. Net interest margin improved 13 basis points from 3.48% in the fourth quarter 2012 to 3.61% in the first quarter 2013 and declined 32 basis points from 3.93% in the first quarter 2012. The improvement in net interest margin during the first quarter 2013 as compared to the prior linked quarter was primarily due to a ten basis point increase in yield on earnings assets combined with a four basis point decline in the cost of interest bearing liabilities. The decline in net interest margin for the first quarter 2013 as compared to the same quarter in 2012 was mostly due to a 48 basis point decline in the yield on earning assets, partially offset by a 21 basis point decline in the cost of interest bearing liabilities.

On a linked quarter basis, interest income remained relatively stable at $17.3 million however, yields on earnings assets improved ten basis points during the first quarter 2013. The improvement in yield was largely related to a change in the mix of average earnings assets. Average loan balances increased $34.5 million with an average yield of 4.90% and average investment balances increased $47.2 million with an average yield of 2.62%, while lower-yielding average overnight funding balances decreased $93.6 million with a yield of 0.21%.

Interest expense decreased $0.2 million to $2.0 million in the first quarter 2013 as compared to $2.2 million in the fourth quarter 2012, primarily as a result of the prepayment of $15.0 million of fixed, high-cost TruPS and related subordinated debentures in the first quarter of 2013 as well as a reduction in deposit interest expense due to lower average rates. The weighted average cost of the redeemed TruPS was 10.5%, resulting in annual interest expense savings of $1.6 million. The average cost of deposits declined by two basis points to 29 basis points in the first quarter 2013, while average interest bearing deposits balances remained stable at $896.7 million.

As compared to the same period last year, interest income declined $0.4 million from $17.7 million in the first quarter 2012 to $17.3 million in the first quarter 2013. The decline in interest income was primarily due to declines in average yields on loans of 37 basis points and investments of 76 basis points, partially offset by increases in average loan and investment balances of $59.7 million and $121.4 million, respectively. Interest expense declined $0.4 million from $2.4 million in the first quarter 2012 to $2.0 million in the first quarter 2013, mostly due to the prepayment of $15.0 million of fixed, high-cost TruPS and related subordinated debentures during the first quarter 2013 as well as the full payment of the outstanding, deferred interest on all subordinated debentures during the third


Table of Contents

quarter 2012. In addition to the decline in interest expense related to our TruPS, interest expense related to deposits declined in the first quarter 2013 as compared to the same quarter in the prior year primarily due to a seven basis point decline in the weighted average cost of interest bearing deposits, partially offset by an increase in average interest bearing deposits of $32.4 million.


Table of Contents

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 3



                                                           Three Months Ended March 31,
                                                   2013                                    2012
                                                  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)                     $ 1,164,382   $    14,082       4.90 %  $ 1,104,681   $    14,482       5.27 %
Investment securities (1)
Taxable                                403,108         2,265       2.28 %      309,644         2,393       3.11 %
Tax-exempt                              81,125           793       3.96 %       52,888           617       4.69 %
Bank Stocks (4)                         14,292           156       4.43 %       14,590           158       4.36 %
Other earning assets                    65,478            34       0.21 %       83,110            42       0.20 %
Total interest-earning assets        1,728,385        17,330       4.07 %    1,564,913        17,692       4.55 %
Non-earning assets:
Cash and due from banks                  8,026                                   8,407
Other assets                            84,716                                  95,214
Total assets                       $ 1,821,127                             $ 1,668,534

LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Deposits:
Interest-bearing demand and NOW    $   276,280   $        78       0.11 %  $   281,936   $       133       0.19 %
Money market                           325,170           258       0.32 %      290,350           277       0.38 %
Savings                                105,032            39       0.15 %       94,608            35       0.15 %
Time certificates of deposit           190,173           260       0.55 %      197,400           332       0.68 %
Total interest-bearing deposits        896,655           635       0.29 %      864,294           777       0.36 %
Borrowings:
Repurchase agreements                   61,682            18       0.12 %       14,868            12       0.33 %
Federal funds purchased (5)                  -             -          - %            2             -       0.78 %
Subordinated debentures (6)             36,199           481       5.39 %       48,906           776       6.39 %
Borrowings                             110,306           818       3.01 %      110,175           827       3.02 %
Total interest-bearing
liabilities                          1,104,842         1,952       0.72 %    1,038,245         2,392       0.93 %
Noninterest bearing liabilities:
Demand deposits                        518,612                                 448,934
Other liabilities                        8,972                                   8,279
Total liabilities                    1,632,426                               1,495,458
Stockholders' Equity                   188,701                                 173,076
Total liabilities and
stockholders' equity               $ 1,821,127                             $ 1,668,534

Net interest income                              $    15,378                             $    15,300
Net interest margin                                                3.61 %                                  3.93 %



(1) Yields on loans and securities have not been adjusted to a tax-equivalent basis. Net interest margin on a fully tax-equivalent basis would have been 3.72% and 4.03% for the three months ended March 31, 2013 and 2012, respectively. The tax-equivalent basis was computed by calculating the deemed interest on municipal bonds and tax-exempt loans that would have been earned on a fully taxable basis to yield the same after-tax income, net of the interest expense disallowance under Internal Revenue Code Sections 265 and 291, using a combined federal and state marginal tax rate of 38%.

(2) The loan average balances and rates include nonaccrual loans.

(3) Net loan fees of $0.3 million and $0.4 million for the three months ended March 31, 2013 and 2012, 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 first quarter 2012 rounded to zero.

(6) March 31, 2012 includes accrued interest, resulting from deferred payments on Trust Preferred Securities.


Table of Contents

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 4



                                                        Three Months Ended March 31, 2013
                                                  Compared to Three Months Ended March 31, 2012
                                               Net Change              Rate                Volume
                                                                  (In thousands)
Interest income:
Gross Loans, net of unearned fees            $         (400 )   $            (1,323 )   $         923
Investment Securities
Taxable                                                (128 )                 1,209            (1,337 )
Tax-exempt                                              176                     (77 )             253
Bank Stocks                                              (2 )                     1                (3 )
Other earning assets                                     (8 )                     1                (9 )
Total interest income                                  (362 )                  (189 )            (173 )

Interest expense:
Deposits:
Interest-bearing demand and NOW                         (55 )                   (52 )              (3 )
Money market                                            (19 )                   (66 )              47
Savings                                                   4                       -                 4
Time certificates of deposit                            (72 )                   (60 )             (12 )
Repurchase agreements                                     6                      (2 )               8
Federal funds purchased                                   -                       -                 -
Subordinated debentures                                (295 )                  (114 )            (181 )
Borrowings                                               (9 )                   (10 )               1
Total interest expense                                 (440 )                  (304 )            (136 )
Net interest income                          $           78     $               115     $         (37 )

Provision for Loan Losses

The provision for loan losses represents a charge against earnings. The provision 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 provision for loan losses is based on our allowance methodology and reflects our judgments about the adequacy of the allowance for loan losses. In determining the amount of the provision, we consider certain quantitative and qualitative factors, including our historical loan loss experience, the volume and type of lending we conduct, the results of our credit review process, the amounts and severity of classified, criticized and nonperforming assets, regulatory policies, general economic conditions, underlying collateral values and other factors regarding collectability and impairment. The amount of expected loss on our loan portfolio is influenced by the collateral value associated with our loans. Loans with greater collateral values, as a percentage of the outstanding loan balance, lessen our exposure to loan loss provision.

In the first quarter 2013, the Company did not record a provision for loan losses, compared to $1.0 million in the first quarter 2012. The Company determined that no provision for loan losses was necessary during the first quarter 2013 to maintain its allowance for loan losses at a level which reflects the probable incurred losses inherent in the loan portfolio as of March 31, 2013.

Net charge-offs in the first quarter 2013 were $1.1 million, as compared to $5.6 million for the same quarter in 2012.

For a discussion of impaired loans and associated collateral values, see "Balance Sheet Analysis-Nonperforming Assets and Other Impaired Loans" below.


Table of Contents

For further discussion of the methodology and factors impacting management's estimate of the allowance for loan losses, see "Balance Sheet Analysis- Allowance for Loan Losses" below.

Noninterest Income

The following table presents the major categories of noninterest income for the current quarter and prior four quarters:

Table 5



                                                                Three Months Ended
                                    March 31,     December 31,      September 30,      June 30,      March 31,
                                      2013            2012              2012             2012          2012
                                                                  (In thousands)
Noninterest income:
Customer service and other fees    $     2,620    $       2,640    $         2,616    $    2,382    $     2,271
Gain on sale of securities                   -              817                746           342            622
Gain on sale of SBA loans                  136                -                203             -              -
Other                                      194              309                250           187            206
Total noninterest income           $     2,950    $       3,766    $         3,815    $    2,911    $     3,099

Noninterest income declined $0.8 million in the first quarter 2013 from $3.8 million in the fourth quarter 2012 to $3.0 million in the first quarter 2013 primarily as a result of a decrease in gains on sale of securities of $0.8 million.

Noninterest income was $3.0 million in the first quarter 2013 as compared to $3.1 million in the same quarter of the prior year. This decrease of $0.1 million was primarily due to a net decrease in the gain on sale of securities of $0.6 million, partially offset by the gain on sale of SBA loans of $0.1 million during the first quarter of 2013 and an increase in customer service fees, primarily investment advisory fees of $0.3 million generated by Private Capital Management, an investment management firm acquired in July 2012.

Private Capital Management increased its assets under management by $33.0 million, or 18.4%, to $212.2 million at March 31, 2013 as compared to $179.2 million at December 31, 2012 and by $47.5 million, or 28.8%, since acquisition. Private Capital Management has contributed approximately $0.9 million to noninterest income since July of 2012.

Noninterest Expense

The following table presents, for the quarters indicated, the major categories of noninterest expense:

Table 6



                                                              Three Months Ended
                                  March 31,      December 31,      September 30,     June 30,      March 31,
                                    2013             2012              2012            2012          2012
                                                                (In thousands)
Noninterest expense:
Salaries and employee
benefits                         $     7,441    $        6,832    $         6,466    $   6,614    $     6,857
Occupancy expense                      1,612             1,550              1,712        1,972          2,019
Furniture and equipment                  761               760                779          783            821
. . .
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