GUARANTY BANCORP AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
| | | | | |
| | | | | |
| | Six Months Ended June 30, |
| | 2016 | | | 2015 |
| | | | | |
| | (In thousands) |
Cash flows from operating activities: | | | | | |
Net income | $ | 11,220 | | $ | 10,561 |
Reconciliation of net income to net cash from operating activities: | | | | | |
Depreciation and amortization | | 1,692 | | | 2,301 |
Net amortization on investment and loan portfolios | | 757 | | | 677 |
Provision for loan losses | | 26 | | | 90 |
Impairment of long-lived assets | | - | | | 122 |
Stock compensation, net | | 1,566 | | | 1,393 |
Dividends on bank stocks | | (342) | | | (240) |
Increase in cash surrender value of life insurance | | (730) | | | (703) |
Gain on sale of securities and SBA loans | | (208) | | | (449) |
Landlord cash allowance | | - | | | 422 |
Gain on the sale of other assets | | (14) | | | - |
Origination of SBA loans with intent to sell | | (2,463) | | | (3,662) |
Proceeds from the sale of SBA loans originated with intent to sell | | 3,252 | | | 3,068 |
Loss, net, and valuation adjustments on real estate owned | | - | | | 39 |
Net change in: | | | | | |
Interest receivable and other assets | | 2,015 | | | 1,797 |
Net deferred income tax assets | | 636 | | | 2,484 |
Interest payable and other liabilities | | (1,511) | | | (1,828) |
Net cash from operating activities | | 15,896 | | | 16,072 |
Cash flows from investing activities: | | | | | |
Activity in available for sale securities: | | | | | |
Sales, maturities, prepayments and calls | | 66,123 | | | 20,599 |
Purchases | | (7,051) | | | (8,561) |
Activity in held to maturity securities and bank stocks: | | | | | |
Maturities, prepayments and calls | | 9,290 | | | 7,688 |
Purchases | | (10,490) | | | (14,320) |
Loan originations and purchases, net of principal collections | | (83,650) | | | (127,364) |
Purchase of bank-owned life insurance contracts | | - | | | (5,000) |
Proceeds from sale of other assets | | - | | | 1,293 |
Proceeds from sales of other real estate owned and foreclosed assets | | - | | | 633 |
Proceeds from sale of SBA loans transferred to held for sale | | - | | | 589 |
Proceeds from sales of premises and equipment | | 2,204 | | | - |
Additions to premises and equipment | | (934) | | | (3,748) |
Net cash from investing activities | | (24,508) | | | (128,191) |
Cash flows from financing activities: | | | | | |
Net change in deposits | | 45,516 | | | 56,675 |
Net change in borrowings on Federal Home Loan Bank line of credit | | (44,247) | | | 50,250 |
Proceeds from issuance of debt | | 25,000 | | | 50,000 |
Cash dividends on common stock | | (4,884) | | | (4,213) |
Tax effect of restricted stock vesting | | 321 | | | 129 |
Net change in repurchase agreements and federal funds purchased | | (8,487) | | | (17,676) |
Repurchase of common stock | | (872) | | | (318) |
Net cash from financing activities | | 12,347 | | | 134,847 |
Net change in cash and cash equivalents | | 3,735 | | | 22,728 |
Cash and cash equivalents, beginning of period | | 26,711 | | | 32,441 |
Cash and cash equivalents, end of period | $ | 30,446 | | $ | 55,169 |
| | | | | |
Supplemental disclosure of noncash activities: | | | | | |
Reclassification of available for sale securities into held to maturity | $ | - | | $ | 49,084 |
See "Notes to Unaudited Condensed Consolidated Financial Statements."
GUARANTY BANCORP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
| (1) | | Organization, Operations and Basis of Presentation |
Guaranty Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and headquartered in Colorado.
The Company’s principal business is to serve as a holding company for its bank subsidiary, Guaranty Bank and Trust Company, referred to as the “Bank”.
References to “Company,” “us,” “we,” and “our” refer to Guaranty Bancorp on a consolidated basis. References to “Guaranty Bancorp” or to the “holding company” refer to the parent company on a stand-alone basis.
The Bank is a full-service community bank offering an array of banking products and services to the communities it serves along the Front Range of Colorado including: accepting time and demand deposits, originating commercial loans, commercial and residential real estate loans, Small Business Administration (“SBA”) guaranteed loans and consumer loans. The Bank, together with its wholly owned subsidiaries Private Capital Management, LLC (“PCM”) and Cherry Hills Investment Advisors, Inc. (“CHIA”), provides wealth management services, including private banking, investment management and trust services. Substantially all of the Bank’s loans are secured by specific items of collateral, including business assets, commercial and residential real estate, which include land or improved land and consumer assets. Commercial loans are generally expected to be repaid from cash flow from the operations of businesses that have taken out the loans. There are no significant concentrations of loans to any one industry or customer.
(a)Basis of Presentation
The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America. All material intercompany balances and transactions have been eliminated in consolidation. The Company’s financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of its financial position and results of operations for the periods presented. All such adjustments are of a normal and recurring nature. Subsequent events have been evaluated through the date of financial statement issuance.
Certain information and note disclosures normally included in consolidated financial statements, prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The interim operating results presented in these financial statements are not necessarily indicative of operating results for the full year. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2015.
(b)Use of Estimates
The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheets and income and expense for the periods presented. Actual results could differ significantly from those estimates.
(c)Loans and Loan Commitments
The Company extends commercial, real estate, agricultural and consumer loans to customers. A substantial portion of the loan portfolio consists of commercial and real estate loans made to borrowers located throughout the Front Range of Colorado. The ability of the Company’s borrowers to honor their contracts is generally dependent upon the real estate and general economic conditions prevailing in Colorado, among other factors.
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances, adjusted for charge-offs, the allowance for
loan losses and any deferred fees or costs. Accounting for loans is performed consistently across all portfolio segments and classes.
A portfolio segment is defined in accounting guidance as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses. A class is defined in accounting guidance as a group of loans having similar initial measurement attributes, risk characteristics and methods for monitoring and assessing risk.
Interest income is accrued on the unpaid principal balance of the Company’s loans. Loan origination fees, net of direct origination costs, are deferred and recognized as an adjustment to the related loan yield using the effective interest method without anticipating prepayments.
The accrual of interest on loans is discontinued (and the loan is put on nonaccrual status) at the time the loan is 90 days past due unless the loan is well secured and in process of collection. The time at which a loan enters past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off prior to the date on which they would otherwise enter past due status if collection of principal or interest is considered doubtful. The interest on a nonaccrual loan is accounted for using the cost-recovery or cash-basis method until the loan qualifies for a return to the accrual-basis method. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero, with payments received being applied first to the principal balance of the loan. Under the cash-basis method, interest income is recognized when the payment is received in cash. A loan is returned to accrual status after the delinquent borrower’s financial condition has improved, when all the principal and interest amounts contractually due are brought current and when the likelihood of the borrower making future timely payments is reasonably assured.
Financial instruments include off‑balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The face amount of each item represents the Company’s total exposure to loss with respect to the item before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
(d)Allowance for Loan Losses and Allowance for Unfunded Commitments
The allowance for loan losses, or “the allowance”, is a valuation allowance for probable incurred loan losses and is reported as a reduction of outstanding loan balances.
Management evaluates the amount of the allowance on a regular basis based upon its periodic review of the collectability of the Company’s loans. Factors affecting the collectability of the loans include the nature and volume of the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, prevailing economic conditions and historical loss experience. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Management maintains the allowance at a level that it deems appropriate to adequately provide for probable incurred losses in the loan portfolio and other extensions of credit. The Company’s methodology for estimating the allowance is consistent across all portfolio segments and classes of loans.
Loans deemed to be uncollectible are charged off and deducted from the allowance. The Company’s loan portfolio primarily consists of non-homogeneous commercial and real estate loans where charge-offs are considered on a loan-by-loan basis based on the facts and circumstances, including management’s evaluation of collateral values in comparison to book values on collateral-dependent loans. Charge-offs on smaller balance unsecured homogenous type loans, such as overdrafts and ready reserves, are recognized by the time the loan in question is 90 days past due. The provision for loan losses and recoveries on loans previously charged-off are added to the allowance.
The allowance consists of both specific and general components. The specific component relates to loans that are individually classified as impaired. All loans are subject to individual impairment evaluation should the pertinent facts and circumstances suggest that such evaluation is necessary. Factors considered by management in determining impairment include the loan’s payment status and the probability of collecting scheduled principal and interest payments when they become due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the contractual terms of the original underlying loan agreement. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. If a loan is impaired, a portion, if any, of the allowance is allocated so that the loan is reported at the present value of estimated future cash flows using the loan’s original contractual rate or at the fair value of collateral, less estimated selling costs, if repayment is expected solely from collateral. Troubled debt restructurings (“TDRs”) are separately identified for impairment disclosures. If a TDR is considered to be a collateral-dependent loan, impairment of the loan is measured using the fair value of the collateral, less estimated selling costs. Likewise, if a TDR is not collateral-dependent, impairment is measured using the present value of estimated future cash flows discounted by the loan’s effective rate at inception. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with its accounting policy for the allowance.
The general component of the allowance covers all other loans not specifically identified as impaired and is determined by calculating losses recognized by portfolio segment during the current credit cycle and adjusted based on management’s evaluation of various qualitative factors. In performing this calculation, loans are aggregated into one of three portfolio segments: Real Estate, Consumer and Commercial & Other. An assessment of risks impacting loans in each of these portfolio segments is performed and qualitative adjustment factors, which will adjust the historical loss rate, are estimated. These qualitative adjustment factors consider current conditions relative to conditions present throughout the current credit cycle in the following areas: credit quality, loan class concentration levels, economic conditions, loan growth dynamics and organizational conditions. The historical loss experience is adjusted for management’s estimate of the impact of these factors based on the risks present for each portfolio segment.
The Company recognizes a liability in relation to unfunded commitments that is intended to represent the estimated future losses on commitments. In calculating the amount of this liability, management considers the amount of the Company’s off-balance sheet commitments, estimated utilization factors and loan specific risk factors. The Company’s liability for unfunded commitments is calculated quarterly and the liability is included under “other liabilities” in the consolidated balance sheet.
(e)Other Intangible Assets
Intangible assets acquired in a business combination are amortized over their estimated useful lives to their estimated residual values and evaluated for impairment whenever changes in circumstances indicate that such an evaluation is necessary.
Core deposit intangible assets (“CDI assets”) are recognized at the time of their acquisition based on valuations prepared by independent third parties or other estimates of fair value. In preparing such valuations, management considers variables such as deposit servicing costs, attrition rates and market discount rates. CDI assets are amortized to expense over their useful lives, ranging from 10 years to 15 years.
Customer relationship intangible assets are recognized at the time of their acquisition based upon management’s estimate of their fair value. In preparing their valuation, management considers variables such as growth in existing customer base, attrition rates and market discount rates. The customer relationship intangible assets are amortized to expense over their estimated useful life, which has been estimated to be 10 years. As of June 30, 2016, the Company had recognized two customer relationship intangible assets as a result of the acquisitions of PCM on July 31, 2012 and CHIA on July 16, 2014.
(f)Derivative Instruments
The Company records all derivatives on its consolidated balance sheets at fair value. At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to the derivative’s likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). To date, the Company has entered into cash flow hedges and stand-alone derivative agreements but has not entered into any fair value hedges. For a cash flow hedge, the gain or loss on the
derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction impacts earnings. Any portion of the cash flow hedge not deemed highly effective in hedging the changes in expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings as noninterest income.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions, at the inception of the derivative contract. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the hedge is highly effective in offsetting changes in cash flows of the hedged items.
(g)Stock Incentive Plan
The Company’s Amended and Restated 2005 Stock Incentive Plan (the “Incentive Plan”) provided for the grant of equity-based awards representing up to a total of 1,700,000 shares of voting common stock to key employees, nonemployee directors, consultants and prospective employees. The Incentive Plan expired by its terms on April 4, 2015. At the Company’s annual meeting of stockholders on May 5, 2015, the Company’s stockholders approved the Guaranty Bancorp 2015 Long-Term Incentive Plan (the “2015 Plan”), which had been previously approved by the Company’s Board of Directors. The 2015 Plan provides for the grant of stock options, stock awards, stock unit awards, performance stock awards, stock appreciation rights and other equity-based awards representing up to a total of 935,000 shares of voting common stock to key employees, nonemployee directors, consultants and prospective employees. All awards issued under the Incentive Plan will remain outstanding in accordance with their terms despite the expiration of the Incentive Plan; however, any awards granted subsequent to the expiration of the Incentive Plan have been, and will continue to be, issued under the 2015 Plan.
As of June 30, 2016, the Company had granted stock awards under both the Incentive Plan and the 2015 Plan. The Company recognizes stock compensation expense for services received in a share-based payment transaction over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The compensation cost of employee and director services received in exchange for stock awards is based on the grant date fair value of the award, as determined by quoted market prices. Stock compensation expense is recognized using an estimated forfeiture rate, adjusted as necessary to reflect actual forfeitures. The Company has issued stock awards that vest based on the passage of time over service periods of one to five years (in some cases vesting in annual installments, in other cases cliff vesting at the end of the service period) and other stock awards that vest contingent upon the satisfaction of certain performance conditions. The last date on which outstanding performance stock awards may vest is February 14, 2019. Compensation cost related to the performance stock awards is recognized based on an evaluation of financial performance in comparison to established criteria. Should expectations of future financial performance change, the amount of expense recognized in future periods could be impacted.
(h)Stock Repurchase Plan
On February 2, 2016, the Company’s Board of Directors authorized the extension of the expiration date of the Company’s share repurchase program originally announced in April 2014. The repurchase program had been scheduled to expire 12 months from the date of its announcement and, as extended, the program is scheduled to expire on April 2, 2017. Pursuant to the program, the Company may repurchase up to 1,000,000 shares of its voting common stock, par value $0.001 per share. As of the date of this filing, the Company had not repurchased any shares under the program.
(i)Income Taxes
Income tax expense is the total of the current year’s income tax payable or refundable and the increase or decrease in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of the enactment date.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that the Company will not realize some portion of or the entire deferred tax asset. In assessing the Company’s likelihood of realizing deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, forecasts of future income, taking into account applicable tax planning strategies and assessments of current and future economic and business conditions. Management performs this analysis quarterly and adjusts as necessary. At June 30, 2016 and December 31, 2015, the Company had a net deferred tax asset of $6,694,000 and $7,912,000, respectively, which includes the deferred tax asset associated with the net unrealized loss on securities and interest rate swaps. After analyzing the composition of, and changes in, the deferred tax assets and liabilities and considering the Company’s forecasted future taxable income and various tax planning strategies, including the intent to hold the securities available for sale that were in a loss position until maturity, management determined that as of June 30, 2016, it was “more likely than not” that the net deferred tax asset would be fully realized. As a result, there was no valuation allowance with respect to the Company’s deferred tax asset as of June 30, 2016 or December 31, 2015.
The Company and the Bank are subject to U.S. federal income tax and state of Colorado income tax. Generally, the Company is no longer subject to examination by Federal taxing authorities for years before 2012 and is no longer subject to examination by the State for years before 2011. The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other noninterest expense. At June 30, 2016 and December 31, 2015, the Company did not have any amounts accrued for interest or penalties.
(j)Earnings per Common Share
Basic earnings per common share represents the earnings allocable to common stockholders divided by the weighted average number of common shares outstanding during the period. Dilutive common shares that may be issued by the Company represent unvested stock awards subject to a service or performance condition.
Earnings per common share have been computed based on the following calculation of weighted average shares outstanding:
| | | | | | | |
| | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | |
Average common shares outstanding | 21,242,520 | | 21,070,199 | | 21,213,706 | | 21,053,853 |
Effect of dilutive unvested stock grants (1) | 119,192 | | 130,239 | | 197,920 | | 137,424 |
Average shares outstanding for calculated | | | | | | | |
diluted earnings per common share | 21,361,712 | | 21,200,438 | | 21,411,626 | | 21,191,277 |
_____________ | | | | | | | |
|
(1) Unvested stock grants representing 554,591 shares at June 30, 2016 had a dilutive impact of 119,192 and 197,920 shares in the diluted earnings per share calculation for the three and six months ended June 30, 2016, respectively. Unvested stock grants representing 654,972 shares at June 30, 2015 had a dilutive impact of 130,239 and 137,424 shares in the diluted earnings per share calculation for the three and six months ended June 30, 2015, respectively. |
(k)Recently Issued Accounting Standards
Adoption of New Accounting Standards:
In September 2015, the FASB issued accounting standards update 2015-16 Simplifying the Accounting for Measurement-Period Adjustments. The update requires acquirers to adjust provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined, rather than retrospectively adjusting previously reported information. Additional disclosure of the impact of measurement period adjustments on current year earnings will also be required. For public business entities, the amendments of this update are effective for interim and annual periods beginning after December 15, 2015.
This update does not have a material impact on the Company’s financial position, results of operations or cash flows.
Recently Issued but not yet Effective Accounting Standards:
In May 2014, the FASB issued accounting standards update 2014-09 Revenue from Contracts with Customers. The main provisions of the update require the identification of performance obligations within a contract and require the recognition of revenue based on a stand-alone allocation of contract revenue to each performance obligation. Performance obligations may be satisfied and revenue recognized over a period of time if: (i) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs, or (ii) the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (iii) the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. The amendments of the update are to be effective for public entities beginning with interim and annual reporting periods beginning after December 15, 2017. Management does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows.
In January 2016, the FASB released accounting standards update 2016-01 Recognition and Measurement of Financial Assets and Liabilities. The main provisions of the update are to eliminate the available for sale classification of accounting for equity securities and to adjust the fair value disclosures for financial instruments carried at amortized costs such that the disclosed fair values represent an exit price as opposed to an entry price. The provisions of this update will require that equity securities be carried at fair market value on the balance sheet and any periodic changes in value will be adjustments to the income statement. A practical expedient is provided for equity securities without a readily determinable fair value, such that these securities can be carried at cost less any impairment. The provisions of this update become effective for interim and annual periods beginning after December 15, 2017. Management does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows.
In February 2016, the FASB issued accounting standards update 2016-02 Leases. The update requires all leases, with the exception of short-term leases that have contractual terms no greater than one year, to be recorded on the balance sheet. Under the provisions of the update, leases classified as operating will be reflected on the balance sheet with the recognition of both a right-of-use asset and a lease liability. Under the update, a distinction will exist between finance and operating type leases and the rules for determining which classification a lease will fall into are similar to existing rules. For public business entities, the amendments of this update are effective for interim and annual periods beginning after December 15, 2018. The update requires a modified retrospective transition under which comparative balance sheets from the earliest historical period presented will be revised to reflect what the financials would have looked like were the provisions of the update applied consistently in all prior periods. Management is in the process of evaluating the impacts of the update on the Company’s financial position and does not expect the requirements of the update to have a material impact on the Company’s results of operations or cash flows.
In March 2016, the FASB issued accounting standards update 2016-09 Compensation-Stock Compensation. The purpose of the update was to simplify the accounting for share-based payment transactions, including the income tax consequences of such transactions. Under the provisions of the update the income tax consequences of excess tax benefits and deficiencies should be recognized in income tax expense in the reporting period in which the awards vest. Currently, excess tax benefits or deficiencies impact stockholder’s equity directly to the extent there is a cumulative excess tax benefit. In the event that a tax deficiency has occurred during the reporting period and a cumulative excess tax benefit does not exist, the tax deficiency is recognized in income tax expense under current GAAP. The update also provides that entities may continue to estimate forfeitures in accounting for stock based compensation or recognize them as they occur. The provisions of this update become effective for interim and annual periods beginning after December 15, 2016. The update requires a modified retrospective transition under which a cumulative effect to equity will be recognized in the period of adoption. Management is in the process of evaluating the impact of the update on the Company’s financial position, results of operations and cash flows.
In June 2016, the FASB issued accounting standards update 2016-13 Financial Instruments - Credit Losses, commonly referred to as “CECL”. The provisions of the update eliminate the probable initial
recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the contractual term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (“HTM”) debt securities. Under the provisions of the update credit losses recognized on available for sale (“AFS”) debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL reserves will be established for purchased loans at the time of acquisition the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. The FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. For public business entities that are SEC filers the amendments of the update will become effective beginning January 1, 2020. Management is in the process of evaluating the impact of CECL on the Company’s financial position, results of operations and cash flows as well as its required disclosures.
(l)Reclassifications
Certain reclassifications of prior year balances have been made to conform to the current year presentation. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or cash flows.
(2)Securities
The fair value of available for sale debt securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) (“AOCI”) were as follows at the dates presented:
| | | | | | | | |
| | | | | | | | |
| June 30, 2016 |
| | Fair
Value | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Amortized
Cost |
| | (In thousands) |
Securities available for sale: | | | | | | | | |
State and municipal | $ | 34,695 | $ | 157 | $ | - | $ | 34,538 |
Mortgage-backed - agency / residential | | 92,258 | | 1,035 | | (313) | | 91,536 |
Mortgage-backed - private / residential | | 269 | | - | | (9) | | 278 |
Trust preferred | | 18,575 | | 550 | | (1,975) | | 20,000 |
Corporate | | 44,034 | | 895 | | (249) | | 43,388 |
Collateralized loan obligations | | 8,325 | | - | | (155) | | 8,480 |
Total securities available for sale | $ | 198,156 | $ | 2,637 | $ | (2,701) | $ | 198,220 |
| | | | | | | | |
| | | | | | | | |
| December 31, 2015 |
| | Fair
Value | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Amortized
Cost |
| | (In thousands) |
Securities available for sale: | | | | | | | | |
State and municipal | $ | 34,713 | $ | 20 | $ | - | $ | 34,693 |
Mortgage-backed - agency / residential | | 129,017 | | 1,081 | | (1,929) | | 129,865 |
Mortgage-backed - private / residential | | 274 | | - | | (10) | | 284 |
Trust preferred | | 17,806 | | 100 | | (2,294) | | 20,000 |
Corporate | | 65,291 | | 660 | | (389) | | 65,020 |
Collateralized loan obligations | | 8,330 | | - | | (148) | | 8,478 |
Total securities available for sale | $ | 255,431 | $ | 1,861 | $ | (4,770) | $ | 258,340 |
During the first quarter of 2015, the Company reclassified, at fair value, approximately $49,084,000 in available for sale mortgage-backed, asset-backed and municipal securities to the held to maturity category, including related unrealized pre-tax losses of approximately $750,000. As of June 30, 2016 unrealized pre-tax losses of approximately $607,000 remained in accumulated other comprehensive income (loss) and will continue to be accreted over the remaining life of the securities. No gains or losses were recognized at the time of reclassification.
The carrying amount, unrecognized gains/losses and fair value of securities held to maturity were as follows at the dates presented:
| | | | | | | | |
| | | | | | | | |
| | Fair
Value | | Gross
Unrecognized
Gains | | Gross
Unrecognized
Losses | | Amortized
Cost |
| | (In thousands) |
June 30, 2016: | | | | | | | | |
State and municipal | $ | 61,938 | $ | 2,559 | $ | (290) | $ | 59,669 |
Mortgage-backed - agency / residential | | 73,455 | | 2,594 | | - | | 70,861 |
Asset-backed | | 18,974 | | 658 | | - | | 18,316 |
Other | | 350 | | - | | - | | 350 |
| $ | 154,717 | $ | 5,811 | $ | (290) | $ | 149,196 |
| | | | | | | | |
December 31, 2015: | | | | | | | | |
State and municipal | $ | 55,812 | $ | 1,349 | $ | (390) | $ | 54,853 |
Mortgage-backed - agency / residential | | 74,692 | | 767 | | (611) | | 74,536 |
Asset-backed | | 19,618 | | 273 | | (27) | | 19,372 |
| $ | 150,122 | $ | 2,389 | $ | (1,028) | $ | 148,761 |
The proceeds from sales and calls of securities and the associated gains are listed below:
| | | | | | | | | |
| | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, |
| | 2016 | | 2015 | | | 2016 | | 2015 |
| | | | | | | | | |
| | (In thousands) |
Proceeds | $ | 33,013 | $ | - | | $ | 52,481 | $ | 2,868 |
Gross gains | | 939 | | - | | | 1,052 | | 16 |
Gross losses | | (1,040) | | - | | | (1,108) | | (16) |
Net tax (benefit) expense related to gains (losses) on sale | | (38) | | - | | | (21) | | - |
The amortized cost and estimated fair value of available for sale and held to maturity debt securities by contractual maturity at June 30, 2016 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. Securities not due at a single maturity date are presented separately.
| | | | |
| | | | |
| | Available for Sale |
| | Fair Value | | Amortized Cost |
| | (In thousands) |
Securities available for sale: | | | | |
Due in one year or less | $ | 4,163 | $ | 4,123 |
Due after one year through five years | | 20,811 | | 20,244 |
Due after five years through ten years | | 13,591 | | 13,298 |
Due after ten years | | 58,739 | | 60,261 |
Total AFS, excluding mortgage-backed (MBS) | | | | |
and collateralized loan obligations | | 97,304 | | 97,926 |
Mortgage-backed and collateralized | | | | |
loan obligations | | 100,852 | | 100,294 |
Total securities available for sale | $ | 198,156 | $ | 198,220 |
| | | | |
| | | | |
| | Held to Maturity |
| | Fair Value | | Amortized Cost |
| | (In thousands) |
Securities held to maturity: | | | | |
Due in one year or less | $ | 254 | $ | 254 |
Due after one year through five years | | 3,287 | | 3,221 |
Due after five years through ten years | | 27,772 | | 26,883 |
Due after ten years | | 30,975 | | 29,661 |
Total HTM, excluding MBS and asset-backed | | 62,288 | | 60,019 |
Mortgage-backed and asset-backed | | 92,429 | | 89,177 |
Total securities held to maturity | $ | 154,717 | $ | 149,196 |
The following tables present the fair value and the unrealized loss on securities that were temporarily impaired as of June 30, 2016 and December 31, 2015, aggregated by major security type and length of time in a continuous unrealized loss position:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
June 30, 2016 | | Less than 12 Months | | | 12 Months or More | | | Total |
| | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses |
| | | | | | | | | | | | | | | | | |
| | (In thousands) |
Description of securities: | | | | | | | | | | | | | | | | | |
Available for sale: | | | | | | | | | | | | | | | | | |
Mortgage-backed - agency / | | | | | | | | | | | | | | | | | |
residential | $ | 7,323 | | $ | (148) | | $ | 14,380 | | $ | (165) | | $ | 21,703 | | $ | (313) |
Mortgage-backed - private / | | | | | | | | | | | | | | | | | |
residential | | 269 | | | (9) | | | - | | | - | | | 269 | | | (9) |
Trust preferred | | - | | | - | | | 8,025 | | | (1,975) | | | 8,025 | | | (1,975) |
Corporate | | 5,751 | | | (249) | | | - | | | - | | | 5,751 | | | (249) |
Collateralized loan obligations | | 2,940 | | | (2) | | | 5,385 | | | (153) | | | 8,325 | | | (155) |
| | | | | | | | | | | | | | | | | |
Held to maturity: | | | | | | | | | | | | | | | | | |
State and municipal | | - | | | - | | | 564 | | | (295) | | | 564 | | | (295) |
Mortgage-backed - agency / | | | | | | | | | | | | | | | | | |
residential | | 3,495 | | | (310) | | | - | | | - | | | 3,495 | | | (310) |
Asset-backed | | - | | | - | | | 7,407 | | | (6) | | | 7,407 | | | (6) |
Total temporarily impaired | $ | 19,778 | | $ | (718) | | $ | 35,761 | | $ | (2,594) | | $ | 55,539 | | $ | (3,312) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
December 31, 2015 | | Less than 12 Months | | | 12 Months or More | | | Total |
| | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses |
| | | | | | | | | | | | | | | | | |
| | (In thousands) |
Description of securities: | | | | | | | | | | | | | | | | | |
Available for sale: | | | | | | | | | | | | | | | | | |
Mortgage-backed - agency / | | | | | | | | | | | | | | | | | |
residential | $ | 56,204 | | $ | (800) | | $ | 31,755 | | $ | (1,129) | | $ | 87,959 | | $ | (1,929) |
Mortgage-backed - private / | | | | | | | | | | | | | | | | | |
residential | | 274 | | | (10) | | | - | | | - | | | 274 | | | (10) |
Trust preferred | | - | | | - | | | 7,706 | | | (2,294) | | | 7,706 | | | (2,294) |
Corporate | | 27,176 | | | (389) | | | - | | | - | | | 27,176 | | | (389) |
Collateralized loan obligations | | 8,330 | | | (148) | | | - | | | - | | | 8,330 | | | (148) |
| | | | | | | | | | | | | | | | | |
Held to maturity: | | | | | | | | | | | | | | | | | |
State and municipal | | 6,726 | | | (351) | | | 10,056 | | | (102) | | | 16,782 | | | (453) |
Mortgage-backed - agency / | | | | | | | | | | | | | | | | | |
residential | | 39,280 | | | (781) | | | 25,838 | | | (820) | | | 65,118 | | | (1,601) |
Asset-backed | | - | | | - | | | 19,618 | | | (438) | | | 19,618 | | | (438) |
Total temporarily impaired | $ | 137,990 | | $ | (2,479) | | $ | 94,973 | | $ | (4,783) | | $ | 232,963 | | $ | (7,262) |
The table above presents unrealized losses on held to maturity securities since the date of the securities purchase, independent of the impact associated with changes is cost basis upon transfer from available for sale to held to maturity.
In determining whether or not there is an other-than-temporary-impairment (“OTTI”) for a security, management considers many factors, including: (i) the length of time for which and the extent to which the security’s fair value has been less than cost, (ii) the financial condition and near-term prospects of the security’s issuer, (iii) whether the decline in the security’s value was affected by macroeconomic conditions, and (iv) whether the Company intends to sell the security and whether it is more likely than not that the Company will be required to sell the security before a recovery in its fair value. The assessment of whether an OTTI exists involves a high degree of subjectivity and judgment and is based on the information available to management at a particular point in time. There were no accumulated credit losses on any of the Company’s securities as of June 30, 2016 or December 31, 2015.
At June 30, 2016, there were 18 individual securities in an unrealized loss position, including 13 individual securities that had been in a continuous unrealized loss position for 12 months or longer. Management has evaluated these securities, in addition to the remaining five securities in an unrealized loss position, and has determined that the decline in value since their purchase dates was primarily attributable to fluctuations in market interest rates and does not reflect a decline in the underlying issuers’ ability to repay. The decrease in the number of securities in an unrealized loss position in excess of 12 months from 43 securities at December 31, 2015 to 13 securities at June 30, 2016 was primarily attributable to the timing of interest rate fluctuations. The total number of securities in an unrealized loss position decreased from 88 individual securities at December 31, 2015 to 18 securities at June 30, 2016 also as a result of the timing of interest rate fluctuations. At June 30, 2016, the Company did not intend to sell, and did not consider it likely that it would be required to sell, any of these securities prior to recovery in their fair value.
The Company’s unrated and rated municipal bond securities, along with the Company’s other rated investment securities, are subject to an annual internal review process that management has historically performed in the fourth quarter. The review process includes a review of the securities’ issuers’ most recent financial statements, including an evaluation of the expected sufficiency of the issuers’ cash flows relative to their debt service requirements. In addition, management considers any interim information reasonably made available to it that would prompt the need for more frequent review. At June 30, 2016 and December 31, 2015, the Company’s unrated municipal bonds comprised approximately 11.4% and 13.8%, respectively, of the carrying value of the Company’s entire municipal bond portfolio.
At June 30, 2016, a revenue bond issued by the Colorado Health Facilities Authority with a book value of $24,115,000 accounted for 10.5% of total stockholders’ equity. This amortizing tax-exempt bond is secured by a pledge of revenues and a deed of trust from a local hospital and carries an interest rate of 4.75% and is scheduled to mature on December 1, 2031. Utilizing the discounted cash flow method and an estimate of current market rates for similar bonds, management determined the estimated fair value of this bond as of June 30, 2016 and December 31, 2015 was approximately equal to its par value. In addition to conducting its annual review of unrated municipal bonds, the most recent of which was completed in the fourth quarter 2015, management conducts a quarterly review of the hospital’s financial statements. To date, the bond has paid principal and interest in accordance with its contractual terms, including a partial redemption in 2013 in advance of the contractual repayment schedule. The hospital has evidenced sufficient cash flow to service the debt.
Certain mortgage backed securities with an aggregate market value of approximately $19,217,000 as of June 30, 2016 were pledged to secure overnight repurchase agreement borrowings. Fluctuations in the fair value of these securities, and or the fluctuation in customer repurchase agreement balances, may result in the need to pledge additional securities against these borrowings. Management monitors the Bank’s collateral position with respect to repurchase agreement borrowings on a daily basis. The Company also pledges certain securities to public deposits under the Colorado Public Deposit Protection Act and pledges securities as collateral for funding lines. At June 30, 2016, the Company’s total pledged securities were $120,824,000.
(3)Loans
A summary of net loans held for investment by loan type at the dates indicated is as follows:
| | | | | |
| | | | | |
| | June 30, | | | December 31, |
| | 2016 | | | 2015 |
| | | | | |
| | (In thousands) |
Commercial and residential real estate | $ | 1,428,397 | | $ | 1,281,701 |
Construction | | 26,497 | | | 107,170 |
Commercial | | 336,069 | | | 323,552 |
Agricultural | | 11,035 | | | 9,294 |
Consumer | | 66,539 | | | 66,288 |
SBA | | 28,494 | | | 25,645 |
Other | | 1,111 | | | 631 |
Total gross loans | | 1,898,142 | | | 1,814,281 |
Deferred costs, net | | 401 | | | 255 |
Loans, held for investment, net | | 1,898,543 | | | 1,814,536 |
Less allowance for loan losses | | (23,050) | | | (23,000) |
Net loans, held for investment | $ | 1,875,493 | | $ | 1,791,536 |
In the second quarter 2016 the Company purchased $22.7 million in performing loans included in our Real Estate portfolio segment. No loans were purchased in the first six months of 2015.
Activity in the allowance for loan losses for the period indicated is as follows:
| | | | | | | | | | | |
| | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, |
| | 2016 | | | 2015 | | | 2016 | | | 2015 |
| | | | | | | | | | | |
| (In thousands) |
Balance, beginning of period | $ | 23,025 | | $ | 22,500 | | $ | 23,000 | | $ | 22,490 |
Provision for loan losses | | 10 | | | 113 | | | 26 | | | 90 |
Loans charged-off | | (57) | | | (48) | | | (359) | | | (97) |
Recoveries on loans previously | | | | | | | | | | | |
charged-off | | 72 | | | 285 | | | 383 | | | 367 |
Balance, end of period | $ | 23,050 | | $ | 22,850 | | $ | 23,050 | | $ | 22,850 |
The Company’s additional disclosures relating to loans and the allowance for loan losses are broken out into two subsets, portfolio segment and class. The portfolio segment level is defined as the level where financing receivables are aggregated in developing the Company’s systematic method for calculating its allowance for loan losses. The class level is the second level at which credit information is presented and represents the categorization of financing related receivables at a slightly less aggregated level than the portfolio segment level. Because data presented according to class is dependent upon the underlying purpose of the loan, whereas loan data organized by portfolio segment is determined by the loan’s underlying collateral, disclosures broken out by portfolio segment versus class may not be in agreement.
The following tables provide detail for the ending balances in the Company’s allowance for loan losses and loans held for investment, broken down by portfolio segment as of the dates indicated. In addition, the tables also provide a rollforward by portfolio segment of the allowance for loan losses for the three and six months ended June 30, 2016 and June 30, 2015. The detail provided for the amount of the allowance for loan losses and loans individually versus collectively evaluated for impairment (i.e., the specific component versus the general component of the allowance for loan losses) corresponds to the Company’s systematic methodology for estimating its allowance for loan losses.
| | | | | | | | | | | |
| | | | | | | | | | | |
| | Real Estate | | | Consumer and
Installment | | | Commercial
and Other | | | Total |
| | (In thousands) |
Allowance for Loan Losses | | | | | | | | | | | |
Balance as of December 31, 2015 | $ | 20,306 | | $ | 71 | | $ | 2,623 | | $ | 23,000 |
Charge-offs | | (204) | | | (7) | | | (148) | | | (359) |
Recoveries | | 85 | | | 11 | | | 287 | | | 383 |
Provision (credit) | | (16) | | | - | | | 42 | | | 26 |
Balance as of June 30, 2016 | $ | 20,171 | | $ | 75 | | $ | 2,804 | | $ | 23,050 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance as of March 31, 2016 | $ | 20,343 | | $ | 75 | | $ | 2,607 | | $ | 23,025 |
Charge-offs | | - | | | (5) | | | (52) | | | (57) |
Recoveries | | 51 | | | 6 | | | 15 | | | 72 |
Provision (credit) | | (223) | | | (1) | | | 234 | | | 10 |
Balance as of June 30, 2016 | $ | 20,171 | | $ | 75 | | $ | 2,804 | | $ | 23,050 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balances at June 30, 2016: | | | | | | | | | | | |
| | | | | | | | | | | |
Allowance for Loan Losses | | | | | | | | | | | |
Individually evaluated | $ | 283 | | $ | - | | $ | 206 | | $ | 489 |
Collectively evaluated | | 19,888 | | | 75 | | | 2,598 | | | 22,561 |
Total | $ | 20,171 | | $ | 75 | | $ | 2,804 | | $ | 23,050 |
| | | | | | | | | | | |
Loans | | | | | | | | | | | |
Individually evaluated | $ | 21,893 | | $ | 1 | | $ | 4,497 | | $ | 26,391 |
Collectively evaluated | | 1,562,636 | | | 6,346 | | | 303,170 | | | 1,872,152 |
Total | $ | 1,584,529 | | $ | 6,347 | | $ | 307,667 | | $ | 1,898,543 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | Real Estate | | | Consumer and
Installment | | | Commercial
and Other | | | Total |
| | (In thousands) |
Allowance for Loan Losses | | | | | | | | | | | |
Balance as of December 31, 2014 | $ | 19,607 | | $ | 39 | | $ | 2,844 | | $ | 22,490 |
Charge-offs | | (7) | | | (4) | | | (86) | | | (97) |
Recoveries | | 72 | | | 12 | | | 283 | | | 367 |
Provision (credit) | | 334 | | | 7 | | | (251) | | | 90 |
Balance as of June 30, 2015 | $ | 20,006 | | $ | 54 | | $ | 2,790 | | $ | 22,850 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Allowance for Loan Losses | | | | | | | | | | | |
Balance as of March 31, 2015 | $ | 19,622 | | $ | 36 | | $ | 2,842 | | $ | 22,500 |
Charge-offs | | - | | | (3) | | | (45) | | | (48) |
Recoveries | | 39 | | | 6 | | | 240 | | | 285 |
Provision (credit) | | 345 | | | 15 | | | (247) | | | 113 |
Balance as of June 30, 2015 | $ | 20,006 | | $ | 54 | | $ | 2,790 | | $ | 22,850 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balances at December 31, 2015: | | | | | | | | | |
| | | | | | | | | | | |
Allowance for Loan Losses | | | | | | | | | | | |
Individually evaluated | $ | 282 | | $ | - | | $ | 11 | | $ | 293 |
Collectively evaluated | | 20,024 | | | 71 | | | 2,612 | | | 22,707 |
Total | $ | 20,306 | | $ | 71 | | $ | 2,623 | | $ | 23,000 |
| | | | | | | | | | | |
Loans | | | | | | | | | | | |
Individually evaluated | $ | 23,846 | | $ | 2 | | $ | 2,305 | | $ | 26,153 |
Collectively evaluated | | 1,489,211 | | | 5,716 | | | 293,456 | | | 1,788,383 |
Total | $ | 1,513,057 | | $ | 5,718 | | $ | 295,761 | | $ | 1,814,536 |
The following tables provide additional detail with respect to impaired loans broken out according to class as of the dates indicated. The recorded investment included in the following table represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. The unpaid balance represents the recorded balance prior to any partial charge-offs. Interest income recognized year-to-date may exclude an immaterial amount of interest income on matured loans that are 90 days or more past due, but that are in the process of being renewed and thus are still accruing.
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
June 30, 2016 | | Recorded
Investment | | | Unpaid
Balance | | | Related
Allowance | | | Average
Recorded
Investment
YTD | | | Interest
Income
Recognized
YTD |
| | (In thousands) |
Impaired loans with no related allowance: | | | | | | | | | | | | | | |
Commercial and residential real estate | $ | 11,610 | | $ | 12,878 | | $ | - | | $ | 12,023 | | $ | 283 |
Construction | | 986 | | | 986 | | | - | | | 986 | | | - |
Commercial | | 251 | | | 251 | | | - | | | 134 | | | 9 |
Consumer | | 19 | | | 19 | | | - | | | 182 | | | 1 |
Other | | 119 | | | 472 | | | - | | | 297 | | | - |
Total | $ | 12,985 | | $ | 14,606 | | $ | - | | $ | 13,622 | | $ | 293 |
| | | | | | | | | | | | | | |
Impaired loans with a related allowance: | | | | | | | | | | | | | | |
Commercial and residential real estate | $ | 9,751 | | $ | 9,868 | | $ | 274 | | $ | 9,911 | | $ | 188 |
Construction | | - | | | - | | | - | | | - | | | - |
Commercial | | 2,587 | | | 2,620 | | | 19 | | | 1,605 | | | 30 |
Consumer | | 395 | | | 478 | | | 9 | | | 420 | | | 5 |
Other | | 673 | | | 723 | | | 187 | | | 224 | | | - |
Total | $ | 13,406 | | $ | 13,689 | | $ | 489 | | $ | 12,160 | | $ | 223 |
| | | | | | | | | | | | | | |
Total impaired loans: | | | | | | | | | | | | | | |
Commercial and residential real estate | $ | 21,361 | | $ | 22,746 | | $ | 274 | | $ | 21,934 | | $ | 471 |
Construction | | 986 | | | 986 | | | - | | | 986 | | | - |
Commercial | | 2,838 | | | 2,871 | | | 19 | | | 1,739 | | | 39 |
Consumer | | 414 | | | 497 | | | 9 | | | 602 | | | 6 |
Other | | 792 | | | 1,195 | | | 187 | | | 521 | | | - |
Total impaired loans | $ | 26,391 | | $ | 28,295 | | $ | 489 | | $ | 25,782 | | $ | 516 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
December 31, 2015 | | Recorded
Investment | | | Unpaid
Balance | | | Related
Allowance | | | Average
Recorded
Investment
YTD | | | Interest
Income
Recognized
YTD |
| | (In thousands) |
Impaired loans with no related allowance: | | | | | | | | | | | | | | |
Commercial and residential real estate | $ | 12,756 | | $ | 14,472 | | $ | - | | $ | 14,194 | | $ | 242 |
Construction | | 986 | | | 986 | | | - | | | 789 | | | - |
Commercial | | - | | | - | | | - | | | 19 | | | - |
Consumer | | 271 | | | 310 | | | - | | | 307 | | | 5 |
Other | | 250 | | | 588 | | | - | | | 171 | | | - |
Total | $ | 14,263 | | $ | 16,356 | | $ | - | | $ | 15,480 | | $ | 247 |
| | | | | | | | | | | | | | |
Impaired loans with a related allowance: | | | | | | | | | | | | | | |
Commercial and residential real estate | $ | 10,232 | | $ | 10,472 | | $ | 268 | | $ | 9,989 | | $ | 388 |
Construction | | - | | | - | | | - | | | - | | | - |
Commercial | | 1,204 | | | 1,220 | | | 11 | | | 492 | | | 18 |
Consumer | | 454 | | | 529 | | | 14 | | | 493 | | | 13 |
Other | | - | | | - | | | - | | | - | | | - |
Total | $ | 11,890 | | $ | 12,221 | | $ | 293 | | $ | 10,974 | | $ | 419 |
| | | | | | | | | | | | | | |
Total impaired loans: | | | | | | | | | | | | | | |
Commercial and residential real estate | $ | 22,988 | | $ | 24,944 | | $ | 268 | | $ | 24,183 | | $ | 630 |
Construction | | 986 | | | 986 | | | - | | | 789 | | | - |
Commercial | | 1,204 | | | 1,220 | | | 11 | | | 511 | | | 18 |
Consumer | | 725 | | | 839 | | | 14 | | | 800 | | | 18 |
Other | | 250 | | | 588 | | | - | | | 171 | | | - |
Total impaired loans | $ | 26,153 | | $ | 28,577 | | $ | 293 | | $ | 26,454 | | $ | 666 |
The gross year-to-date interest income that would have been recorded had the nonaccrual loans been current in accordance with their original terms was $132,000 for the six months ended June 30, 2016 and $339,000 for the six months ended June 30, 2015. For the three months ended June 30, 2016 and June 30, 2015, gross interest income that would have been recorded on nonaccrual loans, had the loans been current in accordance with their original terms, was approximately $57,000 and $175,000 respectively. During the three and six months ended June 30, 2016, approximately $125,000 and $249,000, respectively, in cash-basis interest income was recognized on the company’s largest nonaccrual loan. No cash-basis interest income was recognized in the first six months of 2015.
The following tables summarize, by class, loans classified as past due in excess of 30 days or more, in addition to those loans classified as nonaccrual:
| | | | | | | | | | |
| | | | | | | | | | |
June 30, 2016 | | 30-89
Days Past
Due | | 90 Days +
Past Due
and Still
Accruing | | Nonaccrual | | Total Nonaccrual and
Past Due | | Total Loans,
Held for
Investment |
| | (In thousands) |
Commercial and residential | | | | | | | | | | |
real estate | $ | 1,617 | $ | - | $ | 10,476 | $ | 12,093 | $ | 1,428,698 |
Construction | | - | | - | | 986 | | 986 | | 26,503 |
Commercial | | 90 | | - | | 814 | | 904 | | 336,140 |
Consumer | | 2 | | - | | 257 | | 259 | | 66,553 |
Other | | 677 | | - | | 793 | | 1,470 | | 40,649 |
Total | $ | 2,386 | $ | - | $ | 13,326 | $ | 15,712 | $ | 1,898,543 |
| | | | | | | | | | |
| | | | | | | | | | |
December 31, 2015 | | 30-89
Days Past
Due | | 90 Days +
Past Due
and Still
Accruing | | Nonaccrual | | Total Nonaccrual and
Past Due | | Total Loans,
Held for
Investment |
| | (In thousands) |
Commercial and residential | | | | | | | | | | |
real estate | $ | 653 | $ | - | $ | 11,905 | $ | 12,558 | $ | 1,281,881 |
Construction | | - | | - | | 986 | | 986 | | 107,185 |
Commercial | | 1,147 | | - | | 874 | | 2,021 | | 323,598 |
Consumer | | 291 | | - | | 459 | | 750 | | 66,297 |
Other | | - | | - | | 250 | | 250 | | 35,575 |
Total | $ | 2,091 | $ | - | $ | 14,474 | $ | 16,565 | $ | 1,814,536 |
The Company categorizes loans into risk categories based on relevant information about the ability of a particular borrower to service its debt, such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory guidance:
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral, if any, pledged to secure the loan. Loans so classified have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Loans not meeting the criteria above are considered to be non-classified loans.
The following tables provide detail for the risk categories of loans, by class of loans, based on the most recent credit analysis performed as of the dates indicated:
| | | | | | | | | | | | |
| | | | | | | | | | | | |
June 30, 2016 | | Commercial
& Residential
Real Estate | | Construction | | Commercial | | Consumer | | Other | | Total |
| | (In thousands) |
Non-classified | $ | 1,408,284 | $ | 25,511 | $ | 334,427 | $ | 66,206 | $ | 38,744 | $ | 1,873,172 |
Substandard | | 20,113 | | 986 | | 1,642 | | 333 | | 1,896 | | 24,970 |
Doubtful | | - | | - | | - | | - | | - | | - |
Subtotal | | 1,428,397 | | 26,497 | | 336,069 | | 66,539 | | 40,640 | | 1,898,142 |
Deferred costs, net | | 301 | | 6 | | 71 | | 14 | | 9 | | 401 |
Loans, held for investment, net | $ | 1,428,698 | $ | 26,503 | $ | 336,140 | $ | 66,553 | $ | 40,649 | $ | 1,898,543 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
December 31, 2015 | | Commercial
& Residential
Real Estate | | Construction | | Commercial | | Consumer | | Other | | Total |
| | (In thousands) |
Non-classified | $ | 1,260,134 | $ | 106,184 | $ | 322,650 | $ | 65,365 | $ | 34,194 | $ | 1,788,527 |
Substandard | | 21,567 | | 986 | | 902 | | 923 | | 1,376 | | 25,754 |
Doubtful | | - | | - | | - | | - | | - | | - |
Subtotal | | 1,281,701 | | 107,170 | | 323,552 | | 66,288 | | 35,570 | | 1,814,281 |
Deferred costs, net | | 180 | | 15 | | 46 | | 9 | | 5 | | 255 |
Loans, held for investment, net | $ | 1,281,881 | $ | 107,185 | $ | 323,598 | $ | 66,297 | $ | 35,575 | $ | 1,814,536 |
The book balance of TDRs at June 30, 2016 and December 31, 2015 was $22,594,000 and $22,391,000, respectively. Management established approximately $290,000 and $276,000 in specific reserves with respect to these loans as of June 30, 2016 and December 31, 2015, respectively. The Company had an additional $1,030,000 and $953,000 committed on loans classified as TDRs at June 30, 2016 and December 31, 2015, respectively.
During the three and six months ended June 30, 2016, the terms of two loans totaling $1,865,000 were modified in troubled debt restructurings. The modification of the terms of such loans included one restructure of payment terms and one renewal of a loan with a stated interest rate below market. During the first six months of 2015 there were no modifications of loans designated as TDRs.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no defaults on TDRs during the six months ended June 30, 2016 or June 30, 2015.
(4)Other Intangible Assets
Other intangible assets with finite lives are amortized over their respective estimated useful lives to their estimated residual values. As of June 30, 2016, the Company had intangible assets comprised of its core deposit intangible assets and two customer relationship intangible assets.
The following table presents the gross amounts of core deposit intangible assets and customer relationship intangible assets and the related accumulated amortization at the dates indicated:
| | | | | | | |
| | | | | | | |
| | | | June 30, | | | December 31, |
| Useful Life | | | 2016 | | | 2015 |
| | | | | | | |
| | | | (In thousands) |
Core deposit intangible assets | 10 - 15 years | | $ | 62,975 | | $ | 62,975 |
Core deposit intangible assets accumulated amortization | | | | (62,320) | | | (62,124) |
Core deposit intangible assets, net | | | $ | 655 | | $ | 851 |
| | | | | | | |
Customer relationship intangible assets | 10 years | | | 5,654 | | | 5,654 |
Customer relationship intangible assets accumulated amortization | | | | (1,615) | | | (1,332) |
Customer relationship intangible assets, net | | | $ | 4,039 | | $ | 4,322 |
| | | | | | | |
Total other intangible assets, net | | | $ | 4,694 | | $ | 5,173 |
(5)Borrowings
At June 30, 2016, the Company’s outstanding borrowings were $261,600,000 as compared to $280,847,000 at December 31, 2015. These borrowings at June 30, 2016 consisted of $120,000,000 in term notes and $141,600,000 in advances on our line of credit, both with the Federal Home Loan Bank (the “FHLB”). At December 31, 2015, outstanding borrowings consisted of $95,000,000 of term notes and $185,847,000 in advances on our line of credit, both with the FHLB.
The interest rate on the FHLB line of credit varies with the federal funds rate and was 0.54% at June 30, 2016. The Company has four term notes with the FHLB. Two of the term notes have fixed interest rates, the first a $20,000,000 term note at 2.52% that is payable at its maturity date of January 23, 2018, with a prepayment penalty if paid prior to maturity and is convertible to floating rate on predetermined conversion dates at the discretion of the FHLB. If the note is converted by the FHLB, the Bank has the option to prepay the note without penalty. If the note is not converted by the FHLB, the note continues to be convertible quarterly thereafter, with the option to convert to floating rate at the discretion of the FHLB. The second fixed rate term note of $50,000,000 carries an interest rate of 0.63% and matures October 24, 2016. The Company also has two variable rate term notes of $25,000,000 each that mature on August 5, 2016 and March 7, 2017 and have interest rates that reset quarterly, currently set as 0.74% and 0.88%, respectively. The next rate reset dates on the variable rate term notes are August 5, 2016 and September 7, 2016.
The Company has an advance, pledge and security agreement with the FHLB and had pledged qualifying loans and securities in the amount of $478,170,000 at June 30, 2016 and $454,748,000 at December 31, 2015. The
maximum credit allowance for future borrowings, including term notes and advances on the line of credit, was $216,570,000 at June 30, 2016 and $173,901,000 at December 31, 2015.
In April 2016, the holding company entered into a credit agreement for a $10,000,000 secured line of credit with Wells Fargo Bank, National Association. The holding company’s stock in Guaranty Bank and Trust Company is pledged as collateral to the line of credit. The line of credit matures on March 17, 2017. Under the credit agreement, we elect a fixed or floating interest rate on each advance. As of June 30, 2016 no amounts had been borrowed on the Wells Fargo line of credit.
(6)Subordinated Debentures and Trust Preferred Securities
At both June 30, 2016 and December 31, 2015 the balance of the Company’s outstanding subordinated debentures (the “Debentures”) was $25,774,000. As of June 30, 2016, the Company's Debentures bore a weighted average cost of funds of 3.46%.
The Company’s Debentures were issued in two separate series. Each issuance has a maturity of 30 years from its date of issuance. The Debentures were issued to trusts established by the Company, which in turn issued $25,000,000 of trust preferred securities (“TruPS”). Generally, and with certain limitations, the Company is permitted to call the Debentures subsequent to the first five or ten years, as applicable, after issuance, if certain conditions are met, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment of the trusts, the Debentures or the preferred securities. The Guaranty Capital Trust III TruPS became callable at each quarterly interest payment date starting on July 7, 2008. The CenBank Trust III TruPS became callable at each quarterly interest payment date starting on April 15, 2009.
As of June 30, 2016, the Company was in compliance with all financial covenants of the Debentures.
The Company had accrued, unpaid interest on its Debentures of approximately $225,000 at June 30, 2016 and approximately $208,000 at December 31, 2015. Interest payable on Debentures is included in interest payable and other liabilities on the consolidated balance sheets.
The Company is not considered the primary beneficiary of the trusts that issued the TruPS (variable interest entities); therefore, the trusts are not consolidated in the Company’s financial statements and the Debentures are shown as liabilities. The Company’s investment in the common stock of each trust is included in other assets in the Company’s consolidated balance sheets.
Although the securities issued by each of the trusts are not included as a component of stockholders’ equity in the consolidated balance sheets, they are treated as capital for regulatory purposes. Specifically, under applicable regulatory guidelines, the $25,000,000 of TruPS issued by the trusts qualify as Tier 1 capital, up to a maximum of 25% of capital on an aggregate basis. Any amount that exceeds 25% qualifies as Tier 2 capital. At June 30, 2016, the full $25,000,000 of the TruPS qualified as Tier 1 capital.
Under the Dodd-Frank Act and a joint rule from the Federal Reserve Board, the Office of the Comptroller of the Currency, and the FDIC, certain TruPS are no longer eligible to be included as Tier 1 capital for regulatory purposes. However, an exception to this statutory prohibition applies to securities issued prior to May 19, 2010 by bank holding companies with less than $15 billion of total assets. As we have less than $15 billion in total assets and issued all of our TruPS prior to May 19, 2010, we expect that our TruPS will continue to be eligible to be treated as Tier 1 capital, subject to other rules and limitations.
The following table summarizes the terms of each outstanding subordinated debenture issuance at June 30, 2016 (dollars in thousands):
| | | | | | | | | | | |
| | | | | | | | | | | |
| Date Issued | | Amount | Maturity Date | Call
Date * | Fixed or
Variable | Rate
Adjuster | | Current
Rate | | Next Rate
Reset
Date** |
| | | | | | | | | | | |
CenBank Trust III | 4/8/2004 | | 15,464 | 4/15/2034 | 10/15/2016 | Variable | LIBOR + 2.65 | % | 3.28 | % | 10/15/2016 |
Guaranty Capital Trust III | 6/30/2003 | | 10,310 | 7/7/2033 | 10/7/2016 | Variable | LIBOR + 3.10 | % | 3.73 | % | 10/7/2016 |
* Call date represents the earliest or next date the Company can call the debentures.
** On July 7, 2016, the rate on the Guaranty Capital Trust III subordinated debentures reset to 3.78%. On July 15, 2016, the rate on the CenBank Trust III subordinated debentures reset to 3.33%.
(7)Commitments
The Bank enters into credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making commitments, including obtaining collateral, if necessary, as it does for on-balance sheet instruments.
At the dates indicated, the following financial instruments were outstanding whose contract amounts represented credit risk:
| | | | | |
| | | | | |
| | June 30,
2016 | | | December 31,
2015 |
| | | | | |
| | (In thousands) |
Commitments to extend credit: | | | | | |
Variable | $ | 301,341 | | $ | 307,463 |
Fixed | | 59,538 | | | 61,184 |
Total commitments to extend credit | $ | 360,879 | | $ | 368,647 |
| | | | | |
Standby letters of credit | $ | 9,702 | | $ | 8,857 |
At June 30, 2016, the rates on the fixed rate commitments to extend credit ranged from 1.95% to 7.00%.
A commitment to extend credit is an agreement to lend to a customer as long as there is no violation of any condition established in the underlying contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Several of the commitments may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated.
A commitment to extend credit under an overdraft protection agreement is a commitment for a possible future extension of credit to an existing deposit customer. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Bank is committed.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. A majority of letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments if deemed necessary.
(8)Fair Value Measurements and Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.
Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, quoted prices for similar assets or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset.
Level 3 - Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers of financial instruments between levels within the fair value hierarchy are recognized on the date management determines that the underlying circumstances or assumptions have changed.
Fair values of our securities are determined through the utilization of evaluated pricing models that vary by asset class and incorporate available market information (Level 2). The evaluated pricing models apply available information, as applicable, through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. These models assess interest rate impact, develop prepayment scenarios and take into account market conventions. For securities where routine valuation techniques are not used, management utilizes a discounted cash flow model with market-adjusted discount rates or other unobservable inputs to estimate fair value. Due to the lack of ratings available on these securities, management determined that a relationship to other benchmark quoted securities was unobservable, and as a result, these securities should be classified as Level 3 (Level 3 inputs). The valuation of the Company’s Level 3 bonds is highly sensitive to changes in unobservable inputs.
Currently, the Company uses interest rate swaps to manage interest rate risk. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2 inputs). The Company considers the value of the swaps to be sensitive to fluctuations in interest rates.
Financial Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| | | | | | | | |
| | | | | | | | |
| | Quoted Prices in
Active Markets
for Identical
Assets (Level 1) | | Significant
Other Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs (Level 3) | | Balance |
| | (In thousands) |
Assets/(Liabilities) at June 30, 2016 | | | | | | | | |
State and municipal securities | $ | - | $ | 2,786 | $ | 31,909 | $ | 34,695 |
Mortgage-backed securities – agency / | | | | | | | | |
residential | | - | | 92,258 | | - | | 92,258 |
Mortgage-backed securities – private / | | | | | | | | |
residential | | - | | 269 | | - | | 269 |
Trust preferred securities | | - | | 18,575 | | - | | 18,575 |
Corporate securities | | - | | 44,034 | | - | | 44,034 |
Collateralized loan obligations | | - | | 8,325 | | | | 8,325 |
Interest rate swaps - cash flow hedge | | - | | (4,063) | | - | | (4,063) |
| | | | | | | | |
Assets/(Liabilities) at December 31, 2015 | | | | | | | | |
State and municipal securities | $ | - | $ | 2,673 | $ | 32,040 | $ | 34,713 |
Mortgage-backed securities – agency / | | | | | | | | |
residential | | - | | 129,017 | | - | | 129,017 |
Mortgage-backed securities – private / | | | | | | | | |
residential | | - | | 274 | | - | | 274 |
Trust preferred securities | | - | | 17,806 | | - | | 17,806 |
Corporate securities | | - | | 65,291 | | - | | 65,291 |
Collateralized loan obligations | | - | | 8,330 | | | | 8,330 |
Interest rate swaps - cash flow hedge | | - | | (2,558) | | - | | (2,558) |
There were no transfers of financial assets and liabilities among Level 1, Level 2 and Level 3 during the six months ended June 30, 2016.
The tables below present a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2016 and June 30, 2015:
| | | | | |
| | | | | |
| | State and Municipal Securities |
| | Three Months Ended
June 30, 2016 | | | Six Months Ended
June 30, 2016 |
| | | | | |
| | (In thousands) |
Beginning balance | $ | 31,988 | | $ | 32,040 |
Total unrealized gains (losses) included in: | | | | | |
Net income | | 2 | | | 3 |
Other comprehensive income (loss) | | - | | | - |
Sales, calls and prepayments | | (81) | | | (134) |
Transfers in and (out) of Level 3 | | - | | | - |
Balance end of period | $ | 31,909 | | $ | 31,909 |
| | | | | |
| | | | | |
| | State and Municipal Securities |
| | Three Months Ended
June 30, 2015 | | | Six Months Ended
June 30, 2015 |
| | | | | |
| | (In thousands) |
Beginning balance | $ | 32,037 | | $ | 32,317 |
Total unrealized gains (losses) included in: | | | | | |
Net income | | 1 | | | 6 |
Other comprehensive income (loss) | | - | | | (5) |
Sales, calls and prepayments | | - | | | - |
Transfer to held to maturity | | - | | | (280) |
Transfers in and (out) of Level 3 | | - | | | - |
Balance end of period | $ | 32,038 | | $ | 32,038 |
For the three and six months ended June 30, 2016, there was no other comprehensive income or loss for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as a result of consistent mark-to-market valuation. For the three and six months ended June 30, 2016 and June 30, 2015, the amounts included in net income in the above tables include accretion of any discount on these Level 3 bonds.
The following tables present quantitative information about Level 3 fair value measurements on the Company’s state and municipal securities at June 30, 2016 and December 31, 2015:
| | | | | |
| | | | | |
June 30, 2016 | | Fair Value | Valuation Technique | Unobservable Inputs | Range |
| | (In thousands) |
State and municipal securities | $ | 31,909 | discounted cash flow | discount rate | 2.05%-4.75% |
Total | $ | 31,909 | | | |
| | | | | |
| | | | | |
December 31, 2015 | | Fair Value | Valuation Technique | Unobservable Inputs | Range |
| | (In thousands) |
State and municipal securities | $ | 32,040 | discounted cash flow | discount rate | 2.05%-4.75% |
Total | $ | 32,040 | | | |
Financial Assets and Liabilities Measured on a Nonrecurring Basis
Financial assets and liabilities measured at fair value on a nonrecurring basis were not material as of June 30, 2016 and December 31, 2015.
Nonfinancial Assets and Liabilities Measured on a Nonrecurring Basis
Nonfinancial assets and liabilities measured at fair value on a nonrecurring basis were not material as of June 30, 2016 and December 31, 2015.
Fair Value of Financial Instruments
The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:
| | | | | | | | | | |
| | | | | | | | | | |
| | | | Fair Value Measurements at June 30, 2016: |
| | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In thousands) |
Financial assets: | | | | | | | | | | |
Cash and cash equivalents | $ | 30,446 | $ | 30,446 | $ | - | $ | - | $ | 30,446 |
Securities available for sale | | 198,156 | | - | | 166,247 | | 31,909 | | 198,156 |
Securities held to maturity | | 149,196 | | - | | 151,612 | | 3,105 | | 154,717 |
Bank stocks | | 21,656 | | n/a | | n/a | | n/a | | n/a |
Loans held for investment, net | | 1,875,493 | | - | | - | | 1,873,955 | | 1,873,955 |
Accrued interest receivable | | 5,963 | | - | | 5,963 | | - | | 5,963 |
| | | | | | | | | | |
Financial liabilities: | | | | | | | | | | |
Deposits | $ | 1,847,361 | $ | - | $ | 1,847,662 | $ | - | $ | 1,847,662 |
Federal funds purchased and sold under | | | | | | | | | | |
agreements to repurchase | | 17,990 | | - | | 17,990 | | - | | 17,990 |
Short-term borrowings | | 141,600 | | - | | 141,600 | | - | | 141,600 |
Subordinated debentures | | 25,774 | | - | | - | | 19,435 | | 19,435 |
Long-term borrowings | | 120,000 | | - | | 120,535 | | - | | 120,535 |
Accrued interest payable | | 599 | | - | | 599 | | - | | 599 |
Interest rate swap - cash flow hedge | | 4,063 | | - | | 4,063 | | - | | 4,063 |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2015: |
| | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In thousands) |
Financial assets: | | | | | | | | | | |
Cash and cash equivalents | $ | 26,711 | $ | 26,711 | $ | - | $ | - | $ | 26,711 |
Securities available for sale | | 255,431 | | - | | 223,391 | | 32,040 | | 255,431 |
Securities held to maturity | | 148,761 | | - | | 145,698 | | 4,424 | | 150,122 |
Bank stocks | | 20,500 | | n/a | | n/a | | n/a | | n/a |
Loans held for investment, net | | 1,791,536 | | - | | - | | 1,791,128 | | 1,791,128 |
Accrued interest receivable | | 6,554 | | - | | 6,554 | | - | | 6,554 |
| | | | | | | | | | |
Financial liabilities: | | | | | | | | | | |
Deposits | $ | 1,801,845 | $ | - | $ | 1,800,112 | $ | - | $ | 1,800,112 |
Federal funds purchased and sold under | | | | | | | | | | |
agreements to repurchase | | 26,477 | | - | | 26,477 | | - | | 26,477 |
Short-term borrowings | | 185,847 | | - | | 185,847 | | - | | 185,847 |
Subordinated debentures | | 25,774 | | - | | - | | 18,640 | | 18,640 |
Long-term borrowings | | 95,000 | | - | | 95,353 | | - | | 95,353 |
Accrued interest payable | | 508 | | - | | 508 | | - | | 508 |
Interest rate swap - cash flow hedge | | 2,558 | | - | | 2,558 | | - | | 2,558 |
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Therefore, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions are used by the Company in estimating fair value disclosures for financial instruments:
| (a) | | Cash and Cash Equivalents |
The carrying amounts of cash and short-term instruments approximate fair values (Level 1).
| (b) | | Securities and Bank Stocks |
Fair values for securities available for sale and held to maturity are generally determined through the utilization of evaluated pricing models that vary by asset class and incorporate available market information (Level 2). The evaluated pricing models apply available information, as applicable, through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. These models assess interest rate impact, develop prepayment scenarios and take into account market conventions. For positions that are not traded in active markets or are subject to transfer restrictions (i.e., bonds valued with Level 3 inputs), management uses a combination of reviews of the underlying financial statements, appraisals and management’s judgment regarding credit quality and intent to sell in order to determine the value of the bond.
It is not practical to determine the fair value of bank stocks due to restrictions placed on the transferability of FHLB stock, Federal Reserve Bank stock and Bankers’ Bank of the West stock. These three stocks comprise the majority of the balance of the Company’s bank stocks.
| (c) | | Loans Held for Investment |
For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values (Level 3). Fair values for other loans (e.g., commercial real estate and investment property mortgage loans and commercial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality (Level 3). Impaired loans are valued at the lower of cost or fair value when specific reserves are attributed to these loans because the present value of expected cash flows or the net realizable value of collateral is less than the impaired loan’s recorded investment. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
Loans held for sale are carried at the lower of cost or fair value, with fair value determined by the sales price agreed upon in negotiation with the purchaser (Level 1).
The fair values of demand deposits (e.g., interest and non-interest checking, passbook savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) (Level 2). The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date (Level 2). Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits (Level 2).
The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values (Level 2).
The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 2).
| (h) | | Subordinated Debentures |
The fair values of the Company’s Debentures are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 3).
| (i) | | Accrued Interest Receivable/Payable |
The carrying amounts of accrued interest approximate fair value (Level 2).
| (j) | | Interest Rate Swaps, net |
The fair value of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2).
| (k) | | Off-balance Sheet Instruments |
Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is immaterial.
(9)Derivatives and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company utilizes derivative financial instruments to assist in the management of interest rate risk, primarily helping to secure long-term borrowing rates. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment or receipt of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments or receipts principally related to certain variable-rate borrowings. The Company does not use derivatives for trading or speculative purposes.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheet as of June 30, 2016 and December 31, 2015:
| | | | | | | |
| | | | | | | |
| Balance | | | Fair Value |
| Sheet | | | June 30, | | | December 31, |
| Location | | | 2016 | | | 2015 |
| | | | | | | |
| | | | (In thousands) |
Derivatives designated as hedging instruments | | | | | | | |
Assets: | | | | | | | |
Interest rate swaps | Other assets | | $ | - | | $ | - |
Liabilities: | | | | | | | |
Interest rate swaps | Other liabilities | | $ | 4,063 | | $ | 2,558 |
The Company’s objectives in using interest rate derivatives are to add stability and predictability to interest expense and to manage the Company’s exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. For hedges of the Company’s variable-rate borrowings, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments. As of June 30, 2016, the Company had two forward-starting interest rate swaps with an aggregate notional amount of $50,000,000 that were designated as cash flow hedges associated with the Company’s forecasted variable-rate borrowings. The first $25,000,000 swap became effective in June 2015 at a fixed rate of 2.46% and matures in June 2020. The second $25,000,000 swap became effective in March 2016 at a fixed rate of 3.00% and matures in March 2021.
Summary information about the interest-rate swaps designated as cash flow hedges as of June 30, 2016 and December 31, 2015 is included in the table below:
| | | | | | | |
| | | | | | | |
| | June 30,
2016 | | | | December 31,
2015 | |
| | | | | | | |
| | (Dollars in thousands) | |
Notional amounts | $ | 50,000 | | | $ | 50,000 | |
Weighted average pay rates | | 2.73 | % | | | 2.73 | % |
Weighted average receive rates | | 3 month LIBOR | | | | 3 month LIBOR | |
Weighted average maturity | | 4.4 years | | | | 4.9 years | |
Unrealized gains (losses) | $ | (4,063) | | | $ | (2,558) | |
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in AOCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company’s cash flow hedges are used to hedge the forecasted variable cash outflows associated with forecasted issuances of FHLB advances. During the six months ended June 30, 2016 and June 30, 2015, the income statement effect of hedge ineffectiveness was not material.
Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. Management expects that, during the next 12 months, approximately $1,041,000 will be reclassified from AOCI into interest expense.
The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with another third-party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The impact of these customer interest rate swaps on the Company’s financial statements was immaterial for the periods covered by this report.
The table below presents the effect of the Company’s derivative financial instruments on both comprehensive income and net income for the three and six months ended June 30, 2016 and June 30, 2015:
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Income | | | Three Months Ended | | | Six Months Ended |
Interest Rate Swaps with | | Statement | | | June 30, | | | June 30, |
Hedge Designation | | Location | | | 2016 | | 2015 | | | 2016 | | 2015 |
| | | | | | | | | | | | |
| | | | | (In thousands) |
Gain or (loss) recognized in OCI on | | | | | | | | | | | | |
derivative - net of tax | | Not applicable | | $ | (316) | $ | 277 | | $ | (1,198) | $ | (297) |
(Gain) or loss reclassified from | | | | | | | | | | | | |
accumulated OCI into income | | | | | | | | | | | | |
(effective portion) - net of tax | | Interest expense | | | 163 | | - | | | 265 | | - |
The Company has agreements with its derivative counterparties that contain a cross-default provision whereby if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
The Company has minimum collateral posting thresholds with certain of its derivative counterparties and as of June 30, 2016 had posted $4,733,000 against its obligations under these agreements. If the Company had breached any of these provisions at June 30, 2016, it could have been required to settle its obligations under the agreements at the termination value.
(10)Stock-Based Compensation
Under the Company’s Incentive Plan, which expired by its terms on April 4, 2015, the Company’s Board of Directors had the authority to grant stock-based compensation awards prior to the plan’s expiration. Under the 2015 Plan, which was approved by the Company’s stockholders at the May 5, 2015 annual meeting, the Company’s Board of Directors maintains the authority to grant stock-based compensation awards to nonemployee directors, key employees, consultants and prospective employees under the terms described in each of the plans.
Stock-based compensation awards issuable under either plan include the grant of stock-based compensation awards in the form of options, restricted stock awards, restricted stock unit awards, performance stock awards, stock appreciation rights and other equity based awards. Likewise, the Incentive Plan provided for, and the 2015 Plan provides, that eligible participants may be granted shares of Company common stock that are subject to forfeiture until the grantee vests in the stock award based on the established conditions, which may include service conditions, established performance measures or both.
Prior to the vesting of stock awards that are subject to a service vesting condition, each grantee has the rights of a stockholder with respect to voting the shares of stock represented by the award. The grantee is not entitled to dividend rights with respect to the shares of stock until vesting occurs. Prior to vesting of the stock awards with performance vesting conditions, each grantee has the rights of a stockholder with respect to voting of the shares of stock represented by the award. The recipient is generally not entitled to dividend rights with respect to unvested shares. Other than the stock awards with service and performance-based vesting conditions, no other grants have been made under either the Incentive Plan or the 2015 Plan.
Under the provisions of the 2015 Plan and the Incentive Plan, grants of stock-based compensation awards of 935,000 and 1,700,000 shares, respectively, were authorized, subject to adjustments upon the occurrence of certain events. As of June 30, 2016, there were 172,769 and 381,822 outstanding awards under the 2015 Plan and the Incentive Plan, respectively. As of June 30, 2016, there were 748,469 shares remaining available for grant under the 2015 Plan. Although the Incentive Plan expired by its terms on April 4, 2015, awards previously granted under the Incentive Plan remain outstanding in accordance with their terms.
Of the 554,591 shares represented by unvested awards at June 30, 2016, approximately 532,000 shares are expected to vest. At June 30, 2016 there were 319,005 shares of restricted stock outstanding that were subject to a performance condition. As of June 30, 2016, management expects that approximately 306,000 of these shares will vest and that the remaining shares will expire unvested. The performance shares that are expected to vest relate to awards granted to various key employees from February 2014 through May 2016. The vesting of these performance shares is contingent upon the meeting of certain return on asset performance criteria. The performance-based shares
awarded in 2014, 2015 and 2016 each include a “threshold” and “target” performance level, with vesting determined based on where actual performance falls in relation to the numeric range represented by these performance criteria. As of June 30, 2016, management expected that all of the performance awards made in 2014, 2015 and 2016 will vest (with the exception of estimated forfeitures), which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, the accrual of compensation expense in future periods could be impacted.
A summary of the status of unearned stock awards and the change during the six months ended June 30, 2016 is presented in the table below:
| | | |
| | | |
| Shares | | Weighted Average Fair
Value on Award Date |
Unearned at January 1, 2016 | 590,755 | $ | 12.88 |
Awarded | 165,504 | | 15.33 |
Forfeited | (12,569) | | 11.04 |
Vested | (189,099) | | 11.21 |
Unearned at June 30, 2016 | 554,591 | $ | 14.22 |
The Company recognized $1,566,000 and $1,393,000 in stock-based compensation expense for services rendered for the six months ended June 30, 2016 and June 30, 2015, respectively. The total income tax benefit recognized for share-based compensation arrangements was $595,000 and $530,000 for the six months ended June 30, 2016 and June 30, 2015, respectively. The grant date fair value of restricted stock awards granted in the six months ended June 30, 2016 and June 30, 2015 was $2,538,000 and $2,327,000, respectively. The fair value of awards that vested in the six months ended June 30, 2016 and June 30, 2015 was approximately $2,966,000 and $1,304,000, respectively. At June 30, 2016, compensation cost of $4,924,000 related to unvested awards not yet recognized is expected to be recognized over a weighted-average period of 1.9 years.
(11)Capital Ratios
The following table provides the capital ratios of the Company and Bank as of the dates presented, along with the applicable regulatory capital requirements:
| | | | | | | | | |
| | | | | | | | | |
| Ratio at
June 30,
2016 | | Ratio at
December 31,
2015 | | | Minimum Requirement
for “Adequately Capitalized”
Institution plus fully
phased in Capital
Conservation Buffer | | Minimum
Requirement for
"Well-Capitalized"
Institution | |
Common Equity Tier 1 Risk-Based | | | | | | | | | |
Capital Ratio | | | | | | | | | |
Consolidated | 11.07 | % | 10.94 | % | | 7.00 | % | N/A | |
Guaranty Bank and Trust Company | 11.89 | % | 11.96 | % | | 7.00 | % | 6.50 | % |
| | | | | | | | | |
Tier 1 Risk-Based Capital Ratio | | | | | | | | | |
Consolidated | 12.23 | % | 12.11 | % | | 8.50 | % | N/A | |
Guaranty Bank and Trust Company | 11.89 | % | 11.96 | % | | 8.50 | % | 8.00 | % |
| | | | | | | | | |
Total Risk-Based Capital Ratio | | | | | | | | | |
Consolidated | 13.34 | % | 13.24 | % | | 10.50 | % | N/A | |
Guaranty Bank and Trust Company | 13.00 | % | 13.09 | % | | 10.50 | % | 10.00 | % |
| | | | | | | | | |
Leverage Ratio | | | | | | | | | |
Consolidated | 10.84 | % | 10.68 | % | | 4.00 | % | N/A | |
Guaranty Bank and Trust Company | 10.54 | % | 10.55 | % | | 4.00 | % | 5.00 | % |
(12)Contingencies
The Company and the Bank are defendants, from time-to-time, in legal actions at various points of the legal process, including appeals, arising from transactions conducted in the ordinary course of business. Management believes, after consultation with legal counsel, that it is not probable that the outcome of current legal actions will
result in a liability that has a material adverse effect on the Company’s consolidated financial position, results of operations, comprehensive income or cash flows. In the event that such legal action results in an unfavorable outcome, the resulting liability could have a material adverse effect on the Company’s consolidated financial position, results of operations, comprehensive income or cash flows.
On May 20, 2016, a putative stockholder class action lawsuit (the “Merger Litigation”), was filed against the Company and the individual members of Company’s board of directors in connection with the Company entering into the Agreement and Plan of Reorganization (the “Merger Agreement”). The action, Sciabacucchi v. Cordes et al., Case No. 16cv31793, was filed in Colorado District Court, Denver County.
The Merger Litigation alleges that the members of the Company’s board of directors breached their fiduciary duties owed to the Company’s stockholders by causing a materially incomplete registration statement to be filed. The plaintiff in the Merger Litigation generally seeks, among other things, declaratory and injunctive relief concerning the alleged breach of fiduciary duties, injunctive relief prohibiting consummation of the merger and attorneys’ fees and costs, and other further relief.
On July 5, 2016, the parties to the merger litigation entered into a Memorandum of Agreement providing that, among other things: (1) the Company will make specified additional disclosures in the joint proxy statement/prospectus filed in connection with the Merger; (2) the merger litigation is stayed; and (3) the parties will enter into a stipulation providing for certification of a class for settlement purposes and a class release. The joint proxy statement/prospectus filing filed on July 19, 2016, included these specific additional disclosures. The proposed settlement is subject to, among other things, approval of the District Court, City and County of Denver, Colorado. Under the terms of the proposed settlement, following final court approval, the action will be dismissed with prejudice. There can be no assurances, however, that the parties will ultimately enter into a stipulation of settlement or that court approval of the settlement will be obtained. The proposed settlement may be terminated if any of the conditions to the proposed settlement are not met.
On the Company’s Form 10-Q as of March 31, 2016, the Company disclosed that a $1.85 million fraudulent, foreign wire transfer was initiated due to a compromise of a corporate customer account. In July 2016, the Company and the Company’s insurance carrier recovered all of the funds.
(13)Business Combination
On March 16, 2016, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with Home State Bancorp (“Home State”), parent company of Home State Bank, a Colorado state chartered bank headquartered in Loveland, Colorado (“Home State Bank”). The Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, Home State will be merged with and into the Company, with the Company continuing as the surviving corporation. The Merger Agreement also provides that following the merger, Home State Bank will be merged with and into the Bank, with the Bank continuing as the surviving bank. As of March 31, 2016, the pro forma combined Company would have approximately $3.3 billion in total assets and $2.5 billion in total deposits. The transaction is expected to close during the third quarter 2016, pending stockholder approval. The transaction will be accounted for using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.
(14)Subsequent Events
On July 13, 2016, the Company entered into an underwriting agreement with Keefe, Bruyette & Woods, Inc., with respect to the sale of $40,000,000 of its 5.75% Fixed-to-Floating Rate Subordinated Notes (the “Notes”) due July 20, 2026. The Notes will initially bear a fixed interest rate of 5.75% per annum, payable semi-annually in arrears. On July 20, 2021, and, thereafter, the interest on the Notes will be payable quarterly in arrears, at an annual floating rate equal to three-month LIBOR as determined by the applicable quarterly period, plus 4.73%. Closing on the issuance of the $40,000,000 in Subordinated Notes occurred on July 18, 2016.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Factors That Could Affect Future Results
Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified as such. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or board of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “projected”, “continue”, “remain”, “will”, “should”, “could”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements and the lack of such an identifying word does not necessarily indicate the absence of a forward-looking statement.
Forward-looking statements are based on assumptions and involve risks and uncertainties, many of which are beyond our control, which may cause actual results to differ materially from those discussed in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
| · | | Local, regional, national and international economic conditions and the impact they may have on us and our customers, and our assessment of that impact on our estimates including, but not limited to, the allowance for loan losses. |
| · | | The effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board. |
| · | | Requirements imposed by regulatory agencies to increase our capital to a level greater than the current level required for well-capitalized financial institutions (including the impact of the joint rule by the Federal Reserve Board, the OCC, and the FDIC to revise the regulatory capital rules, including the Basel III standards), the failure to maintain capital above the level required to be well-capitalized under the regulatory capital adequacy guidelines, the availability of capital from private or government sources, or the failure to raise additional capital as needed. |
| · | | Changes in the level of nonperforming assets and charge-offs and the deterioration of other credit quality measures, and their impact on the adequacy of the allowance for loan losses and provision for loan losses. |
| · | | Changes in sources and uses of funds, including loans, deposits and borrowings, including the ability of the Bank to retain and grow core deposits, to purchase brokered deposits and to maintain unsecured federal funds lines and secured lines of credit with correspondent banks. |
| · | | Failure, interruption or breach in security of our electronic communications, information systems and computer systems. |
| · | | The effects of inflation and interest rate, securities market and monetary supply fluctuations. |
| · | | Political instability, acts of war or terrorism and natural disasters. |
| · | | Our ability to develop and promote customer acceptance of new products and services in a timely manner and customers’ perceived overall value of these products and services. |
| · | | Changes in consumer spending, borrowings and savings habits. |
| · | | Competition for loans and deposits and failure to attract or retain loans and deposits. |
| · | | Changes in the financial performance or condition of the Bank’s borrowers and the ability of the Bank’s borrowers to perform under the terms of their loans and the terms of other credit agreements. |
| · | | Our ability to receive regulatory approval for the Bank to declare and pay dividends to the holding company. |
| · | | Our ability to acquire, operate and maintain cost effective and efficient systems. |
| · | | The timing, impact and other uncertainties of any pending or future acquisitions, including our ability to identify suitable future acquisition candidates, success or failure in the integration of their operations, the ability to raise capital or issue debt to fund acquisitions and the ability to enter new markets successfully and capitalize on growth opportunities. |
| · | | Our ability to successfully implement changes in accounting policies and practices, adopted by regulatory agencies, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (the “FASB”) and other accounting standard setters. |
| · | | The loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels. |
| · | | The costs and other effects resulting from changes in laws and regulations and of other legal and regulatory developments, including, but not limited to, increases in FDIC insurance premiums, the commencement of legal proceedings or regulatory or other governmental inquiries, and our ability to successfully undergo regulatory examinations, reviews and other inquiries. |
| · | | Other risks and uncertainties listed from time to time in the Company’s reports and documents filed with the Securities and Exchange Commission (the “SEC”). |
Forward-looking statements speak only as of the date on which such statements are made. We do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 2015 Annual Report on Form 10-K.
Overview
Guaranty Bancorp is a bank holding company with its principal business to serve as the holding company for its Colorado-based bank subsidiary, Guaranty Bank and Trust Company (the “Bank”). The Bank is the sole member of several limited liability companies that hold real estate as well as the sole owner of two investment management firms, Private Capital Management LLC (“PCM”) and Cherry Hills Investment Advisors, Inc. (“CHIA”). References to “Company”, “us”, “we” and “our” refer to Guaranty Bancorp on a consolidated basis. References to “Guaranty Bancorp” or to the “holding company” refer to the parent company on a stand-alone 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 small to medium-sized businesses, including the owners and employees of those businesses, and consumers. Our line of banking products and services include accepting demand and time deposits and originating real estate loans (including construction loans), commercial loans, SBA guaranteed loans and consumer loans. The Bank, PCM and CHIA also provide wealth management solutions, including trust and investment management 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, trust and investment management services. Our major operating expenses include 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.
In addition to building growth organically 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 bank focus. Ideally, the financial institutions we seek to acquire will be in or contiguous to our existing footprint, which would allow us to use the acquisition 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, operate more efficiently and integrate the acquired financial institution while maintaining the stability of our existing business. In certain circumstances, we may seek to acquire financial institutions that may be located outside of our existing footprint. 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, non-financial companies and other competitors 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 Colorado real estate market. In addition, the fiscal, monetary 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.
Earnings Summary
The following table 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 | |
| | 2016 | | | 2015 | | | | (Unfavorable) | | | | 2016 | | | 2015 | | | | (Unfavorable) | |
| | | | | | | | | | | | | | | | | | | | | |
| | (In thousands, except for share data and ratios) | |
Results of Operations: | | | | | | | | | | | | | | | | | | | | | |
Interest income | $ | 21,851 | | $ | 20,159 | | | $ | 1,692 | | | $ | 43,711 | | $ | 40,013 | | | $ | 3,698 | |
Interest expense | | 2,030 | | | 1,219 | | | | (811) | | | | 3,895 | | | 2,296 | | | | (1,599) | |
Net interest income | | 19,821 | | | 18,940 | | | | 881 | | | | 39,816 | | | 37,717 | | | | 2,099 | |
Provision for loan losses | | 10 | | | 113 | | | | 103 | | | | 26 | | | 90 | | | | 64 | |
Net interest income after | | | | | | | | | | | | | | | | | | | | | |
provision for loan losses | | 19,811 | | | 18,827 | | | | 984 | | | | 39,790 | | | 37,627 | | | | 2,163 | |
Noninterest income | | 4,142 | | | 4,404 | | | | (262) | | | | 8,320 | | | 8,519 | | | | (199) | |
Noninterest expense | | 15,134 | | | 14,956 | | | | (178) | | | | 30,926 | | | 30,226 | | | | (700) | |
Income before income taxes | | 8,819 | | | 8,275 | | | | 544 | | | | 17,184 | | | 15,920 | | | | 1,264 | |
Income tax expense | | 3,134 | | | 2,798 | | | | (336) | | | | 5,964 | | | 5,359 | | | | (605) | |
Net income | $ | 5,685 | | $ | 5,477 | | | $ | 208 | | | $ | 11,220 | | $ | 10,561 | | | $ | 659 | |
| | | | | | | | | | | | | | | | | | | | | |
Common Share Data: | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per common share | $ | 0.27 | | $ | 0.26 | | | $ | 0.01 | | | $ | 0.53 | | $ | 0.50 | | | $ | 0.03 | |
Diluted earnings per common | | | | | | | | | | | | | | | | | | | | | |
share | $ | 0.27 | | $ | 0.26 | | | $ | 0.01 | | | $ | 0.52 | | $ | 0.50 | | | $ | 0.02 | |
Average common shares | | | | | | | | | | | | | | | | | | | | | |
outstanding | | 21,242,520 | | | 21,070,199 | | | | 172,321 | | | | 21,213,706 | | | 21,053,853 | | | | 159,853 | |
Diluted average common shares | | | | | | | | | | | | | | | | | | | | | |
outstanding | | 21,361,712 | | | 21,200,438 | | | | 161,274 | | | | 21,411,626 | | | 21,191,277 | | | | 220,349 | |
Average equity to average assets | | 9.68 | % | | 9.71 | % | | | (0.03) | % | | | 9.59 | % | | 9.83 | % | | | (2.44) | % |
Return on average equity | | 10.03 | % | | 10.29 | % | | | (0.26) | % | | | 9.98 | % | | 10.05 | % | | | (0.70) | % |
Return on average assets | | 0.97 | % | | 1.00 | % | | | (0.03) | % | | | 0.96 | % | | 0.99 | % | | | (3.03) | % |
Dividend payout ratio | | 42.97 | % | | 38.47 | % | | | 4.50 | % | | | 43.53 | % | | 39.89 | % | | | 9.13 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| | June 30, | | | June 30, | | | | | |
| | 2016 | | | 2015 | | | | Change | |
Selected Balance Sheet Ratios: | | | | | | | | | | |
Total risk-based capital to | | | | | | | | | | |
risk-weighted assets | | 13.34 | % | | 13.34 | % | | | - | % |
Leverage ratio | | 10.84 | % | | 10.86 | % | | | (0.02) | % |
Loans(1), net of deferred costs and fees | | | | | | | | | | |
to deposits | | 102.77 | % | | 95.77 | % | | | 7.00 | % |
Allowance for loan losses to loans (1), | | | | | | | | | | |
net of deferred costs and fees | | 1.21 | % | | 1.37 | % | | | (0.16) | % |
Allowance for loan losses to | | | | | | | | | | |
nonperforming loans | | 172.97 | % | | 173.21 | % | | | (0.24) | % |
Classified assets to allowance | | | | | | | | | | |
and Tier 1 capital (2) | | 10.55 | % | | 13.87 | % | | | (3.32) | % |
Noninterest bearing deposits to | | | | | | | | | | |
total deposits | | 34.54 | % | | 35.73 | % | | | (1.19) | % |
Time deposits to total deposits | | 15.33 | % | | 13.66 | % | | | 1.67 | % |
________________ | | | | | | | | | | |
(1) Loans held for investment | | | | | | | | |
(2) Based on Bank only Tier 1 capital | | | | | | | | |
Second quarter 2016 net income increased $0.2 million to $5.7 million as compared to $5.5 million for the same quarter in 2015. The $0.2 million increase in net income was the result of a $1.7 million increase in interest income, partially offset by a $0.8 million increase in interest expense, a $0.3 million decrease in noninterest income, a $0.2 million increase in noninterest expense and a $0.3 million increase in income tax expense. The $1.7 million increase in interest income was primarily due to a $226.9 million, or 14.0% increase in average loan balances in the second quarter 2016 as compared to the same quarter in 2015. The $0.8 million increase in interest expense was attributable to an increase in interest expense on the Company’s borrowings and a $137.3 million increase in the Company’s average interest-bearing deposits. The $0.3 million decrease in noninterest income in the second quarter 2016 as compared to the same quarter in 2015 was primarily due to a loss on sale of securities incurred in the second quarter 2016 and lower gains on sale of Small Business Association (SBA) loans. The $0.2 million increase in noninterest expense was primarily the result of $0.3 million in merger related costs incurred in the second quarter 2016. The $0.3 million increase in income tax expense during the second quarter 2016, as compared the same quarter 2015, was primarily a result of growth in pre-tax income over the same period.
For the six months ended June 30, 2016, net income was $11.2 million as compared to $10.6 million for the same period in 2015. The $0.7 million increase in net income during the six months ended June 30, 2016 was primarily the result of a $3.7 million increase in interest income, partially offset by a $1.6 million increase in interest expense, a $0.2 million decrease in noninterest income, a $0.7 million increase in noninterest expense and a $0.6 million increase in income tax expense. The $3.7 million increase in interest income was mostly due to a $257.4 million, or 16.4% increase in average loans for the six months ended June 30, 2016 as compared to the same period in 2015. The $1.6 million increase in interest expense was related to a $149.4 million, or 14.1% increase in average interest-bearing deposits and an increase in the average costs of borrowings. Noninterest income decreased $0.2 million for the first six months of 2016, as compared to the same period in the prior year, mostly due to lower gains on sales of SBA loans. The $0.7 million increase in noninterest expense in the first six months of 2016, as compared to the same period in 2015 was comprised of $1.0 million in merger-related expenses incurred during the first six months of 2016, a $0.7 million increase in salaries and employee benefits, partially offset by a $0.7 million decline in occupancy expense.
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 quarter ended June 30, 2016 and the prior four quarters:
Table 2
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | Three Months Ended | |
| | June 30, | | | March 31, | | | December 31, | | | September 30, | | | June 30, | |
| | 2016 | | | 2016 | | | 2015 | | | 2015 | | | 2015 | |
| | (Dollars in thousands) | |
Net interest income | $ | 19,821 | | $ | 19,995 | | $ | 19,856 | | $ | 19,406 | | $ | 18,940 | |
Interest rate spread | | 3.39 | % | | 3.44 | % | | 3.43 | % | | 3.45 | % | | 3.54 | % |
Net interest margin | | 3.57 | % | | 3.60 | % | | 3.58 | % | | 3.59 | % | | 3.67 | % |
Net interest margin, fully tax | | | | | | | | | | | | | | | |
equivalent | | 3.65 | % | | 3.68 | % | | 3.66 | % | | 3.67 | % | | 3.75 | % |
Average cost of interest-bearing | | | | | | | | | | | | | | | |
liabilities (including | | | | | | | | | | | | | | | |
noninterest-bearing deposits) | | 0.39 | % | | 0.35 | % | | 0.30 | % | | 0.28 | % | | 0.25 | % |
Average cost of deposits | | | | | | | | | | | | | | | |
(including noninterest- | | | | | | | | | | | | | | | |
bearing deposits) | | 0.23 | % | | 0.22 | % | | 0.20 | % | | 0.19 | % | | 0.18 | % |
Net interest income increased by $0.9 million to $19.8 million in the second quarter 2016, as compared to the second quarter 2015. The $0.9 million increase in net interest income in the second quarter 2016, as compared to the same quarter in 2015, was attributable to a $1.7 million increase in interest income, partially offset by a $0.8 million increase in interest expense. The increase in interest income was primarily the result of a $226.9 million, or 14.0% increase in average loan balances in the second quarter 2016 as compared to the same quarter in 2015. The increase in interest expense was primarily attributable to a $0.5 million increase in interest expense on Federal Home Loan
Bank (“FHLB”) borrowings and a $0.3 million increase in interest expense on certificates of deposit. The increase in interest expense related to FHLB borrowings was impacted due to $25.0 million of our hedged borrowings becoming effective in the third quarter 2015, at a rate of 2.46% and $25.0 million becoming effective in the first quarter 2016 at a rate of 3.00%; as well as an increase on the rate on overnight borrowings of approximately 25 basis points. The $0.3 million increase in interest expense on certificates of deposit was the result of a $74.4 million increase in the average balances and a 16 basis point increase in average rate.
As compared to the first quarter 2016, net interest income decreased by $0.2 million mostly due to an increase in interest expense. The increase in interest expense during the second quarter 2016, as compared to the first quarter 2016, was primarily due to an increase in the average cost of FHLB borrowings and the average cost of certificates of deposit.
During the second quarter 2016, net interest margin decreased three basis points to 3.57%, as compared to the first quarter 2016 and decreased ten basis points as compared to the second quarter 2015. The decrease in the net interest margin in the second quarter 2016, as compared to the first quarter 2016, was primarily the result of a four basis point increase in the cost of average interest-bearing liabilities, mostly due to an increase in the average cost of borrowings. Net interest margin decreased in the second quarter 2016, as compared to the second quarter 2015, primarily as a result of a 17 basis point increase in the average cost of interest-bearing liabilities, due to increases in the average cost of interest-bearing deposits and borrowings.
The following table summarizes the Company’s net interest income and related spread and margin for the six months ended June 30, 2016 and June 30, 2015:
Table 3
| | | | | | |
| | | | | | |
| | Six Months Ended | |
| | 2016 | | | 2015 | |
| | (Dollars in thousands) | |
Net interest income | $ | 39,816 | | $ | 37,717 | |
Interest rate spread | | 3.41 | % | | 3.62 | % |
Net interest margin | | 3.58 | % | | 3.76 | % |
Net interest margin, fully tax | | | | | | |
equivalent | | 3.66 | % | | 3.84 | % |
Average cost of interest-bearing | | | | | | |
liabilities (including noninterest- | | | | | | |
bearing deposits) | | 0.37 | % | | 0.24 | % |
Average cost of deposits | | | | | | |
(including noninterest-bearing | | | | | | |
deposits) | | 0.23 | % | | 0.17 | % |
For the six months ended June 30, 2016, net interest income increased $2.1 million, or 5.6%, as compared to the same period in 2015. This increase was comprised of a $3.7 million increase in interest income, partially offset by a $1.6 million increase in interest expense.
The $3.7 million increase in interest income for the six months ended June 30, 2016, as compared to the same period in 2015, was primarily due to a $257.4 million, or 16.4%, increase in average loan balances. The $1.6 million increase in interest expense during the first six months of 2016, as compared to the same period in 2015, was primarily due to an increases in interest expense related to FHLB borrowings and certificates of deposit. Interest expense related to FHLB borrowings increased during the first six months of 2016, as compared to the same period in 2015, due to a $70.6 million increase in average balances and a 58 basis point increase in average borrowing costs. The increase in the average cost of FHLB borrowings was related to the hedged borrowings becoming effective, as discussed above, and the December 2015 Federal Reserve Board’s federal funds interest rate increase. During the six months ended June 30, 2016, net interest margin decreased 18 basis points to 3.58%, as compared to 3.76% for the same period in 2015, primarily as a result of an increase in the average cost of interest-bearing liabilities, as described above.
The following table presents, for the periods indicated, average assets, liabilities and stockholders’ equity, as well as interest income from average interest-earning assets, interest expense from average interest-bearing liabilities and the resultant annualized yields and costs 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 yield earned.
Table 4
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Three Months Ended June 30, | |
| | 2016 | | | | 2015 | |
| | Average Balance | | Interest Income or Expense | Average Yield or Cost | | | | Average Balance | | Interest Income or Expense | Average Yield or Cost | |
| | | | | | | | | | | | | |
| | (Dollars in thousands) | |
ASSETS: | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | |
Gross loans, net of deferred costs | | | | | | | | | | | | | |
and fees (1)(2)(3) | $ | 1,845,337 | $ | 19,057 | 4.15 | % | | $ | 1,618,430 | $ | 17,114 | 4.24 | % |
Investment securities (1) | | | | | | | | | | | | | |
Taxable | | 271,891 | | 1,753 | 2.59 | % | | | 340,916 | | 2,078 | 2.44 | % |
Tax-exempt | | 94,397 | | 757 | 3.23 | % | | | 89,961 | | 712 | 3.17 | % |
Bank Stocks (4) | | 20,165 | | 281 | 5.60 | % | | | 18,183 | | 253 | 5.58 | % |
Other earning assets | | 2,822 | | 3 | 0.43 | % | | | 1,978 | | 2 | 0.41 | % |
Total interest-earning assets | | 2,234,612 | | 21,851 | 3.93 | % | | | 2,069,468 | | 20,159 | 3.91 | % |
Non-earning assets: | | | | | | | | | | | | | |
Cash and due from banks | | 24,754 | | | | | | | 25,337 | | | | |
Other assets | | 97,598 | | | | | | | 104,918 | | | | |
Total assets | $ | 2,356,964 | | | | | | $ | 2,199,723 | | | | |
| | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY: | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | |
Interest-bearing demand and NOW | $ | 378,438 | $ | 95 | 0.10 | % | | $ | 361,164 | $ | 94 | 0.10 | % |
Money market | | 398,209 | | 266 | 0.27 | % | | | 364,017 | | 212 | 0.23 | % |
Savings | | 151,507 | | 41 | 0.11 | % | | | 140,066 | | 38 | 0.11 | % |
Time certificates of deposit | | 284,178 | | 662 | 0.94 | % | | | 209,775 | | 406 | 0.78 | % |
Total interest-bearing deposits | | 1,212,332 | | 1,064 | 0.35 | % | | | 1,075,022 | | 750 | 0.28 | % |
Borrowings: | | | | | | | | | | | | | |
Repurchase agreements | | 19,477 | | 8 | 0.17 | % | | | 20,683 | | 9 | 0.17 | % |
Federal funds purchased (5) | | 3 | | - | 0.98 | % | | | 2 | | - | 0.65 | % |
Subordinated debentures | | 25,774 | | 225 | 3.51 | % | | | 25,774 | | 202 | 3.14 | % |
Borrowings | | 242,633 | | 733 | 1.22 | % | | | 217,243 | | 258 | 0.48 | % |
Total interest-bearing liabilities | | 1,500,219 | | 2,030 | 0.54 | % | | | 1,338,724 | | 1,219 | 0.37 | % |
Noninterest bearing liabilities: | | | | | | | | | | | | | |
Demand deposits | | 616,046 | | | | | | | 634,824 | | | | |
Other liabilities | | 12,639 | | | | | | | 12,630 | | | | |
Total liabilities | | 2,128,904 | | | | | | | 1,986,178 | | | | |
Stockholders' Equity | | 228,060 | | | | | | | 213,545 | | | | |
Total liabilities and stockholders' equity | $ | 2,356,964 | | | | | | $ | 2,199,723 | | | | |
| | | | | | | | | | | | | |
Net interest income | | | $ | 19,821 | | | | | | $ | 18,940 | | |
Net interest margin | | | | | 3.57 | % | | | | | | 3.67 | % |
| | | | | | | | | | | | | |
|
(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 3.65% and 3.75% for the three months ended June 30, 2016 and June 30, 2015, 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 $0.1 million and $0.2 million for the three months ended June 30, 2016 and June 30, 2015, 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 second quarter 2016 and the second quarter 2015 rounded to zero. |
Table 4 (Continued)
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Six Months Ended June 30, | |
| | 2016 | | | | 2015 | |
| | Average Balance | | Interest Income or Expense | Average Yield or Cost | | | | Average Balance | | Interest Income or Expense | Average Yield or Cost | |
| | | | | | | | | | | | | |
| | (Dollars in thousands) | |
ASSETS: | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | |
Gross loans, net of deferred costs | | | | | | | | | | | | | |
and fees (1)(2)(3) | $ | 1,831,669 | $ | 37,911 | 4.16 | % | | $ | 1,574,269 | $ | 33,920 | 4.35 | % |
Investment securities (1) | | | | | | | | | | | | | |
Taxable | | 286,747 | | 3,713 | 2.60 | % | | | 344,664 | | 4,201 | 2.46 | % |
Tax-exempt | | 92,663 | | 1,488 | 3.23 | % | | | 87,748 | | 1,414 | 3.25 | % |
Bank Stocks (4) | | 20,533 | | 592 | 5.80 | % | | | 16,501 | | 475 | 5.80 | % |
Other earning assets | | 2,817 | | 7 | 0.50 | % | | | 2,155 | | 3 | 0.28 | % |
Total interest-earning assets | | 2,234,429 | | 43,711 | 3.93 | % | | | 2,025,337 | | 40,013 | 3.98 | % |
Non-earning assets: | | | | | | | | | | | | | |
Cash and due from banks | | 24,868 | | | | | | | 25,739 | | | | |
Other assets | | 98,762 | | | | | | | 103,418 | | | | |
Total assets | $ | 2,358,059 | | | | | | $ | 2,154,494 | | | | |
| | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY: | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | |
Interest-bearing demand and NOW | $ | 378,107 | $ | 186 | 0.10 | % | | $ | 348,979 | $ | 173 | 0.10 | % |
Money market | | 400,109 | | 525 | 0.26 | % | | | 370,375 | | 424 | 0.23 | % |
Savings | | 152,180 | | 83 | 0.11 | % | | | 140,197 | | 77 | 0.11 | % |
Time certificates of deposit | | 279,271 | | 1,277 | 0.92 | % | | | 200,707 | | 744 | 0.75 | % |
Total interest-bearing deposits | | 1,209,667 | | 2,071 | 0.34 | % | | | 1,060,258 | | 1,418 | 0.27 | % |
Borrowings: | | | | | | | | | | | | | |
Repurchase agreements | | 20,207 | | 18 | 0.18 | % | | | 23,296 | | 20 | 0.17 | % |
Federal funds purchased (5) | | 2 | | - | 0.98 | % | | | 21 | | - | 0.81 | % |
Subordinated debentures | | 25,774 | | 450 | 3.51 | % | | | 25,774 | | 401 | 3.14 | % |
Borrowings | | 249,825 | | 1,356 | 1.09 | % | | | 179,266 | | 457 | 0.51 | % |
Total interest-bearing liabilities | | 1,505,475 | | 3,895 | 0.52 | % | | | 1,288,615 | | 2,296 | 0.36 | % |
Noninterest bearing liabilities: | | | | | | | | | | | | | |
Demand deposits | | 613,891 | | | | | | | 640,970 | | | | |
Other liabilities | | 12,573 | | | | | | | 13,072 | | | | |
Total liabilities | | 2,131,939 | | | | | | | 1,942,657 | | | | |
Stockholders' Equity | | 226,120 | | | | | | | 211,837 | | | | |
Total liabilities and stockholders' equity | $ | 2,358,059 | | | | | | $ | 2,154,494 | | | | |
| | | | | | | | | | | | | |
Net interest income | | | $ | 39,816 | | | | | | $ | 37,717 | | |
Net interest margin | | | | | 3.58 | % | | | | | | 3.76 | % |
| | | | | | | | | | | | | |
|
(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 3.66% and 3.84% for the six months ended June 30, 2016 and June 30, 2015, 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 $0.1 million and $1.1 million for the six months ended June 30, 2016 and June 30, 2015, 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 six months ended June 30, 2016 and June 30, 2015 rounded to zero. |
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, 2016
Compared to Three Months Ended
June 30, 2015 | | | Six Months Ended June 30, 2016
Compared to Six Months Ended
June 30, 2015 |
| | Net Change | | Rate | | Volume | | | Net Change | | Rate | | Volume |
| | | | | | | | | | | | | |
| | (In thousands) |
Interest income: | | | | | | | | | | | | | |
Gross Loans, net of deferred | | | | | | | | | | | | | |
costs and fees | $ | 1,943 | $ | (389) | $ | 2,332 | | $ | 3,991 | $ | (1,267) | $ | 5,258 |
Investment Securities | | | | | | | | | | | | | |
Taxable | | (325) | | 130 | | (455) | | | (488) | | 288 | | (776) |
Tax-exempt | | 45 | | 10 | | 35 | | | 74 | | (5) | | 79 |
Bank Stocks | | 28 | | - | | 28 | | | 117 | | 1 | | 116 |
Other earning assets | | 1 | | - | | 1 | | | 4 | | 3 | | 1 |
Total interest income | | 1,692 | | (249) | | 1,941 | | | 3,698 | | (980) | | 4,678 |
| | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | |
Interest-bearing demand | | | | | | | | | | | | | |
and NOW | | 1 | | (3) | | 4 | | | 13 | | (1) | | 14 |
Money market | | 54 | | 33 | | 21 | | | 101 | | 65 | | 36 |
Savings | | 3 | | - | | 3 | | | 6 | | (1) | | 7 |
Time certificates of deposit | | 256 | | 93 | | 163 | | | 533 | | 199 | | 334 |
Repurchase agreements | | (1) | | - | | (1) | | | (2) | | 1 | | (3) |
Subordinated debentures | | 23 | | 23 | | - | | | 49 | | 49 | | - |
Borrowings | | 475 | | 442 | | 33 | | | 899 | | 667 | | 232 |
Total interest expense | | 811 | | 588 | | 223 | | | 1,599 | | 979 | | 620 |
Net interest income | $ | 881 | $ | (837) | $ | 1,718 | | $ | 2,099 | $ | (1,959) | $ | 4,058 |
Provision for Loan Losses
The provision for loan losses is a charge against earnings and represents management’s estimate of 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 estimated amount of expected loss in 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, reduce our exposure to loan loss provision.
In the second quarter 2016, we recorded an immaterial provision for loan losses, as compared to an immaterial provision for loan losses in the first quarter 2016 and a $0.1 million provision for loan losses in the second quarter 2015. Management considered several factors in its calculation of the adequacy of the allowance for loan losses and resulting provision required to absorb the probable incurred losses inherent in the loan portfolio as of June 30, 2016.
Net recoveries in the first and second quarters of 2016 were immaterial as compared to net recoveries of $0.2 million in the second quarter 2015.
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. For a discussion of impaired loans
and associated collateral values, see “Balance Sheet Analysis — Nonperforming Assets and Other Impaired Loans” below.
Noninterest Income
The following table presents the major categories of noninterest income for the current quarter and prior four quarters:
Table 6
| | | | | | | | | | |
| | | | | | | | | | |
| | Three Months Ended |
| | June 30,
2016 | | March 31,
2016 | | December 31,
2015 | | September 30,
2015 | | June 30,
2015 |
| | (In thousands) |
Noninterest income: | | | | | | | | | | |
Deposit service and other fees | $ | 2,292 | $ | 2,169 | $ | 2,259 | $ | 2,309 | $ | 2,338 |
Investment management and trust | | 1,276 | | 1,280 | | 1,225 | | 1,292 | | 1,338 |
Increase in cash surrender value of | | | | | | | | | | |
life insurance | | 460 | | 448 | | 442 | | 447 | | 461 |
Gain (loss) on sale of securities | | (101) | | 45 | | 132 | | - | | - |
Gain on sale of SBA loans | | 110 | | 154 | | 143 | | 232 | | 169 |
Other | | 105 | | 82 | | 61 | | 119 | | 98 |
Total noninterest income | $ | 4,142 | $ | 4,178 | $ | 4,262 | $ | 4,399 | $ | 4,404 |
Second quarter 2016 noninterest income was $4.1 million, as compared to $4.4 million in the second quarter 2015 and $4.2 million in the first quarter 2016. The decline in noninterest income in the second quarter 2016, as compared to both the first quarter 2016 and the second quarter 2015, was mostly due to a loss on sale of securities incurred in the second quarter 2016.
The following table presents the major categories of noninterest income for the year-to-date periods presented:
Table 7
| | | | |
| | | | |
| | Six Months Ended |
| | June 30,
2016 | | June 30,
2015 |
| | (In thousands) |
Noninterest income: | | | | |
Deposit service and other fees | $ | 4,461 | $ | 4,373 |
Investment management and trust | | 2,556 | | 2,672 |
Increase in cash surrender value of life insurance | | 908 | | 869 |
Loss on sale of securities | | (56) | | - |
Gain on sale of SBA loans | | 264 | | 449 |
Other | | 187 | | 156 |
Total noninterest income | $ | 8,320 | $ | 8,519 |
For the six months ended June 30, 2016, noninterest income decreased $0.2 million to $8.3 million, as compared to $8.5 million for the same period in 2015, mostly due to a decrease in gains on sales of SBA loans.
Noninterest Expense
The following table presents the major categories of noninterest expense for the current quarter and prior four quarters:
Table 8
| | | | | | | | | | |
| | | | | | | | | | |
| | Three Months Ended |
| | June 30,
2016 | | March 31,
2016 | | December 31,
2015 | | September 30,
2015 | | June 30,
2015 |
| | (In thousands) |
Noninterest expense: | | | | | | | | | | |
Salaries and employee benefits | $ | 8,520 | $ | 8,788 | $ | 8,643 | $ | 8,318 | $ | 7,999 |
Occupancy expense | | 1,261 | | 1,375 | | 1,498 | | 1,487 | | 1,630 |
Furniture and equipment | | 713 | | 818 | | 801 | | 740 | | 736 |
Amortization of intangible assets | | 239 | | 240 | | 495 | | 495 | | 496 |
Other real estate owned, net | | 5 | | 2 | | 16 | | (31) | | 54 |
Insurance and assessment | | 597 | | 613 | | 603 | | 604 | | 626 |
Professional fees | | 906 | | 857 | | 700 | | 838 | | 853 |
Impairment of long-lived assets | | - | | - | | - | | - | | 122 |
Other general and administrative | | 2,893 | | 3,099 | | 2,491 | | 2,415 | | 2,440 |
Total noninterest expense | $ | 15,134 | $ | 15,792 | $ | 15,247 | $ | 14,866 | $ | 14,956 |
Noninterest expense increased $0.2 million to $15.1 million in the second quarter 2016, as compared to $15.0 million in the second quarter 2015 and decreased $0.7 million as compared to the first quarter 2016.
Second quarter 2016 noninterest expense increased by $0.2 million, as compared to the second quarter 2015, primarily as a result of $0.3 million in merger-related expenses related to the planned third quarter 2016 merger with Home State Bancorp. Other variances in noninterest expense during the second quarter 2016, as compared to the same quarter in 2015, include a $0.5 million increase in salaries and employee benefits, mostly due to higher base salaries and a $0.4 million decrease in occupancy expense, primarily related to reduced rent and depreciation expense as a result of the renegotiation of the lease for our main offices.
Second quarter 2016 noninterest expense decreased by $0.7 million, as compared to the first quarter 2016, primarily due to the timing of merger-related expenses and a $0.3 million decrease in salaries and employee benefits, due to a decline in payroll taxes related to the timing of the annual payroll cycle.
The following table presents the major categories of noninterest expense for the year-to-date periods presented:
Table 9
| | | | |
| | | | |
| | Six Months Ended |
| | June 30,
2016 | | June 30,
2015 |
| | (In thousands) |
Noninterest expense: | | | | |
Salaries and employee benefits | $ | 17,308 | $ | 16,603 |
Occupancy expense | | 2,636 | | 3,327 |
Furniture and equipment | | 1,531 | | 1,466 |
Amortization of intangible assets | | 479 | | 991 |
Other real estate owned, net | | 7 | | 95 |
Insurance and assessment | | 1,210 | | 1,191 |
Professional fees | | 1,763 | | 1,682 |
Impairment of long-lived assets | | - | | 122 |
Other general and administrative | | 5,992 | | 4,749 |
Total noninterest expense | $ | 30,926 | $ | 30,226 |
For the six months ended June 30, 2016, noninterest expense increased by $0.7 million to $30.9 million as compared to $30.2 million for the same period in 2015. The increase in noninterest expense was comprised of $1.0 million in merger-related expenses incurred in the first six months of 2016 and a $0.7 million increase in salaries and employee benefits expense, partially offset by a $0.7 million decrease in occupancy expense. The $0.7 million increase in salaries and employee benefits during the first six months of 2016, as compared to the first
six months of 2015 was attributable to a $0.3 million increase in base salaries, a $0.2 million increase in our self-funding medical plan and a $0.2 million increase in equity compensation expense resulting from a reduction in forfeitures. The increases in salaries was mostly the result of new positions within our credit, wealth management and commercial lending departments. Although we added new positions within these groups, we maintained a stable level of average FTE employees during each period. The $0.7 million decline in occupancy expense was primarily the result of a $0.5 million reduction in rent and depreciation expense related to the restructure of the lease for our main office.
Income Taxes
Income tax expense was $3.1 million for the second quarter 2016 as compared to $2.8 million for the second quarter 2015. The increase in taxes for the second quarter 2016 was primarily a result of increased pre-tax income. During the second quarter 2016, our effective tax rate increased to 35.5% from approximately 33.8% for the same period in 2015. The increase in the effective tax rate was mostly due to a decrease in tax-exempt income as a percentage of total taxable and tax-exempt income as well as the non-deductible nature of certain merger-related expenses.
BALANCE SHEET ANALYSIS
The following sets forth certain key consolidated balance sheet data:
Table 10
| | | | | | | | | | |
| | | | | | | | | | |
| | June 30, | | March 31, | | December 31, | | September 30, | | June 30, |
| | 2016 | | 2016 | | 2015 | | 2015 | | 2015 |
| | (In thousands) |
Cash and cash equivalents | $ | 30,446 | $ | 31,142 | $ | 26,711 | $ | 23,750 | $ | 55,169 |
Total investments | | 369,008 | | 400,890 | | 424,692 | | 433,299 | | 442,794 |
Total loans | | 1,898,543 | | 1,830,246 | | 1,814,536 | | 1,726,151 | | 1,668,658 |
Total assets | | 2,395,015 | | 2,362,216 | | 2,368,525 | | 2,285,630 | | 2,269,536 |
Earning assets | | 2,270,331 | | 2,233,253 | | 2,241,058 | | 2,161,139 | | 2,140,552 |
Deposits | | 1,847,361 | | 1,872,717 | | 1,801,845 | | 1,847,329 | | 1,741,999 |
FHLB Borrowings | | 261,600 | | 205,900 | | 280,847 | | 151,300 | | 260,550 |
At June 30, 2016, total assets were $2.4 billion, reflecting a $26.5 million increase, as compared to December 31, 2015 and a $125.5 million increase as compared to June 30, 2015. The increase in total assets during the six months ended June 30, 2016 included an $84.0 million, or 4.6%, increase in loans, partially funded by a $55.7 million decrease in investments and a $45.5 million, or 2.5% increase in deposits.
As compared to June 30, 2015, the increase in total assets of $125.5 million was primarily due to a $229.9 million increase in loans, funded by a $105.4 million increase in deposits, a $73.8 million decrease in investments and a $24.7 million decrease in cash.
The following table sets forth the amount of our loans outstanding at the dates indicated:
Table 11
| | | | | | | | | | |
| | | | | | | | | | |
| | June 30, | | March 31, | | December 31, | | September 30, | | June 30, |
| | 2016 | | 2016 | | 2015 | | 2015 | | 2015 |
| | (In thousands) |
Commercial and residential real estate | $ | 1,428,397 | $ | 1,307,854 | $ | 1,281,701 | $ | 1,196,209 | $ | 1,146,508 |
Construction | | 26,497 | | 87,753 | | 107,170 | | 92,473 | | 85,516 |
Commercial | | 336,069 | | 329,939 | | 323,552 | | 336,414 | | 333,860 |
Consumer | | 66,539 | | 66,829 | | 66,288 | | 63,517 | | 61,870 |
Other | | 40,640 | | 37,534 | | 35,570 | | 37,420 | | 41,077 |
Total gross loans | | 1,898,142 | | 1,829,909 | | 1,814,281 | | 1,726,033 | | 1,668,831 |
Deferred costs and (fees) | | 401 | | 337 | | 255 | | 118 | | (173) |
Loans, net | | 1,898,543 | | 1,830,246 | | 1,814,536 | | 1,726,151 | | 1,668,658 |
Less allowance for loan losses | | (23,050) | | (23,025) | | (23,000) | | (22,890) | | (22,850) |
Net loans | $ | 1,875,493 | $ | 1,807,221 | $ | 1,791,536 | $ | 1,703,261 | $ | 1,645,808 |
The following table presents the changes in our loan balances (including loans held for sale) at the dates indicated:
Table 12
| | | | | | | | | | |
| | | | | | | | | | |
| | June 30, | | March 31, | | December 31, | | September 30, | | June 30, |
| | 2016 | | 2016 | | 2015 | | 2015 | | 2015 |
| | (In thousands) |
Beginning balance | $ | 1,829,909 | $ | 1,814,281 | $ | 1,726,033 | $ | 1,668,831 | $ | 1,555,288 |
New credit extended | | 121,753 | | 105,843 | | 155,745 | | 149,502 | | 169,687 |
Net existing credit advanced | | 87,524 | | 50,482 | | 61,165 | | 60,784 | | 83,792 |
Net pay-downs and maturities | | (142,516) | | (139,914) | | (129,189) | | (152,279) | | (138,770) |
Charge-offs and other | | 1,472 | | (783) | | 527 | | (805) | | (1,166) |
Gross loans | | 1,898,142 | | 1,829,909 | | 1,814,281 | | 1,726,033 | | 1,668,831 |
Deferred costs and (fees) | | 401 | | 337 | | 255 | | 118 | | (173) |
Loans, net | $ | 1,898,543 | $ | 1,830,246 | $ | 1,814,536 | $ | 1,726,151 | $ | 1,668,658 |
| | | | | | | | | | |
Net change - loans outstanding | $ | 68,297 | $ | 15,710 | $ | 88,385 | $ | 57,493 | $ | 113,504 |
During the second quarter 2016, loans net of deferred costs and fees increased $68.3 million, comprised of a $120.5 million increase in commercial and residential real estate loans, including a $30.7 million increase in 1-4 family residential real estate loans, and a $6.1 million increase in commercial loans, partially offset by a $61.3 million decline in construction loans. The $61.3 million decline in construction loans during the second quarter 2016 was primarily the result of the completion of the underlying construction projects and the conversion of short-term construction loans to permanent financing. Second quarter 2016 net loan growth consisted of $209.3 million in new loans and net existing credit advanced, partially offset by $142.5 million in net loan pay-downs and maturities. In addition to contractual loan principal payments and maturities, the second quarter 2016 included $48.1 million in early payoffs related to the sale of the borrower’s assets, $15.2 million in payoffs due to our strategic decision to not match certain financing terms offered by competitors, and $19.5 million in pay-downs related to revolving line of credit fluctuations.
As compared to June 30, 2015, loans net of unearned fees increased by $229.9 million, or 13.8 %. The net loan growth was primarily comprised of a $281.9 million increase in commercial and residential real estate loans, partially offset by a $59.0 million decrease in construction loans. At June 30, 2016, our commercial and residential real estate portfolio included $374.0 million of 1-4 family residential loans. The utilization rate on commercial lines of credit was 47.0% at June 30, 2016, as compared to 41.2% at December 31, 2015 and 41.0% as of June 30, 2015.
Under joint guidance from the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency (the “OCC”) on sound risk management practices for financial institutions with concentrations in commercial real estate lending, a financial institution may have elevated concentration risk if it has, among other factors, (i) total reported loans for construction, land development, and other land representing 100% or more of capital (CRE 1), or (ii) total reported loans secured by multifamily and non-farm residential properties, loans for construction, land development and other land and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, representing 300% or more of total capital (CRE 2) and an increase in its commercial real estate loan portfolio of 50% or more during the preceding 36 months. For the Bank, total loans for construction, land development and land represented 26% of capital at June 30, 2016, as compared to 47% at December 31, 2015 and 52% at June 30, 2015. For the Bank, total commercial real estate loans represented 360% of capital at June 30, 2016, as compared to 356% at December 31, 2015 and 351% at June 30, 2015. The balance of the Bank’s commercial real estate loan portfolio increased by 51.8% during the preceding 36 months. Management employs heightened risk management practices with respect to commercial real estate lending, including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. Loans secured by commercial real estate are recorded on the balance sheet as either a commercial real estate loan or commercial loan depending on the purpose of the loan, regardless of the underlying collateral.
With respect to group concentrations, most of our business activity is with customers in the state of Colorado. At June 30, 2016, we did not have any significant concentrations in any particular industry.
Nonperforming Assets and Other Impaired Loans
Credit risk related to nonperforming assets is inherent in lending activities. To manage this risk, we utilize routine monitoring procedures and take prompt corrective action when necessary. We employ a risk rating system that identifies the potential risk associated with loans in our loan portfolio. This monitoring and rating system is designed to help management identify current and potential problems so that corrective actions can be taken promptly.
Loans are placed on nonaccrual or charged-off prior to the date on which they would otherwise enter past due status if collection of principal or interest is considered doubtful. The interest on a nonaccrual loan is accounted for using the cash-basis method until the loan qualifies for a return to the accrual basis method. Generally, payments received on a nonaccrual loan are applied first to the principal balance of the loan, and then to interest, and only to the extent that the remaining recorded investment in the loan is determined to be fully collectible. A loan is returned to accrual status after the delinquent borrower’s financial condition has improved, when all the principal and interest amounts contractually due are brought current and when the likelihood of the borrower making future timely payments is reasonably assured.
A loan is impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments when due according to the contractual terms of the underlying loan agreement. Impaired loans consist of our nonaccrual loans, loans that are 90 days or more past due and other loans for which we determine that noncompliance with contractual terms of the loan agreement is probable. Losses on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs.
The following table summarizes the loans for which the accrual of interest has been discontinued, loans with payments more than 90 days past due and still accruing interest and OREO. For reporting purposes, OREO consists of all real estate, other than bank premises, actually owned or controlled by us, including real estate acquired through foreclosure.
Table 13
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | Quarter Ended | |
| | June 30, | | | March 31, | | | December 31, | | | September 30, | | | June 30, | |
| | 2016 | | | 2016 | | | 2015 | | | 2015 | | | 2015 | |
| | (Dollars in thousands) | |
| | | | | | | | | | | | | | | |
Nonaccrual loans and leases | $ | 3,797 | | $ | 3,815 | | $ | 3,762 | | $ | 3,734 | | $ | 2,004 | |
Nonperforming troubled debt | | | | | | | | | | | | | | | |
restructurings | | 9,529 | | | 9,586 | | | 10,712 | | | 10,778 | | | 11,188 | |
Accruing loans past due 90 days or more (1) | | - | | | - | | | - | | | - | | | - | |
Total nonperforming loans | $ | 13,326 | | $ | 13,401 | | $ | 14,474 | | $ | 14,512 | | $ | 13,192 | |
| | | | | | | | | | | | | | | |
Other real estate owned and foreclosed | | | | | | | | | | | | | | | |
assets | | 674 | | | 674 | | | 674 | | | 1,371 | | | 1,503 | |
Total nonperforming assets | $ | 14,000 | | $ | 14,075 | | $ | 15,148 | | $ | 15,883 | | $ | 14,695 | |
| | | | | | | | | | | | | | | |
Total classified assets | $ | 25,644 | | $ | 27,191 | | $ | 26,428 | | $ | 31,208 | | $ | 31,762 | |
| | | | | | | | | | | | | | | |
Nonperforming loans | $ | 13,326 | | $ | 13,401 | | $ | 14,474 | | $ | 14,512 | | $ | 13,192 | |
Performing troubled debt restructurings | | 13,065 | | | 11,402 | | | 11,679 | | | 12,131 | | | 12,118 | |
Allocated allowance for loan losses | | (489) | | | (281) | | | (293) | | | (277) | | | (277) | |
Net carrying amount of impaired loans | $ | 25,902 | | $ | 24,522 | | $ | 25,860 | | $ | 26,366 | | $ | 25,033 | |
| | | | | | | | | | | | | | | |
Accruing loans past due 30-89 days (1) | $ | 2,386 | | $ | 1,398 | | $ | 2,091 | | $ | 3,461 | | $ | 1,487 | |
| | | | | | | | | | | | | | | |
Allowance for loan losses | $ | 23,050 | | $ | 23,025 | | $ | 23,000 | | $ | 22,890 | | $ | 22,850 | |
| | | | | | | | | | | | | | | |
For the Three Months Ended: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Loans charged-off | $ | (57) | | $ | (302) | | $ | (66) | | $ | (75) | | $ | (48) | |
Recoveries | | 72 | | | 311 | | | 184 | | | 101 | | | 285 | |
Net recoveries | $ | 15 | | $ | 9 | | $ | 118 | | $ | 26 | | $ | 237 | |
| | | | | | | | | | | | | | | |
Provision (credit) for loan losses | $ | 10 | | $ | 16 | | $ | (8) | | $ | 14 | | $ | 113 | |
| | | | | | | | | | | | | | | |
Loan Portfolio Ratios: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Allowance for loan losses to loans, net | | | | | | | | | | | | | | | |
of deferred costs and fees (2) | | 1.21 | % | | 1.26 | % | | 1.27 | % | | 1.33 | % | | 1.37 | % |
Allowance for loan losses to | | | | | | | | | | | | | | | |
nonperforming loans | | 172.97 | % | | 171.82 | % | | 158.91 | % | | 157.73 | % | | 173.21 | % |
Annualized net charge-offs to average | | | | | | | | | | | | | | | |
loans | | - | % | | - | % | | (0.03) | % | | (0.01) | % | | (0.06) | % |
Nonperforming assets to total assets | | 0.58 | % | | 0.60 | % | | 0.64 | % | | 0.69 | % | | 0.65 | % |
Nonperforming loans to loans, net | | | | | | | | | | | | | | | |
of deferred costs and fees (2) | | 0.70 | % | | 0.73 | % | | 0.80 | % | | 0.84 | % | | 0.79 | % |
Loans 30-89 days past due to loans, net | | | | | | | | | | | | | | | |
of deferred costs and fees (2) | | 0.13 | % | | 0.08 | % | | 0.12 | % | | 0.20 | % | | 0.09 | % |
Texas ratio (3) | | 5.17 | % | | 5.14 | % | | 5.65 | % | | 6.09 | % | | 5.80 | % |
Classified asset ratio (4) | | 10.55 | % | | 11.56 | % | | 11.66 | % | | 13.51 | % | | 13.87 | % |
________________________ | | | | | | | | | | | | | | | |
(1) Past due loans include both loans that are past due with respect to payments and loans that are past due because the loan has matured, and is in the process of renewal, but continues to be current with respect to payments. | |
(2) Loans, net of deferred costs and fees, exclude loans held for sale. | |
(3) Texas ratio defined as total NPAs divided by subsidiary bank only Tier 1 Capital plus allowance for loan losses. | |
(4) Classified asset ratio defined as total classified assets to subsidiary bank only Tier 1 Capital plus allowance for loan losses. | |
During the second quarter 2016, nonperforming loans decreased by $1.1 million, as compared to December 31, 2015 and increased by $0.1 million as compared to June 30, 2015. The decrease in nonperforming loans at June 30, 2016, as compared to December 31, 2015 was primarily the result of the payoff during the first quarter 2016 of a single nonaccrual loan with a balance of $1.0 million as of December 31, 2015. Nonperforming loans at June 30, 2016 include one out-of-state loan syndication with a balance of $9.4 million. As of June 30, 2016, no additional funds were committed to be advanced in connection with non-performing loans.
Immaterial net recoveries were recognized during the first and second quarters of 2016. Net recoveries in the second quarter 2015 were $0.2 million.
We categorize loans into risk categories of “pass”, “pass-watch”, “special mention”, “substandard”, “doubtful” and “loss”. These internal categories are based on the definitions in the Uniform Agreement on the Classification of Assets and Appraisal of Securities Held by Banks and Thrifts issued by the OCC, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System. In particular, we consider loans that we have internally rated as substandard, doubtful or loss as adversely classified loans. The amount of accruing loans that we have internally considered to be adversely classified was $11.6 million at June 30, 2016, as compared to $11.3 million at December 31, 2015 and $17.1 million at June 30, 2015.
At June 30, 2016, classified assets represented 10.6% of bank level capital and allowance for loan losses, as compared to 11.7% as of December 31, 2015 and 13.9% as of June 30, 2015.
In addition to adversely classified loans, we have loans that are considered to be “special mention” and “pass-watch” loans. Each internal risk rating is ultimately subjective, but is based on both objective and subjective factors and criteria. The internal risk ratings focus on an evaluation of the borrowers’ ability to meet future debt service and performance to plan and considers potential adverse market or economic conditions. As described below under “Allowance for Loan Losses”, we adjust the general component of our allowance for loan losses for trends in the volume and severity of adversely classified and “pass-watch” list loans, which encompasses any loans with a classification of “pass-watch” or worse.
Other Real Estate Owned (OREO) was $0.7 million at June 30, 2016 and at December 31, 2015 and $1.5 million at June 30, 2015. The balance of OREO at June 30, 2016 was comprised of two separate properties, both of which were land. The balance of OREO at June 30, 2015 was comprised of four separate properties, of which $1.4 million was land and $0.1 million was commercial real estate.
As of June 30, 2016, we had $22.6 million of loans with terms that were modified in troubled debt restructurings (TDRs) with a total allocated allowance for loan loss of $0.3 million. As of December 31, 2015, we had $22.4 million of loans with terms that were modified in TDRs with a total allocated allowance for loan loss of $0.3 million. At June 30, 2016, we had $1.0 million of unfunded commitments to borrowers whose loans were classified as TDRs.
The following table provides the allowance for loan losses allocated to TDRs for the current quarter and the prior four quarters:
Table 14
| | | | | | | | | | |
| | | | | | | | | | |
| | June 30, | | March 31, | | December 31, | | September 30, | | June 30, |
| | 2016 | | 2016 | | 2015 | | 2015 | | 2015 |
| | | | | | | | | | |
| | (In thousands) |
Troubled Debt Restructurings (TDRs): | | | | | | | | | | |
Performing TDRs | $ | 13,065 | $ | 11,402 | $ | 11,679 | $ | 12,131 | $ | 12,118 |
Allocated allowance for loan losses | | | | | | | | | | |
on performing TDRs | | (289) | | (258) | | (270) | | (257) | | (255) |
Net investment in performing TDRs | $ | 12,776 | $ | 11,144 | $ | 11,409 | $ | 11,874 | $ | 11,863 |
| | | | | | | | | | |
Nonperforming TDRs | $ | 9,529 | $ | 9,586 | $ | 10,712 | $ | 10,778 | $ | 11,188 |
Allocated allowance for loan losses | | | | | | | | | | |
on nonperforming TDRs | | (1) | | (2) | | (6) | | (2) | | (9) |
Net investment in nonperforming TDRs | $ | 9,528 | $ | 9,584 | $ | 10,706 | $ | 10,776 | $ | 11,179 |
The following provides a rollforward of TDRs for the six month periods ended June 30, 2016 and June 30, 2015:
Table 15
| | | | | | |
| | | | | | |
Troubled Debt Restructuring Rollforward: | | Performing
TDRs | | Nonperforming
TDRs | | Total |
| | (In thousands) |
Balance at January 1, 2015 | $ | 14,227 | $ | 11,676 | $ | 25,903 |
Principal repayments / advances | | (2,109) | | (488) | | (2,597) |
Charge-offs, net | | - | | - | | - |
New modifications | | - | | - | | - |
Loans removed from TDR Status | | - | | - | | - |
Transfers | | - | | - | | - |
Balance at June 30, 2015 | $ | 12,118 | $ | 11,188 | $ | 23,306 |
| | | | | | |
Balance at January 1, 2016 | $ | 11,679 | $ | 10,712 | $ | 22,391 |
Principal repayments / advances | | (315) | | (1,083) | | (1,398) |
Charge-offs, net | | - | | - | | - |
New modifications | | 1,865 | | - | | 1,865 |
Loans removed from TDR Status | | (164) | | (100) | | (264) |
Transfers | | - | | - | | - |
Balance at June 30, 2016 | $ | 13,065 | $ | 9,529 | $ | 22,594 |
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that, in our judgment, is adequate to absorb probable incurred loan losses in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, historical loss experience and other significant factors affecting loan portfolio collectability, including credit quality, loan class concentration levels, economic conditions, loan growth dynamics, and organizational conditions.
The ratio of allowance for loan losses to total loans was 1.21% at June 30, 2016, as compared to 1.27% at December 31, 2015 and 1.37% at June 30, 2015.
Our methodology for evaluating the adequacy of the allowance for loan losses has two basic elements: first, the specific identification of impaired loans and the measurement of an estimated loss for each individual loan identified; and second, estimating a nonspecific allowance for probable losses incurred on all other loans.
The specific allowance for impaired loans and the allowance calculated for probable incurred losses on other loans are combined to determine the required allowance for loan losses. The amount calculated is compared to the recorded allowance balance at each quarter end and any shortfall is charged against income as an additional provision for loan losses. However, if the recorded allowance exceeds the amount calculated, then the difference would be credited to income as a credit provision for loan losses. For further discussion of the provision for loan losses, see “Provision for Loan Losses” above.
In estimating the allowance for probable incurred losses on other loans, we group the balance of the loan portfolio into portfolio segments that have common characteristics, such as loan type or risk rating. For each nonspecific allowance portfolio segment, we apply loss factors to calculate the required allowance based upon actual historical loss rates over a time period that we have determined represents the current credit cycle, adjusted for qualitative factors affecting loan portfolio collectability, as described above. We also look at risk ratings of loans and compute a qualitative adjustment based on our credit quality in consideration of credit quality during the historical loss period. We also consider other qualitative factors that may warrant adjustment of the computed historical loss rate, including loan growth, loan concentrations, economic considerations and organizational factors.
During the second quarter 2016, we recorded an immaterial provision for loan losses, as compared to an immaterial provision for loan losses in the first quarter 2016 and a $0.1 million provision for loan losses in the second quarter 2015. Management considered net recoveries, the level of nonperforming loans, loan portfolio composition and loan growth in its calculation of the adequacy of the allowance for loan losses and resulting provision required to absorb the probable incurred losses inherent in the loan portfolio as of June 30, 2016. For further discussion of the provision for loan losses, see “Provision for Loan Losses” above.
Approximately $0.3 million, or 1.3%, of the $23.1 million allowance for loan losses at June 30, 2016 relates to specific reserve allocations. This compares to a specific reserve of $0.3 million, or 1.3%, of the total allowance for loan losses at December 31, 2015.
The general component of the allowance as a percentage of overall loans, net of unearned loan fees, was 1.19% at June 30, 2016, as compared to 1.25% at December 31, 2015 and 1.35% at June 30, 2015. The decrease in the general reserve as a percentage of loans between June 30, 2015 and June 30, 2016 was due primarily to the impact of a reduced level of charge-offs on our general component calculation.
We monitor the allowance for loan losses closely and adjust the allowance when necessary, based on our analysis, which includes an ongoing evaluation of substandard loans and their collateral positions.
The following table provides a summary of the activity within the allowance for loan losses account for the periods presented:
Table 16
| | | | | |
| | | | | |
| | Six Months Ended June 30, |
| | 2016 | | | 2015 |
| | | | | |
| | (In thousands) |
Balance, beginning of period | $ | 23,000 | | $ | 22,490 |
Loan charge-offs: | | | | | |
Commercial and residential real estate | | (1) | | | - |
Construction | | (203) | | | (7) |
Commercial | | (62) | | | (1) |
Consumer | | (7) | | | (4) |
Other | | (86) | | | (85) |
Total loan charge-offs | | (359) | | | (97) |
| | | | | |
Loan recoveries: | | | | | |
Commercial and residential real estate | | 62 | | | 60 |
Construction | | 23 | | | 12 |
Commercial | | 161 | | | 136 |
Consumer | | 11 | | | 12 |
Other | | 126 | | | 147 |
Total loan recoveries | | 383 | | | 367 |
Net loan recoveries | | 24 | | | 270 |
Provision for loan losses | | 26 | | | 90 |
Balance, end of period | $ | 23,050 | | $ | 22,850 |
Securities
We manage our investment portfolio principally to provide liquidity, balance our overall interest rate risk and to provide collateral for public deposits and customer repurchase agreements.
The carrying value of our portfolio of investment securities at the dates indicated were as follows:
Table 17
| | | | | | | | | |
| | | | | | | | |
| | June 30, | | December 31, | | | Increase | Percent | |
| | 2016 | | 2015 | | | (Decrease) | Change | |
| | (In thousands) | |
Securities available for sale: | | | | | | | | | |
State and municipal | $ | 34,695 | $ | 34,713 | | $ | (18) | (0.1) | % |
Mortgage-backed - agency / residential | | 92,258 | | 129,017 | | | (36,759) | (28.5) | % |
Mortgage-backed - private / residential | | 269 | | 274 | | | (5) | (1.8) | % |
Trust preferred | | 18,575 | | 17,806 | | | 769 | 4.3 | % |
Corporate | | 44,034 | | 65,291 | | | (21,257) | (32.6) | % |
Collateralized loan obligations | | 8,325 | | 8,330 | | | (5) | (0.1) | % |
Total securities available for sale | $ | 198,156 | $ | 255,431 | | $ | (57,275) | (22.4) | % |
| | | | | | | | | |
Securities held to maturity: | | | | | | | | | |
State and municipal | | 59,669 | | 54,853 | | | 4,816 | 8.8 | % |
Mortgage-backed - agency / residential | | 70,861 | | 74,536 | | | (3,675) | (4.9) | % |
Asset-backed | | 18,316 | | 19,372 | | | (1,056) | (5.5) | % |
Other | | 350 | | - | | | 350 | 100.0 | % |
Total securities held to maturity | $ | 149,196 | $ | 148,761 | | $ | 435 | 0.3 | % |
| | | | | | | | | |
The carrying value of our available for sale investment securities at June 30, 2016 was $198.2 million as compared to the December 31, 2015 carrying value of $255.4 million. The $57.3 million decrease in available for sale securities from December 31, 2015 was primarily a result of the sale of approximately $35.3 million of mortgage-backed securities and the sale of $17.2 million of corporate bonds, as well as pay-downs and maturities.
The carrying value of our held to maturity securities at June 30, 2016 was $149.2 million as compared to $148.8 million at December 31, 2015.
At June 30, 2016 and December 31, 2015, our investment securities portfolio had an average effective duration of approximately 4.7 years and 5.1 years, respectively.
The fair values of our securities are determined through the utilization of evaluated pricing models that vary by asset class and incorporate available market information. The evaluated pricing models apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. These models assess interest rate impact, develop prepayment scenarios and take into account market conventions. Standard inputs into these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.
Five municipal bond issuances were priced using significant unobservable inputs as of June 30, 2016, the largest of which is a revenue bond issued by the Colorado Health Facilities Authority with a par value of $24.1 million and repayment supported by cash flows from a local hospital. We reviewed the financials of the hospital, had discussions with hospital management and reviewed the underlying collateral of the municipal bond to determine an appropriate benchmark risk-adjusted interest rate based on bonds with similar risks. Utilizing the discounted cash flow method and an estimate of current market rates for similar bonds, management determined that the estimated fair value of this bond as of June 30, 2016 was equal to its par value.
At June 30, 2016 and December 31, 2015, we held $21.7 million and $20.5 million, respectively, of other equity securities consisting primarily of bank stocks with no maturity date, which are not reflected in Table 17 above. Bank stocks are comprised of stock of the Federal Reserve Bank of Kansas City, the Federal Home Loan Bank of Topeka and Bankers’ Bank of the West. These stocks have restrictions placed on their transferability as only members of the entities can own the stock. We review the equity securities quarterly for potential impairment. No impairment has been recognized on these equity securities.
Deposits
The following table sets forth the amounts of our deposits outstanding at the dates indicated:
Table 18
| | | | | | | | | |
| | | | | | | | | |
| | At June 30, 2016 | | | | At December 31, 2015 | |
| | Balance | %
of Total | | | | Balance | %
of Total | |
| | | | | | | | | |
| | (Dollars in thousands) |
Noninterest-bearing demand | $ | 638,110 | 34.54 | % | | $ | 612,371 | 33.99 | % |
Interest-bearing demand and NOW | | 383,492 | 20.76 | % | | | 381,834 | 21.19 | % |
Money market | | 392,730 | 21.26 | % | | | 397,371 | 22.05 | % |
Savings | | 149,798 | 8.11 | % | | | 151,130 | 8.39 | % |
Time | | 283,231 | 15.33 | % | | | 259,139 | 14.38 | % |
Total deposits | $ | 1,847,361 | 100.00 | % | | $ | 1,801,845 | 100.00 | % |
Total deposits increased $45.5 million at June 30, 2016 as compared to December 31, 2015. The increase in deposits over the last six months was due to a $25.7 million increase in non-maturing deposits and a $24.1 million increase in time deposits. The increase in non-maturing deposits during the first six months of 2016 was attributable to seasonal cash fluctuations of various commercial customers in addition to new customer relationships. The increase in time deposits was due in part to a $12.0 million increase in our brokered CDs and a successful in-market retail time deposit campaign. Because of the current low interest-rate environment, and because of the span of time since the last period of increasing interest rates, we are uncertain what impact, if any, rising interest rates would have on our deposit base.
Noninterest-bearing deposits as a percentage of total deposits increased to approximately 34.5% at June 30, 2016, as compared to 34.0% at December 31, 2015. Noninterest-bearing deposits help reduce overall funding costs; however, due to the extremely low rate environment, the impact of noninterest-bearing deposits on the overall cost of funds is currently less significant than in a higher rate environment.
Time deposit balances comprised 15.3% of total deposits at June 30, 2016. The majority of the time deposit balance represented deposits of local customers, with $90.4 million representing brokered deposits, as compared to $78.4 million at December 31, 2015. We monitor time deposit maturities and renewals on a daily basis and will raise rates on local time deposits if necessary to grow such deposits.
Securities Sold under Agreement to Repurchase
At June 30, 2016, securities sold under agreements to repurchase were $18.0 million, a decrease of $8.5 million as compared to December 31, 2015, and an increase of $2.2 million as compared to June 30, 2015.
Borrowings
At June 30, 2016, our FHLB borrowings were $261.6 million as compared to $280.8 million at December 31, 2015 and $260.6 million at June 30, 2015. At June 30, 2016, borrowings consisted of $120.0 million in term notes and $141.6 million in line of credit advances. At December 31, 2015, our FHLB borrowings consisted of $95.0 million in term notes and $185.8 million in line of credit advances. The total FHLB commitment, including balances outstanding, at June 30, 2016 and December 31, 2015 was $478.2 million and $454.7 million, respectively.
Under an advance, pledge and security agreement with the FHLB, the Bank had additional borrowing capacity of approximately $216.6 million at June 30, 2016, which can be utilized for term and/or line of credit advances.
The FHLB term borrowings at June 30, 2016 consisted of two fixed-rate term notes and two variable-rate term notes. A $20.0 million, fixed-rate term advance matures on January 23, 2018 with an interest rate of 2.52% and is convertible on a quarterly basis by the FHLB to a variable rate borrowing. If the note is converted by the FHLB, we have the option to prepay the advance without penalty. A $50.0 million, fixed-rate term advance with an interest rate of 0.63% matures on October 24, 2016. A $25.0 million, variable-rate term advance with a current interest rate of 0.74% matures on August 5, 2016. A $25.0 million, variable-rate term advance with a current interest rate of 0.88% matures on March 7, 2017. We expect that both $25.0 million, variable-rate term advances will be renewed annually for the next four years given their direct relationship to our five year forward starting balance sheet swaps initiated in June 2013 and February 2014. The rates on the variable-rate term notes reset quarterly. The interest rate on our FHLB line of credit borrowing is variable and was 0.54% at June 30, 2016.
In April 2016, we entered into a credit agreement for a $10.0 million holding company line of credit with Wells Fargo Bank, National Association. This line of credit is secured with the holding company’s stock in Guaranty Bank and Trust. The line of credit matures on March 17, 2017. Under the credit agreement, we can elect a fixed or floating interest rate on each advance. As of June 30, 2016 no amounts had been borrowed on this line of credit.
Capital Resources
Current risk-based regulatory capital standards generally require banks and bank holding companies to maintain a ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.50%, Tier 1 capital to risk-weighted assets of at least 6.00%, a ratio of Tier 1 capital to average total assets (leverage ratio) of at least 4.00% and a ratio of total capital (which includes Tier 1 capital plus certain forms of subordinated debt, a portion of the allowance for loan and lease losses and preferred stock) to risk-weighted assets of at least 8.00%. However, under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III, which became effective in the first quarter 2015, a capital conservation buffer of 2.5%, comprised of Common Equity Tier 1, is established above the regulatory minimum capital requirement. The capital conservation buffer will be phased in between January 1, 2016 and year end 2018, becoming fully effective on January 1, 2019, however the full phased in capital conservation buffer is included in the table below.
The Bank made the one-time AOCI opt-out election on its March 31, 2015 Call Report, which allowed community banks under $250 billion, who made the one-time opt-out election, to remove the impact of certain unrealized gains and losses from the calculation of regulatory capital. There is no opportunity to change methodology in future periods.
Risk-weighted assets are calculated by multiplying the balance in each category of assets by a risk factor, which ranges from zero for cash assets and certain government obligations to 150% for some loans, and adding the products together.
For regulatory purposes, we maintain capital above the minimum core standards. We actively monitor our regulatory capital ratios to ensure that the Company and the Bank are more than “well capitalized” under the applicable regulatory framework. Under these regulations, a bank is considered “well capitalized” if the institution has a Common Equity Tier 1 risk-based capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a total risk-based capital ratio of 10.0% or greater and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure. The Bank is required to maintain similar capital levels under capital adequacy guidelines. At June 30, 2016, each of the Bank’s capital ratios was above the regulatory capital threshold of “well capitalized”.
The following table provides the capital ratios of the Company and the Bank as of the dates presented, along with the applicable regulatory capital requirements.
Table 19
| | | | | | | | | | | |
| | | | | | | | | | | |
| Ratio at
June 30,
2016 | | Ratio at
December 31,
2015 | | Ratio at
June 30,
2015 | | | Minimum Requirement
for “Adequately Capitalized”
Institution plus fully
phased in Capital
Conservation Buffer | | Minimum
Requirement for
"Well-Capitalized"
Institution | |
Common Equity Tier 1 Risk-Based | | | | | | | | | | | |
Capital Ratio | | | | | | | | | | | |
Consolidated | 11.07 | % | 10.94 | % | 10.97 | % | | 7.00 | % | N/A | |
Guaranty Bank and Trust Company | 11.89 | % | 11.96 | % | 11.75 | % | | 7.00 | % | 6.50 | % |
| | | | | | | | | | | |
Tier 1 Risk-Based Capital Ratio | | | | | | | | | | | |
Consolidated | 12.23 | % | 12.11 | % | 12.16 | % | | 8.50 | % | N/A | |
Guaranty Bank and Trust Company | 11.89 | % | 11.96 | % | 11.75 | % | | 8.50 | % | 8.00 | % |
| | | | | | | | | | | |
Total Risk-Based Capital Ratio | | | | | | | | | | | |
Consolidated | 13.34 | % | 13.24 | % | 13.34 | % | | 10.50 | % | N/A | |
Guaranty Bank and Trust Company | 13.00 | % | 13.09 | % | 12.92 | % | | 10.50 | % | 10.00 | % |
| | | | | | | | | | | |
Leverage Ratio | | | | | | | | | | | |
Consolidated | 10.84 | % | 10.68 | % | 10.86 | % | | 4.00 | % | N/A | |
Guaranty Bank and Trust Company | 10.54 | % | 10.55 | % | 10.50 | % | | 4.00 | % | 5.00 | % |
At June 30, 2016, all of our regulatory capital ratios remain well above minimum requirements for a “well-capitalized” institution. Our Tier 1 risk-based capital ratio and total risk-based capital ratios increased, as compared to our ratios at December 31, 2015, as a result of increased capital due to 2016 year-to-date earnings, partially offset by growth in risk-weighted assets. As of June 30, 2016, the majority of our regulatory capital ratios increased, as compared to June 30, 2015, primarily due to an increase in net retained income, partially offset by growth in risk-weighted assets during the preceding twelve months.
Dividends
Holders of voting common stock are entitled to dividends out of funds legally available for such dividends, when, and if, declared by the Board of Directors. Beginning in May 2013, we paid cash dividends of two and one-half cents per share to stockholders on a quarterly basis through November 2013. Beginning in February 2014, we increased the cash dividend to five cents per share on a quarterly basis through November 2014. Beginning in February 2015, we increased the cash dividend to ten cents per share on a quarterly basis through November 2015. In February 2016, we increased the quarterly cash dividend to11 and one half cents per share.
Our ability to pay dividends is subject to the restrictions of the Delaware General Corporation Law. Because we are a bank holding company with no significant assets other than our bank subsidiary, we currently depend upon dividends from our bank subsidiary for the majority of our revenues. Various banking laws applicable to the Bank limit the payment of dividends, management fees and other distributions by the Bank to the holding company, and may therefore limit our ability to pay dividends on our common stock. Under these laws, the Bank is currently required to request permission from the Federal Reserve prior to payment of a dividend to the holding company.
Under the terms of each of our two outstanding trust preferred financings, including our related subordinated debentures, which occurred on June 30, 2003 and April 8, 2004, respectively, we cannot declare or pay any dividends or distributions (other than stock dividends) on, or redeem, purchase, acquire or make a liquidation payment with respect to, any shares of our capital stock if (i) an event of default under any of the subordinated debenture agreements has occurred and is continuing, or (ii) we defer payment of interest on the TruPS for a period of up to 60 consecutive months. At June 30, 2016, there was no event of default under the subordinated debenture agreements and interest payments on our two trust preferred financings were current.
Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend upon a number of factors, including general business conditions, our financial results, our future business prospects, capital requirements, contractual, legal, and regulatory restrictions on the payment of dividends
by us to our stockholders or by the Bank to the holding company, and such other factors as our Board of Directors may deem relevant.
Contractual Obligations and Off-Balance Sheet Arrangements
The Bank is a party to credit-related financial instruments with off-balance sheet risk entered into in the normal course of business to meet the financing needs of the Bank’s customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
Our exposure to credit loss is represented by the contractual amount of these commitments. We follow the same credit policies in making commitments as we do for on-balance sheet instruments.
At the dates indicated, the following commitments were outstanding:
Table 20
| | | | | |
| | | | | |
| | June 30,
2016 | | | December 31,
2015 |
| | | | | |
| | (In thousands) |
Commitments to extend credit: | | | | | |
Variable | $ | 301,341 | | $ | 307,463 |
Fixed | | 59,538 | | | 61,184 |
Total commitments to extend credit | $ | 360,879 | | $ | 368,647 |
| | | | | |
Standby letters of credit | $ | 9,702 | | $ | 8,857 |
Liquidity
The Bank relies upon deposits as its principal source of funds and therefore must be in a position to service depositors’ needs as they arise. Fluctuations in the account balances of a few large depositors may cause temporary increases and decreases in liquidity from time to time. We deal with such fluctuations by using other sources of liquidity, as discussed below.
The Bank’s initial sources of liquidity are its liquid assets. At June 30, 2016, the Company had $30.4 million of cash and cash equivalents. Further, the Bank had $8.5 million in excess pledging related to customer accounts that required collateral and $104.2 million of unencumbered securities that were available for pledging to our FHLB line at June 30, 2016.
When the level of our liquid assets does not meet our liquidity needs, other available sources of liquid assets, including the purchase of federal funds, sales of loans, including jumbo mortgage loans, brokered and internet certificates of deposit, one-way purchases of certificates of deposit through the Certificates of Deposit Account Registry Service, discount window borrowings from the Federal Reserve and our lines of credit with the FHLB and other correspondent banks, are employed to meet current and presently anticipated funding needs. At June 30, 2016, the Bank had approximately $216.6 million of availability on its FHLB line, $50.8 million of availability on its secured and unsecured federal funds lines with correspondent banks and $3.9 million of availability with the Federal Reserve discount window.
At June 30, 2016, the Bank had $105.4 million of brokered deposits, of which $15.0 million were money markets, $6.5 million will mature in the fourth quarter 2016, $13.3 million will mature in the second quarter 2017, $15.8 million will mature in the third quarter 2017, $5.0 million will mature in the fourth quarter 2017, $36.7 million will mature during 2018 and $13.1 million will mature during 2019 and 2020. As of December 31, 2015, the Bank maintained $78.4 million in brokered deposits. We continue to evaluate new brokered deposits as a source of low-cost, longer-term funding.
The holding company relies primarily on cash flow from the Bank as its source of liquidity. The holding company requires liquidity for the payment of interest on the subordinated debentures, for operating expenses, principally salaries and benefits, for repurchases of our common stock, and, if declared by our Board of Directors, for the payment of dividends to our stockholders. The Bank pays a management fee for its share of expenses paid by the holding company as well as for services provided by the holding company. As discussed in the “Capital
Resources” section above, various banking laws applicable to the Bank limit the payment of dividends by the Bank to the holding company and may therefore limit our ability to pay dividends on our common stock. Under these laws, the Bank is currently required to request permission from the Federal Reserve prior to payment of a dividend to the Company. Under the terms of our TruPS financings, we may defer payment of interest on the subordinated debentures and related TruPS for a period of up to 60 consecutive months as long as we are in compliance with all covenants of the agreement.
As of June 30, 2016, the holding company had approximately $7.6 million of cash on hand, which we expect will be sufficient to fund holding company operations and projected quarterly external stockholder dividends at the current rate through the remainder of 2016. In April 2016, the holding company entered into a credit agreement with Wells Fargo Bank, National Association for a $10.0 million secured line of credit. The line of credit is secured with the holding company’s stock in Guaranty Bank and Trust Company. At June 30, 2016, there were no funds drawn on the line of credit.
Application of Critical Accounting Policies and Accounting Estimates
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the rules and regulations of the SEC. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates on an ongoing basis its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which have formed the basis for making such judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from the recorded estimates under different assumptions or conditions. A summary of critical accounting policies and estimates are listed in the "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. There have been no changes during 2016 to the critical accounting policies listed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. To that end, management actively monitors and manages our interest rate risk exposure. We have not entered into any market risk sensitive instruments for trading purposes. We manage our interest rate sensitivity by matching the repricing opportunities on our earning assets to those on our funding liabilities. In order to manage the repricing characteristics of our assets and liabilities, we use various strategies designed to ensure that our exposure to interest rate fluctuations is limited in accordance with our guidelines of acceptable levels of risk-taking. Balance sheet hedging strategies, including monitoring the terms and pricing of loans and deposits and managing the deployment of our securities, are used to reduce mismatches in interest rate repricing between our portfolio of assets and their funding sources.
Net Interest Income Modeling
Our Asset Liability Management Committee, or ALCO, oversees our exposure to and mitigation of interest rate risk and, along with our Board of Directors, reviews our exposure to interest rate risk at least quarterly. The committee is composed of members of our senior management. The ALCO monitors interest rate risk by analyzing the potential impact on the net portfolio value and net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. The ALCO manages our balance sheet in part to minimize the potential impact of changes in interest rates on net portfolio value and net interest income.
Interest rate risk exposure is measured using interest rate sensitivity analysis to evaluate fluctuations in net portfolio value and net interest income in the event of hypothetical changes in interest rates. If potential changes to net portfolio value and net interest income from hypothetical interest rate changes are not within the limits approved by the Board of Directors, the Board may direct management to adjust the Bank’s mix of assets and liabilities to bring interest rate risk within these limits.
We monitor and evaluate our interest rate risk position on at least a quarterly basis using net interest income simulation analysis under 100, 200 and 300 basis point change scenarios (see below). Each of these analyses measures different interest rate risk factors inherent in the financial statements.
Our primary interest rate risk measurement tool, the “Net Interest Income Simulation Analysis”, measures interest rate risk and the effect of hypothetical interest rate changes on net interest income. This analysis incorporates all of our assets and liabilities together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through these simulations, we estimate the impact on net interest income of an immediate change in market rates of 100, 200 and 300 basis points upward or downward, over a one year period. Assumptions are made to project rates for new loans and deposits based on historical analysis, our outlook and repricing strategies. Asset prepayments and other market risks are developed from industry estimates of prepayment speeds and other market changes. Since the results of these simulations can be significantly influenced by the assumptions on which the simulations rely, we also evaluate the sensitivity of simulation results to changes in underlying assumptions.
The following table shows the projected net interest income increase or decrease over the 12 months following June 30, 2016 and June 30, 2015:
Table 21
| | | | | |
| | | | | |
Market Risk: | | | | | |
| | | | | |
| | Annualized Net Interest Income |
| | June 30, 2016 | | | June 30, 2015 |
| | Amount of Change | | | Amount of Change |
| | (In thousands) |
Rates in Basis Points | | | | | |
300 | $ | 5 | | $ | 2,392 |
200 | | 215 | | | 1,453 |
100 | | 13 | | | 586 |
Static | | - | | | - |
(100) | | (767) | | | (1,244) |
(200) | | 15 | | | (1,394) |
(300) | | N/M | | | N/M |
N/M = not meaningful | | | | | |
Overall, we believe our balance sheet is mildly asset sensitive; i.e. that a change in interest rates would have a greater impact on our assets than on our liabilities. At June 30, 2016, we are positioned to have a short-term favorable impact to net interest income in the event of an immediate 300, 200 or 100 basis point increase in market interest rates. Our asset sensitivity is mostly due to the amount of variable rate loans on the books and is partially mitigated by interest rate floors, or minimum rates: as rates rise, the loan rate may continue to be at the minimum rate. We also anticipate that deposit rates, other than time deposit rates, would increase immediately in a rising rate environment, but at a reduced magnitude. Additionally, the interest rates paid on our FHLB line of credit advances would increase immediately as well. The primary reason that the benefit to net interest income is reduced between the 200 and 300 basis point increase in market interest rates is because we assume that our $20 million FHLB convertible term advance would be called by the FHLB in the event that market interest rates increased by 300 basis points. In addition to performing net interest income modeling, we also monitor the impact an instantaneous change in interest rates would have on our economic value of equity. We anticipate a reduction in the economic value of equity in a rising rate environment as the reduction in the value of our fixed rate earning assets would outweigh the corresponding increase in value of our low cost deposits. As of June 30, 2016, our asset sensitivity had decreased relative to June 30, 2015, primarily due to our effort to reduce asset sensitivity, resulting in a maximization of current earnings.
We estimate that our net interest income would decline in a 100 or 200 basis point falling rate environment. This is consistent with our belief that our balance sheet is asset sensitive. At June 30, 2016, it is not possible for the majority of our deposit rates to fall 100 to 300 basis points since most deposit rates were already below 100 basis points. At June 30, 2016, the loss of gross interest income in a falling interest rate environment is expected to exceed the corresponding reduction in interest expense in a falling rate environment. We believe that this scenario is unlikely. The target federal funds rate is currently set by the Federal Open Market Committee of the Federal Reserve Board at a rate of between 25 and 50 basis points and the prime rate has historically been set at a rate of 300 basis points over the target federal funds rate. Our interest rate risk modeling assumes that the prime rate would continue to be set at a rate of 300 basis points over the target federal funds rate; therefore, a 200 basis point decline in overall rates would only result in a 25 to 50 basis point decline in both target federal funds rate and the prime rate. Further, other rates that are currently below 1% or 2% (e.g. short-term U.S. Treasuries and LIBOR) are modeled to not fall below 0% with an overall 100 or 200 basis point decrease in rates. Many of our variable rate loans are set to an index tied to the prime rate, the target federal funds rate or LIBOR, therefore, a further decrease in rates would likely not have a substantial impact on loan yields.
ITEM 4. Controls and Procedures
The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended [the “Exchange Act”] ) as of June 30, 2016. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at June 30, 2016.
The Company’s disclosure controls and procedures were designed to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company and the Bank are defendants, from time-to-time, in legal actions at various points of the legal process arising from transactions conducted in the ordinary course of business. Management believes that, after consultation with legal counsel, it is not probable that the outcome of current legal actions will result in a liability that would have a material adverse effect on the Company’s consolidated financial position, results of operations, comprehensive income or cash flows. In the event that such a legal action results in an unfavorable outcome, the resulting liability could have a material adverse effect on the Company’s consolidated financial position, results of operations, comprehensive income or cash flows.
ITEM 1A. Risk Factors
There have been no material changes from risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
| (c) | | The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our voting common stock during the second quarter 2016. |
| | | | | |
| | | | | |
| | | | Shares Purchased | Remaining |
| | | | under | Repurchase |
| Total Shares | | Average Price | Publicly Announced | Authority |
| Purchased (1) | | Paid per Share | Repurchase Plan | in Shares |
April 1 to April 30 | - | $ | - | - | 1,000,000 |
May 1 to May 31 | 155 | | 16.59 | - | 1,000,000 |
June 1 to June 30 | - | | - | - | 1,000,000 |
| 155 | $ | 16.59 | - | 1,000,000 |
_______________________
|
(1) These shares relate to the net settlement by employees related to vested, restricted stock awards and do not impact the 1,000,000 shares available for repurchase under the repurchase plan originally announced on April 3, 2014, which is scheduled to expire April 2, 2017. Net settlements represent instances where employees elect to satisfy their income tax liability related to the vesting of restricted stock through the surrender of a proportionate number of the vested shares to the Company. |
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Mine Safety Disclosure
Not applicable.
ITEM 5. Other Information
Not applicable.
| | |
ITEM 6. | Exhibits |
| | |
Exhibit Number | | Description |
| |
2.1 | | Agreement and Plan of Reorganization dated March 16, 2016 (incorporated by reference to Exhibit 2.1 to the Registrant’s form 8-K filed on March 16, 2016). |
| | |
3.1 | | Second Amended and Restated Certification of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on August 12, 2009). |
| | |
3.2 | | Certificate of Amendment to the Registrant’s Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on October 3, 2011). |
| | |
3.3 | | Certificate of Amendment to the Registrant’s Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-Q filed on July 31, 2013). |
| | |
3.4 | | Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K filed on May 7, 2008). |
| | |
4.1 | | Indenture dated July 18, 2016 between the Registrant and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to exhibit 4.1 to the Registrant’s form 8-K filed on July 18, 2016). |
| | |
4.2 | | First Supplemental Indenture dated July 18, 2016 between the Registrant and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to exhibit 4.2 to the Registrant’s form 8-K filed on July 18, 2016). |
| | |
4.3 | | Form of 5.75% Fixed-to-Floating Rate Subordinated Note due July 20, 2026 (included in Exhibit 4.2). |
| | |
31.1* | | Section 302 Certification of Chief Executive Officer. |
| | |
31.2* | | Section 302 Certification of Chief Financial Officer. |
| |
32.1* | | Section 906 Certification of Chief Executive Officer. |
| |
32.2* | | Section 906 Certification of Chief Financial Officer. |
| |
101.INS | XBRL Interactive Data File** |
101.SCH | XBRL Interactive Data File** |
101.CAL | XBRL Interactive Data File** |
101.LAB | XBRL Interactive Data File** |
101.PRE | XBRL Interactive Data File** |
101.DEF | XBRL Interactive Data File** |
* Filed with this Quarterly Report on Form 10-Q.
** This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
i | | | | |
| | | | |
Dated: August 4, 2016 | | | | GUARANTY BANCORP |
| | |
| | | | /s/ CHRISTOPHER G. TREECE |
| | | | Christopher G. Treece |
| | | | Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) |
