Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND 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 30,2009**

** **

**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 300  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 the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934, as amended during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

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

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.  See thedefinitions of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12B-2 of the Exchange Act.

 

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

 

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

 

As of October 29, 2009 there were52,439,898 shares of the registrant’s common stock outstanding, including1,068,005 shares of unvested stock grants and excluding 90,275 shares to beissued under its deferred compensation plan.

 

 

 

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**TABLE OF CONTENTS**

 
| ** **                                  | ** **                                                                                         | ** ** | **Page** |
|---------------------------------------------|----------------------------------------------------------------------------------------------------|------------|----------|
|                                        | Forward-Looking  Statements and Factors that Could Affect Future Results                           |       | 3        |
|                                        |                                                                                               |       |     |
| **PART I—FINANCIAL  INFORMATION** |                                                                                               | 5          |
|                                        |                                                                                               |       |     |
| ITEM 1.                                | Unaudited Condensed  Consolidated Financial Statements                                             |       | 5        |
|                                        |                                                                                               |       |     |
|                                        | Unaudited  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        |       | 29       |
|                                        |                                                                                               |       |     |
| ITEM 3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                        |       | 52       |
|                                        |                                                                                               |       |     |
| ITEM 4.                                | Controls and  Procedures                                                                           |       | 55       |
|                                        |                                                                                               |       |     |
| **PART II—OTHER  INFORMATION**    |                                                                                               | 56         |
|                                        |                                                                                               |       |     |
| ITEM 1.                                | Legal Proceedings                                                                                  |       | 56       |
|                                        |                                                                                               |       |     |
| ITEM 1A.                               | Risk Factors                                                                                       |       | 56       |
|                                        |                                                                                               |       |     |
| ITEM 2.                                | Unregistered  Sales of Equity Securities and Use of Proceeds                                       |       | 57       |
|                                        |                                                                                               |       |     |
| ITEM 3.                                | Defaults  Upon Senior Securities                                                                   |       | 57       |
|                                        |                                                                                               |       |     |
| ITEM 4.                                | Submission  of Matters to a Vote of Security Holders                                               |       | 57       |
|                                        |                                                                                               |       |     |
| ITEM 5.                                | Other Information                                                                                  |       | 57       |
|                                        |                                                                                               |       |     |
| ITEM 6.                                | Exhibits                                                                                           |       | 58       |

 

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### **Forward-Looking Statements and Factors that CouldAffect Future Results**

### ** **

Certain statementscontained in 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 press releases,and in oral and written statements made by or with our approval that are notstatements of historical fact and constitute forward-looking statements withinthe meaning of the Act.  Examples offorward-looking statements include, but are not limited to: (i) projectionsof revenues, expenses, income or loss, earnings or loss per share, the paymentor nonpayment of dividends, capital structure and other financial items; (ii) statementsof plans, objectives and expectations of the Company or its management or boardof directors, including those relating to products or services; (iii) statementsof future economic performance; and (iv) statements of assumptionsunderlying such statements. Words such as “believes”, “anticipates”, “expects”,“intends”, “targeted”, “projected”, “continue”, “remain”, “will”, “should”, “may”and other similar expressions are intended to identify forward-lookingstatements but are not the exclusive means of identifying such statements.

 

Forward-lookingstatements involve risks and uncertainties that may cause actual results todiffer materially from those in such statements. Factors that could causeactual results to differ from those discussed in the forward-looking statementsinclude, but are not limited to:

 

·                  Local, regional,national and international economic conditions and the impact they may have onus and our customers, and our assessment of that impact on our estimatesincluding, but not limited to the allowance for loan losses.

 

·                  Changes in thelevel of nonperforming assets and charge-offs.

 

·                  Theeffects of and changes in trade, monetary and fiscal policies and laws,including the interest rate policies of the Federal Open Market Committee ofthe Federal Reserve Board and the impact of the Federal Deposit Insurance Corporation’sTemporary Liquidity Guaranty Program.

 

·                  Changesimposed by regulatory agencies to increase our capital to a level greater thanthe level required for well-capitalized financial institutions, or otherchanges to the Company and its operations imposed through informalunderstandings or formal agreements entered into with bank regulatory agencies.

 

·                  Thefailure to maintain capital above the level required to be well-capitalizedunder the regulatory capital adequacy guidelines, or the failure to raiseadditional capital as needed.

 

·                  Changesin sources and uses of funds, including loans, deposits and borrowings,including the ability for our bank subsidiary to retain and grow core deposits,to purchase brokered deposits and maintain unsecured federal funds lines withcorrespondent banks and secured lines of credits.

 

·                  Inflationand interest rate, securities market and monetary fluctuations.

 

·                  Politicalinstability, acts of war or terrorism and natural disasters.

 

·                  Thetimely development and acceptance of new products and services and perceivedoverall value of these products and services by customers.

 

·                  Revenuesare lower than expected.

 

·                  Changesin consumer spending, borrowings and savings habits.

 

·                  Changesin the financial performance and/or condition of our borrowers.

 

·                  Creditquality deterioration, which could cause an increase in the provision for loanlosses.

 

·                  Technologicalchanges.

 

·                  Acquisitionsof acquired businesses and greater than expected costs or difficulties relatedto the integration of acquired businesses.

 

·                  The ability toincrease market share and control expenses.

 

·                  Changes in thecompetitive environment among financial or bank holding companies and otherfinancial service providers.

 

·                  The effect ofchanges in laws and regulations with which we and our subsidiaries must comply.

 

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·                  Changes in thesecurities markets.

 

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

 

·                  Changes in thedeferred tax asset valuation allowance in future quarters.

 

·                  Changes in ourorganization, compensation and benefit plans.

 

·                  The costs andeffects of legal and regulatory developments, including the resolution of legalproceedings or regulatory or other governmental inquiries, the results ofregulatory examinations or reviews, and the necessity of regulatory approvalfor dividend payments from the subsidiary bank to the holding company.

 

·                  Our success atmanaging the risks involved in the foregoing items.

 

Forward-looking statements speak only as of the date on which suchstatements are made.  We do not intend toupdate any forward-looking statement to reflect events or circumstances afterthe date on which such statement is made, or to reflect the occurrence of unanticipatedevents.

 

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**PART I -FINANCIAL INFORMATION**

** **

**ITEM 1. Unaudited Consolidated Financial Statements**

** **

**GUARANTY BANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **September 30,  2009**                                                    | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                                                            |       |                        |       |
| Cash and  due from banks                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | $                                                                               | 148,194    |                        | $          | 32,189 |   |
| Federal  funds sold                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | —                                                                          |       | 13,522                      |       |
| Cash and  cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 148,194                                                                         |       | 45,711                      |       |
| Securities  available for sale, at fair value                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 182,573                                                                         |       | 102,874                     |       |
| Securities  held to maturity (fair value of $10,904 and $13,505 at September 30,  2009 and December 31, 2008)                                                                                                                                                                                                                                                                                                                                           |       | 10,377                                                                          |       | 13,114                      |       |
| Bank  stocks, at cost                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | 16,347                                                                          |       | 28,276                      |       |
| Total  investments                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 209,297                                                                         |       | 144,264                     |       |
| Loans,  net of unearned discount                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 1,587,265                                                                       |       | 1,826,333                   |       |
| Less  allowance for loan losses                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | (49,038                                                                         | )          | (44,988                     | )          |
| Net loans                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 1,538,227                                                                       |       | 1,781,345                   |       |
| Loans  held for sale                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 5,500                                                                           |       | 5,760                       |       |
| Premises  and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 61,110                                                                          |       | 63,018                      |       |
| Other  real estate owned and foreclosed assets                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 32,246                                                                          |       | 484                         |       |
| Other  intangible assets, net                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 20,778                                                                          |       | 25,500                      |       |
| Other  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 42,026                                                                          |       | 36,659                      |       |
| Total  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | $                                                                               | 2,057,378  |                        | $          | 2,102,741 |   |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                                                            |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                                                            |       |                        |       |
| Liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                                                            |       |                        |       |
| Deposits:                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                                                            |       |                        |       |
| Noninterest-bearing  demand                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | $                                                                               | 366,308    |                        | $          | 433,761 |   |
| Interest-bearing  demand                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 472,418                                                                         |       | 460,856                     |       |
| Savings                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 72,483                                                                          |       | 68,064                      |       |
| Time                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 721,227                                                                         |       | 735,970                     |       |
| Total  deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 1,632,436                                                                       |       | 1,698,651                   |       |
| Securities  sold under agreements to repurchase and federal funds purchased                                                                                                                                                                                                                                                                                                                                                                                       |       | 12,424                                                                          |       | 21,781                      |       |
| Borrowings                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 164,420                                                                         |       | 166,404                     |       |
| Subordinated  debentures                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 41,239                                                                          |       | 41,239                      |       |
| Interest  payable and other liabilities                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 11,189                                                                          |       | 13,086                      |       |
| Total  liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 1,861,708                                                                       |       | 1,941,161                   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                                                                            |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                                                                            |       |                        |       |
| Preferred  stock—$0.001 par value; 9% non-cumulative; 73,280 shares authorized, 59,053  shares issued and outstanding at September 30, 2009; no shares  authorized or outstanding at December 31, 2008; liquidation preference  of $59,053 at September 30, 2009.                                                                                                                                                                             |       | 57,883                                                                          |       | —                      |       |
| Common  stock—$0.001 par value; 150,000,000 shares authorized, 64,557,950 shares  issued, 52,531,840 shares outstanding at September 30, 2009 (includes  1,084,838 shares of unvested restricted stock and 90,275 shares to be  issued); 100,000,000 share authorized, 64,542,950 shares issued, 52,654,131  shares outstanding at December 31, 2008 (includes 1,420,345 shares of  unvested restricted stock and 109,214 of shares to be issued). |       | 65                                                                              |       | 65                          |       |
| Additional  paid-in capital - Common stock                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 617,946                                                                         |       | 617,188                     |       |
| Shares to  be issued for deferred compensation obligations                                                                                                                                                                                                                                                                                                                                                                                                        |       | 156                                                                             |       | 710                         |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | (379,325                                                                        | )          | (352,003                    | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 1,387                                                                           |       | (1,302                      | )          |
| Treasury  Stock, at cost, 10,904,896 and 10,996,513, respectively                                                                                                                                                                                                                                                                                                                                                                                                 |       | (102,442                                                                        | )          | (103,078                    | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 195,670                                                                         |       | 161,580                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                  |       | $                                                                               | 2,057,378  |                        | $          | 2,102,741 |   |

 

See“Notes to Unaudited Consolidated Financial Statements.”

 

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**GUARANTY BANCORPAND SUBSIDIARIES**

**Unaudited Consolidated Statements of Operations**

 
| ** **                                                                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                                 | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                 | ** ** | **(In  thousands, except share and per share data)**     | ** ** |
|                                                                       |       |                                                     |       |                                      |       |   |   |   |   |
| Interest  income:                                                          |       |                                                     |       |                                      |       |   |   |   |   |
| Loans,  including fees                                                     |       | $                                                        | 21,710     |                                      | $          | 27,675 |   | $ | 67,994 |   | $ | 86,822 |   |
| Investment  securities:                                                    |       |                                                     |       |                                      |       |   |   |   |   |
| Taxable                                                                    |       | 751                                                      |       | 749                                       |       | 2,067 |   | 2,212 |   |
| Tax-exempt                                                                 |       | 763                                                      |       | 846                                       |       | 2,295 |   | 2,616 |   |
| Dividends                                                                  |       | 184                                                      |       | 441                                       |       | 670 |   | 1,346 |   |
| Federal  funds sold and other                                              |       | 61                                                       |       | 8                                         |       | 78 |   | 342 |   |
| Total  interest income                                                     |       | 23,469                                                   |       | 29,719                                    |       | 73,104 |   | 93,338 |   |
| Interest  expense:                                                         |       |                                                     |       |                                      |       |   |   |   |   |
| Deposits                                                                   |       | 6,581                                                    |       | 7,454                                     |       | 20,616 |   | 24,660 |   |
| Securities  sold under agreement to repurchase and federal funds purchased |       | 29                                                       |       | 160                                       |       | 98 |   | 442 |   |
| Borrowings                                                                 |       | 1,323                                                    |       | 1,485                                     |       | 3,956 |   | 3,931 |   |
| Subordinated  debentures                                                   |       | 625                                                      |       | 778                                       |       | 1,945 |   | 2,422 |   |
| Total  interest expense                                                    |       | 8,558                                                    |       | 9,877                                     |       | 26,615 |   | 31,455 |   |
| Net  interest income                                                       |       | 14,911                                                   |       | 19,842                                    |       | 46,489 |   | 61,883 |   |
| Provision  for loan losses                                                 |       | 20,000                                                   |       | 30,750                                    |       | 41,110 |   | 32,525 |   |
| Net  interest income, after provision for loan losses                      |       | (5,089                                                   | )          | (10,908                                   | )          | 5,379 |   | 29,358 |   |
| Noninterest  income:                                                       |       |                                                     |       |                                      |       |   |   |   |   |
| Customer  service and other fees                                           |       | 2,281                                                    |       | 2,521                                     |       | 7,314 |   | 7,325 |   |
| Gain  (loss) on sale of securities                                         |       | (1                                                       | )          | —                                    |       | (1 | ) | 138 |   |
| Other                                                                      |       | 170                                                      |       | 186                                       |       | 679 |   | 891 |   |
| Total  noninterest income                                                  |       | 2,450                                                    |       | 2,707                                     |       | 7,992 |   | 8,354 |   |
| Noninterest  expense:                                                      |       |                                                     |       |                                      |       |   |   |   |   |
| Salaries  and employee benefits                                            |       | 6,536                                                    |       | 5,927                                     |       | 19,987 |   | 24,831 |   |
| Occupancy  expense                                                         |       | 1,908                                                    |       | 1,958                                     |       | 5,755 |   | 6,090 |   |
| Furniture  and equipment                                                   |       | 1,103                                                    |       | 1,390                                     |       | 3,381 |   | 4,087 |   |
| Impairment of goodwill                                                     |       | —                                                   |       | 250,748                                   |       | — |   | 250,748 |   |
| Amortization  of intangible assets                                         |       | 1,559                                                    |       | 1,877                                     |       | 4,722 |   | 5,631 |   |
| Other  general and administrative                                          |       | 6,303                                                    |       | 3,982                                     |       | 16,759 |   | 12,902 |   |
| Total  noninterest expense                                                 |       | 17,409                                                   |       | 265,882                                   |       | 50,604 |   | 304,289 |   |
| Loss  before income taxes                                                  |       | (20,048                                                  | )          | (274,083                                  | )          | (37,233 | ) | (266,577 | ) |
| Income  tax benefit                                                        |       | (3,147                                                   | )          | (8,254                                    | )          | (9,911 | ) | (6,018 | ) |
| Net Loss                                                                   |       | $                                                        | (16,901    | )                                         | $          | (265,829 | ) | $ | (27,322 | ) | $ | (260,559 | ) |
|                                                                       |       |                                                     |       |                                      |       |   |   |   |   |
| Loss per  share–basic:                                                |       | $                                                        | (0.33      | )                                         | $          | (5.21 | ) | $ | (0.53 | ) | $ | (5.11 | ) |
| Loss per  share–diluted:                                              |       | (0.33                                                    | )          | (5.21                                     | )          | (0.53 | ) | (5.11 | ) |
|                                                                       |       |                                                     |       |                                      |       |   |   |   |   |
| Weighted  average shares outstanding-basic                                 |       | 51,416,909                                               |       | 51,067,439                                |       | 51,347,916 |   | 51,020,220 |   |
| Weighted  average shares outstanding-diluted                               |       | 51,416,909                                               |       | 51,067,439                                |       | 51,347,916 |   | 51,020,220 |   |

 

See“Notes to Unaudited Consolidated Financial Statements.”

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**UnauditedConsolidated Statements of Changes in Stockholders’ Equity and ComprehensiveIncome (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, 2007                                                               |       | —                                   |       | $                    |  — |                                                      | 52,616,991 |                                                | $          |  617,675                      |       | $                       |  573  |                     | $          |  (102,926                                            | )          | $          |  (95,196  | ) | $ |  (1,472 | ) | $ |  418,654 |   |
| Adjustment  to apply new accounting principal related to split-dollar life insurance  policies |       |                                     |       |                 |         |                                                      |       |                                                |       |                               |       |                    |       | (71                      | )          |                                                      |       | (71        | )              |
| Comprehensive  loss:                                                                           |       |                                     |       |                 |         |                                                      |       |                                                |       |                               |       |                    |       |                     |       |                                                      |       |       |           |
| Net loss                                                                                       |       | —                                   |       | —               |         | —                                                    |       | —                                              |       | —                             |       | —                  |       | (260,599                 | )          | —                                                    |       | (260,559   | )              |
| Other  comprehensive loss                                                                      |       | —                                   |       | —               |         | —                                                    |       | —                                              |       | —                             |       | —                  |       | —                   |       | (2,913                                                    | )          | (2,913     | )              |
| Total  comprehensive loss                                                                      |       |                                     |       |                 |         |                                                      |       |                                                |       |                               |       |                    |       |                     |       |                                                      |       | (263,472   | )              |
| Stock  compensation awards, net of forfeitures                                                 |       | —                                   |       | —               |         | 53,133                                                    |       | —                                              |       | —                             |       | —                  |       | —                   |       | —                                                    |       | —     |           |
| Earned  stock award compensation, net                                                          |       | —                                   |       | —               |         |                                                      |       | (665                                                | )          | —                             |       | —                  |       | —                   |       | —                                                    |       | (665       | )              |
|                                                                                           |       |                                     |       |                 |         |                                                      |       |                                                |       |                               |       |                    |       |                     |       |                                                      |       |       |           |
| Repurchase  of common stock                                                                    |       | —                                   |       | —               |         | (29,732                                                   | )          | —                                              |       | —                             |       | (159                    | )          | —                   |       | —                                                    |       | (159       | )              |
|                                                                                           |       |                                     |       |                 |         |                                                      |       |                                                |       |                               |       |                    |       |                     |       |                                                      |       |       |           |
| Deferred  compensation                                                                         |       | —                                   |       | —               |         | 21,346                                                    |       | —                                              |       | 119                                |       | —                  |       | —                   |       | —                                                    |       | 119        |           |
| Common  shares issued                                                                          |       | —                                   |       | —               |         | —                                                    |       | 28                                                  |       | (28                                | )          | —                  |       | —                   |       | —                                                    |       | —     |           |
|                                                                                           |       |                                     |       |                 |         |                                                      |       |                                                |       |                               |       |                    |       |                     |       |                                                      |       |       |           |
| Balance,  September 30, 2008                                                              |       | —                                   |       | $                    |  — |                                                      | 52,661,738 |                                                | $          |  617,038                      |       | $                       |  664  |                     | $          |  (103,085                                            | )          | $          |  (355,826 | ) | $ |  (4,385 | ) | $ |  154,406 |   |
|                                                                                           |       |                                     |       |                 |         |                                                      |       |                                                |       |                               |       |                    |       |                     |       |                                                      |       |       |           |
| 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 |   |

 

See“Notes to Unaudited Consolidated Financial Statements.”

 

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Table of Contents

 

**GUARANTY BANCORPAND SUBSIDIARIES**

**Unaudited Consolidated Statements of Cash Flows**

 
| ** **                                                                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| ** **                                                                                | ** ** | **(In thousands)**                       | ** ** |
| Cash flows from operating activities:                                                     |       |                                     |       |   |   |
| Net loss                                                                                  |       | $                                        | (27,322    | ) | $ | (260,559 | ) |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities: |       |                                     |       |   |   |
| Depreciation and amortization                                                             |       | 7,388                                    |       | 8,944 |   |
| Provision for loan losses                                                                 |       | 41,110                                   |       | 32,525 |   |
| Change in valuation allowance for deferred tax asset                                      |       | 5,000                                    |       | — |   |
| Stock compensation, net                                                                   |       | 758                                      |       | (665 | ) |
| Loss (gain) on sale of securities                                                         |       | 1                                        |       | (138 | ) |
| Gain on sale or disposal of real estate owned and assets                                  |       | 61                                       |       | (10 | ) |
| Real estate valuation adjustments                                                         |       | 2,633                                    |       | 1,185 |   |
| Impairment of goodwill                                                                    |       | —                                   |       | 250,748 |   |
| Write down of premises and equipment                                                      |       | —                                   |       | 1,070 |   |
| Other                                                                                     |       | (771                                     | )          | 183 |   |
| Net change in:                                                                            |       |                                     |       |   |   |
| Other assets                                                                              |       | (11,946                                  | )          | 1,508 |   |
| Interest payable and other liabilities                                                    |       | (1,897                                   | )          | (12,203 | ) |
| Net cash provided by operating activities                                                 |       | 15,015                                   |       | 22,588 |   |
| Cash flows from investing activities:                                                     |       |                                     |       |   |   |
| Activity in available-for-sale securities:                                                |       |                                     |       |   |   |
| Sales, maturities, prepayments, and calls                                                 |       | 19,669                                   |       | 42,839 |   |
| Purchases                                                                                 |       | (94,969                                  | )          | (25,592 | ) |
| Activity in held-to-maturity securities and bank stocks:                                  |       |                                     |       |   |   |
| Maturities, prepayments and calls                                                         |       | 14,945                                   |       | 1,334 |   |
| Purchases                                                                                 |       | (85                                      | )          | — |   |
| Loan originations and principal collections, net                                          |       | 154,293                                  |       | (15,100 | ) |
| Collections on and proceeds from sale of loans held for  sale                             |       | 7,960                                    |       | 492 |   |
| Proceeds from sales of other real estate owned and  foreclosed assets                     |       | 6,212                                    |       | 3,596 |   |
| Proceeds from sales of premises and equipment                                             |       | 8                                        |       | 2,462 |   |
| Additions to premises and equipment                                                       |       | (845                                     | )          | (843 | ) |
| Net cash provided by investing activities                                                 |       | 107,188                                  |       | 9,188 |   |
| Cash flows from financing activities:                                                     |       |                                     |       |   |   |
| Net decrease in deposits                                                                  |       | (66,215                                  | )          | (164,406 | ) |
| Net change in short-term borrowings                                                       |       | —                                   |       | (16,359 | ) |
| Proceeds from issuance of long-term debt                                                  |       | —                                   |       | 125,169 |   |
| Repayment of long-term debt                                                               |       | (1,984                                   | )          | (6,017 | ) |
| Net change in federal funds purchased and repurchase  agreements                          |       | (9,357                                   | )          | 18,987 |   |
| Repurchase of common stock                                                                |       | (47                                      | )          | (159 | ) |
| Issuance of preferred stock                                                               |       | 57,883                                   |       | — |   |
| Net cash used by financing activities                                                     |       | (19,720                                  | )          | (42,785 | ) |
| Net change in cash and cash equivalents                                                   |       | 102,483                                  |       | (11,009 | ) |
| Cash and cash equivalents, beginning of period                                            |       | 45,711                                   |       | 52,356 |   |
| Cash and cash equivalents, end of period                                                  |       | $                                        | 148,194    |   | $ | 41,347 |   |

 

See“Notes to Unaudited Consolidated Financial Statements.”

 

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Table of Contents

 

**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed ConsolidatedFinancial Statements**

 

**(1)****              ****Organization, Operations andBasis of Presentation**

 

GuarantyBancorp (formerly Centennial Bank Holdings, Inc.) is a bank holdingcompany registered under the Bank Holding Company Act of 1956, as amended.  On May 6, 2008, the stockholders of the Companyapproved the proposal to change the name of the holding company from CentennialBank Holdings, Inc. to Guaranty Bancorp.  This name change was effective on May 12,2008.

 

Our principal business is to serve as a holding company forour subsidiaries. As of September 30, 2009, Guaranty Bancorp had a singlebank subsidiary, Guaranty Bank and Trust Company, referred to as Guaranty Bankor the Bank.

 

Reference to “Bank” means Guaranty Bank, and “we” or “Company”means Guaranty Bancorp on a consolidated basis with the Bank, ifapplicable.  References to “GuarantyBancorp” or to the holding company refer to the parent company on a stand-alonebasis.

 

The Bank is a full-servicecommunity bank offering an array of banking products and services to consumersand small to medium-sized businesses in the communities it serves along the FrontRange of Colorado, including accepting time and demand deposits and originatingcommercial loans (including energy loans), real estate loans, Small BusinessAdministration guaranteed loans and consumer loans.  The Bank also provides trust services, includingpersonal trust administration, estate settlement, investment managementaccounts and self-directed IRAs. Substantially all loans are secured by specific items of collateralincluding business assets, consumer assets and commercial and residential realestate.  Commercial loans are expected tobe repaid from cash flow from operations of business.  There are no significant concentrations ofloans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on thereal estate and general economic conditions of the area, among other factors.

 

***(a)******                ******Basis ofPresentation***

 

The accounting and reporting policies of the Company conform togenerally accepted accounting principles in the United States of America. Allsignificant intercompany balances and transactions have been eliminated. Ourfinancial statements reflect all adjustments that are, in the opinion ofmanagement, necessary for a fair presentation of the financial position andresults of operations for the periods presented. We have evaluated allsubsequent events through October 30, 2009, the date the financialstatements were issued.

 

Certain information and note disclosures normally included inconsolidated financial statements prepared in accordance with generallyaccepted accounting principles in the United States of America have beencondensed or omitted pursuant to the rules and regulations of theSecurities and Exchange Commission. The interim operating results are notnecessarily indicative of operating results for the full 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, 2008.

 

***(b)******                ******Use ofEstimates***

 

The preparation of the consolidated financial statements in conformitywith generally accepted accounting principles in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities as of the dates of the consolidated balancesheets and income and expense for the periods presented. Actual results coulddiffer significantly from those estimates. Material estimates that areparticularly susceptible to significant changes include the assessment forother than temporary impairment of certain investment securities, the allowancefor loan losses, valuation of other real estate owned, deferred tax assets andliabilities, carrying value of intangible assets, stock compensation expenseand accounting for derivative instruments. Assumptions and factors are evaluated on an annual basis or wheneverevents or changes in circumstance indicate that the previous assumptions andfactors have changed.  The result of theanalysis could result in adjustments to the estimates.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

***(c)******                 ******Allowancefor Loan Losses***

 

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

 

The allowance for loan losses is evaluated on a regular basis bymanagement and based upon management’s periodic review of the collectibility ofthe loans in light of historical experience, the nature and volume of the loanportfolio, adverse situations that may affect borrowers’ ability to repay,estimated value of any underlying collateral and prevailing economicconditions.  This evaluation isinherently subjective as it requires estimates that are susceptible tosignificant 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 losses and recoveries on loans previouslycharged off are added to the allowance.

 

Theallowance consists of specific and general components. The specific componentrelates to loans that are individually classified as impaired. The generalcomponent covers all other loans and is based on historical loss experienceadjusted for current factors. A loan is considered impaired when, based oncurrent information and events, it is probable that the Company will be unableto collect the scheduled payments of principal or interest when due accordingto the contractual terms of the loan agreement. Factors considered bymanagement in determining impairment include payment status and the probabilityof collecting scheduled principal and interest payments when due. Loans thatexperience insignificant payment delays and payment shortfalls generally arenot 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 allocatedallowance for impaired loans is measured on a loan-by-loan basis forcommercial, real estate and agricultural loans by either the present value ofexpected future cash flows discounted at the loan’s effective interest rate,the loan’s obtainable market price, or the fair value of the collateral if theloan is collateral dependent. Groups of smaller balance, homogenous loans arecollectively evaluated for impairment.

 

***(d)******                     ******OtherIntangible Assets***

 

Coredeposit intangible assets, referred to as CDI, are recognized apart fromgoodwill at the time of acquisition based on valuations prepared by independentthird parties 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.

 

***(e)      StockIncentive Plan***

 

TheCompany’s Amended and Restated 2005 Stock Incentive Plan (“Plan”) provides for upto 2,500,000 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, 2009, the Company has only granted stockawards. The Company accounts for the equity-based compensation using theprovisions found in the Financial Accounting Standard Board’s (FASB) AccountingStandards Codification (FASC) Subsection 718-10.  The Company recognizes stock compensationcost for services received in a share-based payment transaction over therequired service period, generally defined as the vesting period. For awardswith graded vesting, compensation cost is recognized on a straight-line basisover the requisite service period for the entire award. The compensation costof employee and director services received in exchange for stock awards isbased on the 

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

grant datefair value of the award (as determined by quoted market prices). Stock compensationexpense recognized reflects estimated forfeitures, adjusted as necessary foractual forfeitures. The Company has issued stock awards that vest basedon service periods from one to four years, and stock awards that vest based onperformance conditions. The maximum contractual term for the performance-basedshare awards is December 31, 2012. As of September 30, 2009, none ofthe performance-based restricted stock awards were expected to vest prior tothe end of the contractual term. Should this expectation change, additionalexpense could be recorded in future periods.

 

***(f)       Deferred CompensationPlans***

 

TheCompany has Deferred Compensation Plans (the “Plans”) that allow 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 2005 Deferred Compensation Plan (2005 Plan) are given theopportunity to elect to have all or a portion of their deferred compensationearn a rate of return equal to the total return on the Company’s common stock.The 2005 Plan does not provide for diversification of a participant’s assetsallocated to Company common stock and assets allocated to Company common stockcan only be settled with a fixed number of shares of stock. In accordance withFASC Section 710-10-35, the deferred compensation obligation associatedwith Company common stock is classified as a component of stockholders’ equityand the related shares are treated as shares to be issued and are included intotal shares outstanding for accounting purposes. At September 30, 2009and December 31, 2008, there were 90,275 and 109,214 shares, respectively,to be issued.  Subsequent changes in thefair value of the common stock are not reflected in operations or stockholders’equity of the Company. Actual Company common stock held by the Company for thesatisfaction of obligations of the 2005 Plan is classified as treasury stock.

 

***(g)******                ******Incometaxes***

 

Income tax expense is thetotal of the current year income tax due or refundable and the change indeferred tax assets and liabilities. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax credit carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date. Deferred tax assets are reduced by a valuationallowance when, in the opinion of management, it is more likely than not thatsome portion or all of the deferred tax asset will not be realized. Indetermining the realizability of the deferred tax assets, management evaluatesboth positive and negative evidence, including the existence of any cumulativelosses in the current year and the prior two years, the amount of taxes paid inavailable carry-back years, the forecasts of future income, applicable taxplanning strategies, and assessments of current and future economic andbusiness conditions.  This analysis isupdated quarterly and adjusted as necessary. The Company established a net deferred tax asset valuation allowance of$5.0 million for the quarter ended September 30, 2009.

 

At September 30, 2009 and December 31,2008, the Company did not have any tax benefit disallowed related touncertainty in income taxes as discussed at FASC Section 740-10-05, *Income Taxes*.  Atax position is recognized as a benefit only if it is “more likely than not”that the tax position would be sustained in a tax examination, with a taxexamination being presumed to occur. The amount recognized is the largestamount of tax benefit that is greater than 50% likely of being realized onexamination. For tax positions not meeting the “more likely than not” test, notax benefit is recorded.

 

The Company and its subsidiary aresubject to U.S. federal income tax and State of Colorado tax.  The Company is no longer subject toexamination by Federal or State taxing authorities for years before 2006. At September 30,2009 and December 31, 2008, the Company did not have any unrecognized taxbenefits. The Company does not expect the amount of any unrecognized taxbenefits to significantly increase in the next twelve months.  The Company recognizes interest related toincome tax matters as interest expense and 

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

penaltiesrelated to income tax matters as other noninterest expense. At September 30,2009 and December 31, 2008, the Company does not have any amounts accruedfor interest and penalties.

 

***(h)        DerivativeFinancial Instruments***

 

Management utilizes derivativefinancial instruments to accommodate the needs of its customers primarilythrough the use of interest rate swaps. Derivative financial instruments are not used to manage interest raterisk in the Company’s assets or liabilities. The Company offsets each interest rate swap to minimize its net riskexposure resulting from such transactions and accordingly has not elected toqualify for hedge accounting methods addressed under current provisions ofGAAP. All derivative financial instruments are stated at fair value in theConsolidated Statements of Condition with changes in fair value reported incurrent period earnings.  See Note 10 forfurther information.

 

***(i)         Earningsper Common Share***

 

Basic earnings per share representsincome available to common stockholders divided by the weighted average numberof common shares outstanding during the period. Diluted earnings per sharereflect additional common shares that would have been outstanding if potentialdilutive common shares had been issued. In accordance with earnings per shareguidance found at FASC 260-10,*Earnings per Share,*the Company’s obligation to issue shares of stock to participants in its 2005Deferred Compensation Plan has been treated as outstanding shares of stock in thebasic earnings per share calculation. The Company’s unvested restricted stock awards do not contain nonforfeitable rights to dividendsand, therefore, are not subject to the two-class method of computing basicearnings per share.  The Company’s outstandingshares of preferred stock do not participate in the earnings or loss of theCompany, and therefore, are not subject to the two-class method of computingbasic earnings per share. Dilutive common shares that may beissued by the Company relate to unvested common share grants subject to aservice condition for the nine months ended September 30, 2009 and 2008.As a result of the net loss for the three and nine-months ended September 30,2009 and 2008, all unvested restricted shares were considered to beanti-dilutive and thus were excluded from earnings per share computations forthe three and nine months ended September 30, 2009 and 2008,respectively.  Earnings per common sharehave been computed based on the following:

 
| ** **                                                                    | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                          | ** ** | ** **                                 |       |                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average  common shares outstanding                                            |       | 51,416,909                                 |       | 51,067,439                                |       | 51,347,916 |   | 51,020,220 |   |
| Effect of  dilutive preferred stock(1)                                        |       | —                                     |       | —                                    |       | — |   | — |   |
| Effect of  dilutive unvested stock grants (2)                            |       | —                                     |       | —                                    |       | — |   | — |   |
| Average  shares outstanding for calculating diluted earnings per common share |       | 51,416,909                                 |       | 51,067,439                                |       | 51,347,916 |   | 51,020,220 |   |

 

----

(1) The Company has 59,053shares outstanding of convertible preferred stock.  These shares are convertible into 32,807,222shares of common stock of the Company. The impact of the future conversion of these shares is antidilutive forthe three and nine months ended September 30, 2009 due to the net loss forthose periods.

 

(2) Impact of unvested stockgrants of 1,084,838 and 1,566,812 at September 30, 2009 and 2008,respectively, is antidilutive for the three and nine months ended September 30,2009 and 2008, respectively, due to the net loss for those periods.

 

***(j)   Recently Issued Accounting Standards***

 

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

 

On July 1,2009, the FASB’s GAAP Codification became effective as the sole authoritativesource of US GAAP.  This codification wasissued under FASB Statement No. 168, **The***FASBAccounting Standards*

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

*Codification**TM* **and the Hierarchyof Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162****(SFAS168)*. ***This Codification**reorganizes current GAAP for non-governmental entities into a topical index tofacilitate accounting research and to provide users additional assurance thatthey have referenced all related literature pertaining to a given topic.  Existing GAAP prior to the Codification wasnot altered in compilation of the GAAP Codification. The GAAP Codificationencompasses all FASB Statements of Financial Accounting Standards (SFAS),Emerging Issues Task Force (EITF) statements, FASB Staff Positions (FSP), FASBInterpretations (FIN), FASB Derivative Implementation Guides (DIG), AmericanInstitute of Certified Public Accountants (AICPA) Statement of Positions(SOPs), Accounting Principals Board (APB) Opinions and Accounting ResearchBulletins (ARBs), along with the remaining body of GAAP, effective as of June 30,2009.  Financial statements issued forall interim and annual periods ending after September 15, 2009 willreference accounting guidance embodied in the Codification as opposed toreferencing the previously authoritative pronouncements.  Accounting literature included in theCodification is referenced by Topic, Subtopic, Section, Paragraph and Subparagraph.

 

***NewlyIssued But Not Yet Effective Accounting Standards:***

 

In June 2009,the FASB issued new guidance referenced at FASC 105-10-65-1-d-2,  *Transition Related to FASBStatement No. 168*, *The**FASB Accounting Standards CodificationTM**and the Hierarchy of Generally Accepted AccountingPrinciples*  (subparagraph105-10-65-1-d-2).  Subparagraph105-10-65-1-d-2 provides that Statement No. 166 *Accountingfor the Transfer of Financial Assets and Amendment of FASB Statement No. 140Instruments*(SFAS 166)**shall remainauthoritative until such time that it is integrated into the Codification.  SFAS 166 removes the concept of a specialpurpose entity (SPE) including Variable Interest Entities that are SPEs. Itlimits the circumstances in which a transferor derecognizes a financialasset.  The statement amends therequirements for the transfer of a financial asset to meet the requirements for“sale” accounting.  The statement iseffective for all interim and annual periods beginning after November 15,2009. The Company does not expect the adoption to have a material impact on theCompany’s consolidated financial position, results of operations or cash flows.

 

In June 2009,the FASB issued new guidance referenced at FASC 105-10-65-1-d-3,  *Transition Related to FASBStatement No. 168*, *The**FASB Accounting Standards CodificationTM**and the Hierarchy of Generally Accepted AccountingPrinciples* (Subparagraph 105-10-65-1-d-3).  Subparagraph 105-10-65-1-d-3 provides thatStatement No. 167 *Amendments to FASBInterpretation No. 46(R) *(SFAS 167) shall remainauthoritative until such time that it is integrated into the Codification.  SFAS 167 Statement amends prior variableinterest entity guidance and requires an enterprise to perform an analysis todetermine whether the enterprise’s variable interest give it a controllingfinancial interest in the variable interest entity.  The statement is effective for all interimand annual periods beginning after November 15, 2009. The Company does notexpect the adoption to have a material impact on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

***(k)   Reclassifications***

** **

Certain reclassificationsof prior year balances have been made to conform to the current yearpresentation. These reclassifications had no impact on the Company’sconsolidated financial position, results of operations or net change in cashand cash equivalents.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

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

 

*The fair value of available for sale debt securities and the relatedgross unrealized gains and losses recognized in accumulated other comprehensiveincome (loss) were as follows at the dates presented:*

* *
| ** **                                                 | ** ** | **Fair Value**     | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Amortized  Cost** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                                                 | ** ** | **(In thousands)** | ** ** |
| September 30, 2009:                                   | ** ** | ** **         | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **          | ** ** |
| U.S. government agencies and government-sponsored entities |       | $                  | 17,470     |                         | $          | 34                            |       | $                   | (21        | ) | $ | 17,457 |   |
| State and municipal                                        |       | 65,579             |       | 1,189                        |       | —                        |       | 64,390              |       |
| Mortgage-backed securities – agency/residential       |       | 92,300             |       | 1,479                        |       | (337                          | )          | 91,372              |       |
| Mortgage-backed securities – private/residential      |       | 5,161              |       | —                       |       | (107                          | )          | 5,054               |       |
| Marketable equity                                          |       | 1,519              |       | —                       |       | —                        |       | 1,519               |       |
| Other securities                                           |       | 544                |       | —                       |       | —                        |       | 544                 |       |
| Total                                                      |       | $                  | 182,573    |                         | $          | 2,702                         |       | $                   | (465       | ) | $ | 180,336 |   |
|                                                       |       |               |       |                         |       |                          |       |                |       |
| December 31, 2008:                                    | ** ** | ** **         | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **          | ** ** |
| U.S. Treasury securities                                   |       | $                  | 3,495      |                         | $          | 1                             |       | $                   | —     |   | $ | 3,494 |   |
| U.S. government agencies and government-sponsored entities |       | 2,510              |       | 17                           |       | —                        |       | 2,493               |       |
| State and municipal                                        |       | 63,015             |       | 456                          |       | (2,836                        | )          | 65,395              |       |
| Mortgage-backed securities – agency/residential       |       | 31,965             |       | 299                          |       | (40                           | )          | 31,706              |       |
| Marketable equity                                          |       | 1,345              |       | —                       |       | —                        |       | 1,345               |       |
| Other securities                                           |       | 544                |       | —                       |       | —                        |       | 544                 |       |
| Total                                                      |       | $                  | 102,874    |                         | $          | 773                           |       | $                   | (2,876     | ) | $ | 104,977 |   |

 

*Thecarrying amount, unrecognized gains and losses, and fair value of securitiesheld to maturity were as follows at the dates presented:*

* *
| ** **                                           | ** ** | **Amortized  Cost** | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair value** | ** ** |
|------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                                           | ** ** | **(In thousands)**  | ** ** |
| September 30, 2009:                             |       |                |       |                         |       |                          |       |                |       |
| Mortgage-backed securities – agency/residential |       | $                   | 10,377     |                         | $          | 527                           |       | $                   | —     |   | $ | 10,904 |   |
|                                                 |       |                | ** ** | ** **                   | ** ** | ** **                    |       |                |       |
| December 31, 2008:                              |       |                |       |                         |       |                          |       |                |       |
| Mortgage-backed securities – agency/residential |       | $                   | 13,114     |                         | $          | 391                           |       | $                   | —     |   | $ | 13,505 |   |

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

The amortized costand estimated fair value of available for sale debt securities by contractualmaturity at September 30, 2009 are shown below. Expected maturities willdiffer from contractual maturities because borrowers may have the right toprepay obligations 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                                   |       | $                            | 2,145      |   | $ | 2,153 |   |
| Due after one year through five years                     |       | 13,860                       |       | 14,270 |   |
| Due after five years through ten years                    |       | 8,385                        |       | 8,605 |   |
| Due after ten years                                       |       | 58,001                       |       | 58,565 |   |
| Total AFS, excluding MBS and marketable equity securities |       | 82,391                       |       | 83,593 |   |
| Mortgage-backed and marketable equity securities          |       | 97,945                       |       | 98,980 |   |
| Total available for sale                                  |       | $                            | 180,336    |   | $ | 182,573 |   |

 
| ** **                   | ** ** | **Held to maturity**    | ** ** |
|------------------------------|------------|-------------------------|------------|
| ** **                   | ** ** | **Amortized cost** | ** ** | **Fair value** | ** ** |
| ** **                   | ** ** | **(In thousands)**      | ** ** |
| Securities held to maturity: |       |                    |       |   |   |
| Mortgage-backed securities   |       | $                       | 10,377     |   | $ | 10,904 |   |
|                              |            |                         |            |  |  |  |  |

 

The followingtables present the fair value and the unrealized loss on securities that weretemporarily impaired as of September 30, 2009 and December 31, 2008by aggregated major security type and length of time in a continuous unrealizedloss position:

 

**September 30,2009**

 
| ** **                                                  | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**       | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|-----------------|------------|
| ** **                                                  | ** ** | **Fair value**               | ** ** | **Unrealized  losses**     | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** |
| ** **                                                  | ** ** | **(In thousands)**           | ** ** |
| Description of securities:                                  |       |                         |       |                       |       |            |       |   |   |   |   |   |   |
| U.S.  government agencies and government-sponsored entities |       | $                            | 7,473      |                       | $          | (21             | )          | $ | — |   | $ | — |   | $ | 7,473 |   | $ | (21 | ) |
| Mortgage-backed securities – agency/residential        |       | 20,010                       |       | (337                       | )          | —          |       | — |   | 20,010 |   | (337 | ) |
| Mortgage-backed securities – private/residential       |       | 5,161                        |       | (107                       | )          |            |       |   |   | 5,161 |   | (107 | ) |
| Total temporarily impaired                                  |       | $                            | 32,644     |                       | $          | (465            | )          | $ | — |   | $ | — |   | $ | 32,644 |   | $ | (465 | ) |

 

**December 31,2008**

 
| ** **                                           | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**       | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|-----------------|------------|
| ** **                                           | ** ** | **Fair value**               | ** ** | **Unrealized  losses**     | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** |
| ** **                                           | ** ** | **(In thousands)**           | ** ** |
| Description of securities:                           |       |                         |       |                       |       |            |       |   |   |   |   |   |   |
| Mortgage-backed securities – agency/residential |       | $                            | 4,348      |                       | $          | (40             | )          | $ | — |   | $ | — |   | $ | 4,348 |   | $ | (40 | ) |
| State and municipal                                  |       | 2,670                        |       | (23                        | )          | 35,897          |       | (2,813 | ) | 38,567 |   | (2,836 | ) |
| Total temporarily impaired                           |       | $                            | 7,018      |                       | $          | (63             | )          | $ | 35,897 |   | $ | (2,813 | ) | $ | 42,915 |   | $ | (2,876 | ) |

 

At September 30, 2009, the Company owned threemortgage-backed securities (MBS) and two agency securities in unrealized losspositions.  No security was in anunrealized loss position for greater than twelve months at September 30,2009.  Generally, the fair value of ouravailable for sale securities fluctuates as a result of changes in marketinterest rates.  A single mortgage-backedagency sponsored by a U.S. Government agency accounts for approximately 54% ofthe total unrealized loss at September 30, 2009.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

All of the Company’s mortgage-backed securities arebacked by either a U.S. Government agency or government-sponsored agency,except for a single private-label mortgage-backed security.  This private-label security is a seniortranche that was rated AAA by two rating agencies at September 30, 2009.

 

The Company owns securities issued by U.S.government agencies and government-sponsored entities that have an AAA creditrating as determined by at least one major rating agency or state and municipalbonds that have either been rated as investment grade or higher by at least onemajor rating agency or have been subject to an annual internal review processby management.  This annual internalreview process considers a review of the issuers’ current financial statements,including the related cash flows and interest payments. This annual internalreview process was updated in the third quarter 2009 for the largest non-ratedmunicipal security in our portfolio. Although this security was in an unrealized gain position at September 30,2009, management reviewed the issuer’s current financial statements in thethird quarter 2009 and concluded that no impairment existed related to creditissues.

 

Management concluded that the unrealized lossposition on its securities was a result of the level of market interest ratesand not a result of the underlying issuers’ ability to repay.  In addition, we do not intend to sell thesecurities with an unrealized loss and do not believe that it is more likelythan not that we will be required to sell a security in an unrealized loss positionprior to a recovery in its value.

 

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

 

*A summary of net loans held for investment by loan type at the datesindicated is as follows:*

 
| ** **                       | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **(In thousands)**           | ** ** |
| Loans on real estate:            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Residential and commercial       |       | $                            | 715,005    |                        | $          | 680,030 |   |
| Construction                     |       | 163,074                      |       | 268,306                     |       |
| Equity lines of credit           |       | 56,591                       |       | 50,270                      |       |
| Commercial loans                 |       | 573,562                      |       | 746,241                     |       |
| Agricultural loans               |       | 19,428                       |       | 22,738                      |       |
| Lease financing                  |       | 4,722                        |       | 3,549                       |       |
| Installment loans to individuals |       | 38,704                       |       | 38,352                      |       |
| Overdrafts                       |       | 768                          |       | 855                         |       |
| SBA and other                    |       | 18,181                       |       | 19,592                      |       |
|                             |       | 1,590,035                    |       | 1,829,933                   |       |
| Less:                            |       |                         |       |                        |       |
| Allowance for loan losses        |       | (49,038                      | )          | (44,988                     | )          |
| Unearned discount                |       | (2,770                       | )          | (3,600                      | )          |
| Net Loans                        |       | $                            | 1,538,227  |                        | $          | 1,781,345 |   |

 

*A summary of transactions in the allowance for loan losses for theperiod indicated is as follows:*

 
| ** **                                  | ** ** | **Quarter  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                              | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **(In  thousands)**                   | ** ** |
| Balance,  beginning of period               |       | $                                     | 43,041     |                                      | $          | 26,506 |   | $ | 44,988 |   | $ | 25,711 |   |
| Provision  for loan losses                  |       | 20,000                                |       | 30,750                                    |       | 41,110 |   | 32,525 |   |
| Loans  charged-off                          |       | (14,618                               | )          | (12,779                                   | )          | (38,389 | ) | (14,195 | ) |
| Recoveries  on loans previously charged-off |       | 615                                   |       | 288                                       |       | 1,329 |   | 724 |   |
| Balance,  end of period                     |       | $                                     | 49,038     |                                      | $          | 44,765 |   | $ | 49,038 |   | $ | 44,765 |   |

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

*The following table details key information regarding the Company’simpaired loans at the dates indicated:*

 
| ** **                                     | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **(In thousands)**           | ** ** |
| Impaired loans with a valuation  allowance     |       | $                            | 34,562     |                        | $          | 42,191 |   |
| Impaired loans without a valuation  allowance  |       | 46,623                       |       | 12,631                      |       |
| Total impaired loans                           |       | $                            | 81,185     |                        | $          | 54,822 |   |
| Valuation allowance related to  impaired loans |       | $                            | 7,515      |                        | $          | 11,064 |   |

* *
| ** **                                           | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|
| ** **                                           | ** ** | **2009**                             | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                           | ** ** | **(In thousands)**                   | ** ** |
| Average of individually impaired loans during period |       | $                                    | 68,170     |                                     | $          | 42,409 |   | $ | 62,343 |   | $ | 32,261 |   |
| Interest income recognized during impairment         |       | $                                    | —     |                                     | $          | 65 |   | $ | 160 |   | $ | 113 |   |
| Cash-basis interest income recognized                |       | $                                    | —     |                                     | $          | 65 |   | $ | 160 |   | $ | 113 |   |

 

The gross interest income that would have beenrecorded in the year-to-date periods ended September 30, 2009 and September 30,2008, if the loans had been current in accordance with their original terms andhad been outstanding throughout the period (or since origination, if held forpart of the period), was $2,617,000 and $1,726,000, respectively.  At September 30, 2009 and December 31,2008, nonaccrual loans were $81,035,000 and $54,594,000, respectively.

 

**(4)       OtherIntangible Assets**

 

Other intangible assets with definite lives areamortized over their respective estimated useful lives to their estimatedresidual values.  The amortizationexpense represents the estimated decline in the value of the underlyingdeposits from customers acquired.  As of September 30,2009 and December 31, 2008, the Company’s only intangible asset was ourCore Deposit Intangible.

 

*The following table presents the gross amounts of core depositintangible assets and the related accumulated amortization at the datesindicated:*

 
| ** **                      | ** ** | ** **      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **Useful life** | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                      | ** ** | ** **      | ** ** | **(In  thousands)**    | ** ** |
| Core  deposit intangible assets |       | 7 - 15 years    |       | $                      | 62,975     |                  | $          | 62,975 |   |
| Accumulated  amortization       |       |            |       | (42,197                | )          | (37,475               | )          |
| Other  intangible assets, net   |       |            |       | $                      | 20,778     |                  | $          | 25,500 |   |

 

*Following is the aggregate amortization expense recognized in eachperiod:*

 
| ** **            | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **            | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **            | ** ** | **(In  thousands)**                        | ** ** |
| Amortization  expense |       | $                                          | 1,559      |                                      | $          | 1,877 |   | $ | 4,722 |   | $ | 5,631 |   |
|                       |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |

 

**(5)****                 ****Borrowings**

 

At September 30,2009, our outstanding borrowings were $164,420,000 as compared to $166,404,000at December 31, 2008. These borrowings at September 30, 2009consisted of term notes at the Federal Home Loan Bank (“FHLB”).  We also maintain a line of credit at theFHLB, however, as of September 30, 2009, there was no balance outstandingon this line of credit.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

The totalcommitment, including balances outstanding, for borrowings at the FHLB for theterm notes and line of credit at September 30, 2009 and December 31,2008 was $381.6 million and $428.3 million, respectively.  The interest rate on the line of creditvaries with the federal funds rate, and was 0.18% at September 30,2009.  The term notes have fixed interestrates that range from 2.52% to 6.22%. A blanket pledge and security agreement with the FHLB, which encompassescertain loans and securities, serves as collateral for these borrowings.

 

As of December 31,2008, the Company had a revolving credit agreement, as amended, with U.S. BankNational Association, which contained financial covenants, includingmaintaining a minimum adjusted return (excluding goodwill impairment andintangible asset amortization) on average assets, a maximum nonperformingassets to total loans ratio, regulatory capital ratios that qualify the Companyas well-capitalized and a minimum total risk-based capital amount.  There was no balance outstanding on this lineof credit at December 31, 2008.  At December 31,2008, the Company was in compliance with all covenants except the minimum totalrisk-based capital amount.  The minimumtotal risk-based capital amount was set by U.S. Bank and was based on theCompany receiving additional capital from Treasury’s Capital Purchase Programprior to December 31, 2008.  As theCompany’s application to receive capital under Treasury’s Capital PurchaseProgram was still pending as of December 31, 2008, the Company did notmeet this financial covenant and voluntarily decided to terminate its line ofcredit on February 9, 2009 with U.S. Bank as there was no outstandingbalance on the line of credit. The revolving credit agreement would haveotherwise expired on March 31, 2009.

 

**(6)****                 ****Subordinated Debentures and Trust Preferred Securities**

 

The Company had $41,239,000 in aggregate principalbalances of subordinated debentures outstanding with a weighted average cost of6.01% and 8.68% at September 30, 2009and December 31,2008, respectively. The subordinated debentures were issued in four separateseries. Each issuance has a maturity of thirty years from its date of issue.The subordinated debentures were issued to trusts established by the Company,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, 2009, the Company wasin compliance with all covenants of these subordinated debentures.

 

Under the terms of each subordinated debenturesagreement, the Company has the ability to defer interest on the debentures fora period of up to sixty months as long as it is in compliance with allcovenants of the agreement.  On July 31,2009, the Company notified the trustees of the four trusts that it will deferinterest on all four of its subordinated debentures.  Such a deferral is not anevent of default under each subordinated debentures agreement and interest onthe debentures continues to accrue during such deferral period.

 

These securities are currently included in Tier Icapital for purposes of determining the Company’s Tier I and total risk-basedcapital ratios. The Board of Governors of the Federal Reserve System, which isthe holding company’s banking regulator, has promulgated a modification of thecapital regulations affecting trust preferred securities. Under thismodification, beginning March 31, 2011, the Company is required to use amore restrictive formula to determine the amount of trust preferred securitiesthat can be included in regulatory Tier I capital. The Company will be allowedto include in Tier I capital an amount of trust preferred securities equal tono more than 25% of the sum of all core capital elements, which is generallydefined as stockholders’ equity less certain intangibles, including coredeposit intangibles, net of any related deferred income tax liability. Thecurrent regulations limit the amount of trust preferred securities that can beincluded in Tier I capital to 25% of the sum of core capital elements without adeduction for permitted intangibles.

 

The Guaranty Capital Trust III trust preferredissuance on June 30, 2003, became callable at each quarterly interestpayment date starting on July 7, 2008. The Company has not called this security on any of its quarterlyinterest payment dates.  The CenBankTrust III trust preferred issuance became callable at each quarterly interestpayment date starting on April 15, 2009.  The Company has not called this security onany of its quarterly interest payment dates.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

*The following table summarizes the terms of each subordinated debentureissuance at September 30, 2009**(dollarsin 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   |                | 9/7/2010   |                        | 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          |       | 10/15/2009          |       | Variable                    |       | LIBOR+ 2.65%      |       | 3.16              | %          | 10/15/2009                          |       |
| Guaranty  Capital Trust III |       | 6/30/2003        |       | 10,310     |       | 7/7/2033           |       | 10/7/2009           |       | Variable                    |       | LIBOR+ 3.10%      |       | 3.61              | %          | 10/7/2009                           |       |
|                             |            |                  |            |            |            |                    |            |                     |            |                             |            |                        |            |                   |            |                                     |            |  |

 

----

*Call date represents the earliest or next date the Company can call thedebentures.

 

**(7)****                ****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 Company’s exposure to credit loss is representedby the contractual amount of these commitments. The Company follows the samecredit policies in making commitments as it does for on-balance sheetinstruments.

 

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

 
| ** **                    | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **(In  thousands)**          | ** ** |
| Commitments  to extend credit |       | $                            | 327,982    |                        | $          | 390,277 |   |
| Standby  letters of credit    |       | 16,657                       |       | 24,792                      |       |
| Commercial  letters of credit |       | 11,000                       |       | 11,000                      |       |
|                          |       |                         |       |                        |       |
| Totals                        |       | $                            | 355,639    |                        | $          | 426,069 |   |

 

Commitments to extend credit are agreements to lendto a customer as long as there is no violation of any condition established inthe contract. Commitments generally have fixed expiration dates or othertermination clauses and may require payment of a fee. Several of thecommitments may expire without being drawn upon. Therefore, the totalcommitment amounts do not necessarily represent future cash requirements. Theamount of collateral obtained, if it is deemed necessary by the Company, isbased on management’s credit evaluation of the customer.

 

Commitments to extend credit under overdraftprotection agreements are commitments for possible future extensions of creditto existing deposit customers. These lines of credit are uncollateralized andusually do not contain a specified maturity date and might not be drawn upon tothe total extent to which the Company is committed.

 

Stand-by letters of credit are conditionalcommitments issued by the Company to guarantee the performance of a customer toa third party. Those letters of credit are primarily issued to support publicand private borrowing arrangements. Substantially all letters of credit issuedhave expiration dates within one year. The credit risk involved in issuingletters of credit is essentially the same as that involved in extending loanfacilities to customers. The Company generally holds collateral supportingthose commitments if deemed necessary.

 

The Company enters into commercial letters of crediton behalf of its customers, which authorize a third party to draw drafts on theCompany up to a stipulated amount and with specific terms and conditions. Acommercial letter of credit is a conditional commitment on the part of theCompany to provide payment on drafts drawn in accordance with the terms of thecommercial letter of credit.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

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

 

Effective January 1, 2008, the Companyadopted the guidance found at FASC Topic 820, *Fair ValueMeasures and Disclosures*, (previously FASB Statement No. 157, *Fair Value Measurements*). Topic 820 clarifies that fair value is an exit price, representing theamount that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants.  Under this guidance, fair value measurementsare not adjusted for transaction costs. This guidance establishes a fair value hierarchy that prioritizes theinputs to valuation techniques used to measure fair value. The hierarchy givesthe highest priority to unadjusted quoted prices in active markets foridentical assets or liabilities (level 1 measurements) and the lowest priorityto unobservable inputs (level 3 measurements). The three levels of the fairvalue hierarchy are described below:

 

Basis of Fair Value Measurement:

 

Level 1 - Unadjusted quoted prices in active markets that areaccessible at the measurement date for identical, unrestricted assets.

 

Level 2 - Significant other observable inputs other than Level 1 pricessuch as quoted prices in markets that are not active, quoted prices for similarassets, or other inputs that are observable, either directly or indirectly, forsubstantially the full term of the asset.

 

Level 3 - Prices or valuation techniques that require inputs that areboth significant to the fair value measurement and are unobservable (i.e.,supported by little or no market activity).

 

A financial instrument’s level within thefair value hierarchy is based on the lowest level of input that is significantto the fair value measurement.

 

The fair values of securities available forsale are generally determined by matrix pricing, which is a mathematicaltechnique widely used in the industry to value debt securities without relyingexclusively on quoted prices for the specific securities but rather by relyingon the securities’ relationship to other benchmark quoted securities (Level 2inputs).

 

The fair values of derivatives are generally derivedfrom market-observable data such as interest rates, volatilities, andinformation derived from or corroborated by that market-observable data, whichgenerally fall into Level 2 inputs. However, a significant input into the fairvalue of the derivatives is a credit valuation adjustment, which uses creditspreads that are typically derived by management or obtained from a third partydata provider that provides an implied credit spread for public entities.  As a result,the credit spreads are generally unobservable to the market, rendering them aLevel 3 input.

 

Level 3 is for positions that are not tradedin active markets or are subject to transfer restrictions, and/or wherevaluations are adjusted to reflect illiquidity and/or non-transferability. Suchadjustments are generally based on available market evidence. In the absence ofsuch evidence, management’s best estimate is used. Management’s best estimateconsists of both internal and external support on the Level 3 investment.Internal cash flow models using a present value formula along with indicativeexit pricing obtained from broker/dealers were used to determine fair value forcertain Level 3 investments. Subsequent to inception, management only changeslevel 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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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

***Financial Assets and Liabilities Measured ona Recurring Basis***

 

Assets andliabilities measured at fair value on a recurring basis are summarized below:

 
| ** **                                                 | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant    Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------|------------|-------------|------------|
| ** **                                                 | ** ** | **(In  thousands)**                                                                                 | ** ** |
| **Assets/Liabilities at  September 30, 2009**         | ** ** | ** **                                                                                          | ** ** | ** **                                              | ** ** | ** **                                       | ** ** | ** **  | ** ** |
| U.S. government agencies and government-sponsored entities |       | $                                                                                                   | —     |                                                    | $          | 17,470                                           |       | $           | —     |   | $ | 17,470 |   |
| State and municipal                                        |       | —                                                                                              |       | 26,660                                                  |       | 38,919                                           |       | 65,579      |       |
| Mortgage-backed securities – agency/residential       |       | —                                                                                              |       | 92,300                                                  |       | —                                           |       | 92,300      |       |
| Mortgage-backed securities – private/residential      |       | —                                                                                              |       | 5,161                                                   |       | —                                           |       | 5,161       |       |
| Marketable equity                                          |       | —                                                                                              |       | 1,519                                                   |       | —                                           |       | 1,519       |       |
| Other securities                                           |       | —                                                                                              |       | 544                                                     |       | —                                           |       | 544         |       |
| Derivative Assets                                          |       | —                                                                                              |       | —                                                  |       | 231                                              |       | 231         |       |
| Derivative Liabilities                                     |       | —                                                                                              |       | —                                                  |       | 154                                              |       | 154         |       |
|                                                       |       |                                                                                                |       |                                                    |       |                                             |       |        |       |
| **Assets at  December 31, 2008**                      |       |                                                                                                |       |                                                    |       |                                             |       |        |       |
| U.S. Treasury Securities                                   |       | $                                                                                                   | —     |                                                    | $          | 3,495                                            |       | $           | —     |   | $ | 3,495 |   |
| U.S. government agencies and government-sponsored entities |       | —                                                                                              |       | 2,510                                                   |       | —                                           |       | 2,510       |       |
| State and municipal                                        |       | —                                                                                              |       | 27,118                                                  |       | 35,897                                           |       | 63,015      |       |
| Mortgage-backed securities – agency/residential       |       | —                                                                                              |       | 31,965                                                  |       | —                                           |       | 31,965      |       |
| Marketable equity                                          |       | —                                                                                              |       | 1,345                                                   |       | —                                           |       | 1,345       |       |
| Other securities                                           |       | —                                                                                              |       | 544                                                     |       | —                                           |       | 544         |       |

 

See Note 10, Derivatives and Hedging Activity, forfurther discussion of the valuation of the derivatives as of September 30,2009.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

The table below presents areconciliation of gains and losses for all assets measured at fair value on arecurring basis using significant unobservable inputs (Level 3) for the threeand nine months ending September 30, 2009.

 

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

 
| ** **                                        | ** ** | **Three months ended   September 30, 2009**  | ** ** | **Nine months ended   September 30, 2009** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                        | ** ** | **Net  Derivative  Assets and  Liabilities** | ** ** | **Available  for Sale  Securities**             | ** ** | **Net  Derivative  Assets and  Liabilities** | ** ** | **Available  for Sale  Securities** | ** ** |
| ** **                                        | ** ** | **(In thousands)**                                | ** ** |
| Beginning Balance                                 |       | $                                                 | 88         |                                            | $          | 38,550 |   | $ | — |   | $ | 35,897 |   |
| Total unrealized gains (losses) included in:      |       |                                              |       |                                            |       |   |   |   |   |
| Net Income                                        |       | (11                                               | )          | —                                          |       | 77 |   | — |   |
| Other Comprehensive Income                        |       | —                                            |       | 369                                             |       | — |   | 3,022 |   |
| Purchases, sales, issuances, and settlements, net |       | —                                            |       | —                                          |       | — |   | — |   |
| Transfers in and (out) of level three             |       | —                                            |       | —                                          |       | — |   | — |   |
| Balance September 30, 2009                   |       | $                                                 | 77         |                                            | $          | 38,919 |   | $ | 77 |   | $ | 38,919 |   |

 

***Financial Assets and Liabilities Measured ona Nonrecurring Basis***

 

The following representsassets and liabilities measured at fair value on a non-recurring basis as of September 30,2009.

 
| ** **                         | ** ** | **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, 2009 |       |                                                                                                |       |                                                           |       |                                                      |       |        |       |
| Impaired  loans                    |       | $                                                                                                   | —     |                                                           | $          | —                                                    |       | $           | 27,047     |   | $ | 27,047 |   |
|                               |       |                                                                                                |       |                                                           |       |                                                      |       |        |       |
| Assets at  December 31, 2008  |       |                                                                                                |       |                                                           |       |                                                      |       |        |       |
| Impaired  loans                    |       | $                                                                                                   | —     |                                                           | $          | —                                                    |       | $           | 31,127     |   | $ | 31,127 |   |

 

Impaired loans with a valuation allowance based uponfair value of the underlying collateral had a carrying amount of $34,562,000 atSeptember 30, 2009 as compared to $42,191,000 at December 31, 2008and $43,826,000 at September 30, 2008. The valuation allowance on impaired loans was $7,515,000 at September 30,2009 as compared to $11,064,000 at December 31, 2008 and $12,825,000 at September 30,2008.  During the nine month periodsended September 30, 2009 and 2008, an additional provision for loan lossesof approximately $30.8  million and $21.0million was made for impaired loans, respectively.  During the three month periods ended September 30,2009 and 2008, an additional provision for loan losses of approximately $14.3million and $19.0 million was made for impaired loans, respectively.

 

Impaired loans are evaluated and valued atthe time the loan is identified as impaired, at the lower of cost or fairvalue.  Fair value is measured based onthe value of the collateral securing these loans and is classified at a level 3in the fair value hierarchy. Collateral may be real estate and/or businessassets including equipment, inventory and/or accounts receivable and isgenerally determined based on appraisals performed by qualified licensedappraisers hired by the Company. Appraised and reported values may bediscounted 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 typicallysignificant and result in a Level 3 classification of the inputs fordetermining fair value.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

Impaired loans are reviewed and evaluated onat least a quarterly basis for additional impairment and adjusted accordingly,based on the same factors identified above.

 

***Nonfinancial Assets and Liabilities Measuredon a Nonrecurring Basis***

 

Nonfinancial assets and liabilities measuredat 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, 2009             |       |                                                                  |       |                                                    |       |                                             |       |        |       |
| Other real estate owned and foreclosed assets |       | $                                                                     | —     |                                                    | $          | —                                           |       | $           | 32,246     |   | $ | 32,246 |   |
|                                               |            |                                                                       |            |                                                         |            |                                                  |            |             |            |  |  |  |  |

 

Other real estate owned is valued at the timethe loan is foreclosed upon and the asset is transferred to other real estateowned.  The value is based primarily onthird party appraisals, less costs to sell.  The appraisals are generally discounted based on management’s historicalknowledge, changes in market conditions from the time of valuation, and/ormanagement’s expertise and knowledge of the client and client’s business. Suchdiscounts are typically significant and result in a Level 3 classification ofthe inputs for determining fair value. Other real estate owned is reviewed andevaluated on at least an annual basis for additional impairment and adjustedaccordingly, based on the same factors identified above.

 

***Fair Value of Financial Instruments***

 

Theestimated fair values, and related carrying amounts, of the Company’s financialinstruments are as follows:

 
| ** **                                                       | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                       | ** ** | **Carrying  amount**        | ** ** | **Fair value**             | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**          | ** ** |
| Financial assets:                                                |       |                        |       |                       |       |   |   |   |   |
| Cash and cash equivalents                                        |       | $                           | 148,194    |                       | $          | 148,194 |   | $ | 45,711 |   | $ | 45,711 |   |
| Securities available for sale                                    |       | 182,573                     |       | 182,573                    |       | 102,874 |   | 102,874 |   |
| Securities held to maturity                                      |       | 10,377                      |       | 10,904                     |       | 13,114 |   | 13,505 |   |
| Bank stocks                                                      |       | 16,347                      |       | n/a                        |       | 28,276 |   | n/a |   |
| Loans, net                                                       |       | 1,538,227                   |       | 1,526,915                  |       | 1,781,345 |   | 1,777,496 |   |
| Loans held for sale                                              |       | 5,500                       |       | 5,500                      |       | 5,760 |   | 5,760 |   |
| Accrued interest receivable                                      |       | 7,921                       |       | 7,921                      |       | 7,202 |   | 7,202 |   |
| Interest rate swaps, net                                         |       | 77                          |       | 77                         |       | — |   | — |   |
|                                                             |       |                        |       |                       |       |   |   |   |   |
| Financial liabilities:                                           |       |                        |       |                       |       |   |   |   |   |
| Deposits                                                         |       | 1,632,436                   |       | 1,640,992                  |       | 1,698,651 |   | 1,712,160 |   |
| Federal funds purchased and sold under agreements  to repurchase |       | 12,424                      |       | 12,424                     |       | 21,781 |   | 21,781 |   |
| Subordinated debentures                                          |       | 41,239                      |       | 34,411                     |       | 41,239 |   | 35,938 |   |
| Long-term borrowings                                             |       | 164,420                     |       | 173,055                    |       | 166,404 |   | 178,785 |   |
| Accrued interest payable                                         |       | 3,181                       |       | 3,181                      |       | 3,927 |   | 3,927 |   |
|                                                                  |            |                             |            |                            |            |  |  |  |  |  |  |  |  |

 

Thefair value of a financial instrument is the current amount that would beexchanged between willing parties, other than in a forced liquidation. Fairvalue is best determined based upon quoted market prices. However, in manyinstances, there are no quoted market prices for the Company’s variousfinancial instruments. In cases where quoted market prices are not available,fair values are based on estimates using present value or other valuationtechniques. Those techniques are significantly affected by the assumptionsused, including the discount rate and estimates of future cash flows.Accordingly, the fair value estimates may not be realized in an immediatesettlement of the instrument.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

Topic820 excludes certain financial instruments and all nonfinancial instrumentsfrom disclosure requirements.  Therefore,the aggregate fair value amounts presented may not necessarily represent theunderlying fair value of the Company.

 

Thefollowing methods and assumptions were used by the Company in estimating fairvalue disclosures for financial instruments:

 

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

** **

Thecarrying amounts of cash and short-term instruments approximate fair values.

 

***(b) Securitiesand Bank Stocks***

** **

Fairvalues for securities available for sale and held to maturity are generallydetermined by matrix pricing, which is a mathematical technique widely used inthe industry to value debt securities without relying exclusively on quotedprices for the specific securities but rather by relying on the securities’relationship to other benchmark quoted securities.

 

Itis not practical to determine the fair value of bank stocks due to restrictionsplaced on the transferability of FHLB stock, Federal Reserve Bank stock andBankers’ Bank of the West stock.  Thesethree stocks comprise the balance of bank stocks.

 

***(c) Loans***

** **

Loans,net exclude loans held-for-sale as these fair values are disclosed on aseparate line on the table.   Forvariable-rate loans that reprice frequently and with no significant change incredit risk, fair values are based on carrying values. Fair values for otherloans (e.g., commercial real estate and investment property mortgage loans,commercial and industrial loans) are estimated using discounted cash flowanalyses, using interest rates currently being offered for loans with similarterms to borrowers 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 at lower cost orfair value. The fair value of loans held for sale is based upon bindingcontracts and quotes from third party investors.

 

***(d) InterestRate Swaps, net***

** **

Thefair value for interest rate swaps are determined by netting the discountedfuture fixed cash receipts, or payments, and the discounted expected variablecash payments, or receipts.  The variablecash payments, or receipts, are based on an expectation of future interestrates derived from forward interest rate curves.

 

***(e) Deposits***

** **

Thefair values disclosed for demand deposits (e.g., interest and non-interestchecking, passbook savings, and certain types of money market accounts) are, bydefinition, equal to the amount payable on demand at the reporting date (i.e.,their carrying amount). The carrying amounts of variable-rate, fixed-term moneymarket accounts and certificates of deposit approximate their fair values atthe reporting date. Fair values for fixed-rate certificates of deposit areestimated using a discounted cash flows calculation that applies interest ratescurrently being offered on certificates to a schedule of aggregated expectedmonthly maturities on time deposits.

 

***(f) Short-termBorrowings***

** **

Thecarrying amounts of federal funds purchased, borrowings under repurchaseagreements, and other short-term borrowings maturing within ninety daysapproximate their fair values.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

** **

Thefair values of the Company’s long-term borrowings are estimated usingdiscounted cash flow analyses based on the Company’s current incrementalborrowing rates for similar types of borrowing arrangements.

 

***(h) SubordinatedDebentures***

** **

Thefair values of the Company’s Subordinated Debentures are estimated usingdiscounted cash flow analyses based on the Company’s current incrementalborrowing rates for similar types of borrowing arrangements.

 

***(i) AccruedInterest Payable***

** **

Thecarrying amounts of accrued interest approximate fair value.

 

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

** **

Thefair value of off-balance sheet instruments is not material.

 

**(9)     Stock-Based Compensation**

 

Under the Company’s Amended and Restated 2005 StockIncentive Plan (the “Incentive Plan”), the Company’s Board of Directors maygrant stock based compensation awards to nonemployee directors, key employees,consultants and prospective employees under the terms described in theIncentive Plan. The allowable stock based compensation awards include the grantof Options, Restricted Stock Awards, Restricted Stock Unit Awards, PerformanceStock Awards, Stock Appreciation Rights and other Equity Based Awards. TheIncentive Plan provides that eligible participants may be granted shares ofCompany common stock that are subject to forfeiture until the grantee vests inthe stock award based on the established conditions, which may include serviceconditions, established performance measures or both.

 

Prior to vesting of the stock awards with eitherservice or performance vesting conditions, each grantee shall have the rightsof a stockholder with respect to voting of the granted stock. The recipient isnot entitled to dividend rights with respect to the shares of granted stockuntil vesting occurs, at which time, the dividend rights will exist on vestedand unvested shares of granted stock for performance-based awards and vestedshares only for service based awards, subject to termination of such rightsunder the terms of the Incentive Plan.

 

Other than the stock awards with service and performance-basedvesting conditions, no grants have been made under the Incentive Plan.

 

The Incentive Plan authorized grants of stock basedcompensation awards of up to 2,500,000 shares of authorized Company commonstock, subject to adjustments provided by the Incentive Plan. As of September 30,2009 and December 31, 2008, there were 1,084,838 and 1,420,345 shares ofunvested stock granted (net of forfeitures), with 914,315 and 730,412 sharesavailable for grant under the Incentive Plan, respectively.  Of the 1,084,838 shares unearned at September 30,2009, approximately 426,000 shares are expected to vest.  The Company does not expect any of the630,000 shares of performance awards to vest.

 

*A summary of the status of unearned stock awards and the change duringthe period is presented in the table below:*

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value on  Award Date** | ** ** |
|--------------------------------------|------------|------------|------------|--------------------------------------------------|------------|
| Unearned  at December 31, 2008  |       | 1,420,345  |       | $                                                | 9.65       |   |
| Awarded                              |       | 15,000     |       | 1.70                                             |       |
| Forfeited                            |       | (198,903   | )          | 10.13                                            |       |
| Vested                               |       | (151,604   | )          | 9.10                                             |       |
| Unearned  at September 30, 2009 |       | 1,084,838  |       | $                                                | 9.53       |   |

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

The Company recognized $758,000 in stock-basedcompensation expense for services rendered for the nine months ended September 30,2009 and for the nine months ended September 30, 2008 recognized$2,049,000, less a $2,714,000 cumulative adjustment related toperformance-based shares not expected to vest prior to their expiration date aswell as a cumulative forfeiture adjustment on remaining service-basedrestricted awards.  The total income taxeffect recognized in the consolidated income statement for share-basedcompensation arrangements was a $131,000 expense for the nine months ended September 30,2009 compared to a $538,000 expense for the same period in 2008.   The 2009 income tax effect related toshare-based compensation arrangements included $419,000 in expense related tothe write-off of the deferred tax asset for the difference between the grantdate value of the award as compared to fair value of the award uponvesting.  At September 30, 2009,compensation cost of $1,834,000 related to nonvested awards not yet recognizedis expected to be recognized over a weighted-average period of 1.6 years.   The fair value of awards that vested in thethird quarter 2009 was approximately $277,000.

 

**(10) **       **Derivativesand Hedging Activities**

 

*Risk Management Objective of UsingDerivatives*

 

The Company is exposed to certain risksarising 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.

 

*FairValues of Derivative Instruments on the Consolidated Balance Sheet*

 

The table below presents the fair value ofthe Company’s derivative financial instruments as well as their classificationon the Consolidated Balance Sheet as of September 30, 2009.

 
| **As of September 30, 2009:**                                                      | ** ** | **Asset  Derivatives** | ** ** | **Liability  Derivatives** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                              | ** ** | **(In thousands)**     | ** ** |
| Derivatives **not**  designated as hedging instruments under FASC Subtopic 815-10       |       |                   |       |                       |       |
| Interest Rate Products                                                                  |       | $                      | 231        |                       | $          | 154 |   |
| Total derivatives **not**  designated as hedging instruments under FASC Subtopic 815-10 |       | $                      | 231        |                       | $          | 154 |   |

 

The asset derivatives are classified in other assetson the balance sheet and the liability derivatives are classified in interestpayable and other liabilities on the consolidated balance sheet.

 

*Non-designated Hedges*

 

None of the Company’s derivatives aredesignated as qualifying hedging relationships under FASC Subtopic 815-10.  Derivatives not designated as hedges are notspeculative and result from a service the Company provides to certaincustomers, which the Company implemented during the first quarter of 2009.  The Company executes interest rate swaps withcommercial banking customers to facilitate the customer’s respective riskmanagement strategies.  Those interestrate swaps are simultaneously hedged by offsetting interest rate swaps that theCompany executes with a third party, such that the Company minimizes its net riskexposure resulting from such transactions. As the interest rate swaps associated with this program do not meet thestrict hedge accounting requirements under FASC Topic 815, changes in the fairvalue of both the customer swaps and the offsetting swaps are recognizeddirectly in earnings.  As of September 30,2009, the Company had two interest rate swaps with customers with a totalnotional amount of 

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Notesto Unaudited Condensed Consolidated Financial Statements (Continued)**

 

$24,338,000, and two offsetting interest rate swaps with a totalnotional amount of $24,338,000; for an aggregate notional amount of $48,676,000related to this program.  During thethree months ended September 30, 2009, the Company recognized a net lossof $11,000 related to changes in fair value of these swaps.  During the nine months ended September 30,2009, the Company recognized net gains of $77,000 related to changes in fairvalue of these swaps.

 

*Effectof Derivative Instruments on the Consolidated Income Statement*

 

The tables below present the effect of theCompany’s derivative financial instruments on the Consolidated Income Statementfor the nine months ended September 30, 2009:

 
| **Derivatives Not Designated**             | ** ** | **Location of Gain or (Loss)**          | ** ** | **Amount of Gain (Loss) Recognized in Income on  Derivative** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------------|------------|
| **as Hedging Instruments  Under SFAS 133** | ** ** | **Recognized in Income on  Derivative** | ** ** | **Three Months Ended   September 30, 2009**              | ** ** | **Nine Months Ended   September 30, 2009** | ** ** |
| ** **                                 | ** ** | ** **                              | ** ** | **(In thousands)**                                            | ** ** |
| Interest Rate Products                     |       | Other non—interest income          |       | $                                                             | (11        | ) | $ | 77 |   |
|                                       |       |                                    |       |                                                          |       |   |   |
| Total                                      |       |                                    |       | $                                                             | (11        | ) | $ | 77 |   |

 

**(11)****          ****Capital Ratios**

 

The Company’s capital ratiosexceed the highest regulatory capital requirement of “well-capitalized” at September 30,2009 and December 31, 2008 as follows:

 
| ** **                       | ** ** | **Ratio at   September 30,  2009** | ** ** | **Ratio at  December 31,  2008** | ** ** | **Minimum  Capital  Requirement** | ** ** | **Minimum  Requirement for  “Well  Capitalized”  Institution** | ** ** |
|----------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                       |       |                                    |       |                                  |       |                              |       |                                                                     |       |
| Total Risk-Based Capital  Ratio  |       |                                    |       |                                  |       |                              |       |                                                                     |       |
| Consolidated                     |       | 13.42                                   | %          | 10.61                                 | %          | 8.00                              | %          | N/A                                                                      |       |
| Guaranty Bank and Trust  Company |       | 12.45                                   | %          | 10.52                                 | %          | 8.00                              | %          | 10.00                                                                    | %          |
| Tier 1 Risk-Based Capital  Ratio |       |                                    |       |                                  |       |                              |       |                                                                     |       |
| Consolidated                     |       | 9.28                                    | %          | 9.35                                  | %          | 4.00                              | %          | N/A                                                                      |       |
| Guaranty Bank and Trust  Company |       | 11.18                                   | %          | 9.26                                  | %          | 4.00                              | %          | 6.00                                                                     | %          |
| Leverage Ratio                   |       |                                    |       |                                  |       |                              |       |                                                                     |       |
| Consolidated                     |       | 8.41                                    | %          | 8.98                                  | %          | 4.00                              | %          | N/A                                                                      |       |
| Guaranty Bank and Trust  Company |       | 10.14                                   | %          | 8.90                                  | %          | 4.00                              | %          | 5.00                                                                     | %          |

 

**(12)  TotalComprehensive Income**

 

*The following table presents the components of other comprehensive lossand total comprehensive income (loss) for the periods presented:*

 
| ** **                                                                | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine Months  Ended   September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                | ** ** | **2009**                                    | ** ** | **2008**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                | ** ** | **(In  thousands)**                         | ** ** |
| Net loss                                                                  |       | $                                           | (16,901    | )                                           | $          | (265,829 | ) | $ | (27,322 | ) | $ | (260,559 | ) |
| Other  comprehensive income (loss):                                       |       |                                        |       |                                        |       |   |   |   |   |
| Change in  net unrealized gains (losses), net                             |       | 1,121                                       |       | (2,406                                      | )          | 4,340 |   | (4,560 | ) |
| Less:  Reclassification adjustments for losses (gains) included in income |       | 1                                           |       | —                                      |       | 1 |   | (138 | ) |
| Net  unrealized holding gains (losses)                                    |       | 1,120                                       |       | (2,406                                      | )          | 4,339 |   | (4,698 | ) |
| Income  tax benefit (expense)                                             |       | (424                                        | )          | 915                                         |       | (1,650 | ) | 1,785 |   |
| Other  comprehensive income (loss)                                        |       | 696                                         |       | (1,491                                      | )          | 2,689 |   | (2,913 | ) |
| Total  comprehensive loss                                                 |       | $                                           | (16,205    | )                                           | $          | (267,320 | ) | $ | (24,633 | ) | $ | (263,472 | ) |

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

**(13) Preferred Stock**

 

Duringthe third quarter, the Company issued 59,053 shares of 9% non-cumulative Series AConvertible Preferred Stock, which resulted in additional capital of$57,883,000, net of expenses.  The liquidation preference for the Series AConvertible Preferred Stock is $1,000 per share.  The Series AConvertible Preferred Stock is 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 customary anti-dilutionadjustments. Due to the conversion price adjustment resulting from nonpaymentof dividends, for purposes of the risk-based and leverage capital guidelines ofthe Board of Governors of the Federal Reserve System, and for purposes ofregulatory reporting, the Series A Convertible Preferred Stock is treatedas cumulative preferred stock (e.g., a restricted core capital element for Tier1 capital purposes).

 

**(14) Legal Contingencies**

 

Inthe ordinary course of our business, we are party to various legal actions,which we believe are incidental to the operation of our business. Although theultimate outcome and amount of liability, if any, with respect to these legalactions to which we are currently a party, cannot presently be ascertained withcertainty, in the opinion of management, based upon information currentlyavailable to us, any resulting liability is not likely to have a materialadverse effect on the Company’s consolidated financial position, results ofoperations or cash flows.

 

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**ITEM 2.**       **Management’s Discussion and Analysis of Financial Conditionand 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, 7Aand 8 of our 2008 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 holding company with itsprincipal business to serve as a holding company to its bank subsidiary.  Unless the context requires otherwise, theterms “Company,” “us,” “we,” and “our” refers to Guaranty Bancorp on aconsolidated basis.  References to the “Bank”refer to Guaranty Bank and Trust Company, our bank subsidiary.

 

On May 6, 2008, the stockholders of the Companyapproved the proposal to change the name of the holding company from CentennialBank Holdings, Inc. to Guaranty Bancorp.  This name change was effective on May 12, 2008.

 

On August 11, 2009,the Company issued 59,053 shares of Series A Convertible Preferred Stock,par value $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.   As a result of this issuance,the Company contributed $40.0 million of capital into its bank subsidiary.

 

Through our banking subsidiary, we provide bankingand 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 and depositaccounts. Our major operating expenses are the interest we pay on deposits andborrowings and general operating expenses. We rely primarily on locallygenerated deposits to provide us with funds for making loans.

 

We are subject to competition from other financialinstitutions and our operating results, like those of other financialinstitutions operating exclusively or primarily in Colorado, are significantlyinfluenced by economic conditions in Colorado, including the strength of thereal estate market. In addition, both the fiscal and regulatory policies of thefederal government and regulatory authorities that govern financialinstitutions and market interest rates also impact our financial condition,results of operations and cash flows.

 

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**Earnings Summary**

 

*Table 1 summarizes certain key financial results for the periodsindicated:*

 

**Table 1**

 
| ** **                                           | ** ** | **Three  Months Ended September 30,**        | ** ** | **Nine Months  Ended September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                        | ** ** | ** **                                | ** ** | **Change -** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change -** | ** ** |
| ** **                                           | ** ** | ** **                                        | ** ** | ** **                                | ** ** | **Favorable** | ** ** | ** ** | ** ** | ** ** | ** ** | **Favorable** | ** ** |
| ** **                                           | ** ** | **2009**                                          | ** ** | **2008**                                  | ** ** | **(Unfavorable)** | ** ** | **2009** | ** ** | **2008** | ** ** | **(Unfavorable)** | ** ** |
| ** **                                           | ** ** | **(In  thousands, except share data and ratios)** | ** ** |
| **Results of Operations:**                           |       |                                              |       |                                      |       |   |   |   |   |   |   |   |   |
| Interest  income                                     |       | $                                                 | 23,469     |                                      | $          | 29,719 |   | $ | (6,250 | ) | $ | 73,104 |   | $ | 93,338 |   | $ | (20,234 | ) |
| Interest  expense                                    |       | 8,558                                             |       | 9,877                                     |       | 1,319 |   | 26,615 |   | 31,455 |   | 4,840 |   |
| Net  interest income                                 |       | 14,911                                            |       | 19,842                                    |       | (4,931 | ) | 46,489 |   | 61,883 |   | (15,394 | ) |
| Provision  for loan losses                           |       | 20,000                                            |       | 30,750                                    |       | 10,750 |   | 41,110 |   | 32,525 |   | (8,585 | ) |
| Net  interest income after provision for loan losses |       | (5,089                                            | )          | (10,908                                   | )          | 5,819 |   | 5,379 |   | 29,358 |   | (23,979 | ) |
| Noninterest  income                                  |       | 2,450                                             |       | 2,707                                     |       | (257 | ) | 7,992 |   | 8,354 |   | (362 | ) |
| Noninterest  expense                                 |       | 17,409                                            |       | 265,882                                   |       | 248,473 |   | 50,604 |   | 304,289 |   | 253,685 |   |
| Loss  before income taxes                            |       | (20,048                                           | )          | (274,083                                  | )          | 254,035 |   | (37,233 | ) | (266,577 | ) | 229,344 |   |
| Income  tax benefit                                  |       | (3,147                                            | )          | (8,254                                    | )          | (5,107 | ) | (9,911 | ) | (6,018 | ) | 3,893 |   |
| Net loss                                             |       | $                                                 | (16,901    | )                                         | $          | (265,829 | ) | $ | 248,928 |   | $ | (27,322 | ) | $ | (260,559 | ) | $ | 233,237 |   |
|                                                 |       |                                              |       |                                      |       |   |   |   |   |   |   |   |   |
| **Share Data:**                                      |       |                                              |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic  loss per share                                |       | $                                                 | (0.33      | )                                         | $          | (5.21 | ) | $ | 4.88 |   | $ | (0.53 | ) | $ | (5.11 | ) | $ | 4.58 |   |
| Diluted  loss per share                              |       | $                                                 | (0.33      | )                                         | $          | (5.21 | ) | $ | 4.88 |   | $ | (0.53 | ) | $ | (5.11 | ) | $ | 4.58 |   |
| Average  shares outstanding                          |       | 51,416,909                                        |       | 51,067,439                                |       | 349,470 |   | 51,347,916 |   | 51,020,220 |   | 327,696 |   |
| Diluted  average shares outstanding                  |       | 51,416,909                                        |       | 51,067,439                                |       | 349,470 |   | 51,347,916 |   | 51,020,220 |   | 327,696 |   |

* *
| ** **                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **Percent** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|-------------|------------|
| ** **                                                    | ** ** | **2009**               | ** ** | **2008**              | ** ** | **Change**  | ** ** |
| **Selected Balance Sheet Ratios:**                            |       |                   |       |                  |       |        |       |
| Total  risk based capital to risk weighted assets             |       | 13.42                  | %          | 10.61                 | %          | 26.48       | %          |
| Loans,  net of unearned discount to deposits                  |       | 97.23                  | %          | 107.52                | %          | (9.57       | )%         |
| Allowance  for loan losses to loans, net of unearned discount |       | 3.09                   | %          | 2.46                  | %          | 25.61       | %          |

 

The $16.9 million third quarter 2009 net lossis $248.9 million lower than the third quarter 2008 net loss of $265.8million.  Excluding the goodwillimpairment charge in the prior year of $250.7 million, the net loss for thethird quarter 2009 is $1.8 million greater than the same quarter in 2008.  The primary reasons for this increase in netloss, exclusive of the 2008 goodwill impairment, are a $4.9 million decrease innet interest income, as well as a $5.0 million charge for a valuation allowancerelated to deferred tax assets.  Thesedecreases were offset mostly by a $10.8 million reduction in the provision forloan losses.  The causes for thesechanges are discussed below.

 

Net interest income decreased by $4.9 millionfor the third quarter 2009 as compared to the same period in 2008 mostly due tolower rates attributable to a greater than 175 basis point decrease in thetargeted federal funds rate by the Federal Open Markets Committee (FOMC) of theFederal Reserve Board since the beginning of the third quarter 2008. Thetargeted federal funds rate was 2.00% at July 1, 2008 and fell to between0% and 0.25% on December 16, 2008, where it remains today.

 

In the quarter ended September 30, 2009,a $5.0 million valuation allowance was established related to deferred tax assets.  See “Income Taxes” below for furtherdiscussion of this valuation allowance.

 

The provision for loan losses is the amountrequired to maintain the allowance for loan losses at a level that, in ourjudgment, is adequate to absorb probable incurred loan losses in the loanportfolio.  The allowance for loan lossesincreased to 3.09% of total loans at September 30, 2009, as compared to2.46% at September 30, 2008. The provision for loan losses was $20.0million for the third quarter 2009, as compared to $30.8 million for the samequarter in 2008.  It remained high in thethird quarter of 2009 primarily due to an increase in nonperforming assets andrelated charge-offs.

 

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Noninterest expense decreased by $248.5 million in the third quarter 2009 as comparedto the same quarter in 2008 primarily as a result of $250.7 million goodwillimpairment charge in 2008.  Excluding the2008 goodwill impairment charge, noninterest expense increased by $2.3million.   This increase, net of goodwillimpairment charge, is due primarily to a $0.6 million increase in salaries andemployee benefits and a $2.3 million increase in other general andadministrative expense.  The $0.6 millionincrease in salaries and employee benefits in the third quarter 2009 ascompared to the same quarter 2008 is due mostly to the impact of a $2.6million reversal of equity-based compensation in the third quarter of2008.   This cumulative reversal ofequity-based compensation expense was a result of a determination thatperformance-based shares were no longer expected to meet their performancetarget prior to their expiration date. Excluding the impact of this 2008 reversal of expense, salaries andbenefits in the third quarter of 2009 decreased by $2.0 million from the thirdquarter of 2008 due to a major effort announced in mid-2008 to betteralign our expenses with the current size of our business.  This effort resulted in a decline in thenumber of full-time equivalent employees from 393 at September 30, 2008 to368 at September 30, 2009.  The $2.3million increase in the other general and administrative expense category inthe third quarter 2009 from third quarter 2008 is mostly due to a $1.0 millionincrease in FDIC insurance assessments, a $1.1 million net increase inwrite-downs of other real estate owned and a $0.3 million increase in othercollection-related expenses.

 

On a year-to-date basis in2009, the Company reported a net loss of $27.3 million as compared to a netloss of $260.6 million for the same period in 2008.  The primary cause for the decrease in netloss in 2009, as compared to 2008, is that there was no goodwill impairmentcharge in 2009, as compared to the $250.7 million goodwill impairment chargerecorded during the third quarter 2008. Other differences for the nine monthsended September 30, 2009 as compared to the same period in 2008 include a$15.4 million reduction in net interest income due to lower rates and adecrease in earning assets, an $8.6 million increase to the provision for loanlosses and a $5.0 million charge to establish a valuation allowance fordeferred tax assets. These decreases to net income were partially offset by a$2.9 million reduction in noninterest expense, excluding the goodwillimpairment charge, for the first nine months of 2009 as compared to the sameperiod in 2008.

 

**Net Interest Income and NetInterest Margin**

 

Net interest income, which is our primary source ofincome, represents the difference between interest earned on assets andinterest paid on liabilities.  Theinterest rate spread is the difference between the yield on ourinterest-bearing assets and liabilities. Net interest margin is net interest income expressed as a percentage ofaverage interest-earning assets.

 

*The following table summarizes the Company’s net interest income andrelated spread and margin for the current quarter and prior four quarters:*

 

**Table 2**

 
| ** **                                | ** ** | **Quarter  Ended**           | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** | **March 31,    2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** |
| ** **                                | ** ** | **(Dollars in  thousands)**  | ** ** |
|                                      |       |                         |       |   |   |   |   |   |   |   |   |
| Net  interest income                      |       | $                            | 14,911     |   | $ | 15,860 |   | $ | 15,718 |   | $ | 17,679 |   | $ | 19,842 |   |
| Interest  rate spread                     |       | 2.65                         | %          | 2.77 | % | 2.62 | % | 2.92 | % | 3.37 | % |
| Net  interest margin                      |       | 3.14                         | %          | 3.38 | % | 3.26 | % | 3.55 | % | 4.02 | % |
| Net interest margin, fully tax equivalent |       | 3.23                         | %          | 3.46 | % | 3.34 | % | 3.64 | % | 4.11 | % |
|                                           |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thirdquarter 2009 net interest income of $14.9 million declined by $4.9 million fromthe third quarter 2008.  This decrease isa result of a $1.6 million unfavorable rate variance and a $3.4 millionunfavorable volume variance. (see Table 5).

 

The $1.6million unfavorable rate variance from the prior year third quarter isprimarily attributable to lower yields on earnings assets, and in particularloans.  The yield on earning assetsdeclined by 107 basis points from 6.02% for the third quarter 2008 to 4.95% forthe third quarter 2009.  The FOMCdecreased the target federal funds rate by a total of greater than 175 basispoints since the beginning of the third quarter 2008.  The targeted federal funds rate was 2.00% at July 1,2008 and fell to between 0% and 0.25% on December 16, 2008, where itremains today.  Similarly, the prime ratedecreased by 175 basis points from July 2008 to the end of 2008.

 

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Interestincome decreased by $6.3 million from $29.7 million in the third quarter 2008to $23.5 million in the third quarter 2009. Approximately 56% of the Company’s outstanding loan balances arevariable rate loans and are tied to indices such as prime or LIBOR.  As a result of the decline in rates discussedabove, the average yield on loans for the Company decreased by 80 basis pointsfrom 6.09% for the quarter ended September 30, 2008 to 5.29% for the sameperiod in 2009.  The Company believesthat it remains asset sensitive at the end of the third quarter 2009 over thelong term in a risking rate environment, and therefore, expects that asinterest rates rise, net interest income will also increase.

 

Rates paidon interest-bearing liabilities also declined during this same period by 35basis points, for a net decrease in the net interest spread of 72 basis pointsover this same period.  Overall netinterest margin declined by 88 basis points. The cause for the larger impact on net interest margin as compared tothe interest rate spread is that the benefit from noninterest bearing depositshad a smaller impact in 2009 compared to 2008 due to the extremely low interestrate environment.

 

The $3.4million unfavorable volume variance is mostly attributable to an $81.9 milliondecrease in average total earning assets for the third quarter 2009 as comparedto the same period in 2008.  The averagebalance of loans decreased from the same period in the prior year by $180.3million, primarily as a result of management’s efforts to reduce overall riskin the loan portfolio.

 

On a linkedquarter basis, net interest margin increased from 3.26% for the first quarter2009 to 3.38% in the second quarter 2009 and decreased to 3.14% in the thirdquarter 2009.  Although there were nochanges in the federal funds rate or prime rates during this time, the resultsof management efforts to address falling interest rates in 2008 began to takeeffect through higher yields on loans due to the utilization of loan floors andhigher minimum pricing on renewed and new loans.   These efforts resulted in an overall increaseof $0.1 million in net interest income in the second quarter 2009 as comparedto the first quarter 2009 despite a $73.4 million decrease in average earningassets.   The decrease in net interestmargin and net interest spread in the third quarter 2009, as compared to thesecond quarter 2009, is primarily a result of a significant increase to theCompany’s short-term liquidity position as reflected by an $85.4 millionincrease in average cash equivalents, which only earned 0.24% during thequarter.  Excluding these low-yieldingcash equivalents, the Company’s net interest margin would have been 17 basispoints higher in the third quarter 2009. This increase in short-term liquidity was a result of a $106.1 milliondecrease in quarterly average loan balances coupled with a net increase tocapital during the quarter as a result of the issuance of preferred stock in August 2009.  A portion of this additional liquidity wasinvested in our securities portfolio, which increased by $84.3 million duringthe third quarter 2009.  Managementcontinues to evaluate alternatives for the utilization of this additionalliquidity to improve our future margin, including a combination of purchasingnew investment securities, making new loans and not renewing certain maturingtime deposits.

 

*The following table summarizes the Company’s net interest income andrelated spread and margin for the year-to-date periods presented:*

 

**Table 3**

 
| ** **                                 | ** ** | **Nine Months  Ended**       | ** ** |
|--------------------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **September 30,  2009** | ** ** | **September 30,  2008** | ** ** |
|                                       |       |                         |       |   |   |
| Net  interest income                       |       | $                            | 46,489     |   | $ | 61,883 |   |
| Interest  rate spread                      |       | 2.68                         | %          | 3.48 | % |
| Net  interest margin                       |       | 3.26                         | %          | 4.21 | % |
| Net  interest margin, fully tax equivalent |       | 3.34                         | %          | 4.31 | % |
|                                            |            |                              |            |  |  |  |  |

 

For thenine-month period ended September 30, 2009, net interest income decreasedby $15.4 million, or 24.9%, as compared to the same period in 2008.  This decrease is due to an $9.1 millionunfavorable rate variance and a $6.3 million unfavorable volume variance (seeTable 5).

 

Theunfavorable rate variance of $9.1 million for year-to-date 2009 is mostly dueto a decrease in the yield on earning assets by 122 basis points to 5.13% forthe nine months ended September 30, 2009 from 6.35% for the same period in2008.  The FOMC decreased the targetfederal funds rate seven times by a total of greater than 400 basis 

 

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points during 2008.  Similarly, the prime rate decreased by 400basis points from January 2008 to the end of 2008.  These rate decreases also impacted the Bank’scost of funds.  The cost ofinterest-bearing liabilities was 2.45% for the first nine months of 2009 ascompared to 2.87% for the same period in 2008. The cost of interest-bearing liabilities did not decrease assignificantly due to fixed rate costs on our time deposits and borrowings.  Overall time deposit costs did decline by 96basis points, but the Company continued to hold higher cost time deposits throughout2009.  In the fourth quarter 2009,approximately $271.9 million of time deposits with an average rate of 3.46%will mature.

 

Theunfavorable volume variance is mostly a result of lower average earningassets.  Average earning assets decreasedby $55.5 million for the year-to-date 2009 as compared to the same period in2008.   This is primarily due to a $65.6million decline in average loans and a $16.7 million decline in averageinvestments for this period.   During thelatter part of the third quarter 2009, the Company did increase its investmentsecurities by approximately $84.3 million. Investment securities at September 30, 2009 were $209.3 million, ascompared to average investment securities of $153.7 million for the thirdquarter 2009 and average investment securities of $142.4 million for theyear-to-date period ended September 30, 2009.   These declines in average earnings assetswere partially offset by a $26.8 million increase in other earnings assets,which primarily consists of federal funds sold and interest bearing deposits atbanks.   These other earning assets onlyearned 0.25% for the nine-months ended September 30, 2009 as compared to2.98% for the same period in 2008.   Asthese are primarily overnight or short-term investments, the yield is close tothe targeted federal funds rate, which declined by 400 basis points throughout2008 to between 0 and .25% in December 2008.  At September 30, 2009, the Company had$119.7 million of other earnings assets.

 

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The following table presents, for the periodsindicated, average assets, liabilities and stockholders’ equity, as well as thenet interest income from average interest-earning assets and the resultantannualized yields and costs expressed in percentages.

 

**Table 4**

 
| ** **                                          | ** ** | **Quarter Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                          | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | **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)   |       | $                                    | 1,627,066  |   | $ | 21,710 |   | 5.29 | % | $ | 1,807,325 |   | $ | 27,675 |   | 6.09 | % |
| Investment  securities (1)                          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 72,773                               |       | 751 |   | 4.10 | % | 53,273 |   | 749 |   | 5.59 | % |
| Tax-exempt                                          |       | 64,474                               |       | 763 |   | 4.70 | % | 69,272 |   | 846 |   | 4.86 | % |
| Bank  Stocks (4)                                    |       | 16,410                               |       | 184 |   | 4.44 | % | 32,714 |   | 441 |   | 5.37 | % |
| Other  earning assets                               |       | 101,585                              |       | 61 |   | 0.24 | % | 1,662 |   | 8 |   | 1.87 | % |
| Total  interest-earning assets                      |       | 1,882,308                            |       | 23,469 |   | 4.95 | % | 1,964,246 |   | 29,719 |   | 6.02 | % |
| **Non-earning assets:**                             |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cash and  due from banks                            |       | 25,396                               |       |   |   |   |   | 35,770 |   |   |   |   |   |
| Other  assets                                       |       | 114,975                              |       |   |   |   |   | 351,897 |   |   |   |   |   |
|                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Total assets**                                    |       | $                                    | 2,022,679  |   |   |   |   |   | $ | 2,351,913 |   |   |   |   |   |
|                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                            |       | $                                    | 149,994    |   | $ | 96 |   | 0.25 | % | $ | 148,536 |   | $ | 177 |   | 0.47 | % |
| Money  market                                       |       | 324,686                              |       | 690 |   | 0.84 | % | 517,001 |   | 2,343 |   | 1.80 | % |
| Savings                                             |       | 72,514                               |       | 58 |   | 0.32 | % | 70,512 |   | 99 |   | 0.56 | % |
| Time  certificates of deposit                       |       | 712,557                              |       | 5,737 |   | 3.19 | % | 484,706 |   | 4,835 |   | 3.97 | % |
| Total  interest-bearing deposits                    |       | 1,259,751                            |       | 6,581 |   | 2.07 | % | 1,220,755 |   | 7,454 |   | 2.43 | % |
| Borrowings:                                         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase  agreements                              |       | 12,796                               |       | 29 |   | 0.89 | % | 20,317 |   | 105 |   | 2.05 | % |
| Federal  funds purchased (5)                        |       | 22                                   |       | 0 |   | 0.15 | % | 9,981 |   | 55 |   | 2.21 | % |
| Subordinated  debentures                            |       | 41,239                               |       | 625 |   | 6.01 | % | 41,239 |   | 778 |   | 7.50 | % |
| Borrowings                                          |       | 164,434                              |       | 1,323 |   | 3.19 | % | 192,088 |   | 1,485 |   | 3.08 | % |
| Total  interest-bearing liabilities                 |       | 1,478,242                            |       | 8,558 |   | 2.30 | % | 1,484,380 |   | 9,877 |   | 2.65 | % |
| Noninterest  bearing liabilities:                   |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                    |       | 345,831                              |       |   |   |   |   | 426,128 |   |   |   |   |   |
| Other  liabilities                                  |       | 12,120                               |       |   |   |   |   | 17,838 |   |   |   |   |   |
| Total  liabilities                                  |       | 1,836,193                            |       |   |   |   |   | 1,928,346 |   |   |   |   |   |
| Stockholders’  Equity                          |       | 186,486                              |       |   |   |   |   | 423,567 |   |   |   |   |   |
| **Total liabilities and stockholders’ equity** |       | $                                    | 2,022,679  |   |   |   |   |   | $ | 2,351,913 |   |   |   |   |   |
|                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net  interest income                                |       |                                 |       | $ | 14,911 |   |   |   |   |   | $ | 19,842 |   |   |   |
| Net  interest margin                                |       |                                 |       |   |   | 3.14 | % |   |   |   |   | 4.02 | % |

 

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(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 3.23% and 4.11% for the three months ended September 30,2009 and September 30, 2008, 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 $0.6million and $0.9 million for the three months ended September 30, 2009 and2008, 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.

(5) The interest expenserelated to federal funds purchased for the third quarter 2009 rounded to zero.

 

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| ** **                                          | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | **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)   |       | $                                        | 1,722,321  |   | $ | 67,994 |   | 5.28 | % | $ | 1,787,912 |   | $ | 86,822 |   | 6.49 | % |
| Investment  securities (1)                          |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 55,875                                   |       | 2,067 |   | 4.95 | % | 53,411 |   | 2,212 |   | 5.53 | % |
| Tax-exempt                                          |       | 64,480                                   |       | 2,295 |   | 4.76 | % | 73,094 |   | 2,616 |   | 4.78 | % |
| Bank  Stocks (4)                                    |       | 21,998                                   |       | 670 |   | 4.07 | % | 32,590 |   | 1,346 |   | 5.52 | % |
| Other  earning assets                               |       | 42,133                                   |       | 78 |   | 0.25 | % | 15,348 |   | 342 |   | 2.98 | % |
| Total  interest-earning assets                      |       | 1,906,807                                |       | 73,104 |   | 5.13 | % | 1,962,355 |   | 93,338 |   | 6.35 | % |
| **Non-earning assets:**                             |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Cash and  due from banks                            |       | 27,279                                   |       |   |   |   |   | 38,020 |   |   |   |   |   |
| Other  assets                                       |       | 98,983                                   |       |   |   |   |   | 359,209 |   |   |   |   |   |
|                                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| **Total assets**                                    |       | $                                        | 2,033,069  |   |   |   |   |   | $ | 2,359,584 |   |   |   |   |   |
|                                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                            |       | $                                        | 145,680    |   | $ | 274 |   | 0.25 | % | $ | 152,537 |   | $ | 639 |   | 0.56 | % |
| Money  market                                       |       | 299,323                                  |       | 1,996 |   | 0.89 | % | 546,317 |   | 8,615 |   | 2.11 | % |
| Savings                                             |       | 71,582                                   |       | 169 |   | 0.32 | % | 70,740 |   | 311 |   | 0.59 | % |
| Time  certificates of deposit                       |       | 713,567                                  |       | 18,177 |   | 3.41 | % | 461,820 |   | 15,095 |   | 4.37 | % |
| Total  interest-bearing deposits                    |       | 1,230,152                                |       | 20,616 |   | 2.24 | % | 1,231,414 |   | 24,660 |   | 2.67 | % |
| Borrowings:                                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase  agreements                              |       | 14,667                                   |       | 97 |   | 0.88 | % | 18,851 |   | 323 |   | 2.29 | % |
| Federal  funds purchased                            |       | 184                                      |       | 1 |   | 0.69 | % | 6,655 |   | 119 |   | 2.39 | % |
| Subordinated  debentures                            |       | 41,239                                   |       | 1,945 |   | 6.31 | % | 41,239 |   | 2,422 |   | 7.85 | % |
| Borrowings                                          |       | 167,569                                  |       | 3,956 |   | 3.16 | % | 167,634 |   | 3,931 |   | 3.13 | % |
| Total  interest-bearing liabilities                 |       | 1,453,811                                |       | 26,615 |   | 2.45 | % | 1,465,793 |   | 31,455 |   | 2.87 | % |
| Noninterest  bearing liabilities:                   |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                    |       | 395,827                                  |       |   |   |   |   | 450,330 |   |   |   |   |   |
| Other  liabilities                                  |       | 11,573                                   |       |   |   |   |   | 19,842 |   |   |   |   |   |
| Total  liabilities                                  |       | 1,861,211                                |       |   |   |   |   | 1,935,965 |   |   |   |   |   |
| Stockholders’  Equity                          |       | 171,858                                  |       |   |   |   |   | 423,619 |   |   |   |   |   |
| **Total liabilities and stockholders’ equity** |       | $                                        | 2,033,069  |   |   |   |   |   | $ | 2,359,584 |   |   |   |   |   |
|                                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                |       |                                     |       | $ | 46,489 |   |   |   |   |   | $ | 61,883 |   |   |   |
| Net  interest margin                                |       |                                     |       |   |   | 3.26 | % |   |   |   |   | 4.21 | % |

 

----

(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 3.34% and 4.31% for the nine months ended September 30,2009 and September 30, 2008, 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 $2.5million and $2.6 million for the nine months ended September 30, 2009 and2008, 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 the dollar amount ofchanges in interest income and interest expense for the major categories of ourinterest-earning assets and interest-bearing liabilities. Information isprovided for each category of interest-earning assets and interest-bearingliabilities with respect to (i) changes attributable to volume (i.e.,changes in average balances multiplied by the prior-period average rate) and (ii) changesattributable to rate (i.e., changes in average rate multiplied by prior-periodaverage balances). For purposes of this table, changes attributable to bothrate and volume, which cannot be segregated, have been allocatedproportionately to the change due to volume and the change due to rate.

 

**Table 5**

 
| ** **                         | ** ** | **Three  Months Ended September 30, 2009  Compared to Three Months Ended  September 30, 2008** | ** ** | **Nine Months  Ended September 30, 2009  Compared to Nine Months Ended  September 30, 2008** | ** ** |
|------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Net Change**                                                                                           | ** ** | **Rate**                                                                                               | ** ** | **Volume** | ** ** | **Net Change** | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| ** **                         | ** ** | **(In  thousands)**                                                                                      | ** ** |
| **Interest income:**               | ** ** | ** **                                                                                               | ** ** | ** **                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  Loans, net of unearned fees |       | $                                                                                                        | (5,965     | )                                                                                                      | $          | (3,360 | ) | $ | (2,605 | ) | $ | (18,828 | ) | $ | (15,741 | ) | $ | (3,087 | ) |
| Investment  Securities             |       |                                                                                                     |       |                                                                                                   |       |   |   |   |   |   |   |   |   |
| Taxable                            |       | 2                                                                                                        |       | (5                                                                                                     | )          | 7 |   | (145 | ) | (255 | ) | 110 |   |
| Tax-exempt                         |       | (83                                                                                                      | )          | (26                                                                                                    | )          | (57 | ) | (321 | ) | (14 | ) | (307 | ) |
| Bank  Stocks                       |       | (257                                                                                                     | )          | (65                                                                                                    | )          | (192 | ) | (676 | ) | (302 | ) | (374 | ) |
| Other  earning assets              |       | 53                                                                                                       |       | (1                                                                                                     | )          | 54 |   | (264 | ) | 293 |   | (557 | ) |
| Total  interest income             |       | (6,250                                                                                                   | )          | (3,457                                                                                                 | )          | (2,793 | ) | (20,234 | ) | (16,019 | ) | (4,215 | ) |
|                               |       |                                                                                                     |       |                                                                                                   |       |   |   |   |   |   |   |   |   |
| **Interest expense:**              |       |                                                                                                     |       |                                                                                                   |       |   |   |   |   |   |   |   |   |
| Deposits:                          |       |                                                                                                     |       |                                                                                                   |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand           |       | (81                                                                                                      | )          | (83                                                                                                    | )          | 2 |   | (365 | ) | (337 | ) | (28 | ) |
| Money  market                      |       | (1,653                                                                                                   | )          | (972                                                                                                   | )          | (681 | ) | (6,619 | ) | (3,712 | ) | (2,907 | ) |
| Savings                            |       | (41                                                                                                      | )          | (44                                                                                                    | )          | 3 |   | (142 | ) | (146 | ) | 4 |   |
| Time  certificates of deposit      |       | 902                                                                                                      |       | (628                                                                                                   | )          | 1,530 |   | 3,082 |   | (2,096 | ) | 5,178 |   |
| Repurchase  agreements             |       | (76                                                                                                      | )          | (46                                                                                                    | )          | (30 | ) | (226 | ) | (166 | ) | (60 | ) |
| Federal  funds purchased           |       | (55                                                                                                      | )          | (27                                                                                                    | )          | (28 | ) | (118 | ) | (49 | ) | (69 | ) |
| Subordinated  debentures           |       | (153                                                                                                     | )          | (153                                                                                                   | )          | — |   | (477 | ) | (477 | ) | — |   |
| Borrowings                         |       | (162                                                                                                     | )          | 65                                                                                                     |       | (227 | ) | 25 |   | 27 |   | (2 | ) |
| Total  interest expense            |       | (1,319                                                                                                   | )          | (1,888                                                                                                 | )          | 569 |   | (4,840 | ) | (6,956 | ) | 2,116 |   |
|                               |       |                                                                                                     |       |                                                                                                   |       |   |   |   |   |   |   |   |   |
| **Net interest income**            |       | $                                                                                                        | (4,931     | )                                                                                                      | $          | (1,569 | ) | $ | (3,362 | ) | $ | (15,394 | ) | $ | (9,063 | ) | $ | (6,331 | ) |

 

**Provision for Loan Losses**

 

The provision for loan losses represents acharge against earnings. The provision is the amount required to maintain theallowance for loan losses at a level that, in our judgment, is adequate toabsorb probable incurred loan losses in the loan portfolio. The provision forloan losses is based on our reserve methodology and reflects our judgmentsabout 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 regardingcollectibility 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 2009, the Company recorded aprovision for loan losses of $20.0 million, compared to $30.8 million in the thirdquarter 2008.  Of the $20.0 million ofprovision for loan losses in the third quarter 2009, approximately $14.3million was related to impaired loans and related charge-offs.  Provision for loan losses of $5.7 million wasmade for the general component of the allowance for loan losses, which wasprimarily due to the impact of net charge-offs during the quarter on thehistorical loss and economic condition components of our allowance for loanlosses.  The Company determinedthat the provision for loan losses made during the third quarter was sufficientto maintain our allowance for loan losses at a level necessary for the probableincurred losses inherent in the loan portfolio as of September 30, 2009.

 

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Netcharge-offs in the third quarter 2009 were $14.0 million, as compared to $12.5million for the same quarter in 2008. The third quarter 2009 provision for loan losses in excess of thirdquarter 2009 net charge-offs was due primarily to the impact of continuedstress on commercial real estate values and performance on our generalcomponent of the allowance for loan losses.

 

Fora discussion of impaired loans and associated collateral values, see “BalanceSheet Analysis—Nonperforming Assets” below.

 

For the nine months ended September 30,2009, the Company recorded a provision for loan loss of $41.1 million ascompared to $32.5 million in the same period in 2008.  The allowance for loan losses as a percentageof loans increased to 3.09% at September 30, 2009, as compared to 2.52% atSeptember 30, 2008.  The increase inboth the overall allowance for loan losses and the provision for loan losses isdue to the impact of the increase in non-performing loans and netcharge-offs.   Net charge-offs in theyear-to-date period 2009 were $37.1 million as compared to $13.5 million forthe same period in 2008.

 

For further discussionof the methodology and factors impacting management’s estimate of the allowancefor loan losses, see “Balance Sheet Analysis— Allowance for Loan Losses” below.

 

**Noninterest Income**

 

*The following table presents the major categories of noninterest incomefor the current quarter and prior four quarters:*

 

**Table 6**

 
| ** **                       | ** ** | **Quarter  Ended**           | ** ** |
|----------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** | **March 31,    2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** |
| ** **                       | ** ** | **(In  thousands)**          | ** ** |
| Noninterest  income:             |       |                         |       |   |   |   |   |   |   |   |   |
| Customer  service and other fees |       | $                            | 2,281      |   | $ | 2,354 |   | $ | 2,679 |   | $ | 2,357 |   | $ | 2,521 |   |
| Loss on  sale of securities      |       | (1                           | )          | — |   | — |   | — |   | — |   |
| Other                            |       | 170                          |       | 273 |   | 236 |   | (91 | ) | 186 |   |
| Total  noninterest income        |       | $                            | 2,450      |   | $ | 2,627 |   | $ | 2,915 |   | $ | 2,266 |   | $ | 2,707 |   |

 

Noninterest income for the third quarter 2009decreased by $0.2 million from the second quarter 2009 and decreased by $0.3million from the third quarter 2008.  Thedecrease in customer service and other fees in the third quarter 2009 ascompared to the third quarter 2008 was primarily the result of decreases incustomer fee income from ATM and non-sufficient fund charges, partially offsetby higher analysis fees as a result of a reduction in the earnings credit rateon commercial deposit accounts.

 

Fluctuations in the other noninterest incomecategory over the past several quarters are primarily the result of thevolatility of the fair value of assets held by the Company for purposes offunding its nonqualified deferred compensation plan.   In particular, the loss recorded within theother noninterest income category during the fourth quarter 2008 was primarilya result of a $0.3 million fair value write-down (contra-income) related to theaverage balance of $1.1 million of assets held for purposes of funding theCompany’s deferred compensation plan.  These assets are required to be marked-to-market through the incomestatement.  These write-downs of theassets held for the deferred compensation plan are almost entirely offset by areduction to our deferred compensation liability account, which reduces ouroverall compensation cost.  Therefore,this volatility on the market value of our deferred compensation plan asset andliability accounts had only a nominal overall impact on net income.

 

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*The following table presents the major categories of noninterest incomefor the year-to-date periods presented:*

 

**Table 7**

 
| ** **                         | ** ** | **Nine Months  Ended**       | ** ** |
|------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **September 30,  2009** | ** ** | **September 30,  2008** | ** ** |
| ** **                         | ** ** | **(In  thousands)**          | ** ** |
| Noninterest  income:               |       |                         |       |   |   |
| Customer  service and other fees   |       | $                            | 7,314      |   | $ | 7,325 |   |
| Gain  (loss) on sale of securities |       | (1                           | )          | 138 |   |
| Other                              |       | 679                          |       | 891 |   |
| Total  noninterest income          |       | $                            | 7,992      |   | $ | 8,354 |   |

 

Noninterest income for the first nine months of 2009decreased by $0.4 million from the same period in 2008.  Customer service and other fees remainedrelatively flat even though individual income items within this overallcategory fluctuated year over year.   Inparticular, non-sufficient fund (NSF) fees and ATM fees declined by $0.6million and analysis fees on corporate accounts increased by $0.6 million. Theincrease in analysis fees is primarily the result of a decline in the earningscredit rate on compensating balances.

 

**Noninterest Expense**

 

*The following table presents, for the quarters indicated, the majorcategories of noninterest expense:*

 

**Table 8**

 
| ** **                         | ** ** | **Quarter  Ended**           | ** ** |
|------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** |
| ** **                         | ** ** | **(In  thousands)**          | ** ** |
| Noninterest  expense:              |       |                         |       |   |   |   |   |   |   |   |   |
| Salaries  and employee benefits    |       | $                            | 6,536      |   | $ | 6,712 |   | $ | 6,739 |   | $ | 6,255 |   | $ | 5,927 |   |
| Occupancy  expense                 |       | 1,908                        |       | 1,926 |   | 1,921 |   | 1,725 |   | 1,958 |   |
| Furniture  and equipment           |       | 1,103                        |       | 1,147 |   | 1,131 |   | 1,203 |   | 1,390 |   |
| Impairment of goodwill             |       | —                       |       | — |   | — |   | — |   | 250,748 |   |
| Amortization  of intangible assets |       | 1,559                        |       | 1,581 |   | 1,582 |   | 1,803 |   | 1,877 |   |
| Other  general and administrative  |       | 6,303                        |       | 6,348 |   | 4,108 |   | 4,381 |   | 3,982 |   |
| Total  noninterest expense         |       | $                            | 17,409     |   | $ | 17,714 |   | $ | 15,481 |   | $ | 15,367 |   | $ | 265,882 |   |

 

Noninterestexpense, excluding the $250.7 million goodwill impairment in the third quarter2008, increased by $2.3 million, or 15.0%, to $17.4 million for the thirdquarter 2009, as compared to the third quarter 2008, and decreased by $0.3million from the second quarter 2009.

 

Salary andemployee benefits expense increased by $0.6 million, or 10.3%, in the thirdquarter 2009 as compared to the same quarter in 2008.  The $0.6 million increase in salariesand employee benefits in the third quarter 2009 as compared to the same quarteris due mostly to theimpact of a $2.6 million reversal of equity-based compensation in the thirdquarter of 2008.   This cumulativereversal of equity-based compensation expense as a result of a determinationthat performance-based shares that were no longer expected to meet theirperformance target prior to their expiration date.  Excluding the impact of this 2008 reversal ofexpense, salaries and benefits in the third quarter of 2009 decreased by $2.0million from the third quarter of 2008 primarily as a result of a reduction in full-time equivalent employees from thethird quarter 2008.  In the secondquarter 2008, the Company announced a major effort to better align our expenseswith the current size of our business. This effort resulted in a reduction of full-time equivalent employeesfrom 441 at June 30, 2008 to 368 at September 30, 2009.

 

On acombined basis, occupancy expense and furniture and equipment expense decreasedby $0.3 million in the third quarter 2009 as compared to the same quarter in2008 primarily as a result of the decision to close two branches in 2008, aswell as the outsourcing of a portion of our data processing.

 

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Amortizationof intangible asset expense is $1.6 million in the third quarter 2009 ascompared to $1.9 million in the third quarter 2008, a decrease of 16.9%.   This decrease is attributable to the use ofaccelerated amortization methods related to the core deposit intangible asset.

 

Othergeneral and administrative expense increased by $2.3 million in the thirdquarter 2009 as compared to the third quarter 2008.  The increase in other general andadministrative expense in the third quarter 2009 as compared to the same periodin 2008 is mostly due to an increase of $1.3 million in other real estate ownedand loan collection expenses and a $1.0 million increase in Federal DepositInsurance Corporation (FDIC) insurance premiums.  The increase in other real estate owned andloan collection expenses are primarily a result of a net increase of $1.1million in write-downs on other real estate owned properties due mostly to thereceipt of pending sales contracts for the disposition of approximately $16.0million of other real estate owned at September 30, 2009.  Although it is possible that not all of thesetransactions will close, the Company adjusted the values of the other realestate owned to agree to the sales contracts, less anticipated costs tosell.  The remaining increase is duemostly to higher collection costs and appraisal costs.   The FDIC insurance premiums increased in thethird quarter 2009 as compared to the same quarter in 2008 primarily as aresult of significant increases to the assessment rates by the FDIC.  In January 2009, the FDIC finalized new rules thatincreased the FDIC insurance premiums by 7 basis points starting in the firstquarter 2009, with additional increases effective in the second quarter2009.  These changes more than doubledthe amount of FDIC insurance premiums paid by the Company.   Additionally, the FDIC’s Temporary LiquidityGuarantee Program implemented an additional insurance assessment of 10 basispoints on noninterest bearing transaction accounts in excess of the baseinsured amounts.

 

Compared tothe linked prior quarter, all of the categories of other noninterest expenseremained relatively flat in the third quarter 2009 as compared to the secondquarter 2009 with the exception of salaries, which declined by $0.2 million.This decrease in salary expense for the third quarter 2009 is primarily theresult of severance paid in the second quarter 2009.

 

*The following table presents, for the year-to-date periods indicated,the major categories of noninterest expense:*

 

**Table 9**

 
| ** **                         | ** ** | **Nine Months  Ended**       | ** ** |
|------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **September 30,  2009** | ** ** | **September 30,  2008** | ** ** |
| ** **                         | ** ** | **(In  thousands)**          | ** ** |
| Noninterest  expense:              |       |                         |       |   |   |
| Salaries  and employee benefits    |       | $                            | 19,987     |   | $ | 24,831 |   |
| Occupancy  expense                 |       | 5,755                        |       | 6,090 |   |
| Furniture  and equipment           |       | 3,381                        |       | 4,087 |   |
| Impairment  of goodwill            |       | —                       |       | 250,748 |   |
| Amortization  of intangible assets |       | 4,722                        |       | 5,631 |   |
| Other  general and administrative  |       | 16,759                       |       | 12,902 |   |
| Total  noninterest expense         |       | $                            | 50,604     |   | $ | 304,289 |   |

 

Noninterest expense for the nine months ended September 30, 2009decreased by $253.7 million as compared to the same period in 2008, primarilydue to the $250.7 million non-cash goodwill impairment charge recorded in thethird quarter 2008.   Noninterestexpense, excluding the 2008 goodwill impairment charge, decreased by $2.9million for the year-to-date period ended September 30, 2009, as comparedto the same period in 2008.

 

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The $4.8 million year-to-date decline in salaries and employee benefitsexpense is due to a $4.2 million reduction in base salary and employee benefitexpense and a $2.1million decrease to bonus and incentives, partially offset by a $1.4 millionincrease to equity-based compensation expense.    The decline in base salaries and benefits,as well as bonus and incentives, is primarily a result of a reduction inemployees in 2009 as compared to 2008.  At the beginning of 2008, there were 476 full-time equivalent employeesas compared to 368 at September 30, 2009.  The increase toequity-based compensation expense is primarily the result of a cumulativereversal of equity-based compensation expense in the third quarter 2008 for$2.6 million primarily as a result of a determination that performance-basedshares were no longer expected to meet their performance target prior to theirexpiration date.  Excluding this reversalof equity-based compensation expense in the third quarter of 2008, equity-basedcompensation expense declined by $1.2 million for the year-to-date period endedSeptember 30, 2009 as compared to the same period in 2008, mostly due tofewer full-time equivalent employees, as well as only one new grant ofrestricted stock awards throughout 2009.

 

Occupancy expense and furniture and equipment expense decreased on ayear-to-date basis from the prior year by $0.3 million and $0.7 million,respectively, primarily asa result of a decision to close two branches in 2008, as well as theoutsourcing of a portion of our data processing.

 

Amortizationof intangible asset expense decreased by $0.9 million, or 16.1%, on ayear-to-date basis in 2009 as compared to 2008 due to the use of acceleratedmethods to amortize the core deposit intangible asset.

 

Othergeneral and administrative expense increased by $3.9 million for theyear-to-date period ended September 30, 2009 as compared to the sameperiod in 2008.   The $3.9 millionincrease to general and administrative expenses is mostly due to higher FDICinsurance cost as well as higher other real estate owned, collection costs andappraisal costs.  For the year-to-dateperiod ended September 30, 2009, as compared to the same period in 2008,there was a $2.8 million increase in FDIC insurance assessments, due to higherrates in 2009, including a $0.9 million one-time assessment in the secondquarter 2009.   For the nine months endedSeptember 30, 2009, as compared to the same period in 2008, there was a$1.3 million increase to expenses associated with other real estate owned andother problem assets, including write-downs on other real estate owned.

 

**Income Taxes**

 

The effective tax benefitwas 15.7% for the three months ending September 30, 2009 as compared to aneffective tax benefit of 3.0% for the same period in 2008. The effective taxbenefit was 26.6% for the nine months ending September 30, 2009 ascompared to an effective tax benefit of 2.3% for the same period in 2008.   The primary difference between the expectedbenefit and the effective tax benefit for the three and nine months ended September 30,2009 was the establishment of a $5.0 million valuation allowance related todeferred tax assets.  The primarydifference between the expected benefit and the effective tax benefit for thethree and nine months ended September 30, 2008 was the goodwill impairmentcharge, for which no tax benefit was recorded.

 

In the quarter ended September 30,2009, management determined that a deferred tax valuation allowance should berecorded.  In making this determination,management considered all evidence currently available, both positive andnegative, including forecasts of future income, applicable tax planningstrategies, and assessments of the current and future economic and businessconditions. Positive evidence includes the existence of taxes paid in availablecarry-back years as well as the probability that taxable income will begenerated in future periods; the potential to carry-back 2009 losses to prioryears; and  various other tax planningstrategies that we can implement, if needed, to realize a portion of thedeferred tax asset.  Negative evidenceincludes the cumulative losses in the current year and the immediatelypreceding fiscal year, the generally downward economic and business trends, thevolatility of earnings in the current economic environment relative toadditions to the provision for loan losses and the fact the Company has a threeyear cumulative loss for financial reporting purposes.

 

Based upon these factors,the Company established a net deferred tax asset valuation allowance of $5.0million for the quarter ended September 30, 2009.  On a quarterly basis, the Company willdetermine whether this valuation allowance is necessary and whether theallowance should be adjusted based on then available evidence.

 

To the extent that theCompany has a three year cumulative loss for financial reporting purposes,projections of future taxable income are generally not permitted to be utilizedin determining that a valuation allowance related to deferred tax assets is notnecessary.  Therefore, the effective taxrate or benefit in future quarters may be higher or lower than expected due tofuture adjustments to the valuation allowance associated with deferred taxassets.

 

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**BALANCE SHEET ANALYSIS**

 

*The following sets forth certain key consolidated balance sheet data:*

 

**Table 10**

 
| ** **               | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** |
|--------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **(In  thousands)**          | ** ** |
|                     |       |                         |       |                    |       |                     |       |                             |       |                         |       |
| Cash and  due from banks |       | $                            | 148,194    |                    | $          | 47,096                   |       | $                                | 35,982     |                         | $          | 45,711 |   | $ | 41,347 |   |
| Total  investments       |       | 209,297                      |       | 124,952                 |       | 139,387                  |       | 144,264                          |       | 143,649                      |       |
| Total  loans             |       | 1,587,265                    |       | 1,651,572               |       | 1,757,103                |       | 1,826,333                        |       | 1,779,673                    |       |
| Total  assets            |       | 2,057,378                    |       | 1,944,867               |       | 2,036,395                |       | 2,102,741                        |       | 2,052,944                    |       |
|                     |       |                         |       |                    |       |                     |       |                             |       |                         |       |
| Earning  assets          |       | 1,921,726                    |       | 1,800,472               |       | 1,902,670                |       | 1,989,884                        |       | 1,927,128                    |       |
| Deposits                 |       | 1,632,436                    |       | 1,560,730               |       | 1,639,797                |       | 1,698,651                        |       | 1,635,101                    |       |
|                          |            |                              |            |                         |            |                          |            |                                  |            |                              |            |  |  |  |  |  |

 

At September 30, 2009, the Company had totalassets of $2.1 billion, or $45 million less than total assets at December 31,2008.  The decline in assets from December 31,2008 is primarily a result of a $239 million decrease in total loansoutstanding, consisting mostly of a $64 million decrease in real estate loansand a $173 million decrease in commercial loans.   The decline in loans is mostly a result ofmanagement’s efforts to reduce the risk profile on the balance sheet byreducing residential real-estate and residential land and land developmentloans, as well as lower yielding syndicated and participated commercial loans.

 

The Company’s cash and due from banks increased by$102.5 million to $148.2 million at September 30, 2009, as compared to$45.7 million at December 31, 2008. Similarly, total investments increased by $65.0 million to $209.3million at September 30, 2009 as compared to $144.3 million at December 31,2008.  This increase in liquid short-termassets as well as the increase to total investments, is primarily a result ofthe decline in loans, as well as the issuance of $57.9 million, net ofexpenses, of preferred stock in the third quarter 2009.   The increase in total investments primarilyconsists of the purchase of mortgage backed securities issued by U.S.government and government-sponsored agencies.

 

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*The following table sets forth the amount of our loans outstanding atthe dates indicated:*

 

**Table 11**

 
| ** **                                      | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** | **March 31,    2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|----------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **(In  thousands)**          | ** ** |
| Real estate  - Residential and Commercial       |       | $                            | 715,005    |                    | $          | 682,923                    |       | $                           | 658,982    |                         | $          | 680,030 |   | $ | 693,800 |   |
| Real  estate - Construction                     |       | 163,074                      |       | 190,197                 |       | 250,665                    |       | 268,306                     |       | 248,883                      |       |
| Equity  lines of credit                         |       | 56,591                       |       | 55,812                  |       | 52,679                     |       | 50,270                      |       | 49,205                       |       |
| Commercial                                      |       | 573,562                      |       | 639,462                 |       | 714,218                    |       | 746,241                     |       | 706,678                      |       |
| Agricultural                                    |       | 19,428                       |       | 22,764                  |       | 22,686                     |       | 22,738                      |       | 23,989                       |       |
| Consumer                                        |       | 38,704                       |       | 37,878                  |       | 38,220                     |       | 38,352                      |       | 38,777                       |       |
| Leases  receivable and other                    |       | 23,671                       |       | 25,506                  |       | 22,828                     |       | 23,996                      |       | 22,099                       |       |
| Total  gross loans                              |       | 1,590,035                    |       | 1,654,542               |       | 1,760,278                  |       | 1,829,933                   |       | 1,783,431                    |       |
| Less:  allowance for loan losses                |       | (49,038                      | )          | (43,041                 | )          | (37,598                    | )          | (44,988                     | )          | (44,765                      | )          |
| Unearned  discount                              |       | (2,770                       | )          | (2,970                  | )          | (3,175                     | )          | (3,600                      | )          | (3,758                       | )          |
| Loans,  net of unearned discount                |       | $                            | 1,538,227  |                    | $          | 1,608,531                  |       | $                           | 1,719,505  |                         | $          | 1,781,345 |   | $ | 1,734,908 |   |
|                                            |       |                         |       |                    |       |                       |       |                        |       |                         |       |
| Loans  held for sale at lower of cost or market |       | $                            | 5,500      |                    | $          | 5,250                      |       | $                           | 5,175      |                         | $          | 5,760 |   | $ | — |   |

 

There were $934.7 million of real estate loans at September 30,2009, compared to $998.6 million at December 31, 2008 and $991.9 millionat September 30, 2008.

 

Managementcontinues its efforts to decrease its exposure to residential and commercialreal estate loans. At September 30, 2009, there were approximately $27million of loans secured by for-sale residential real estate and approximately$69 million of residential land and land development loans, respectively.  This compares to December 31, 2008, withapproximately $57 million of loans secured by for-sale residential real estateand approximately $114 million of residential land and land developmentloans.  Loans secured by commercial realestate decreased by $85.9 million, or 9.8%, to $791.2 million at September 30,2009 as compared to $877.1 million at December 31, 2008.  Loans secured by commercial real estate arerecorded on the balance sheet as either a commercial real estate loan orcommercial loan depending on the purpose of the loan, not the underlyingcollateral. This decline in loans secured by commercial real estate, as well asmanagement’s efforts to reduce lower yielding syndicated and participated loansare the primary reasons for the decline in commercial loans at September 30,2009 as compared to December 31, 2008.

 

The $105.2 million decrease in constructionloans, and the $35.0 million increase in residential and commercial real estateloans at September 30, 2009 as compared to December 31, 2008 ispartially due to reclassifying $77 million of construction loans to commercialreal estate loans because of the completion of the underlying building projectsand the commencement of amortization of these loans.   A portion of the remainder of the decreasein construction loans was a result of payoffs on existing loans, as well asmoving loans to other real estate owned during 2009.

 

The Company does not have any Alternative A-paper(Alt-A) or subprime residential loans in its loan portfolio.

 

**Nonperforming Assets**

 

Credit risk related to nonperforming assets arisesas a result of lending activities. To manage this risk, we employ frequentmonitoring procedures and take prompt corrective action when necessary. Weemploy a risk rating system that identifies the potential risk associated withloans in our loan portfolio. This monitoring and rating system is designed tohelp management determine current and potential problems so that correctiveactions can be taken promptly.

 

Generally, loans are placed on nonaccrual statuswhen they become 90 days or more past due or at such earlier time as managementdetermines timely recognition of interest to be in doubt.  Accrual of interest is discontinued on a loanwhen we believe, after considering economic and business conditions andanalysis of the borrower’s financial condition and the underlying collateralvalue, that the collection of interest is doubtful.

 

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The following table summarizes the loans for whichthe accrual of interest has been discontinued, loans with payments more than 90days past due and still accruing interest and other real estate owned. Forreporting purposes, other real estate owned consists of all real estate, otherthan bank premises, actually owned or controlled by us, including real estateacquired through foreclosure.

 

**Table 12**

 
| ** **                                                                            | ** ** | **Quarter  Ended**           | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                            | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** | **March 31,    2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in  thousands)**  | ** ** |
|                                                                                  |       |                         |       |   |   |   |   |   |   |   |   |
| Nonaccrual  loans and leases, not restructured                                        |       | $                            | 81,035     |   | $ | 52,483 |   | $ | 57,299 |   | $ | 54,594 |   | $ | 54,654 |   |
| Other  nonperforming loans                                                            |       | 150                          |       | 2,671 |   | 911 |   | 228 |   | 324 |   |
| Total  nonperforming loans                                                            |       | $                            | 81,185     |   | $ | 55,154 |   | $ | 58,210 |   | $ | 54,822 |   | $ | 54,978 |   |
| Other  real estate owned and foreclosed assets                                        |       | 32,246                       |       | 34,746 |   | 14,524 |   | 484 |   | 1,199 |   |
| Total  nonperforming assets                                                           |       | $                            | 113,431    |   | $ | 89,900 |   | $ | 72,734 |   | $ | 55,306 |   | $ | 56,177 |   |
|                                                                                  |       |                         |       |   |   |   |   |   |   |   |   |
| Impaired  loans                                                                       |       | $                            | 81,185     |   | $ | 55,154 |   | $ | 58,210 |   | $ | 54,822 |   | $ | 54,978 |   |
| Allocated  allowance for loan losses                                                  |       | (7,515                       | )          | (7,291 | ) | (6,342 | ) | (11,064 | ) | (12,825 | ) |
| Net  investment in impaired loans                                                     |       | $                            | 73,670     |   | $ | 47,863 |   | $ | 51,868 |   | $ | 43,758 |   | $ | 42,153 |   |
| Accruing  loans past due 90 days or more                                              |       | $                            | 9,140      |   | $ | 2,671 |   | $ | 911 |   | $ | 228 |   | $ | 324 |   |
| Loans  past due 30-89 days                                                            |       | $                            | 52,443     |   | $ | 39,836 |   | $ | 31,957 |   | $ | 35,169 |   | $ | 20,660 |   |
| Loans  charged-off                                                                    |       | $                            | 14,618     |   | $ | 13,509 |   | $ | 10,262 |   | $ | 2,032 |   | $ | 12,779 |   |
| Recoveries                                                                            |       | (615                         | )          | (347 | ) | (367 | ) | (1,005 | ) | (288 | ) |
| Net  charge-offs                                                                      |       | $                            | 14,003     |   | $ | 13,162 |   | $ | 9,895 |   | $ | 1,027 |   | $ | 12,491 |   |
| Provision  for loan losses                                                            |       | $                            | 20,000     |   | $ | 18,605 |   | $ | 2,505 |   | $ | 1,250 |   | $ | 30,750 |   |
| Allowance  for loan losses                                                            |       | $                            | 49,038     |   | $ | 43,041 |   | $ | 37,598 |   | $ | 44,988 |   | $ | 44,765 |   |
|                                                                                  |       |                         |       |   |   |   |   |   |   |   |   |
| Allowance  for loan losses to loans, net of unearned discount                         |       | 3.09                         | %          | 2.61 | % | 2.14 | % | 2.46 | % | 2.52 | % |
| Allowance  for loan losses to nonaccrual loans                                        |       | 60.51                        | %          | 82.01 | % | 65.62 | % | 82.41 | % | 81.91 | % |
| Allowance  for loan losses to nonperforming assets                                    |       | 43.23                        | %          | 47.88 | % | 51.69 | % | 81.34 | % | 79.69 | % |
| Allowance  for loan losses to nonperforming loans                                     |       | 60.40                        | %          | 78.04 | % | 64.59 | % | 82.06 | % | 81.42 | % |
| Nonperforming  assets to loans, net of unearned discount, and other real estate owned |       | 7.00                         | %          | 5.33 | % | 4.11 | % | 3.03 | % | 3.15 | % |
| Annualized  net charge-offs to average loans                                          |       | 3.42                         | %          | 3.05 | % | 2.22 | % | 0.22 | % | 2.75 | % |
| Nonaccrual  loans to loans, net of unearned discount                                  |       | 5.11                         | %          | 3.18 | % | 3.26 | % | 2.99 | % | 3.07 | % |
| Loans  30-89 days past due to loans, net of unearned discount                         |       | 3.30                         | %          | 2.41 | % | 1.82 | % | 1.93 | % | 1.16 | % |

 

Nonperforming assets at September 30, 2009increased by $58.1 million from December 31, 2008, primarily as a resultof a $31.8 million increase in other real estate owned.    Additionally, accruing loans past due 90days or more increased by $8.9 million over the same period.   Included in the $9.1 million of accruingloans over 90 days past due at September 30, 2009, were two loanrelationships totaling $8.9 million that were in the process of renewal atquarter end and, therefore, were not considered to be impaired as of September 30,2009.   As of October 29, 

 

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2009, one of these two loan relationships totaling$4.8 million was renewed and the second one remained in the process of renewal.

 

At September 30, 2009, approximately $33.1million, or 41%, of all nonperforming loans outstanding were residentialconstruction, land and land development.  At December 31, 2008, approximately $36.8 million, or 67.1%, of allnonperforming loans were residential construction, land and land developmentloans.

 

At September 30, 2009, approximately $25.6million, or 32%, of all nonperforming loans outstanding were commercial realestate loans.   At December 31,2008, approximately $6.0 million, or 11.0%, of all nonperforming loans werecommercial real estate loans.  Theincrease in nonperforming loans related to commercial real estate is primarilythe result of two loan relationships.

 

The Company has aninternal risk rating system of classified loans as pass, watch, specialmention, substandard, doubtful and loss.  These internal guidelines arebased on the definitions in the Uniform Agreement on the Classification ofAssets and Appraisal of Securities Held by Banks and Thrifts issued by theOffice of the Comptroller of the Currency, the Federal Deposit InsuranceCorporation, the Board of Governors of the Federal Reserve System, and theOffice of Thrift Supervision.  In particular, loans internally classifiedas substandard, doubtful or loss are considered adversely classifiedloans.   During the third quarter 2009, the amount of loans that theCompany has internally considered to be adversely classified, other thanimpaired loans as described above, has declined to $115.5 million at September 30,2009 as compared to $121.5 million at June 30, 2009 and $120.0 million at December 31,2008.  Each internal risk classification is judgmental, but based onobjective and subjective factors/criteria.  The internal risk ratingsfocus on an evaluation of the borrowers’ ability to meet future debt serviceand performance to plan under stress versus only their currentcondition.  As described below under “Allowance for Loan Losses”, theCompany adjusts the general component of its allowance for loan losses for thetrends in the volume and severity of adversely classified loans.

 

Net charge-offs in the third quarter 2009 were $14.0million, as compared to $13.2 million in the second quarter 2009, and $12.5million in the third quarter 2008.  Netcharge-offs for the year-to-date period ended September 30 2009, were$37.1 million, as compared to $13.5 million for the same period in 2008.  Impaired loans as of September 30, 2009totaled $81.2 million, as compared to $54.8 million at December 31, 2008.

 

**Allowance for Loan Losses**

 

The allowance for loan losses is maintained at alevel that, in our judgment, is adequate to absorb probable incurred losses inthe loan portfolio. The amount of the allowance is based on management’sevaluation of the collectibility of the loan portfolio, historical lossexperience, 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 loan losses tototal loans was 3.09% at September 30, 2009, as compared to 2.46% at December 31, 2008 and 2.52% at September 30, 2008.

 

Our methodology for evaluating the adequacy of theallowance for loan losses has two basic elements: first, the identification ofimpaired loans and the measurement of an estimated loss for each individualloan is identified; second, estimating an allowance for probable incurredlosses on other loans. The specific allowance for impaired loans and theremaining allowance are combined to determine the required allowance for loanlosses.

 

In estimating the allowance for probable incurredlosses on other loans, we group the balance of the loan portfolio into segmentsthat have common characteristics, such as loan type or risk weighting.  For each nonspecific allowance portfoliosegment, we apply loss factors to calculate the required allowance based uponactual historical loss rates adjusted for qualitative factors affecting loanportfolio collectibility as described above. Management also looks at risk weightings of loans and computes a factorfor the volume and severity of classified loans using assigned risk ratingsunder regulatory definitions of “watch”, “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 riskweighting categories watch or substandard are evaluated for trends in volumeand severity.

 

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The provision for loan losses recorded in2009 was required in order for the Company to maintain the allowance for loanlosses (3.09% of total loans as of September 30, 2009) at a levelnecessary for the probable incurred losses inherent in the loan portfolio as ofSeptember 30, 2009.  For further discussion of the provisionfor loan losses, see “Provision for Loan Losses” above.

 

The specific allowance for impaired loans and theallowance calculated for probable incurred losses on other loans are combinedto 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.  Forfurther discussion of the provision for loan losses, see “Provision for LoanLosses” above.

 

*The following table provides a summary of the activity within theallowance for loan losses account for the periods presented:*

 

**Table 13**

 
| ** **                                | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(In  thousands)**                       | ** ** |
| Balance,  beginning of period             |       | $                                         | 44,988     |   | $ | 25,711 |   |
| Loan  charge-offs:                        |       |                                      |       |   |   |
| Real  estate - Residential and Commercial |       | 5,075                                     |       | 2,077 |   |
| Real  estate - Construction               |       | 27,593                                    |       | 11,056 |   |
| Commercial                                |       | 3,141                                     |       | 863 |   |
| Agricultural                              |       | —                                    |       | 18 |   |
| Consumer                                  |       | 233                                       |       | 181 |   |
| Lease  receivable and other               |       | 2,347                                     |       | — |   |
| Total  loan charge-offs                   |       | 38,389                                    |       | 14,195 |   |
| Recoveries:                               |       |                                      |       |   |   |
| Real  estate - Residential and Commercial |       | 477                                       |       | 389 |   |
| Real  estate - Construction               |       | 403                                       |       | 69 |   |
| Commercial                                |       | 385                                       |       | 161 |   |
| Agricultural                              |       | 4                                         |       | 11 |   |
| Consumer                                  |       | 59                                        |       | 94 |   |
| Lease  receivable and other               |       | 1                                         |       | — |   |
| Total  loan recoveries                    |       | 1,329                                     |       | 724 |   |
| Net loan  charge-offs                     |       | 37,060                                    |       | 13,471 |   |
| Provision  for loan losses                |       | 41,110                                    |       | 32,525 |   |
| Balance,  end of period                   |       | $                                         | 49,038     |   | $ | 44,765 |   |

 

Management continues tomonitor the allowance for loan losses closely and will adjust the allowancewhen necessary, based on its analysis, which includes an ongoing evaluation ofsubstandard loans and their collateral positions.

 

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**Securities**

 

We manage our investment portfolio principally toprovide liquidity, balance our overall interest rate risk and to providecollateral for public deposits and customer repurchase agreements.

 

*The carrying value of our portfolio of investment securities at September 30,2009 and December 31, 2008 was as follows:*

 

**Table 14**

 
| ** **                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                                   | ** ** | **2009**               | ** ** | **2008**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                                                   | ** ** | **(In  thousands)**    | ** ** |
| Securities  available-for-sale:                              |       |                   |       |                  |       |           |       |       |       |
| U.S.  Treasury securities                                    |       | $                      | —     |                  | $          | 3,495          |       | $          | (3,495     | ) | (100.0 | )% |
| U.S.  Government agencies and government- sponsored entities |       | 17,470                 |       | 2,510                 |       | 14,960         |       | 596.0      | %          |
| State and  municipal                                         |       | 65,579                 |       | 63,015                |       | 2,564          |       | 4.1        | %          |
| Mortgage  backed securities — agency/residential        |       | 92,300                 |       | 31,965                |       | 60,335         |       | 188.8      | %          |
| Mortgage  backed securities — private/residential       |       | 5,161                  |       | —                |       | 5,161          |       | n/a        |       |
| Marketable  equity                                           |       | 1,519                  |       | 1,345                 |       | 174            |       | 12.9       | %          |
| Other  securities                                            |       | 544                    |       | 544                   |       | —         |       | —     |       |
| Total  securities available-for-sale                         |       | $                      | 182,573    |                  | $          | 102,874        |       | $          | 79,699     |   | 77.5 | % |
|                                                         |       |                   |       |                  |       |           |       |       |       |
| Securities  held-to-maturity:                                |       |                   |       |                  |       |           |       |       |       |
| Mortgage  backed securities — agency/residential        |       | $                      | 10,377     |                  | $          | 13,114         |       | $          | (2,737     | ) | (20.9 | )% |

 

At September 30, 2009, there was oneprivate-label mortgage backed security with a carrying value of approximately$5.2 million.  This private-labelmortgage backed security is a senior tranche and was AAA rated by two separaterating agencies as of September 30, 2009. All other mortgage-backed securities are sponsored by either U.S.government agencies or government-sponsored entities.

 

The carrying value of our available-for-saleinvestment securities at September 30, 2009 was $182.6 million, comparedto the December 31, 2008 carrying value of $102.9 million. The increase ininvestment securities is primarily the result of the purchase of mortgagebacked and agency bonds in the third quarter 2009 in order to utilize a portionof the amount of federal funds sold and cash held in interest bearing bankaccounts.

 

Management performs an annual review process for allnon-rated municipal securities in our portfolio.  Included in the obligations of state andpolitical subdivisions is an individual non-rated municipal bond with a fairvalue of $38.9 million and an unrealized gain of $0.2 million at September 30,2009.   Management updated its creditanalysis for this particular security during the third quarter 2009 due to therelative size of this security.  Thethird quarter 2009 analysis of this particular bond included a review of theissuer’s current financial statements and the related cash flows and interestpayments.

 

Management concluded that the unrealized lossposition on its securities was a result of the level of market interest ratesand not a result of the underlying issuers’ ability to repay.   In addition, we do not have the intention tosell the securities with an unrealized loss and do not believe that it is morelikely 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.

 

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**Deposits**

 

*Thefollowing table sets forth the amounts of our deposits outstanding at the datesindicated:*

 

**Table 15**

 
| ** **                   | ** ** | **At September 30, 2009** | ** ** | **At December 31, 2008** | ** ** |
|------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                   | ** ** | **Balance**                    | ** ** | **% of Total**                | ** ** | **Balance** | ** ** | **% of Total** | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)**     | ** ** |
| Noninterest bearing deposits |       | $                              | 366,308    |                          | 22.44      | % | $ | 433,761 |   | 25.52 | % |
| Interest bearing demand      |       | 152,914                        |       | 9.37                          | %          | 145,492 |   | 8.57 | % |
| Money market                 |       | 319,504                        |       | 19.57                         | %          | 315,364 |   | 18.57 | % |
| Savings                      |       | 72,483                         |       | 4.44                          | %          | 68,064 |   | 4.01 | % |
| Time                         |       | 721,227                        |       | 44.18                         | %          | 735,970 |   | 43.33 | % |
|                         |       |                           |       |                          |       |   |   |   |   |
| Total deposits               |       | $                              | 1,632,436  |                          | 100.00     | % | $ | 1,698,651 |   | 100.00 | % |

 

At the end of the third quarter 2009, deposits were $1.6 billion ascompared to $1.7 billion at December 31, 2008, reflecting a decrease of$66.2 million.  Included in the changesin balances for specific categories of deposits between December 31, 2008and September 30, 2009 is a $66.5 million movement of funds from anoninterest bearing account to a money market account by a single accountholder who administers an omnibus account on behalf of bank cash sweep accountcustomers.

 

Excluding time deposits, deposits declined by $51.5 million during thefirst nine months of 2009 primarily as a result of a decrease in our customers’available balances and increased competition for such deposits.   Noninterest bearing deposits comprisedapproximately 22.4% of total deposits at September 30, 2009.  In a higher rate environment, noninterestbearing deposits help mitigate overall deposits funding costs.  Due to the extremely low rate environment,the impact of noninterest bearing deposits on the overall cost of funds is lessin 2009 than it was in 2008.

 

Time deposits declined by $14.7 million during the first nine months of2009.   There was a $2.1 million netincrease in brokered deposits, including reciprocal deposits with other banksthrough the Certificate of Deposit Account Registry Service (CDARS), duringthis time frame.  The $2.1 million netincrease in brokered time deposits was primarily a result of a $28.6 millionincrease in brokered deposits and a $26.4 million decrease in reciprocalbalances with other banks through CDARS. During the third quarter 2009, approximately $53.3 million of newbrokered deposits at an average rate of 1.14%, were purchased in anticipationof $55 million in maturities of brokered deposits with an average rate of 3.87%during the fourth quarter 2009.

 

During the fourth quarter 2009, it is expected that $271.9 million ofdeposits will mature, including $55.4 million of brokered deposits.   These maturing time deposits have a weightedaverage rate of 3.46% and will either renew at prevailing rates or will beredeemed.   Management intends to utilizea portion of its cash and cash equivalents at September 30, 2009, forthose time deposits that are redeemed during the fourth quarter 2009.

 

**Borrowings and Subordinated Debentures**

 

At September 30,2009, our outstanding borrowings were $164,420,000 as compared to $166,404,000at December 31, 2008.

 

Theborrowings at September 30, 2009 consisted of 16 separate fixed-rate termnotes with the FHLB at our Bank subsidiary level, with maturities ranging from14 to 100 months.  Approximately $140million of the FHLB term advances at September 30, 2009 have Bermudanconversion options to a variable rate. The initial fixed rate periods range from one to five years and can beprepaid without penalty at or after conversion. Our bank subsidiary also had a line of credit with the FHLB at September 30,2009, but there was no balance outstanding on this line of credit as of thatdate.

 

The totalcommitment, including balances outstanding, for borrowings at the Federal HomeLoan Bank for the term notes and line of credit at September 30, 2009 and December 31,2008 was $381.6 million and $428.3 million, respectively. The interest rate onthe line of credit varies with the federal funds rate, and was 0.18% and 0.65%at September 30, 2009 and December 31, 2008, respectively.  The term notes have fixed interest rates thatrange from 

 

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2.52% to 6.22%. A blanket pledge and security agreement withthe Federal Home Loan Bank, which encompasses certain loans and securities,serves as collateral for these borrowings. However, as of September 30, 2009 and December 31, 2008, therewere no investment securities pledged as collateral under the blanket pledgeand security agreement.

 

As of December 31,2008, the Company had a revolving credit agreement, as amended, with U.S. BankNational Association, which contained financial covenants, includingmaintaining a minimum adjusted return (excluding goodwill impairment andintangible asset amortization) on average assets, a maximum nonperformingassets to total loans ratio, regulatory capital ratios that qualify the Companyas well-capitalized and a minimum total risk-based capital amount.   At December 31, 2008, the Company wasin compliance with all covenants except the minimum total risk-based capitalamount.  The minimum total risk-basedcapital amount was set by U.S. Bank and was based on the Company receivingadditional capital from Treasury’s Capital Purchase Program prior to December 31,2008.  As the Company’s application toreceive capital under Treasury’s Capital Purchase Program was still pending asof December 31, 2008, the Company did not meet this financial covenant andvoluntarily decided to terminate its line of credit on February 9, 2009with U.S. Bank. The revolving credit agreement would have otherwise expired on March 31,2009.

 

At September 30, 2009, we had a $41,239,000aggregate principal balance of junior subordinated debentures outstanding witha weighted average cost of 6.01%.  Thesubordinated debentures were issued in four separate series. Each issuance hasa maturity of thirty years from its date of issue. The subordinated debentureswere issued to trusts established by us, which in turn issued $40 million oftrust preferred securities. Generally and with certain limitations, the Companyis permitted to call the debentures subsequent to the first five or ten years,as applicable, after issue if certain conditions are met, or at any time uponthe occurrence and continuation of certain changes in either the tax treatmentor the capital treatment of the trusts, the debentures or the preferredsecurities.  The Guaranty Capital TrustIII issuance of $10.3 million has a variable rate of LIBOR plus 3.10% and wascallable without penalty on July 7, 2008, and every quarterthereafter.  The CenBank Trust IIIissuance of $15.5 million has a variable rate of LIBOR plus 2.65% and wascallable without penalty on April 15, 2009, and every quarterthereafter.   Management did not calleither of these securities on the latest call date, but will continue toevaluate whether to call these debentures each quarter.

 

Under theterms of each subordinated debentures agreement, the Company has the ability todefer interest on the debentures for a period of up to sixty months as long asit 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 continuesto defer interest for the fourth quarter of 2009.  Such a deferral is not an event ofdefault and the interest continues to accrue. The Company is prohibited from paying any dividends on its other stockfor so long as interest is deferred, with the exception of stock dividends.

 

These securities are currently included in Tier Icapital for purposes of determining the Company’s Tier I and total risk-basedcapital ratios. The Board of Governors of the Federal Reserve System, which isthe holding company’s banking regulator, has promulgated a modification of thecapital regulations affecting trust preferred securities. Under thismodification, beginning March 31, 2011, the Company is required to use amore restrictive formula to determine the amount of trust preferred securitiesthat can be included in regulatory Tier I capital. The Company will be allowedto include in Tier I capital an amount of trust preferred securities equal tono more than 25% of the sum of all core capital elements, which is generallydefined as stockholders’ equity less certain intangibles, including coredeposit intangibles, net of any related deferred income tax liability.  The existing regulations in effect limit theamount of trust preferred securities that can be included in Tier I capital to25% of the sum of core capital elements without a deduction for permittedintangibles.   The adoption of thismodification is not expected to have a material impact on the inclusion oftrust preferred securities for purposes of Tier 1 capital.

 

**Capital Resources**

 

Current risk-based regulatory capital standardsgenerally require banks and bank holding companies to maintain a ratio of “core”or “Tier 1” capital (consisting principally of common equity) to risk-weightedassets of at least 4%, a ratio of Tier 1 capital to average total assets(leverage ratio) of at least 4% and a ratio of total capital (which includesTier 1 capital plus certain forms of subordinated debt, a portion of theallowance for loan losses, and preferred stock) to risk-weighted assets of atleast 8%. Risk-weighted assets are calculated by multiplying the balance ineach category of assets by a risk factor, which ranges from zero for cashassets and certain government obligations to 100% for high-risk loans, andadding the products together.

 

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For regulatory purposes, the Companymaintains capital above the minimum core standards.  The Company actively monitors itsregulatory capital ratios to ensure that the Company and its bank subsidiaryare more than well capitalized 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.  Our subsidiary bank is required to maintainsimilar capital levels under capital adequacy guidelines.  At September 30, 2009, our subsidiarybank was “well-capitalized”.

 

*Thefollowing table provides the current capital ratios of the Company as of thedates presented, along with the regulatory capital requirements:*

 

**Table 16**

 
| ** **                      | ** ** | **Ratio at   September 30,   2009** | ** ** | **Ratio at   December 31,   2008** | ** ** | **Minimum   Capital   Requirement** | ** ** | **Minimum   Requirement   for “Well   Capitalized”   Institution** | ** ** |
|---------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------------------------------|------------|
|                            |       |                                     |       |                                    |       |                                | ** ** | ** **                                                                   | ** ** |
| Total Risk-Based Capital Ratio  |       |                                     |       |                                    |       |                                | ** ** | ** **                                                                   | ** ** |
| Consolidated                    |       | 13.42                                    | %          | 10.61                                   | %          | 8.00                                | %          | N/A                                                                          |       |
| Guaranty Bank and Trust Company |       | 12.45                                    | %          | 10.52                                   | %          | 8.00                                | %          | 10.00                                                                        | %          |
| Tier 1 Risk-Based Capital Ratio |       |                                     |       |                                    |       |                                |       |                                                                         |       |
| Consolidated                    |       | 9.28                                     | %          | 9.35                                    | %          | 4.00                                | %          | N/A                                                                          |       |
| Guaranty Bank and Trust Company |       | 11.18                                    | %          | 9.26                                    | %          | 4.00                                | %          | 6.00                                                                         | %          |
| Leverage Ratio                  |       |                                     |       |                                    |       |                                |       |                                                                         |       |
| Consolidated                    |       | 8.41                                     | %          | 8.98                                    | %          | 4.00                                | %          | N/A                                                                          |       |
| Guaranty Bank and Trust Company |       | 10.14                                    | %          | 8.90                                    | %          | 4.00                                | %          | 5.00                                                                         | %          |

 

On August 11, 2009,the Company 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 its bank subsidiary.  This issuanceand the contribution of capital into the bank subsidiary improved the Company’sand subsidiary bank’s regulatory capital ratios.

 

**Contractual Obligations and Off-Balance SheetArrangements**

 

The Company is a party to credit-related financial instruments withoff-balance sheet risk in the normal course of business to meet the financingneeds of its customers. These financial instruments include commitments toextend credit, stand-by letters of credit, and commercial letters of credit.Such commitments involve, to varying degrees, elements of credit and interestrate risk in excess of the amount recognized in the consolidated balancesheets.

 

The Company’s exposure to credit loss is representedby the contractual amount of these commitments. The Company follows the samecredit policies in making commitments as it does for on-balance sheetinstruments.

 

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

 

**Table 17**

 
| ** **                    | ** ** | **September 30,  2009** | ** ** | **December 31,    2008** | ** ** |
|-------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **(In  thousands)**          | ** ** |
|                          | ** ** | ** **                   | ** ** | ** **                    | ** ** |
| Commitments  to extend credit |       | $                            | 327,982    |                          | $          | 390,277 |   |
| Standby  letters of credit    |       | 16,657                       |       | 24,792                        |       |
| Commercial  letters of credit |       | 11,000                       |       | 11,000                        |       |
|                          |       |                         |       |                          |       |
| Totals                        |       | $                            | 355,639    |                          | $          | 426,069 |   |

 

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**Liquidity**

 

The Bank relies on deposits as its principal source of funds and,therefore, must be in a position to service depositors’ needs as they arise.Fluctuations in the balances of a few large depositors may cause temporaryincreases and decreases in liquidity from time to time. We deal with suchfluctuations by using existing liquidity sources.

 

At September 30, 2009, the Company had $148.2 million of cash andcash equivalents, including $119.7 million of interest bearing deposits atbanks that could be used for the Bank’s immediate liquidity needs.  Further, the Company had $41.5 million of investmentsecurities that were either overpledged or available for pledging at September 30,2009, excluding the $24.1 million of securities pledged at the Fed discountwindow at September 30, 2009.

 

Concerns over deposit fluctuations with respect to the overall bankingindustry were addressed by the FDIC in September and October 2008.The FDIC temporarily increased the individual account deposit insurance from$100,000 per account to $250,000 per account through December 31, 2009,which has subsequently been extended through December 31, 2013.  The FDIC also implemented a TemporaryLiquidity Guarantee Program (TLGP), which provides for full FDIC coverage fortransaction accounts, regardless of dollar amounts. The Bank elected to opt-into this program, thus, our customers receive full coverage for transactionaccounts under the program. The TLGP was originally set to expire December 31,2009, but the FDIC has extended the program through June 30, 2010.  The Bank intends to continue participation inthis program.  Concerns regarding theoverall banking industry or the Company could have an adverse effect on futuredeposit levels.

 

In order to address the concern of FDIC insurance oflarger depositors, the Bank became a member of the Certificate of DepositAccount Registry Service (CDARS®) program in 2008. Through CDARS®, the Bank’scustomers can increase their FDIC insurance by up to $50 million throughreciprocal certificate of deposit accounts. This is accomplished by the Bankentering into reciprocal depository relationships with other member banks. Theindividual customer’s large deposit is broken into amounts below the $100,000amount (or $250,000 if the time deposit matures prior to December 31,2013) and placed with other banks that are members of the network. Thereciprocal member bank issues certificate of deposits in amounts that ensurethat the entire deposit is eligible for FDIC insurance.

 

When the level of liquid assets (our primaryliquidity) does not meet our liquidity needs, other available sources of liquidassets (our secondary liquidity), including the purchase of federal funds,sales of securities under agreements to repurchase, purchase of brokeredcertificates of deposit, sales of loans, discount window borrowings from theFederal Reserve Bank, and our lines of credit with the Federal Home Loan Bankof Topeka (FHLB) are employed to meet current and presently anticipated fundingneeds. At September 30, 2009, the Bank had approximately $217.2 million ofavailability on its FHLB line, $55 million of availability on its federal fundslines with correspondent banks, and $24.1 million of availability with theFederal Reserve discount window. The Bank can also increase its amount ofbrokered deposits. However, if we would become less than well-capitalized underthe capital adequacy guidelines, regulatory approval would have to be obtainedin order to continue purchasing brokered deposits.  These sources provide significant secondaryliquidity to the Bank to service its depositors’ needs.

 

At September 30, 2009, the holding company had$19.9 million of cash and cash equivalents as compared to $1.6 million at June 30,2009.   The increase in cash and cashequivalents at the holding company level is primarily due to the net proceedsof $57.9 million from the issuance of preferred stock, less a $40 millioninjection of capital into the subsidiary bank. Asthe immediate cash flow needs of the holding company are minimal, the cashbalance at the holding company is a source of strength and potential capitalfor the Bank.   Historically, the holding company had relied on dividendsfrom its Bank as a primary source of liquidity. The ability of the Bank to paydividends or make other capital distributions to the holding company is subjectto the regulatory approval of the Federal Reserve Bank of Kansas City and theColorado Division of Banking.  TheCompany does not believe that such approval would be granted until the level ofnonperforming assets at the bank level substantially declines. The holdingcompany requires liquidity for the payment of interest on its juniorsubordinated debentures, 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 preferred and commonstockholders.  Excluding the payment ofinterest on its junior subordinated debentures, the annual operating netexpenses of the holding company are minimal. On July 31, 2009, the holding company temporarily deferred intereston its junior subordinated debentures in accordance with the debentureagreements.

 

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**Application of Critical Accounting Policiesand 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 of contingentliabilities at the date of the condensed consolidated financial statements andthe reported amounts of revenues and expenses during the reporting period. Onan on-going basis, management evaluates its estimates and judgments, includingthose related to customers and suppliers, allowance for loan losses, bad debts,investments, financing operations, long-lived assets, contingencies andlitigation. Management bases its estimates and judgments on historicalexperience and on various other factors that are believed to be reasonableunder the circumstances, the results of which have formed the basis for makingsuch judgments about the carrying value of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from therecorded estimates under different assumptions or conditions.  A summary of critical accounting policies andestimates are listed in the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” section of the Company’s 2008 AnnualReport Form 10-K for the fiscal year ended December 31, 2008.  There have been no changes to the criticalaccounting policies listed in the Company’s 2008 Annual Report Form 10-Kduring 2009.  During the first quarter2009, the Company began offering customers interest rate swaps, and adopted thefollowing accounting policy:

 

*Accounting Policy for Derivative Instrumentsand Hedging Activities*

 

FASC Topic 815, *Derivatesand Hedging,*(formerly Statement of Financial Accounting Standards No. 161,*Disclosures about Derivative Instruments andHedging Activities, an amendment of FASB Statement No. 133)*expanded the previous disclosure requirements with the intent to provide usersof financial statements with an enhanced understanding of: (a) how and whyan entity uses derivative instruments, (b) how derivative instruments andrelated hedged items are accounted for, and (c) how derivative instrumentsand related hedged items affect an entity’s financial position, financialperformance, and cash flows. Topic 815 requires qualitative disclosures aboutobjectives and strategies for using derivatives, quantitative disclosures aboutthe fair value of and gains and losses on derivative instruments, anddisclosures about credit-risk-related contingent features in derivativeinstruments.

 

As required by Topic 815, the Company recordsall derivatives on the balance sheet at fair value.  The accounting forchanges in the fair value of derivatives depends on the intended use of thederivative, whether the Company has elected to designate a derivative in ahedging relationship and apply hedge accounting and whether the hedgingrelationship has satisfied the criteria necessary to apply hedge accounting.Currently, none of the Company’s derivatives are designated in qualifyinghedging relationships, as the derivatives are not used to manage risks withinthe Company’s assets or liabilities. As such, all changes in fair value of theCompany’s derivatives are recognized directly in earnings.

 

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**ITEM 3.  Quantitativeand Qualitative Disclosure about Market Risk**

 

Market risk is the risk of loss in a financialinstrument arising from adverse changes in market prices and rates, foreigncurrency exchange rates, commodity prices and equity prices. Our market riskarises primarily from interest rate risk inherent in our lending and deposittaking activities. To that end, management actively monitors and manages ourinterest rate risk exposure. We do not have any market risk sensitiveinstruments entered into 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, which aredesigned to ensure that exposure to interest rate fluctuations is limited toour guidelines of acceptable levels of risk-taking. Hedging strategies,including the terms and pricing of loans and deposits and managing thedeployment of our securities, are used to reduce mismatches in interest ratere-pricing opportunities of portfolio assets and their funding sources.

 

**Credit Risk-related ContingentFeatures**

 

During the first quarter 2009, the Companyentered into interest rate swap contracts with certain commercial bankingcustomers 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 itscredit risk 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 committee and compared to the maximum exposureapproved in the Company’s Derivatives and Hedging Policy.

 

The Company hasagreements with its derivative counterparties that contain a provision where ifthe Company defaults 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.

 

The Company also has agreements with certain of itsderivative counterparties that contain a provision where if the Company failsto maintain its status as a well-capitalized institution, then the counterpartycould terminate the derivative positions and the Company would be required tosettle its obligations under the agreements.

 

As of September 30, 2009, the fair value ofderivatives in a net liability position, which includes accrued interest butexcludes any adjustment for nonperformance risk related to these agreements,was $210,000. The Company has minimum collateral posting thresholds withcertain of its derivative counterparties, but has not been required to postcollateral against its obligations under these agreements. If the Company hadbreached any of these provisions at September 30, 2009, it would have beenrequired to settle its obligations under the agreements at the terminationvalue.

 

**Net Interest Income Modeling**

 

Our Asset Liability Management Committee, or ALCO,comprised of members of our senior management addresses interest rate risk. TheALCO monitors interest rate risk by analyzing the potential impact on netinterest income and the net portfolio of equity value from potential changes ininterest rates, and considers the impact of alternative strategies or changesin balance sheet structure. The ALCO manages our balance sheet in part tomaintain the potential impact on net portfolio value and net interest incomewithin acceptable ranges despite changes in interest rates.

 

Our exposure to interest rate risk is reviewed on atleast a quarterly basis by the ALCO and our board of directors. Interest raterisk exposure is measured using interest rate sensitivity analysis to determineour change in net portfolio value and net interest income in the event ofhypothetical changes in interest rates. If potential changes to net portfoliovalue and net interest income resulting from hypothetical interest rate changesare not within board-

 

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approvedlimits, the board may direct management to adjust the asset and liability mixto bring interest rate risk within board-approved limits.

 

We monitor and evaluate our interest rate riskposition on a quarterly basis using net interest income simulation analysisunder 100 and 200 basis point change scenarios (see below). Each of theseanalyses measures different interest rate risk factors inherent in thefinancial statements.

 

The Company’s primary interest rate risk tool, theNet Interest Income Simulation Analysis, measures interest rate risk and theeffect 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 net interest income increase or decreaseover the next twelve months as of   September 30,2009 and 2008:*

 

**Table 18**

** **

**MARKET RISK:**

 
| ** **                | ** ** | **Annualized  Net Interest Income** | ** ** |
|---------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **September 30,  2009**        | ** ** | **September 30,  2008** | ** ** |
| ** **                | ** ** | **Amount of  Change**               | ** ** | **Amount of  Change** | ** ** |
| ** **                | ** ** | **(In  thousands)**                 | ** ** |
| **Rates in Basis Points** |       |                                |       |   |   |
| 200                       |       | $                                   | 125        |   | $ | 8,037 |   |
| 100                       |       | (702                                | )          | 3,645 |   |
| Static                    |       | —                              |       | — |   |
| (100)                     |       | 4,464                               |       | (3,943 | ) |
| (200)                     |       | 7,335                               |       | (9,165 | ) |
|                           |            |                                     |            |  |  |  |  |

 

Overall, the Company believes it is asset-sensitive,which is consistent with the decline in net interest income during 2009 as aresult of lower rates.   At September 30,2009, the Company is positioned to have a short-term favorable interest incomeimpact in a 200 basis point rising rate environment, but would have anunfavorable interest income impact in a 100 basis point rising rateenvironment.    The primary reason forthe minimal impact on short-term net interest income during a rising ratesenvironment is due to the minimum rates, or floors, on many variable rate loansin the loan portfolio.  This minimumpricing will cause interest rates on variable rate loans to reprice less rapidlyin a 100 basis point or smaller rising rate environment than was projected inthe prior year.  Approximately $434million of the variable rate loans are earning interest at the minimum rate.  Many of these loans are based on a spread toprime, which is currently at 3.25%. The most common minimum rate is between5.0% and 5.5%.  As rates rise, the loanrate may continue to be at the minimum rate, especially in an up 100 rateenvironment.   It will take an increasein rates of at least 200 basis points to have a meaningful, favorable impact onnet interest income in the short term (e.g. less than one year).  Management would anticipate that depositsrates, other than time deposit rates, would increase immediately in a risingrate environment.  Because of thecontinued extremely low rate environment at September 30, 2009, theCompany is less asset sensitive at September 30, 2009 as compared to September 30,2008, due to the fact that the low rate environment has triggered a minimumpricing on many loans.

 

In a falling rate environment, the Company isprojected to have an increase in net interest income.  However, it is not possible for many of theCompany’s deposit rates to fall 100 or 200 basis points due to their currentrates already being below 100 basis points at September 30, 2009.  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 thatprime would continue to be set at a rate of 300 basis points over the targetfederal funds rate, therefore, a 200 basis point decline in overall rates wouldonly have between a 0 and 25 basis point decline in both federal funds and theprime rate.  Further, other rates thatare currently 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. Additionally, current deposit rates,especially time deposit rates, would decrease to some 

 

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extentduring a falling rate environment. As a falling rate environment wouldpotentially impact the cost of liabilities, especially time deposit rates, to agreater degree than earning assets for the above reasons, a falling rateenvironment would be expected to have a favorable impact on net interestmargin. However, if the actual prime rate falls below a 300 basis point spread totarget federal funds rate, the Company may not experience as large of anincrease in a falling rate environment due to a result of falling yields onearning assets tied to prime, that do not already have a minimum, or floorrate.

 

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**ITEM 4.  Controlsand Procedures**

 

As of the end of the period covered by this report,an evaluation was carried out by the Company’s management, with theparticipation of the Chief Executive Officer and the Chief Financial Officer,of the effectiveness of the Company’s disclosure controls and procedures (asdefined in Rule 15d-15(e) under the Securities Exchange Act of 1934).The Company’s disclosure controls were designed to provide a reasonableassurance that information required to be disclosed in reports that we file orsubmit under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission. It should be noted that thedesign of any system of controls is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions, regardless of how remote. However, the controls have been designedto provide reasonable assurance of achieving the controls’ stated goals. Basedon that evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer, have concluded that the Company’s disclosure controls and proceduresare effective at September 30, 2009 to ensure that information required tobe disclosed in the reports that we file or submit under the SecuritiesExchange Act of 1934 was (i) accumulated and communicated to management,including the Company’s Chief Executive Officer and Chief Financial Officer, toallow timely decisions regarding required disclosure and (ii) recorded,processed, summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission.

 

There have been no changes in the Company’s internalcontrol 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—OTHER INFORMATION**

 

**ITEM 1.  LegalProceedings**

 

In the ordinary course ofour business, 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 other information setforth in this report, you should carefully consider the factors discussed in Part I,“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the yearended December 31, 2008, as amended and supplemented by the factorsdiscussed 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.

 

*The level of ourcommercial real estate loan portfolio may subject us to additional regulatoryscrutiny.*

 

The FDIC, theFederal Reserve and the Office of the Comptroller of the Currency, havepromulgated joint guidance on sound risk management practices for financialinstitutions with concentrations in commercial real estate lending. Under theguidance, a financial institution that, like us, is actively involved incommercial real estate lending should perform a risk assessment to identifyconcentrations. A financial institution may have a concentration in commercialreal estate lending if, among other factors, (i) total reported loans forconstruction, land development, and other land represent 100% or more of totalcapital or (ii) total reported loans secured by multifamily and non-farmresidential properties, loans for construction, land development and other landand loans otherwise sensitive to the general commercial real estate market,including loans to commercial real estate related entities, represent 300% ormore of total capital. Management should also employ heightened risk managementpractices including board and management oversight and strategic planning,development of underwriting standards, risk assessment and monitoring throughmarket analysis and stress testing. We have concluded that we have aconcentration in commercial real estate lending under the foregoing standards.While we believe we have currently implemented policies and procedures withrespect to our commercial real estate loan portfolio consistent with thisguidance, bank regulators could require us to implement additional policies andprocedures or obtain additional capital consistent with their interpretation ofthe guidance, which could result in additional regulatory burdens and costs tous.

 

*Our small to medium-sized business target markets may havefewer financial resources to weather a downturn in the economy.*

 

We target the banking and financial services needs ofsmall and medium-sized businesses.  Thesebusinesses generally have fewer financial resources in terms of capitalborrowing capacity than larger entities. If general economic conditions negatively impact these businesses in themarkets in which we operate, our business, financial condition, and results ofoperation could be adversely affected.

 

*Ourdeposit insurance premiums have increased and could increase further in thefuture, which could have a material adverse effect on our future earnings.*

 

The FDIC insures deposits at FDIC insured financial institutions,including the Bank. The FDIC charges the insured financial institutionspremiums to maintain the Deposit Insurance Fund at a certain level. Currenteconomic conditions have increased bank failures and expectations for furtherfailures, in which case the FDIC ensures payments of deposits up to insuredlimits from the Deposit Insurance Fund.

 

On October 16, 2008,the FDIC published a restoration plan designed to replenish the DepositInsurance Fund over a period of five years and to increase the depositinsurance reserve ratio, which decreased to 1.01% of insured deposits on June 30,2008, to the statutory minimum of 1.15% of insured deposits by December 31,2013. In order to implement the restoration plan, the FDIC changed both itsrisk-based assessment system and its base assessment rates.  For the first quarter of 2009 only, the FDICincreased all FDIC deposit assessment rates by 7 basis points. These ratesranged from 12-14 basis points for Risk Category I institutions to 50 basispoints for Risk Category IV institutions. Beginning with the second quarter of 2009, the base assessment rates nowrange from 12-

 

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16 basis points for RiskCategory I institutions to 45 basis points for Risk Category IV institutions,subject to adjustment as described below. Changes to the risk-based assessment system include increasing premiumsfor institutions that rely on excessive amounts of brokered deposits, includingCDARS, increasing premiums for excessive use of secured liabilities, includingFederal Home Loan Bank advances, lowering premiums for smaller institutionswith very high capital levels, and adding financial ratios and debt issuerratings to the premium calculations for banks with over $10 billion in assets,while providing a reduction for their unsecured debt.

 

In addition, on May 22,2009, the FDIC adopted a final rule imposing a special assessment on allinstitutions of 5 basis points for the second quarter of 2009. The Bank accrued$0.9 million for this special assessment as a liability and expense for thesecond quarter of 2009.  In its finalrule, the FDIC indicated that the FDIC may impose an additional specialassessment in 2009 of up to 5 basis points if the FDIC believes that thereserve ratio of the DIF is estimated to fall to a level that would adverselyaffect public confidence or to a level which shall be close to or below zero.Any such additional special assessment will not exceed 10 basis points timesthe institution’s assessment base for the corresponding quarter. The latest possibledate for imposing an additional special assessment under the final rule wouldbe December 31, 2009, with collection on March 30, 2010.  The FDIC initially indicated that such anadditional assessment is probable.  However, on September 29, 2009, the FDIC adopted a Notice ofProposed Rulemaking that would require insured institutions to prepay theirestimated quarterly risk-based assessments for the fourth quarter of 2009, andfor all of 2010, 2011 and 2012.   Thisprepayment of FDIC assessments for the next three years would be in lieu of anadditional special assessment in 2009. As part of this prepayment, the FDIC would assume an increase of 3 basispoints effective January 1, 2011. If this proposed rulemaking is finalized as drafted, the prepaymentwould not affect the timing of expense but affect liquidity due to theimmediate cash flows required to fund the prepayment.  The prepaid asset would be treated as a zeropercent risk weighted asset for purposes of computing the risk based capitalratios.  Finally, the proposed rule wouldextend the restoration period discussed above to eight years.

 

An increase in the Risk Category of the Bank, further adjustments tothe base assessment rates or additional special assessments could have amaterial adverse effect on our earnings.

 

**ITEM 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

 

(a)           None.

 

(b)           None.

 

(c)   There were no purchases made byor on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) underthe Securities Exchange Act of 1934), of our common stock during the thirdquarter 2009.  Historically thesepurchases related to the net settlement of vested, restricted stockawards.  The Company does not have anyexisting publicly announced repurchase plans or programs.

 

**ITEM 3.  DefaultsUpon Senior Securities**

 

None.

 

**ITEM 4.  Submissionof Matters to a Vote of Security Holders**

 

None.

 

**ITEM 5.  OtherInformation**

 

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                       |       | 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).                                                                                                     |
|                      |       |                                                                                                                                                                                                                                                              |
| 4.1                       |       | 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).                                                  |
|                      |       |                                                                                                                                                                                                                                                              |
| 10.1                      |       | Amendment No. 1 to  Investment Agreement, dated as August 11, 2009, by and among Guaranty  Bancorp and the Investors named therein (incorporated by reference to  Exhibit 10.1 to Registrant’s Form 8-K filed on August 12,  2009). |
|                      |       |                                                                                                                                                                                                                                                              |
| 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 the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
| Date: October 30,  2009 | GUARANTY BANCORP                                                                 |
|------------------------------|----------------------------------------------------------------------------------|
|                         |                                                                             |
|                         |                                                                             |
|                         | /s/ PAUL W. TAYLOR                                                          |
|                         | Paul W. Taylor                                                                   |
|                         | *Executive  Vice President, Chief Financial and Operating Officer and Secretary* |

 

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