Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For the quarterly period ended September 30,2010**

** **

**OR**

 

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

 

**For the transition period from                     to**

 

**Commission File Number: 000-51556**

 

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**GUARANTYBANCORP**

(Exactname of registrant as specified in its charter)

 

| **DELAWARE**                                                      | ** ** | **41-2150446**                           |
|-------------------------------------------------------------------|------------|------------------------------------------|
| (State  or other jurisdiction

of  incorporation or organization) |       | (I.R.S.  Employer Identification Number) |
|                                                              |       |                                     |
| **1331  Seventeenth St., Suite 345**

**Denver,  CO**        | ** ** | **80202**                                |
| (Address  of principal executive offices)                         |       | (Zip  Code)                              |

 

**303-293-5563**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

 

| Large Accelerated Filer o              |   | Accelerated Filer o         |
|---------------------------------------------|--------|----------------------------------|
|                                        |   |                             |
| Non-accelerated Filer o                |   | Smaller Reporting Company x |
| (Do not check if smaller reporting company) |   |                             |

 

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

 

As of October 29, 2010, therewere 53,536,917 shares of the registrant’s voting common stock outstanding,including 1,978,849 shares of unvested stock grants and excluding 156,567shares to be issued under its deferred compensation plan.

 

 

 

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**TABLE OFCONTENTS**

 
| ** **                                  | ** **                                                                                         | **Page** |
|---------------------------------------------|----------------------------------------------------------------------------------------------------|----------|
|                                        | Forward-Looking  Statements and Factors that Could Affect Future Results                           | 3        |
|                                        |                                                                                               |     |
| **PART I—FINANCIAL  INFORMATION** | 5                                                                                                  |
|                                        |                                                                                               |     |
| ITEM 1.                                | Unaudited Condensed  Consolidated Financial Statements                                             | 5        |
|                                        |                                                                                               |     |
|                                        | Unaudited  Consolidated Balance Sheets                                                             | 5        |
|                                        |                                                                                               |     |
|                                        | Unaudited  Consolidated Statements of Operations                                                   | 6        |
|                                        |                                                                                               |     |
|                                        | Unaudited Consolidated Statement of Changes in  Stockholders’ Equity and Comprehensive Income | 7        |
|                                        |                                                                                               |     |
|                                        | Unaudited Consolidated Statements of Cash Flows                                                    | 8        |
|                                        |                                                                                               |     |
|                                        | Notes to Unaudited Condensed Consolidated Financial  Statements                                    | 9        |
|                                        |                                                                                               |     |
| ITEM 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations        | 33       |
|                                        |                                                                                               |     |
| ITEM 3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                        | 56       |
|                                        |                                                                                               |     |
| ITEM 4.                                | Controls and  Procedures                                                                           | 58       |
|                                        |                                                                                               |     |
| **PART II—OTHER INFORMATION**     | 59                                                                                                 |
|                                        |                                                                                               |     |
| ITEM 1.                                | Legal Proceedings                                                                                  | 59       |
|                                        |                                                                                               |     |
| ITEM 1A.                               | Risk Factors                                                                                       | 59       |
|                                        |                                                                                               |     |
| ITEM 2.                                | Unregistered  Sales of Equity Securities and Use of Proceeds                                       | 60       |
|                                        |                                                                                               |     |
| ITEM 3.                                | Defaults  Upon Senior Securities                                                                   | 60       |
|                                        |                                                                                               |     |
| ITEM 4                                      | [Removed and  Reserved]                                                                            | 60       |
|                                        |                                                                                               |     |
| ITEM 5.                                | Other Information                                                                                  | 60       |
|                                        |                                                                                               |     |
| ITEM 6.                                | Exhibits                                                                                           | 61       |

 

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**Forward-Looking Statements and Factors that Could Affect Future Results**

 

Certain statements containedin this Quarterly Report on Form 10-Q that are not statements ofhistorical fact constitute forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 (the “Act”), notwithstandingthat such statements are not specifically identified. In addition, certainstatements may be contained in our future filings with the SEC, in pressreleases, and in oral and written statements made by or with our approval thatare not statements of historical fact and constitute forward-looking statementswithin the meaning of the Act.  Examplesof forward-looking statements include, but are not limited to:(i) projections of revenues, expenses, income or loss, earnings or lossper share, the payment or nonpayment of dividends, capital structure and otherfinancial items; (ii) statements of plans, objectives and expectations ofthe Company or its management or board of directors, including those relatingto products or services; (iii) statements of future economic performance;and (iv) statements of assumptions underlying such statements. Words suchas “believes”, “anticipates”, “expects”, “intends”, “targeted”, “projected”, “continue”,“remain”, “will”, “should”, “may” and other similar expressions are intended toidentify forward-looking statements but are not the exclusive means ofidentifying such statements.

 

Forward-looking statementsinvolve risks and uncertainties that may cause actual results to differmaterially from those in such statements. Factors that could cause actualresults to differ from those discussed in the forward-looking statementsinclude, but are not limited to:

 

·                  Local, regional, national and internationaleconomic conditions and the impact they may have on us and our customers, andour assessment of that impact on our estimates including, but not limited tothe allowance for loan losses.

 

·                  Changes in the level of nonperforming assetsand charge-offs and other credit quality measures, and their impact on theadequacy of our allowance for loan losses and our provision for loan losses.

 

·                  The effects of and changes in trade, monetaryand fiscal policies and laws, including the interest rate policies of theFederal Open Market Committee of the Federal Reserve Board and the impact ofthe Federal Deposit Insurance Corporation’s Temporary Liquidity GuarantyProgram.

 

·                  The effects of the provisions of theDodd-Frank Wall Street Reform and Consumer Protection Act, including any newregulatory interpretations and guidance issued under such Act.

 

·                  The effects of the regulatory writtenagreement that the Company and its subsidiary bank, Guaranty Bank and TrustCompany (the “Bank”), have entered into with our regulators.

 

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

 

·                  Changes imposed by regulatory agencies toincrease our capital to a level greater than the level required forwell-capitalized financial institutions, or the effect of other potentialfuture regulatory actions against the Company or the Bank, whether through informalunderstandings or formal agreements entered into with regulatory agencies.

 

·                  The failure to maintain capital above thelevel required to be well-capitalized under the regulatory capital adequacyguidelines, the availability of capital from private or government sources, orthe failure to raise additional capital as needed.

 

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

 

·                  Inflation and interest rate, securitiesmarket and monetary fluctuations.

 

·                  Political instability, acts of war orterrorism and natural disasters.

 

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

 

·                  Revenues are lower than expected.

 

·                  Changes in consumer spending, borrowings andsavings habits.

 

·                  Competition for loans and deposits andfailure to attract or retain loans and deposits.

 

·                  Changes in the financial performance and/orcondition of the Bank’s borrowers and the ability of the Bank’s borrowers toperform under the terms of their loans and other terms of credit agreements.

 

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·                  Technological changes.

 

·                  Acquisitions of acquired businesses andgreater than expected costs or difficulties related to the integration ofacquired businesses.

 

·                  The ability to increase market share andcontrol expenses.

 

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

 

·                  The effect of changes in laws and regulationswith which the Company and the Bank must comply, including, but not limited to,any increase in FDIC insurance premiums.

 

·                  Changes in business strategy or developmentplans.

 

·                  Changes in the securities markets.

 

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

 

·                  Changes in the deferred tax asset valuationallowance in future quarters.

 

·                  Changes in our organization, compensation andbenefit plans.

 

·                  The costs and effects of legal and regulatorydevelopments, including the resolution of legal proceedings or regulatory orother governmental inquiries, and the results of regulatory examinations orreviews.

 

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

 

Forward-looking statements speakonly as of the date on which such statements are made.  We do not intend to update anyforward-looking statement to reflect events or circumstances after the date onwhich such statement is made, or to reflect the occurrence of unanticipatedevents.

 

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1. Unaudited Condensed Consolidated Financial Statements**

 

**GUARANTY BANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **September 30,  2010**         | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                 |       |                        |       |
| Cash  and due from banks                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | $                                    | 109,770    |                        | $          | 234,483 |   |
| Securities  available for sale, at fair value                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | 370,555                              |       | 221,134                     |       |
| Securities  held to maturity (fair value of $13,985 and $10,428 at September 30,  2010 and December 31, 2009)                                                                                                                                                                                                                                                                                                                                                                   |       | 13,346                               |       | 9,942                       |       |
| Bank  stocks, at cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 17,230                               |       | 17,160                      |       |
| Total  investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 401,131                              |       | 248,236                     |       |
| Loans,  net of unearned discount                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 1,289,492                            |       | 1,519,608                   |       |
| Less  allowance for loan losses                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | (41,898                              | )          | (51,991                     | )          |
| Net  loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 1,247,594                            |       | 1,467,617                   |       |
| Loans  held for sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | —                               |       | 9,862                       |       |
| Premises  and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 58,044                               |       | 60,267                      |       |
| Other  real estate owned and foreclosed assets                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 45,700                               |       | 37,192                      |       |
| Other  intangible assets, net                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | 15,337                               |       | 19,222                      |       |
| Other  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | 55,570                               |       | 50,701                      |       |
| Total  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | $                                    | 1,933,146  |                        | $          | 2,127,580 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                 |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                                 |       |                        |       |
| Liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                                 |       |                        |       |
| Deposits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                 |       |                        |       |
| Noninterest-bearing  demand                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | $                                    | 358,447    |                        | $          | 366,103 |   |
| Interest-bearing  demand                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 505,706                              |       | 523,971                     |       |
| Savings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 76,429                               |       | 71,816                      |       |
| Time                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 571,897                              |       | 731,400                     |       |
| Total  deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 1,512,479                            |       | 1,693,290                   |       |
| Securities  sold under agreements to repurchase and federal funds purchased                                                                                                                                                                                                                                                                                                                                                                                                               |       | 17,951                               |       | 22,990                      |       |
| Borrowings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 164,242                              |       | 164,364                     |       |
| Subordinated  debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 41,239                               |       | 41,239                      |       |
| Interest  payable and other liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 11,641                               |       | 13,059                      |       |
| Total  liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 1,747,552                            |       | 1,934,942                   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                 |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                 |       |                        |       |
| Preferred  stock—$0.001 par value; 9% non-cumulative; 73,280 shares authorized, 64,579  shares issued and outstanding at September 30, 2010; 73,280 shares  authorized, 60,434 shares issued and outstanding at December 31, 2009;  liquidation preference of $64,579 at September 30, 2010; liquidation  preference of $60,434 at December 31, 2009.                                                                                                            |       | 63,372                               |       | 59,227                      |       |
| Common  stock—$0.001 par value; 150,000,000 shares authorized, 65,760,967 voting  shares issued, 53,694,478 voting shares outstanding at September 30,  2010 (includes 1,989,017 shares ofunvested restricted stock and 156,567 shares to be issued);  150,000,000 shares authorized, 64,952,450 voting shares issued, 52,952,703  voting shares outstanding at December 31, 2009 (includes 1,381,105 shares of  unvested restricted stock and 129,806 of shares to be issued). |       | 66                                   |       | 65                          |       |
| Additional  paid-in capital - Common stock                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 619,174                              |       | 618,343                     |       |
| Shares  to be issued for deferred compensation obligations                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 237                                  |       | 199                         |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | (396,976                             | )          | (382,599                    | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 2,209                                |       | (143                        | )          |
| Treasury  Stock, at cost, 10,872,542 and 10,873,533 shares, respectively                                                                                                                                                                                                                                                                                                                                                                                                                  |       | (102,488                             | )          | (102,454                    | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 185,594                              |       | 192,638                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | $                                    | 1,933,146  |                        | $          | 2,127,580 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Operations**

 
| ** **                                                                 | ** ** | **Three Months Ended September 30,**                               | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2010**                                                                               | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                 | ** ** | **(In thousands, except share and per share data)** | ** ** |
| Interest  income:                                                          |       |                                                                                   |       |                                                    |       |   |   |   |   |
| Loans,  including fees                                                     |       | $                                                                                      | 19,012     |                                                    | $          | 21,710 |   | $ | 59,245 |   | $ | 67,994 |   |
| Investment  securities:                                                    |       |                                                                                   |       |                                                    |       |   |   |   |   |
| Taxable                                                                    |       | 1,966                                                                                  |       | 751                                                     |       | 5,097 |   | 2,067 |   |
| Tax-exempt                                                                 |       | 682                                                                                    |       | 763                                                     |       | 2,106 |   | 2,295 |   |
| Dividends                                                                  |       | 185                                                                                    |       | 184                                                     |       | 552 |   | 670 |   |
| Federal  funds sold and other                                              |       | 77                                                                                     |       | 61                                                      |       | 296 |   | 78 |   |
| Total  interest income                                                     |       | 21,922                                                                                 |       | 23,469                                                  |       | 67,296 |   | 73,104 |   |
| Interest  expense:                                                         |       |                                                                                   |       |                                                    |       |   |   |   |   |
| Deposits                                                                   |       | 3,688                                                                                  |       | 6,581                                                   |       | 12,395 |   | 20,616 |   |
| Securities  sold under agreement to repurchase and federal funds purchased |       | 26                                                                                     |       | 29                                                      |       | 102 |   | 98 |   |
| Borrowings                                                                 |       | 1,329                                                                                  |       | 1,323                                                   |       | 3,944 |   | 3,956 |   |
| Subordinated  debentures                                                   |       | 683                                                                                    |       | 625                                                     |       | 1,894 |   | 1,945 |   |
| Total  interest expense                                                    |       | 5,726                                                                                  |       | 8,558                                                   |       | 18,335 |   | 26,615 |   |
| Net  interest income                                                       |       | 16,196                                                                                 |       | 14,911                                                  |       | 48,961 |   | 46,489 |   |
| Provision  for loan losses                                                 |       | 2,500                                                                                  |       | 20,000                                                  |       | 14,900 |   | 41,110 |   |
| Net  interest income, after provision for loan losses                      |       | 13,696                                                                                 |       | (5,089                                                  | )          | 34,061 |   | 5,379 |   |
| Noninterest  income:                                                       |       |                                                                                   |       |                                                    |       |   |   |   |   |
| Customer  service and other fees                                           |       | 2,343                                                                                  |       | 2,281                                                   |       | 6,811 |   | 7,314 |   |
| Gain  (loss) on sale of securities                                         |       | 82                                                                                     |       | (1                                                      | )          | 97 |   | (1 | ) |
| Gain on  sale of loans                                                     |       | —                                                                                 |       | —                                                  |       | 1,196 |   | — |   |
| Other                                                                      |       | 128                                                                                    |       | 242                                                     |       | 596 |   | 734 |   |
| Total  noninterest income                                                  |       | 2,553                                                                                  |       | 2,522                                                   |       | 8,700 |   | 8,047 |   |
| Noninterest  expense:                                                      |       |                                                                                   |       |                                                    |       |   |   |   |   |
| Salaries  and employee benefits                                            |       | 6,551                                                                                  |       | 6,536                                                   |       | 19,586 |   | 19,987 |   |
| Occupancy  expense                                                         |       | 1,890                                                                                  |       | 1,908                                                   |       | 5,616 |   | 5,755 |   |
| Furniture  and equipment                                                   |       | 850                                                                                    |       | 1,103                                                   |       | 2,793 |   | 3,381 |   |
| Amortization  of intangible assets                                         |       | 1,285                                                                                  |       | 1,559                                                   |       | 3,885 |   | 4,722 |   |
| Other  real estate owned, net                                              |       | 7,836                                                                                  |       | 1,654                                                   |       | 13,700 |   | 2,617 |   |
| Insurance  and assessments                                                 |       | 1,596                                                                                  |       | 1,688                                                   |       | 5,233 |   | 4,924 |   |
| Professional  fees                                                         |       | 677                                                                                    |       | 516                                                     |       | 2,293 |   | 2,261 |   |
| Other  general and administrative                                          |       | 2,027                                                                                  |       | 2,517                                                   |       | 6,151 |   | 7,012 |   |
| Total  noninterest expense                                                 |       | 22,712                                                                                 |       | 17,481                                                  |       | 59,257 |   | 50,659 |   |
| Loss  before income taxes                                                  |       | (6,463                                                                                 | )          | (20,048                                                 | )          | (16,496 | ) | (37,233 | ) |
| Income  tax expense (benefit)                                              |       | (2,456                                                                                 | )          | (3,147                                                  | )          | (6,290 | ) | (9,911 | ) |
| Net  loss                                                                  |       | (4,007                                                                                 | )          | (16,901                                                 | )          | (10,206 | ) | (27,322 | ) |
| Preferred  stock dividends                                                 |       | (1,421                                                                                 | )          | —                                                  |       | (4,171 | ) | — |   |
| Net  loss allocable to common stockholders                                 |       | $                                                                                      | (5,428     | )                                                       | $          | (16,901 | ) | $ | (14,377 | ) | $ | (27,322 | ) |
|                                                                       |       |                                                                                   |       |                                                    |       |   |   |   |   |
| Loss  per common share—basic:                                         |       | $                                                                                      | (0.11      | )                                                       | $          | (0.33 | ) | $ | (0.28 | ) | $ | (0.53 | ) |
| Loss  per common share—diluted:                                       |       | (0.11                                                                                  | )          | (0.33                                                   | )          | (0.28 | ) | (0.53 | ) |
|                                                                       |       |                                                                                   |       |                                                    |       |   |   |   |   |
| Weighted  average common shares outstanding-basic                          |       | 51,698,129                                                                             |       | 51,416,909                                              |       | 51,655,592 |   | 51,347,916 |   |
| Weighted  average common shares outstanding-diluted                        |       | 51,698,129                                                                             |       | 51,416,909                                              |       | 51,655,592 |   | 51,347,916 |   |

 

See“Notes to Unaudited Consolidated Financial Statements.”

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Changes in Stockholders’Equity and Comprehensive Income (Loss)**

 
| ** **                                     | ** ** | **Preferred  Shares********Outstanding**                  | ** ** | **Preferred  Stock** | ** ** | **Common  Stock  Shares  Outstanding  and to be  issued** | ** ** | **Common  Stock and  Additional  Paid-in  Capital** | ** ** | **Shares to be  Issued** | ** ** | **Treasury Stock** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Totals** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------|------------|---------------------------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **(In thousands, except share data)** | ** ** |
| Balance,  December 31, 2008               |       | —                                                    |       | $                    | —     |                                                                | 52,654,131 |                                                     | $          | 617,253                            |       | $                       | 710        |                     | $          | (103,078                                                  | )          | $          | (352,003   | ) | $ | (1,302 | ) | $ | 161,580 |   |
| Comprehensive  loss:                           |       |                                                      |       |                 |       |                                                                |       |                                                     |       |                               |       |                    |       |                     |       |                                                      |       |       |       |
| Net  loss                                      |       | —                                                    |       | —               |       | —                                                              |       | —                                                   |       | —                             |       | —                  |       | (27,322                  | )          | —                                                    |       | (27,322    | )          |
| Other  comprehensive income                    |       | —                                                    |       | —               |       | —                                                              |       | —                                                   |       | —                             |       | —                  |       | —                   |       | 2,689                                                     |       | 2,689      |       |
| Total  comprehensive loss                      |       |                                                      |       |                 |       |                                                                |       |                                                     |       |                               |       |                    |       |                     |       |                                                      |       | (24,633    | )          |
| Stock  compensation awards, net of forfeitures |       | —                                                    |       | —               |       | (183,903                                                            | )          | —                                                   |       | —                             |       | —                  |       | —                   |       | —                                                    |       | —     |       |
| Earned  stock award compensation, net          |       | —                                                    |       | —               |       | —                                                              |       | 758                                                      |       | —                             |       | —                  |       | —                   |       | —                                                    |       | 758        |       |
| Repurchase  of common stock                    |       | —                                                    |       | —               |       | (24,111                                                             | )          | —                                                   |       | —                             |       | (47                     | )          | —                   |       | —                                                    |       | (47        | )          |
| Deferred  compensation                         |       | —                                                    |       | —               |       | 85,723                                                              |       | —                                                   |       | 129                                |       | —                  |       | —                   |       | —                                                    |       | 129        |       |
| Common  shares issued                          |       | —                                                    |       | —               |       | —                                                              |       | —                                                   |       | (683                               | )          | 683                     |       | —                   |       | —                                                    |       | —     |       |
| Preferred  shares issued, net of expenses      |       | 59,053                                                    |       | 57,883               |       | —                                                              |       | —                                                   |       | —                             |       | —                  |       | —                   |       | —                                                    |       | 57,883     |       |
| Balance,  September 30, 2009              |       | 59,053                                                    |       | $                    | 57,883     |                                                                | 52,531,840 |                                                     | $          | 618,011                            |       | $                       | 156        |                     | $          | (102,442                                                  | )          | $          | (379,325   | ) | $ | 1,387 |   | $ | 195,670 |   |
|                                           |       |                                                      |       |                 |       |                                                                |       |                                                     |       |                               |       |                    |       |                     |       |                                                      |       |       |       |
| Balance,  December 31, 2009               |       | 60,434                                                    |       | $                    | 59,227     |                                                                | 52,952,703 |                                                     | $          | 618,408                            |       | $                       | 199        |                     | $          | (102,454                                                  | )          | $          | (382,599   | ) | $ | (143 | ) | $ | 192,638 |   |
| Comprehensive  loss:                           |       |                                                      |       |                 |       |                                                                |       |                                                     |       |                               |       |                    |       |                     |       |                                                      |       |       |       |
| Net  loss                                      |       | —                                                    |       | —               |       | —                                                              |       | —                                                   |       | —                             |       | —                  |       | (10,206                  | )          | —                                                    |       | (10,206    | )          |
| Other  comprehensive income                    |       | —                                                    |       | —               |       | —                                                              |       | —                                                   |       | —                             |       | —                  |       | —                   |       | 2,352                                                     |       | 2,352      |       |
| Total  comprehensive loss                      |       |                                                      |       |                 |       |                                                                |       |                                                     |       |                               |       |                    |       |                     |       |                                                      |       | (7,854     | )          |
| Stock  compensation awards, net of forfeitures |       | —                                                    |       | —               |       | 740,784                                                             |       | —                                                   |       | —                             |       | —                  |       | —                   |       | —                                                    |       | —     |       |
| Earned  stock award compensation, net          |       | —                                                    |       | —               |       | —                                                              |       | 832                                                      |       | —                             |       | —                  |       | —                   |       | —                                                    |       | 832        |       |
| Repurchase  of common stock                    |       | —                                                    |       | —               |       | (25,770                                                             | )          | —                                                   |       | —                             |       | (34                     | )          | —                   |       | —                                                    |       | (34        | )          |
| Deferred  compensation                         |       | —                                                    |       | —               |       | 26,761                                                              |       | —                                                   |       | 38                                 |       | —                  |       | —                   |       | —                                                    |       | 38         |       |
| Preferred  share dividends                     |       | 4,145                                                     |       | 4,145                |       | —                                                              |       | —                                                   |       | —                             |       | —                  |       | (4,171                   | )          | —                                                    |       | (26        | )          |
| Balance,  September 30, 2010              |       | 64,579                                                    |       | $                    | 63,372     |                                                                | 53,694,478 |                                                     | $          | 619,240                            |       | $                       | 237        |                     | $          | (102,488                                                  | )          | $          | (396,976   | ) | $ | 2,209 |   | $ | 185,594 |   |

 

See“Notes to Unaudited Consolidated Financial Statements.”

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Cash Flows**

 
| ** **                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **                                                                       | ** ** | **(In thousands)**                                 | ** ** |
| Cash  flows from operating activities:                                           |       |                                                    |       |   |   |
| Net  loss                                                                        |       | $                                                       | (10,206    | ) | $ | (27,322 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |       |                                                    |       |   |   |
| Depreciation  and amortization                                                   |       | 6,327                                                   |       | 7,388 |   |
| Provision  for loan losses                                                       |       | 14,900                                                  |       | 41,110 |   |
| Change  in valuation allowance for deferred tax asset                            |       | —                                                  |       | 5,000 |   |
| Stock  compensation, net                                                         |       | 832                                                     |       | 758 |   |
| Gain on  sale of securities                                                      |       | (97                                                     | )          | 1 |   |
| Gain on  sale of loans                                                           |       | (1,196                                                  | )          | — |   |
| Loss,  net and valuation adjustments on real estate owned                        |       | 12,459                                                  |       | 2,694 |   |
| Other                                                                            |       | 52                                                      |       | (771 | ) |
| Net  change in:                                                                  |       |                                                    |       |   |   |
| Other  assets                                                                    |       | (6,311                                                  | )          | (11,946 | ) |
| Interest  payable and other liabilities                                          |       | (1,418                                                  | )          | (1,897 | ) |
| Net  cash provided by operating activities                                       |       | 15,342                                                  |       | 15,015 |   |
| Cash  flows from investing activities:                                           |       |                                                    |       |   |   |
| Activity  in available for sale securities:                                      |       |                                                    |       |   |   |
| Sales,  maturities, prepayments, and calls                                       |       | 92,579                                                  |       | 19,669 |   |
| Purchases                                                                        |       | (238,714                                                | )          | (94,969 | ) |
| Activity  in held to maturity securities and bank stocks:                        |       |                                                    |       |   |   |
| Maturities,  prepayments and calls                                               |       | 3,194                                                   |       | 14,945 |   |
| Purchases                                                                        |       | (6,481                                                  | )          | (85 | ) |
| Loan  originations and principal collections, net                                |       | 160,707                                                 |       | 154,293 |   |
| Proceeds  from sale of loans held for sale                                       |       | 18,413                                                  |       | 7,960 |   |
| Proceeds  from sales of other real estate owned and foreclosed assets            |       | 16,515                                                  |       | 6,212 |   |
| Proceeds  from sales of premises and equipment                                   |       | 11                                                      |       | 8 |   |
| Additions  to premises and equipment                                             |       | (247                                                    | )          | (845 | ) |
| Net  cash provided by investing activities                                       |       | 45,977                                                  |       | 107,188 |   |
| Cash  flows from financing activities:                                           |       |                                                    |       |   |   |
| Net  decrease in deposits                                                        |       | (180,811                                                | )          | (66,215 | ) |
| Repayment  of long-term debt                                                     |       | (122                                                    | )          | (1,984 | ) |
| Net  change in federal funds purchased and repurchase agreements                 |       | (5,039                                                  | )          | (9,357 | ) |
| Repurchase  of common stock                                                      |       | (34                                                     | )          | (47 | ) |
| Issuance  of preferred stock                                                     |       | —                                                  |       | 57,883 |   |
| Cash  dividends on preferred stock                                               |       | (26                                                     | )          | — |   |
| Net  cash used by financing activities                                           |       | (186,032                                                | )          | (19,720 | ) |
| Net  change in cash and cash equivalents                                         |       | (124,713                                                | )          | 102,483 |   |
| Cash  and cash equivalents, beginning of period                                  |       | 234,483                                                 |       | 45,711 |   |
| Cash  and cash equivalents, end of period                                        |       | $                                                       | 109,770    |   | $ | 148,194 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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Table of Contents

 

**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements**

 

**(1)****             ****Organization, Operations and Basis ofPresentation**

 

GuarantyBancorp is a bank holding company registered under the Bank Holding Company Actof 1956, as amended.

 

Our principal business is to serveas a holding company for our subsidiaries. As of September 30, 2010,Guaranty Bancorp had a single bank subsidiary, Guaranty Bank and Trust Company,referred to as Guaranty Bank or the Bank.

 

Reference to “Bank” means GuarantyBank, and “we” or “Company” means Guaranty Bancorp on a consolidated basis withthe Bank, if applicable.  References to “GuarantyBancorp” or to the “holding company” refer to the parent company on astand-alone basis.

 

The Bank is a full-servicecommunity bank offering an array of banking products and services to thecommunities it serves along the Front Range of Colorado, including acceptingtime and demand deposits and originating commercial loans, real estate loans,Small Business Administration guaranteed loans and consumer loans.  The Bank also provides trust services,including personal trust administration, estate settlement, investmentmanagement accounts and self-directed IRAs.  Substantially all loans are secured by specific items of collateral,including business assets, consumer assets, and commercial and residential realestate.  Commercial loans are generallyexpected to be repaid from the operating cash flows of the borrower’sbusinesses.  There are no significantconcentrations of loans to any one industry or customer.  However, our customers’ ability to repaytheir loans is dependent on the real estate and general economic conditions ofthe area, among other factors.

 

***(a)******                ******Basis of Presentation***

 

Theaccounting and reporting policies of the Company conform to generally acceptedaccounting principles in the United States of America. All significantintercompany balances and transactions have been eliminated. Our financialstatements reflect all adjustments that are, in the opinion of management,necessary for a fair presentation of the financial position and results of operationsfor the periods presented. We have evaluated all subsequent events through thedate the financial statements were issued.

 

Certaininformation and note disclosures normally included in consolidated financialstatements prepared in accordance with generally accepted accounting principlesin the United States of America have been condensed or omitted pursuant to the rules andregulations of the Securities and Exchange Commission. The interim operatingresults are not necessarily indicative of operating results for the year.  For further information, refer to theconsolidated financial statements and notes included in the Company’s annualreport on Form 10-K for the year ended December 31, 2009.

 

***(b)******                ******Use of Estimates***

 

Thepreparation of the consolidated financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities asof the dates of the consolidated balance sheets and income and expense for theperiods presented. Actual results could differ significantly from thoseestimates. Material estimates that are particularly susceptible to significantchanges include the assessment for impairment of certain investment securities,the allowance for loan losses, deferred tax assets and liabilities, impairmentof intangible assets, stock compensation expense, other real estate owned andaccounting for derivative instruments. Assumptions and factors used in the estimates are evaluated on an annualbasis or whenever events or changes in circumstance indicate that the previousassumptions and factors have changed. The result of the analysis could result in adjustments to the estimates.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

***(c)******                 ******Allowance for Loan Losses***

 

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

 

Theallowance for loan losses is evaluated on a regular basis by management and isbased upon management’s periodic review of the collectability of the loans inlight of historical experience, the nature and volume of the loan portfolio,adverse situations that may affect borrowers’ ability to repay, estimated valueof any underlying collateral and prevailing economic conditions. Thisevaluation is inherently subjective as it requires estimates that aresusceptible to significant revision as more information becomes available.  An allowance for loan losses is maintained ata level deemed appropriate by management to adequately provide for known andinherent risks in the loan portfolio and other extensions of credit.

 

Loansthat are deemed to be uncollectible are charged off and deducted from theallowance.  The provision for loan lossesand recoveries on loans previously charged off are added to the allowance.

 

Theallowance consists of specific and general components.  The specific component relates to loans thatare individually classified as impaired. The general component covers all other loans and is based on historicalloss experience adjusted for current factors. A loan is considered impaired when, based on current information andevents, it is probable that the Company will be unable to collect the scheduledpayments of principal or interest when due according to the contractual termsof the loan agreement.  Factorsconsidered by management in determining impairment include payment status andthe probability of collecting scheduled principal and interest payments whendue. Loans, for which the terms have been modified, and for which the borroweris experiencing financial difficulties, are considered troubled debtrestructurings and classified as impaired. Loans that experience insignificant payment delays and paymentshortfalls generally are not classified as impaired.

 

Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and the borrower, including the length of the delay, thereasons for the delay, the borrower’s prior payment record, and the amount ofthe shortfall in relation to the principal and interest owed.  The specific allowance for impaired loans ismeasured on a loan-by-loan basis for commercial, real estate and agriculturalloans by either the present value of expected future cash flows discounted atthe loan’s effective interest rate, the loan’s obtainable market price, or thefair value of the collateral if the loan is collateral dependent. Groups ofsmaller balance, homogenous loans, as applicable, are collectively evaluatedfor impairment.

 

***(d)******              ******Other Real Estate Owned and ForeclosedAssets***

 

Assets acquired throughor instead of loan foreclosure are initially recorded at fair value less coststo sell, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowanceis recorded through expense. Operating revenues and expenses of such assets andreductions in the fair value of the assets are included in noninterest expense.Gains and losses associated with dispositions of other real estate owned arerecorded as noninterest expense as part of other real estate owned, net.

 

***(e)******               ******Other Intangible Assets***

 

Coredeposit intangible assets, referred to as CDI, are recognized apart from goodwillat the time of acquisition based on valuations prepared by independent thirdparties or other estimates of fair value. In preparing such valuations,variables such as deposit servicing costs, attrition rates, and market discountrates are considered. CDI assets are amortized to expense over their usefullives, which we have estimated to range from 7 years to 15 years.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

***(f)******                  ******Stock Incentive Plan***

 

TheCompany’s Amended and Restated 2005 Stock Incentive Plan provides for up to8,500,000 grants of stock options, stock awards, stock units awards,performance stock awards, stock appreciation rights, and other equity basedawards to key employees, nonemployee directors, consultants and prospectiveemployees. As of September 30, 2010, the Company has only granted stockawards. The Company recognizes stock compensation cost for services received ina share-based payment transaction over the required service period, generallydefined as the vesting period. For awards with graded vesting, compensationcost is recognized on a straight-line basis over the requisite service periodfor the entire award. The compensation cost of employee and director servicesreceived in exchange for stock awards is based on the grant date fair value ofthe award (as determined by quoted market prices). Stock compensation expenserecognized reflects estimated forfeitures, adjusted as necessary for actualforfeitures. The Company has issued stock awards that vest based on serviceperiods from one to four years, and stock awards that vest based on performanceconditions. The maximum contractual term for the performance-based share awardsis December 31, 2013. As of September 30, 2010, certainperformance-based restricted stock awards were expected to vest prior to theend of the contractual term, while others were not expected to vest prior tothe end of the contractual term, based on current projections in comparison toperformance conditions. Should these expectations change, additional expensecould be recorded or reversed in future periods.

 

***(g)******               ******Deferred Compensation Plan***

 

TheCompany has a Deferred Compensation Plan (the “Plan”) that allows directors andcertain key employees to voluntarily defer compensation. Compensation expenseis recorded for the deferred compensation and a related liability isrecognized. Participants may elect designated investment options for thenotional investment of their deferred compensation. The recorded obligationsare adjusted for deemed income or loss related to the investments selected.Participants in the Plan are given the opportunity to elect to have all or aportion of their deferred compensation earn a rate of return equal to the totalreturn on the Company’s common stock. The Plan does not provide fordiversification of a participant’s assets allocated to Company common stock andassets allocated to Company common stock can only be settled with a fixednumber of shares of stock. The deferred compensation obligation associated withCompany common stock is classified as a component of stockholders’ equity andthe related shares are treated as shares to be issued and are included in totalshares outstanding for accounting purposes. At September 30, 2010 and December 31,2009, there were 156,567 and 129,806 shares, respectively, to be issued.  Subsequent changes in the fair value of thecommon stock are not reflected in operations or stockholders’ equity of theCompany. Actual Company common stock held by the Company for the satisfactionof obligations of the Plan is classified as treasury stock.  At the end of 2009, due primarily to a lowparticipation rate and the overall administration costs, the Company determinednot to offer eligible or existing participants the ability to defer anyadditional compensation in 2010 or beyond until further notice.

 

***(h)******               ******Income Taxes***

 

Income tax expense is the total ofthe current year income tax due or refundable and the change in deferred taxassets and liabilities. Deferred tax assets and liabilities are recognized forthe future tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss and tax credit carry forwards. Deferredtax assets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled.  Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date.

 

Deferred tax assets are reduced bya valuation allowance when, in the opinion of management, it is more likelythan not that some portion, or all, of the deferred tax asset will not berealized. In assessing the realization of deferred tax assets, managementevaluates both positive and negative evidence, including the existence of anycumulative losses in the current year and the prior two years, the amount oftaxes paid in available carry-back years, the forecasts of future income,applicable tax planning strategies, and assessments of current and futureeconomic and business conditions. This analysis is updated quarterly andadjusted as necessary.  At September 30,2010 and December 31, 2009, the Company had a net deferred tax asset of$11,637,000 and $10,170,000, respectively. At the end of the third quarter 2010, based on the Company’s ability tocarryback approximately $9,400,000 of potential tax losses generated to prioryears and various tax 

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

planningstrategies, the Company has determined that a valuation allowance for deferredtax assets is not required.

 

At September 30, 2010 and December 31,2009, the Company did not have any uncertain tax positions for which a taxbenefit is disallowed under current accounting guidance.  A tax position is recognized as a benefitonly if it is “more likely than not” that the tax position would be sustainedin a tax examination, with a tax examination being presumed to occur. Theamount recognized is the largest amount of tax benefit that is greater than 50%likely to be realized on examination. For tax positions not meeting the “more likely than not” test, no taxbenefit is recorded.

 

The Company and its subsidiary are subject to U.S.federal income tax and State of Colorado tax. The Company is no longer subject to examination by Federal or Statetaxing authorities for years before 2006. At September 30, 2010 and December 31,2009, the Company did not have any unrecognized tax benefits. The Company doesnot expect the amount of any unrecognized tax benefits to significantlyincrease in the next twelve months.  TheCompany recognizes interest related to income tax matters as interest expenseand penalties related to income tax matters as other noninterest expense. At September 30,2010 and December 31, 2009, the Company does not have any amounts accruedfor interest and/or penalties.

 

***(i)******                 ******Derivative Financial Instruments***

 

Management utilizes derivative financial instrumentsexclusively to accommodate the needs of its customers through the use ofinterest rate swaps.  Derivativefinancial instruments are not used to manage interest rate risk in the Company’sassets or liabilities.  The Companyoffsets each interest rate swap to minimize its net risk exposure resultingfrom such transactions and accordingly has not elected to qualify for hedgeaccounting methods addressed under current provisions of GAAP. All derivativefinancial instruments are stated at fair value in the Consolidated Statementsof Condition with changes in fair value reported in current period earnings.  See Note 11 for further information.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

***(j)******                       ******Loss per Common Share***

 

Basic loss per common share represents lossallocable to common stockholders divided by the weighted average number ofcommon shares outstanding during the period. Diluted loss per common share doesnot reflect additional common shares that would have been outstanding becauseunder current GAAP these shares are not considered when reporting a loss.  The Company’s obligation to issue shares ofstock to participants in its Deferred Compensation Plan has been treated asoutstanding shares of stock in the basic earnings per common sharecalculation.  The Company’s unvestedrestricted stock awards do not containnonforfeitable rights to dividends and, therefore, are not subject to thetwo-class method of computing basic loss per common share.  The Company’s outstanding shares of preferredstock do not participate in the earnings or loss of the Company, and therefore,are not subject to the two-class method of computing basic loss per share.Potential dilutive common shares that may be issued by the Company relate toconvertible preferred stock and unvested common share grants subject to aservice condition for the three and nine months ending September 30, 2010 and2009.   The loss per common share hasbeen computed based on the following:

 
| ** **                                                                    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Average common shares outstanding                                             |       | 51,698,129                                               |       | 51,416,909                                              |       | 51,655,592 |   | 51,347,916 |   |
| Effect of dilutive preferred stock(1)                                         |       | —                                                   |       | —                                                  |       | — |   | — |   |
| Effect of dilutive unvested stock grants (2)                                  |       | —                                                   |       | —                                                  |       | — |   | — |   |
| Average shares outstanding for calculating diluted  earnings per common share |       | 51,698,129                                               |       | 51,416,909                                              |       | 51,655,592 |   | 51,347,916 |   |

 

----

(1) The Company had 64,579 shares outstanding of convertible preferred stockat September 30, 2010 and 59,053 at September 30, 2009.  Subject to the terms of the convertiblepreferred stock, these 64,579 shares are convertible into 35,877,222 shares ofcommon stock of the Company based on a conversion price of $1.80.  The impact of the future conversion of theseshares is anti-dilutive for the three and nine months ended September 30, 2010due to the net loss attributable to common stockholders for these periods.

 

(2)The impact of unvested stock grants of 1,989,017 and 1,084,838 at September 30,2010 and 2009, respectively, is anti-dilutive for the three and nine monthsended September 30, 2010 and 2009, respectively, due to the net lossattributable to common stockholders for these periods.

 

***(k)******                    ******RecentlyIssued Accounting Standards***

 

***Adoption of New Accounting Standards:***

 

In January 2010, the FASB issuedguidance clarifying the accounting for stockholder distributions where thestockholder has the ability to elect to have his/her distribution in the formof cash (up to a pre-determined maximum), stock or a combination of the two.  The update provided that the stock portion ofa distribution where the stockholder had the ability to elect the distributionas stock or cash (up to a pre-determined maximum) should be accounted for as ashare issuance and thereby eliminate diversity in practice. The provisions ofthis update became effective for financial statements dated on or afterDecember 15, 2009. The adoption of this standard did not have a material impacton the Company’s consolidated financial position, results of operations or cashflows.

 

In January 2010, the FASB issuedguidance requiring increased fair value disclosures.  There are two components to the increaseddisclosure requirements set forth in the update:  (1) a description of, as well as thedisclosure of, the dollar amount of transfers in or out of level one or leveltwo and (2) in the reconciliation for fair value measurements using significantunobservable inputs (level 3), a reporting entity should present separatelyinformation about purchases, sales, issuances and settlements (that is, grossamounts shall be disclosed as opposed to a single net figure). Increaseddisclosures regarding the transfers in/out of level one and two are requiredfor interim and annual periods beginning after December 15, 2009.  The adoption of this portion of the standarddid not have a material impact on the Company’s consolidated financialposition, 

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements (Continued)**

 

resultsof operations or cash flows. Increased disclosures regarding the level threefair value reconciliation are required for fiscal years beginning afterDecember 15, 2010.

 

***Newly Issued But Not Yet Effective Accounting Standards:***

 

In April2010, the FASB issued accounting guidance for loan modifications when the loanin question is part of a pool of loans accounted for as a single asset.  Diversity in practice developed surroundinghow to account for loans that are part of a pool subsequent to a modificationthat would constitute a troubled debt restructuring. The purpose of this updatewas to eliminate the diversity in practice. Under the new guidance, loans thatare accounted for as part of a pool are not isolated from the pool foraccounting purposes subsequent to a modification, even if the modificationconstitutes a troubled debt restructuring. Upon adoption of the guidance, an entity may make a one time election toterminate accounting for loans in a pool, and the election may be applied on apool by pool basis.  This accountingtreatment for the modification of loans accounted for as part of larger poolsis effective for all interim and annual reporting periods beginning on or afterJuly 15, 2010.    As the Company does notcurrently have any pools of loans accounted for as a single asset, we do notexpect that the adoption of this standard will have a material impact on theCompany’s consolidated financial position, results of operations or cash flows.

 

In July2010, the FASB updated disclosure requirements with respect to the creditquality of financing receivables and the allowance for credit losses. According to the guidance, there are two levels of detail at which creditinformation will be presented - the portfolio segment level and classlevel.  The portfolio segment level is defined as the level wherefinancing receivables are aggregated in developing a Company’s systematic methodfor calculating its allowance for credit losses.  The class level is thesecond level at which credit information will be presented and represents thecategorization of financing related receivables at a slightly less aggregatedlevel than the portfolio segment level.  Companies will now be required toprovide the following disclosures as a result of this update: a rollforward ofthe allowance for credit losses at the portfolio segment level with the endingbalances further categorized according to impairment method along with thebalance reported in the related financing receivables at period end; additionaldisclosure of nonaccrual and impaired financing receivables by class as ofperiod end; credit quality and past due/aging  information by class as ofperiod end; information surrounding the nature and extent of loan modificationsand troubled-debt restructurings and their effect on the allowance for creditlosses during the period; and detail of any significant purchases or sales offinancing receivables during the period.  The increased period-enddisclosure requirements become effective for periods ending on or afterDecember 15, 2010.  The increaseddisclosures for activity within a reporting period become effective for periodsbeginning on or after December 15, 2010.  The provisions of this updatewill expand the Company’s current disclosures with respect to our allowance forloan losses.

 

***(l)******                       ******Reclassifications***

 

Certain reclassifications of prioryear balances have been made to conform to the current year presentation. Thesereclassifications had no impact on the Company’s consolidated financialposition, results of operations or net change in cash and cash equivalents.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

**(2)****                 ****Securities**

 

*The fair value of available forsale debt securities and the related gross unrealized gains and lossesrecognized in accumulated other comprehensive income (loss) were as follows atthe dates presented:*

* *
| ** **                                                  | ** ** | **Fair value**              | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Amortized  cost** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                                                  | ** ** | **(In thousands)**          | ** ** |
| ** **                                                  | ** ** | **September 30, 2010** | ** ** |
| Debt  securities available for sale:                        | ** ** | ** **                       | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **          | ** ** |
| U.S.  government agencies and government-sponsored entities |       | $                                | 21,835     |                         | $          | 24                            |       | $                   | —     |   | $ | 21,811 |   |
| State  and municipal                                        |       | 56,291                           |       | 879                          |       | (1,090                        | )          | 56,502              |       |
| Mortgage-backed  - agency / residential                     |       | 281,566                          |       | 3,895                        |       | (316                          | )          | 277,987             |       |
| Mortgage-backed  - private / residential                    |       | 8,984                            |       | 180                          |       | (9                            | )          | 8,813               |       |
| Marketable  equity                                          |       | 1,519                            |       | —                       |       | —                        |       | 1,519               |       |
| Other  securities                                           |       | 360                              |       | —                       |       | —                        |       | 360                 |       |
| Total                                                       |       | $                                | 370,555    |                         | $          | 4,978                         |       | $                   | (1,415     | ) | $ | 366,992 |   |

 
| ** **                                                  | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------|------------|
| Debt  securities available for sale:                        | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  government agencies and government-sponsored entities |       | $                               | 17,129     |   | $ | — |   | $ | (329 | ) | $ | 17,458 |   |
| State  and municipal                                        |       | 60,827                          |       | 820 |   | (567 | ) | 60,574 |   |
| Mortgage-backed  - agency / residential                     |       | 127,340                         |       | 1,300 |   | (889 | ) | 126,929 |   |
| Mortgage-backed  - private / residential                    |       | 13,959                          |       | — |   | (567 | ) | 14,526 |   |
| Marketable  equity                                          |       | 1,519                           |       | — |   | — |   | 1,519 |   |
| Other  securities                                           |       | 360                             |       | — |   | — |   | 360 |   |
| Total                                                       |       | $                               | 221,134    |   | $ | 2,120 |   | $ | (2,352 | ) | $ | 221,366 |   |

 

*The carrying amount, unrecognizedgains and fair value of securities held to maturity were as follows at thedates presented:*

* *
| ** **                                            | ** ** | **Amortized  Cost**     | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair value** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                                            | ** ** | **(In thousands)** | ** ** |
| September  30, 2010:                                  |       |                    |       |                         |       |                          |       |                |       |
| Mortgage-backed  securities — agency/residential |       | $                       | 13,346     |                         | $          | 639                           |       | $                   | —     |   | $ | 13,985 |   |
|                                                  |       |                    |       |                         |       |                          |       |                |       |
| December  31, 2009:                                   |       |                    |       |                         |       |                          |       |                |       |
| Mortgage-backed  securities — agency/residential |       | $                       | 9,942      |                         | $          | 486                           |       | $                   | —     |   | $ | 10,428 |   |

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

The amortized cost and estimatedfair value of available for sale debt securities by contractual maturity atSeptember 30, 2010 are shown below. Expected maturities will differ fromcontractual maturities because borrowers may have the right to prepayobligations with or without prepayment penalties.

 
| ** **                                                          | ** ** | **Available for sale (AFS)** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                          | ** ** | **Amortized cost**                     | ** ** | **Fair value** | ** ** |
| ** **                                                          | ** ** | **(In thousands)**                     | ** ** |
| Debt  securities available for sale:                                |       |                                        |       |   |   |
| Due in  one year or less                                            |       | $                                           | 23,531     |   | $ | 23,573 |   |
| Due  after one year through five years                              |       | 10,675                                      |       | 11,147 |   |
| Due  after five years through ten years                             |       | 5,101                                       |       | 5,422 |   |
| Due  after ten years                                                |       | 39,006                                      |       | 37,984 |   |
| Total  AFS, excluding MBS, marketable equity and other securities   |       | 78,313                                      |       | 78,126 |   |
| Mortgage-backed  securities, marketable equity and other securities |       | 288,679                                     |       | 292,429 |   |
| Total  available for sale                                           |       | $                                           | 366,992    |   | $ | 370,555 |   |

 
| ** **                                            | ** ** | **Held to maturity** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **Amortized cost**        | ** ** | **Fair value** | ** ** |
| ** **                                            | ** ** | **(In thousands)**        | ** ** |
| Securities  held to maturity:                         |       |                           |       |   |   |
| Mortgage-backed  securities — agency/residential |       | $                              | 13,346     |   | $ | 13,985 |   |
|                                                       |            |                                |            |  |  |  |  |

 

The following tables presentthe fair value and the unrealized loss on securities that were temporarilyimpaired as of September 30, 2010 and December 31, 2009, aggregated by majorsecurity type and length of time in a continuous unrealized loss position:

 
| ** **                                                  | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**       | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|-----------------|------------|
| **September 30, 2010**                            | ** ** | **Fair  value**                        | ** ** | **Unrealized  losses**               | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** |
| ** **                                                  | ** ** | **(In thousands)**                | ** ** |
| Description  of securities:                                 |       |                                   |       |                                 |       |            |       |   |   |   |   |   |   |
| *Available for Sale*                                        |       |                                   |       |                                 |       |            |       |   |   |   |   |   |   |
| State  and municipal                                        |       | $                                      | 36,930     |                                 | $          | (1,090          | )          | $ | — |   | $ | — |   | $ | 36,930 |   | $ | (1,090 | ) |
| Mortgage-backed  securities — agency/residential       |       | 100,279                                |       | (316                                 | )          | —          |       | — |   | 100,279 |   | (316 | ) |
| Mortgage-backed  securities — private/residential      |       | 979                                    |       | (9                                   | )          | —          |       | — |   | 979 |   | (9 | ) |
| Total  temporarily impaired                                 |       | $                                      | 138,188    |                                 | $          | (1,415          | )          | $ | — |   | $ | — |   | $ | 138,188 |   | $ | (1,415 | ) |
| ** **                                                  | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**       | ** ** |
| **December 31, 2009**                             | ** ** | **Fair  value**                        | ** ** | **Unrealized  losses**               | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** |
| ** **                                                  | ** ** | **(In thousands)**                | ** ** |
| Description  of securities:                                 |       |                                   |       |                                 |       |            |       |   |   |   |   |   |   |
| *Available for Sale*                                        |       |                                   |       |                                 |       |            |       |   |   |   |   |   |   |
| U.S.  government agencies and government-sponsored entities |       | $                                      | 17,129     |                                 | $          | (329            | )          | $ | — |   | $ | — |   | $ | 17,129 |   | $ | (329 | ) |
| State  and municipal                                        |       | 37,453                                 |       | (567                                 | )          | —          |       | — |   | 37,453 |   | (567 | ) |
| Mortgage-backed  securities — agency/residential       |       | 50,163                                 |       | (889                                 | )          | —          |       | — |   | 50,163 |   | (889 | ) |
| Mortgage-backed  securities — private/residential      |       | 13,959                                 |       | (567                                 | )          | —          |       | — |   | 13,959 |   | (567 | ) |
| Total  temporarily impaired                                 |       | $                                      | 118,704    |                                 | $          | (2,352          | )          | $ | — |   | $ | — |   | $ | 118,704 |   | $ | (2,352 | ) |

 

In determining whether ornot there is an other-than-temporary-impairment (OTTI) for debt securities,management considers many factors, including: (1) the length of time andthe extent to which the fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer, (3) whether themarket decline was affected by macroeconomic conditions, and (4) whetherthe Company has the intention to sell the debt security or more likely than notwill be required to sell the debt security before its anticipated recovery. Theassessment of 

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements (Continued)**

 

whether an other-than-temporarydecline exists involves a high degree of subjectivity and judgment and is basedon the information available to management at a point in time.

 

At September 30 2010, the Companyowned one private label mortgage-backed security (MBS), six agencymortgage-backed securities and one municipal bond in unrealized loss positions.  The municipal bond is a revenue bondguaranteed by the revenues from a local hospital.  No security was in an unrealized lossposition for greater than twelve months at September 30, 2010.  Generally, the fair value of our availablefor sale securities fluctuates as a result of changes in market interestrates.  The municipal bond mentionedabove accounts for approximately 77% of the total unrealized loss at September30, 2010.

 

All of the Company’smortgage-backed securities are backed by either a U.S. Government agency orgovernment-sponsored agency, except for three private-label mortgage-backedsecurities with a total fair value of $9.0 million.  Each of these private-label securities aresenior tranches that were rated AAA by at least one major rating agency atSeptember 30, 2010.  The unrealized lossreflected by one of our private label securities is attributable to changes ininterest rates and liquidity and not reflective of credit quality.

 

The Bank’s municipal bondsecurities have all been rated investment grade or higher by various ratingagencies or have been subject to an annual internal review process bymanagement. This annual review process for non-rated securities considers areview of the issuers’ most recent financial statements, including the relatedcash flows and interest payments.   Inaddition, we perform a quarterly review of the significant revenue bonddiscussed above.  Based on the creditratings of our bonds, our annual review of all non-rated securities and thequarterly review of the significant revenue obligation, we concluded that theunrealized loss position at September 30, 2010 is the result of the level ofmarket interest rates and not a result of the underlying issuer’s ability torepay.

 

We do not intend to sell any of thedebt securities in our portfolio with an unrealized loss and do not believethat it is more likely than not that we will be required to sell any of thesesecurities prior to a recovery in their value. The fair value of these debtsecurities is expected to recover as the bonds approach maturity. Accordingly,we have not recognized any OTTI in our consolidated statements of operations.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

**(3)****                 ****Loans**

 

*A summary of net loans held forinvestment by loan type at the dates indicated is as follows:*

* *
| ** **                        | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(In thousands)**      | ** ** |
| Loans  on real estate:            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Residential  and commercial       |       | $                            | 740,106    |                        | $          | 760,719 |   |
| Construction                      |       | 56,624                       |       | 105,612                     |       |
| Equity  lines of credit           |       | 51,903                       |       | 54,852                      |       |
| Commercial  loans                 |       | 370,281                      |       | 521,016                     |       |
| Agricultural  loans               |       | 16,088                       |       | 18,429                      |       |
| Lease  financing                  |       | 4,014                        |       | 4,011                       |       |
| Installment  loans to individuals |       | 30,303                       |       | 36,175                      |       |
| Overdrafts                        |       | 627                          |       | 358                         |       |
| SBA and  other                    |       | 21,595                       |       | 20,997                      |       |
|                              |       | 1,291,541                    |       | 1,522,169                   |       |
| Less:                             |       |                         |       |                        |       |
| Allowance  for loan losses        |       | (41,898                      | )          | (51,991                     | )          |
| Unearned  discount                |       | (2,049                       | )          | (2,561                      | )          |
| Net  Loans                        |       | $                            | 1,247,594  |                        | $          | 1,467,617 |   |

 

*A summary of transactions in theallowance for loan losses for the period indicated is as follows:*

* *
| ** **                                  | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                  | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                                  | ** ** |
| Balance,  beginning of period               |       | $                                                        | 46,866     |                                                    | $          | 43,041 |   | $ | 51,991 |   | $ | 44,988 |   |
| Provision  for loan losses                  |       | 2,500                                                    |       | 20,000                                                  |       | 14,900 |   | 41,110 |   |
| Loans  charged-off                          |       | (7,953                                                   | )          | (14,618                                                 | )          | (26,142 | ) | (38,389 | ) |
| Recoveries  on loans previously charged-off |       | 485                                                      |       | 615                                                     |       | 1,149 |   | 1,329 |   |
| Balance,  end of period                     |       | $                                                        | 41,898     |                                                    | $          | 49,038 |   | $ | 41,898 |   | $ | 49,038 |   |

 

*The following table details keyinformation regarding the Company’s impaired loans at the dates indicated:*

* *
| ** **                                     | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **(In thousands)**      | ** ** |
| Impaired  loans with a valuation allowance     |       | $                            | 14,985     |                        | $          | 21,039 |   |
| Impaired  loans without a valuation allowance  |       | 55,356                       |       | 38,668                      |       |
| Total  impaired loans                          |       | $                            | 70,341     |                        | $          | 59,707 |   |
| Valuation  allowance related to impaired loans |       | $                            | 3,539      |                        | $          | 6,603 |   |

 

Loans, for which the terms havebeen modified, and for which the borrower is experiencing financialdifficulties, are considered troubled debt restructurings and are classified asimpaired.  As of September 30, 2010,we had $26,664,000 of loans with terms that were modified in troubled debtrestructurings, with a total allocated allowance for loan loss of$1,858,000.   Troubled debtrestructurings were immaterial at December 31, 2009.  The troubled debt restructurings are includedin impaired loans above.  The Company hasnot committed additional funds to borrowers whose loans are classified astroubled debt restructurings.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

*The following table is a summaryof interest recognized and cash-basis interest earned on impaired loans:*

* *
| ** **                                            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                            | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                            | ** ** | **(In thousands)**                                  | ** ** |
| Average  of individually impaired loans during period |       | $                                                        | 67,873     |                                                    | $          | 68,170 |   | $ | 66,628 |   | $ | 62,343 |   |
| Interest  income recognized during impairment         |       | $                                                        | —     |                                                    | $          | — |   | $ | — |   | $ | 160 |   |
| Cash-basis  interest income recognized                |       | $                                                        | —     |                                                    | $          | — |   | $ | — |   | $ | 160 |   |

 

The gross interest income thatwould have been recorded in the year-to-date periods ended September 30,2010 and September 30, 2009, if the loans had been current in accordancewith their original terms and had been outstanding throughout the period (orsince origination, if held for part of the period), was $1,914,000 and$2,617,000, respectively.  At September 30,2010 and December 31, 2009, nonaccrual loans were $65,921,000 and$59,584,000, respectively.

 

**(4)       Other Real Estate Owned**

 

*Changesin the carrying amount of the Company’s other real estate owned for September 30,2010 and September 30, 2009 were as follows (in thousands):*

* *
| Balance  as of December 31, 2008:  |   | $       | 484    |   |
|-----------------------------------------|--------|---------|--------|--------|
| Additions  to OREO                      |   | 40,668  |   |
| Sales  Proceeds                         |   | (6,212  | )      |
| Losses  and write-downs, net of gains   |   | (2,694  | )      |
| Balance  as of September 30, 2009: |   | $       | 32,246 |   |
|                                    |   |    |   |   |
| Balance  as of December 31, 2009:  |   | $       | 37,192 |   |
| Additions  to OREO                      |   | 37,482  |   |
| Sales  Proceeds                         |   | (16,515 | )      |
| Losses  and write-downs, net of gains   |   | (12,459 | )      |
| Balance  as of September 30, 2010: |   | $       | 45,700 |   |

 

**(5)       Other Intangible Assets**

 

Other intangible assets withdefinite lives are amortized over their respective estimated useful lives totheir estimated residual values.  Theamortization expense represents the estimated decline in the value of theunderlying customer deposits acquired through past acquisitions.  As of September 30, 2010 and December 31,2009, the Company’s only intangible asset was its Core Deposit Intangible.

 

*The following table presents thegross amounts of core deposit intangible assets and the related accumulatedamortization at the dates indicated:*

 
| ** **                      | ** ** | ** **           | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|----------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **Useful life** | ** ** | **2010**                | ** ** | **2009**              | ** ** |
| ** **                      | ** ** | ** **           | ** ** | **(In thousands)** | ** ** |
| Core  deposit intangible assets |       | 7 - 15 years         |       | $                       | 62,975     |                  | $          | 62,975 |   |
| Accumulated  amortization       |       |                 |       | (47,638                 | )          | (43,753               | )          |
| Other  intangible assets, net   |       |                 |       | $                       | 15,337     |                  | $          | 19,222 |   |

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

*Following is the aggregate amortization expense recognized in each period:*

* *
| ** **            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **            | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **            | ** ** | **(In thousands)**                                  | ** ** |
| Amortization  expense |       | $                                                        | 1,285      |                                                    | $          | 1,559 |   | $ | 3,885 |   | $ | 4,722 |   |
|                       |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

**(6)****                 ****Borrowings**

 

At September 30,2010, our outstanding borrowings were $164,242,000 as compared to $164,364,000at December 31, 2009. These borrowings at September 30, 2010consisted of term notes at the Federal Home Loan Bank (“FHLB”).  We also maintain a line of credit at theFHLB. However, as of September 30, 2010 and December 31, 2009, therewas no balance outstanding on this line of credit.

 

The Bankhas executed a specific pledging and security agreement with the FHLB in theamount of $379,738,000 at September 30, 2010 and $195,338,000 at December 31,2009, which encompasses certain loans and securities as collateral for theseborrowings.  The maximum credit allowancefor future borrowings, including term notes and the line of credit, was$215,496,000 at September 30, 2010 and $30,974,000 at December 31,2009.

 

Theinterest rate on the line of credit varies with the federal funds rate, and was0.28% at September 30, 2010.  Theterm notes have fixed interest rates that range from 2.52% to 6.22%, with aweighted average rate of 3.17%.

 

**(7)****                    ****Subordinated Debentures and Trust PreferredSecurities**

 

The Company had a $41,239,000aggregate balance of subordinated debentures outstanding with a weightedaverage cost of 5.88% and 5.87% at September 30, 2010 and December 31, 2009,respectively. The subordinated debentures were issued in four separate series.Each issuance has a maturity of thirty years from its date of issue. Thesubordinated debentures were issued to trusts established by the Company (“Trusts”),which in turn issued $40 million of trust preferred securities. Generally andwith certain limitations, the Company is permitted to call the debenturessubsequent to the first five or ten years, as applicable, after issue ifcertain conditions are met, or at any time upon the occurrence and continuationof certain changes in either the tax treatment or the capital treatment of theTrusts, the debentures or the preferred securities.  As of September 30, 2010, the Companywas in compliance with all covenants of these subordinated debentures.

 

Under the terms of eachsubordinated debentures agreement, the Company has the ability to deferinterest on the debentures for a period of up to sixty months as long as it isin compliance with all covenants of the agreement.  On July 31, 2009, the Company notifiedthe trustees of the four trusts that it would defer interest on all four of itssubordinated debentures.  Such a deferralis not an event of default under each subordinated debentures agreement andinterest on the debentures continues to accrue during such deferralperiod.  Prior to paying any interest onthe subordinated debentures, the Company must obtain prior written approvalfrom the Federal Reserve Bank of Kansas City under the terms of its WrittenAgreement.

 

The Company is not considered theprimary beneficiary of these Trusts (variable interest entities), therefore thetrusts are not consolidated in the Company’s financial statements, but ratherthe subordinated debentures are shown as a liability.  The Company’s investment in the common stockof each Trust is included in other assets in the consolidated balance sheets.

 

Although the securities issued byeach of the Trusts are not included as a component of stockholders’ equity inthe consolidated balance sheets, the securities are treated as capital forregulatory purposes. Specifically, under applicable regulatory guidelines, the$40 million of securities issued by the trusts, along with the $63.4 million of9% Series A Convertible Preferred Stock, qualify as Tier 1 capital up to amaximum of 25% of capital on an aggregate basis. Any amount that exceeds 25%qualifies as Tier 2 capital.  At September 30,2010, approximately $40.0 million of the combined $103.4 million of the Trusts’securities and preferred stock outstanding qualified as Tier 1 capital. Theremaining $63.4 million is treated as Tier 2 capital.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

The Board of Governors of theFederal Reserve System, which is the holding company’s banking regulator, haspromulgated a modification of the capital regulations affecting  restricted core capital elements, includingtrust preferred securities and cumulative preferred stock. Under thismodification, beginning March 31, 2011, the Company is required to use amore restrictive formula to determine the amount of restricted core capitalelements that can be included in regulatory Tier 1 capital. The Company will beallowed to include in Tier 1 capital an amount of restricted core capitalelements equal to no more than 25% of the sum of all qualifying core capitalelements, including qualifying restricted core capital elements.   For purposes of both Tier 1 capital and the25% limitation,  certain intangibles,including core deposit intangibles, net of any related deferred income taxliability are deducted. The existing regulations in effect limit the amount ofrestricted core capital elements that can be included in Tier 1 capital to 25%of the sum of qualifying core capital elements without a deduction forpermitted intangibles.   The adoption ofthis modification is not expected to have a material impact on the inclusion ofour restricted core capital elements for purposes of Tier 1 capital.

 

Under the Dodd-Frank Wall StreetReform and Consumer Protection Act, certain trust preferred securities will nolonger be eligible to be included as Tier 1 capital for regulatorypurposes.  However, an exception to thisstatutory prohibition applies to securities issued prior to May 19, 2010by bank holding companies with less than $15 billion of total assets.  As we have less than $15 billion in totalassets and had issued all of our trust preferred securities prior to May 19,2010, we believe that our trust preferred securities will continue to beeligible to be treated as Tier 1 capital, subject to other rules andlimitations.

 

The Guaranty Capital Trust IIItrust preferred issuance on June 30, 2003, became callable at eachquarterly interest payment date starting on July 7, 2008.  The Company has not called this security onany of its quarterly interest payment dates.  The CenBank Trust III trust preferred issuance became callable at eachquarterly interest payment date starting on April 15, 2009.   The Company has not called this security onany of its quarterly interest payment dates.  The CenBank Trust I trust preferred issuance became callablesemi-annually starting on September 7, 2010.  Under the terms of the Written Agreement,regulatory approval is required prior to the call of any trust preferredissuance.

 

*The following table summarizesthe terms of each subordinated debenture issuance at September 30, 2010 (dollars in thousands):*

 
| ** **                 | ** ** | **Date  Issued** | ** ** | **Amount** | ** ** | **Maturity  Date** | ** ** | **Call  Date*** | ** ** | **Fixed or  Variable** | ** ** | **Rate Adjuster**  | ** ** | **Current  Rate** | ** ** | **Next Rate  Reset Date** | ** ** |
|----------------------------|------------|------------------|------------|------------|------------|--------------------|------------|-----------------|------------|-----------------------------|------------|-------------------------|------------|-------------------|------------|-------------------------------------|------------|
|                       |       |             |       |       |       |               |       |            |       |                        |       |                    |       |              |       |                                |       |
| CenBank Trust I            |       | 9/7/2000         |       | $          | 10,310     |               | 9/7/2030   |            | 3/7/2011   |                        | Fixed      |                    | N/A        |              | 10.60      | %                                   | N/A        |   |
| CenBank Trust II           |       | 2/22/2001        |       | 5,155      |       | 2/22/2031          |       | 2/22/2011       |       | Fixed                       |       | N/A                     |       | 10.20             | %          | N/A                                 |       |
| CenBank Trust III          |       | 4/8/2004         |       | 15,464     |       | 4/15/2034          |       | 1/15/2011       |       | Variable                    |       | LIBOR + 2.65% |       | 2.94              | %          | 10/15/2010                          |       |
| Guaranty Capital Trust III |       | 6/30/2003        |       | 10,310     |       | 7/7/2033           |       | 1/7/2011        |       | Variable                    |       | LIBOR + 3.10% |       | 3.39              | %          | 10/7/2010                           |       |
|                            |            |                  |            |            |            |                    |            |                 |            |                             |            |                         |            |                   |            |                                     |            |  |

 

----

* Calldate represents the earliest or next date the Company can call the debentures.

 

**(8)****               ****Commitments**

 

The Company is a party tocredit-related financial instruments with off-balance sheet risk in the normalcourse of business to meet the financing needs of its customers. Thesefinancial instruments include commitments to extend credit, stand-by letters ofcredit and commercial letters of credit. Such commitments involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized in the consolidated balance sheets.

 

The Bank’s exposure to credit lossis represented by the contractual amount of these commitments. The Bank followsthe same credit policies in making commitments as it does for on-balance sheetinstruments.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements (Continued)**

 

*At the dates indicated, thefollowing commitments were outstanding:*

 
| ** **                          | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **(In thousands)**      | ** ** |
| Commitments  to extend credit:      |       |                         |       |                        |       |
| Variable                            |       | $                            | 253,939    |                        | $          | 264,616 |   |
| Fixed                               |       | 24,770                       |       | 40,486                      |       |
| Total  commitments to extend credit |       | $                            | 278,709    |                        | $          | 305,102 |   |
|                                |       |                         |       |                        |       |   |   |
| Standby  letters of credit          |       | $                            | 12,695     |                        | $          | 14,917 |   |
| Commercial  letters of credit       |       | $                            | 11,000     |                        | $          | 11,000 |   |

 

At September 30, 2010, therates on the fixed rate commitments to extend credit ranged from 2.01 to 9.25%.

 

Commitments to extend credit areagreements to lend to a customer as long as there is no violation of anycondition established in the contract. Commitments generally have fixedexpiration dates or other termination clauses and may require payment of a fee.Commitments can, and often do, expire without being drawn upon. Therefore, thetotal commitment amounts do not necessarily represent future cash requirements.Off-balance sheet risk to credit loss exists up to the face amount of theseinstruments, although material losses are not anticipated.  The same credit policies are used to makesuch commitments as are used for loans, including obtaining collateral, ifnecessary, at exercise of the commitment.

 

Commitments to extend credit underoverdraft protection agreements are commitments for possible future extensionsof credit to existing deposit customers. These lines of credit areuncollateralized and usually do not contain a specified maturity date and mightnot be drawn upon to the total extent to which the Company is committed.

 

Stand-by letters of credit areconditional commitments issued by the Bank to guarantee the performance of acustomer to a third party. Those letters of credit are primarily issued tosupport public and private borrowing arrangements.  Essentially all letters of credit issued haveexpiration dates within one year. The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loan facilitiesto customers. The Bank generally holds collateral supporting those commitmentsif deemed necessary.

 

The Bank enters into commercialletters of credit on behalf of its customers, which authorize a third party todraw drafts on the Bank up to a stipulated amount and with specific terms andconditions. A commercial letter of credit is a conditional commitment on thepart of the Bank to provide payment on drafts drawn in accordance with theterms of the commercial letter of credit.

 

**(9)****                    ****Fair Value Measurements and FairValue of Financial Instruments**

 

Fair value is the exchange pricethat would be received for an asset or paid to transfer a liability (exitprice) in the principal or most advantageous market for the asset or liabilityin an orderly transaction between market participants on the measurement date.   There are three levels of inputs that may beused to measure fair values:

 

Basis of Fair Value Measurement:

 

Level 1 - Unadjusted quoted pricesin active markets that are accessible at the measurement date for identical,unrestricted assets.

 

Level 2 -  Significantother observable inputs other than Level 1 prices such as quoted prices inmarkets that are not active, quoted prices for similar assets, or other inputsthat are observable, either directly or indirectly, for substantially the fullterm of the asset.

 

Level 3 - Prices or valuationtechniques that require inputs that are both significant to the fair valuemeasurement and are unobservable (i.e., supported by little or no marketactivity).

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

A financial instrument’s levelwithin the fair value hierarchy is based on the lowest level of input that issignificant to the fair value measurement.

 

The fair values of securitiesavailable for sale are generally determined by matrix pricing, which is amathematical technique widely used in the industry to value debt securitieswithout relying exclusively on quoted prices for the specific securities butrather by relying on the securities’ relationship to other benchmark quotedsecurities (Level 2 inputs).

 

The fair value of loans held forsale is based upon binding contracts and quotes from third party investors(Level 2 inputs).

 

Impaired loans are evaluated andvalued at the time the loan is identified as impaired, at the lower of cost orfair value.  Fair value is measured basedon the value of the collateral securing these loans and is classified at aLevel 3 in the fair value hierarchy. Collateral may be real estate and/or business assets includingequipment, inventory and/or accounts receivable and is valued based onappraisals performed by qualified licensed appraisers hired by theCompany.   Appraised and reported valuesmay be discounted based on management’s historical knowledge, changes in marketconditions from the time of valuation, and/or management’s expertise andknowledge of the client and client’s business. Such discounts are typically significant and result in a Level 3classification of the inputs for determining fair value. Impaired loans arereviewed and evaluated on at least a quarterly basis for additional impairmentand adjusted accordingly, based on the same factors identified above.

 

Thefair value of derivatives is generally derived from market-observable data suchas interest rates, volatilities, and information derived from or corroboratedby that market-observable data, which generally fall into Level 2 inputs.However, a significant input into the fair value of the derivatives is a creditvaluation adjustment, which uses credit spreads that are typically derived bymanagement or obtained from a third party data provider that provides animplied credit spread for public entities. As a result, the credit spreads are generally unobservable to themarket, rendering them a Level 3 input.

 

Level3 is for positions that are not traded in active markets or are subject totransfer restrictions, and/or where valuations are adjusted to reflectilliquidity and/or non-transferability. Such adjustments are generally based onavailable market evidence. In the absence of such evidence, management’s bestestimate is used.  Management’s best estimateconsists of both internal and external support on the Level 3 investment.  Internal cash flow models using a presentvalue formula along with indicative exit pricing obtained from broker/dealerswere used to determine the fair value for the Level 3 investment.  Subsequent to inception, management onlychanges Level 3 inputs and assumptions when corroborated by evidence such astransactions in similar instruments, completed or pending third-partytransactions in the underlying investment or comparable entities, subsequentrounds of financing, recapitalizations and other transactions across thecapital structure, offerings in the equity or debt markets, and changes infinancial ratios or cash flows.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

***Financial Assets andLiabilities Measured on a Recurring Basis***

 

Assets and liabilities measured atfair value on a recurring basis are summarized below:

 
| ** **                                                  | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant   Other Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------|------------|
| ** **                                                  | ** ** | **(In thousands)**                                                                             | ** ** |
| **Assets/Liabilities at September 30, 2010**           | ** ** | ** **                                                                                          | ** ** | ** **                                                           | ** ** | ** **                                            | ** ** | ** **  | ** ** |
| U.S. government agencies and government-sponsored  entities |       | $                                                                                                   | —     |                                                                 | $          | 21,835                                                |       | $           | —     |   | $ | 21,835 |   |
| State and municipal                                         |       | —                                                                                              |       | 19,361                                                               |       | 36,930                                                |       | 56,291      |       |
| Mortgage-backed securities — agency/residential        |       | —                                                                                              |       | 281,566                                                              |       | —                                                |       | 281,566     |       |
| Mortgage-backed securities — private/residential       |       | —                                                                                              |       | 8,984                                                                |       | —                                                |       | 8,984       |       |
| Marketable equity                                           |       | —                                                                                              |       | 1,519                                                                |       | —                                                |       | 1,519       |       |
| Other securities                                            |       | —                                                                                              |       | 360                                                                  |       | —                                                |       | 360         |       |
| Derivative  assets                                          |       | —                                                                                              |       | —                                                               |       | 514                                                   |       | 514         |       |
| Derivative  liabilities                                     |       | —                                                                                              |       | —                                                               |       | (493                                                  | )          | (493        | )          |
|                                                        |       |                                                                                                |       |                                                                 |       |                                                  |       |        |       |
| **Assets/Liabilities at December 31, 2009**            |       |                                                                                                |       |                                                                 |       |                                                  |       |        |       |
| U.S. government agencies and government-sponsored  entities |       | $                                                                                                   | —     |                                                                 | $          | 17,129                                                |       | $           | —     |   | $ | 17,129 |   |
| State and municipal                                         |       | —                                                                                              |       | 23,374                                                               |       | 37,453                                                |       | 60,827      |       |
| Mortgage-backed securities — agency/residential        |       | —                                                                                              |       | 127,340                                                              |       | —                                                |       | 127,340     |       |
| Mortgage-backed securities — private/residential       |       | —                                                                                              |       | 13,959                                                               |       | —                                                |       | 13,959      |       |
| Marketable equity                                           |       | —                                                                                              |       | 1,519                                                                |       | —                                                |       | 1,519       |       |
| Other securities                                            |       | —                                                                                              |       | 360                                                                  |       | —                                                |       | 360         |       |
| Derivative  assets                                          |       | —                                                                                              |       | —                                                               |       | 206                                                   |       | 206         |       |
| Derivative  liabilities                                     |       | —                                                                                              |       | —                                                               |       | (151                                                  | )          | (151        | )          |

 

See Note 11, Derivatives andHedging Activity, for further discussion of the valuation of the derivatives asof September 30, 2010.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

Thetable below presents a reconciliation and income statement classification ofgains and losses for all assets measured at fair value on a recurring basisusing significant unobservable inputs (Level 3) for the three and nine monthsended September 30, 2010:

 

**Fair ValueMeasurements Using Significant Unobservable Inputs (Level 3)**

 
| ** **                                         | ** ** | **Three months ended  September 30, 2010** | ** ** | **Nine months ended  September 30, 2010** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                         | ** ** | **Net  Derivative  Assets and  Liabilities**              | ** ** | **State and  Municipal  Securities**                     | ** ** | **Net  Derivative  Assets and  Liabilities** | ** ** | **State and  Municipal  Securities** | ** ** |
| ** **                                         | ** ** | **(In thousands)**                                        | ** ** |
| Beginning  balance                                 |       | $                                                              | 36         |                                                          | $          | 35,591 |   | $ | 55 |   | $ | 37,453 |   |
| Total  unrealized gains (losses) included in:      |       |                                                           |       |                                                          |       |   |   |   |   |
| Net  Loss                                          |       | (15                                                            | )          | —                                                        |       | (34 | ) | — |   |
| Other  comprehensive income (loss)                 |       | —                                                         |       | 1,339                                                         |       | — |   | (523 | ) |
| Purchases,  sales, issuances, and settlements, net |       | —                                                         |       | —                                                        |       | — |   | — |   |
| Transfers  in and (out) of level three             |       | —                                                         |       | —                                                        |       | — |   | — |   |
| Balance  September 30, 2010                   |       | $                                                              | 21         |                                                          | $          | 36,930 |   | $ | 21 |   | $ | 36,930 |   |

 

***Financial Assets andLiabilities Measured on a Nonrecurring Basis***

 

The following representassets and liabilities measured at fair value on a non-recurring basis as of September 30,2010 and December 31, 2009.  Thevaluation methodology used to measure the fair value of these loans isdescribed earlier in the Note.

 
| ** **                         | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant  Other  Observable  Inputs (Level 2)** | ** ** | **Significant  Unobservable  Inputs (Level 3)** | ** ** | **Balance** | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------|------------|
| ** **                         | ** ** | **(In thousands)**                                                                             | ** ** |
| Assets  at September 30, 2010 |       |                                                                                                |       |                                                           |       |                                                      |       |        |       |
| Impaired  loans                    |       | $                                                                                                   | —     |                                                           | $          | —                                                    |       | $           | 32,483     |   | $ | 32,483 |   |
|                               |       |                                                                                                |       |                                                           |       |                                                      |       |        |       |
| Assets  at December 31, 2009  |       |                                                                                                |       |                                                           |       |                                                      |       |        |       |
| Impaired  loans                    |       | $                                                                                                   | —     |                                                           | $          | —                                                    |       | $           | 23,357     |   | $ | 23,357 |   |
| Loans  held for sale               |       | $                                                                                                   | —     |                                                           | $          | —                                                    |       | $           | 9,862      |   | $ | 9,862 |   |

 

Impaired loans, which are usuallymeasured for impairment using the fair value of collateral, had a carryingamount of $70,341,000 at September 30, 2010, after cumulative partialcharge-offs of $13,493,000.  In addition,these loans have a specific valuation allowance of $3,539,000 at September 30,2010.  Of the $70,341,000 impaired loanportfolio at September 30, 2010, $36,022,000 were carried at fair value asa result of the aforementioned charge-offs and specific valuation allowances.The remaining impaired loans valued at $34,320,000 were carried at cost at September 30,2010, as the fair value of the collateral on these loans exceeded the bookvalue for each individual credit. Charge-offs and changes in specific valuationallowances during 2010 on impaired loans carried at fair value at September 30,2010 resulted in an additional provision for loan losses of $7,292,000 duringthe third quarter 2010 and $21,885,000 for the nine months ended September 30,2010.  This provision was offset by areduction to the general component of the allowance for loan losses.   At December 31, 2009, impaired loanshad a carrying amount of $59,707,000 after a partial charge-off of$9,372,000.  In addition, these loans hada specific valuation allowance of $6,603,000 at December 31, 2009.  Of the $59,707,000 impaired loan portfolio atDecember 31, 2009, $30,235,000 were carried at fair value as a result ofthe aforementioned charge-offs and specific valuation allowances.   The remaining $29,472,000 were carried atcost at December 31, 2009, as the fair value of the collateral on theseloans exceeded the book value for each individual credit.

 

There were no loans held for saleas of September 30, 2010.  Loansheld for sale, which are carried at the lower of cost or fair value, werecarried at  a fair value of $9,862,000 atDecember 31, 2009, which is made up of the 

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements (Continued)**

 

original outstanding balances of$16,023,000, net of charge-offs taken at the date the loans were transferred toheld for sale of $6,161,000.

 

Impaired loans are reviewed andevaluated on at least a quarterly basis for additional impairment and adjustedaccordingly, based on the same factors identified above.

 

***Nonfinancial Assets andLiabilities Measured on a Nonrecurring Basis***

 

Nonfinancial assets and liabilitiesmeasured at fair value on a nonrecurring basis are summarized below      :

 
| ** **                                     | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------|------------|
| ** **                                     | ** ** | **(In thousands)**                                                                             | ** ** |
| Assets  at September 30, 2010             |       |                                                                                                |       |                                                       |       |                                                  |       |        |       |
| Other  real estate owned and foreclosed assets |       | $                                                                                                   | —     |                                                       | $          | —                                                |       | $           | 45,700     |   | $ | 45,700 |   |
|                                           |       |                                                                                                |       |                                                       |       |                                                  |       |        |       |
| Assets  at December 31, 2009              |       |                                                                                                |       |                                                       |       |                                                  |       |        |       |
| Other  real estate owned and foreclosed assets |       | $                                                                                                   | —     |                                                       | $          | —                                                |       | $           | 37,192     |   | $ | 37,192 |   |

 

Other real estate owned is valuedat the time the loan is foreclosed upon and the asset is transferred to otherreal estate owned.  The value is basedprimarily on third party appraisals, less costs to sell. The appraisals aresometimes further discounted based on management’s historical knowledge,changes in market conditions from the time of valuation, and/or management’sexpertise and knowledge of the client and client’s business. Such discounts aretypically significant and result in a Level 3 classification of the inputs fordetermining fair value. Other real estate owned is reviewed and evaluated on atleast an annual basis for additional impairment and adjusted accordingly, basedon the same factors identified above. Other real estate owned had a carryingamount of $45,700,000 at September 30, 2010, which is made up of anoutstanding balance of $55,936,000, with a valuation allowance of $10,236,000.

 

***Fair Value of FinancialInstruments***

 

The estimated fair values, andrelated carrying amounts, of the Company’s financial instruments are asfollows:

 
| ** **                                                                  | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                  | ** ** | **Carrying  amount**             | ** ** | **Fair value**             | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** |
| ** **                                                                  | ** ** | **(In thousands)**          | ** ** |
| Financial  assets:                                                          |       |                             |       |                            |       |   |   |   |   |
| Cash  and cash equivalents                                                  |       | $                                | 109,770    |                            | $          | 109,770 |   | $ | 234,483 |   | $ | 234,483 |   |
| Securities  available for sale                                              |       | 370,555                          |       | 370,555                         |       | 221,134 |   | 221,134 |   |
| Securities  held to maturity                                                |       | 13,346                           |       | 13,985                          |       | 9,942 |   | 10,428 |   |
| Bank  stocks                                                                |       | 17,230                           |       | n/a                             |       | 17,160 |   | n/a |   |
| Loans,  net                                                                 |       | 1,247,594                        |       | 1,281,766                       |       | 1,467,617 |   | 1,494,649 |   |
| Loans  held for sale                                                        |       | —                           |       | —                          |       | 9,862 |   | 9,862 |   |
| Accrued  interest receivable                                                |       | 6,760                            |       | 6,760                           |       | 6,675 |   | 6,675 |   |
| Interest  rate swaps, net                                                   |       | 21                               |       | 21                              |       | 55 |   | 55 |   |
|                                                                        |       |                             |       |                            |       |   |   |   |   |
| Financial  liabilities:                                                     |       |                             |       |                            |       |   |   |   |   |
| Deposits                                                                    |       | 1,512,479                        |       | 1,516,441                       |       | 1,693,290 |   | 1,700,549 |   |
| Securities  sold under agreements to repurchase and federal funds purchased |       | 17,951                           |       | 17,951                          |       | 22,990 |   | 22,990 |   |
| Subordinated  debentures                                                    |       | 41,239                           |       | 33,755                          |       | 41,239 |   | 33,768 |   |
| Long-term  borrowings                                                       |       | 164,242                          |       | 174,450                         |       | 164,364 |   | 171,345 |   |
| Accrued  interest payable                                                   |       | 4,916                            |       | 4,916                           |       | 3,398 |   | 3,398 |   |
|                                                                             |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements (Continued)**

 

The fair value of a financialinstrument is the current amount that would be exchanged between willingparties, other than in a forced liquidation. Fair value is best determinedbased upon quoted market prices. However, in many instances, there are noquoted market prices for the Company’s various financial instruments. In caseswhere quoted market prices are not available, fair values are based onestimates using present value or other valuation techniques.  Those techniques are significantly affectedby the assumptions used, including the discount rate and estimates of futurecash flows. Accordingly, the fair value estimates may not be realized in animmediate settlement of the instrument.

 

Nonfinancial instruments areexcluded from the above disclosure. Therefore, the aggregate fair value amounts presented may notnecessarily represent the underlying fair value of the Company.

 

The following methods andassumptions were used by the Company in estimating fair value disclosures forfinancial instruments:

 

***(a) Cashand Cash Equivalents***

 

The carrying amounts of cash andshort-term instruments approximate fair values.

 

***(b) Securities and Bank Stocks***

 

Fair values for securitiesavailable for sale and held to maturity are generally determined by matrixpricing, which is a mathematical technique widely used in the industry to valuedebt securities without relying exclusively on quoted prices for the specificsecurities but rather by relying on the securities’ relationship to otherbenchmark quoted securities.

 

It is not practical to determinethe fair value of bank stocks due to restrictions placed on the transferabilityof FHLB stock, Federal Reserve Bank stock and Bankers’ Bank of the Weststock.  These three stocks comprise thebalance of bank stocks.

 

***(c) Loans***

 

Loans, net of unearned feesexcludes loans held for sale as these fair values are disclosed on a separateline on the table.   For variable-rateloans that reprice frequently and with no significant change in credit risk,fair values are based on carrying values. Fair values for other loans (e.g.,commercial real estate loans, investment property mortgage loans and commercialand industrial loans) are estimated using discounted cash flow analyses, usinginterest rates currently being offered for loans with similar terms toborrowers of similar credit quality. Impaired loans are valued at the lower of cost or fair value asdescribed above in this note.

 

Loans held for sale are carried atthe lower of cost or fair value. The fair value of loans held for sale is basedupon binding contracts and quotes from third party investors.

 

***(d) Interest Rate Swaps, net***

 

The fair value for interest rateswaps are determined by netting the discounted future fixed cash receipts, orpayments, and the discounted expected variable cash payments, or receipts.  The variable cash payments, or receipts, arebased on an expectation of future interest rates derived from forward interestrate curves.

 

***(e) Deposits***

 

The fair values disclosed fordemand deposits (e.g., interest and non-interest checking, passbook savings,and certain types of money market accounts) are, by definition, equal to theamount payable on demand at the reporting date (i.e., their carrying amount).The carrying amounts of variable-rate, fixed-term money market accounts andcertificates of deposit approximate their fair values at the reporting date.Fair values for fixed-rate certificates of deposit are estimated using adiscounted cash flows calculation that applies interest rates currently beingoffered on certificates to a schedule of aggregated expected monthly maturitieson time deposits.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

***(f) Short-term Borrowings***

 

The carrying amounts of federalfunds purchased, borrowings under repurchase agreements, and other short-termborrowings maturing within ninety days approximate their fair values.

 

***(g) Long-termBorrowings***

 

The fair values of the Company’slong-term borrowings are estimated using discounted cash flow analyses based onthe Company’s current incremental borrowing rates for similar types ofborrowing arrangements.

 

***(h) Subordinated Debentures***

 

The fair values of the Company’ssubordinated debentures are estimated using discounted cash flow analyses basedon the Company’s current incremental borrowing rates for similar types ofborrowing arrangements.

 

***(i) Accrued Interest Payable***

 

The carrying amounts of accruedinterest approximate fair value.

 

***(j) Off-balanceSheet Instruments***

 

Fair values for off-balance sheet,credit-related financial instruments are based on fees currently charged toenter into similar agreements, taking into account the remaining terms of theagreements and the counterparties’ credit standing. The fair value of commitmentsis not material.

 

**(10)   Stock-Based Compensation**

 

Under the Company’s Amended andRestated 2005 Stock Incentive Plan (the “Incentive Plan”), the Company’s Boardof Directors may grant stock-based compensation awards to nonemployeedirectors, key employees, consultants and prospective employees under the termsdescribed in the Incentive Plan. The allowable stock-based compensation awardsinclude the grant of Options, Restricted Stock Awards, Restricted Stock UnitAwards, Performance Stock Awards, Stock Appreciation Rights and otherEquity-Based Awards. The Incentive Plan provides that eligible participants maybe granted shares of Company voting common stock that are subject to forfeitureuntil the grantee vests in the stock award based on the established conditions,which may include service conditions, established performance measures or both.

 

Prior to vesting of the stockawards with a service vesting condition, each grantee shall have the rights ofa stockholder with respect to voting of the granted stock. The recipient is notentitled to dividend rights with respect to the shares of granted stock untilvesting occurs. Prior to vesting of the stock awards with performance vestingconditions, each grantee shall have the rights of a stockholder with respect tovoting of the granted stock. With respect to existing performance-based awardsgranted prior to 2010, the recipient is not entitled to dividend rights withrespect to the shares of granted stock until initial vesting occurs, at whichtime, the dividend rights will exist on vested and unvested shares of grantedstock, subject to termination of such rights under the terms of the IncentivePlan.  With respect to existingperformance-based awards granted in 2010, the recipient is not entitled to dividendrights with respect to the shares of granted stock until vesting occurs.

 

Other than the stock awards withservice and performance-based vesting conditions, no grants have been madeunder the Incentive Plan.

 

The Incentive Plan authorizesgrants of stock based compensation awards of up to 8,500,000 shares of Companyvoting common stock, subject to adjustments provided by the Incentive Plan. Asof September 30, 2010 and December 31, 2009, there were 1,989,017 and1,381,105 shares of unvested stock granted (net of forfeitures), with 5,784,031and 524,815 shares available for grant under the Incentive Plan,respectively.  Of the 1,989,017 sharesunearned at September 30, 2010, approximately 1,043,000 shares areexpected to vest.  Of the 1,403,517 sharesof restricted stock outstanding with a performance condition, we expect that515,678 shares will vest and that the remaining shares will expireunvested.   In August 2010, theCompany granted four of its executive officers an aggregate of 773,517 shares ofperformance-based restricted shares.  The vesting of 515,678 of these newly issued 

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements (Continued)**

 

performance-based restricted sharesis contingent upon the meeting of certain return on asset and net incomeperformance measures, as well as the termination of the Written Agreement datedJanuary 22, 2010.   Approximately50% of these 515,678 shares will vest if the targeted performance goals aremet, with a potential to earn up to the remaining 50% of these shares if thetargeted performance goals are exceeded by certain prescribed amounts.  Similarly, only 12.5% of the shares will vestif only the minimum threshold levels are met. If the minimum thresholds are not met, then no shares will vest.  The vesting of the remaining 257,839performance shares issued to the top four executives on August 6, 2010 iscontingent upon the termination of the Written Agreement and certain time-basedvesting criteria.

 

*A summary of the status ofunearned stock awards and the change during the period is presented in thetable below:*

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted Average Fair  Value on Award Date** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------------------------------------------------|------------|
| Unearned  at December 31, 2009  |       | 1,381,105  |       | $                                                                       | 7.15       |   |
| Awarded                              |       | 808,517    |       | 1.19                                                                    |       |
| Forfeited                            |       | (67,733    | )          | 5.27                                                                    |       |
| Vested                               |       | (132,872   | )          | 8.66                                                                    |       |
| Unearned  at September 30, 2010 |       | 1,989,017  |       | $                                                                       | 4.69       |   |

 

The Company recognized $832,000 and$758,000 in stock-based compensation expense for services rendered for the ninemonths ended September 30, 2010 and September 30, 2009, respectively.The total income tax effect recognized in the consolidated income statement forshare-based compensation arrangements was a $54,000 expense for the nine monthsended September 30, 2010, compared to a $131,000 expense for the sameperiod in 2009.  The 2010 income taxeffect related to share-based compensation arrangements included $370,000 in expenserelated to the write-off of the deferred tax asset for the difference betweenthe grant date value of the award as compared to fair value of the award uponvesting.  At September 30, 2010,compensation cost of $1,438,000 related to nonvested awards not yet recognizedis expected to be recognized over a weighted-average period of 2.6 years.  The fair value of awards that vested in thethird quarter 2010 was approximately $21,372.

 

**(11)**    **Derivatives and Hedging Activities**

 

*Risk Management Objective ofUsing Derivatives*

 

The Company is exposed to certainrisks arising from both its business operations and economic conditions.  The Company principally manages its exposuresto a wide variety of business and operational risks through management of itscore business activities. The Company manages economic risks, includinginterest rate, liquidity, and credit risk, primarily by managing the amount,sources, and duration of its assets and liabilities.  The Company’s existing interest ratederivatives result from a service provided to certain qualifying customers and,therefore, are not used to manage interest rate risk in the Company’s assets orliabilities. The Company manages a matched book with respect to its derivativeinstruments in order to minimize its net risk exposure resulting from suchtransactions.

 

*Fair Values of DerivativeInstruments on the Consolidated Balance Sheet*

 

The table below presents the fairvalue of the Company’s derivative financial instruments as well as theirclassification on the Consolidated Balance Sheet as of September 30, 2010.

 
| ** **                                                    | ** ** | **Asset  Derivatives**  | ** ** | **Liability  Derivatives** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                    | ** ** | **(In thousands)** | ** ** |
| As of  September 30, 2010:                                    |       |                    |       |                       |       |
| Derivatives  **not** designated as hedging  instruments       |       |                    |       |                       |       |
| Interest  rate products                                       |       | $                       | 514        |                       | $          | 493 |   |
| Total  derivatives **not** designated as  hedging instruments |       | $                       | 514        |                       | $          | 493 |   |

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

The asset and liability derivativesare respectively classified in other assets and interest payable and otherliabilities in the consolidated balance sheet.

 

*Non-designated Hedges*

 

None of the Company’s derivativesare designated as qualifying hedging relationships. Derivatives not designatedas hedges are not speculative and result from a service the Company provides tocertain customers, which the Company implemented during the first quarter of2009.  The Company executes interest rateswaps with commercial banking customers to facilitate the customer’s respectiverisk management strategies.  Thoseinterest rate swaps are simultaneously hedged by offsetting interest rate swapsthat the Company executes with a third party, such that the Company minimizesits net risk exposure resulting from such transactions.  As the interest rate swaps associated withthis program do not meet the strict hedge accounting requirements under FASCTopic 815, changes in the fair value of both the customer swaps and theoffsetting swaps are recognized directly in earnings.  As of September 30, 2010, the Companyhad two interest rate swaps with customers with a total notional amount of$23,176,000, and two offsetting interest rate swaps with a total notionalamount of $23,176,000; for an aggregate notional amount of $46,352,000 relatedto this program.

 

*Effect of Derivative Instrumentson the Consolidated Income Statement*

 

The tables below present the effectof the Company’s derivative financial instruments on the Consolidated IncomeStatement for the nine months ended September 30, 2010:

 
| ** **                                                                 | ** ** | **Location of Gain or (Loss)**      | ** ** | **Amount of Gain (Loss) Recognized in Income  on Derivatives** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| **Derivatives Not Designated  as Hedging Instruments** | ** ** | **Recognized in Income on  Derivatives** | ** ** | **Three Months Ended  September 30, 2010**                                    | ** ** | **Nine Months Ended  September 30, 2010** | ** ** |
| ** **                                                                 | ** ** | ** **                                              | ** ** | **(In thousands)**                                                                           | ** ** |
| Interest  rate products                                                    |       | Other non-interest income                               |       | $                                                                                                 | (15        | ) | $ | (34 | ) |
|                                                                       |       |                                                    |       |                                                                                              |       |   |   |
| Total                                                                      |       |                                                    |       | $                                                                                                 | (15        | ) | $ | (34 | ) |

 

**(12)**    **Capital Ratios**

 

TheCompany’s capital ratios exceed the regulatory capital requirement of “well-capitalized”at September 30, 2010 and December 31, 2009 as follows:

 
| ** **                      | ** ** | **Ratio at  September 30,  2010** | ** ** | **Ratio at  December 31,  2009** | ** ** | **Minimum  Capital  Requirement** | ** ** | **Minimum  Requirement for  “Well  Capitalized”  Institution** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------------------------|------------|
|                            |       |                                        |       |                                       |       |                              |       |                                                                          |       |
| Total Risk-Based Capital Ratio  |       |                                        |       |                                       |       |                              |       |                                                                          |       |
| Consolidated                    |       | 15.28                                       | %          | 13.80                                      | %          | 8.00                              | %          | N/A                                                                           |       |
| Guaranty Bank and Trust Company |       | 14.33                                       | %          | 12.82                                      | %          | 8.00                              | %          | 10.00                                                                         | %          |
| Tier 1 Risk-Based Capital Ratio |       |                                        |       |                                       |       |                              |       |                                                                          |       |
| Consolidated                    |       | 9.86                                        | %          | 9.43                                       | %          | 4.00                              | %          | N/A                                                                           |       |
| Guaranty Bank and Trust Company |       | 13.06                                       | %          | 11.55                                      | %          | 4.00                              | %          | 6.00                                                                          | %          |
| Leverage Ratio                  |       |                                        |       |                                       |       |                              |       |                                                                          |       |
| Consolidated                    |       | 7.71                                        | %          | 7.89                                       | %          | 4.00                              | %          | N/A                                                                           |       |
| Guaranty Bank and Trust Company |       | 10.22                                       | %          | 9.66                                       | %          | 4.00                              | %          | 5.00                                                                          | %          |

 

**(13)  Written Agreement**

 

On January 22, 2010, theCompany and the Bank entered into a Written Agreement with the Federal ReserveBank of Kansas City (“Federal Reserve”) and the Colorado Division of Banking (“CDB”).   The Written Agreement requires the Bank tosubmit written plans within certain timeframes to the Federal Reserve and theCDB that addressed the following items: board oversight, credit risk managementpractices, commercial real estate concentrations, problem assets, reserves forloan and lease losses, capital, liquidity, brokered deposits, earnings and 

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements (Continued)**

 

overall condition.  The Agreement also requires the Company tosubmit to the Federal Reserve a written plan that addresses capital and awritten statement of the Company’s annual cash flow projections.  All written plans required to be submittedunder the Written Agreement were timely submitted and approved by the FederalReserve and/or CDB, respectively.

 

In addition, the Written Agreementplaces restrictions on the Bank accepting any new brokered deposits, but continuesto permit contractual rollovers and renewals of brokered deposits.  The Written Agreement also provides thatwritten approval must be obtained from the federal regulators prior toappointing any new director or senior executive officer or changing theresponsibilities of any senior executive officer and making indemnification andseverance payments.  Further, the WrittenAgreement provides that prior written approval must be obtained from theFederal Reserve, and in the case of the Bank, the CDB, prior to payingdividends.   Prior written approval mustalso be obtained from the Federal Reserve before the Company can incur,increase or guarantee any debt, take any other form of payment representing areduction in capital from the Bank, or make any distributions of interest,principal or other sums on subordinated debentures or trust preferredsecurities.  At September 30, 2010,the Company and the Bank are in compliance with all of the provisions of theWritten Agreement.

 

**(14)   TotalComprehensive Loss**

 

*The following table presents the components of other comprehensiveincome and total comprehensive loss for the periods presented:*

 
| ** **                                                                | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                | ** ** | **(In thousands)**                                  | ** ** |
| Net loss                                                                  |       | $                                                        | (4,007     | )                                                       | $          | (16,901 | ) | $ | (10,206 | ) | $ | (27,322 | ) |
| Other  comprehensive income:                                              |       |                                                     |       |                                                    |       |   |   |   |   |
| Change  in net unrealized gains, net                                      |       | 671                                                      |       | 1,121                                                   |       | 3,892 |   | 4,340 |   |
| Less:  Reclassification adjustments for losses (gains) included in income |       | (82                                                      | )          | 1                                                       |       | (97 | ) | 1 |   |
| Net  unrealized holding gains                                             |       | 589                                                      |       | 1,120                                                   |       | 3,795 |   | 4,339 |   |
| Income  tax expense                                                       |       | (224                                                     | )          | (424                                                    | )          | (1,443 | ) | (1,650 | ) |
| Other  comprehensive income                                               |       | 365                                                      |       | 696                                                     |       | 2,352 |   | 2,689 |   |
| Total  comprehensive loss                                                 |       | $                                                        | (3,642     | )                                                       | $          | (16,205 | ) | $ | (7,854 | ) | $ | (24,633 | ) |

 

**(15)     PreferredStock**

 

On August 11, 2009, theCompany issued 59,053 shares of 9% non-cumulative Series A ConvertiblePreferred Stock, which resulted in additional capital of $57,846,000, net ofexpenses.  The liquidation preference forthe Series A Convertible Preferred Stock is $1,000 per share.  The Series A Convertible Preferred Stockis not redeemable.  Each share of Series AConvertible Preferred Stock will automatically convert into shares of theCompany’s common stock on the fifth anniversary of the issuance date of the Series AConvertible Preferred Stock, or August 11, 2014, subject to certainlimitations. The preferred stock holders may elect to convert their shares of Series AConvertible Preferred Stock into shares of the Company’s common stock prior tothe mandatory conversion of the Series A Convertible Preferred Stockfollowing the earlier of the second anniversary of the issuance date the Series AConvertible Preferred Stock, or August 11, 2011, and the occurrence ofcertain events resulting in the conversion, exchange or reclassification of theCompany’s common stock. Each share of Series A Convertible Preferred Stockwill be convertible into shares of the Company’s common stock at a conversionprice of $1.80 per share, adjustable downward in $0.04 increments to $1.50 pershare in the event of certain nonpayments of dividends (whether paid in cash orin kind) on the Series A Convertible Preferred Stock. The conversion priceof the Series A Convertible Preferred Stock is subject to customaryanti-dilution adjustments. Due to the conversion price adjustment resultingfrom nonpayment of dividends, for purposes of the risk-based and leveragecapital guidelines of the Board of Governors of the Federal Reserve System, andfor purposes of regulatory reporting, the Series A Convertible PreferredStock is treated as cumulative preferred stock (e.g., a restricted core capitalelement for Tier 1 capital purposes). The Company has paid quarterly dividends in the form of additionalshares of Series A Convertible Preferred Stock since November 2009.  The outstanding balance, net of stockissuance costs, of Series A Convertible Preferred Stock was $63,372,000and $59,227,000 at September 30, 2010 and December 31, 2009,respectively.  The liquidation preferencefor the Series A Convertible Preferred Shares was $64,579,000 and$60,434,000 at September 30, 2010 and December 31, 2009,respectively.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements(Continued)**

 

**(16) LegalContingencies**

 

In the ordinary course of ourbusiness, we are party to various legal actions, which we believe are incidentalto the operation of our business. Although the ultimate outcome and amount ofliability, if any, with respect to these legal actions to which we arecurrently a party, cannot presently be ascertained with certainty, in theopinion of management, based upon information currently available to us, anyresulting liability is not likely to have a material adverse effect on theCompany’s consolidated financial position, results of operations or cash flows.

 

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| **ITEM 2.** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |
|------------------|-------------------------------------------------------------------------------------------------|

 

ThisMD&A should be read together with our unaudited Condensed ConsolidatedFinancial Statements and unaudited Statistical Information included elsewherein this Report, Part II, Item 1A of this Report, and Items 1, 1A, 6,7, 7A and 8 of our 2009 Annual Report on Form 10-K.  Also, please see the disclosure in the “Forward-LookingStatements and Factors that Could Affect Future Results” section in this Reportfor certain other factors that could cause actual results or future events todiffer materially from those anticipated in the forward-looking statementsincluded in this Report or from historical performance.

 

**Overview**

 

Guaranty Bancorp is a bank holdingcompany with its principal business to serve as a holding company to its banksubsidiary.  Unless the context requiresotherwise, the terms “Company,” “us,” “we,” and “our” refers to GuarantyBancorp on a consolidated basis. References to the “Bank” refer to Guaranty Bank and Trust Company, ourbank subsidiary.

 

Through the Bank, we providebanking and other financial services throughout our targeted Colorado markets toconsumers and to small and medium-sized businesses, including the owners andemployees of those businesses.  Thesebanking products and services include accepting time and demand deposits,originating commercial loans, including energy loans, real estate loans,including construction loans, Small Business Administration guaranteed loansand consumer loans. We derive our income primarily from interest, includingloan origination fees, received on real estate-related loans, commercial loansand leases and consumer loans and, to a lesser extent, interest on investmentsecurities and other fees received in connection with servicing loan anddeposit accounts. Our major operating expenses are the interest we pay ondeposits and borrowings and general operating expenses. We rely primarily onlocally generated deposits to provide us with funds for making loans.

 

We are subject to competition fromother financial institutions and our operating results, like those of otherfinancial institutions operating exclusively or primarily in Colorado, aresignificantly influenced by economic conditions in Colorado, including thestrength of the real estate market. In addition, both the fiscal and regulatorypolicies of the federal government and regulatory authorities that governfinancial institutions and market interest rates also impact our financialcondition, results of operations and cash flows.

 

Based in part on the results of our regularlyscheduled examination by the Federal Reserve Bank of Kansas City (“FederalReserve”) and the Colorado Division of Banking (“CDB”) in May 2009, theholding company and the Bank entered into a Written Agreement on January 22,2010 with the Federal Reserve and CDB (the “Written Agreement”).  Asummary of the Written Agreement is located in the “Supervision and Regulation”section of Part I of the Company’s 2009 Annual Report Form 10-K forthe fiscal year ended December 31, 2009 under the heading “WrittenAgreement” and is incorporated herein by reference.

 

TheBoard of Directors and management of the Company and the Bank are committed toaddressing and resolving the matters raised in the Written Agreement on atimely basis.  All written plans requiredto be submitted pursuant to the Written Agreement (“Written Plans”) weresubmitted to the Federal Reserve and CDB in a timely manner during the firstquarter 2010.  Approval was obtained forthe Bank’s plan to reduce its reliance on brokered deposits, and such plan wasadopted by the Bank’s Board of Directors in March 2010.   Similarly, all remaining Written Plans wereapproved by the Federal Reserve and/or CDB, respectively, in the second quarter2010 and adopted by the Company.  At September 30,2010, both the Company and the Bank were in compliance with all provisions ofthe Written Agreement.

 

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**Earnings Summary**

 

*Table 1 summarizes certain keyfinancial results for the periods indicated:*

 

**Table 1**

 
| ** **                                           | ** ** | **Three Months Ended September 30,**                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                     | ** ** | ** **                                              | ** ** | **Change -** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change -** | ** ** |
| ** **                                           | ** ** | **2010**                                                                       | ** ** | **2009**                                                | ** ** | **Favorable  (Unfavorable)** | ** ** | **2010** | ** ** | **2009** | ** ** | **Favorable  (Unfavorable)** | ** ** |
| ** **                                           | ** ** | **(In thousands, except share data and ratios)** | ** ** |
| **Results of Operations:**                           |       |                                                                           |       |                                                    |       |   |   |   |   |   |   |   |   |
| Interest  income                                     |       | $                                                                              | 21,922     |                                                    | $          | 23,469 |   | $ | (1,547 | ) | $ | 67,296 |   | $ | 73,104 |   | $ | (5,808 | ) |
| Interest  expense                                    |       | 5,726                                                                          |       | 8,558                                                   |       | 2,832 |   | 18,335 |   | 26,615 |   | 8,280 |   |
| Net  interest income                                 |       | 16,196                                                                         |       | 14,911                                                  |       | 1,285 |   | 48,961 |   | 46,489 |   | 2,472 |   |
| Provision  for loan losses                           |       | 2,500                                                                          |       | 20,000                                                  |       | 17,500 |   | 14,900 |   | 41,110 |   | 26,210 |   |
| Net  interest income after provision for loan losses |       | 13,696                                                                         |       | (5,089                                                  | )          | 18,785 |   | 34,061 |   | 5,379 |   | 28,682 |   |
| Noninterest  income                                  |       | 2,553                                                                          |       | 2,522                                                   |       | 31 |   | 8,700 |   | 8,047 |   | 653 |   |
| Noninterest  expense                                 |       | 22,712                                                                         |       | 17,481                                                  |       | (5,231 | ) | 59,257 |   | 50,659 |   | (8,598 | ) |
| Loss  before income taxes                            |       | (6,463                                                                         | )          | (20,048                                                 | )          | 13,585 |   | (16,496 | ) | (37,233 | ) | 20,737 |   |
| Income  tax benefit                                  |       | (2,456                                                                         | )          | (3,147                                                  | )          | (691 | ) | (6,290 | ) | (9,911 | ) | (3,621 | ) |
| Net  loss                                            |       | (4,007                                                                         | )          | (16,901                                                 | )          | 12,894 |   | (10,206 | ) | (27,322 | ) | 17,116 |   |
| Preferred  stock dividends                           |       | (1,421                                                                         | )          | —                                                  |       | (1,421 | ) | (4,171 | ) | — |   | (4,171 | ) |
| Net  loss applicable to common stockholders          |       | $                                                                              | (5,428     | )                                                       | $          | (16,901 | ) | $ | 11,473 |   | $ | (14,377 | ) | $ | (27,322 | ) | $ | 12,945 |   |
| ** **                                           |       |                                                                           |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Common Share Data:**                               |       |                                                                           |       |                                                    |       |   |   |   |   |   |   |   |   |
| Basic  loss per common share                         |       | $                                                                              | (0.11      | )                                                       | $          | (0.33 | ) | $ | 0.22 |   | $ | (0.28 | ) | $ | (0.53 | ) | $ | 0.25 |   |
| Diluted  loss per common share                       |       | $                                                                              | (0.11      | )                                                       | $          | (0.33 | ) | $ | 0.22 |   | $ | (0.28 | ) | $ | (0.53 | ) | $ | 0.25 |   |
| Average  common shares outstanding                   |       | 51,698,129                                                                     |       | 51,416,909                                              |       | 281,220 |   | 51,655,592 |   | 51,347,916 |   | 307,676 |   |
| Diluted  average common shares outstanding           |       | 51,698,129                                                                     |       | 51,416,909                                              |       | 281,220 |   | 51,655,592 |   | 51,347,916 |   | 307,676 |   |

 
| ** **                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **Selected Balance Sheet Ratios:**                            |       |                   |       |                  |       |
| Total  risk-based capital to risk-weighted assets             |       | 15.28                  | %          | 13.80                 | %          |
| Loans,  net of unearned discount, to deposits                 |       | 85.26                  | %          | 89.74                 | %          |
| Allowance  for loan losses to loans, net of unearned discount |       | 3.25                   | %          | 3.42                  | %          |

 

The$4.0 million third quarter 2010 net loss (excluding the preferred stockdividend) is a $12.9 million improvement from the third quarter 2009 net lossof $16.9 million.  The primary reasonsfor the reduction in loss in the third quarter 2010 as compared to the sameperiod last year are a $17.5 million reduction in the provision for loanlosses, increases in net interest income and noninterest income and decreasesin most categories of noninterest expense. These items were partially offset bya $6.2 million increase in write-downs and losses on other real estate owned.

 

On August 11, 2009, theCompany issued 59,053 shares of Series A Convertible Preferred Stock, parvalue $0.001 per share, at a price of $1,000 per share.  The Company received $57.9 million, net ofexpense, from the issuance of these shares, which significantly increased ourcapital.  The quarterly preferred stockdividends paid in the form of additional shares of preferred on the preferredstock are included in the net loss allocable to common stockholders.

 

In the third quarter 2010, netinterest income increased by $1.3 million as compared to the same quarter in2009.   On a year-to-date basis, netinterest income improved by $2.5 million in 2010 as compared to the same periodin 2009.  Although average earning assetsdeclined on both a quarter-to-date and year-to-date basis in comparison to thesame periods in 2009, overall net interest income increased due to an increasein net interest margin resulting primarily from higher loan yields and lowerdeposit costs.

 

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The provision for loan lossesdecreased in the third quarter 2010 by approximately $17.5 million compared tothe same quarter in 2009.  The provisionfor loan losses also decreased by $26.2 million on a year-to-date basis in 2010as compared to the same period in 2009.  The overall declines in the quarter-to-date and year-to-date 2010provision for loan losses as compared to the same periods in 2009 reflect lowerlevels of loans outstanding, a lower specific component of the allowance forloan losses, a reduction in classified assets and a migration of highercharge-off quarters out of the historical loss component of the calculation.

 

Noninterest expense increased by$5.2 million in the third quarter 2010 as compared to the same quarter in2009.  This increase is primarilyattributable to a $6.2 million increase in other real estate owned expense as aresult of write-downs on other realestate owned properties caused by valuation adjustments and sales, partiallyoffset by decreases in most other categories of noninterest expense.   Similarly, noninterest expense increased by$8.6 million on a year-to-date basis in 2010 as compared to 2009 primarily as aresult of an $11.1 million increase in other real estate owned expense and a$0.3 million increase in insurance and assessments, partially offset bydecreases in nearly all other areas of noninterest expense.

 

**NetInterest Income and Net Interest Margin**

 

Net interest income, which is ourprimary source of income, represents the difference between interest earned onassets and interest paid on liabilities. The interest rate spread is thedifference between the yield on our interest-bearing assets and liabilities.Net interest margin is net interest income expressed as a percentage of averageinterest-earning assets.

 

*The following table summarizesthe Company’s net interest income and related spread and margin for the currentquarter and prior four quarters:*

 

**Table 2**

 
| ** **                                | ** ** | **Quarter Ended**               | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **September 30,  2010**         | ** ** | **June 30,  2010** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)** | ** ** |
| Net  interest income                      |       | $                                    | 16,196     |   | $ | 16,133 |   | $ | 16,632 |   | $ | 16,284 |   | $ | 14,911 |   |
| Interest  rate spread                     |       | 3.16                                 | %          | 3.09 | % | 3.10 | % | 2.81 | % | 2.65 | % |
| Net  interest margin                      |       | 3.53                                 | %          | 3.47 | % | 3.50 | % | 3.26 | % | 3.14 | % |
| Net interest margin, fully tax equivalent |       | 3.61                                 | %          | 3.55 | % | 3.58 | % | 3.34 | % | 3.23 | % |
|                                           |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thirdquarter 2010 net interest income of $16.2 million increased by $1.3 millionfrom the third quarter 2009.  Thisincrease is a result of a $3.1 million favorable rate variance, which waspartially offset by a $1.8 million unfavorable volume variance (see Table 5).

 

The 39basis point increase in net interest margin in the third quarter 2010 comparedto the third quarter 2009 resulted in a $3.1 million favorable rate variance.  This increase in net interest margin ispartly due to a 29 basis point increase in loan yields in the third quarter2010 as compared to the same period in 2009, as well as a 68 basis pointdecline in the cost of funds over the same period.  There were no overall declines in thetargeted federal funds rates or the prime rate throughout 2009 or 2010.  The increase in loan yields throughout 2009and into 2010 is a result of favorable repricing on matured loans, primarily asa result of the implementation of a minimum rate, or floor, on variable rateloans.  Similarly, the decline in thecost of funds is a result of lower deposit costs that are primarilyattributable to lower costs on renewed and new time deposits throughout 2009and into 2010.

 

The $1.8million unfavorable volume variance for the third quarter 2010 as compared tothe same period in 2009 is mostly attributable to a shift in earning assetsfrom higher yielding loan balances to lower yielding investments and overnightcash balances, as well as an overall $62.2 million decrease in average totalearning assets.  The average balance ofloans decreased in the third quarter 2010 as compared to the same period in theprior year by $275.3 million. Offsetting this decrease, the Company’s average investmentsecurities (including bank stocks) and overnight funds for the third quarter2010 increased by $192.0 million and $21.1 million, respectively, as comparedto the same quarter in 2009.  In thethird quarter 2010, investment securities and overnight funds had an averageyield of 3.25% and 0.25%, respectively, as compared to a yield of 5.58% forloans.   With respect to deposits, theaverage balances of lower-cost customer deposits increased in the third quarter2010 as compared to the same quarter in 2009. The $118.1 million decline in the average balance of higher cost timedeposit balances helped mitigate the overall impact of the unfavorable volumevariance by reducing the volume of some of our higher cost 

 

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liabilities.The decline in time deposits is mostly due to our efforts to decreasehigher-cost brokered and internet deposits. In the fourth quarter 2010, it is expected that approximately $48.5million of brokered and internet deposits will mature and not be renewed.

 

TheCompany believes that it remains asset sensitive at the end of the thirdquarter 2010, whereby an increase in rates will have a favorable impact onoverall net interest income, especially with greater increases in overall rates(see Table 18).

 

On alinked quarter basis, net interest margin increased by six basis points in thethird quarter 2010 as compared to the second quarter 2010.  This was primarily a result of an eight basispoint increase in loan yields from 5.50% to 5.58%.  Other items contributing to the increase innet interest margin in the third quarter 2010 include a favorable change in themix of earning assets in the third quarter 2010 as compared to the secondquarter 2010, with a $39.0 million reduction in average overnight funds and athree basis point decrease in the overall cost of funds.

 

*The following table summarizesthe Company’s net interest income and related spread and margin for theyear-to-date periods presented:*

 

**Table 3**

 
| ** **                                | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **September 30,  2010**    | ** ** | **September 30,  2009** | ** ** |
| Net interest income                       |       | $                               | 48,961     |   | $ | 46,489 |   |
| Interest rate spread                      |       | 3.12                            | %          | 2.68 | % |
| Net interest margin                       |       | 3.50                            | %          | 3.26 | % |
| Net interest margin, fully tax equivalent |       | 3.58                            | %          | 3.34 | % |
|                                           |            |                                 |            |  |  |  |  |

 

For thenine month period ended September 30, 2010, net interest income increasedby $2.5 million, or 5.3%, as compared to the same period in 2009.  This increase is due to a $10.8 millionfavorable rate variance partially offset by an $8.3 million unfavorable volumevariance (see Table 5).

 

Thefavorable rate variance of $10.8 million for year-to-date 2010 is primarilyattributable to a 30 basis point increase in the yield on loans combined with a76 basis point decrease in the cost of interest-bearing liabilities.  The Federal Open Markets Committee (FOMC) ofthe Federal Reserve Board has not changed the target federal funds rate since December 2008.  The improvement in loan yields and decreasein deposit costs is due mostly to the renewal of loans at higher rates and therenewal of deposits at lower rates in 2009 and 2010.   The overall cost of time deposits decreasedfrom 3.41% for the first nine months of 2009 to 2.05% for the same period in2010, a decrease of 136 basis points.

 

The $8.3million unfavorable volume variance for the year-to-date period in 2010 ascompared to the same period in 2009 is the combination of a $35.4 milliondecrease in average earning assets and a shift in allocation from higheryielding loan balances to lower yielding investment securities and overnightfunding balances.   Average loan balancesdecreased by $301.8 million for the first nine months of 2010 as compared tothe same period in 2009.  Averageinvestment securities and bank stocks increased by $150.6 million, whileaverage overnight funding balances increased $115.8 million for theyear-to-date period in 2010 as compared to the same period in 2009.   The yields on investment securities andovernight funds were 3.54% and 0.25% for the first nine months of 2010 ascompared to a loan yield of 5.58% during the same period.  This shift from higher yielding loans tolower yielding investments and overnight funds negatively impacted our marginin 2010.  Partially offsetting theunfavorable mix in earning assets was a decrease in higher cost time depositbalances.  Average time depositsdecreased by $63.4 million for the first nine months of 2010 as compared to thesame period in 2009, creating a favorable $1.5 million volume variance on netinterest income.

 

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The following table presents, forthe periods indicated, average assets, liabilities and stockholders’ equity, aswell as the net interest income from average interest-earning assets and theresultant annualized yields and costs expressed in percentages.

 

**Table 4**

 
| ** **                                          | ** ** | **Quarter Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                          | ** ** | **2010**                                       | ** ** | **2009** | ** ** |
| ** **                                          | ** ** | **Average  Balance**                           | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**           | ** ** |
| **ASSETS:**                                         | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest-earning assets:**                        | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  loans, net of unearned fees (1)(2)(3)        |       | $                                              | 1,351,752  |   | $ | 19,012 |   | 5.58 | % | $ | 1,627,066 |   | $ | 21,710 |   | 5.29 | % |
| Investment  securities (1)                          |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 271,357                                        |       | 1,966 |   | 2.87 | % | 72,773 |   | 751 |   | 4.10 | % |
| Tax-exempt                                          |       | 57,119                                         |       | 682 |   | 4.73 | % | 64,474 |   | 763 |   | 4.70 | % |
| Bank  Stocks (4)                                    |       | 17,174                                         |       | 185 |   | 4.25 | % | 16,410 |   | 184 |   | 4.44 | % |
| Other  earning assets                               |       | 122,658                                        |       | 77 |   | 0.25 | % | 101,585 |   | 61 |   | 0.24 | % |
| Total  interest-earning assets                      |       | 1,820,060                                      |       | 21,922 |   | 4.78 | % | 1,882,308 |   | 23,469 |   | 4.95 | % |
| **Non-earning assets:**                             |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Cash  and due from banks                            |       | 25,147                                         |       |   |   |   |   | 25,396 |   |   |   |   |   |
| Other  assets                                       |       | 117,621                                        |       |   |   |   |   | 114,975 |   |   |   |   |   |
| **Total assets**                                    |       | $                                              | 1,962,828  |   |   |   |   |   | $ | 2,022,679 |   |   |   |   |   |
|                                                |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**      |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                      |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                            |       | $                                              | 168,310    |   | $ | 87 |   | 0.20 | % | $ | 149,994 |   | $ | 96 |   | 0.25 | % |
| Money  market                                       |       | 341,511                                        |       | 662 |   | 0.77 | % | 324,686 |   | 690 |   | 0.84 | % |
| Savings                                             |       | 77,027                                         |       | 43 |   | 0.22 | % | 72,514 |   | 58 |   | 0.32 | % |
| Time  certificates of deposit                       |       | 594,442                                        |       | 2,896 |   | 1.93 | % | 712,557 |   | 5,737 |   | 3.19 | % |
| Total  interest-bearing deposits                    |       | 1,181,290                                      |       | 3,688 |   | 1.24 | % | 1,259,751 |   | 6,581 |   | 2.07 | % |
| Borrowings:                                         |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase  agreements                              |       | 17,501                                         |       | 26 |   | 0.60 | % | 12,796 |   | 29 |   | 0.89 | % |
| Federal  funds purchased (5)                        |       | 48                                             |       | — |   | 0.98 | % | 22 |   | — |   | 0.15 | % |
| Subordinated  debentures                            |       | 41,239                                         |       | 683 |   | 6.57 | % | 41,239 |   | 625 |   | 6.01 | % |
| Borrowings                                          |       | 164,259                                        |       | 1,329 |   | 3.21 | % | 164,434 |   | 1,323 |   | 3.19 | % |
| Total  interest-bearing liabilities                 |       | 1,404,337                                      |       | 5,726 |   | 1.62 | % | 1,478,242 |   | 8,558 |   | 2.30 | % |
| Noninterest  bearing liabilities:                   |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                    |       | 347,288                                        |       |   |   |   |   | 345,831 |   |   |   |   |   |
| Other  liabilities                                  |       | 20,543                                         |       |   |   |   |   | 12,120 |   |   |   |   |   |
| Total  liabilities                                  |       | 1,772,168                                      |       |   |   |   |   | 1,836,193 |   |   |   |   |   |
| Stockholders’  Equity                          |       | 190,660                                        |       |   |   |   |   | 186,486 |   |   |   |   |   |
| **Total liabilities and stockholders’ equity** |       | $                                              | 1,962,828  |   |   |   |   |   | $ | 2,022,679 |   |   |   |   |   |
| Net  interest income                                |       |                                           |       | $ | 16,196 |   |   |   |   |   | $ | 14,911 |   |   |   |
| Net  interest margin                                |       |                                           |       |   |   | 3.53 | % |   |   |   |   | 3.14 | % |

 

----

| (1) Yields on loans and  securities have not been adjusted to a tax-equivalent basis.  Net interest margin on a fully  tax-equivalent basis would have been 3.61% and 3.23% for the three months  ended September 30, 2010 and September 30, 2009, respectively.  The tax-equivalent basis was computed by  calculating the deemed interest on municipal bonds and tax-exempt loans that  would have been earned on a fully taxable basis to yield the same after-tax  income, net of the interest expense disallowance under Internal Revenue Code  Sections 265 and 291, using a combined federal and state marginal tax rate of  38%.

 

(2) The loan average  balances and rates include nonaccrual loans.

 

(3) Net loan fees of $0.5  million and $0.6 million for the three months ended September 30, 2010  and 2009, respectively, are included in the yield computation.

 

(4) Includes Bankers Bank of  the West stock, Federal Agricultural Mortgage Corporation (Farmer Mac) stock,  Federal Reserve Bank stock and Federal Home Loan Bank stock.

 

(5) The interest expense  related to federal funds purchased for the third quarter 2010 and the third  quarter 2009 rounded to zero. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**Table 4 (Continued)**

 
| ** **                                          | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                          | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **                                          | ** ** | **Average  Balance**                                    | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**                    | ** ** |
| **ASSETS:**                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest-earning assets:**                        | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  loans, net of unearned fees (1)(2)(3)   |       | $                                                       | 1,420,534  |   | $ | 59,245 |   | 5.58 | % | $ | 1,722,321 |   | $ | 67,994 |   | 5.28 | % |
| Investment  securities (1)                          |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 217,503                                                 |       | 5,097 |   | 3.13 | % | 55,875 |   | 2,067 |   | 4.95 | % |
| Tax-exempt                                          |       | 58,270                                                  |       | 2,106 |   | 4.83 | % | 64,480 |   | 2,295 |   | 4.76 | % |
| Bank  Stocks (4)                                    |       | 17,140                                                  |       | 552 |   | 4.30 | % | 21,998 |   | 670 |   | 4.07 | % |
| Other  earning assets                               |       | 157,943                                                 |       | 296 |   | 0.25 | % | 42,133 |   | 78 |   | 0.25 | % |
| Total  interest-earning assets                      |       | 1,871,390                                               |       | 67,296 |   | 4.81 | % | 1,906,807 |   | 73,104 |   | 5.13 | % |
| **Non-earning assets:**                             |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Cash  and due from banks                            |       | 24,654                                                  |       |   |   |   |   | 27,279 |   |   |   |   |   |
| Other  assets                                       |       | 113,337                                                 |       |   |   |   |   | 98,983 |   |   |   |   |   |
| **Total assets**                                    |       | $                                                       | 2,009,381  |   |   |   |   |   | $ | 2,033,069 |   |   |   |   |   |
|                                                |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**      |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                      |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                            |       | $                                                       | 167,715    |   | $ | 251 |   | 0.20 | % | $ | 145,680 |   | $ | 274 |   | 0.25 | % |
| Money  market                                       |       | 334,133                                                 |       | 2,055 |   | 0.82 | % | 299,323 |   | 1,996 |   | 0.89 | % |
| Savings                                             |       | 74,782                                                  |       | 135 |   | 0.24 | % | 71,582 |   | 169 |   | 0.32 | % |
| Time  certificates of deposit                       |       | 650,196                                                 |       | 9,954 |   | 2.05 | % | 713,567 |   | 18,177 |   | 3.41 | % |
| Total  interest-bearing deposits                    |       | 1,226,826                                               |       | 12,395 |   | 1.35 | % | 1,230,152 |   | 20,616 |   | 2.24 | % |
| Borrowings:                                         |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase  agreements                              |       | 18,131                                                  |       | 101 |   | 0.75 | % | 14,667 |   | 97 |   | 0.88 | % |
| Federal  funds purchased                            |       | 113                                                     |       | 1 |   | 0.90 | % | 184 |   | 1 |   | 0.69 | % |
| Subordinated  debentures                            |       | 41,239                                                  |       | 1,894 |   | 6.14 | % | 41,239 |   | 1,945 |   | 6.31 | % |
| Borrowings                                          |       | 164,290                                                 |       | 3,944 |   | 3.21 | % | 167,569 |   | 3,956 |   | 3.16 | % |
| Total  interest-bearing liabilities                 |       | 1,450,599                                               |       | 18,335 |   | 1.69 | % | 1,453,811 |   | 26,615 |   | 2.45 | % |
| Noninterest  bearing liabilities:                   |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                    |       | 350,777                                                 |       |   |   |   |   | 395,827 |   |   |   |   |   |
| Other  liabilities                                  |       | 15,926                                                  |       |   |   |   |   | 11,573 |   |   |   |   |   |
| Total  liabilities                                  |       | 1,817,302                                               |       |   |   |   |   | 1,861,211 |   |   |   |   |   |
| Stockholders’  Equity                          |       | 192,079                                                 |       |   |   |   |   | 171,858 |   |   |   |   |   |
| **Total liabilities and stockholders’ equity** |       | $                                                       | 2,009,381  |   |   |   |   |   | $ | 2,033,069 |   |   |   |   |   |
| Net  interest income                                |       |                                                    |       | $ | 48,961 |   |   |   |   |   | $ | 46,489 |   |   |   |
| Net  interest margin                                |       |                                                    |       |   |   | 3.50 | % |   |   |   |   | 3.26 | % |

 

----

(1) Yields on loans andsecurities have not been adjusted to a tax-equivalent basis.  Net interest margin on a fully tax-equivalentbasis would have been 3.58% and 3.34% for the nine months ended September 30,2010 and September 30, 2009, respectively. The tax-equivalent basis was computed by calculating the deemed intereston municipal bonds and tax-exempt loans that would have been earned on a fullytaxable basis to yield the same after-tax income, net of the interest expensedisallowance under Internal Revenue Code Sections 265 and 291, using a combinedfederal and state marginal tax rate of 38%.

 

(2) The loan average balancesand rates include nonaccrual loans.

 

(3) Net loan fees of $1.5million and $2.5 million for the nine months ended September 30, 2010 and2009, respectively, are included in the yield computation.

 

(4) Includes Bankers Bank ofthe West stock, Federal Agricultural Mortgage Corporation (Farmer Mac) stock,Federal Reserve Bank stock and Federal Home Loan Bank stock.

 

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The following table presents thedollar amount of changes in interest income and interest expense for the majorcategories of our interest-earning assets and interest-bearing liabilities.Information is provided for each category of interest-earning assets andinterest-bearing liabilities with respect to (i) changes attributable tochanges in volume (i.e., changes in average balances multiplied by theprior-period average rate) and (ii) changes attributable to rate (i.e.,changes in average rate multiplied by prior-period average balances). Forpurposes of this table, changes attributable to both rate and volume, whichcannot be segregated, have been allocated proportionately to the change due tovolume and the change due to rate.

 

**Table 5**

 
| ** **                         | ** ** | **Three Months Ended September 30, 2010  Compared to Three Months Ended  September 30, 2009** | ** ** | **Nine Months Ended September 30, 2010  Compared to Nine Months Ended  September 30, 2009** | ** ** |
|------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Net Change**                                                                                                                                  | ** ** | **Rate**                                                                                                                                           | ** ** | **Volume** | ** ** | **Net Change** | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| ** **                         | ** ** | **(In thousands)**                                                                                                                              | ** ** |
| **Interest income:**               | ** ** | ** **                                                                                                                                           | ** ** | ** **                                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  Loans, net of unearned fees |       | $                                                                                                                                                    | (2,698     | )                                                                                                                                                  | $          | 1,268 |   | $ | (3,966 | ) | $ | (8,749 | ) | $ | 4,157 |   | $ | (12,906 | ) |
| Investment  Securities             |       |                                                                                                                                                 |       |                                                                                                                                               |       |   |   |   |   |   |   |   |   |
| Taxable                            |       | 1,215                                                                                                                                                |       | (149                                                                                                                                               | )          | 1,364 |   | 3,030 |   | (440 | ) | 3,470 |   |
| Tax-exempt                         |       | (81                                                                                                                                                  | )          | 7                                                                                                                                                  |       | (88 | ) | (189 | ) | 36 |   | (225 | ) |
| Bank  Stocks                       |       | 1                                                                                                                                                    |       | (5                                                                                                                                                 | )          | 6 |   | (118 | ) | 41 |   | (159 | ) |
| Other  earning assets              |       | 16                                                                                                                                                   |       | 3                                                                                                                                                  |       | 13 |   | 218 |   | 1 |   | 217 |   |
| Total  interest income             |       | (1,547                                                                                                                                               | )          | 1,124                                                                                                                                              |       | (2,671 | ) | (5,808 | ) | 3,795 |   | (9,603 | ) |
| **Interest expense:**              |       |                                                                                                                                                 |       |                                                                                                                                               |       |   |   |   |   |   |   |   |   |
| Deposits:                          |       |                                                                                                                                                 |       |                                                                                                                                               |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand           |       | (9                                                                                                                                                   | )          | (25                                                                                                                                                | )          | 16 |   | (23 | ) | (89 | ) | 66 |   |
| Money  market                      |       | (28                                                                                                                                                  | )          | (68                                                                                                                                                | )          | 40 |   | 59 |   | (119 | ) | 178 |   |
| Savings                            |       | (15                                                                                                                                                  | )          | (19                                                                                                                                                | )          | 4 |   | (34 | ) | (42 | ) | 8 |   |
| Time  certificates of deposit      |       | (2,841                                                                                                                                               | )          | (2,001                                                                                                                                             | )          | (840 | ) | (8,223 | ) | (6,726 | ) | (1,497 | ) |
| Repurchase  agreements             |       | (3                                                                                                                                                   | )          | 45                                                                                                                                                 |       | (48 | ) | 4 |   | (8 | ) | 12 |   |
| Federal  funds purchased           |       | —                                                                                                                                               |       | —                                                                                                                                             |       | — |   | — |   | — |   | — |   |
| Subordinated  debentures           |       | 58                                                                                                                                                   |       | 58                                                                                                                                                 |       | — |   | (51 | ) | (51 | ) | — |   |
| Borrowings                         |       | 6                                                                                                                                                    |       | 7                                                                                                                                                  |       | (1 | ) | (12 | ) | 75 |   | (87 | ) |
| Total  interest expense            |       | (2,832                                                                                                                                               | )          | (2,003                                                                                                                                             | )          | (829 | ) | (8,280 | ) | (6,960 | ) | (1,320 | ) |
| **Net interest income**            |       | $                                                                                                                                                    | 1,285      |                                                                                                                                               | $          | 3,127 |   | $ | (1,842 | ) | $ | 2,472 |   | $ | 10,755 |   | $ | (8,283 | ) |

 

**Provisionfor Loan Losses**

 

The provision for loan lossesrepresents a charge against earnings. The provision is the amount required tomaintain the allowance for loan losses at a level that, in our judgment, isadequate to absorb probable incurred loan losses in the loan portfolio. Theprovision for loan losses is based on our allowance methodology and reflectsour judgments about the adequacy of the allowance for loan losses.  In determining the amount of the provision,we consider certain quantitative and qualitative factors, including ourhistorical loan loss experience, the volume and type of lending we conduct, theresults of our credit review process, the amounts and severity of classified,criticized and nonperforming assets, regulatory policies, general economicconditions, underlying collateral values and other factors regardingcollectability and impairment.  Theamount of expected loss on our loan portfolio is influenced by the collateralvalue associated with our loans. Loans with greater collateral value lessen ourexposure to loan loss provision.

 

In the third quarter 2010, theCompany recorded a provision for loan losses of $2.5 million, compared to $20.0million in the third quarter 2009.   On ayear-to-date basis in 2010, the Company recorded a provision for loan losses of$14.9 million as compared to $41.1 million for the same period in 2009.

 

The provision for loan losses inthe third quarter 2010 consisted of approximately $7.3 million related to thechange in the specific component of the allowance for loan losses, net ofcharge-offs, partially offset by a decrease to the general component of theallowance for loan losses.  The generalcomponent of the allowance for loan losses declined primarily due to lowerlevels of loans, a decrease in classified loans and a migration of highercharge-off quarters out of the historical loss component of thecalculation.  The specific component ofthe allowance for loan losses at September 30, 2010 decreased relative to June 30,2010 and December 31, 2009 as certain impaired loans with a specificallocated component of the allowance at the end of the previous quarter werecharged off during 2010.   At September 30,2010, total impaired loans had cumulative partial charge-offs of approximately$13.5

 

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million.  The general component of the provision forloan losses is primarily related to the level of historical charge-offs.

 

The Company determined that theprovision for loan losses made during the third quarter 2010 was sufficient tomaintain our allowance for loan losses at a level which reflects the probableincurred losses inherent in the loan portfolio as of September 30, 2010.

 

Net charge-offs in the thirdquarter 2010 were $7.5 million, as compared to $14.0 million for the samequarter in 2009.  Net charge-offs for thefirst nine months of 2010 were $25.0 million as compared to $37.1 million inthe same period in 2009.

 

For a discussion of impaired loansand associated collateral values, see “Balance Sheet Analysis—NonperformingAssets” below.

 

For further discussion of themethodology and factors impacting management’s estimate of the allowance forloan losses, see “Balance Sheet Analysis— Allowance for Loan Losses” below.

 

**NoninterestIncome**

 

*The following table presents themajor categories of noninterest income for the current quarter and prior fourquarters:*

 

**Table 6**

 
| ** **                         | ** ** | **Quarter Ended**       | ** ** |
|------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **September 30,  2010** | ** ** | **June 30,  2010** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** |
| ** **                         | ** ** | **(In thousands)**      | ** ** |
| Noninterest  income:               |       |                         |       |   |   |   |   |   |   |   |   |
| Customer  service and other fees   |       | $                            | 2,343      |   | $ | 2,254 |   | $ | 2,214 |   | $ | 2,206 |   | $ | 2,281 |   |
| Gain  (loss) on sale of securities |       | 82                           |       | 1 |   | 14 |   | (1 | ) | (1 | ) |
| Gain on  sale of loans             |       | —                       |       | 1,196 |   | — |   | — |   | — |   |
| Other                              |       | 128                          |       | 274 |   | 194 |   | 127 |   | 242 |   |
| Total  noninterest income          |       | $                            | 2,553      |   | $ | 3,725 |   | $ | 2,422 |   | $ | 2,332 |   | $ | 2,522 |   |

 

Noninterestincome for the third quarter 2010 was up slightly compared to both the thirdquarter 2009 and the second quarter 2010, excluding the $1.2 million gain onsale of loans in the second quarter 2010.

 

*The following table presents themajor categories of noninterest income for the year-to-date periods presented:*

 

**Table 7**

 
| ** **                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September 30,  2010**    | ** ** | **September 30,  2009** | ** ** |
| ** **                         | ** ** | **(In thousands)**         | ** ** |
| Noninterest  income:               |       |                            |       |   |   |
| Customer  service and other fees   |       | $                               | 6,811      |   | $ | 7,314 |   |
| Gain  (loss) on sale of securities |       | 97                              |       | (1 | ) |
| Gain on  sale of loans             |       | 1,196                           |       | — |   |
| Other                              |       | 596                             |       | 734 |   |
| Total  noninterest income          |       | $                               | 8,700      |   | $ | 8,047 |   |

 

Forthe nine months ended September 30, 2010, noninterest income, excludingthe $1.2 million gain on sale of loans, decreased by $0.5 million compared tothe same period in 2009.   This decreaseis mostly due to lower account analysis fees and other service charges as somecustomers migrated to lower fee transaction accounts.

 

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**NoninterestExpense**

 

*The following table presents, forthe quarters indicated, the major categories of noninterest expense:*

 

**Table 8**

 
| ** **                         | ** ** | **Quarter Ended**       | ** ** |
|------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **September 30,  2010** | ** ** | **June 30,  2010** | ** ** | **March 31,  2010** | ** ** | **December   31, 2009** | ** ** | **September 30,  2009** | ** ** |
| ** **                         | ** ** | **(In thousands)**      | ** ** |
| Noninterest  expense:              |       |                         |       |   |   |   |   |   |   |   |   |
| Salaries  and employee benefits    |       | $                            | 6,551      |   | $ | 6,472 |   | $ | 6,563 |   | $ | 6,560 |   | $ | 6,536 |   |
| Occupancy  expense                 |       | 1,890                        |       | 1,836 |   | 1,890 |   | 1,854 |   | 1,908 |   |
| Furniture  and equipment           |       | 850                          |       | 967 |   | 976 |   | 1,060 |   | 1,103 |   |
| Amortization  of intangible assets |       | 1,285                        |       | 1,300 |   | 1,300 |   | 1,556 |   | 1,559 |   |
| Other  real estate owned           |       | 7,836                        |       | 3,115 |   | 2,749 |   | 3,281 |   | 1,654 |   |
| Insurance  and assessment          |       | 1,596                        |       | 1,825 |   | 1,812 |   | 1,612 |   | 1,688 |   |
| Professional  fees                 |       | 677                          |       | 739 |   | 877 |   | 963 |   | 516 |   |
| Other  general and administrative  |       | 2,027                        |       | 2,165 |   | 1,959 |   | 2,860 |   | 2,517 |   |
| Total  noninterest expense         |       | $                            | 22,712     |   | $ | 18,419 |   | $ | 18,126 |   | $ | 19,746 |   | $ | 17,481 |   |

 

The $5.2million increase in noninterest expense in the third quarter 2010 as comparedto the same period in 2009 is primarily the result of a $6.2 million increasein other real estate owned expense, partially offset by a $0.5 million decreasein other general and administrative expenses and a $0.3 million decrease incombined occupancy and furniture and equipment expense.

 

The $6.2million increase in other real estate owned expense in the third quarter 2010as compared to the same period in 2009 is mostly due to an increase inwrite-downs on other real estate owned properties resulting from valuationadjustments and sales.  The majority ofthe write-downs in the third quarter 2010 resulted from updated valuationadjustments related to broker property opinions on two large land parcels inorder to facilitate their ultimate disposition.

 

Overalloccupancy and furniture and equipment expense declined by $0.3 million in thethird quarter 2010 as compared to the same period in 2009 due to lowerdepreciation and lease expense resulting primarily from the reduction of leasedspace in our headquarters building.

 

Amortizationof intangible assets declined by $0.3 million in the current quarter ascompared to the same period last year due to accelerated amortization ofintangible assets associated with previous acquisitions.

 

Insuranceand assessments decreased by $0.1 million in the third quarter 2010 as comparedto the same quarter in 2009.  Thedecrease is partly attributable to an overall decline in total deposits, whichare currently used as the assessment base, at the end of the third quarter 2010as compared to the end of the same quarter in 2009.  The Company expects that FDIC insurance willfurther decline in the fourth quarter 2010, as well as in the first quarter2011.

 

The $0.5million decline in other general and administrative expenses in the thirdquarter 2010 as compared to the third quarter 2009 is primarily a result ofseveral smaller items comprising our total general and administrative expensecategory including business development, data processing and othermiscellaneous losses.

 

On alinked quarter basis, the $4.3 million increase in noninterest expense in thethird quarter 2010 as compared to the second quarter 2010 is due mostly to a$4.7 million increase in expenses related to other real estate owned, partiallyoffset by a $0.2 million decrease in insurance and assessments.   The increase in other real estate ownedexpense is due mostly to an increase in write-downs on other real estate ownedproperties resulting from valuation adjustments and sales as discussed above.

 

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*The following table presents, forthe year-to-date periods indicated, the major categories of noninterestexpense:*

 

**Table 9**

 
| ** **                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September 30,  2010**    | ** ** | **September 30,  2009** | ** ** |
| ** **                         | ** ** | **(In thousands)**         |
| Noninterest  expense:              |       |                            |       |   |   |
| Salaries  and employee benefits    |       | $                               | 19,586     |   | $ | 19,987 |   |
| Occupancy  expense                 |       | 5,616                           |       | 5,755 |   |
| Furniture  and equipment           |       | 2,793                           |       | 3,381 |   |
| Amortization  of intangible assets |       | 3,885                           |       | 4,722 |   |
| Other  real estate owned           |       | 13,700                          |       | 2,617 |   |
| Insurance  and assessment          |       | 5,233                           |       | 4,924 |   |
| Professional  fees                 |       | 2,293                           |       | 2,261 |   |
| Other  general and administrative  |       | 6,151                           |       | 7,012 |   |
| Total  noninterest expense         |       | $                               | 59,257     |   | $ | 50,659 |   |

 

Noninterestexpense for the nine months ended September 30, 2010 increased by $8.6million compared to the same period in 2009 primarily due to an $11.1 millionincrease in expenses associated with other real estate owned and a $0.3 millionincrease in insurance and assessments.  With the exception of a slight increase in professional fees, all othercategories of noninterest expense declined in the nine months of 2010 ascompared to the same period in 2009.

 

The$0.4 million year-to-date decline in salaries and employee benefits expense in2010 as compared to 2009 is due mostly to a reduction in base salary and bonusexpense, partially offset by an increase in benefit expense.   The overall reduction in salary and bonus expenseis primarily a result of a decrease in full-time equivalent employees by eightfrom the third quarter of 2009.

 

The$0.6 million decrease in furniture and equipment in the nine months ended September 30,2010 as compared to the same period in 2009 is primarily the result ofnegotiated reductions in lease and maintenance contracts, as well as lowerdepreciation expense resulting from certain fixed assets becoming fullydepreciated.

 

On ayear-to-date basis in 2010, amortization of intangible asset expense decreasedby $0.8 million as compared to 2009 due to the use of accelerated methods toamortize the core deposit intangible asset.

 

Otherreal estate owned expense increased by $11.1 million on a year-to-date basis in2010 as compared to 2009 primarily as a result of an increase in write-downsresulting from valuation adjustments related mostly to the decision to expeditethe disposition of certain properties.

 

Insuranceand assessment expense increased $0.3 million in 2010 compared to 2009,primarily as a result of increased FDIC insurance premiums.  The increase in premiums was partially offsetby a $0.9 million one-time special assessment in 2009 that did not occur in2010.  Although there was a year-to-dateincrease in FDIC insurance premiums in 2010 as compared to the same period in2009, FDIC insurance premiums declined during the most recent quarter and weexpect that the FDIC premiums will continue to decline in the fourth quarter2010.

 

Othergeneral and administrative expense decreased by $0.9 million for theyear-to-date period ended September 30, 2010 as compared to the sameperiod in 2009.   This decrease is attributable toreductions in several categories including data processing, delivery, and othermiscellaneous losses.

 

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**IncomeTaxes**

 

Theeffective tax benefit was 38.0% for the three months ending September 30,2010 as compared to an effective tax benefit of 15.7% for the same period in2009.  The primary difference between theexpected benefit and the effective tax benefit for the three months ended September 30,2010 is tax-exempt income.    The primarydifference between the expected benefit and the effective tax benefit for thethree months ended September 30, 2009 is tax-exempt income as well as avaluation allowance related to deferred tax assets.   The valuation allowance on deferred taxassets recorded in the third quarter 2009 was subsequently reversed in the fourthquarter 2009 as a result of the enactment of the *Worker, Homeownership, andBusiness Assistance Act of 2009*in November 2009, which permitted businesses to elect to carryback a netoperating loss from 2009 for five years, as compared to two years under priorlaw. The change in the carryback enabled the Company to elect to carryback its2009 net operating loss which significantly reduced our deferred tax asset.

 

Incometax expense is the total of the current year income tax due or refundable andthe change in deferred tax assets and liabilities. Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and taxcredit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin income in the period that includes the enactment date. Deferred tax assetsare reduced by a valuation allowance when, in the opinion of management, it ismore likely than not that some portion, or all, of the deferred tax asset willnot be realized. In assessing the realization of deferred tax assets,management evaluates both positive and negative evidence, including theexistence of any cumulative losses in the current year and the prior two years,the amount of taxes paid in available carry-back years, the forecasts of futureincome, applicable tax planning strategies, and assessments of current andfuture economic and business conditions. This analysis is updated quarterly andadjusted as necessary.  At the end of thethird quarter 2010, based on the Company’s ability to carryback up to $9.4million of potential tax losses generated in future years to prior years andvarious tax planning strategies, including sale leaseback of certain locations,the Company has determined that a valuation allowance for deferred tax assetsis not required.

 

Becausethe Company continues to have a deferred tax asset, the Company will, on aquarterly basis, evaluate the need for a valuation allowance and whether theallowance should be adjusted based on then available evidence.  If the Company continues to record a net lossfor financial reporting purposes in 2010, it may record a valuation allowance relatedto its deferred tax assets depending on then available evidence.

 

**BALANCE SHEET ANALYSIS**

 

*The following sets forth certainkey consolidated balance sheet data:*

 

**Table 10**

 
| ** **                 | ** ** | **September 30,  2010** | ** ** | **June 30,  2010** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** |
|----------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **(In thousands)**      | ** ** |
| Cash and  cash equivalents |       | $                            | 109,770    |                    | $          | 184,701                  |       | $                           | 222,723    |                         | $          | 234,483 |   | $ | 148,194 |   |
| Total  investments         |       | 401,131                      |       | 312,293                 |       | 252,393                  |       | 248,236                     |       | 209,297                      |       |
| Total  loans               |       | 1,289,492                    |       | 1,374,208               |       | 1,435,071                |       | 1,519,608                   |       | 1,587,265                    |       |
| Total  assets              |       | 1,933,146                    |       | 1,983,798               |       | 2,030,331                |       | 2,127,580                   |       | 2,057,378                    |       |
| Earning  assets            |       | 1,776,923                    |       | 1,848,132               |       | 1,898,553                |       | 1,985,059                   |       | 1,921,726                    |       |
| Deposits                   |       | 1,512,479                    |       | 1,544,271               |       | 1,602,884                |       | 1,693,290                   |       | 1,632,436                    |       |
|                            |            |                              |            |                         |            |                          |            |                             |            |                              |            |  |  |  |  |  |

 

AtSeptember 30, 2010, the Company had total assets of $1.9 billion, or$194.4 million less than the $2.1 billion of total assets at December 31,2009.  The decline in assets from December 31,2009 is mostly due to a $230.1 million decline in loans, net of unearneddiscount.  Most of this decrease was incommercial loans.  The decline incommercial loans is partly attributable to planned efforts by the bank toreduce lower yielding syndicated and participated loans.

 

Thedecrease in total assets at September 30, 2010 as compared to September 30,2009 is the result of a decline in total loans, partially offset by an increasein securities available for sale.  Totalloans, net of unearned discount, decreased by $297.8 million from September 30,2009 to September 30, 2010, whereas securities available for sale

 

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increasedby $188.0 million over the same time period. The increase in securities is nearly all related to purchases ofmortgage-backed government agency or government-sponsored agency securities.

 

*The following table sets forththe amount of our loans outstanding at the dates indicated:*

 

**Table 11**

 
| ** **                                      | ** ** | **September 30,  2010** | ** ** | **June 30,  2010** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **(In thousands)**      | ** ** |
| Real  estate - Residential and Commercial       |       | $                            | 740,106    |                    | $          | 754,019                  |       | $                           | 748,135    |                         | $          | 760,719 |   | $ | 715,005 |   |
| Real  estate - Construction                     |       | 56,624                       |       | 83,389                  |       | 111,231                  |       | 105,612                     |       | 163,074                      |       |
| Equity  lines of credit                         |       | 51,903                       |       | 51,221                  |       | 53,014                   |       | 54,852                      |       | 56,591                       |       |
| Commercial                                      |       | 370,281                      |       | 411,605                 |       | 448,908                  |       | 521,016                     |       | 573,562                      |       |
| Agricultural                                    |       | 16,088                       |       | 17,968                  |       | 17,203                   |       | 18,429                      |       | 19,428                       |       |
| Consumer                                        |       | 30,303                       |       | 31,936                  |       | 34,986                   |       | 36,175                      |       | 38,704                       |       |
| Leases  receivable and other                    |       | 26,236                       |       | 26,289                  |       | 24,022                   |       | 25,366                      |       | 23,671                       |       |
| Total  gross loans                              |       | 1,291,541                    |       | 1,376,427               |       | 1,437,499                |       | 1,522,169                   |       | 1,590,035                    |       |
| Less:  allowance for loan losses                |       | (41,898                      | )          | (46,866                 | )          | (52,015                  | )          | (51,991                     | )          | (49,038                      | )          |
| Unearned  discount                              |       | (2,049                       | )          | (2,219                  | )          | (2,428                   | )          | (2,561                      | )          | (2,770                       | )          |
| Loans,  net of unearned discount                |       | $                            | 1,247,594  |                    | $          | 1,327,342                |       | $                           | 1,383,056  |                         | $          | 1,467,617 |   | $ | 1,538,227 |   |
|                                            |       |                         |       |                    |       |                     |       |                        |       |                         |       |
| Loans  held for sale at lower of cost or market |       | $                            | —     |                    | $          | 1,150                    |       | $                           | 11,506     |                         | $          | 9,862 |   | $ | 5,500 |   |

 

There were $848.6 million of realestate loans at September 30, 2010, compared to $921.2 million at December 31,2009 and $934.7 million at September 30, 2009.

 

Underjoint guidance from the FDIC, the Federal Reserve and the Office of theComptroller of the Currency on sound risk management practices for financialinstitutions with concentrations in commercial real estate lending, a financialinstitution may be actively involved in commercial real estate lending if,among other factors, (i) total reported loans for construction, landdevelopment, and other land represent 100% or more of capital, or (ii) totalreported loans secured by multifamily and non-farm residential properties,loans for construction, land development and other land and loans otherwisesensitive to the general commercial real estate market, including loans tocommercial real estate related entities, represent 300% or more of totalcapital.  For our Bank, the totalreported loans for construction, land development and land represented 86% ofcapital at September 30, 2010, as compared to 110% at December 31,2009, and 138% at September 30, 2009. For our Bank, the total reported commercial real estate loansrepresented 297% of capital at September 30, 2010, as compared to 329% at December 31,2009, and 349% at September 30, 2009.  Management employs heightened risk management practices, including boardand management oversight and strategic planning, development of underwritingstandards, risk assessment and monitoring through market analysis and stresstesting.  Loans secured by commercialreal estate are recorded on the balance sheet as either a commercial realestate loan or commercial loan depending on the purpose of the loan, not theunderlying collateral. The overall decline in loans in 2009 and 2010 ispartially attributable to management’s efforts to mitigate overall risk withinthe loan portfolio through the reduction of real estate loans and loans securedby real estate.   Further, management hasworked to reduce the volume of lower yielding syndicated and participatedloans.

 

The$106.5 million decrease in construction loans, and the $25.1 million increasein residential and commercial real estate loans at September 30, 2010 ascompared to September 30, 2009 is partially due to reclassifying $66.7million of construction loans to residential and commercial real estate loansbecause of the completion of the underlying building projects and thecommencement of amortization on these loans.  A portion of the remainder of the decrease in construction loans was aresult of payoffs on existing loans, as well as moving loans to other realestate owned during 2009 and 2010.

 

With respect to groupconcentrations, most of the Company’s business activity is with customers inthe state of Colorado.  At September 30,2010, the Company did not have any significant concentrations in any particularindustry.

 

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The Company does not have anyAlternative A-paper (Alt-A) or subprime residential loans in its loanportfolio.

 

**NonperformingAssets**

 

Credit risk related tononperforming assets arises as a result of lending activities. To manage thisrisk, we employ frequent monitoring procedures and take prompt correctiveaction when necessary. We employ a risk rating system that identifies thepotential risk associated with loans in our loan portfolio. This monitoring andrating system is designed to help management determine current and potentialproblems so that corrective actions can be taken promptly.

 

Generally, loans are placed onnonaccrual status when they become 90 days or more past due or at such earliertime as management determines timely recognition of interest to be indoubt.  Accrual of interest isdiscontinued on a loan when we believe, after considering economic and businessconditions and analysis of the borrower’s financial condition and theunderlying collateral value, that the collection of interest is doubtful.

 

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The following table summarizes theloans for which the accrual of interest has been discontinued, loans withpayments more than 90 days past due and still accruing interest and other realestate owned. For reporting purposes, other real estate owned consists of allreal estate, other than bank premises, actually owned or controlled by us,including real estate acquired through foreclosure.

 

**Table 12**

 
| ** **                                                                            | ** ** | **Quarter Ended**               | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                            | ** ** | **September 30,  2010**         | ** ** | **June 30,  2010** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Nonaccrual  loans and leases, not restructured                                        |       | $                                    | 65,921     |   | $ | 64,339 |   | $ | 70,500 |   | $ | 59,584 |   | $ | 81,035 |   |
| Other  impaired loans                                                                 |       | 4,420                                |       | 1,065 |   | 558 |   | 123 |   | 150 |   |
| Total  nonperforming loans                                                            |       | $                                    | 70,341     |   | $ | 65,404 |   | $ | 71,058 |   | $ | 59,707 |   | $ | 81,185 |   |
| Other  real estate owned and foreclosed assets                                        |       | 45,700                               |       | 30,298 |   | 30,918 |   | 37,192 |   | 32,246 |   |
| Total  nonperforming assets                                                           |       | $                                    | 116,041    |   | $ | 95,702 |   | $ | 101,976 |   | $ | 96,899 |   | $ | 113,431 |   |
|                                                                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Impaired  loans                                                                       |       | $                                    | 70,341     |   | $ | 65,404 |   | $ | 71,058 |   | $ | 59,707 |   | $ | 81,185 |   |
| Allocated  allowance for loan losses                                                  |       | (3,539                               | )          | (3,716 | ) | (10,802 | ) | (6,603 | ) | (7,515 | ) |
| Net  investment in impaired loans                                                     |       | $                                    | 66,802     |   | $ | 61,688 |   | $ | 60,256 |   | $ | 53,104 |   | $ | 73,670 |   |
| Accruing  loans past due 90 days or more                                              |       | $                                    | 4,420      |   | $ | 1,065 |   | $ | 558 |   | $ | 123 |   | $ | 9,140 |   |
| Loans  past due 30-89 days                                                            |       | $                                    | 21,876     |   | $ | 33,050 |   | $ | 21,956 |   | $ | 21,709 |   | $ | 52,443 |   |
| Loans  charged-off                                                                    |       | $                                    | 7,953      |   | $ | 13,918 |   | $ | 4,271 |   | $ | 7,618 |   | $ | 14,618 |   |
| Recoveries                                                                            |       | (485                                 | )          | (369 | ) | (295 | ) | (566 | ) | (615 | ) |
| Net  charge-offs                                                                      |       | $                                    | 7,468      |   | $ | 13,549 |   | $ | 3,976 |   | $ | 7,052 |   | $ | 14,003 |   |
| Provision  for loan losses                                                            |       | $                                    | 2,500      |   | $ | 8,400 |   | $ | 4,000 |   | $ | 10,005 |   | $ | 20,000 |   |
| Allowance  for loan losses                                                            |       | $                                    | 41,898     |   | $ | 46,866 |   | $ | 52,015 |   | $ | 51,991 |   | $ | 49,038 |   |
|                                                                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Allowance  for loan losses to loans, net of unearned discount                         |       | 3.25                                 | %          | 3.41 | % | 3.62 | % | 3.42 | % | 3.09 | % |
| Allowance  for loan losses to nonaccrual loans                                        |       | 63.56                                | %          | 72.84 | % | 73.78 | % | 87.26 | % | 60.51 | % |
| Allowance  for loan losses to nonperforming assets                                    |       | 36.11                                | %          | 48.97 | % | 51.01 | % | 53.65 | % | 43.23 | % |
| Allowance  for loan losses to nonperforming loans                                     |       | 59.56                                | %          | 71.66 | % | 73.20 | % | 87.08 | % | 60.40 | % |
| Nonperforming  assets to loans, net of unearned discount, and other real estate owned |       | 8.69                                 | %          | 6.81 | % | 6.96 | % | 6.22 | % | 7.00 | % |
| Annualized  net charge-offs to average loans                                          |       | 2.19                                 | %          | 3.83 | % | 1.08 | % | 1.77 | % | 3.42 | % |
| Nonaccrual  loans to loans, net of unearned discount                                  |       | 5.11                                 | %          | 4.68 | % | 4.91 | % | 3.92 | % | 5.11 | % |
| Loans  30-89 days past due to loans, net of unearned discount                         |       | 1.70                                 | %          | 2.40 | % | 1.53 | % | 1.43 | % | 3.30 | % |

 

Nonperformingassets at September 30, 2010 increased by $19.1 million from December 31,2009, primarily as a result of the addition of a single loan in the amount of$18.9 million during the quarter.

 

AtSeptember 30, 2010, residential construction, land and land developmentloans accounted for $7.9 million, or 11.3%, of all nonperforming loans.   At December 31, 2009, approximately$25.8 million, or 43%, of all nonperforming loans were residentialconstruction, land and land development loans.

 

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AtSeptember 30, 2010, approximately $44.9 million, or 63.8%, of allnonperforming loans outstanding were commercial real estate loans.   At December 31, 2009, approximately$12.2 million, or 21%, of all nonperforming loans were commercial real estateloans.  The primary reason for thesignificant increase between year end and September 30, 2010 was theaddition of a single loan of approximately $18.9 million in the third quarter2010.

 

The Company has an internal riskrating system of classified loans as pass, watch, special mention, substandard,doubtful and loss.  These internal guidelines are based on the definitionsin the Uniform Agreement on the Classification of Assets and Appraisal ofSecurities Held by Banks and Thrifts issued by the Office of the Comptroller ofthe Currency, the Federal Deposit Insurance Corporation, the Board of Governorsof the Federal Reserve System, and the Office of Thrift Supervision.  Inparticular, loans internally classified as substandard, doubtful or loss areconsidered adversely classified loans.   During the third quarter2010, the amount of performing loans that the Company has internally consideredto be adversely classified has declined to $66.1 million at September 30,2010 as compared to $101.2 million at December 31, 2009 and $117.1 millionat September 30, 2009.

 

In addition to adversely classifiedloans, the Company has loans that are considered to be Special Mention or Watchloans.  The amount of loans that theCompany has internally considered to be Special Mention or Watch decreased byapproximately 45% from December 31, 2009 to September 30, 2010.  Each internal risk classification isjudgmental, but based on both objective and subjective factors/criteria. The internal risk ratings focus on an evaluation of the borrowers’ ability tomeet future debt service and performance to plan under stress versus only theircurrent condition.  As described below under “Allowance for LoanLosses”, the Company adjusts the general component of its allowance for loanlosses for the trends in the volume and severity of adversely classified andwatch list loans.

 

Netcharge-offs in the third quarter 2010 were $7.5 million, as compared to $14.0million in the third quarter 2009. Impaired loans as of September 30, 2010 totaled $70.3 million, ascompared to $59.7 million at December 31, 2009, and $81.2 million at September 30,2009.

 

Otherreal estate owned is $45.7 million at September 30, 2010, compared to$37.2 million at December 31, 2009. The balance at September 30, 2010is comprised of approximately 38 separate properties of which $15.1 million island; $28.9 million is commercial real estate; and $1.7 million is residentialreal estate.  The balance at December 31,2009 was comprised of approximately 27 separate properties of which $15.4million was land; $20.5 million was commercial real estate, includingmulti-family units; and $1.3 million was residential real estate.   The increase in other real estate owned at September 30,2010 as compared to December 31, 2009 is primarily attributable to two commercialreal estate properties of $17.6 million and $4.2 million being added in August 2010.   These two additions in August 2010 areexpected to be sold in the fourth quarter 2010 based on existing signed lettersof intent from prospective buyers.  In additionto these two properties, approximately $4.6 million of other properties areunder signed purchase agreements and could close in the fourth quarter 2010.

 

At September 30, 2010, noadditional funds are committed to be advanced in connection with impairedloans.

 

At September 30, 2010, therewere eight loans to six borrowers with a remaining interest reserve ofapproximately $1.5 million. As of September 30, 2010, we had $26,664,000of loans with terms that were modified in troubled debt restructurings, with atotal allocated allowance for loan loss of $1,858,000.   Troubled debt restructurings were immaterialat December 31, 2009.  The troubleddebt restructurings are included in impaired loans above.  The Company has not committed additionalfunds to borrowers whose loans are classified as troubled debt restructurings.

 

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**Allowancefor Loan Losses**

 

The allowance for loan losses ismaintained at a level that, in our judgment, is adequate to absorb probableincurred losses in the loan portfolio. The amount of the allowance is based onmanagement’s evaluation of the collectibility of the loan portfolio, historicalloss experience, and other significant factors affecting loan portfoliocollectibility, including the volume and severity of delinquent and classifiedloans, trends in volume and terms of loans, levels and trends in creditconcentrations, effects of changes in underwriting standards, policies,procedures and practices, national and local economic trends and conditions,changes in capabilities and experience of lending management and staff, andother external factors, including industry conditions, competition andregulatory requirements.

 

The ratio of allowance for loanlosses to total loans was 3.25% at September 30, 2010, as compared to 3.42% at December 31, 2009 and 3.09% at September 30,2009.

 

Our methodology for evaluating theadequacy of the allowance for loan losses has two basic elements: first, theidentification of impaired loans and the measurement of an estimated loss foreach individual loan is identified; second, estimating an allowance forprobable incurred losses on other loans.

 

The specific allowance for impairedloans and the allowance calculated for probable incurred losses on other loansare combined to determine the required allowance for loan losses.  The amount calculated is compared to theactual allowance for loan losses balance at each quarter end and any shortfallis charged to income as an additional provision for loan losses.  For further discussion of the provision forloan losses, see “Provision for Loan Losses” above.

 

In estimating the allowance forprobable incurred losses on other loans, we group the balance of the loanportfolio into segments that have common characteristics, such as loan type orrisk rating.  For each nonspecificallowance portfolio segment, we apply loss factors to calculate the requiredallowance based upon actual historical loss rates adjusted for qualitativefactors affecting loan portfolio collectibility as described above.  Management also looks at risk ratings ofloans and computes a factor for the volume and severity of classified loansusing assigned risk ratings under regulatory definitions of “watch”, “specialmention”, “substandard”‘, “doubtful” and “loss”.  Loans graded as either doubtful or loss aretreated as impaired and are included as part of the specific reserve computedabove.  Loans segregated by risk ratingcategories watch, special mention or substandard are evaluated for trends involume and severity.

 

The provision for loan lossesrecorded in 2010 was required in order for the Company to maintain theallowance for loan losses (3.25% of total loans as of September 30, 2010)at a level necessary for the probable incurred losses inherent in the loanportfolio as of September 30, 2010. For further discussion of the provision for loan losses, see “Provisionfor Loan Losses” above.

 

Approximately $3.5 million, or8.4%, of the $41.9 million allowance for loan losses at September 30,2010, relates to loans with specific allowance allocations.  This compares to a specific reserve of $6.6million, or 12.7%, of the total allowance for loan losses at December 31,2009.  The decrease in the percent of theportfolio from specific reserves is attributable to partial charge offs takenin the first nine months of 2010, which reduced the book balance of selectloans to the point where a specific reserve was no longer considered necessaryas of September 30, 2010.   At September 30,2010, the impaired loans had approximately $13.5 million of previous partialcharge-offs as compared to approximately $9.4 million of previous charge-offsrelated to impaired loans at December 31, 2009.

 

The general component of theallowance for loan losses as a percent of overall loans, net of unearneddiscount, was 2.98% at September 30, 2010, as compared to 2.99% at December 31,2009.

 

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*The following table provides asummary of the activity within the allowance for loan losses account for theperiods presented:*

 

**Table 13**

 
| ** **                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **(In thousands)**                                 | ** ** |
| Balance,  beginning of period             |       | $                                                       | 51,991     |   | $ | 44,988 |   |
| Loan  charge-offs:                        |       |                                                    |       |   |   |
| Real  estate - Residential and Commercial |       | 9,348                                                   |       | 5,075 |   |
| Real  estate - Construction               |       | 15,023                                                  |       | 27,593 |   |
| Commercial                                |       | 1,496                                                   |       | 3,141 |   |
| Agricultural                              |       | 54                                                      |       | — |   |
| Consumer                                  |       | 160                                                     |       | 233 |   |
| Lease  receivable and other               |       | 61                                                      |       | 2,347 |   |
| Total  loan charge-offs                   |       | 26,142                                                  |       | 38,389 |   |
| Recoveries:                               |       |                                                    |       |   |   |
| Real  estate - Residential and Commercial |       | 327                                                     |       | 477 |   |
| Real  estate - Construction               |       | 293                                                     |       | 403 |   |
| Commercial                                |       | 257                                                     |       | 385 |   |
| Agricultural                              |       | —                                                  |       | 4 |   |
| Consumer                                  |       | 65                                                      |       | 59 |   |
| Lease  receivable and other               |       | 207                                                     |       | 1 |   |
| Total  loan recoveries                    |       | 1,149                                                   |       | 1,329 |   |
| Net  loan charge-offs                     |       | 24,993                                                  |       | 37,060 |   |
| Provision  for loan losses                |       | 14,900                                                  |       | 41,110 |   |
| Balance,  end of period                   |       | $                                                       | 41,898     |   | $ | 49,038 |   |

 

Managementcontinues to monitor the allowance for loan losses closely and will adjust theallowance when necessary, based on its analysis, which includes an ongoingevaluation of substandard loans and their collateral positions.

 

**Securities**

 

We manage our investment portfolioprincipally to provide liquidity, balance our overall interest rate risk and toprovide collateral for public deposits and customer repurchase agreements.

 

*The carrying value of ourportfolio of investment securities at September 30, 2010 and December 31,2009 was as follows:*

 

**Table 14**

** **
| ** **                                                   | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|--------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                                   | ** ** | **2010**                | ** ** | **2009**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                                                   | ** ** | **(In thousands)** | ** ** |
| Debt  securities available for sale:                         |       |                    |       |                  |       |           |       |       |       |
| U.S.  Government agencies and government- sponsored entities |       | $                       | 21,835     |                  | $          | 17,129         |       | $          | 4,706      |   | 27.5 | % |
| State  and municipal                                         |       | 56,291                  |       | 60,827                |       | (4,536         | )          | (7.5       | )%         |
| Mortgage-backed  securities – agency/residential        |       | 281,566                 |       | 127,340               |       | 154,226        |       | 121.1      | %          |
| Mortgage-backed  securities – private/residential       |       | 8,984                   |       | 13,959                |       | (4,975         | )          | (35.6      | )%         |
| Marketable  equity                                           |       | 1,519                   |       | 1,519                 |       | —         |       | —     |       |
| Other  securities                                            |       | 360                     |       | 360                   |       | —         |       | —     |       |
| Total  securities available for sale                         |       | $                       | 370,555    |                  | $          | 221,134        |       | $          | 149,421    |   | 67.6 | % |
|                                                         |       |                    |       |                  |       |           |       |       |       |
| Securities  held to maturity:                                |       |                    |       |                  |       |           |       |       |       |
| Mortgage-backed  securities – agency/residential        |       | $                       | 13,346     |                  | $          | 9,942          |       | $          | 3,404      |   | 34.2 | % |

 

The Company does not own anycollateralized debt obligations (CDOs) or securities backed by sub-primemortgage loans.

 

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At September 30, 2010, therewere three private-label mortgage-backed securities with a carrying value ofapproximately $9.0 million.  Each of theprivate-label mortgage-backed securities is a senior tranche and was AAA ratedas of September 30, 2010.  All othermortgage-backed securities are sponsored by either U.S. government agencies orgovernment-sponsored entities.

 

The carrying value of our availablefor sale investment securities at September 30, 2010 was $370.6 million,compared to the December 31, 2009 carrying value of $221.1 million.Year-to-date activity in our investment portfolio has been concentrated on thepurchase of U.S. Government Agency Collateralized Mortgage Obligations or U.S.Government Agency Mortgage-Backed Securities.

 

Fairvalues for municipal securities are generally determined by matrix pricing,which is a mathematical technique widely used in the industry to value debtsecurities without relying exclusively on quoted prices for the specificsecurities but rather by relying on the securities’ relationship to otherbenchmark quoted securities.  Characteristicsutilized by matrix pricing include insurer, credit support, state of issuance,and bond rating.  These factors are usedto incorporate additional spreads and municipal curves.  A separate curve structure is used forbank-qualified municipal bonds versus general market municipals. For thebank-qualified municipal bonds, active quotes are obtained when available.

 

Fairvalues for U.S. Treasury securities, U.S. government agencies andgovernment-sponsored entities and mortgage-backed securities are determinedusing a combination of daily closing prices, evaluations, income data, securitymaster (descriptive) data, and terms and conditions data.  Additional data used to compute the fairvalue of U.S. mortgage-backed pass-through issues (FHLMC, FNMA, GNMA, and SBApools) includes daily composite seasoned, pool-specific, and generic couponevaluations, and factors and descriptive data for individual pass-throughpools.   Additional data used to computethe fair value of U.S. collateralized mortgage obligations include dailyevaluations and descriptive data.  Additional data used to compute the fair value of mortgage-backedsecurities — private/residential include independent bond ratings.

 

One municipal bond related to ahospital was priced using significant unobservable inputs.  Management reviewed the financials of thehospital, had discussions with hospital management and reviewed the underlyingcollateral for the municipal bond to determine an appropriate benchmark risk-adjustedinterest rate based on transactions with similar risks.

 

Out of our entire portfolio of debtsecurities, eight securities reflected an unrealized loss as of September 30,2010.  Management concluded that theunrealized loss position on these securities was a result of the level of marketinterest rates and not a result of the underlying issuers’ ability torepay.   In addition, we do not intend tosell these securities with an unrealized loss and do not believe that it ismore likely than not that we will be required to sell the securities prior to arecovery in their value.   Accordingly,we have not recognized any other-than-temporary impairment in our consolidatedstatements of income.

 

At both September 30, 2010 andDecember 31, 2009, we held $17.2 million, of other equity securitiesconsisting of bank stocks with no maturity date, which are not reflected in theabove schedule. Bank stocks are comprised mostly of stock of the FederalReserve Bank of Kansas City, the Federal Home Loan Bank of Topeka and Bankers’Bank of the West.  These stocks haverestrictions placed on their transferability as only members of the entitiescan own the stock.

 

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**Deposits**

 

*The following table sets forththe amounts of our deposits outstanding at the dates indicated:*

 

**Table 15**

 
| ** **                    | ** ** | **At September 30, 2010** | ** ** | **At December 31, 2009** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                    | ** ** | **Balance**                              | ** ** | **% of Total**                | ** ** | **Balance** | ** ** | **% of Total** | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)**     | ** ** |
| Noninterest  bearing deposits |       | $                                        | 358,447    |                                    | 23.70      | % | $ | 366,103 |   | 21.62 | % |
| Interest  bearing demand      |       | 165,000                                  |       | 10.91                                   | %          | 171,844 |   | 10.15 | % |
| Money  market                 |       | 340,706                                  |       | 22.53                                   | %          | 352,127 |   | 20.80 | % |
| Savings                       |       | 76,429                                   |       | 5.05                                    | %          | 71,816 |   | 4.24 | % |
| Time                          |       | 571,897                                  |       | 37.81                                   | %          | 731,400 |   | 43.19 | % |
|                          |       |                                     |       |                                    |       |   |   |   |   |
| Total  deposits               |       | $                                        | 1,512,479  |                                    | 100.00     | % | $ | 1,693,290 |   | 100.00 | % |

 

At theend of the third quarter 2010, deposits were $1.5 billion as compared to $1.7billion at December 31, 2009, reflecting a decrease of $180.8 million.

 

Excludingtime deposits, deposits declined by $21.3 million during the first nine monthsof 2010 primarily as a result of a decrease in our customers’ availablebalances due partly to seasonality and customer cash flow needs.  Although overall balances declined during2010, there was a net increase in the number of transaction and savingsaccounts.

 

Noninterestbearing deposits as a percent of total deposits increased to approximately23.7% at September 30, 2010, as compared to 21.6% at December 31,2009.  Noninterest bearing deposits helpreduce overall deposits funding costs, but due to the extremely low rateenvironment, the impact of noninterest bearing deposits on the overall cost offunds is currently less significant than in a higher rate environment.

 

Timedeposits declined by $159.5 million for the year-to-date period ending September 30,2010.  There was a $78.8 million decreasein brokered deposits to $175.8 million, excluding reciprocal deposits withother banks through the Certificate of Deposit Account Registry Service(CDARS), during the first nine months of 2010. During the remainder of 2010, approximately $48.5 million of internetand brokered deposits will mature and are not expected to be renewed or rolledover.

 

**Borrowingsand Subordinated Debentures**

 

At September 30,2010, our outstanding borrowings were $164,242,000 as compared to $164,364,000at December 31, 2009.  Thesebalances are solely related to term note borrowings at the Federal Home LoanBank (“FHLB”).

 

Theborrowings at September 30, 2010 consisted of 16 separate fixed-rate termnotes with the FHLB at our Bank level, with remaining maturities ranging from 2to 88 months.  Approximately $140 millionof the FHLB term advances at September 30, 2010 have Bermudan conversionoptions to a variable rate.  The initialfixed rate periods range from one to five years and can be prepaid withoutpenalty at or after conversion.  The Bankalso had a line of credit with the FHLB at September 30, 2010, but therewas no balance outstanding on this line of credit as of that date.

 

The totalcommitment, including balances outstanding, for borrowings at the FHLB for theterm notes and line of credit at September 30, 2010 and December 31,2009 was $379.7 million and $195.3 million, respectively. The interest rate onthe line of credit varies with the federal funds rate, and was 0.28% and 0.18%at September 30, 2010 and December 31, 2009, respectively.  The term notes have fixed interest rates thatrange from 2.52% to 6.22%. The weighted-average rate onthe FHLB term notes was 3.17% at September 30, 2010.

 

AtSeptember 30, 2010, we had a $41,239,000 aggregate principal balance ofjunior subordinated debentures outstanding with a weighted average cost of5.88%.  The subordinated debentures wereissued in four separate series. Each issuance has a maturity of thirty yearsfrom its date of issue. The subordinated debentures were issued to trustsestablished by us, which in turn issued $40 million of trust preferredsecurities. Generally and with certain limitations, the Company is permitted tocall the debentures subsequent to the first five or ten years, as applicable,

 

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afterissue if certain conditions are met, or at any time upon the occurrence andcontinuation of certain changes in either the tax treatment or the capitaltreatment of the trusts, the debentures or the preferred securities.  The Guaranty Capital Trust III issuance of$10.3 million has a variable rate of LIBOR plus 3.10% and has been callablewithout penalty each quarter since July 7, 2008, and continues to becallable quarterly. The CenBank Trust III issuance of $15.5 million has avariable rate of LIBOR plus 2.65% and has been callable without penalty since April 15,2009, and continues to be callable quarterly. The CenBank Trust I issuance of$10.3 million has a fixed rate of 10.6% and has been callable since September 7,2010, and continues to be callable, with a penalty, quarterly.   Management did not call any of thesesecurities on the latest call date, but will continue to evaluate whether tocall these debentures each quarter. Under the terms of the Written Agreement, regulatory approval would berequired prior to calling any trust preferred issuance.

 

Underthe terms of each subordinated debentures agreement, the Company has theability to defer interest on the debentures for a period of up to sixty monthsas long as it is in compliance with all covenants of the agreement.  On July 31, 2009, the Company deferredregularly scheduled interest payments on each series of its junior subordinated debentures and continued to deferinterest during the third quarter of 2010. Such a deferral is not an event of default and the interest continuesto accrue.  Prior to paying any intereston the subordinated debentures, the Company must obtain prior written approvalfrom the Federal Reserve under the terms of the Written Agreement. The Companyis prohibited from paying any dividends on its other classes of stock for solong as interest is deferred, with the exception of stock dividends.

 

The Board of Governors of theFederal Reserve System, which is the holding company’s banking regulator, haspromulgated a modification of the capital regulations affecting restricted corecapital elements, including trust preferred securities and cumulative preferredstock. Under this modification, beginning March 31, 2011, the Company isrequired to use a more restrictive formula to determine the amount of restrictedcore capital elements that can be included in regulatory Tier 1 capital. TheCompany will be allowed to include in Tier 1 capital an amount of restrictedcore capital elements equal to no more than 25% of the sum of all qualifyingcore capital elements, including qualifying restricted core capitalelements.   For purposes of both Tier 1capital and the 25% limitation,  certainintangibles, including core deposit intangibles, net of any related deferredincome tax liability are deducted. The existing regulations in effect limit theamount of restricted core capital elements that can be included in Tier 1capital to 25% of the sum of qualifying core capital elements without adeduction for permitted intangibles.  The adoption of this modification is not expected to have a materialimpact on the inclusion of our restricted core capital elements for purposes ofTier 1 capital.

 

Under the Dodd-Frank Wall StreetReform and Consumer Protection Act, certain trust preferred securities will nolonger be eligible to be included as Tier 1 capital for regulatorypurposes.  However, an exception to thisstatutory prohibition applies to securities issued prior to May 19, 2010by bank holding companies with less than $15 billion of total assets.  As we have less than $15 billion in totalassets and had issued all of our trust preferred securities prior to May 19,2010, we believe that our trust preferred securities will continue to beeligible to be treated as Tier 1 capital, subject to other rules andlimitations.

 

**Capital Resources**

 

Current risk-based regulatorycapital standards generally require banks and bank holding companies tomaintain a ratio of “core” or “Tier 1” capital (consisting principally ofcommon equity) to risk-weighted assets of at least 4%, a ratio of Tier 1capital to average total assets (leverage ratio) of at least 4% and a ratio oftotal capital (which includes Tier 1 capital plus certain forms of subordinateddebt, a portion of the allowance for loan losses, and preferred stock) torisk-weighted assets of at least 8%. Risk-weighted assets are calculated bymultiplying the balance in each category of assets by a risk factor, whichranges from zero for cash assets and certain government obligations to 100% forhigh-risk loans, and adding the products together.

 

For regulatory purposes, theCompany maintains capital above the minimum core standards.  The Company actively monitors its regulatorycapital ratios to ensure that the Company and the Bank are more than wellcapitalized under the applicable regulatory framework.  Under the regulations adopted by the federalregulatory authorities, a bank is well-capitalized if the institution has atotal risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capitalratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is notsubject to any order or written directive by any such regulatory authority tomeet and maintain a specific capital level for any capital measure.  The Bank is required to maintain similarcapital levels under capital adequacy guidelines.  At September 30, 2010, the Bank’scapital ratios exceed the regulatory capital requirement of “well-capitalized”.

 

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*The following table provides thecurrent capital ratios of the Company as of the dates presented, along with theregulatory capital requirements:*

 

**Table 16**

 
| ** **                       | ** ** | **Ratio at  September 30,  2010** | ** ** | **Ratio at  December 31,  2009** | ** ** | **Ratio at  September 30,  2009** | ** ** | **Minimum  Capital  Requirement** | ** ** | **Minimum  Requirement  for “Well  Capitalized”  Institution** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | ** **                                  | ** ** | ** **                                 | ** ** | ** **                                  | ** ** | ** **                        | ** ** | ** **                                                                    | ** ** |
| Total  Risk-Based Capital Ratio  |       |                                        |       |                                       |       |                                        |       |                              | ** ** | ** **                                                                    | ** ** |
| Consolidated                     |       | 15.28                                       | %          | 13.80                                      | %          | 13.42                                       | %          | 8.00                              | %          | N/A                                                                           |       |
| Guaranty  Bank and Trust Company |       | 14.33                                       | %          | 12.82                                      | %          | 12.45                                       | %          | 8.00                              | %          | 10.00                                                                         | %          |
| Tier 1  Risk-Based Capital Ratio |       |                                        |       |                                       |       |                                        |       |                              |       |                                                                          |       |
| Consolidated                     |       | 9.86                                        | %          | 9.43                                       | %          | 9.28                                        | %          | 4.00                              | %          | N/A                                                                           |       |
| Guaranty  Bank and Trust Company |       | 13.06                                       | %          | 11.55                                      | %          | 11.18                                       | %          | 4.00                              | %          | 6.00                                                                          | %          |
| Leverage  Ratio                  |       |                                        |       |                                       |       |                                        |       |                              |       |                                                                          |       |
| Consolidated                     |       | 7.71                                        | %          | 7.89                                       | %          | 8.41                                        | %          | 4.00                              | %          | N/A                                                                           |       |
| Guaranty  Bank and Trust Company |       | 10.22                                       | %          | 9.66                                       | %          | 10.14                                       | %          | 4.00                              | %          | 5.00                                                                          | %          |

 

On August 11, 2009, theCompany issued $57.9 million, net of expenses, of Series A ConvertiblePreferred Stock.   This Preferred Stockis treated as a restricted core capital element for Tier 1 capital purposes atthe consolidated level.  As a result ofthis issuance, the Company contributed an aggregate of $40.0 million of capitalinto the Bank.  This issuance and thecontribution of capital into the bank subsidiary improved the Company’s and theBank’s risk-based regulatory capital ratios.

 

In December 2009, the Companyfiled a universal shelf registration statement on Form S-3 with theSecurities and Exchange Commission (SEC) to register up to $100 million insecurities. The SEC declared the registration statement effective on February 11,2010. The Company does not have any current plans to raise additional capital;however, the shelf registration provides us with the ability to raise capital,subject to SEC rules and limitations, if the Board of Directors decides todo so.

 

**Contractual Obligations andOff-Balance Sheet Arrangements**

 

The Company is a party tocredit-related financial instruments with off-balance sheet risk in the normalcourse of business to meet the financing needs of its customers. Thesefinancial instruments include commitments to extend credit, stand-by letters ofcredit, and commercial letters of credit. Such commitments involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized in the consolidated balance sheets.

 

The Company’s exposure to creditloss is represented by the contractual amount of these commitments. The Companyfollows the same credit policies in making commitments as it does foron-balance sheet instruments.

 

*At the dates indicated, thefollowing commitments were outstanding:*

 

**Table 17**

 
| ** **                          | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **(In thousands)**      | ** ** |
| Commitments  to extend credit:      |       |                         |       |                        |       |
| Variable                            |       | $                            | 253,939    |                        | $          | 264,616 |   |
| Fixed                               |       | 24,770                       |       | 40,486                      |       |
| Total  commitments to extend credit |       | $                            | 278,709    |                        | $          | 305,102 |   |
|                                |       |                         |       |                        |       |
| Standby  letters of credit          |       | $                            | 12,695     |                        | $          | 14,917 |   |
| Commercial  letters of credit       |       | $                            | 11,000     |                        | $          | 11,000 |   |

 

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**Liquidity**

 

The Bank relies on deposits as itsprincipal source of funds and, therefore, must be in a position to servicedepositors’ needs as they arise. Fluctuations in the balances of a few largedepositors may cause temporary increases and decreases in liquidity from timeto time. We deal with such fluctuations by using existing liquidity sources.

 

The Bank’s primary sources ofliquidity are its liquid assets.  At September 30,2010, the Company had $109.8 million of cash and cash equivalents, including$86.3 million of interest-bearing deposits at banks (most of which was held atthe Federal Reserve Bank of Kansas City) that could be used for the Bank’simmediate liquidity needs.  Further, theCompany had $10.1 million of excess pledging related to customer accounts thatrequire collateral at September 30, 2010 and $45.4 million of securitiesthat are unavailable for pledging.

 

When the level of liquid assets(our primary liquidity) does not meet our liquidity needs, other availablesources of liquid assets (our secondary liquidity), including the purchase offederal funds, sales of loans, discount window borrowings from the FederalReserve, and our lines of credit with the Federal Home Loan Bank of Topeka(FHLB) and other correspondent banks are employed to meet current and presentlyanticipated funding needs. The Bank had approximately $215.5 million ofavailability on its FHLB line, $35.0 million of availability on its securedfederal funds lines with correspondent banks, and $31.4 million of availabilitywith the Federal Reserve discount window.

 

The FDIC temporarily increased theindividual account deposit insurance from $100,000 per account to $250,000 peraccount through December 31, 2013, which became permanent with theenactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act(Dodd-Frank Act) on July 21, 2010. The FDIC also implemented a Transaction Account Guarantee (TAG) program,which provides for full FDIC coverage for transaction accounts, regardless ofdollar amounts.  The Bank elected toopt-in to this program, thus, our customers receive full coverage fortransaction accounts under the program. The TAG program has been extended by the FDIC through December 31,2010 and the Dodd-Frank Act further mandated coverage for all non-interestbearing accounts in insured depository institutions through December 31,2012.  As of September 30, 2010, theBank had approximately 270 accounts with approximately $89.7 million ofbalances in excess of $250,000 covered under the TAG program.  Concerns regarding the overall bankingindustry or the Company could have an adverse effect on future deposit levels.

 

In order to address the concern ofFDIC insurance of larger depositors, the Bank became a member of theCertificate of Deposit Account Registry Service (CDARS®) program in 2008.Through CDARS®, the Bank’s customers can increase their FDIC insurance by up to$50 million through reciprocal certificate of deposit accounts. This isaccomplished by the Bank entering into reciprocal depository relationships withother member banks. The individual customer’s large deposit is broken intoamounts below the $250,000 insured amount and placed with other banks that aremembers of the network. The reciprocal member bank issues certificate ofdeposits in amounts that ensure that the entire deposit is eligible for FDICinsurance.   As of September 30,2010, the Company had approximately $30.1 million of deposits in the CDARS®program.  For regulatory purposes, CDARS®is considered a brokered deposit even though reciprocal deposits are generallyfrom customers in the local market.

 

Under the terms of the WrittenAgreement, the Bank cannot obtain any new brokered deposits, but can continueto rollover or renew existing brokered deposits.  Additionally, the Bank submitted a writtenplan to its regulators to improve the Bank’s liquidity position, includingmeasures to diversify funding sources and reduce reliance on brokereddeposits.  Since the date of theexamination on which the Written Agreement is based in part, the Company hasdiversified its funding sources, primarily through increasing its primaryfunding sources such as additional interest-bearing deposits in banks andinvestment securities. Over the next three quarters, approximately $95.5million of brokered deposits (excluding CDARS®) are expected to mature,although the Company may renew or rollover a portion of those brokereddeposits.  As needed for liquidity andbalance sheet planning, the Bank will continue to monitor and update its ratesin order to rollover and obtain new time deposits from its local markets and/ordirectly through the internet.

 

The holding company reliesprimarily on cash flow from the Bank as a primary source of liquidity. The Bankpays a management fee for its share of expenses paid by the holding company, aswell as for services provided by

 

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the holding company. The WrittenAgreement prohibits the Bank from paying dividends or making otherdistributions to the Holding Company without the prior written approval of theFederal Reserve and CDB.  Accordingly,the Bank’s ability to pay dividends or make other distributions to the holdingcompany and the holding company’s ability to pay cash dividends on its commonor preferred stock will be restricted until the Written Agreement isterminated.

 

The holding company requiresliquidity for the payment of interest on the subordinated debentures (ifapproved by our regulators), for operating expenses, principally salaries andbenefits, for repurchases of our common stock, and, if declared by our board ofdirectors, for the payment of dividends to our stockholders.  The Written Agreement prohibits the Companyfrom paying dividends or making other distributions without the prior writtenapproval of the Federal Reserve. Accordingly, our ability to pay dividends to our stockholders will berestricted until the Written Agreement is terminated.  Under the terms of our trust preferredfinancings, we may defer payment of interest on the trust preferred securitiesfor a period of up to sixty consecutive months as long as we are in compliancewith all covenants of the agreement. On July 31, 2009, we gave notice thatwe would defer regularly scheduled interest payments on each of oursubordinated debentures until further notice. During the deferral period, theCompany may not pay cash dividends to stockholders of any class of stock, withthe exception of cash dividends paid to preferred stockholders representingfractional shares of preferred in kind dividends.. In addition, we arecurrently restricted from making payments of principal or interest on oursubordinated debentures or trust preferred securities under the terms of ourWritten Agreement without the prior approval of the Federal Reserve.

 

Based on current cash flowprojections for the holding company, we estimate that cash balances maintainedby the holding company are sufficient to meet the operating needs of theholding company for over four years assuming that the holding company continuesto defer interest on its trust preferred securities.

 

**Application of CriticalAccounting Policies and Accounting Estimates**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses the Company’s condensed consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of these condensed consolidatedfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent liabilities at the date of the condensed consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. On an on-going basis, management evaluates its estimates andjudgments, including those related to customers and suppliers, allowance forloan losses, bad debts, investments, financing operations, derivatives,long-lived assets, contingencies and litigation. Management bases its estimatesand judgments on historical experience and on various other factors that arebelieved to be reasonable under the circumstances, the results of which haveformed the basis for making such judgments about the carrying value of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from the recorded estimates under different assumptions orconditions.  A summary of criticalaccounting policies and estimates are listed in the “Management’s Discussionand Analysis of Financial Condition and Results of Operations” section of theCompany’s 2009 Annual Report Form 10-K for the fiscal year ended December 31,2009.  There have been no changes to thecritical accounting policies listed in the Company’s 2009 Annual Report Form 10-Kduring 2010.

 

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**ITEM 3.**   **Quantitative and Qualitative Disclosure about Market Risk**

 

Market risk is the risk of loss ina financial instrument arising from adverse changes in market prices and rates,foreign currency exchange rates, commodity prices and equity prices. Our marketrisk arises primarily from interest rate risk inherent in our lending anddeposit taking activities. To that end, management actively monitors andmanages our interest rate risk exposure. We have not entered into any marketrisk sensitive instruments for trading purposes. We manage our interest ratesensitivity by matching the re-pricing opportunities on our earning assets tothose on our funding liabilities. We use various asset/liability strategies tomanage the re-pricing characteristics of our assets and liabilities designed toensure that exposure to interest rate fluctuations is limited to our guidelinesof acceptable levels of risk-taking. Balance sheet hedging strategies, including the terms and pricing ofloans and deposits and managing the deployment of our securities, are used toreduce mismatches in interest rate re-pricing opportunities of portfolio assetsand their funding sources.

 

**Credit Risk-related ContingentFeatures**

 

During the first quarter 2009, theCompany entered into interest rate swap contracts with certain commercialbanking customers to facilitate the customer’s respective risk managementstrategies.  Those interest rate swapsare simultaneously hedged by offsetting interest rate swaps that the Companyexecutes with a third party, such that the Company minimizes its net riskexposure resulting from such transactions. Thus, these existing interest rate derivatives result from a serviceprovided to certain qualifying customers and, therefore, are not used to manageinterest rate risk in the Company’s assets or liabilities. The Company managesa matched book with respect to its derivative instruments in order to minimizeits net risk exposure resulting from such transactions.

 

The Company evaluates its creditrisk associated with its interest rate swaps by evaluating the maximumpotential credit exposure prior to the execution of the interest rateswap.  This maximum potential creditexposure is evaluated by executive management in relation to the Company’sDerivatives and Hedging Policy.  On aquarterly basis, the actual credit risk for all swaps is reported to theCompany’s asset-liability management committee and compared to the maximumexposure approved in the Company’s Derivatives and Hedging Policy.

 

The Company has agreements with itsderivative counterparties that contain a provision where if the Companydefaults on any of its indebtedness, including default whererepayment of the indebtedness has not been accelerated by thelender, then the Company could also be declared in default on itsderivative obligations.

 

TheCompany also has agreements with certain of its derivative counterparties thatcontain a provision where if the Company fails to maintain its status as awell-capitalized institution, then the counterparty could terminate thederivative positions and the Company would be required to settle itsobligations under the agreements.

 

Asof September 30, 2010, the fair value of derivatives in a net liabilityposition, which excludes any adjustment for nonperformance risk related tothese agreements, was $493,000. The Company has minimum collateral postingthresholds with certain of its derivative counterparties, but has not beenrequired to post collateral against its obligations under these agreements. Ifthe Company had breached any of these provisions at September 30, 2010, itwould have been required to settle its obligations under the agreements at thetermination value.

 

**Net Interest Income Modeling**

 

Our Asset Liability ManagementCommittee, or ALCO, addresses interest rate risk. The committee is composed ofmembers of our senior management. The ALCO monitors interest rate risk byanalyzing the potential impact on the net portfolio of equity value and netinterest income from potential changes in interest rates, and considers theimpact of alternative strategies or changes in balance sheet structure. TheALCO manages our balance sheet in part to maintain the potential impact on netportfolio value and net interest income within acceptable ranges despitechanges in interest rates.

 

Our exposure to interest rate riskis reviewed on at least a quarterly basis by the ALCO and our board ofdirectors. Interest rate risk exposure is measured using interest ratesensitivity analysis to determine our change in net portfolio value and netinterest income in the event of hypothetical changes in interest rates. Ifpotential changes to net portfolio value and net interest income resulting fromhypothetical interest rate changes are not within board-approved limits, theboard may direct management to adjust the asset and liability mix to bring interestrate risk within board-approved limits.

 

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We monitor and evaluate ourinterest rate risk position on at least a quarterly basis using net interestincome simulation analysis under 100 and 200 basis point change scenarios (seebelow). Each of these analyses measures different interest rate risk factorsinherent in the financial statements.

 

The Company’s primary interest raterisk tool, the Net Interest Income Simulation Analysis, measures interest raterisk and the effect of interest rate changes on net interest income.  This analysis incorporates all of the Company’sassets and liabilities together with forecasted changes in the balance sheetand assumptions that reflect the current interest rate environment.  Through these simulations, managementestimates the impact on net interest income of a 100 and 200 basis point upwardor downward change of market interest rates over a one year period.  Assumptions are made to project rates for newloans and deposits based on historical analysis, management outlook andrepricing strategies.  Asset prepaymentsand other market risks are developed from industry estimates of prepaymentspeeds and other market changes.  Sincethe results of these simulations can be significantly influenced by assumptionsutilized, management evaluates the sensitivity of the simulation results tochanges in assumptions.

 

*The following table shows the netinterest income increase or decrease over the next twelve months as of September 30,2010 and 2009:*

 

**Table 18**

 

**MARKET RISK:**

 
| ** **                | ** ** | **Annualized Net Interest Income** | ** ** |
|---------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | **September 30, 2010**                  | ** ** | **September 30, 2009** | ** ** |
| ** **                | ** ** | **Amount of Change**                    | ** ** | **Amount of Change** | ** ** |
| ** **                | ** ** | **(In thousands)**                           | ** ** |
| **Rates in Basis Points** |       |                                              |       |   |   |
| 200                       |       | $                                                 | 1,578      |   | $ | 125 |   |
| 100                       |       | 673                                               |       | (702 | ) |
| Static                    |       | —                                            |       | — |   |
| (100)                     |       | (232                                              | )          | 4,464 |   |
| (200)                     |       | (1,243                                            | )          | 7,335 |   |
|                           |            |                                                   |            |  |  |  |  |

 

Overall, the Company believes it isasset sensitive.  At September 30,2010, the Company is positioned to have a short-term favorable interest incomeimpact in a 200 basis point or 100 basis point rising rate environment.  This is due to the amount of overnightfunding and variable rate loans on the books. Although overnight funding is extremely asset sensitive, the variablerate loans are less asset sensitive because many of these variable rate loanshave a floor, or minimum rate.  The mostcommon minimum rate is between 5.0% and 5.5%. As rates rise, the loan rate may continue to be at the minimumrate.   Because of the low rateenvironment, management also performed a rate shock of an increase of 300 basispoints on its net interest income.  This300 basis point rate shock reflects an increase of $3.9 million of net interestincome, or $2.4 million greater than the 200 basis point rate shock in thetable above.  Management also anticipatesthat deposit rates, other than time deposit rates, would increase immediatelyin a rising rate environment, but to a lesser degree than overnight fund rates.

 

In a falling rate environment, theCompany is projected to have a decrease in net interest income.  This is consistent with the expected assetsensitivity of the Company. Because it is not possible for many of the Company’sdeposit rates to fall 100 or 200 basis points due to the current rates alreadybeing below 100 basis points at September 30, 2010, the loss of grossinterest income in a falling rate environment is now expected to exceed thereduction in interest expense in a falling rate environment.  The target federal funds rate is currentlyset by the FOMC at a rate between 0 and 25 basis points. The prime rate hashistorically been set at a rate of 300 basis points over the target federalfunds rate. The Company’s interest rate risk modeling has an assumption that primewould continue to be set at a rate of 300 basis points over the target federalfunds rate, therefore, a 200 basis point decline in overall rates would onlyhave between a 0 and 25 basis point decline in both federal funds and the primerate.  Further, other rates that arecurrently below 1% or 2% (e.g. U.S. Treasuries, LIBOR, etc.) aremodeled to not fall below 0% with an overall 100 or 200 basis point decrease inrates. Many of our variable rate loans are set to an index tied to prime,federal funds or LIBOR, therefore, a further decrease in rates would not have asubstantial impact on loan yields.

 

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**ITEM 4.**   **Controls and Procedures**

 

As of the end of the period coveredby this Report, an evaluation was carried out by the Company’s management, withthe participation of the Chief Executive Officer and the Chief FinancialOfficer, of the effectiveness of the Company’s disclosure controls andprocedures (as defined in Rule 15d-15(e) under the SecuritiesExchange Act of 1934). The Company’s disclosure controls were designed toprovide reasonable assurance that information required to be disclosed inreports that we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the Securities and Exchange Commission. Itshould be noted that the design of any system of controls is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote. However, the controlshave been designed to provide reasonable assurance of achieving the controls’stated goals. Based on that evaluation, the Company’s Chief Executive Officerand Chief Financial Officer have concluded that the Company’s disclosurecontrols and procedures are effective at September 30, 2010 to ensure thatinformation required to be disclosed in the reports that we file or submitunder the Securities Exchange Act of 1934 was (i) accumulated andcommunicated to management, including the Company’s Chief Executive Officer andChief Financial Officer, to allow timely decisions regarding requireddisclosure and (ii) recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the Securities andExchange Commission.

 

There have been no changes in theCompany’s internal control over financial reporting (as defined in Rule 15d-15(f) underthe Securities Exchange Act of 1934) during our most recent fiscal quarter thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**PART II—OTHERINFORMATION**

 

**ITEM 1.**   **Legal Proceedings**

 

In the ordinary course of ourbusiness, we are party to various legal actions, which we believe areincidental to the operation of our business. Although the ultimate outcome andamount of liability, if any, with respect to these legal actions to which weare currently a party cannot presently be ascertained with certainty, in theopinion of management, based upon information currently available to us, anyresulting liability is not likely to have a material adverse effect on theCompany’s consolidated financial position, results of operations or cash flows.

 

**ITEM 1A.  Risk Factors**

 

In addition to the otherinformation set forth in this Report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2009, as amended and supplemented by thefactors discussed below, which could materially affect our business, financialcondition and/or operating results.  Therisks described below and in our Annual Report on Form 10-K are not theonly risks facing the Company. Additional risks and uncertainties not currentlyknown to us or that we currently deem to be immaterial also may materiallyaffect our business, financial condition and/or operating results.

 

**Recent legislativeand required regulatory initiatives will impose restrictions and requirementson financial institutions that could have an adverse effect on our business.**

 

The United States Congress, theTreasury Department and the Federal Deposit Insurance Corporation have takenseveral steps to support the financial services industry, which have includedcertain well-publicized programs, such as the Troubled Asset Relief Program, aswell as programs enhancing the liquidity available to financial institutionsand increasing insurance available on bank deposits. These programs haveprovided an important source of support to many financial institutions. Partlyin response to these programs and the current economic climate, the Presidentsigned into law on July 21, 2010 the Dodd-Frank Wall Street Reform andConsumer Protection Act of 2010 (the “Dodd-Frank Act”). Few provisions of theDodd-Frank Act are effective immediately, with various provisions becomingeffective in stages. Many of the provisions require governmental agencies toimplement rules over the next 18 months. These rules will increaseregulation of the financial services industry and impose restrictions on theability of firms within the industry to conduct business consistent withhistorical practices. These rules will, as examples, impact the ability offinancial institutions to charge certain banking and other fees, allow interestto be paid on demand deposits, impose new restrictions on lending practices andrequire depository institution holding companies to maintain capital levels atlevels not less than the levels required for insured depository institutions.We cannot predict the substance or impact of pending or future legislation orregulation. Compliance with such legislation or regulation may, among othereffects, significantly increase our costs, limit our product offerings andoperating flexibility, require significant adjustments in our internal businessprocesses, and possibly require us to maintain our regulatory capital at levelsabove historical practices.

 

**We continue tohold and acquire a large amount of OREO properties, which has led to increasedoperating expenses and vulnerability to additional declines in real propertyvalues.**

 

We foreclose on and take title tothe real estate serving as collateral for a number of our loans as part of ourbusiness. During 2009 and the first nine months of 2010, we continued to acquirea large amount of OREO. At September 30, 2010, the Bank had 38 separateOREO properties with an aggregate book value of $45.7 million. Large OREObalances have led to significantly increased expenses as we have incurred coststo manage and dispose of these properties. We expect that our operating resultsin 2010 will continue to be negatively affected by expenses associated withOREO, including personnel costs, insurance and taxes, completion and repaircosts, and valuation adjustments with assets that are tied up in OREO. Anyfurther decrease in market prices of real estate in our market areas may leadto additional OREO write downs, with a corresponding expense in our incomestatement. We evaluate OREO property values periodically and write down the carryingvalue of the properties if the results of our evaluations require it.

 

**To reduce ourlevel of nonperforming loans, we may elect to sell loans to third parties,which could result in losses for the Bank.**

 

We may elect to sell loans orpackages of loans to third parties. Such sales may be at prices below thecarrying value of the loans, which would require the immediate recognition ofadditional losses and reduce our capital levels.

 

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**ITEM 2.**   **Unregistered Sales of Equity Securities and Use of Proceeds**

 

(a)           None.

 

(b)           None.

 

(c)   The following table provides information with respect topurchases made by or on behalf of the Company or any “affiliated purchaser” (asdefined in Rule 10b-18(a)(3) under the Securities Exchange Act of1934), of our voting common stock during the third quarter 2010.  These purchases relate to the net settlementof vested, restricted stock awards.  TheCompany does not have any existing publicly announced repurchase plans orprograms.

 
| ** **                             | ** ** | **Total Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------------------------------------------|------------|
| July 1  to July 31           |       | 932                              |       | $                                                | 1.11       |   |
| August 1  to August 31       |       | —                           |       | —                                           |       |
| September 1  to September 30 |       | 1,740                            |       | 1.56                                             |       |
|                                   |       | 2,672                            |       | $                                                | 1.40       |   |

 

**ITEM 3.**   **Defaults Upon Senior Securities**

 

None.

 

**ITEM 4.**   **[Removed and Reserved]**

 

**ITEM 5.**   **Other Information**

** **

None.

 

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**ITEM 6.**   **Exhibits**

 
| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                                                                  |
|---------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                             |
| 3.1                       |       | Second Amended and Restated  Certification of Incorporation of the Registrant (incorporated by reference  to Exhibit 3.1 to Registrant’s Form 8-K filed on August 12,  2009).                |
|                      |       |                                                                                                                                                                                                             |
| 3.2                       |       | Certificate of Designations for  Series A Convertible Preferred Stock of the Registrant (incorporated by  reference to Exhibit 4.1 to Registrant’s Form 8-K filed on  August 12, 2009). |
|                      |       |                                                                                                                                                                                                             |
| 3.3                       |       | Amended and Restated Bylaws of  the Registrant (incorporated by reference to Exhibit 3.2 to Registrant’s  Form 8-K filed on May 7, 2008).                                                    |
|                      |       |                                                                                                                                                                                                             |
| 31.1                      |       | Section 302 Certification of  Chief Executive Officer.                                                                                                                                                      |
|                      |       |                                                                                                                                                                                                             |
| 31.2                      |       | Section 302 Certification of  Chief Financial Officer.                                                                                                                                                      |
|                      |       |                                                                                                                                                                                                             |
| 32.1                      |       | Section 906 Certification of  Chief Executive Officer.                                                                                                                                                      |
|                      |       |                                                                                                                                                                                                             |
| 32.2                      |       | Section 906 Certification of  Chief Financial Officer.                                                                                                                                                      |

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
| Date: November 2, 2010 | GUARANTY BANCORP                                                                 |
|-----------------------------|----------------------------------------------------------------------------------|
|                        |                                                                             |
|                        |                                                                             |
|                        |                                                                             |
|                        | /s/   PAUL  W. TAYLOR                                             |
|                        | Paul W. Taylor                                                                   |
|                        | *Executive  Vice President, Chief Financial and Operating Officer and Secretary* |

 

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