10-Q 1 gbnk-20160930x10q.htm 10-Q 10-Q 20160930 Q3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




FORM 10-Q





 

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



For the quarterly period ended September 30, 2016



OR





 

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 200

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 No



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  No  

 

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.  

  



 

Large Accelerated Filer   

Accelerated Filer   

Non-accelerated Filer    (Do not check if smaller reporting company)

Smaller Reporting Company



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

 

As of November 7, 2016, there were 28,349,107 shares of the registrant’s common stock outstanding, consisting of 27,330,107 shares of voting common stock, of which 564,376 shares were in the form of unvested stock awards, and 1,019,000 shares of the registrant’s non-voting common stock.

 

1

 


 

Table of Contents



 

 

 

 

 

  

 

  

 

Page



 

 

 

 



 

 

PART I—FINANCIAL INFORMATION

  



 

 

ITEM 1.

  

Unaudited Condensed Consolidated Financial Statements

  



 

 

 

  

Unaudited Condensed Consolidated Balance Sheets

  



 

 

 

  

Unaudited Condensed Consolidated Statements of Income 

  



 

 

 

  

Unaudited Condensed Consolidated Statements of Comprehensive Income 

  



 

 

 

  

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity 

  



 

 

 

  

Unaudited Condensed Consolidated Statements of Cash Flows

  



 

 

 

  

Notes to Unaudited Condensed Consolidated Financial Statements

  



 

 

ITEM 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

40 



 

 

ITEM 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

65 



 

 

ITEM 4.

  

Controls and Procedures

  

67 



 

PART II—OTHER INFORMATION

  

68 



 

 

ITEM 1.

  

Legal Proceedings

  

68 



 

 

ITEM 1A.

  

Risk Factors

  

68 



 

 

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

68 



 

 

ITEM 3.

  

Defaults Upon Senior Securities

  

68 



 

 

ITEM 4.

  

Mine Safety Disclosure

  

68 



 

 

ITEM 5.

  

Other Information

  

68 



 

 

ITEM 6.

  

Exhibits

  

69 



 



 



2

 


 

PART I – FINANCIAL INFORMATION



Item 1. Unaudited Condensed Consolidated Financial Statements



GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets





 

 

 

 



 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015



 

(In thousands, except share and per share data)

Assets

 

 

 

 

Cash and due from banks

$

163,908 

$

26,711 



 

 

 

 

Time deposits with banks

 

504 

 

 -



 

 

 

 

Securities available for sale, at fair value

 

364,349 

 

255,431 

Securities held to maturity (fair value of $188,353 and $150,122 at

 

 

 

 

September 30, 2016 and December 31, 2015)

 

183,184 

 

148,761 

Bank stocks, at cost

 

14,558 

 

20,500 

Total investments

 

562,091 

 

424,692 



 

 

 

 

Loans, held for investment, net of deferred costs

 

2,412,999 

 

1,814,536 

Less allowance for loan losses

 

(23,300)

 

(23,000)

Net loans, held for investment

 

2,389,699 

 

1,791,536 



 

 

 

 

Premises and equipment, net

 

68,779 

 

48,308 

Other real estate owned and foreclosed assets

 

637 

 

674 

Goodwill

 

56,148 

 

 -

Other intangible assets, net

 

16,005 

 

5,173 

Bank-owned life insurance

 

65,030 

 

48,909 

Other assets

 

23,464 

 

22,522 

Total assets

$

3,346,265 

$

2,368,525 



 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

Liabilities:

 

 

 

 

Deposits:

 

 

 

 

Noninterest-bearing demand

$

857,064 

$

612,371 

Interest-bearing demand and NOW

 

802,043 

 

381,834 

Money market

 

554,447 

 

397,371 

Savings

 

160,698 

 

151,130 

Time

 

377,860 

 

259,139 

Total deposits

 

2,752,112 

 

1,801,845 



 

 

 

 

Securities sold under agreement to repurchase and federal funds purchased

 

35,936 

 

26,477 

Federal Home Loan Bank term notes

 

122,521 

 

95,000 

Federal Home Loan Bank line of credit borrowing

 

 -

 

185,847 

Subordinated debentures

 

64,973 

 

25,774 

Interest payable and other liabilities

 

19,363 

 

11,943 

Total liabilities

 

2,994,905 

 

2,146,886 



 

 

 

 

Stockholders’ equity:

 

 

 

 

Common stock (1)

 

31 

 

24 

Additional paid-in capital - common stock

 

831,400 

 

712,310 

Accumulated deficit

 

(372,495)

 

(382,147)

Accumulated other comprehensive loss

 

(2,936)

 

(4,805)

Treasury stock, at cost, 2,344,909 and 2,287,744 shares, respectively

 

(104,640)

 

(103,743)

Total stockholders’ equity

 

351,360 

 

221,639 

Total liabilities and stockholders’ equity

$

3,346,265 

$

2,368,525 

____________________

 

 

 

 

(1)

Common stock—$0.001 par value; 40,000,000 shares authorized; 30,694,016 shares issued and 28,349,107 shares outstanding at September 30, 2016 (includes 564,376 shares of unvested restricted stock); 30,000,000 shares authorized; 23,992,596 shares issued and 21,704,852 shares outstanding at December 31, 2015 (includes 590,755 shares of unvested restricted stock).

 

See "Notes to Unaudited Condensed Consolidated Financial Statements."

3

 


 

GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Income







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

Nine Months Ended



 

September 30,

 

 

September 30,



 

2016

 

2015

 

 

2016

 

2015



 

 

 

 

 

 

 

 

 



 

(In thousands, except share and per share data)

Interest income:

 

 

 

 

 

 

 

 

 

Loans, including costs and fees

$

22,295 

$

17,829 

 

$

60,206 

$

51,749 

Investment securities:

 

 

 

 

 

 

 

 

 

Taxable

 

1,741 

 

2,064 

 

 

5,454 

 

6,265 

Tax-exempt

 

971 

 

719 

 

 

2,459 

 

2,133 

Dividends

 

237 

 

249 

 

 

829 

 

724 

Federal funds sold and other

 

98 

 

 

 

105 

 

Total interest income

 

25,342 

 

20,863 

 

 

69,053 

 

60,876 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

1,228 

 

866 

 

 

3,299 

 

2,284 

Securities sold under agreement to repurchase and

 

 

 

 

 

 

 

 

 

federal funds purchased

 

13 

 

11 

 

 

31 

 

31 

Borrowings

 

636 

 

375 

 

 

1,992 

 

832 

Subordinated debentures

 

715 

 

205 

 

 

1,165 

 

606 

Total interest expense

 

2,592 

 

1,457 

 

 

6,487 

 

3,753 

Net interest income

 

22,750 

 

19,406 

 

 

62,566 

 

57,123 

Provision for loan losses

 

27 

 

14 

 

 

53 

 

104 

Net interest income, after provision for loan losses

 

22,723 

 

19,392 

 

 

62,513 

 

57,019 

Noninterest income:

 

 

 

 

 

 

 

 

 

Deposit service and other fees

 

2,581 

 

2,309 

 

 

7,042 

 

6,682 

Investment management and trust

 

1,333 

 

1,292 

 

 

3,889 

 

3,964 

Increase in cash surrender value of life insurance

 

490 

 

447 

 

 

1,398 

 

1,316 

Loss on sale of securities

 

(66)

 

 -

 

 

(122)

 

 -

Gain on sale of SBA loans

 

208 

 

232 

 

 

472 

 

681 

Other

 

159 

 

119 

 

 

346 

 

275 

Total noninterest income

 

4,705 

 

4,399 

 

 

13,025 

 

12,918 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

10,984 

 

8,318 

 

 

28,292 

 

24,921 

Occupancy expense

 

1,417 

 

1,487 

 

 

4,053 

 

4,814 

Furniture and equipment

 

750 

 

740 

 

 

2,281 

 

2,206 

Amortization of intangible assets

 

389 

 

495 

 

 

868 

 

1,486 

Other real estate owned, net

 

20 

 

(31)

 

 

27 

 

64 

Insurance and assessments

 

608 

 

604 

 

 

1,818 

 

1,795 

Professional fees

 

962 

 

838 

 

 

2,725 

 

2,520 

Impairment of long-lived assets

 

 -

 

 -

 

 

 -

 

122 

Other general and administrative

 

3,494 

 

2,415 

 

 

9,486 

 

7,164 

Total noninterest expense

 

18,624 

 

14,866 

 

 

49,550 

 

45,092 

Income before income taxes

 

8,804 

 

8,925 

 

 

25,988 

 

24,845 

Income tax expense

 

3,043 

 

2,923 

 

 

9,007 

 

8,282 

Net income

$

5,761 

$

6,002 

 

$

16,981 

$

16,563 



 

 

 

 

 

 

 

 

 

Earnings per common share–basic: 

$

0.25 

$

0.28 

 

$

0.78 

$

0.79 

Earnings per common share–diluted: 

 

0.25 

 

0.28 

 

 

0.77 

 

0.78 

Dividends declared per common share: 

 

0.12 

 

0.10 

 

 

0.35 

 

0.30 



 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding-basic:

 

22,811,386 

 

21,076,380 

 

 

21,750,153 

 

21,061,445 

Weighted average common shares outstanding-diluted:

 

22,957,268 

 

21,224,989 

 

 

21,965,047 

 

21,215,435 



See "Notes to Unaudited Condensed Consolidated Financial Statements."

4

 


 

GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income













 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

Nine Months Ended



 

September 30,

 

 

September 30,



 

2016

 

 

2015

 

 

2016

 

 

2015



 

 

 

 

 

 

 

 

 

 

 



 

(In thousands)



 

 

 

 

 

 

 

 

 

 

 

Net income

$

5,761 

 

$

6,002 

 

$

16,981 

 

$

16,563 

Change in net unrealized gains (losses) on available for sale

 

 

 

 

 

 

 

 

 

 

 

securities during the period excluding the change attributable to

 

 

 

 

 

 

 

 

 

 

 

available for sale securities reclassified to held to maturity

 

645 

 

 

1,706 

 

 

3,434 

 

 

906 

Income tax effect

 

(245)

 

 

(648)

 

 

(1,305)

 

 

(344)

Change in unamortized loss on available for sale securities

 

 

 

 

 

 

 

 

 

 

 

reclassified into held to maturity securities

 

105 

 

 

108 

 

 

326 

 

 

307 

Income tax effect

 

(41)

 

 

(41)

 

 

(125)

 

 

(117)

Reclassification adjustment for net losses (gains) included

 

 

 

 

 

 

 

 

 

 

 

in net income during the period

 

66 

 

 

 -

 

 

122 

 

 

 -

Income tax effect

 

(25)

 

 

 -

 

 

(46)

 

 

 -

Change in fair value of derivatives during the period

 

379 

 

 

(1,290)

 

 

(1,554)

 

 

(1,769)

Income tax effect

 

(144)

 

 

490 

 

 

591 

 

 

672 

Reclassification adjustment of losses (gains) on derivatives

 

 

 

 

 

 

 

 

 

 

 

during the period

 

259 

 

 

82 

 

 

687 

 

 

82 

Income tax effect

 

(98)

 

 

(31)

 

 

(261)

 

 

(31)

Other comprehensive income (loss)

 

901 

 

 

376 

 

 

1,869 

 

 

(294)

Total comprehensive income

$

6,662 

 

$

6,378 

 

$

18,850 

 

$

16,269 







See "Notes to Unaudited Condensed Consolidated Financial Statements”





 

5

 


 

GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share data)







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Common Stock
Shares Outstanding

 

Common Stock
and Additional
Paid-in Capital

 

Treasury
Stock

 

Accumulated
Deficit

 

Accumulated Other
Comprehensive Loss

 

Totals



 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2015

21,628,873 

$

709,365 

$

(103,127)

$

(396,172)

$

(3,127)

$

206,939 

Net income

 -

 

 -

 

 -

 

16,563 

 

 -

 

16,563 

Other comprehensive loss

 -

 

 -

 

 -

 

 -

 

(294)

 

(294)

Stock compensation awards, net of forfeitures

121,759 

 

 -

 

 -

 

 -

 

 -

 

 -

Stock based compensation, net

 -

 

2,094 

 

 -

 

 -

 

 -

 

2,094 

Tax effect of restricted stock vestings

 

 

151 

 

 -

 

 -

 

 -

 

151 

Repurchase of common stock

(22,430)

 

 -

 

(329)

 

 -

 

 -

 

(329)

Dividends paid

 -

 

 -

 

 -

 

(6,321)

 

 -

 

(6,321)

Balance, September 30, 2015

21,728,202 

$

711,610 

$

(103,456)

$

(385,930)

$

(3,421)

$

218,803 



 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2016

21,704,852 

$

712,334 

$

(103,743)

$

(382,147)

$

(4,805)

$

221,639 

Net income

 -

 

 -

 

 -

 

16,981 

 

 -

 

16,981 

Other comprehensive income

 -

 

 -

 

 -

 

 -

 

1,869 

 

1,869 

Issuance of common stock for acquisition of Home

 

 

 

 

 

 

 

 

 

 

 

State Bancorp net of issuance costs

6,533,756 

 

116,468 

 

 -

 

 -

 

 -

 

116,468 

Stock compensation awards, net of forfeitures

167,664 

 

 -

 

 -

 

 -

 

 -

 

 -

Stock based compensation, net

 -

 

2,304 

 

 -

 

 -

 

 -

 

2,304 

Tax effect of restricted stock vestings

 -

 

325 

 

 -

 

 -

 

 -

 

325 

Repurchase of common stock

(57,165)

 

 -

 

(897)

 

 -

 

 -

 

(897)

Dividends paid

 -

 

 -

 

 -

 

(7,329)

 

 -

 

(7,329)

Balance, September 30, 2016

28,349,107 

$

831,431 

$

(104,640)

$

(372,495)

$

(2,936)

$

351,360 























See "Notes to Unaudited Condensed Consolidated Financial Statements."







 

6

 


 





GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows







 

 

 

 

 



 

 

 

 

 



 

Nine Months Ended September 30,



 

2016

 

 

2015



 

 

 

 

 



 

(In thousands)

Cash flows from operating activities:

 

 

 

 

 

Net income

$

16,981 

 

$

16,563 

Reconciliation of net income to net cash from operating activities:

 

 

 

 

 

Depreciation and amortization

 

2,739 

 

 

3,478 

Net amortization and accretion

 

593 

 

 

752 

Provision for loan losses

 

53 

 

 

104 

Impairment of long-lived assets

 

 -

 

 

122 

Stock compensation, net

 

2,304 

 

 

2,094 

Dividends on bank stocks

 

(459)

 

 

(377)

Increase in cash surrender value of life insurance

 

(1,121)

 

 

(1,081)

Gain on sale of securities and SBA loans

 

(350)

 

 

(681)

Landlord cash allowance

 

 -

 

 

654 

Gain on the sale of other assets

 

(14)

 

 

 -

Origination of SBA loans with intent to sell

 

(4,510)

 

 

(5,264)

Proceeds from the sale of SBA loans originated with intent to sell

 

5,613 

 

 

7,093 

Loss, net, and valuation adjustments on real estate owned

 

104 

 

 

32 

Net change in:

 

 

 

 

 

Interest receivable and other assets

 

817 

 

 

1,267 

Net deferred income tax assets

 

150 

 

 

1,976 

Interest payable and other liabilities

 

2,670 

 

 

(855)

Net cash from operating activities

 

25,570 

 

 

25,877 

Cash flows from investing activities:

 

 

 

 

 

Activity in available for sale securities:

 

 

 

 

 

Sales, maturities, prepayments, calls and redemptions

 

388,820 

 

 

29,120 

Purchases

 

(99,363)

 

 

(8,561)

Activity in held to maturity securities and bank stocks:

 

 

 

 

 

Maturities, prepayments and calls

 

20,521 

 

 

15,454 

Purchases

 

(46,305)

 

 

(19,566)

Loan originations and purchases, net of principal collections

 

(151,834)

 

 

(185,738)

Purchase of bank-owned life insurance contracts

 

(15,000)

 

 

(5,000)

Proceeds from sale of other assets

 

2,204 

 

 

1,293 

Proceeds from sales of other real estate owned and foreclosed assets

 

 -

 

 

772 

Proceeds from sale of SBA loans transferred to held for sale

 

229 

 

 

589 

Additions to premises and equipment

 

(1,142)

 

 

(4,619)

Cash paid in acquisition, net of cash received

 

(23,930)

 

 

(1,457)

Net cash from investing activities

 

74,200 

 

 

(177,713)

Cash flows from financing activities:

 

 

 

 

 

Net change in deposits

 

180,564 

 

 

162,005 

Net change in borrowings on Federal Home Loan Bank line of credit

 

(187,899)

 

 

(84,000)

Proceeds from Federal Home Loan Bank term advances

 

25,000 

 

 

75,000 

Proceeds from issuance of subordinated debt, net of issuance costs

 

39,199 

 

 

 -

Cash dividends on common stock

 

(7,329)

 

 

(6,321)

Tax effect of restricted stock vesting

 

325 

 

 

147 

Net change in repurchase agreements and federal funds purchased

 

(10,527)

 

 

(3,357)

Repurchase of common stock

 

(897)

 

 

(329)

Payment of stock issuance costs related to acquisition

 

(1,009)

 

 

 -

Net cash from financing activities

 

37,427 

 

 

143,145 

Net change in cash and cash equivalents

 

137,197 

 

 

(8,691)

Cash and cash equivalents, beginning of period

 

26,711 

 

 

32,441 

Cash and cash equivalents, end of period

$

163,908 

 

$

23,750 



 

 

 

 

 

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."

7

 


 

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. On September 8, 2016, the Company completed the previously announced transaction with Home State Bancorp (“Home State”) in exchange for a combination of Company stock and cash.  Based in Loveland, Colorado Home State serves the banking needs of businesses and consumer customers in northern Colorado.



(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)Business Combinations



The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair value upon the date of acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to determine the fair values of assets acquired and liabilities assumed. Any excess of purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.



(c)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

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the dates of the consolidated balance sheets and income and expense for the periods presented. Actual results could differ significantly from those estimates.



(d)Loans and Loan Commitments



The Company’s loan portfolio includes originated and purchased loans. 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.



Originated and purchased loans for which there was no evidence of credit deterioration upon acquisition and for which collection of all contractually required payments upon acquisition was considered probable are referred to collectively as non-purchased credit impaired loans, or “Non-PCI” loans. Purchased loans for which there was at the acquisition date evidence of credit deterioration since origination and for which collection of all contractually required payments was not probable were designated as and referred to as purchased credit impaired or “PCI” loans. In the September 8, 2016 transaction with Home State, the Company designated $2,108,000 of loans as PCI.



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, acquisition-related discount and any deferred fees or costs. Acquired loans are recorded upon acquisition at fair value, with no associated allowance for loan loss. However, if subsequent to acquisition the credit quality of an acquired loan deteriorates, an allowance may be required.  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. Purchase discount or premium on acquired, Non-PCI loans is recognized as an adjustment to interest income over the contractual life of such loans using the effective interest method, or taken into income when the related loans are paid off or sold. With respect to PCI loans, the “accretable yield”, calculated as the excess of undiscounted expected cash flows at acquisition over the fair value at acquisition, is accreted into income over the term of the loan assuming the amount and timing of cash flows are reasonably estimable.



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.



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(e)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 originated 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

10

 


 

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.



(f)Goodwill and Other Intangible Assets



Goodwill was recorded in the transaction with Home State on September 8, 2016 and represents the excess of the purchase price over the fair value of acquired tangible assets, identifiable intangible assets and liabilities. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified.



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 September 30, 2016, the Company had recognized three customer relationship intangible assets as a result of the acquisitions of PCM on July 31, 2012, CHIA on July 16, 2014 and Home State Bancorp (“Home State”) on September 8, 2016.



(g)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.



(h)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

11

 


 

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 September 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.



(i)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.



(j)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 September 30, 2016 and December 31, 2015, the Company had a net deferred tax asset of $3,451,000 and $7,912,000, respectively, which includes the deferred tax asset (liability) associated with the net unrealized loss (gain) 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 September 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 September 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

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interest related to income tax matters as interest expense and penalties related to income tax matters as other noninterest expense. At September 30, 2016 and December 31, 2015, the Company did not have any amounts accrued for interest or penalties.



(k)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 September 30,

 

Nine Months Ended September 30,



2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

Average common shares outstanding

22,811,386 

 

21,076,380 

 

21,750,153 

 

21,061,445 

Effect of dilutive unvested stock grants (1)

145,882 

 

148,609 

 

214,894 

 

153,990 

Average shares outstanding for calculated

 

 

 

 

 

 

 

diluted earnings per common share

22,957,268 

 

21,224,989 

 

21,965,047 

 

21,215,435 

_____________

 

 

 

 

 

 

 



(1) Unvested stock grants representing 564,376 shares at September 30, 2016 had a dilutive impact of 145,882 and 214,894 shares in the diluted earnings per share calculation for the three and nine months ended September 30, 2016, respectively. Unvested stock grants representing 651,275 shares at September 30, 2015 had a dilutive impact of 148,609 and 153,990 shares in the diluted earnings per share calculation for the three and nine months ended September 30, 2015, respectively.





(l)Recently Issued Accounting Standards



Adoption of New Accounting Standards:



In April 2015, the FASB issued accounting standards update 2015-03 modifying the presentation of debt issuance costs. The update requires that debt issuance costs be presented as a direct reduction of debt balances on the balance sheet. For public business entities, the amendments of this update are effective for interim and annual periods beginning after December 15, 2015.  As a result of this update the Company has presented debt issuance costs as a reduction of the related debt balance on the Company’s Balance Sheet.



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

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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

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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.



In August 2016, the FASB issued accounting standards update 2016-15, Statement of Cash Flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update are effective for fiscal years and interim periods beginning after December 15, 2017; however early adoption is permitted. Management is currently in the process of evaluating the impact of the update on the Company’s statement of cash flows.



(m)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)Business Combination



On March 16, 2016, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with Home State, a Colorado state chartered bank headquartered in Loveland, Colorado whereby Home State would merge into the Company. The transaction closed on September 8, 2016 with an aggregate transaction value of $152,478,000.  The Merger Agreement provided that, subject to certain conditions, Home State shareholders would receive 6,533,756 shares of Company voting common stock valued at $117,477,000 based on the Company’s closing stock price on September 8, 2016 of $17.98, in addition to $35,001,000 in cash. 



The Company believes that the transaction will enhance its liquidity and its market share in northern Colorado.  



Home State’s results of operations have been included in the Company’s results of operations beginning September 9, 2016, however, it is impracticable to provide separate information on Home State’s revenues and income subsequent to September 8, 2016 due to changes in the consolidated balance sheet.   Pre-tax merger expenses of $2,205,000 and $3,227,000 were included in the Company’s results of operations for the three and nine months ended September 30, 2016. Of the $2,205,000 in pre-tax merger expenses incurred in the three months ended September 30, 2016, $1,389,000 was included in salaries and employee benefits expense, while $816,000 was included in other general and administrative expense.  Of the $3,227,000 in pre-tax merger expenses incurred in the nine months ended September 30, 2016, $1,389,000 was included in salaries and employee benefits expense, while $1,838,000 was included in other general and administrative expense.  In addition to merger-related costs recognized as expense, the Company incurred debt-issuance and stock-issuance costs of $801,000 and $1,009,000, respectively, as of September 30, 2016.  Debt-issuance costs were recorded as a reduction to subordinated debentures and stock-issuance costs were recorded as a reduction to additional paid in capital on the Company’s balance sheet.



Goodwill of $56,148,000 was recognized in the transaction and represents expected synergies and cost savings resulting from combining the operations of Home State with the Company. Due to the tax-free structure of the transaction, goodwill is not deductible for tax purposes. The fair values of assets acquired and liabilities assumed at acquisition is preliminary and pending receipt of final valuations. Additionally, preliminary valuations of Home State’s deferred tax assets are subject to adjustment, pending completion of the “stub” period return, covering Home State’s operations from January 1, 2016 through September 8, 2016.



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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the September 8, 2016 transaction with Home State:







 

 



 

 

Assets acquired:

 

 



 

(In thousands)

Cash and cash equivalents

$

11,849 

Time deposits with banks

 

504 

Securities available-for-sale

 

396,450 

Securities held-to-maturity

 

850 

Bank stocks

 

1,355 

Net Loans

 

445,529 

Premises and equipment, net

 

23,460 

Other real estate owned

 

67 

Goodwill

 

56,148 

Other intangible assets, net

 

11,701 

Other assets

 

8,244 

Total assets acquired

 

956,157 



 

 

Liabilities assumed:

 

 

Deposits

 

769,709 

Securities sold under agreement to repurchase and federal funds purchased

 

19,985 

Federal Home Loan Bank term notes

 

2,525 

Federal Home Loan Bank line of credit borrowing

 

2,052 

Other liabilities

 

9,408 

Total liabilities assumed

 

803,679 

Net assets acquired

$

152,478 



The fair value of net assets acquired includes fair value adjustments to certain loans that were considered impaired as of the acquisition date. The fair value adjustments were determined using discounted expected cash flows. Acquired loans that evidence credit deterioration since origination, for which the acquirer does not expect to collect all contractual cash flows are designated as PCI upon acquisition. The gross contractual amount of loans identified as PCI as of the acquisition date totaled $2,834,000, however, contractual cash flows not expected to be collected as of acquisition date on these PCI loans totaled $531,000, representing 18.7% of their contractual balance.  Additionally, PCI loans had an interest rate fair value adjustment as of September 8, 2016 of $195,000 bringing the net fair value to $2,108,000 as of September 8, 2016. Cash flows on PCI loans cannot be reliably estimated and as a result these loans have been designated as nonaccrual. Loans that were not designated PCI at acquisition had a fair value of $443,423,000 and a contractual balance of $458,014,000 as of September 8, 2016. The credit component of the fair value adjustment on non-PCI loans as of acquisition totaled $8,358,000, representing 1.8% of their contractual balances. No allowance for loan losses related to acquired loans was brought over as a result of the Home State transaction. The composition of Home State’s portfolio as of September 8, 2016 is detailed in the table below:





 

 



 

 



 

September 30,



 

2016



 

(In thousands)

Commercial and residential real estate

$

294,069 

Construction

 

39,947 

Commercial

 

45,996 

Agricultural

 

7,906 

Consumer

 

16,460 

SBA

 

25,227 

Other

 

15,924 

Total gross loans

 

445,529 



16

 


 

The following tables present pro-forma financial information as if the transaction occurred as of January 1, 2015. The pro-forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction and the related tax effects. The unaudited pro forma financial information has been adjusted to exclude one-time expenses related to the transaction. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on January 1, 2015.  







 

 

 

 

 



 

 

 

 

 



 

Three Months Ended September 30,



 

2016

 

 

2015

UNAUDITED

 

(Dollars in thousands, except per share data)



 

 

 

 

 

Net interest income

$

28,832 

 

$

27,134 

Noninterest income

 

6,124 

 

 

6,309 

Net income

 

8,419 

 

 

8,940 



 

 

 

 

 

Earnings per common share-basic:

$

0.30 

 

$

0.32 

Earnings per common share-diluted:

$

0.30 

 

$

0.32 











 

 

 

 

 



 

 

 

 

 



 

Nine Months Ended September 30,



 

2016

 

 

2015

UNAUDITED

 

(Dollars in thousands, except per share data)



 

 

 

 

 

Net interest income

$

84,004 

 

$

80,182 

Noninterest income

 

19,326 

 

 

18,190 

Net income

 

25,503 

 

 

23,265 



 

 

 

 

 

Earnings per common share-basic:

$

0.92 

 

$

0.84 

Earnings per common share-diluted:

$

0.91 

 

$

0.84 





(3)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:









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



September 30, 2016



 

Fair
Value

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Amortized
Cost



 

(In thousands)

Securities available for sale:

 

 

 

 

 

 

 

 

U.S. government agencies

$

5,018 

$

 -

$

 -

$

5,018 

State and municipal

 

142,457 

 

257 

 

(376)

 

142,576 

Mortgage-backed - agency / residential

 

130,544 

 

887 

 

(256)

 

129,913 

Mortgage-backed - private / residential

 

270 

 

 -

 

(5)

 

275 

Asset-backed

 

2,151 

 

 -

 

(1)

 

2,152 

Corporate

 

63,422 

 

648 

 

(456)

 

63,230 

Collateralized loan obligations

 

20,487 

 

11 

 

(62)

 

20,538 

Total securities available for sale

$

364,349 

$

1,803 

$

(1,156)

$

363,702 





17

 


 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



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 September 30, 2016, unrealized pre-tax losses of approximately $575,000 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)

September 30, 2016:

 

 

 

 

 

 

 

 

State and municipal

$

64,285 

$

2,289 

$

(252)

$

62,248 

Mortgage-backed - agency / residential

 

104,453 

 

2,566 

 

(28)

 

101,915 

Asset-backed

 

18,415 

 

594 

 

 -

 

17,821 

Other

 

1,200 

 

 -

 

 -

 

1,200 



$

188,353 

$

5,449 

$

(280)

$

183,184