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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

OR

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                    

 

Commission File Number: 000-51556

 

 

GUARANTY BANCORP

(Exact name of registrant as specified in its charter)

 

DELAWARE		41-2150446
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
1331 Seventeenth St., Suite 345 Denver, CO		80202
(Address of principal executive offices)		(Zip Code)

 

303-675-1194

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x

 

As of July 29, 2013, there were 20,373,252 shares of the registrant’s voting common stock outstanding, including 519,682 shares of unvested stock awards, and excluding 1,019,000 shares of the registrant’s non-voting common stock outstanding.

 

 

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Table of Contents

 

		Page
	Forward-Looking Statements and Factors That Could Affect Future Results	3
PART I—FINANCIAL INFORMATION		5
ITEM 1.	Unaudited Condensed Consolidated Financial Statements	5
	Unaudited Condensed Consolidated Balance Sheets	5
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)	6
	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity	7
	Unaudited Condensed Consolidated Statements of Cash Flows	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	63
ITEM 4.	Controls and Procedures	65
PART II—OTHER INFORMATION		66
ITEM 1.	Legal Proceedings	66
ITEM 1A.	Risk Factors	66
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
ITEM 3.	Defaults Upon Senior Securities	66
ITEM 4	Mine Safety Disclosure	66
ITEM 5.	Other Information	66
ITEM 6.	Exhibits	67

 

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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. In addition, certain statements may be contained in our future filings with the SEC, in press releases, and in oral and written statements made by or with our approval that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. 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.

 

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those 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.

 

·                   The ability to receive regulatory approval for the Bank to declare and pay dividends to the Company.

 

·                   Changes 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 recent joint rule by the Federal Reserve Board, Office of the Comptroller of the Currency, and the FDIC to revise the regulatory capital rules, including the implementation of 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 other credit quality measures, and their impact on the adequacy of the Bank’s allowance for loan losses and the Bank’s provision for loan losses.

 

·                   Changes in sources and uses of funds, including loans, deposits and borrowings, including the ability for the Bank to retain and grow core deposits, to purchase brokered deposits and maintain unsecured federal funds lines and secured lines of credit with correspondent banks.

 

·                   The effects of inflation, as well as, interest rate, securities market and monetary supply fluctuations.

 

·                   Political instability, acts of war or terrorism and natural disasters.

 

·                   The timely development and acceptance of new products and services and perceived overall value of these products and services by customers.

 

·                   Revenues are lower than expected.

 

·                   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 and/or condition of the Bank’s borrowers and the ability of the Bank’s borrowers to perform under the terms of their loans and terms of other credit agreements.

 

·                   Technological changes.

 

·                   Acquisitions and greater than expected costs or difficulties related to the integration of acquired businesses or other assets.

 

·                   The ability to increase market share and control expenses.

 

·                   Changes in the competitive environment among financial or bank holding companies and other financial service providers.

 

·                   Changes in business strategy or development plans.

 

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·                   The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

 

·                   Changes in our organization, compensation and benefit plans.

 

·                   Our ability to hire and retain qualified executive officers.

 

·                   The costs and effects of changes in laws and regulations and of other legal and regulatory developments, including, but not limited to, increases in FDIC insurance premiums, the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations, reviews or other inquires.

 

·                   Our success at managing the risks involved in the foregoing items.

 

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.

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Consolidated Financial Statements

 

GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

 

		June 30,			December 31,
		2013			2012
		(Dollars in thousands)
Assets
Cash and due from banks		$	30,613		$	163,217
Time deposits with banks		5,000			8,000
Securities available for sale, at fair value		432,218			413,382
Securities held to maturity (fair value of $33,657 and $32,290 at June 30, 2013 and December 31, 2012)		34,772			31,283
Bank stocks, at cost		17,981			14,262
Total investments		484,971			458,927
Loans, net of unearned loan fees		1,240,555			1,158,749
Less allowance for loan losses		(20,218		)	(25,142		)
Net loans		1,220,337			1,133,607
Premises and equipment, net		46,265			46,918
Other real estate owned and foreclosed assets		6,460			19,580
Other intangible assets, net		7,935			9,348
Securities sold, not yet settled		—			5,878
Bank owned life insurance		30,902			15,564
Other assets		33,645			25,899
Total assets		$	1,866,128		$	1,886,938
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand		$	505,782		$	564,215
Interest-bearing demand and NOW		332,541			285,679
Money market		319,957			312,724
Savings		105,853			100,704
Time		185,118			191,434
Total deposits		1,449,251			1,454,756
Securities sold under agreement to repurchase and federal funds purchased		24,894			67,040
Borrowings		167,903			110,163
Subordinated debentures		25,774			41,239
Securities purchased, not yet settled		5,000			16,943
Interest payable and other liabilities		7,982			8,597
Total liabilities		1,680,804			1,698,738
Stockholders’ equity:
Common stock (1)(2)		24			117
Additional paid-in capital - common stock		706,062			705,272
Accumulated deficit		(412,389		)	(417,957		)
Accumulated other comprehensive income (loss)		(5,910		)	3,165
Treasury stock, at cost, 2,200,564 and 2,194,003 shares, respectively(2)		(102,463		)	(102,397		)
Total stockholders’ equity		185,324			188,200
Total liabilities and stockholders’ equity		$	1,866,128		$	1,886,938

 

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(1)          Common stock—$0.001 par value; 30,000,000 shares authorized; 23,593,049 shares issued and 21,392,485 shares outstanding at June 30, 2013 (includes 520,682 shares of unvested restricted stock); 23,363,524 shares issued and 21,169,521 shares outstanding at December 31, 2012 (includes 339,359 shares of unvested restricted stock).

 

(2)          Share amounts for all periods presented reflect the Company’s May 20, 2013 1-for-5 reverse stock split.

 

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

 

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GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2013			2012			2013			2012
		(In thousands, except share and per share data)
Interest income:
Loans, including fees		$	14,104		$	14,511		$	28,186		$	28,993
Investment securities:
Taxable		2,322			2,366			4,587			4,759
Tax-exempt		786			618			1,579			1,235
Dividends		170			153			326			311
Federal funds sold and other		67			58			101			100
Total interest income		17,449			17,706			34,779			35,398
Interest expense:
Deposits		615			711			1,250			1,488
Securities sold under agreement to repurchase and federal funds purchased		11			12			29			24
Borrowings		849			827			1,667			1,654
Subordinated debentures		235			773			716			1,549
Total interest expense		1,710			2,323			3,662			4,715
Net interest income		15,739			15,383			31,117			30,683
Provision for loan losses		—			500			—			1,500
Net interest income, after provision for loan losses		15,739			14,883			31,117			29,183
Noninterest income:
Customer service and other fees		3,018			2,382			5,638			4,653
Gain on sale of securities		54			342			54			964
Gain on sale of SBA loans		287			—			423			—
Other		352			187			546			393
Total noninterest income		3,711			2,911			6,661			6,010
Noninterest expense:
Salaries and employee benefits		7,213			6,614			14,654			13,471
Occupancy expense		1,598			1,972			3,210			3,991
Furniture and equipment		745			783			1,506			1,604
Amortization of intangible assets		706			761			1,413			1,523
Other real estate owned, net		(257		)	461			77			813
Insurance and assessments		641			881			1,249			1,689
Professional fees		853			856			1,764			1,484
Prepayment penalty on subordinated debentures		—			—			629			—
Impairment of long-lived assets		—			2,750			—			2,750
Other general and administrative		2,380			2,438			4,569			4,673
Total noninterest expense		13,879			17,516			29,071			31,998
Income before income taxes		5,571			278			8,707			3,195
Income tax expense (benefit)		1,753			(5,914		)	2,617			(5,914		)
Net income		$	3,818		$	6,192		$	6,090		$	9,109
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Change in net unrealized gains (losses)		$	(8,108	)	$	(334	)	$	(9,312	)	$	248
Less: Reclassification adjustments for net losses (gains) included in net income		(33		)	(212		)	(33		)	(598		)
Unrealized gains (losses) on derivatives:
Change in net unrealized gains (losses)		271			—			271			—
Less: Reclassification adjustments for hedge ineffectiveness included in net income		(1		)	—			(1		)	—
Other comprehensive income (loss)		(7,871		)	(546		)	(9,075		)	(350		)
Total comprehensive income (loss)		$	(4,053	)	$	5,646		$	(2,985	)	$	8,759
Earnings per common share—basic(1):		$	0.18		$	0.30		$	0.29		$	0.44
Earnings per common share—diluted(1):		0.18			0.30			0.29			0.44
Dividends declared per common share(1):		0.03			—			0.03			—
Weighted average common shares outstanding-basic(1):		20,860,228			20,782,861			20,854,858			20,780,713
Weighted average common shares outstanding-diluted(1):		20,941,486			20,847,792			20,934,521			20,857,264

 

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

 

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

 

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GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

 

		Common Stock shares Outstanding and to be issued		Common Stock and Additional Paid-in Capital			Treasury Stock			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Totals
Balance, January 1, 2012		21,087,325		$	704,698		$	(102,354	)	$	(433,016	)	$	1,683		$	171,011
Net income		—		—			—			9,109			—			9,109
Other comprehensive loss		—		—			—			—			(350		)	(350		)
Stock compensation awards, net of forfeitures		156,820		—			—			—			—			—
Earned stock award compensation, net		—		360			—			—			—			360
Repurchase of common stock		(1,007	)	—			(9		)	—			—			(9		)
Balance, June 30, 2012		21,243,138		$	705,058		$	(102,363	)	$	(423,907	)	$	1,333		$	180,121
Balance, January 1, 2013		21,169,521		$	705,389		$	(102,397	)	$	(417,957	)	$	3,165		$	188,200
Net income		—		—			—			6,090			—			6,090
Other comprehensive loss		—		—			—			—			(9,075		)	(9,075		)
Stock compensation awards, net of forfeitures		229,525		—			—			—			—			—
Earned stock award compensation, net		—		697			—			—			—			697
Repurchase of common stock		(6,561	)	—			(66		)	—			—			(66		)
Dividends paid		—		—			—			(522		)	—			(522		)
Balance, June 30, 2013		21,392,485		$	706,086		$	(102,463	)	$	(412,389	)	$	(5,910	)	$	185,324

 

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

 

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GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

 

		Six Months Ended June 30,
		2013			2012
		(In thousands)
Cash flows from operating activities:
Net income		$	6,090		$	9,109
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,461			3,141
Provision for loan losses		—			1,500
Impairment of long-lived assets		—			2,750
Stock compensation, net		697			360
Gain on sale of securities		(54		)	(964		)
Gain on sale of SBA loans		(423		)	—
Proceeds from the sale of loans originated with intent to sell		2,992			—
Loss (gain), net and valuation adjustments on real estate owned		(300		)	1,174
Other		(260		)	(308		)
Net change in:
Other assets		(1,686		)	(8,439		)
Interest payable and other liabilities		(626		)	(1,432		)
Net cash from operating activities		8,891			6,891
Cash flows from investing activities:
Activity in available for sale securities:
Sales, maturities, prepayments and calls		48,631			71,894
Purchases		(90,048		)	(88,485		)
Activity in held to maturity securities and bank stocks:
Maturities, prepayments and calls		3,592			2,119
Purchases		(10,735		)	(5,234		)
Loan originations net of principal collections		(84,129		)	(21,024		)
Redemption (purchase) of time deposits with banks		3,000			(5,000		)
Proceeds from sale of loans held for sale		—			70
Purchase of life insurance contracts		(15,000		)	—
Proceeds from sales of other real estate owned and foreclosed assets		7,774			5,404
Proceeds from sale of SBA loans transferred to held for sale		1,779			—
Additions to premises and equipment		(395		)	(273		)
Net cash from investing activities		(135,531		)	(40,529		)
Cash flows from financing activities:
Net change in deposits		(5,505		)	65,151
Net change in short-term borrowings		57,748			—
Repayment of borrowings		(8		)	(7		)
Redemption of subordinated debentures		(15,465		)	—
Stockholder dividends		(522		)	—
Net change in repurchase agreements and federal funds purchased		(42,146		)	(3,589		)
Repurchase of common stock		(66		)	(9		)
Net cash from financing activities		(5,964		)	61,546
Net change in cash and cash equivalents		(132,604		)	27,908
Cash and cash equivalents, beginning of period		163,217			109,225
Cash and cash equivalents, end of period		$	30,613		$	137,133
Supplemental disclosure of noncash activities:
Financing of the sale of other real estate owned		$	8,576		$	—

 

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

 

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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.

 

Our principal business is to serve as a holding company for our subsidiaries. As of June 30, 2013, Guaranty Bancorp had a single bank subsidiary, Guaranty Bank and Trust Company, referred to as “Guaranty Bank” or the “Bank”.

 

References to “we” or “Company” mean Guaranty Bancorp on a consolidated basis with the Bank, if applicable. 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 and originating commercial loans (including energy loans), real estate loans (including jumbo mortgages), Small Business Administration guaranteed loans and consumer loans. The Bank and its subsidiary, Private Capital Management, LLC (“PCM”) provide wealth management services, including private banking, investment management and trust services. Substantially all loans are secured by specific items of collateral, including business assets, consumer assets and commercial and residential real estate, including land or improved land. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. Our customers’ ability to repay their loans is generally dependent on the real estate market and general economic conditions prevailing in Colorado, among other factors.

 

(a)              Basis of Presentation

 

The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America and prevailing practices within the financial services industry. All significant intercompany balances and transactions have been eliminated in consolidation. Our financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal and recurring nature. We have evaluated all subsequent events through the date the financial statements were issued.

 

Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The interim operating results are not necessarily indicative of operating results for the 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, 2012.

 

(b)                  Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheet and income and expense for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes include the assessment for impairment of certain investment securities, the allowance for loan losses, deferred tax assets and liabilities, impairment of other intangible assets and long-lived assets, stock compensation expense and other real estate owned. Assumptions and factors used in the estimates are evaluated on an annual basis or whenever events or changes in circumstance indicate that the previous assumptions and factors have changed. The result of the analysis could result in adjustments to the estimates.

 

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(c)                   Time Deposits with Banks

 

The Company invests in short term, fully insured time deposits with other banks through the Certificate of Deposit Account Registry Service (“CDARS”).

 

(d)                  Loans, Loan Commitments and Related Financial Instruments

 

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 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 pay-off are reported at their outstanding unpaid principal balances, adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans. Accounting for our 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 credit 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. 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 delinquent unless the credit is well secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

 

The interest on nonaccrual loans is accounted for on the cash-basis method, until qualifying for a return to the accrual basis of accounting, and payments received on nonaccrual loans are applied first to the principal balance of the loan. Loans are returned to accrual status after the borrower’s financial condition has improved, when all the principal and interest amounts contractually due are brought current and future payments are 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 for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

 

The Company recognizes a liability in relation to these commitments intended to represent estimated future losses on these commitments. In calculating this estimate, we consider the volume of off-balance sheet commitments, estimated utilization factors as well as risk factors determined based on the nature of the loan. Our liability for unfunded commitments is calculated quarterly with the balance presented in Other Liabilities in our Consolidated Balance Sheet.

 

(e)                   Allowance for Loan Losses

 

The allowance for loan losses is a valuation allowance for probable incurred loan losses. The allowance for loan losses is reported as a reduction of outstanding loan balances.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. An

 

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allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan portfolio and other extensions of credit. Our methodology for estimating our allowance is consistent across all portfolio segments and classes of loans.

 

Loans deemed to be uncollectible are charged off and deducted from the allowance. Our 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 real estate-dependent loans. Charge-offs on smaller balance 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 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 facts and circumstances pertinent to a particular loan suggest that such evaluation is necessary. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when 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 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 existing rate or at the fair value of collateral if repayment is expected solely from collateral. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

 

The general component covers all other loans not identified as impaired and is based on historical losses adjusted for current factors. The historical loss component of the allowance is determined by calculating losses recognized by portfolio segment over the preceding four years. In calculating the historical component of our allowance, we aggregate our loans into one of three portfolio segments: Commercial, Real Estate and Consumer & Other. Risk factors impacting loans in each of the portfolio segments include broad deterioration of property values, reduced consumer and business spending as a result of continued high unemployment and reduced credit availability and lack of confidence in a sustainable recovery. The actual loss experience is adjusted for management’s estimate of the impact of other factors based on the risks present for each portfolio segment. These other factors include consideration of the following: the overall level of concentrations and trends of substandard and watch loans, loan concentrations within a portfolio segment or division of a portfolio segment, identification of certain loan types with higher risk than other loans, existing internal risk factors, loan growth dynamics and management’s evaluation of the impact of local and national economic conditions on each of our loan types.

 

(f)                         Other Real Estate Owned and Foreclosed Assets

 

Assets acquired through or in lieu of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating revenues and expenses of such assets and reductions in the fair value of the assets are included in noninterest expense. Gains and losses on their disposition are also included in noninterest expense.

 

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(g)                      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, referred to as CDI, are recognized at the time of acquisition based on valuations prepared by independent third parties or other estimates of fair value. In preparing such valuations, variables such as deposit servicing costs, attrition rates, and market discount rates are considered. CDI assets are amortized to expense over their useful lives, which we have estimated to range from 7 years to 15 years.

 

Customer relationship intangible assets are recognized at the time of acquisition based upon management’s estimate of fair value. In preparing such valuations, variables such as growth in existing customer base, attrition rates and market discount rates are considered. The customer relationship asset is amortized to expense over its useful life, which we have estimated at 10 years. Our customer relationship intangible asset was recognized as a result of the acquisition of Private Capital Management in the third quarter 2012.

 

(h)    Impairment of Long-Lived Assets

 

Long-lived assets, such as premises and equipment, and finite-lived intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset, less costs to sell.

 

Assets to be disposed of are reported at the lower of the carrying value or fair value less costs to sell, and are no longer depreciated. In 2012, the Company recorded an impairment related to two bank buildings that were later transferred to assets held for sale. At June 30, 2013, one of these properties remains held for sale.

 

(i)                         Derivative Instruments

 

The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

 

(j)                         Stock Incentive Plan

 

The Company’s Amended and Restated 2005 Stock Incentive Plan provides for up to 1,700,000 grants of stock options, stock awards, stock units awards, performance stock awards, stock appreciation rights, and other equity-based awards to key employees, nonemployee directors, consultants and prospective employees. As of June 30, 2013, the Company has only granted stock awards. The Company recognizes stock compensation cost 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

 

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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 recognized reflects estimated forfeitures, adjusted as necessary for actual forfeitures. The Company has issued stock awards that vest based on service periods from one to four years, and stock awards that vest based on performance conditions. The maximum contractual term for the performance-based share awards is December 31, 2015. At the end of June 30, 2013, certain performance-based restricted stock awards were expected to vest prior to the end of the contractual term, while approximately 74,819 shares were not expected to vest prior to the end of the contractual term, based on current projections in comparison to performance conditions. Should these expectations change, additional expense could be recorded or reversed in future periods.

 

(k)                      Income Taxes

 

Income tax expense is the total of the current year income tax due or refundable and the change 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 some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of 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, the forecasts of future income, taking into account applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. At June 30, 2013 and December 31, 2012, the Company had a net deferred tax asset of $18,030,000 and $14,990,000, respectively, which includes the net unrealized gain (loss) on securities. At June 30, 2013, after analyzing the composition of and changes in the deferred tax assets and liabilities, consideration of the Company’s forecasted future taxable income, and various tax planning strategies, including the intent to hold the securities available for sale that are in a loss position until maturity, we determined that it is “more likely than not” that the net deferred tax asset will be fully realized. There is no valuation allowance as of June 30, 2013.

 

At June 30, 2013 and December 31, 2012, the Company did not have any uncertain tax positions for which a tax benefit was disallowed under current accounting guidance. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

 

The Company and the Bank are subject to U.S. federal income tax and State of Colorado tax. The Company is no longer subject to examination by Federal or State taxing authorities for years before 2008 except to the extent of the amount of the 2009 carryback claim for a refund filed in 2010 with respect to 2004 through 2006. At June 30, 2013 and December 31, 2012, the Company did not have any unrecognized tax benefits. The Company does not expect the amount of any unrecognized tax benefits to significantly change in the next twelve months. 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, 2013 and December 31, 2012, the Company did not have any amounts accrued for interest and/or penalties.

 

(l)                         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. When there is a loss, generally there is no difference between basic and diluted loss per common shares as any potential additional common shares are typically anti-dilutive as they decrease the loss per common share. Dilutive common shares that may be issued by the Company relate to unvested common share grants subject to a service or performance condition for the three and six months ended June 30, 2013 and 2012. The earnings per common share has been computed based on the following:

 

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		Three Months Ended June 30,				Six Months Ended June 30,
		2013		2012		2013		2012
Average common shares outstanding(1)		20,860,228		20,782,861		20,854,858		20,780,713
Effect of dilutive unvested stock grants (1)(2)		81,258		64,931		79,663		76,550
Average shares outstanding for calculated diluted earnings per common share		20,941,486		20,847,792		20,934,521		20,857,263

 

(1)All share amounts reflect the Company’s May 20, 2013 1-for-5 reverse stock split.

 

(2)The impact of unvested stock grants of 520,682 shares at June 30, 2013 had a dilutive impact of 81,258 and 79,663 shares in the diluted earnings per share calculation for the three and six months ended June 30, 2013, respectively. The impact of unvested stock grants of 456,184 shares at June 30, 2012 had a dilutive impact of 64,931 and 76,550 shares in the diluted earnings per share calculation for the three and six months ended June 30, 2012, respectively.

 

(m)    Recently Issued Accounting Standards

 

Adoption of New Accounting Standards:

 

In February 2013, the FASB issued an accounting standards update to finalize the reporting requirements for reclassifications of amounts out of accumulated other comprehensive income (“AOCI”).  Items reclassified out of AOCI to net income in their entirety must have the effect of the reclassification disclosed according to the respective income statement line item. This information must be provided either on the face of the financial statements by income statement line item, or in a footnote. For public companies, the amendments in the update became effective for interim and annual periods beginning on or after December 15, 2012. As of June 30, 2013, the impact of this update on the Company’s disclosures was minimal.

 

(n)    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 net change in cash and cash equivalents. All per share amounts and shares outstanding for all periods presented reflect the May 20, 2013 1-for-5 reverse stock split.

 

(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 were as follows at the dates presented:

 

 

		June 30, 2013
		Fair value			Gross unrealized gains			Gross unrealized losses			Amortized cost
		(In thousands)
Securities available for sale:
State and municipal		$	58,083		$	143		$	(2,233	)	$	60,173
Mortgage-backed - agency / residential		279,619			1,202			(6,806		)	285,223
Mortgage-backed - private / residential		634			—			(51		)	685
Asset-backed		23,665			—			(1,310		)	24,975
Marketable equity		1,535			—			—			1,535
Trust preferred		34,197			658			(1,119		)	34,658
Corporate		34,485			138			(592		)	34,939
Total securities available for sale		$	432,218		$	2,141		$	(12,111	)	$	442,188

 

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		December 31, 2012
		Fair value			Gross unrealized gains			Gross unrealized losses			Amortized cost
Securities available for sale:
State and municipal		$	65,244		$	519		$	(116	)	$	64,841
Mortgage-backed - agency / residential		264,283			4,342			(411		)	260,352
Mortgage-backed - private / residential		720			—			(5		)	725
Asset-backed		20,511			147			(7		)	20,371
Marketable equity		1,535			—			—			1,535
Trust preferred		32,840			794			(594		)	32,640
Corporate		28,249			528			(91		)	27,812
Total securities available for sale		$	413,382		$	6,330		$	(1,224	)	$	408,276

 

The carrying amount, unrecognized gains/losses and fair value of securities held to maturity were as follows at the dates presented:

 

		Amortized cost			Gross unrecognized gains			Gross unrecognized losses			Fair value
June 30, 2013:
State and municipal		$	19,278		$	4		$	(1,413	)	$	17,869
Mortgage-backed - agency / residential		15,494			385			(91		)	15,788
		$	34,772		$	389		$	(1,504	)	$	33,657
December 31, 2012:
State and municipal		$	12,627		$	83		$	(44	)	$	12,666
Mortgage-backed - agency / residential		18,656			968			—			19,624
		$	31,283		$	1,051		$	(44	)	$	32,290

 

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,
		2013			2012			2013			2012
		(In thousands)
Proceeds		$	7,500		$	8,852		$	7,500		$	30,641
Gross Gains		54			342			54			1,031
Gross Losses		—			—			—			(67		)
Net tax expense related to gains (losses) on sale		21			130			21			366

 

The amortized cost and estimated fair value of available for sale securities by contractual maturity at June 30, 2013 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

 

		Available for sale (AFS)
		Amortized cost			Fair value
		(In thousands)
Securities available for sale:
Due in one year or less		$	100		$	101
Due after one year through five years		15,458			15,538
Due after five years through ten years		28,521			28,026
Due after ten years		110,666			106,765
Total AFS, excluding MBS and marketable equity securities		154,745			150,430
Mortgage-backed and marketable equity securities		287,443			281,788
Total securities available for sale		$	442,188		$	432,218

 

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