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GBNK > SEC Filings for GBNK > Form 10-K/A on 23-Aug-2013All Recent SEC Filings

Show all filings for GUARANTY BANCORP | Request a Trial to NEW EDGAR Online Pro

Form 10-K/A for GUARANTY BANCORP


23-Aug-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 the information set forth in "Item 8. Financial Statements and Supplementary Data."

Overview

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 loans including commercial, energy, real estate, small business and consumer loans. We derive our income primarily from interest received on loans and, to a lesser extent, interest on investment securities, fees received in connection with servicing loan and deposit accounts and fees from investment advisory and 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 local 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.

Guaranty Bancorp has a single bank subsidiary, Guaranty Bank and Trust Company. Guaranty Bank owns several single-member limited liability companies that hold real estate as well as an investment advisory firm, Private Capital Management.

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 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 credit provisions and 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 non-impaired loans. A specific allowance is assigned to an impaired loan when the present value of expected cash flows or collateral do not support the carrying amount of the loan. The methodology used to assign an allowance to a non-impaired loan is more subjective. Generally, the allowance assigned to non-impaired loans is determined by applying historical loss rates by portfolio segment 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


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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 portfolio. 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 portfolio segments.

Other Real Estate Owned and Foreclosed Assets

Other real estate owned or other foreclosed assets acquired through loan foreclosure or loan settlement agreement 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, the valuation allowance is adjusted through a charge to 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 recognized in noninterest expense.

Investment in Debt and Equity Securities

We classify our investments in debt and equity securities as either held to maturity or available for sale. 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, discounted cash flow 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. From an accounting standpoint, deferred tax assets are reviewed to determine if a valuation allowance is required based on both positive and negative evidence currently available. Positive evidence includes the historical levels of our taxable income, estimates of our future taxable income including tax planning strategies, the reversals of deferred tax liabilities and taxes available in carry-back years. Negative evidence primarily includes a cumulative three-year loss for financial reporting purposes. Additionally, current and future economic and business conditions are considered.

Additionally, the Company reviews its uncertain tax positions annually. 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


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reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.

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 and customer relationship intangible assets with finite lives are tested for impairment when changes in events or circumstances indicate that their carrying amount may not be recoverable. Core deposits were tested for impairment during 2011 and 2012 and we determined that no impairment had occurred.

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.


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RESULTS OF OPERATIONS

The following table presents certain key aspects of our performance.

Table 1



                                                                                    Change - Favorable
                                          Year Ended December 31,                      (Unfavorable)
                                     2012           2011           2010         2012 v 2011     2011 v 2010
                                                (Dollars in thousands, except per share data)
Results of Operations:
Interest income                  $     69,565   $     74,313   $     87,937    $      (4,748 ) $     (13,624 )
Interest expense                        9,154         14,419         23,582            5,265           9,163
Net interest income                    60,411         59,894         64,355              517          (4,461 )
Provision (credit) for loan
losses                                 (2,000 )        5,000         34,400            7,000          29,400
Net interest income after
provision for loan losses              62,411         54,894         29,955            7,517          24,939
Noninterest income                     13,591         13,945          8,102             (354 )         5,843
Noninterest expense                    64,114         62,487         75,686           (1,627 )        13,199
Income (loss) before income
taxes                                  11,888          6,352        (37,629 )          5,536          43,981
Income tax benefit                     (3,171 )            -         (6,290 )          3,171          (6,290 )
Net income (loss)                $     15,059   $      6,352   $    (31,339 )  $       8,707   $      37,691

Net income (loss) applicable
to common stockholders           $     15,059   $    (13,454 ) $    (36,963 )  $      28,513   $      23,509

Common Share Data:
Basic income (loss) per common
share(2)                         $       0.72   $      (1.04 ) $      (3.58 )  $        1.76   $        2.54
Diluted income (loss) per
common share(2)                  $       0.72   $      (1.04 ) $      (3.58 )  $        1.76   $        2.54

Average common shares
outstanding(2)                     20,786,802     12,988,346     10,334,256        7,798,456       2,654,090
Diluted average common shares
outstanding(2)                     20,878,251     12,988,346     10,334,256        7,884,905       2,654,090

Average equity to average
assets                                  10.25 %         9.37 %         9.57 %           9.39 %         (2.09 )%
Return on average equity                 8.40 %         3.83 %       (16.44 )%           N/M             N/M
Return on average assets                 0.86 %         0.36 %        (1.57 )%           N/M             N/M

N/M=not meaningful

                                     Year Ended December 31,             Percent Change
                                   2012        2011       2010     2012 v 2011    2011 v 2010
Selected Balance Sheet Ratios:
Total risk based capital to
risk weighted assets                16.27 %     16.33 %    14.99 %       (0.37 )%        8.94 %
Leverage ratio                      11.93 %     12.12 %     6.25 %       (1.57 )%        93.9 %
Loans, net of unearned
discount to deposits                79.65 %     83.59 %    82.37 %       (4.71 )%        1.48 %
Allowance for loan losses to
loans, net of unearned
discount                             2.17 %      3.16 %     3.91 %      (31.33 )%      (19.18 )%
Allowance for loan losses to
nonperforming loans                180.67 %    129.30 %    60.64 %       39.73 %       113.23 %
Classified assets to allowance
and Tier 1 capital(1)               25.16 %     36.14 %    74.19 %      (30.38 )%      (51.29 )%
Non-performing loans to loans,
net of unearned discount             1.20 %      2.44 %     7.53 %      (50.82 )%      (67.60 )%
Noninterest-bearing deposits
to total deposits                   38.78 %     34.29 %    25.60 %       13.09 %        33.95 %
Time deposits to total
deposits                            13.16 %     15.53 %    32.39 %      (15.26 )%      (52.05 )%



(1) Based on Bank only Tier 1 capital

(2) All share and per share amounts presented reflect the Company's May 20, 2013 1-for-5 reverse stock split.


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2012 Compared to 2011

The Company's net income for 2012 improved by $8.7 million, or 137.1%, to $15.1 million compared to $6.4 million for the year ended December 31, 2011. Earnings per basic and diluted common share improved to $0.72 for the year ended December 31, 2012 as compared to a loss per basic and diluted common share of $1.04 from the prior year. The prior year loss per common share calculation included a non-cash adjustment of approximately $19.8 million, or $1.52 per basic and diluted common share, related to three quarters of paid-in-kind preferred stock dividends and the mandatory accelerated conversion of the Company's Series A Convertible Preferred Stock into common stock in September 2011. Share and per share amounts presented reflect the Company's May 20, 2013 1-for-5 reverse stock split.

The increase in net income in 2012, as compared to 2011, was primarily due to a decline in provision for loan losses of $7.0 million, attributable to continued improvements in credit quality in 2012; the reversal of the deferred tax asset valuation allowance of $6.6 million, discussed below; and the reduction in interest expense of $5.3 million, mostly due to reductions in deposit rates and the early payoff of several Federal Home Loan Bank ("FHLB") borrowings in September 2011. These improvements were partially offset by a reduction in interest income of $4.7 million, due to declines in average earning assets yields; an increase in noninterest expense of $1.6 million; and a decrease in noninterest income of $0.4 million. The increase in noninterest expense was due to the net increase in other real estate owned ("OREO") expense of $2.8 million, mostly due to a write-down of $3.0 million on a single property that was subsequently sold in January 2013, and the impairment related to the closure of two branches of $2.8 million, offset by a decrease in intangible amortization of $1.0 million and the FHLB prepayment penalty of $2.7 million recorded in 2011.

The Company had a deferred tax asset valuation allowance of $6.6 million at December 31, 2011. During 2012, this deferred tax valuation allowance was reversed based on the Company's determination that it was 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 resumed recording income tax expense.

The Company's total risk-based capital ratio decreased six basis points to 16.27% at December 31, 2012 as compared to 16.33% at December 31, 2011 primarily due an increase in total risk-based assets of $111.2 million, in conjunction with an increase in total risk-based capital of $17.3 million.

Credit quality measures continued to improve in 2012, as evidenced by the 31.1% reduction in the classified asset ratio from 36.6% at December 31, 2011 to 25.2% at December 31, 2012. This ratio was further reduced in January 2013 by the sale of our single largest OREO property with a book value of $10.9 million to approximately 20.5%.

2011 Compared to 2010

The Company's net income for 2011 was $6.4 million, compared to a loss of $31.3 million for the same period in 2010. The earnings per share calculation for 2011 included a non-cash adjustment of approximately $19.8 million, or $1.52 loss per basic and diluted common share, related to the regular quarterly paid-in-kind dividends on the Company's Series A Convertible Preferred Stock of $4.6 million, the special paid-in-kind dividend on the Series A Convertible Preferred Stock of $4.8 million and the accelerated conversion of the Series A Convertible Preferred Stock into common stock of $10.4 million. After giving effect to the preferred stock dividends and mandatory accelerated conversion of preferred stock, the loss per basic and diluted common share was $1.04 for 2011, compared to a loss per basic and diluted common share in 2010 of $3.58. Included in the basic and diluted common share computation for 2010 are $5.6 million in preferred stock dividends paid in the form of additional shares of Series A Convertible Preferred Stock. Share and per share amounts presented reflect the Company's May 20, 2013 1-for-5 reverse stock split. The net income before income taxes was $6.4 million in 2011 compared to a loss of $37.6 million in 2010, an increase in net income before income tax of $44.0 million. The primary causes for the improvement in net income before income tax in 2011 as compared to 2010 were a $29.4 million reduction in provision for loan losses, resulting from reduced levels of nonperforming and classified loans during 2011; a $13.2 million decrease in noninterest expense, primarily attributable to a decrease in expenses related to other real estate owned; an increase in noninterest income of $5.8 million due to higher net gains on sales of investments, as well as an other-than-temporary impairment ("OTTI")


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loss recognized in 2010. These improvements were partially offset by a $4.5 million decrease in net interest income due mostly to a reduced level of earnings assets in 2011.

The Company's total risk-based capital ratio increased by 134 basis points to 16.33% at December 31, 2011 as compared to 14.99% at December 31, 2010. This increase in our capital ratio is primarily the result of a reduction in total risk-weighted assets and positive net earnings.

The Company's asset quality trends improved dramatically during 2011. Classified assets decreased 50.5% from $168.4 million at December 31, 2010 to $83.4 million at December 31, 2010.

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,
                                              2012       2011       2010
                                                (Dollars in thousands)
Net interest income                         $ 60,411   $ 59,894   $ 64,355
Interest rate spread                            3.37 %     3.25 %     3.09 %
Net interest margin                             3.67 %     3.61 %     3.47 %
Net interest margin, fully tax equivalent       3.77 %     3.68 %     3.55 %


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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. Nonaccrual loans are included in the calculation of average loans and leases while nonaccrued interest thereon, is excluded from the computation of yields earned.

Table 3



                                                            Year Ended December 31,
                                                  2012                                   2011
                                                 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)                    $ 1,110,267   $    57,326       5.16 % $ 1,123,619   $    59,985       5.34 %
Investment securities (1)
Taxable                               333,977         8,746       2.62 %     334,377        11,277       3.37 %
Tax-exempt                             56,680         2,558       4.51 %      43,972         2,066       4.70 %
Bank stocks (4)                        14,583           631       4.33 %      16,107           653       4.06 %
Other earning assets(5)               129,391           304       0.23 %     140,608           332       0.24 %
Total interest-earning assets       1,644,898        69,565       4.23 %   1,658,683        74,313       4.48 %
Non-earning assets:
Cash and due from banks                 8,373                                 13,990
Other assets                           95,844                                 96,259

Total assets                      $ 1,749,115                            $ 1,768,932

LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Deposits:
Interest-bearing demand and NOW   $   280,153   $       453       0.16 % $   188,897   $       301       0.16 %
Money market                          295,613         1,061       0.36 %     359,849         1,717       0.48 %
Savings                                97,263           145       0.15 %      86,467           162       0.19 %
Time certificates of deposit          194,230         1,219       0.63 %     318,514         4,566       1.43 %
Total interest-bearing deposits       867,259         2,878       0.33 %     953,727         6,746       0.71 %
Borrowings:
Repurchase agreements                  41,953            67       0.16 %      18,525            74       0.40 %
Federal funds purchased(6)                  2             -       0.97 %          12             -       1.12 %
Subordinated debentures (7)            45,506         2,882       6.33 %      47,066         2,872       6.10 %
Borrowings                            110,172         3,327       3.02 %     149,490         4,727       3.16 %
Total interest-bearing
liabilities                         1,064,892         9,154       0.86 %   1,168,820        14,419       1.23 %
Noninterest-bearing
liabilities:
Demand deposits                       496,940                                425,763
Other liabilities                       7,983                                  8,548
Total liabilities                   1,569,815                              1,603,131
Stockholders' equity                  179,300                                165,801
Total liabilities and
stockholders' equity              $ 1,749,115                            $ 1,768,932

Net interest income                             $    60,411                            $    59,894
Net interest margin                                               3.67 %                                 3.61 %



(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 3.77% and 3.68% for the years ended December 31, 2012 and 2011, 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 38.01%.

(2) The loan average balances include nonaccrual loans.

(3) Net loan fees of $1.6 million and $1.6 million for the years ended December 31, 2012 and 2011, 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) Balances include interest bearing balances due from banks.

(6) The interest expense related to federal funds purchased for the years ended December 31, 2012 and 2011 rounded to zero.

(7) Includes accrued interest, resulting from deferred payments on Trust Preferred Securities.


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