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Section 1: 10-Q (10-Q)

10-Q 20180930 Q3

Table of Contents

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, 2018



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 every Interactive Data File required to be submitted 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 such files).  Yes No

 

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

  



 

Large Accelerated Filer   

Accelerated Filer  

Non-accelerated Filer    

Smaller Reporting Company  

Emerging Growth Company   

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 No  



As of October 29, 2018, there were 29,301,662 shares of the registrant’s common stock outstanding, of which 428,331 shares were in the form of unvested stock awards.

 

1

 


 

Table of Contents

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

  

45 



 

 

ITEM 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

69 



 

 

ITEM 4.

  

Controls and Procedures

  

71 



 

PART II—OTHER INFORMATION

  

72 



 

 

ITEM 1.

  

Legal Proceedings

  

72 



 

 

ITEM 1A.

  

Risk Factors

  

72 



 

 

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

73 



 

 

ITEM 3.

  

Defaults Upon Senior Securities

  

74 



 

 

ITEM 4.

  

Mine Safety Disclosure

  

74 



 

 

ITEM 5.

  

Other Information

  

74 



 

 

ITEM 6.

  

Exhibits

  

75 



 



 



2

 


 

Table of Contents

PART I – FINANCIAL INFORMATION



Item 1. Unaudited Condensed Consolidated Financial Statements



GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets





 

 

 

 



 

 

 

 



 

September 30,

 

December 31,



 

2018

 

2017



 

(In thousands, except share and per share data)

Assets

 

 

 

 

Cash and due from banks

$

39,188 

$

51,553 



 

 

 

 

Time deposits with banks

 

254 

 

254 



 

 

 

 

Securities available for sale, at fair value

 

335,025 

 

329,977 

Securities held to maturity (fair value of $241,636 and $257,665

 

 

 

 

at September 30, 2018 and December 31, 2017)

 

251,188 

 

259,916 

Bank stocks, at cost

 

26,021 

 

24,419 

Total investments

 

612,234 

 

614,312 



 

 

 

 

Loans held for sale

 

2,228 

 

1,725 



 

 

 

 

Loans, held for investment, net of deferred costs and fees

 

2,929,415 

 

2,805,663 

Less allowance for loan losses

 

(23,750)

 

(23,250)

Net loans, held for investment

 

2,905,665 

 

2,782,413 



 

 

 

 

Premises and equipment, net

 

63,030 

 

65,874 

Other real estate owned and foreclosed assets

 

596 

 

761 

Goodwill

 

67,917 

 

65,106 

Other intangible assets, net

 

15,814 

 

14,441 

Bank-owned life insurance

 

80,277 

 

78,573 

Other assets

 

23,324 

 

23,878 

Total assets

$

3,810,527 

$

3,698,890 



 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

Liabilities:

 

 

 

 

Deposits:

 

 

 

 

Noninterest-bearing demand

$

960,931 

$

939,550 

Interest-bearing demand and NOW

 

850,848 

 

813,882 

Money market

 

570,995 

 

527,621 

Savings

 

211,996 

 

201,687 

Time

 

465,177 

 

458,887 

Total deposits

 

3,059,947 

 

2,941,627 



 

 

 

 

Securities sold under agreement to repurchase

 

8,622 

 

44,746 

Federal Home Loan Bank line of credit borrowing

 

183,060 

 

157,444 

Federal Home Loan Bank term notes

 

50,000 

 

70,000 

Subordinated debentures, net

 

65,127 

 

65,065 

Interest payable and other liabilities

 

15,532 

 

15,109 

Total liabilities

 

3,382,288 

 

3,293,991 



 

 

 

 

Stockholders’ equity:

 

 

 

 

Common stock (1)

 

32 

 

32 

Additional paid-in capital - common stock

 

862,094 

 

859,509 

Accumulated deficit

 

(314,678)

 

(343,383)

Accumulated other comprehensive loss

 

(11,517)

 

(4,694)

Treasury stock, at cost, 2,461,802 and 2,421,208 shares, respectively

 

(107,692)

 

(106,565)

Total stockholders’ equity

 

428,239 

 

404,899 

Total liabilities and stockholders’ equity

$

3,810,527 

$

3,698,890 

____________________

 

 

 

 



(1)

Common stock—$0.001 par value; 40,000,000 shares authorized;  31,765,316 shares issued and 29,303,514 shares outstanding at September 30, 2018 (includes 430,501 shares of unvested restricted stock); 40,000,000 shares authorized; 31,643,472 shares issued and 29,222,264 shares outstanding at December 31, 2017 (includes 434,149 shares of unvested restricted stock).



See "Notes to Unaudited Condensed Consolidated Financial Statements."

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Table of Contents

GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Income







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

Nine Months Ended



 

September 30,

 

 

September 30,



 

2018

 

2017

 

 

2018

 

2017



 

 

 

 

 

 

 

 

 



 

(In thousands, except share and per share data)

Interest income:

 

 

 

 

 

 

 

 

 

Loans, including costs and fees

$

33,825 

$

30,902 

 

$

99,489 

$

87,270 

Investment securities:

 

 

 

 

 

 

 

 

 

Taxable

 

2,652 

 

2,221 

 

 

7,763 

 

6,892 

Tax-exempt

 

1,206 

 

1,233 

 

 

3,659 

 

3,713 

Dividends

 

406 

 

275 

 

 

1,220 

 

1,011 

Federal funds sold and other

 

26 

 

57 

 

 

83 

 

76 

Total interest income

 

38,115 

 

34,688 

 

 

112,214 

 

98,962 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

3,186 

 

1,939 

 

 

8,234 

 

5,262 

Securities sold under agreement to repurchase

 

23 

 

16 

 

 

71 

 

48 

Federal funds purchased

 

33 

 

 -

 

 

56 

 

 -

Borrowings

 

1,146 

 

531 

 

 

3,333 

 

2,079 

Subordinated debentures

 

937 

 

868 

 

 

2,759 

 

2,568 

Total interest expense

 

5,325 

 

3,354 

 

 

14,453 

 

9,957 

Net interest income

 

32,790 

 

31,334 

 

 

97,761 

 

89,005 

Provision for loan losses

 

206 

 

497 

 

 

924 

 

708 

Net interest income, after provision for loan losses

 

32,584 

 

30,837 

 

 

96,837 

 

88,297 

Noninterest income:

 

 

 

 

 

 

 

 

 

Deposit service and other fees

 

3,571 

 

3,580 

 

 

10,538 

 

10,405 

Investment management and trust

 

2,750 

 

1,478 

 

 

7,514 

 

4,482 

Increase in cash surrender value of life insurance

 

670 

 

674 

 

 

2,001 

 

1,884 

Gain (loss) on sale of securities

 

 -

 

(86)

 

 

16 

 

(86)

Gain on sale of SBA loans

 

430 

 

143 

 

 

916 

 

971 

Other

 

851 

 

341 

 

 

1,612 

 

1,218 

Total noninterest income

 

8,272 

 

6,130 

 

 

22,597 

 

18,874 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

12,617 

 

11,736 

 

 

38,391 

 

34,909 

Occupancy expense

 

1,667 

 

1,714 

 

 

5,086 

 

4,940 

Furniture and equipment

 

1,009 

 

974 

 

 

3,100 

 

2,894 

Amortization of intangible assets

 

924 

 

672 

 

 

2,788 

 

1,969 

Other real estate owned, net

 

19 

 

(20)

 

 

60 

 

174 

Insurance and assessments

 

694 

 

642 

 

 

2,061 

 

1,995 

Professional fees

 

905 

 

929 

 

 

3,036 

 

3,155 

Impairment of long-lived assets

 

 -

 

 -

 

 

 -

 

224 

Other general and administrative

 

3,775 

 

5,160 

 

 

11,705 

 

12,579 

Total noninterest expense

 

21,610 

 

21,807 

 

 

66,227 

 

62,839 

Income before income taxes

 

19,246 

 

15,160 

 

 

53,207 

 

44,332 

Income tax expense

 

4,302 

 

5,106 

 

 

11,443 

 

14,313 

Net income

$

14,944 

$

10,054 

 

$

41,764 

$

30,019 



 

 

 

 

 

 

 

 

 

Earnings per common share–basic: 

$

0.52 

$

0.36 

 

$

1.45 

$

1.08 

Earnings per common share–diluted: 

 

0.51 

 

0.36 

 

 

1.44 

 

1.07 

Dividends declared per common share: 

 

0.16 

 

0.13 

 

 

0.49 

 

0.38 



 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding-basic:

 

28,868,984 

 

27,920,658 

 

 

28,851,952 

 

27,900,627 

Weighted average common shares outstanding-diluted:

 

29,068,332 

 

28,120,111 

 

 

29,083,965 

 

28,140,332 



See "Notes to Unaudited Condensed Consolidated Financial Statements."

4

 


 

Table of Contents

GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income













 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

Nine Months Ended



 

September 30,

 

 

September 30,



 

2018

 

 

2017

 

 

2018

 

 

2017



 

 

 

 

 

 

 

 

 

 

 



 

(In thousands)



 

 

 

 

 

 

 

 

 

 

 

Net income

$

14,944 

 

$

10,054 

 

$

41,764 

 

$

30,019 

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

 

(2,592)

 

 

91 

 

 

(9,086)

 

 

2,249 

Income tax effect

 

640 

 

 

(35)

 

 

2,241 

 

 

(855)

Change in unamortized loss on available for sale securities

 

 

 

 

 

 

 

 

 

 

 

reclassified into held to maturity securities

 

102 

 

 

120 

 

 

316 

 

 

365 

Income tax effect

 

(25)

 

 

(46)

 

 

(78)

 

 

(139)

Reclassification adjustment for net losses (gains) included

 

 

 

 

 

 

 

 

 

 

 

in net income during the period

 

 -

 

 

86 

 

 

(16)

 

 

86 

Income tax effect

 

 -

 

 

(33)

 

 

 

 

(33)

Change in fair value of derivatives during the period

 

101 

 

 

33 

 

 

808 

 

 

(187)

Income tax effect

 

(25)

 

 

(13)

 

 

(199)

 

 

71 

Reclassification adjustment of losses on derivatives

 

 

 

 

 

 

 

 

 

 

 

during the period

 

52 

 

 

190 

 

 

263 

 

 

609 

Income tax effect

 

(13)

 

 

(72)

 

 

(65)

 

 

(231)

Other comprehensive income (loss)

 

(1,760)

 

 

321 

 

 

(5,812)

 

 

1,935 

Total comprehensive income

$

13,184 

 

$

10,375 

 

$

35,952 

 

$

31,954 



See "Notes to Unaudited Condensed Consolidated Financial Statements”



 

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Table of Contents

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, 2017

28,334,004 

$

832,098 

$

(105,050)

$

(367,944)

$

(6,726)

$

352,378 

Net income

 -

 

 -

 

 -

 

30,019 

 

 -

 

30,019 

Other comprehensive income

 -

 

 -

 

 -

 

 -

 

1,935 

 

1,935 

Stock compensation awards, net of forfeitures

108,011 

 

 -

 

 -

 

 -

 

 -

 

 -

Stock based compensation, net

 -

 

2,272 

 

 -

 

 -

 

 -

 

2,272 

Repurchase of common stock

(40,145)

 

 -

 

(985)

 

 -

 

 -

 

(985)

Dividends paid

 -

 

 -

 

 -

 

(10,467)

 

 -

 

(10,467)

Balance, September 30, 2017

28,401,870 

$

834,370 

$

(106,035)

$

(348,392)

$

(4,791)

$

375,152 



 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

29,222,264 

$

859,541 

$

(106,565)

$

(343,383)

$

(4,694)

$

404,899 

Net income

 -

 

 -

 

 -

 

41,764 

 

 -

 

41,764 

Other comprehensive loss

 -

 

 -

 

 -

 

 -

 

(5,812)

 

(5,812)

Stock compensation awards, net of forfeitures

121,844 

 

 -

 

 -

 

 -

 

 -

 

 -

Stock based compensation, net

 -

 

2,585 

 

 -

 

 -

 

 -

 

2,585 

Repurchase of common stock

(40,594)

 

 -

 

(1,127)

 

 -

 

 -

 

(1,127)

Reclassification of stranded tax effect

 -

 

 -

 

 -

 

1,011 

 

(1,011)

 

 -

Dividends paid

 -

 

 -

 

 -

 

(14,070)

 

 -

 

(14,070)

Balance, September 30, 2018

29,303,514 

$

862,126 

$

(107,692)

$

(314,678)

$

(11,517)

$

428,239 









See "Notes to Unaudited Condensed Consolidated Financial Statements."



 

6

 


 

Table of Contents

 





GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows







 

 

 

 

 



 

 

 

 

 



 

Nine Months Ended September 30,



 

2018

 

 

2017



 

 

 

 

 



 

(In thousands)

Cash flows from operating activities:

 

 

 

 

 

Net income

$

41,764 

 

$

30,019 

Reconciliation of net income to net cash from operating activities:

 

 

 

 

 

Depreciation and amortization

 

5,009 

 

 

4,178 

Net accretion on investment and loan portfolios

 

(844)

 

 

(392)

Provision for loan losses

 

924 

 

 

708 

Impairment of long-lived assets

 

 -

 

 

224 

Stock compensation, net

 

2,585 

 

 

2,272 

Dividends on bank stocks

 

(512)

 

 

(362)

Increase in cash surrender value of life insurance

 

(1,704)

 

 

(1,587)

Net gain on sale of securities and SBA loans

 

(932)

 

 

(885)

Gain on the sale of other assets

 

(954)

 

 

(271)

Origination of SBA loans with intent to sell

 

(11,421)

 

 

(5,413)

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

 

11,719 

 

 

10,641 

Loss, net, and valuation adjustments on real estate owned

 

49 

 

 

160 

Net change in:

 

 

 

 

 

Interest receivable and other assets

 

10 

 

 

1,433 

Net deferred income tax assets

 

118 

 

 

493 

Interest payable and other liabilities

 

(1,000)

 

 

(2,804)

Net cash from operating activities

 

44,811 

 

 

38,414 

Cash flows from investing activities:

 

 

 

 

 

Activity in available for sale securities:

 

 

 

 

 

Sales, maturities, prepayments and calls

 

28,619 

 

 

83,967 

Purchases

 

(44,352)

 

 

(57,765)

Activity in held to maturity securities and bank stocks:

 

 

 

 

 

Maturities, prepayments and calls

 

22,555 

 

 

18,431 

Purchases

 

(15,962)

 

 

(30,184)

Loan originations, net of principal collections

 

(114,020)

 

 

(69,615)

Loan purchases

 

(6,465)

 

 

(79,154)

Purchase of bank-owned life insurance contracts

 

 -

 

 

(7,500)

Proceeds from sale of other assets

 

5,687 

 

 

1,463 

Proceeds from sales of other real estate owned and foreclosed assets

 

112 

 

 

514 

Proceeds from sale of SBA and other loans transferred to held for sale

 

 -

 

 

3,940 

Additions to premises and equipment

 

(803)

 

 

(879)

Cash paid in acquisition, net of cash received

 

(5,223)

 

 

 -

Net cash from investing activities

 

(129,852)

 

 

(136,782)

Cash flows from financing activities:

 

 

 

 

 

Net change in deposits

 

118,381 

 

 

199,020 

Repayment of Federal Home Loan Bank term notes

 

(20,000)

 

 

(2,409)

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

 

25,616 

 

 

(73,509)

Cash dividends on common stock

 

(14,070)

 

 

(10,467)

Net change in repurchase agreements and federal funds purchased

 

(36,124)

 

 

995 

Repurchase of common stock

 

(1,127)

 

 

(985)

Net cash from financing activities

 

72,676 

 

 

112,645 

Net change in cash and cash equivalents

 

(12,365)

 

 

14,277 

Cash and cash equivalents, beginning of period

 

51,553 

 

 

50,111 

Cash and cash equivalents, end of period

$

39,188 

 

$

64,388 



 

 

 

 

 



See "Notes to Unaudited Condensed Consolidated Financial Statements."

7

 


 

Table of Contents

 

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 and 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 subsidiary Private Capital Management, LLC (“PCM”), 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. There are no significant concentrations of loans to any one industry or customer.



On September 8, 2016, the Company completed the acquisition of Home State Bancorp (“Home State”), based in Loveland, Colorado, in exchange for a combination of Company stock and cash. The transaction enhanced the Company’s balance sheet liquidity and supports the Company’s objective of serving the banking needs of northern Colorado business and consumer customers. On April 3, 2017, Cherry Hills Investment Advisors, Inc. (“CHIA”), a previous wholly owned subsidiary of the Bank, was consolidated into PCM. On October 27, 2017, the Company completed the acquisition of Castle Rock Bank Holding Company (“Castle Rock”), based in Castle Rock, Colorado in exchange for Company stock. Similar to the Home State acquisition, the Castle Rock acquisition enhanced the Company’s liquidity and grew market share in Douglas County, Colorado. On January 16, 2018, the Company through PCM acquired the assets of Wagner Wealth Management, LLC (“Wagner”). The Wagner acquisition increased the Company’s market share in the Denver wealth management marketplace and added additional investment advisory expertise.



On May 22, 2018 the Company jointly announced with Independent Bank Group, Inc. (“Independent”), the execution of an Agreement and Plan of Reorganization (the “Reorganization Agreement”), under which the Company would merge (the “Merger”) with and into Independent in an all-stock transaction. Under the terms of the Reorganization Agreement, stockholders of the Company will receive 0.45 shares of Independent common stock for each share of Company common stock. Closing of the Merger remains subject to customary conditions, including the receipt of bank regulatory approvals and the satisfaction of other customary closing conditions. Independent’s Registration Statement on Form S-4, which registered the Independent shares to be issued in connection with the Merger, was filed with the Securities and Exchange Commission on August 15, 2018 and has been made effective. Independent’s shareholders approved the transaction at the special meeting of shareholders on September 24, 2018 and the Company’s stockholders approved the transaction at the Company’s special meeting of stockholders on September 25, 2018.



(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

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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, 2017.



(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 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 extends commercial, real estate 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 loan contracts is generally dependent upon the real estate and general economic conditions prevailing in Colorado, among other factors.



Loans acquired in a business combination, that on the date of acquisition reflected evidence of credit deterioration since origination and for which collection of all contractually required payments was not probable, were designated as purchased credit impaired or “PCI” loans. In the September 8, 2016 Home State transaction, the Company designated $2,108,000 of loans as PCI. In the October 27, 2017 Castle Rock transaction, the Company designated $1,283,000 of loans as PCI. As of September 30, 2018, $1,060,000 in PCI loans remained in the Company’s loan portfolio. Loans not designated as PCI (“Non-PCI” loans) comprise the significant majority of the Company’s loan portfolio and consist of internally originated loans in addition to acquired loans. Acquired Non-PCI loans were designated as such as of the date of acquisition for one or both of the following reasons: (1) management considered the collection of all contractually required payments probable, and (2) the loan demonstrated no evidence of credit deterioration since origination.



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 discounts 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.

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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.



(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 and prevailing economic conditions. 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 uncollectable 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 using the loan’s

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effective rate at inception. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with its accounting policy for the allowance.



The general component of the allowance covers all other loans not specifically identified as impaired and is determined by calculating losses recognized by portfolio segment during the current credit cycle and adjusted based on management’s evaluation of various qualitative factors. In performing this calculation, loans are aggregated into one of three portfolio segments: Real Estate, Consumer and Commercial & Other. An assessment of risks impacting loans in each of these portfolio segments is performed and qualitative adjustment factors, which will adjust the historical loss rate, are estimated. These qualitative adjustment factors consider current conditions relative to conditions present throughout the current credit cycle in the following areas: credit quality, loan class concentration levels, economic conditions, loan growth dynamics and organizational conditions. The historical loss experience is adjusted for management’s estimate of the impact of these factors based on the risks present for each portfolio segment.



The Company recognizes a liability in relation to unfunded commitments that is intended to represent the estimated future losses on commitments. In calculating the amount of this liability, management considers the amount of the Company’s off-balance sheet commitments, estimated utilization factors and loan specific risk factors. The Company’s liability for unfunded commitments is calculated quarterly and the liability is included under “other liabilities” in the consolidated balance sheet.



(f)Goodwill and Other Intangible Assets



Goodwill was recorded in the Home State, Castle Rock and Wagner transactions and represents the excess of the purchase price over the fair value of acquired tangible assets and identifiable intangible assets less 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 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, ranging from 10  to 13 years. The Company has added to its aggregated customer relationship intangible asset in its acquisitions of PCM, CHIA, Home State and Wagner.



Non-compete intangible assets are recognized at estimated fair value in the event that non-compete or similar agreements are entered into in an acquisition between the Company and the sellers of the acquired business. In preparing their valuation, management considers the ability and likelihood of a seller to compete in the absence of the agreement in addition to the terms of the agreement in consideration of the specific market in which the seller would be likely to compete. Non-compete intangible assets are amortized to expense over their estimated useful life. The Company has a non-compete intangible asset acquired in the Wagner acquisition which it is amortizing to expense over a period of three years.



(g)Derivative Instruments



The Company records all derivatives on its consolidated balance sheet 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-

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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 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, 2018, there were 497,975 shares remaining available for grant under the 2015 Plan.



As of September 30, 2018, 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 16, 2021. Compensation cost related to the performance stock awards is recognized based on an evaluation of expected financial performance in comparison to established criteria. Should expectations of the Company’s future financial performance change, expense to be recognized in future periods could be impacted.



(i)Stock Repurchase Plan



On February 12, 2018, 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. Due to previous extensions the program was scheduled to expire on April 2, 2018, however, this most recent extension extends the expiration date of the repurchase program through April 2, 2019. 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. Repurchases reflected on the Statement of Changes in Stockholder’s Equity are not made under the Company’s share repurchase program but rather represent the repurchase of shares related to employee net settlements of restricted stock.



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(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. During 2017 the President of the United States signed the 2017 Tax Cuts and Jobs Act (“the Tax Act”) which reduced the statutory federal corporate income tax rate from 35% to 21% beginning in 2018. As a result, the Company’s existing deferred tax assets and liabilities (net deferred tax asset) which were expected to be reversed beginning in 2018 were re-measured in 2017 using the updated statutory rates applicable in 2018. The re-measurement of the Company’s net deferred tax asset resulted in a $976,000 charge being recognized in income tax expense in the fourth quarter 2017.



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, 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, 2018 and December 31, 2017, the Company had a net deferred tax asset of $3,586,000 and $1,802,000, respectively, which includes the deferred tax asset associated with the net unrealized loss on securities and interest rate swaps. The portion of the total deferred tax asset related to the net unrealized losses on securities and interest rate swaps was $3,770,000 as of September 30, 2018 and $1,867,000 as of December 31, 2017. 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, 2018, 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, 2018 or December 31, 2017.



The Company and the Bank are subject to U.S. federal income tax, State of Colorado income tax and income tax in other states. Generally, the Company is no longer subject to examination by Federal taxing authorities for years before 2015 and is no longer subject to examination by the State of Colorado for years before 2014. The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other noninterest expense. At September 30, 2018 and December 31, 2017, 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,



2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

Average common shares outstanding

28,868,984 

 

27,920,658 

 

28,851,952 

 

27,900,627 

Effect of dilutive unvested stock grants (1)

199,348 

 

199,453 

 

232,013 

 

239,705 

Average shares outstanding for calculated

 

 

 

 

 

 

 

diluted earnings per common share

29,068,332 

 

28,120,111 

 

29,083,965 

 

28,140,332 

_____________

 

 

 

 

 

 

 





(1) Unvested stock grants representing 430,501 shares at September 30, 2018 had a dilutive impact of 199,348 and 232,013 shares in the diluted earnings per share calculation for the three and nine months ended September 30, 2018, respectively. Unvested stock grants representing 476,549 shares at September 30, 2017 had a dilutive impact of 199,453 and 239,705 shares in the diluted earnings per share calculation for the three and nine months ended September 30, 2017, respectively.

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(l)Recently Issued Accounting Standards



Adoption of New Accounting Standards:



In May 2014, the FASB issued accounting standards update 2014-09 Revenue from Contracts with Customers, codified at ASC 606. 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. For public business entities, the amendments of this update became effective beginning with interim and annual reporting periods beginning after December 15, 2017. Interest income earned on financial instruments is outside of the scope of the update, and as a result the impact of the update to the Company is limited to certain components of noninterest income. The Company adopted ASC 606 utilizing the modified retrospective method on January 1, 2018. Because the Company’s noninterest income is primarily generated by customer transactions or attributable to the passage of time (wealth management fees), ASC 606 has not had a material impact on the timing of revenue recognition. The Company had no material uncompleted customer contract liabilities as of December 31, 2017 and as a result there was no cumulative transition adjustment recorded in the Company’s accumulated deficit upon adoption in the first quarter 2018. The most significant impact of ASC 606 to the Company was the additional disclosure requirements added to Note 14 “Revenue”.



In January 2016, the FASB released accounting standards update 2016-01 Recognition and Measurement of Financial Assets and Liabilities. The provisions of this update became effective for interim and annual periods beginning after December 15, 2017. The main provisions of the update eliminated the available for sale classification of accounting for equity securities and adjusted fair value disclosures for financial instruments carried at amortized costs to reflect an exit price as opposed to an entry price. The provisions of this update also required that equity securities be carried at fair market value on the balance sheet and any periodic changes in value to be adjustments to the income statement. A practical expedient was provided for equity securities without a readily determinable fair value, such that these securities can be carried at cost less any impairment. The Company adopted the provisions of the update beginning in the first quarter 2018 and considered these requirements in calculating the September 30, 2018 estimate of loan portfolio fair value included in Note nine “Fair Value Measurements and Fair Value of Financial Instruments”. 



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 became effective for fiscal years and interim periods beginning after December 15, 2017. The provisions of the update outlined the appropriate classification of debt extinguishment costs, repayment of debt instruments with insignificant coupons, contingent consideration payments made subsequent to a business combination, insurance proceeds, premiums and settlements on bank-owned life insurance policies, distributions from equity method investees, beneficial interest in securitizations and the appropriate classification of payments and receipts that contain aspects of multiple classes of cash flows. The provisions of the update did not affect the presentation of our 2018 statement of cash flows.



In January 2017, the FASB issued ASU No. 2017-01, Business Combinations - Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, feedback received by FASB indicated that analyzing transactions can be inefficient and costly and that the current definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The requirements of this update did not have a material impact on the Company’s financial position, results of operations or cash flows.

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In February 2018, the FASB issued accounting standards update 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). The amendments of the update allowed an optional reclassification to retained earnings for stranded tax effects included in accumulated other comprehensive income, resulting from the reduction in the U.S. Statutory Corporate Income Tax Rate as provided for in the Tax Act. The provisions of the update are effective for all entities beginning with fiscal years commencing after December 15, 2018, with early adoption allowed in any interim period. The Company adopted the update in the first quarter 2018 and reclassified the $1,011,000 in stranded tax effects from AOCI into retained earnings, as reflected on the Statement of Changes in Stockholder’s Equity.



Recently Issued but not yet Effective Accounting Standards:



In February 2016, the FASB issued accounting standards update 2016-02 Leases, codified at ASC 842. The update requires all leases, with the exception of short-term leases that have contractual terms of 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. ASU 2016-02 initially required a restatement of comparative financial statements from the earliest historical period presented to reflect consistent application of the rule in comparative historical periods but in July 2018 the FASB issued accounting standards update 2018-11, which provided an alternative transition method. Under the alternative transition method, provided in ASU 2018-11, the impact of applying the new lease accounting rules to comparative periods may be captured by a cumulative-effect adjustment to retained earnings in the initial period of adoption. Management is in the process of reviewing accounts payable records and contracts to determine whether the Company has imbedded leases present in other contracts not traditionally identified as leases. As of the date of this filing, management expects the financial statement impact of accounting for leases not traditionally identified as leases under ASC 842 to be immaterial. Based on leases outstanding at September 30, 2018, we anticipate total assets and total liabilities will increase between $10,000,000 and $12,000,000 as the result of additional leases being recognized on our balance sheet, we do not expect the provisions of ASC 842 to have a material impact on our results of operations or cash flows. Decisions to execute, modify, or renew leases prior to the implementation date will impact the results of the Company’s final analysis.



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 incurred 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, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP, a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL reserves will be established for purchased loans at the time of acquisition the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. The FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. For public business entities that are SEC filers, the amendments of the update will become effective beginning January 1, 2020. The Company has formed a cross-functional committee and has engaged a third party vendor to assist in the identification of appropriate segmentations and methodologies which will assist the Company in forecasting lifetime loss rates. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the first reporting period in which the new standard is effective, but cannot yet estimate the magnitude or direction of the one-time adjustment or the overall impact of the new guidance on the Company’s financial position, results of operations or cash flows.



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In January 2017, the FASB issued accounting standards update 2017-04, Simplifying the Test for Goodwill Impairment. The provisions of the update eliminate the existing second step of the goodwill impairment test which provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net remaining amount representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will provide that impairment should be recognized as the excess of any of the reporting unit’s carrying value over the fair value of the reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting unit’s goodwill. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2019. 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 March 2017, the FASB issued accounting standards update 2017-08, Premium Amortization on Purchased Callable Debt Securities. The provisions of the update require premiums recognized upon the purchase of callable debt securities to be amortized to the earliest call date, which is expected to better align the amortization period with expectations incorporated into market pricing. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2018. 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 August 2017, the FASB issued accounting standards update 2017-12, Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. Adoption of the standard also provides a one-time opportunity to transfer held to maturity securities to available for sale. The update is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption permitted. The update requires a modified retrospective transition method in which the Company would recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. Management is evaluating whether the Company will transfer certain held to maturity securities to available for sale under the provisions of the update. Management does not expect the requirements of this update relating to accounting for the Company’s derivative instruments to have a material impact on the Company’s financial position, results of operations or 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 Combinations



On December 1, 2017, Private Capital Management LLC, a wholly owned subsidiary of the Bank, entered into an Asset Purchase Agreement with Wagner Wealth Management LLC (“Wagner”). The transaction, structured as an asset purchase, closed on January 16, 2018, with the Company paying $5,223,000 of cash, in addition to agreeing to make a contingent payment on approximately the one-year anniversary of the acquisition valued at $1,846,000 on January 16, 2018.



On July 18, 2017, the Company entered into an Agreement and Plan of Reorganization (the “Castle Rock Merger Agreement”) with Castle Rock Bank Holding Company (“Castle Rock”), parent company of Castle Rock Bank, a Colorado state chartered bank headquartered in Castle Rock, Colorado whereby Castle Rock would merge into the Company. The transaction closed on October 27, 2017 with an aggregate transaction value of $24,421,000. The Castle Rock Merger Agreement provided that, subject to certain conditions, Castle Rock shareholders would receive 840,629 shares of Company voting common stock valued at $24,420,000 based on the Company’s closing stock price on October 27, 2017 of $29.05, in addition to approximately $1,000 in cash paid in lieu of the issuance of fractional shares of Company stock.



The Wagner acquisition increased the Company’s market share in the Denver wealth management marketplace and added additional investment advisory expertise. The Castle Rock transaction enhanced the Company’s balance sheet liquidity and supported the Company’s objective of serving the banking needs of business and consumer customers in Colorado’s Front Range markets.

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Wagner’s and Castle Rock’s results of operations subsequent to the respective merger dates have been included in the Company’s results of operations; however, it is impractical to provide separate information on Wagner or Castle Rock’s revenues and income subsequent to acquisition due to changes in the consolidated balance sheet. Pre-tax merger-related expenses of $75,000, incurred in connection with the Wagner transaction were included in the Company’s results of operations in the first quarter 2018. An additional $1,033,000 and $400,000, respectively, in merger-related expenses were incurred by the Company in the second and third quarter 2018, related to the Independent transaction. Comparatively, no merger related expenses were incurred in 2017 until the third quarter 2017 when $268,000 in merger-related expenses, related to the Castle Rock transaction, were incurred. The Company did not incur debt-issuance or stock-issuance costs in association with the Wagner or Castle Rock transactions.



Goodwill of $2,811,000 and $8,702,000, respectively, was recognized in the Wagner and Castle Rock transactions. The recognized goodwill represents expected synergies and cost savings resulting from combining the operations of the acquired institutions with those of the Company. Since the Wagner acquisition was a taxable transaction, tax-deductible goodwill of $2,811,000 will be amortized over a period of 15 years for income tax purposes. The tax-free structure of the Castle Rock transaction precludes the amortization of tax-deductible goodwill for tax purposes. The fair values of assets acquired and liabilities assumed at acquisition are subject to measurement period adjustments, for a period of one-year following the acquisition, should information obtained in a subsequent period shed light on the valuations utilized as of the acquisition date.



The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the January 16, 2018 transaction with Wagner:









 

 



 

 

Assets acquired:

 

 



 

(In thousands)

Goodwill

$

2,811 

Other intangible assets, net

 

4,161 

Premises and equipment, net

 

24 

Other assets

 

188 

Total assets acquired

 

7,184 



 

 

Liabilities assumed:

 

 

Other liabilities

 

115 

Anniversary payment liability

 

1,846 

Total liabilities assumed

 

1,961 

Net assets acquired

$

5,223 



The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the October 27, 2017 transaction with Castle Rock:







 

 

Assets acquired:

 

 



 

(In thousands)

Cash and cash equivalents

$

21,717 

Securities available for sale

 

39,670 

Bank stocks

 

705 

Net Loans

 

71,052 

Premises and equipment, net

 

4,184 

Other real estate owned

 

761 

Goodwill

 

8,702 

Other intangible assets, net

 

1,870 

Bank owned life insurance

 

3,371 

Other assets

 

1,048 

Total assets acquired

 

153,080 



 

 

Liabilities assumed:

 

 

Deposits

 

128,450 

Other liabilities

 

209 

Total liabilities assumed

 

128,659 

Net assets acquired

$

24,421 



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The fair value of net assets acquired in the Castle Rock transaction 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 $1,644,000 in the Castle Rock transaction. Contractual cash flows not expected to be collected as of acquisition date on these PCI loans totaled $320,000 in the Castle Rock transaction. Additionally, Castle Rock PCI loans had an interest rate fair value adjustment of $41,000, bringing the net fair value of acquired PCI loans to $1,283,000 in the Castle Rock transaction. The cash flows on the Company’s PCI loans cannot be estimated and as a result these loans have been designated as nonaccrual. Loans that were not designated PCI in the Castle Rock transaction had a fair value and contractual balance of $69,769,000 and $72,220,000 as of October 27, 2017. The credit component of the fair value adjustment on non-PCI loans as of acquisition totaled $1,494,000 in the Castle Rock transaction, representing 2.1% of contractual loan balances. No allowance for loan losses related to acquired loans was brought over as a result of the Castle Rock transaction.



The composition of Castle Rock Bank’s loan portfolio as of October 27, 2017 is detailed in the table below:







 

 



 

October 27,



 

2017



 

(In thousands)

Commercial and residential real estate

$

51,531 

Construction

 

6,337 

Commercial

 

5,666 

Agricultural

 

3,735 

Consumer

 

3,783 

Total gross loans

$

71,052 



The following tables present unaudited pro-forma financial information as if the Wagner transaction occurred as of January 1, 2017. The unaudited pro-forma information includes adjustments for noninterest income on investment management fees generated, amortization of intangibles arising from the transaction and the related tax effects. The unaudited pro forma financial information has been adjusted to exclude nonrecurring expenses related to the Wagner transaction. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction occurred on January 1, 2017.  







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,



 

2018

 

 

2017

 

 

2018

 

 

2017

UNAUDITED

 

(Dollars in thousands, except per share data)



 

 

 

 

 

 

 

 

 

 

 

Net interest income

$

32,790 

 

$

31,334 

 

$

97,761 

 

$

89,005 

Noninterest income

 

8,272 

 

 

6,910 

 

 

22,752 

 

 

21,214 

Net income

 

14,944 

 

 

10,043 

 

 

41,837 

 

 

29,985 



 

 

 

 

 

 

 

 

 

 

 

Earnings per common share-basic:

$

0.52 

 

$

0.36 

 

$

1.45 

 

$

1.07 

Earnings per common share-diluted:

$

0.51 

 

$

0.36 

 

$

1.44 

 

$

1.07 



Unaudited pro forma net income for the first nine months of 2018 excludes $75,000 in merger-related expenses incurred by the Company during the first quarter 2018. These expenses were excluded since they were nonrecurring in nature and directly attributable to the transaction. For the first nine months of 2017, no merger-related expense adjustments were made to pro forma income. 



 



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(3)Securities



The fair value of available for sale debt securities and the related gross unrealized gains and losses recognized in AOCI were as follows at the dates presented:







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Fair
Value

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Amortized
Cost



 

(In thousands)

September 30, 2018:

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

State and municipal

$

78,094 

$

74 

$

(3,043)

$

81,063 

Mortgage-backed - agency / residential

 

156,476 

 

28 

 

(6,787)

 

163,235 

Corporate

 

95,196 

 

79 

 

(3,865)

 

98,982 

Collateralized loan obligations

 

5,259 

 

 

(32)

 

5,285 

Total securities available for sale

$

335,025 

$

187 

$

(13,727)

$

348,565 





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

State and municipal

$

82,486 

$

530 

$

(1,224)

$

83,180 

Mortgage-backed - agency / residential

 

131,180 

 

133 

 

(3,069)

 

134,116 

Corporate

 

103,512 

 

546 

 

(1,320)

 

104,286 

Collateralized loan obligations

 

12,799 

 

17 

 

(51)

 

12,833 

Total securities available for sale

$

329,977 

$

1,226 

$

(5,664)

$

334,415 



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, 2018:

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

 

 

 

 

 

 

State and municipal

$

130,468 

$

366 

$

(4,666)

$

134,768 

Mortgage-backed - agency / residential

 

95,945 

 

24 

 

(4,769)

 

100,690 

Asset-backed

 

14,023 

 

 -

 

(507)

 

14,530 

Other

 

1,200 

 

 -

 

 -

 

1,200 

Total securities held to maturity

$

241,636 

$

390 

$

(9,942)

$

251,188 



 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

 

 

 

 

 

 

State and municipal

$

136,490 

$

1,121 

$

(1,530)