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** **

 

** **

**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 March 31,2010**

** **

**OR**

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

 

**For the transition period from           to           **

 

**Commission File Number: 000-51556**

 

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**GUARANTY BANCORP**

(Exact name ofregistrant as specified in its charter)

 

| **DELAWARE**                                                  | ** ** | **41-2150446**                          |
|---------------------------------------------------------------|------------|-----------------------------------------|
| (State or other jurisdictionof 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 oNo o

 

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

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

 

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 April 28, 2010 there were 52,823,914shares of the registrant’s voting common stock outstanding, including 1,325,571shares of unvested stock grants and excluding 156,567 shares to be issued underits deferred compensation plan.

 

 

 

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Table of Contents

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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         | 31       |
|                                        |                                                                                                |     |
| ITEM 3.                                | Quantitative and Qualitative  Disclosures About Market Risk                                         | 51       |
|                                        |                                                                                                |     |
| ITEM 4.                                | Controls and Procedures                                                                             | 53       |
|                                        |                                                                                                |     |
| **PART II—OTHER  INFORMATION**    | 54                                                                                                  |
|                                        |                                                                                                |     |
| ITEM 1.                                | Legal Proceedings                                                                                   | 54       |
|                                        |                                                                                                |     |
| ITEM 1A.                               | Risk Factors                                                                                        | 54       |
|                                        |                                                                                                |     |
| ITEM 2.                                | Unregistered Sales of Equity  Securities and Use of Proceeds                                        | 54       |
|                                        |                                                                                                |     |
| ITEM 3.                                | Defaults Upon Senior Securities                                                                     | 54       |
|                                        |                                                                                                |     |
| ITEM 4.                                | Other Information                                                                                   | 54       |
|                                        |                                                                                                |     |
| ITEM 5.                                | Exhibits                                                                                            | 55       |

 

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### **Table of Contents**

 

### **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 pressreleases, and in oral and written statements made by or with our approval thatare not statements of historical fact and constitute forward-looking statementswithin the meaning of the Act.  Examplesof forward-looking statements include, but are not limited to: (i) 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 theymay have on us and our customers, and our assessment of that impact on ourestimates including, but not limited to the allowance for loan losses.

 

·                  Changesin the level of nonperforming assets and charge-offs and other credit qualitymeasures, and their impact on the adequacy of the Bank’s allowance for loanlosses and the Bank’s provision for loan losses.

 

·                  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 InsuranceCorporation’s Temporary Liquidity Guaranty Program.

 

·                  Theeffects of the regulatory written agreement the Company and its subsidiarybank, Guaranty Bank & Trust Company (the “Bank”), have entered intowith their regulators.

 

·                  Theability to receive regulatory approval for the Bank to declare and paydividends to the Company.

 

·                  Changesimposed by regulatory agencies to increase our capital to a level greater thanthe level required for well-capitalized financial institutions, or the effectof other potential future regulatory actions against the Company or the Bank,whether through informal understandings or formal agreements entered into withregulatory agencies.

 

·                  Thefailure to maintain capital above the level required to be well-capitalizedunder the regulatory capital adequacy guidelines, the availability of capitalfrom private or government sources, or the failure to raise additional capitalas 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.

 

·                  Competitionfor loans and deposits and failure to attract or retain loans and deposits.

 

·                  Changesin the financial performance and/or condition of the Bank’s borrowers and theability of the Bank’s borrowers to perform under the terms of their loans andother terms of credit agreements.

 

·                  Technologicalchanges.

 

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Table of Contents

 

·                  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 the Company and the Bank mustcomply, including, but not limited to, any increase in FDIC insurance premiums.

 

·                  Changes inbusiness strategy or development plans.

 

·                  Changes in thesecurities markets.

 

·                  The effect ofchanges in accounting policies and practices, as may be adopted by the regulatoryagencies, as well as the Public Company Accounting Oversight Board, theFinancial 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, and the results ofregulatory examinations or reviews.

 

·                  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 ofunanticipated events.

 

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**PART I - FINANCIAL INFORMATION**

 

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

 

**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **March 31,**                                 | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **2010**                                           | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **(Dollars in  thousands, except per share data)** | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                               |       |                  |       |
| Cash and  due from banks                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | $                                                  | 222,723    |                  | $          | 234,483 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                                               |       |                  |       |
| Securities  available for sale, at fair value                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 219,490                                            |       | 221,134               |       |
| Securities  held to maturity (fair value of $16,168 and $10,428 at March 31, 2010  and December 31, 2009)                                                                                                                                                                                                                                                                                                                                                               |       | 15,760                                             |       | 9,942                 |       |
| Bank  stocks, at cost                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | 17,143                                             |       | 17,160                |       |
| Total  investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 252,393                                            |       | 248,236               |       |
| Loans,  net of unearned discount                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 1,435,071                                          |       | 1,519,608             |       |
| Less  allowance for loan losses                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | (52,015                                            | )          | (51,991               | )          |
| Net loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 1,383,056                                          |       | 1,467,617             |       |
| Loans  held for sale                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 11,506                                             |       | 9,862                 |       |
| Premises  and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 59,587                                             |       | 60,267                |       |
| Other  real estate owned and foreclosed assets                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 30,918                                             |       | 37,192                |       |
| Other  intangible assets, net                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 17,922                                             |       | 19,222                |       |
| Other  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 52,226                                             |       | 50,701                |       |
| Total  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | $                                                  | 2,030,331  |                  | $          | 2,127,580 |   |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                               |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                               |       |                  |       |
| Liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                               |       |                  |       |
| Deposits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                               |       |                  |       |
| Noninterest-bearing  demand                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | $                                                  | 363,059    |                  | $          | 366,103 |   |
| Interest-bearing  demand                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 486,918                                            |       | 523,971               |       |
| Savings                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 74,537                                             |       | 71,816                |       |
| Time                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 678,370                                            |       | 731,400               |       |
| Total  deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 1,602,884                                          |       | 1,693,290             |       |
| Securities  sold under agreements to repurchase and federal funds purchased                                                                                                                                                                                                                                                                                                                                                                                                       |       | 18,387                                             |       | 22,990                |       |
| Borrowings                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 164,310                                            |       | 164,364               |       |
| Subordinated  debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 41,239                                             |       | 41,239                |       |
| Interest  payable and other liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 12,531                                             |       | 13,059                |       |
| Total  liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 1,839,351                                          |       | 1,934,942             |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                                               |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                                               |       |                  |       |
| Preferred  stock—$0.001 par value; 9% non-cumulative; 73,280 shares authorized, 61,787  shares issued and outstanding at March 31, 2010; 73,280 shares authorized,  60,434 shares issued and outstanding at December 31 2009; liquidation  preference of $61,787 at March 31, 2010; liquidation preference of $60,434 at  December 31, 2009                                                                                                                                  |       | 60,580                                             |       | 59,227                |       |
| Common  stock—$0.001 par value; 150,000,000 shares authorized, 64,967,450 voting  shares issued, 52,982,035 voting shares outstanding at March 31, 2010  (includes 1,330,571 shares of unvested restricted stock and 156,567 shares to  be issued); 150,000,000 shares authorized, 64,952,450 voting shares issued,  52,952,703 voting shares outstanding at December 31, 2009 (includes 1,381,105  shares of unvested restricted stock and 129,806 of shares to be issued). |       | 65                                                 |       | 65                    |       |
| Additional  paid-in capital - Common stock                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 618,714                                            |       | 618,343               |       |
| Shares to be  issued for deferred compensation obligations                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 237                                                |       | 199                   |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | (385,804                                           | )          | (382,599              | )          |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | (341                                               | )          | (143                  | )          |
| Treasury Stock,  at cost, 10,859,201 and 10,873,533, respectively                                                                                                                                                                                                                                                                                                                                                                                                                 |       | (102,471                                           | )          | (102,454              | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 190,980                                            |       | 192,638               |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | $                                                  | 2,030,331  |                  | $          | 2,127,580 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Operations**

 
| ** **                                                                 | ** ** | **Three Months  Ended March 31,**                    | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| ** **                                                                 | ** ** | **(In thousands,  except share and per share data)** | ** ** |
| Interest income:                                                           |       |                                                 |       |   |   |
| Loans, including fees                                                      |       | $                                                    | 20,784     |   | $ | 23,076 |   |
| Investment securities:                                                     |       |                                                 |       |   |   |
| Taxable                                                                    |       | 1,516                                                |       | 726 |   |
| Tax-exempt                                                                 |       | 720                                                  |       | 767 |   |
| Dividends                                                                  |       | 185                                                  |       | 288 |   |
| Federal funds sold and other                                               |       | 116                                                  |       | 3 |   |
| Total interest income                                                      |       | 23,321                                               |       | 24,860 |   |
| Interest expense:                                                          |       |                                                 |       |   |   |
| Deposits                                                                   |       | 4,713                                                |       | 7,125 |   |
| Securities sold under  agreement to repurchase and federal funds purchased |       | 43                                                   |       | 38 |   |
| Borrowings                                                                 |       | 1,301                                                |       | 1,321 |   |
| Subordinated debentures                                                    |       | 632                                                  |       | 658 |   |
| Total interest expense                                                     |       | 6,689                                                |       | 9,142 |   |
| Net interest income                                                        |       | 16,632                                               |       | 15,718 |   |
| Provision for loan losses                                                  |       | 4,000                                                |       | 2,505 |   |
| Net interest income, after  provision for loan losses                      |       | 12,632                                               |       | 13,213 |   |
| Noninterest income:                                                        |       |                                                 |       |   |   |
| Customer service and other  fees                                           |       | 2,214                                                |       | 2,679 |   |
| Gain on sale of securities                                                 |       | 14                                                   |       | — |   |
| Other                                                                      |       | 194                                                  |       | 215 |   |
| Total noninterest income                                                   |       | 2,422                                                |       | 2,894 |   |
| Noninterest expense:                                                       |       |                                                 |       |   |   |
| Salaries and employee  benefits                                            |       | 6,563                                                |       | 6,739 |   |
| Occupancy expense                                                          |       | 1,890                                                |       | 1,921 |   |
| Furniture and equipment                                                    |       | 976                                                  |       | 1,131 |   |
| Amortization of intangible  assets                                         |       | 1,300                                                |       | 1,582 |   |
| Other real estate owned, net                                               |       | 2,749                                                |       | 48 |   |
| Insurance and assessments                                                  |       | 1,812                                                |       | 1,041 |   |
| Professional fees                                                          |       | 877                                                  |       | 849 |   |
| Other general and  administrative                                          |       | 1,959                                                |       | 2,149 |   |
| Total noninterest expense                                                  |       | 18,126                                               |       | 15,460 |   |
| Loss before income taxes                                                   |       | (3,072                                               | )          | 647 |   |
| Income tax expense (benefit)                                               |       | (1,227                                               | )          | 211 |   |
| Net income (loss)                                                          |       | (1,845                                               | )          | 436 |   |
| Preferred stock dividends                                                  |       | (1,360                                               | )          | — |   |
| Net income (loss) applicable  to common stockholders                       |       | $                                                    | (3,205     | ) | $ | 436 |   |
|                                                                       |       |                                                 |       |   |   |
| Earnings (loss) per common  share–basic:                              |       | $                                                    | (0.06      | ) | $ | 0.01 |   |
| Earnings (loss) per common  share–diluted:                            |       | (0.06                                                | )          | 0.01 |   |
|                                                                       |       |                                                 |       |   |   |
| Weighted average common  shares outstanding-basic                          |       | 51,607,044                                           |       | 51,277,748 |   |
| Weighted average common shares  outstanding-diluted                        |       | 51,607,044                                           |       | 51,277,930 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 
| ** **                                     | ** ** | **Preferred Shares********Outstanding** | ** ** | **Preferred Stock** | ** ** | **Common Stock Shares Outstanding and to be  issued** | ** ** | **Common Stock and Additional Paid-in  Capital** | ** ** | **Shares to be Issued** | ** ** | **Treasury Stock** | ** ** | **Accumulated Deficit** | ** ** | **Accumulated Other Comprehensive Income  (Loss)** | ** ** | **Totals** | ** ** |
|------------------------------------------------|------------|-----------------------------------------|------------|---------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------|------------|--------------------|------------|-------------------------|------------|----------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **(In thousands, except share data)**   | ** ** |
| Balance,  December 31, 2008               |       | —                                  |       | $                   | —     |                                                  | 52,654,131 |                                             | $          | 617,253                 |       | $                  | 710        |                    | $          | (103,078                                           | )          | $          | (352,003   | ) | $ | (1,302 | ) | $ | 161,580 |   |
| Comprehensive  income:                         |       |                                    |       |                |       |                                                  |       |                                             |       |                    |       |               |       |                    |       |                                               |       |       |       |
| Net  income                                    |       | —                                  |       | —              |       | —                                                |       | —                                           |       | —                  |       | —             |       | 436                     |       | —                                             |       | 436        |       |
| Other  comprehensive income                    |       | —                                  |       | —              |       | —                                                |       | —                                           |       | —                  |       | —             |       | —                  |       | 1,468                                              |       | 1,468      |       |
| Total  comprehensive income                    |       |                                    |       |                |       |                                                  |       |                                             |       |                    |       |               |       |                    |       |                                               |       | 1,904      |       |
| Stock  compensation awards, net of forfeitures |       | —                                  |       | —              |       | (106,334                                              | )          | —                                           |       | —                  |       | —             |       | —                  |       | —                                             |       | —     |       |
| Earned  stock award compensation, net          |       | —                                  |       | —              |       |                                                  |       | 61                                               |       | —                  |       | —             |       | —                  |       | —                                             |       | 61         |       |
| Repurchase  of common stock                    |       | —                                  |       | —              |       | (13,486                                               | )          | —                                           |       | —                  |       | (24                | )          | —                  |       | —                                             |       | (24        | )          |
| Deferred  compensation                         |       | —                                  |       | —              |       | 36,675                                                |       | —                                           |       | 52                      |       | —             |       | —                  |       | —                                             |       | 52         |       |
| Common  shares issued                          |       | —                                  |       | —              |       | —                                                |       | —                                           |       | (681                    | )          | 681                |       | —                  |       | —                                             |       | —     |       |
| Balance,  March 31, 2009                  |       | —                                  |       | $                   | —     |                                                  | 52,570,986 |                                             | $          | 617,314                 |       | $                  | 81         |                    | $          | (102,421                                           | )          | $          | (351,567   | ) | $ | 166 |   | $ | 163,573 |   |
|                                           |       |                                    |       |                |       |                                                  |       |                                             |       |                    |       |               |       |                    |       |                                               |       |       |       |
| Balance,  December 31, 2009               |       | 60,434                                  |       | $                   | 59,227     |                                                  | 52,952,703 |                                             | $          | 618,408                 |       | $                  | 199        |                    | $          | (102,454                                           | )          | $          | (382,599   | ) | $ | (143 | ) | $ | 192,638 |   |
| Comprehensive  loss:                           |       |                                    |       |                |       |                                                  |       |                                             |       |                    |       |               |       |                    |       |                                               |       |       |       |
| Net loss                                       |       | —                                  |       | —              |       | —                                                |       | —                                           |       | —                  |       | —             |       | (1,845                  | )          | —                                             |       | (1,845     | )          |
| Other  comprehensive loss                      |       | —                                  |       | —              |       | —                                                |       | —                                           |       | —                  |       | —             |       | —                  |       | (198                                               | )          | (198       | )          |
| Total  comprehensive loss                      |       |                                    |       |                |       |                                                  |       |                                             |       |                    |       |               |       |                    |       |                                               |       | (2,043     | )          |
| Stock  compensation awards, net of forfeitures |       | —                                  |       | —              |       | 15,000                                                |       | —                                           |       | —                  |       | —             |       | —                  |       | —                                             |       | —     |       |
| Earned  stock award compensation, net          |       | —                                  |       | —              |       | —                                                |       | 371                                              |       | —                  |       | —             |       | —                  |       | —                                             |       | 371        |       |
| Repurchase  of common stock                    |       | —                                  |       | —              |       | (12,429                                               | )          | —                                           |       | —                  |       | (17                | )          | —                  |       | —                                             |       | (17        | )          |
| Deferred  compensation                         |       | —                                  |       | —              |       | 26,761                                                |       | —                                           |       | 38                      |       | —             |       | —                  |       | —                                             |       | 38         |       |
| Common  shares issued                          |       | —                                  |       | —              |       | —                                                |       | —                                           |       | —                  |       | —             |       | —                  |       | —                                             |       | —     |       |
| Preferred  share dividends                     |       | 1,353                                   |       | 1,353               |       | —                                                |       | —                                           |       | —                  |       | —             |       | (1,360                  | )          | —                                             |       | (7         | )          |
| Balance,  March 31, 2010                  |       | 61,787                                  |       | $                   | 60,580     |                                                  | 52,982,035 |                                             | $          | 618,779                 |       | $                  | 237        |                    | $          | (102,471                                           | )          | $          | (385,804   | ) | $ | (341 | ) | $ | 190,980 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Cash Flows**

 
| ** **                                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                                                                                | ** ** | **(In thousands)**                    | ** ** |
| Cash flows from operating activities:                                                     |       |                                  |       |   |   |
| Net income (loss)                                                                         |       | $                                     | (1,845     | ) | $ | 436 |   |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                             |       | 2,144                                 |       | 2,465 |   |
| Provision for loan losses                                                                 |       | 4,000                                 |       | 2,505 |   |
| Stock compensation, net                                                                   |       | 371                                   |       | 61 |   |
| Gain on sale of securities                                                                |       | (14                                   | )          | — |   |
| Loss (gain) and valuation adjustments on real estate owned                                |       | 2,631                                 |       | (32 | ) |
| Other                                                                                     |       | 29                                    |       | (500 | ) |
| Net change in:                                                                            |       |                                  |       |   |   |
| Other assets                                                                              |       | (1,402                                | )          | 307 |   |
| Interest payable and other liabilities                                                    |       | (528                                  | )          | (2,090 | ) |
| Net cash provided by operating activities                                                 |       | 5,386                                 |       | 3,152 |   |
| Cash flows from investing activities:                                                     |       |                                  |       |   |   |
| Activity in available-for-sale securities:                                                |       |                                  |       |   |   |
| Sales, maturities, prepayments, and calls                                                 |       | 21,665                                |       | 7,463 |   |
| Purchases                                                                                 |       | (20,460                               | )          | (56 | ) |
| Activity in held-to-maturity securities and bank stocks:                                  |       |                                  |       |   |   |
| Maturities, prepayments and calls                                                         |       | 735                                   |       | — |   |
| Purchases                                                                                 |       | (6,467                                | )          | — |   |
| Loan originations and principal collections, net                                          |       | 72,048                                |       | 45,471 |   |
| Collections on and proceeds from sale of loans held for  sale                             |       | 4,562                                 |       | 585 |   |
| Proceeds from sales of other real estate owned and  foreclosed assets                     |       | 6,022                                 |       | 251 |   |
| Additions to premises and equipment                                                       |       | (164                                  | )          | (322 | ) |
| Net cash provided by investing activities                                                 |       | 77,941                                |       | 53,392 |   |
| Cash flows from financing activities:                                                     |       |                                  |       |   |   |
| Net decrease in deposits                                                                  |       | (90,406                               | )          | (58,854 | ) |
| Repayment of long-term debt                                                               |       | (54                                   | )          | (1,905 | ) |
| Net change in federal funds purchased and repurchase  agreements                          |       | (4,603                                | )          | (5,490 | ) |
| Repurchase of common stock                                                                |       | (17                                   | )          | (24 | ) |
| Cash dividends on preferred stock                                                         |       | (7                                    | )          | — |   |
| Net cash used by financing activities                                                     |       | (95,087                               | )          | (66,273 | ) |
| Net change in cash and cash equivalents                                                   |       | (11,760                               | )          | (9,729 | ) |
| Cash and cash equivalents, beginning of period                                            |       | 234,483                               |       | 45,711 |   |
| Cash and cash equivalents, end of period                                                  |       | $                                     | 222,723    |   | $ | 35,982 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed ConsolidatedFinancial Statements**

 

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

 

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

 

Our principal business is to serve as a holding company forour subsidiaries. As of March 31, 2010 Guaranty Bancorp had a single banksubsidiary, Guaranty Bank and Trust Company, referred to as Guaranty Bank orthe 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 astand-alone basis.

 

The Bank is a full-servicecommunity bank offering an array of banking products and services to thecommunities it serves along the Front Range of Colorado, including acceptingtime and demand deposits and originating commercial loans (including energyloans), real estate loans, Small Business Administration guaranteed loans and consumerloans.  The Bank also provides trustservices, including personal trust administration, estate settlement,investment management accounts and self-directed IRAs.   Substantially all loans are secured byspecific items of collateral, including business assets, consumer assets, andcommercial and residential real estate. Commercial loans are generally expected to be repaid from the operatingcash flows of the borrower’s businesses. There are no significant concentrations of loans to any one industry orcustomer.  However, our customers’ability to repay their loans is dependent on the real estate and generaleconomic 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 the date the financial statements were issued.

 

Certain information and note disclosures normally included in consolidatedfinancial statements prepared in accordance with generally accepted accountingprinciples in the United States of America have been condensed or omittedpursuant to the rules and regulations of the Securities and ExchangeCommission. The interim operating results are not necessarily indicative ofoperating results for the year.  Forfurther information, refer to the consolidated financial statements and notesincluded in the Company’s annual report on Form 10-K for the year ended December 31,2009.

 

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

 

The preparation of the consolidated financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilitiesas of the dates of the consolidated balance sheets and income and expense forthe periods presented. Actual results could differ significantly from thoseestimates. Material estimates that are particularly susceptible to significantchanges include the assessment for impairment of certain investment securities,the allowance for loan losses, deferred tax assets and liabilities, impairmentof goodwill and other intangible assets, stock compensation expense, other realestate owned and accounting for derivative instruments.  Assumptions and factors used in the estimatesare evaluated on an annual basis or whenever events or changes in circumstanceindicate that the previous assumptions and factors have changed.  The result of the analysis could result inadjustments 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 a valuation allowance for probableincurred loan losses.  The allowance forloan losses is reported as a reduction of outstanding loan balances.

 

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

 

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

 

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

 

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

 

***(d)******              ******Other RealEstate Owned and Foreclosed Assets***

 

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

 

***(e)******               ******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.

 

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** **

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

***(f)******                  ******StockIncentive Plan***

 

TheCompany’s Amended and Restated 2005 Stock Incentive Plan provides for up to2,500,000 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 March 31, 2010, the Company has only granted stockawards. The Company recognizes stock compensation cost for services received ina share-based payment transaction over the required service period, generallydefined as the vesting period. For awards with graded vesting, compensationcost is recognized on a straight-line basis over the requisite service periodfor the entire award. The compensation cost of employee and director servicesreceived in exchange for stock awards is based on the grant date fair value ofthe award (as determined by quoted market prices). Stock compensation expenserecognized reflects estimated forfeitures, adjusted as necessary for actualforfeitures. The Company has issued stock awards that vest based on serviceperiods from one to four years, and stock awards that vest based on performanceconditions. The maximum contractual term for the performance-based share awardsis December 31, 2012. As of March 31, 2010, none of theperformance-based restricted stock awards were expected to vest prior to theend of the contractual term. Should this expectation change, additional expensecould be recorded in future periods.

 

***(g)******               ******DeferredCompensation Plans***

 

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

 

***(h)******               ******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 carry forwards.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. A valuation allowance, if needed, reduces deferredtax assets to the amount expected to be realized.  For purposes of a valuation allowance, theCompany evaluates all evidence currently available, both positive and negative,including existence of  taxes paid inavailable carry-back years, forecasts of future income, cumulative losses,applicable tax planning strategies and assessments of the current and futureeconomic and business conditions.

 

Deferred tax assets arereduced by a valuation allowance when, in the opinion of management, it is morelikely than not that some portion, or all, of the deferred tax asset will notbe realized. In assessing the realization of deferred tax assets, managementevaluates both positive and negative evidence, including the existence of anycumulative losses in the current year and the prior two years, the amount oftaxes paid in available carry-back years, the forecasts of future income,applicable tax planning strategies, and assessments of current and futureeconomic and business conditions. This analysis is updated quarterly andadjusted as

 

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** **

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

necessary.  Atthe end of the first quarter 2010, based on the Company’s ability to carrybackup to $9.4 million of potential tax losses generated in future years to prioryears  and various tax planning strategies,including sale leaseback of certain locations, the Company has determined thata valuation allowance for deferred tax assets is not required.

 

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

 

***(i)         DerivativeFinancial Instruments***

 

Management utilizes derivativefinancial instruments exclusively to accommodate the needs of its customersthrough 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 11 forfurther information.

 

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** **

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

***(j)         Earnings(loss) per Common Share***

 

Basic earnings or loss per commonshare represents income or loss allocable to common stockholders divided by theweighted average number of common shares outstanding during the period. Dilutedearnings or loss per share reflect additional common shares that would havebeen outstanding if potential dilutive common shares had been issued. TheCompany’s obligation to issue shares of stock to participants in its 2005Deferred Compensation Plan has been treated as outstanding shares of stock inthe basic earnings per common share calculation.  The Company’s unvested restricted stockawards do not contain nonforfeitablerights to dividends and, therefore, are not subject to the two-class method ofcomputing basic earnings per common share. The Company’s outstanding shares of preferred stock do not participatein the earnings or loss of the Company, and therefore, are not subject to thetwo-class method of computing basic earnings per share. Dilutivecommon shares that may be issued by the Company relate to convertible preferredstock and unvested common share grants subject to a service condition for thethree months ended March 31, 2009. Earnings (loss) per common share have been computed based on thefollowing:

 
| ** **                                                                   | ** ** | **Three  Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                   | ** ** | **2010**                               | ** ** | **2009** | ** ** |
|                                                                         | ** ** | ** **                             |       |   |   |
| Average  common shares outstanding                                           |       | 51,607,044                             |       | 51,277,748 |   |
| Effect of  dilutive preferred stock(1)                                       |       | —                                 |       | — |   |
| Effect of  dilutive unvested stock grants(2)                                 |       | —                                 |       | 182 |   |
| Average  shares outstanding and calculated diluted earnings per common share |       | 51,607,044                             |       | 51,277,930 |   |

 

----

(1)  The Company has 61,787shares outstanding of convertible preferred stock at March 31, 2010.  These shares are convertible into 34,326,111shares of common stock of the Company based on a conversion price of$1.80.  The impact of the futureconversion of these shares is antidilutive for the three months ended March 31,2010 due to the net loss for the period.

 

(2) Theimpact of unvested stock grants of 1,330,571 at March 31, 2010 isantidilutive for the three months ended March 31, 2010 due to the net lossfor the period.

 

***(k)   Recently Issued Accounting Standards***

 

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

 

In June 2009, theFASB amended previous guidance relating to transfers of financial assets andeliminated the concept of a qualifying special-purpose entity.  This guidance must be applied as of thebeginning of each reporting entity’s first annual reporting period that beginsafter November 15, 2009, for interim periods within that first annualreporting period and for interim and annual reporting periods thereafter. Thisguidance must be applied to transfers occurring on or after the effective date.Additionally, on and after the effective date, the concept of a qualifyingspecial-purpose entity is no longer relevant for accounting purposes.Therefore, formerly qualifying special-purpose entities should be evaluated forconsolidation by reporting entities on and after the effective date inaccordance with the applicable consolidation guidance. The disclosureprovisions were also amended and apply to transfers that occurred both beforeand after the effective date of this guidance. The adoption of this standarddid not have a material impact on the Company’s consolidated financialposition, results of operations or cash flows.

 

In June 2009, theFASB amended guidance for consolidation of variable interest entity guidance by replacing the quantitative-based risks and rewards calculation fordetermining which enterprise, if any, has a controlling financial interest in avariable interest entity with an approach focused on identifying whichenterprise has the power to direct the activities of a variable interest entitythat most significantly impact the entity’s economic performance and (1) theobligation to absorb losses of the entity or (2) the right to receivebenefits from the entity. Additional disclosures about an enterprise’s involvementin variable interest entities are also required. This guidance is effective asof the beginning of each reporting entity’s first annual reporting period thatbegins after November 15, 2009, for interim periods within that firstannual reporting period, and for interim and annual reporting periodsthereafter. The adoption of this standard did not have a material impact on theCompany’s consolidated financial position, results of operations or cash flows.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

In January 2010, theFASB issued guidance clarifying the accounting for shareholder distributionswhere the shareholder has the ability to elect to have his/her distribution inthe form of cash (up to a pre-determined maximum), stock or a combination ofthe two.  The amendments of the updateprovide that the stock portion of a distribution where the shareholder had theability to elect the distribution as stock or cash (up to a pre-determinedmaximum) should be accounted for as a share issuance and thereby eliminatediversity in practice. The provisions of this update became effective forfinancial statements dated on or after December 15, 2009. The adoption ofthis standard did not have a material impact on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

***Newly Issued But Not YetEffective Accounting Standards:***

 

In January 2010,the FASB issued guidance requiring increased fair value disclosures.  There are two components to the increaseddisclosure requirements set forth in the update:  (1) a description of, as well as thedisclosure of, the dollar amount of transfers in or out of level one or leveltwo (2) in the reconciliation for fair value measurements usingsignificant unobservable inputs (level 3), a reporting entity should presentseparately information about purchases, sales, issuances and settlements (thatis, gross amounts shall be disclosed as opposed to a single net figure).Increased disclosures regarding the transfers in/out of level one and two arerequired for interim and annual periods beginning after December 15,2009.  The adoption of this portion ofthe standard did not have a material impact on the Company’s consolidatedfinancial position, results of operations or cash flows. Increased disclosuresregarding the level three fair value reconciliation are required for fiscalyears beginning after December 15, 2010.

 

***(l)   Reclassifications***

** **

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

 

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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:*

* *
| ** **                                                  | ** ** | **March 31,  2010**    | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                  | ** ** | **Fair  value**             | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Amortized  cost** | ** ** |
| ** **                                                  | ** ** | **(In  thousands)**         | ** ** |
| Securities  available for sale:                             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  government agencies and government-sponsored entities |       | $                           | 20,072     |   | $ | 108 |   | $ | — |   | $ | 19,964 |   |
| State and  municipal                                        |       | 58,184                      |       | 793 |   | (3,142 | ) | 60,533 |   |
| Mortgage-backed  - agency / residential                     |       | 129,476                     |       | 1,991 |   | (224 | ) | 127,709 |   |
| Mortgage-backed  - private / residential                    |       | 9,879                       |       | 29 |   | (108 | ) | 9,958 |   |
| Marketable  equity                                          |       | 1,519                       |       | — |   | — |   | 1,519 |   |
| Other  securities                                           |       | 360                         |       | — |   | — |   | 360 |   |
| Total                                                       |       | $                           | 219,490    |   | $ | 2,921 |   | $ | (3,474 | ) | $ | 220,043 |   |
| ** **                                                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **December 31,  2009** | ** ** |
| Securities  available for sale:                             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  government agencies and government-sponsored entities |       | $                           | 17,129     |   | $ | — |   | $ | (329 | ) | $ | 17,458 |   |
| State and  municipal                                        |       | 60,827                      |       | 820 |   | (567 | ) | 60,574 |   |
| Mortgage-backed  - agency / residential                     |       | 127,340                     |       | 1,300 |   | (889 | ) | 126,929 |   |
| Mortgage-backed  - private / residential                    |       | 13,959                      |       | — |   | (567 | ) | 14,526 |   |
| Marketable  equity                                          |       | 1,519                       |       | — |   | — |   | 1,519 |   |
| Other  securities                                           |       | 360                         |       | — |   | — |   | 360 |   |
| Total                                                       |       | $                           | 221,134    |   | $ | 2,120 |   | $ | (2,352 | ) | $ | 221,366 |   |

 

*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)**  |       |
| March 31, 2010:                                 |   |                |       |                         |       |                          |       |            |   |
| Mortgage-backed securities — agency/residential |   | $                   | 15,760     |                         | $          | 513                           |       | $               | (105   | ) | $ | 16,168 |   |
|                                                 |   |                | ** ** | ** **                   | ** ** | ** **                    |       |            |   |
| December 31, 2009:                              |   |                |       |                         |       |                          |       |            |   |
| Mortgage-backed securities — agency/residential |   | $                   | 9,942      |                         | $          | 486                           |       | $               | — |   | $ | 10,428 |   |

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

The amortized cost andestimated fair value of available for sale debt securities by contractualmaturity at March 31, 2010 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                                            |       | $                            | 1,500      |   | $ | 1,528 |   |
| Due after one year through five years                              |       | 11,154                       |       | 11,497 |   |
| Due after five years through ten years                             |       | 15,766                       |       | 16,126 |   |
| Due after ten years                                                |       | 52,077                       |       | 49,105 |   |
| Total AFS, excluding MBS, marketable equity and other securities   |       | 80,497                       |       | 78,256 |   |
| Mortgage-backed securities, marketable equity and other securities |       | 139,546                      |       | 141,234 |   |
| Total available for sale                                           |       | $                            | 220,043    |   | $ | 219,490 |   |

 
| ** **                                           | ** ** | **Held to maturity** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|
| ** **                                           | ** ** | **Amortized cost**   | ** ** | **Fair value** | ** ** |
| ** **                                           | ** ** | **(In thousands)**   | ** ** |
| Securities held to maturity:                         |       |                 |       |   |   |
| Mortgage-backed securities — agency/residential |       | $                    | 15,760     |   | $ | 16,168 |   |
|                                                      |            |                      |            |  |  |  |  |

 

The followingtables present the fair value and the unrealized loss on securities that weretemporarily impaired as of March 31, 2010 and December 31, 2009aggregated by major security type and length of time in a continuous unrealizedloss position:

 
| ** **                                            | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**       | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|-----------------|------------|
| **March 31, 2010**                               | ** ** | **Fair value**               | ** ** | **Unrealized  losses**     | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** |
| ** **                                            | ** ** | **(In thousands)**           | ** ** |
| Description of securities:                            |       |                         |       |                       |       |            |       |   |   |   |   |   |   |
| *Available for Sale*                                  |       |                         |       |                       |       |            |       |   |   |   |   |   |   |
| State and municipal                                   |       | $                            | 34,878     |                       | $          | (3,142          | )          | — |   | — |   | $ | 34,878 |   | $ | (3,142 | ) |
| Mortgage-backed securities — agency/residential  |       | 29,375                       |       | (224                       | )          | —          |       | — |   | 29,375 |   | (224 | ) |
| Mortgage-backed securities — private/residential |       | 5,996                        |       | (108                       | )          | —          |       | — |   | 5,996 |   | (108 | ) |
| *Held to Maturity*                                    |       |                         |       |                       |       |            |       |   |   |   |   |   |   |
| Mortgage-backed securities — agency/residential  |       | 6,363                        |       | (105                       | )          | —          |       | — |   | 6,363 |   | (105 | ) |
| Total temporarily impaired                            |       | $                            | 76,612     |                       | $          | (3,579          | )          | $ | — |   | $ | — |   | $ | 76,612 |   | $ | (3,579 | ) |
|                                                       |            |                              |            |                            |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Tableof Contents

** **

**GUARANTYBANCORP AND SUBSIDIARIES**

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

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

 

In determiningwhether or not there is an OTTI for debt securities, management considers manyfactors, including: (1) the length of time and the extent to which thefair value has been less than cost, (2) the financial condition andnear-term prospects of the issuer, (3) whether the market decline wasaffected by macroeconomic conditions, and (4) whether the Company has theintention to sell the debt security or more likely than not will be required tosell the debt security before its anticipated recovery. The assessment ofwhether an other-than-temporary decline exists involves a high degree ofsubjectivity and judgment and is based on the information available tomanagement at a point in time.

 

At March 31, 2010, the Company owned fouragency mortgage-backed securities (MBS) (including one that is classified asheld to maturity), two private label mortgage-backed securities and one municipalbond in unrealized loss positions.  Nosecurity was in an unrealized loss position for greater than twelve months at March 31,2010.  Generally, the fair value of ouravailable for sale securities fluctuates as a result of changes in marketinterest rates.  A single municipal bondaccounts for approximately 88% of the total unrealized loss at March 31,2010.

 

All of the Company’s mortgage-backed securities arebacked by either a U.S. Government agency or government-sponsored agency,except for three private-label mortgage-backed securities with a total fairvalue of $9.9 million.  Each of theseprivate-label securities are senior tranches that were rated AAA by at leastone major rating agency at March 31, 2010. The decline in fair value is attributable to changes in interest ratesand liquidity and not reflective of credit quality.

 

The Bank’s municipal bond securities have all beenrated investment grade or higher by various rating agencies or have beensubject to an annual internal review process by management. This annual reviewprocess for non-rated securities considers a review of the issuers’ currentfinancial statements, including the related cash flows and interestpayments.  Based on credit ratings onthese bonds and our annual review, we concluded that the unrealized losspositions on these securities is a result of the level of market interest ratesand not a result of the underlying issuers’ ability to repay.

 

We do not intend to sell any of the debt securitieswith an unrealized loss and do not believe that it is more likely than not thatwe will be required to sell a security in an unrealized loss position prior toa recovery in its value. The fair value of these debt securities is expected torecover as the bonds approach maturity. Accordingly, we have not recognized anyOTTI in our consolidated statements of income.

 

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Tableof Contents

** **

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

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

 

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

* *
| ** **                       | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **(In thousands)**       | ** ** |
| Loans on real estate:            | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Residential and commercial       |       | $                        | 748,135    |                        | $          | 760,719 |   |
| Construction                     |       | 111,231                  |       | 105,612                     |       |
| Equity lines of credit           |       | 53,014                   |       | 54,852                      |       |
| Commercial loans                 |       | 448,908                  |       | 521,016                     |       |
| Agricultural loans               |       | 17,203                   |       | 18,429                      |       |
| Lease financing                  |       | 4,014                    |       | 4,011                       |       |
| Installment loans to individuals |       | 34,986                   |       | 36,175                      |       |
| Overdrafts                       |       | 612                      |       | 358                         |       |
| SBA and other                    |       | 19,396                   |       | 20,997                      |       |
|                             |       | 1,437,499                |       | 1,522,169                   |       |
| Less:                            |       |                     |       |                        |       |
| Allowance for loan losses        |       | (52,015                  | )          | (51,991                     | )          |
| Unearned discount                |       | (2,428                   | )          | (2,561                      | )          |
| Net Loans                        |       | $                        | 1,383,056  |                        | $          | 1,467,617 |   |

 

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

* *
| ** **                                 | ** ** | **Quarter Ended March 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| ** **                                 | ** ** | **(In thousands)**               | ** ** |
| Balance, beginning of period               |       | $                                | 51,991     |   | $ | 44,988 |   |
| Provision for loan losses                  |       | 4,000                            |       | 2,505 |   |
| Loans charged-off                          |       | (4,271                           | )          | (10,262 | ) |
| Recoveries on loans previously charged-off |       | 295                              |       | 367 |   |
| Balance, end of period                     |       | $                                | 52,015     |   | $ | 37,598 |   |

 

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

* *
| ** **                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                     | ** ** | **(In thousands)** | ** ** |
| Impaired loans with a valuation  allowance     |       | $                  | 49,503     |                  | $          | 21,039 |   |
| Impaired loans without a valuation  allowance  |       | 21,555             |       | 38,668                |       |
| Total impaired loans                           |       | $                  | 71,058     |                  | $          | 59,707 |   |
| Valuation allowance related to  impaired loans |       | $                  | 10,802     |                  | $          | 6,603 |   |

 

*The following table is a summary of interest recognized and cash-basisinterest earned on impaired loans:*

 
| ** **                                           | ** ** | **Quarter Ended March 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| ** **                                           | ** ** | **(In thousands)**               | ** ** |
| Average of individually impaired loans during period |       | $                                | 65,383     |   | $ | 56,516 |   |
| Interest income recognized during impairment         |       | $                                | —     |   | $ | 11 |   |
| Cash-basis interest income recognized                |       | $                                | —     |   | $ | 11 |   |

 

The gross interest income that would have beenrecorded in the year-to-date periods ended March 31, 2010 and March 31,2009, 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 $1,584,000 and $1,518,000, respectively.  At March 31, 2010 and December 31,2009, nonaccrual loans were $70,500,000 and $59,584,000, respectively.

 

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Tableof Contents

** **

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

**(4)       OtherReal Estate Owned**

 

*Changes in the carrying amount ofthe Company’s other real estate owned for March 31, 2010 and March 31,2009 were as follows (in thousands):*

* *
| Balance as  of December 31, 2008: |   | $      | 484    |   |
|----------------------------------------|--------|--------|--------|--------|
| Additions  to OREO                     |   | 14,259 |   |
| Sales  Proceeds                        |   | (251   | )      |
| Losses  and write-downs, net of gains  |   | 32     |   |
| Balance  as of March 31, 2009:    |   | $      | 14,524 |   |
| Balance  as of December 31, 2009: |   | $      | 37,192 |   |
| Additions  to OREO                     |   | 2,379  |   |
| Sales  Proceeds                        |   | (6,022 | )      |
| Losses  and write-downs, net of gains  |   | (2,631 | )      |
| Balance  as of March 31, 2010:    |   | $      | 30,918 |   |

 

**(5)       OtherIntangible Assets**

 

Other intangible assets with definite lives areamortized over their respective estimated useful lives to their estimated residualvalues.  The amortization expenserepresents the estimated decline in the value of the underlying deposits fromcustomers acquired through past acquisitions. As of March 31, 2010 and December 31, 2009, the Company’s onlyintangible asset was our Core Deposit Intangible.

 

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

 
| ** **                      | ** ** | ** **      | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------|------------|---------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **Useful life** | ** ** | **2010**            | ** ** | **2009**              | ** ** |
| ** **                      | ** ** | ** **      | ** ** | **(In  thousands)** | ** ** |
| Core deposit  intangible assets |       | 7 - 15 years    |       | $                   | 62,975     |                  | $          | 62,975 |   |
| Accumulated  amortization       |       |            |       | (45,052             | )          | (43,753               | )          |
| Other  intangible assets, net   |       |            |       | $                   | 17,922     |                  | $          | 19,222 |   |

 

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

* *
| ** **            | ** ** | **Quarter  Ended March 31,** | ** ** |
|-----------------------|------------|-----------------------------------|------------|
| ** **            | ** ** | **2010**                          | ** ** | **2009** | ** ** |
| ** **            | ** ** | **(In  thousands)**               | ** ** |
| Amortization  expense |       | $                                 | 1,300      |   | $ | 1,582 |   |
|                       |            |                                   |            |  |  |  |  |

 

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

 

At March 31,2010, our outstanding borrowings were $164,310,000 as compared to $164,364,000at December 31, 2009. These borrowings at March 31, 2010 consisted ofterm notes at the Federal Home Loan Bank (“FHLB”).  We also maintain a line of credit at theFHLB. However, as of March 31, 2010, there was no balance outstanding onthis line of credit.

 

The Bank hasexecuted a specific pledging and security agreement with the FHLB in the amountof $264,166,000 at March 31, 2010 and $195,338,000 at December 31,2009, which encompassed certain loans and securities as collateral for theseborrowings.  The maximum credit allowancefor future borrowings, including term notes and the line of credit, was$99,856,000 at March 31, 2010 and $30,974,000 at December 31, 2009.

 

The interestrate on the line of credit varies with the federal funds rate, and was 0.20% atMarch 31, 2010.  The term notes havefixed interest rates that range from 2.52% to 6.22%, with a weighted average rate of 3.17%.

 

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

 

The Company had a $41,239,000 aggregate balance ofsubordinated debentures outstanding with a weighted average cost of 5.85% and5.87% at March 31, 2010and December 31, 2009, respectively. 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 the Company (“Trusts”), which in turnissued $40 million of trust preferred securities. Generally and with certainlimitations, the Company is permitted to call the debentures subsequent to thefirst five or ten years, as applicable, after issue if certain conditions aremet, or at any time upon the occurrence and continuation of certain changes ineither the tax treatment or the capital treatment of the Trusts, the debenturesor the preferred securities.  As of March 31,2010, the Company was in compliance with all covenants of these subordinateddebentures.

 

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 would 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.  Prior to paying any interest on thesubordinated debentures, the Company must obtain prior written approval fromthe Federal Reserve Bank of Kansas City under the terms of its WrittenAgreement.

 

The Company is not considered the primarybeneficiary of these Trusts (variable interest entities), therefore the trustsare not consolidated in the Company’s financial statements, but rather thesubordinated debentures are shown as a liability.  The Company’s investment in the common stockof each Trust is included in other assets in the Consolidated Balance Sheets.

 

Although the securities issued by each of the Trustsare not included as a component of stockholders’ equity in the consolidatedbalance sheets, the securities are treated as capital for regulatory purposes.Specifically, under applicable regulatory guidelines, the $40 million ofsecurities issued by the trusts qualify as Tier 1 capital, along with the $60.6million of 9% Series A Convertible Preferred Stock, up to a maximum of 25%of capital on an aggregate basis. Any amount that exceeds 25% qualifies as Tier2 capital.  At March 31, 2010,approximately $43.6 million of the combined $100.6 million of the Trusts’securities and preferred stock outstanding qualified as Tier 1 capital. Theremaining $57 million is treated as Tier 2 capital.

 

The Board of Governors of the Federal ReserveSystem, which is the holding company’s banking regulator, has promulgated amodification of the capital regulations affecting trust preferred securities.Under this modification, beginning March 31, 2011, the Company is requiredto use a more restrictive formula to determine the amount of trust preferredsecurities that can be included in regulatory Tier I capital. The Company willbe allowed to include in Tier I capital an amount of trust preferred securitiesequal to no more than 25% of the sum of all core capital elements, which isgenerally defined as stockholders’ equity less certain intangibles, includingcore deposit intangibles, net of any related deferred income taxliability.  The existing regulations ineffect limit the amount of trust preferred securities that can be included inTier I capital to 25% of the sum of core capital elements without a deductionfor permitted intangibles.   The adoptionof this modification is not expected to have a material impact on the inclusionof trust preferred securities for purposes of Tier 1 capital.

 

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 on any of its quarterlyinterest payment dates.   Under the termsof the Written Agreement, regulatory approval would have to be received priorto the call of any trust preferred issuance.

 

20

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*The following table summarizes the terms of each subordinated debentureissuance at March 31, 2010**(dollars in thousands):*

 
| ** **                                | ** ** | **Date  Issued** | ** ** | **Amount** | ** ** | **Maturity  Date** | ** ** | **Call Date*** | ** ** | **Fixed or  Variable** | ** ** | **Rate  Adjuster**     | ** ** | **Current  Rate** | ** ** | **Next Rate  Reset Date** | ** ** |
|-------------------------------------------|------------|------------------|------------|------------|------------|--------------------|------------|----------------|------------|------------------------|------------|------------------------|------------|-------------------|------------|---------------------------|------------|
| ** **                                |       |             | ** ** | ** ** |       |               |       |           |       |                   | ** ** | ** **             |       |              |       |                      |       |
| CenBank Trust I                           |       | 9/7/2000         |       | $          | 10,310     |               | 9/7/2030   |           | 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          |       | 4/15/2010      |       | Variable               |       | LIBOR + 2.65 | %          | 2.90              | %          | 4/15/2010                 |       |
| Guaranty Capital Trust III |       | 6/30/2003        |       | 10,310     |       | 7/7/2033           |       | 4/7/2010       |       | Variable               |       | LIBOR + 3.10 | %          | 3.35              | %          | 4/7/2010                  |       |
|                                           |            |                  |            |            |            |                    |            |                |            |                        |            |                        |            |                   |            |                           |            |  |

----

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

 

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

 

The Company is a party to credit-related financialinstruments with off-balance sheet risk in the normal course of business tomeet the financing needs of its customers. These financial instruments includecommitments to extend credit, stand-by letters of credit and commercial lettersof credit. Such commitments involve, to varying degrees, elements of credit andinterest rate risk in excess of the amount recognized in the consolidatedbalance sheets.

 

The Bank’s exposure to credit loss is represented bythe contractual amount of these commitments. The Bank follows the same creditpolicies in making commitments as it does for on-balance sheet instruments.

 

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

 
| ** **                         | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **(In thousands)**       | ** ** |
| Commitments to extend credit:      |       |                     |       |                        |       |
| Variable                           |       | $                        | 283,390    |                        | $          | 264,616 |   |
| Fixed                              |       | 30,690                   |       | 40,486                      |       |
| Total commitments to extend credit |       | $                        | 314,080    |                        | $          | 305,102 |   |
|                               |       |                     |       |                        |       |
| Standby letters of credit          |       | $                        | 13,204     |                        | $          | 14,917 |   |
| Commercial letters of credit       |       | $                        | 11,000     |                        | $          | 11,000 |   |

 

At March 31, 2010, the rates on the fixed ratecommitments to extend credit range from 2.50% to 9.00%.

 

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 total commitmentamounts do not necessarily represent future cash requirements. Off-balancesheet risk to credit loss exists up to the face amount of these instruments,although material losses are not anticipated. The same credit policies are used to make such commitments as are usedfor loans, including obtaining collateral, if necessary, at exercise of thecommitment.

 

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 Bank to guarantee the performance of a customer to athird party. Those letters of credit are primarily issued to support public andprivate borrowing arrangements. Essentially all letters of credit issued have expiration dates withinone year. The credit risk involved in issuing letters of credit is essentiallythe same as that involved in extending loan facilities to customers. The Bankgenerally holds collateral supporting those commitments if deemed necessary.

 

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

 

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

 

Fair value is the exchange price that wouldbe received for an asset or paid to transfer a liability (exit price) in theprincipal or most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date.   There are three levels of inputs that may beused to measure fair values:

 

Basis of Fair Value Measurement:

 

Level 1 -Unadjusted quoted prices in active markets that are accessible at themeasurement date for identical, unrestricted assets.

 

Level 2-  Significant other observable inputs other than Level 1 prices suchas 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 are both significant tothe fair value measurement and are unobservable (i.e., supported by little orno 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 value of loans held for sale isbased upon binding contracts and quotes from third party investors (Level 2inputs).

 

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.  Collateralmay be real estate and/or business assets including equipment, inventory and/oraccounts receivable and is valued based on appraisals performed by qualifiedlicensed appraisers hired by the Company.  Appraised and reported values may be discounted based on management’shistorical knowledge, changes in market conditions from the time of valuation,and/or management’s expertise and knowledge of the client and client’sbusiness.  Such discounts are typicallysignificant and result in a Level 3 classification of the inputs fordetermining fair value. Impaired loans are reviewed and evaluated on at least aquarterly basis for additional impairment and adjusted accordingly, based onthe same factors identified above.

 

The fair values ofderivatives are generally derived from market-observable data such as interestrates, volatilities, and information derived from or corroborated by thatmarket-observable data, which generally fall into Level 2 inputs. However, a significantinput into the fair value of the derivatives is a credit valuation adjustment,which uses credit spreads that are typically derived by management or obtainedfrom a third party data provider that provides an implied credit spread forpublic entities.  As a result, the creditspreads are generally unobservable to the market, rendering them a Level 3input.

 

Level 3 is for positionsthat are not traded in active markets or are subject to transfer restrictions,and/or where valuations are adjusted to reflect illiquidity and/ornon-transferability. Such adjustments are generally based on available marketevidence. In the absence of such evidence, management’s best estimate isused.  Management’s best estimateconsists of both internal and external support on the Level 3 investment.  Internal cash flow models using a presentvalue formula along with indicative exit pricing obtained from broker/dealerswere used to determine the fair value for the Level 3 investment.  Subsequent to inception, management onlychanges Level 3 inputs and assumptions when corroborated by evidence such astransactions in similar instruments, completed or pending third-partytransactions in the underlying investment or comparable entities, subsequentrounds of financing, 

 

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recapitalizations and other transactions across thecapital structure, offerings in the equity or debt markets, and changes infinancial ratios or cash flows.

 

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

 

Assets and liabilities measured at fair valueon 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  March 31, 2010**             |       |                                                                   |       |                                                 |       |                                             |       |        |       |
| U.S. government agencies and government-sponsored entities |       | $                                                                      | —     |                                                 | $          | 20,072                                           |       | $           | —     |   | $ | 20,072 |   |
| State and municipal                                        |       | —                                                                 |       | 23,306                                               |       | 34,878                                           |       | 58,184      |       |
| Mortgage-backed securities — agency/residential       |       | —                                                                 |       | 129,476                                              |       | —                                           |       | 129,476     |       |
| Mortgage-backed securities — private/residential      |       | —                                                                 |       | 9,879                                                |       | —                                           |       | 9,879       |       |
| Marketable equity                                          |       | —                                                                 |       | 1,519                                                |       | —                                           |       | 1,519       |       |
| Other securities                                           |       | —                                                                 |       | 360                                                  |       | —                                           |       | 360         |       |
| Derivative Assets                                          |       | —                                                                 |       | —                                               |       | 293                                              |       | 293         |       |
| Derivative Liabilities                                     |       | —                                                                 |       | —                                               |       | (256                                             | )          | (256        | )          |
|                                                       |       |                                                                   |       |                                                 |       |                                             |       |        |       |
| **Assets/Liabilities at  December 31, 2009**          |       |                                                                   |       |                                                 |       |                                             |       |        |       |
| U.S. government agencies and government-sponsored entities |       | $                                                                      | —     |                                                 | $          | 17,129                                           |       | $           | —     |   | $ | 17,129 |   |
| State and municipal                                        |       | —                                                                 |       | 23,374                                               |       | 37,453                                           |       | 60,827      |       |
| Mortgage-backed securities — agency/residential       |       | —                                                                 |       | 127,340                                              |       | —                                           |       | 127,340     |       |
| Mortgage-backed securities — private/residential      |       | —                                                                 |       | 13,959                                               |       | —                                           |       | 13,959      |       |
| Marketable equity                                          |       | —                                                                 |       | 1,519                                                |       | —                                           |       | 1,519       |       |
| Other securities                                           |       | —                                                                 |       | 360                                                  |       | —                                           |       | 360         |       |
| Derivative Assets                                          |       | —                                                                 |       | —                                               |       | 206                                              |       | 206         |       |
| Derivative Liabilities                                     |       | —                                                                 |       | —                                               |       | (151                                             | )          | (151        | )          |

 

SeeNote 11, Derivatives and Hedging Activity, for further discussion of thevaluation of the derivatives as of March 31, 2010.

 

23

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Thetable below presents a reconciliation and income statement classification ofgains and losses for all assets measured at fair value on a recurring basisusing significant unobservable inputs (Level 3) for the three months ended March 31,2010:

 

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

 
| ** **                                        | ** ** | **Quarter ended  March 31, 2010**      | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **Net Derivative  Assets and  Liabilities** | ** ** | **State and  Municipal  Securities** | ** ** |
| ** **                                        | ** ** | **(In thousands)**                          | ** ** |
| Balance December 31, 2009                    |       | $                                           | 55         |   | $ | 37,453 |   |
| Total unrealized (losses) included in:            |       |                                        |       |   |   |
| Net Loss                                          |       | (18                                         | )          | — |   |
| Other Comprehensive Loss                          |       | —                                      |       | (2,575 | ) |
| Purchases, sales, issuances, and settlements, net |       | —                                      |       | — |   |
| Transfers in and (out) of level three             |       | —                                      |       | — |   |
| Balance March 31, 2010                       |       | $                                           | 37         |   | $ | 34,878 |   |

 

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

 

Thefollowing represent assets and liabilities measured at fair value on anon-recurring basis as of March 31, 2010 and December 31, 2009.  The valuation methodology used to measure thefair value of these loans is described earlier in the Note.

 
| ** **                        | ** ** | **Quoted  Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant  Other  Observable  Inputs (Level 2)** | ** ** | **Significant  Unobservable  Inputs (Level 3)** | ** ** | **Balance** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|-------------|------------|
| ** **                        | ** ** | **(In  thousands)**                                                    | ** ** |
| Assets at  March 31, 2010    |       |                                                                   |       |                                                 |       |                                            |       |        |       |
| Impaired  loans                   |       | $                                                                      | —     |                                                 | $          | —                                          |       | $           | 42,469     |   | $ | 42,469 |   |
| Loans  held for sale              |       | $                                                                      | —     |                                                 | $          | —                                          |       | $           | 11,506     |   | $ | 11,506 |   |
|                              |       |                                                                   |       |                                                 |       |                                            |       |        |       |
| Assets at  December 31, 2009 |       |                                                                   |       |                                                 |       |                                            |       |        |       |
| Impaired  loans                   |       | $                                                                      | —     |                                                 | $          | —                                          |       | $           | 23,357     |   | $ | 23,357 |   |
| Loans  held for sale              |       | $                                                                      | —     |                                                 | $          | —                                          |       | $           | 9,862      |   | $ | 9,862 |   |

 

Impaired loans, which are usually measuredfor impairment using the fair value of collateral, had a carrying amount of$71,058,000 at March 31, 2010, after a partial charge-off of$2,329,000.  In addition, these loanshave a specific valuation allowance of $10,802,000 at March 31, 2010.  Of the $71,058,000 impaired loan portfolio atMarch 31, 2010, $53,271,000 were carried at fair value as a result of theaforementioned charge-offs and specific valuation allowances. The remainingimpaired loans valued at $17,787,000 were carried at cost at March 31,2010, as the fair value of the collateral on these loans exceeded the bookvalue for each individual credit. Charge-offs and changes in specific valuationallowances during 2010 on impaired loans carried at fair value at March 31,2010 resulted in additional provision for loan losses of $8,130,000 during thefirst quarter 2010.  This provision wasoffset by a reduction to the general component of the allowance for loanlosses.   At December 31, 2009,impaired loans had a carrying amount of $59,707,000 after a partial charge-offof $9,372,000.  In addition, these loanshad a specific valuation allowance of $6,603,000 at December 31,2009.  Of the $59,707,000 impaired loanportfolio at December 31, 2009, $30,235,000 were carried at fair value asa result of the aforementioned charge-offs and specific valuationallowances.   The remaining $29,472,000were carried at cost at December 31, 2009, as the fair value of thecollateral on these loans exceeded the book value for each individual credit.

 

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

 

24

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***Nonfinancial Assets andLiabilities Measured on 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 March 31, 2010                 |       |                                                                   |       |                                                 |       |                                             |       |        |       |
| Other real estate owned and foreclosed assets |       | $                                                                      | —     |                                                 | $          | —                                           |       | $           | 30,918     |   | $ | 30,918 |   |
|                                          |       |                                                                   |       |                                                 |       |                                             |       |        |       |
| Assets at December 31, 2009              |       |                                                                   |       |                                                 |       |                                             |       |        |       |
| Other real estate owned and foreclosed assets |       | $                                                                      | —     |                                                 | $          | —                                           |       | $           | 37,192     |   | $ | 37,192 |   |

 

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. Other real estateowned had a carrying amount of $30,918,000 at March 31, 2010, which ismade up of an outstanding balance of $34,424,000, with a valuation allowance of$3,506,000.

 

***Fair Value of Financial Instruments***

 

The estimated fairvalues, and related carrying amounts, of the Company’s financial instrumentsare as follows:

 
| ** **                                                       | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                       | ** ** | **Carrying amount**     | ** ** | **Fair value**             | ** ** | **Carrying amount** | ** ** | **Fair value** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**      | ** ** |
| Financial  assets:                                               |       |                    |       |                       |       |   |   |   |   |
| Cash  and cash equivalents                                       |       | $                       | 222,723    |                       | $          | 222,723 |   | $ | 234,483 |   | $ | 234,483 |   |
| Securities  available for sale                                   |       | 219,490                 |       | 219,490                    |       | 221,134 |   | 221,134 |   |
| Securities  held to maturity                                     |       | 15,760                  |       | 16,168                     |       | 9,942 |   | 10,428 |   |
| Bank  stocks                                                     |       | 17,143                  |       | n/a                        |       | 17,160 |   | n/a |   |
| Loans,  net                                                      |       | 1,383,056               |       | 1,406,681                  |       | 1,467,617 |   | 1,494,649 |   |
| Loans  held for sale                                             |       | 11,506                  |       | 11,506                     |       | 9,862 |   | 9,862 |   |
| Accrued  interest receivable                                     |       | 6,817                   |       | 6,817                      |       | 6,675 |   | 6,675 |   |
| Interest  rate swaps, net                                        |       | 37                      |       | 37                         |       | 55 |   | 55 |   |
|                                                             |       |                    |       |                       |       |   |   |   |   |
| Financial  liabilities:                                          |       |                    |       |                       |       |   |   |   |   |
| Deposits                                                         |       | 1,602,884               |       | 1,608,900                  |       | 1,693,290 |   | 1,700,549 |   |
| Federal  funds purchased and sold under agreements to repurchase |       | 18,387                  |       | 18,387                     |       | 22,990 |   | 22,990 |   |
| Subordinated debentures                                          |       | 41,239                  |       | 33,662                     |       | 41,239 |   | 33,768 |   |
| Long-term borrowings                                             |       | 164,310                 |       | 171,832                    |       | 164,364 |   | 171,345 |   |
| Accrued interest payable                                         |       | 3,994                   |       | 3,994                      |       | 3,398 |   | 3,398 |   |
|                                                                  |            |                         |            |                            |            |  |  |  |  |  |  |  |  |

 

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

 

25

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

 

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

 

***(a) Cash and Cash Equivalents***

** **

The carrying amounts ofcash and short-term instruments approximate fair values.

 

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

** **

Fair values forsecurities available for sale and held to maturity are generally determined bymatrix pricing, which is a mathematical technique widely used in the industryto value debt securities without relying exclusively on quoted prices for thespecific securities but rather by relying on the securities’ relationship toother benchmark quoted securities.

 

It is not practical todetermine the fair value of bank stocks due to restrictions placed on thetransferability of FHLB stock, Federal Reserve Bank stock and Bankers’ Bank ofthe West stock.  These three stockscomprise the balance of bank stocks.

 

***(c) Loans***

** **

Loans, net excludes loans held-for-sale as thesefair values are disclosed on a separate line on the table.   For variable-rate loans that repricefrequently and with no significant change in credit risk, fair values are basedon carrying values. Fair values for other loans (e.g., commercial real estateand investment property mortgage loans, commercial and industrial loans) areestimated using discounted cash flow analyses, using interest rates currentlybeing offered for loans with similar terms to borrowers of similar creditquality.  Impaired loans are valued atthe lower of cost or fair value as described above in this note.

 

**Loans held for sale are carried at the lower of cost orfair value. The fair value of loans held for sale is based upon bindingcontracts and quotes from third party investors.**

 

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

** **

The fair value forinterest rate swaps are determined by netting the discounted future fixed cashreceipts, or payments, and the discounted expected variable cash payments, orreceipts.  The variable cash payments, orreceipts, are based on an expectation of future interest rates derived fromforward interest rate curves.

 

***(e) Deposits***

** **

The fair values disclosedfor demand deposits (e.g., interest and non-interest checking, passbooksavings, and certain types of money market accounts) are, by definition, equalto the amount payable on demand at the reporting date (i.e., their carryingamount). The carrying amounts of variable-rate, fixed-term money marketaccounts and certificates of deposit approximate their fair values at thereporting 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-term Borrowings***

** **

The carrying amounts offederal funds purchased, borrowings under repurchase agreements, and othershort-term borrowings maturing within ninety days approximate their fairvalues.

 

26

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** **

***(g) Long-term Borrowings***

** **

The fair values of theCompany’s long-term borrowings are estimated using discounted cash flowanalyses based on the Company’s current incremental borrowing rates for similartypes of borrowing arrangements.

 

***(h) Subordinated Debentures***

** **

The fair values of theCompany’s Subordinated Debentures are estimated using discounted cash flowanalyses based on the Company’s current incremental borrowing rates for similartypes of borrowing arrangements.

 

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

** **

The carrying amounts ofaccrued interest approximate fair value.

 

***(j) Off-balance Sheet Instruments***

** **

Fair values for off-balance sheet, credit-relatedfinancial instruments are based on fees currently charged to enter into similaragreements, taking into account the remaining terms of the agreements and thecounterparties’ credit standing. The fair value of commitments is not material.

 

**(10)****             ****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. The IncentivePlan provides that eligible participants may be granted shares of Companyvoting 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 a servicevesting condition, each grantee shall have the rights of a stockholder withrespect to voting of the granted stock. The recipient is not entitled todividend rights with respect to the shares of granted stock until vestingoccurs. Prior to vesting of the stock awards with performance vestingconditions, each grantee shall have the rights of a stockholder with respect tovoting of the granted stock. The recipient is not entitled to dividend rightswith respect to the shares of granted stock until initial vesting occurs, atwhich time, the dividend rights will exist on vested and unvested shares ofgranted stock, subject to termination of such rights under the terms of the IncentivePlan.

 

Other than the stock awards with service andperformance-based vesting conditions, no grants have been made under theIncentive Plan.

 

The Incentive Plan authorized grants of stock basedcompensation awards of up to 2,500,000 shares of authorized Company votingcommon stock, subject to adjustments provided by the Incentive Plan. As of March 31,2010 and December 31, 2009 there were 1,330,571and 1,381,105 shares ofunvested stock granted (net of forfeitures), with 509,815 and 524,815 shares availablefor grant under the Incentive Plan, respectively.  Of the 1,330,571 shares unearned at March 31,2010, approximately 625,000 shares are expected to vest.  The Company does not expect any of the630,000 shares of performance awards to vest.

 

27

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*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, 2009 |       | 1,381,105  |       | $                                                    | 7.15       |   |
| Awarded                             |       | 15,000     |       | 1.33                                                 |       |
| Forfeited                           |       | —     |       | —                                               |       |
| Vested                              |       | (65,534    | )          | 8.47                                                 |       |
| Unearned at March 31, 2010     |       | 1,330,571  |       | $                                                    | 7.02       |   |

 

The Company recognized $371,000 and $61,000 instock-based compensation expense for services rendered for the three monthsended March 31, 2010 and March 31, 2009, respectively.   The total income tax effect recognized inthe consolidated income statement for share-based compensation arrangements wasa $35,000 expense for the three months ended March 31, 2010, compared to a$186,000 expense for the same period in 2009.  The 2010 income tax effect related to share-based compensationarrangements included $176,000 in expense related to the write-off of thedeferred tax asset for the difference between the grant date value of the awardas compared to fair value of the award upon vesting.  At March 31, 2010, compensation cost of$1,557,000 related to nonvested awards not yet recognized is expected to berecognized over a weighted-average period of 2.6 years.   The fair value of awards that vested in thefirst quarter 2010 was approximately $91,000.

 

**(11)****              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.

 

*Fair Values of DerivativeInstruments 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 March 31, 2010.

 
| ** **                                                   | ** ** | **Asset  Derivatives** | ** ** | **Liability  Derivatives** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                   | ** ** | **(In  thousands)**    | ** ** |
| As of March 31, 2010:                                        |       |                   |       |                       |       |
|                                                         |       |                   |       |                       |       |
| Derivatives **not**  designated as hedging instruments       |       |                   |       |                       |       |
| Interest Rate Products                                       |       | $                      | 293        |                       | $          | 256 |   |
|                                                         |       |                   |       |                       |       |   |   |
| Total derivatives **not**  designated as hedging instruments |       | $                      | 293        |                       | $          | 256 |   |

 

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. Derivatives not designated ashedges are not speculative and result from a service the Company provides tocertain customers, which the Company implemented during the first quarter of2009.  The Company executes interest rateswaps with commercial banking customers to facilitate the customer’s respectiverisk management strategies.  Thoseinterest rate swaps are simultaneously hedged by offsetting interest rate swapsthat the Company executes with a third party, 

 

28

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such that the Company minimizes its net risk exposure resulting fromsuch transactions.  As the interest rateswaps associated with this program do not meet the strict hedge accountingrequirements under FASC Topic 815, changes in the fair value of both thecustomer swaps and the offsetting swaps are recognized directly inearnings.  As of March 31, 2010, theCompany had two interest rate swaps with customers with a total notional amountof $23,257,000, and two offsetting interest rate swaps with a total notionalamount of $23,257,000; for an aggregate notional amount of $46,514,000 relatedto this program.  During the three monthsended March 31, 2010, the Company recognized a net loss of $18,000 relatedto changes in fair value of these swaps.

 

*Effect ofDerivative Instruments on the Consolidated Income Statement*

 

The tables below present the effect of theCompany’s derivative financial instruments on the Consolidated Income Statementfor the three months ended March 31, 2010:

 
| **Derivatives Not Designated as Hedging Instruments** | ** ** | **Location of  Gain or (Loss)  Recognized in Income on  Derivative** | ** ** | **Amount of  Gain  (Loss) Recognized in  Income on Derivative  Three Months Ended  March 31, 2010** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
|                                                  | ** ** | ** **                                                           | ** ** | **(In thousands)**                                                                                       | ** ** |
| Interest Rate Products                                |       | Other non-interest income                                            |       | $                                                                                                        | (18        | ) |
|                                                  |       |                                                                 |       |                                                                                                     |       |
| Total                                                 |       |                                                                 |       | $                                                                                                        | (18        | ) |

 

**(12)****              CapitalRatios**

 

The Company’s capitalratios exceed the highest regulatory capital requirement of “well-capitalized”at March 31, 2010 and December 31, 2009 as follows:

 
| ** **                      | ** ** | **Ratio at  March 31,  2010** | ** ** | **Ratio at  December 31,  2009** | ** ** | **Minimum  Capital  Requirement** | ** ** | **Minimum  Requirement for  “Well Capitalized”  Institution** | ** ** |
|---------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------------------|------------|
| Total Risk-Based Capital Ratio  |       |                               |       |                                  |       |                              |       |                                                                    |       |
| Consolidated                    |       | 14.28                              | %          | 13.80                                 | %          | 8.00                              | %          | N/A                                                                     |       |
| Guaranty Bank and Trust Company |       | 13.40                              | %          | 12.82                                 | %          | 8.00                              | %          | 10.00                                                                   | %          |
| Tier 1 Risk-Based Capital Ratio |       |                               |       |                                  |       |                              |       |                                                                    |       |
| Consolidated                    |       | 9.64                               | %          | 9.43                                  | %          | 4.00                              | %          | N/A                                                                     |       |
| Guaranty Bank and Trust Company |       | 12.12                              | %          | 11.55                                 | %          | 4.00                              | %          | 6.00                                                                    | %          |
| Leverage Ratio                  |       |                               |       |                                  |       |                              |       |                                                                    |       |
| Consolidated                    |       | 7.94                               | %          | 7.89                                  | %          | 4.00                              | %          | N/A                                                                     |       |
| Guaranty Bank and Trust Company |       | 9.90                               | %          | 9.66                                  | %          | 4.00                              | %          | 5.00                                                                    | %          |

 

**(13)****             ****Written Agreement**

 

On January 22, 2010,the Company and the Bank entered into a Written Agreement with the FederalReserve Bank of Kansas City (“Federal Reserve”) and the Colorado Division ofBanking (“CDB”).   The Written Agreementrequired the Bank to submit written plans within certain timeframes to theFederal Reserve and the CDB that addressed the following items: boardoversight, credit risk management practices, commercial real estateconcentrations, problem assets, reserves for loan and lease losses, capital,liquidity, brokered deposits, earnings and overall condition.  The Agreement also requires the Company tosubmit to the Federal Reserve a written plan that addresses capital and awritten statement of the Company’s annual cash flow projections.

 

In addition, the WrittenAgreement places restrictions on the Bank accepting any new brokered deposits,but continues to permit contractual rollovers and renewals of brokereddeposits.  The Written Agreement also providesthat written approval must be obtained from the federal regulators prior toappointing any new director or senior executive officer or changing theresponsibilities of any senior executive officer and making indemnification andseverance payments.  Further, the WrittenAgreement provides that prior written approval must be obtained from the 

 

29

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Federal Reserve, and inthe case of the Bank, the CDB, prior to paying dividends.   Prior written approval must also be obtainedfrom the Federal Reserve before the Company can incur, increase or guaranteeany debt, take any other form of payment representing a reduction in capitalfrom the Bank, or make any distributions of interest, principal or other sumson subordinated debentures or trust preferred securities.

 

**(14)****             ****Total Comprehensive Income(loss)**

 

*The following table presents the componentsof other comprehensive loss and total comprehensive income (loss) for theperiods presented:*

 
| ** **                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                       | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**                    | ** ** |
| Net income (loss)                                                |       | $                                     | (1,845     | ) | $ | 436 |   |
| Other comprehensive income (loss):                               |       |                                  |       |   |   |
| Change in net unrealized gains (losses), net                     |       | (335                                  | )          | 2,372 |   |
| Less: Reclassification adjustments for gains included in  income |       | (14                                   | )          | — |   |
| Net unrealized holding gains (losses)                            |       | (321                                  | )          | 2,372 |   |
| Income tax benefit (expense)                                     |       | 123                                   |       | (904 | ) |
| Other comprehensive income (loss)                                |       | (198                                  | )          | 1,468 |   |
| Total comprehensive income (loss)                                |       | $                                     | (2,043     | ) | $ | 1,904 |   |

 

**(15)****             ****Preferred Stock**

 

On August 11, 2009, the Company issued 59,053 shares of 9%non-cumulative Series A Convertible Preferred Stock, which resulted inadditional capital of $57,846,000, net of expenses.  The liquidation preference for the Series AConvertible Preferred Stock is $1,000 per share.  The Series A Convertible Preferred Stockis not redeemable.  Each share of Series AConvertible Preferred Stock will automatically convert into shares of theCompany’s common stock on the fifth anniversary of the issuance date of the Series AConvertible Preferred Stock, or August 11, 2014, subject to certainlimitations. The preferred stock holders may elect to convert their shares of Series AConvertible Preferred Stock into shares of the Company’s common stock prior tothe mandatory conversion of the Series A Convertible Preferred Stockfollowing the earlier of the second anniversary of the issuance date the Series AConvertible Preferred Stock, or August 11, 2011, and the occurrence ofcertain events resulting in the conversion, exchange or reclassification of theCompany’s common stock. Each share of Series A Convertible Preferred Stockwill be convertible into shares of the Company’s common stock at a conversionprice of $1.80 per share, adjustable downward in $0.04 increments to $1.50 pershare in the event of certain nonpayments of dividends (whether paid in cash orin kind) on the Series A Convertible Preferred Stock. The conversion priceof the Series A Convertible Preferred Stock is subject to customaryanti-dilution adjustments. Due to the conversion price adjustment resulting fromnonpayment of dividends, for purposes of the risk-based and leverage capitalguidelines of the Board of Governors of the Federal Reserve System, and forpurposes of regulatory reporting, the Series A Convertible Preferred Stockis treated as cumulative preferred stock (e.g., a restricted core capitalelement for Tier 1 capital purposes).

 

**(16)****             ****Legal Contingencies**

 

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.

 

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

 

ThisMD&A should be read together with our unaudited Condensed ConsolidatedFinancial Statements and unaudited Statistical Information included elsewherein this Report, Part II, Item 1A of this Report, and Items 1, 1A, 6, 7, 7Aand 8 of our 2009Annual 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.

 

Through the Bank, we provide banking and otherfinancial services throughout our targeted Colorado markets to consumers and tosmall and medium-sized businesses, including the owners and employees of thosebusinesses.  These banking products andservices include accepting time and demand deposits, originating commercialloans, including energy loans, real estate loans, including construction loans,Small Business Administration guaranteed loans and consumer loans. We deriveour income primarily from interest, including loan origination fees, receivedon real estate-related loans, commercial loans and leases and consumer loansand, to a lesser extent, interest on investment securities and other feesreceived in connection with servicing loan and deposit accounts. Our majoroperating expenses are the interest we pay on deposits and borrowings andgeneral operating expenses. We rely primarily on locally generated deposits toprovide 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.

 

Basedin part on the results of our regularly scheduled examination by the FederalReserve Bank of Kansas City (“Federal Reserve”) and the Colorado Division ofBanking (“CDB”) in May 2009, the holding company and the Bank entered intoa Written Agreement on January 22, 2010 with the Federal Reserve and CDB(the “Written Agreement”).

 

TheWritten Agreement required the Bank to submit written plans within certaintimeframes to the Federal Reserve and the CDB that address the following items (i) strengtheningboard oversight of the management and operations of the Bank; (ii) strengtheningcredit risk management practices; (iii) strengthening the Bank’smanagement of commercial real estate concentrations; (iv) improving theBank’s position with respect to problem assets; (v) maintaining adequatereserves for loan and lease losses; (vi) maintaining sufficient capital atthe Bank; (vii) improving the management of the Bank’s liquidity positionand funds management practices; (viii) reducing the Bank’s reliance on brokereddeposits; and (ix) improving the Bank’s earnings and overall conditionthrough a business plan and budget.  TheAgreement also requires the Company to prepare and submit to the FederalReserve (i) a written plan that address maintaining sufficient capital atthe Company and the Bank and (ii) a written statement of the Company’sannual cash flow projections.

 

Inaddition, the Agreement (i) requires the Bank’s board of directors or adesignated committee thereof to approve any extension, renewal or restructuringof any credit to any borrower whose loans have been criticized by the FederalReserve and/or the CDB; (ii) requires the Bank to charge off or collectcertain problem loans; (iii) requires the Bank to review and revise itsallowance for loan and lease losses consistent with relevant supervisoryguidance; (iv) restricts the Bank from accepting any new brokereddeposits, but continues to permit contractual rollovers and renewals ofbrokered deposits; (v) requires the Company and the Bank to comply withthe notice provisions of Section 32 of the Federal Deposit Insurance Actand Subpart H of Regulation Y of the Board of Governors of the Federal ReserveSystem in connection with appointing any new director or senior executiveofficer or changing the responsibilities of any senior executive officer sothat the officer would assume a different senior executive officer position;and (vi) requires the Company and the Bank to comply with the restrictionson 

 

31

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indemnificationand severance payments of Section 18(k) of the Federal DepositInsurance Act and Part 359 of the FDIC’s regulations.

 

Further,the Written Agreement provides that prior written approval must be obtainedfrom the Federal Reserve, and in the case of the Bank, the CDB, prior to payingdividends.  Prior written approval mustalso be obtained from the Federal Reserve before the Company can incur,increase or guarantee any debt, take any other form of payment representing areduction in capital from the Bank, or make any distributions of interest,principal or other sums on subordinated debentures or trust preferredsecurities.

 

TheBoard of Directors and management of the Company and the Bank are committed toaddressing and resolving the matters raised in the Written Agreement on atimely basis.  All Written Plans weresubmitted to the Federal Reserve and CDB in a timely manner during the firstquarter 2010.  Approval was obtained forthe Bank’s plan to reduce its reliance on brokered deposits, and such plan wasadopted by the Bank’s board of directors in March 2010.   The holding company and Bank are waiting forregulatory approval of the remaining plans submitted in March 2010.

 

**Earnings Summary**

 

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

 

**Table 1**

 
| ** **                                           | ** ** | **Three  Months Ended March 31,**            | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** | **Change -** | ** ** |
| ** **                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** | **Favorable** | ** ** |
| ** **                                           | ** ** | **2010**                                          | ** ** | **2009** | ** ** | **(Unfavorable)** | ** ** |
| ** **                                           | ** ** | **(In thousands, except share data and  ratios)** | ** ** |
| **Results of Operations:**                           |       |                                              |       |   |   |   |   |
| Interest  income                                     |       | $                                                 | 23,321     |   | $ | 24,860 |   | $ | (1,539 | ) |
| Interest  expense                                    |       | 6,689                                             |       | 9,142 |   | 2,453 |   |
| Net  interest income                                 |       | 16,632                                            |       | 15,718 |   | 914 |   |
| Provision  for loan losses                           |       | 4,000                                             |       | 2,505 |   | (1,495 | ) |
| Net  interest income after provision for loan losses |       | 12,632                                            |       | 13,213 |   | (581 | ) |
| Noninterest  income                                  |       | 2,422                                             |       | 2,894 |   | (472 | ) |
| Noninterest  expense                                 |       | 18,126                                            |       | 15,460 |   | (2,666 | ) |
| Income  (loss) before income taxes                   |       | (3,072                                            | )          | 647 |   | (3,719 | ) |
| Income  tax expense (benefit)                        |       | (1,227                                            | )          | 211 |   | 1,438 |   |
| Net  income (loss)                                   |       | (1,845                                            | )          | 436 |   | (2,281 | ) |
| Preferred  stock dividends                           |       | (1,360                                            | )          | — |   | (1,360 | ) |
| Net  income (loss) applicable to common stockholders |       | $                                                 | (3,205     | ) | $ | 436 |   | $ | (3,641 | ) |
| ** **                                           |       |                                              |       |   |   |   |   |
| **Share Data:**                                      |       |                                              |       |   |   |   |   |
| Basic  earnings (loss) per common share              |       | $                                                 | (0.06      | ) | $ | 0.01 |   | $ | (0.07 | ) |
| Diluted  earnings (loss) per common share            |       | $                                                 | (0.06      | ) | $ | 0.01 |   | $ | (0.07 | ) |
| Average  common shares outstanding                   |       | 51,607,044                                        |       | 51,277,748 |   | 329,296 |   |
| Diluted  average common shares outstanding           |       | 51,607,044                                        |       | 51,277,930 |   | 329,114 |   |

* *
| ** **                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Percent** | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|-------------|------------|
| ** **                                                    | ** ** | **2010**           | ** ** | **2009**              | ** ** | **Change**  | ** ** |
| **Selected Balance Sheet Ratios:**                            |       |               |       |                  |       |        |       |
| Total  risk based capital to risk weighted assets             |       | 14.28              | %          | 13.80                 | %          | 3.48        | %          |
| Loans,  net of unearned discount to deposits                  |       | 89.53              | %          | 89.74                 | %          | (0.23       | )%         |
| Allowance  for loan losses to loans, net of unearned discount |       | 3.62               | %          | 3.42                  | %          | 5.94        | %          |

 

The$1.8 million first quarter 2010 net loss (excluding the preferred stockdividend) is $2.3 million lower than the first quarter 2009 net income of $0.4million.  The primary reason for thedecrease from the prior year period is a $1.5 million increase in the provisionfor loan losses, as well as a $2.7 million increase in noninterest expenseprimarily from higher other real estate expenses. These items were partiallyoffset by a $0.9 million increase in net interest income and a tax benefit onthese items.

 

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 

 

32

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issuance of these shares,which significantly increased our capital. The quarterly dividend on the preferred stock is included in the netincome (loss) applicable to common stockholders.

 

Net interest income increased by $0.9 millionin the first quarter 2010 as compared to the same period in 2009.  Although average earning assets declined inthe first quarter 2010 as compared to the same quarter in 2009, overall netinterest income increased due to an increase in net interest margin resultingfrom higher loan yields and lower deposit costs.

 

Although the provision for loan lossesincreased in the first quarter 2010, as compared to the same quarter in 2009,this is the second consecutive quarter of significant declines in the provisionfor loan losses.  Overall classifiedloans and delinquent loans have declined over the past two quarters.

 

Noninterest expense increased by $2.7 millionin the first quarter 2010, as compared to the same quarter in 2009.  This increase is primarily attributable to a$2.7 million increase in other real estate expense as a result of write-downs on other real estate ownedproperties resulting from valuation adjustments and sales.

 

**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**          | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **March 31,  2010**    | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** |
| ** **                                | ** ** | **(Dollars in  thousands)** | ** ** |
| Net  interest income                      |       | $                           | 16,632     |   | $ | 16,284 |   | $ | 14,911 |   | $ | 15,860 |   | $ | 15,718 |   |
| Interest  rate spread                     |       | 3.10                        | %          | 2.81 | % | 2.65 | % | 2.77 | % | 2.62 | % |
| Net  interest margin                      |       | 3.50                        | %          | 3.26 | % | 3.14 | % | 3.38 | % | 3.26 | % |
| Net interest margin, fully tax equivalent |       | 3.58                        | %          | 3.34 | % | 3.23 | % | 3.46 | % | 3.34 | % |
|                                           |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Firstquarter 2010 net interest income of $16.6 million increased by $0.9 millionfrom the first quarter 2009.  Thisincrease is a result of a $4.8 million favorable rate variance, which wasmostly offset by a $3.9 million unfavorable volume variance. (see Table 4).

 

The $4.8million favorable rate variance from the prior year first quarter is primarilyattributable to a 24 basis point increase in net interest margin in the firstquarter 2010 as compared to the same quarter in 2009. This increase in netinterest margin is primarily due to a 47 basis point increase in loan yields inthe first quarter 2010 as compared to the same period in 2009, as well as a 74basis point decline in the cost of funds over the same period.  There were no overall declines in thetargeted federal funds rates or the prime rate throughout 2009.  The increase in loan yields throughout 2009and into 2010 is a result of favorable repricing on matured loans, primarily asa result of the implementation of a minimum rate, or floor, on variable rateloans.   Similarly, the decline in thecost of funds is a result of lower deposit costs that are primarilyattributable to lower costs on renewed and new time deposits throughout 2009and into 2010.

 

The $3.9million unfavorable volume variance is mostly attributable to a $26.4 milliondecrease in average total earning assets for the first quarter 2010 as comparedto the same period in 2009.  The averagebalance of loans decreased from the same period in the prior year by $361.1million, primarily as a result of management’s efforts to reduce overall riskin the loan portfolio. In the first quarter 2010, the Company had approximately$190.3 million in earnings assets earning 25 basis points on an overnightbasis, compared to just $5.2 million in average earning assets earning 27 basispoints on an overnight basis in the same period in 2009.   Net interest margin would have been approximately35 basis points higher in the first quarter 2010 without the $190.3 million inlow-yielding overnight assets. Management continues to explore alternatives todeploy these low-yielding overnight assets in order to improve overall netinterest margin.  In addition to modestanticipated loan growth and purchases of investment 

 

33

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securities, it is expected that we will notrenew between $90 million and $125 million of time deposits throughout theremainder of 2010.

 

The Companybelieves that it remains slightly asset sensitive at the end of the firstquarter 2010 over the long term in a rising rate environment, and therefore,expects that as interest rates rise, net interest income will also increase.

 

On a linkedquarter basis, net interest margin increased for the second consecutivequarter.  Overall net interest marginincreased to 3.50% in the first quarter 2010 from 3.26% for the fourth quarter2009 and 3.14% in the third quarter 2009. Although there were no changes in the federal funds rate or prime ratesduring this time, the increases in net interest margin are a result ofmanagement efforts to address falling interest rates through the utilization ofloan floors and higher minimum pricing on renewed and new loans and to lower depositcosts.  Partially offsetting theseefforts was a significant increase to the Company’s short-term liquidityposition starting in the third quarter 2009. Excluding these low-yielding cash equivalents, the Company’s netinterest margin would have been 17 basis points higher in the third quarter2009, 29 basis points higher in the fourth quarter 2009 and 35 basis pointshigher in the first quarter 2010.

 

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The following tablepresents, for the periods indicated, average assets, liabilities andstockholders’ equity, as well as the net interest income from averageinterest-earning assets and the resultant annualized yields and costs expressedin percentages.

 

**Table 3**

 
| ** **                                           | ** ** | **Quarter Ended March 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| ** **                                           | ** ** | **Average  Balance**             | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**       | ** ** |
| **ASSETS:**                                          | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest-earning assets:**                         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross loans, net of unearned fees(1)(2)(3)           |       | $                                | 1,492,630  |   | $ | 20,784 |   | 5.65 | % | $ | 1,808,727 |   | $ | 23,076 |   | 5.17 | % |
| Investment securities (1)                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                              |       | 168,348                          |       | 1,516 |   | 3.65 | % | 48,944 |   | 726 |   | 6.02 | % |
| Tax-exempt                                           |       | 60,055                           |       | 720 |   | 4.86 | % | 63,813 |   | 767 |   | 4.88 | % |
| Bank Stocks(4)                                       |       | 17,115                           |       | 185 |   | 4.38 | % | 28,274 |   | 288 |   | 4.13 | % |
| Other earning assets                                 |       | 190,302                          |       | 116 |   | 0.25 | % | 5,175 |   | 3 |   | 0.27 | % |
| Total interest-earning assets                        |       | 1,928,450                        |       | 23,321 |   | 4.90 | % | 1,954,933 |   | 24,860 |   | 5.16 | % |
| **Non-earning assets:**                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                              |       | 25,545                           |       |   |   |   |   | 29,947 |   |   |   |   |   |
| Other assets                                         |       | 112,935                          |       |   |   |   |   | 80,800 |   |   |   |   |   |
|                                                 |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **Total assets**                                     |       | $                                | 2,066,930  |   |   |   |   |   | $ | 2,065,680 |   |   |   |   |   |
|                                                 |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**       |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand                              |       | $                                | 164,731    |   | $ | 79 |   | 0.19 | % | $ | 140,136 |   | $ | 88 |   | 0.25 | % |
| Money market                                         |       | 335,577                          |       | 726 |   | 0.88 | % | 297,386 |   | 630 |   | 0.86 | % |
| Savings                                              |       | 72,914                           |       | 45 |   | 0.25 | % | 70,120 |   | 55 |   | 0.32 | % |
| Time certificates of deposit                         |       | 708,897                          |       | 3,863 |   | 2.21 | % | 719,600 |   | 6,352 |   | 3.58 | % |
| Total interest-bearing deposits                      |       | 1,282,119                        |       | 4,713 |   | 1.49 | % | 1,227,242 |   | 7,125 |   | 2.35 | % |
| Borrowings:                                          |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase agreements                                |       | 19,239                           |       | 43 |   | 0.90 | % | 17,007 |   | 37 |   | 0.89 | % |
| Federal funds purchased(5)                           |       | 51                               |       | 0 |   | 0.77 | % | 285 |   | 1 |   | 0.87 | % |
| Subordinated debentures                              |       | 41,239                           |       | 632 |   | 6.21 | % | 41,239 |   | 658 |   | 6.47 | % |
| Borrowings                                           |       | 164,327                          |       | 1,301 |   | 3.21 | % | 171,848 |   | 1,321 |   | 3.12 | % |
| Total interest-bearing liabilities                   |       | 1,506,975                        |       | 6,689 |   | 1.80 | % | 1,457,621 |   | 9,142 |   | 2.54 | % |
| Noninterest bearing liabilities:                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                      |       | 352,937                          |       |   |   |   |   | 432,080 |   |   |   |   |   |
| Other liabilities                                    |       | 13,105                           |       |   |   |   |   | 12,122 |   |   |   |   |   |
| Total liabilities                                    |       | 1,873,017                        |       |   |   |   |   | 1,901,823 |   |   |   |   |   |
| Stockholders’ Equity                            |       | 193,913                          |       |   |   |   |   | 163,857 |   |   |   |   |   |
| **Total liabilities and stockholders’  equity** |       | $                                | 2,066,930  |   |   |   |   |   | $ | 2,065,680 |   |   |   |   |   |
|                                                 |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                  |       |                             |       | $ | 16,632 |   |   |   |   |   | $ | 15,718 |   |   |   |
| Net interest margin                                  |       |                             |       |   |   | 3.50 | % |   |   |   |   | 3.26 | % |

----

(1) Yields on loans andsecurities have not been adjusted to a tax-equivalent basis.  Net interest margin on a fully tax-equivalentbasis would have been 3.58% and 3.34% for the three months ended March 31,2010 and March 31, 2009, respectively. The tax-equivalent basis was computed by calculating the deemed intereston municipal bonds and tax-exempt loans that would have been earned on a fullytaxable basis to yield the same after-tax income, net of the interest expensedisallowance under Internal Revenue Code Sections 265 and 291, using a combinedfederal and state marginal tax rate of 38%.

 

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

 

(3) Net loan fees of $0.5million and $0.8 million for the three months ended March 31, 2010 and2009, respectively, are included in

the yield computation.

 

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

 

(5) The interest expenserelated to federal funds purchased for the first quarter 2010 rounded to zero.

 

35

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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 is provided for each category ofinterest-earning assets and interest-bearing liabilities with respect to (i) changesattributable to changes in volume (i.e., changes in average balances multipliedby the prior-period average rate) and (ii) changes attributable to rate(i.e., changes in average rate multiplied by prior-period average balances).  For purposes of this table, changesattributable to both rate and volume, which cannot be segregated, have beenallocated proportionately to the change due to volume and the change due torate.

 

**Table 4**

 
|                              |   | **Three Months Ended March 31, 2010 Compared to  Three Months Ended March 31, 2009** |   |
|-----------------------------------|--------|------------------------------------------------------------------------------------------------|--------|
|                              |   | **Net Change**                                                                                 |   | **Rate** |   | **Volume** |   |
|                              |   | **(In thousands)**                                                                             |   |
| **Interest income:**              |   |                                                                                           |   |   |   |   |   |
| Gross Loans, net of unearned fees |   | $                                                                                              | (2,292 | ) | $ | 2,514 |   | $ | (4,806 | ) |
| Investment Securities             |   |                                                                                           |   |   |   |   |   |
| Taxable                           |   | 790                                                                                            |   | (152 | ) | 942 |   |
| Tax-exempt                        |   | (47                                                                                            | )      | (2 | ) | (45 | ) |
| Bank Stocks                       |   | (103                                                                                           | )      | 19 |   | (122 | ) |
| Other earning assets              |   | 113                                                                                            |   | — |   | 113 |   |
| Total interest income             |   | (1,539                                                                                         | )      | 2,379 |   | (3,918 | ) |
|                              |   |                                                                                           |   |   |   |   |   |
| **Interest expense:**             |   |                                                                                           |   |   |   |   |   |
| Deposits:                         |   |                                                                                           |   |   |   |   |   |
| Interest-bearing demand           |   | (9                                                                                             | )      | (35 | ) | 26 |   |
| Money market                      |   | 96                                                                                             |   | 14 |   | 82 |   |
| Savings                           |   | (10                                                                                            | )      | (12 | ) | 2 |   |
| Time certificates of deposit      |   | (2,489                                                                                         | )      | (2,396 | ) | (93 | ) |
| Repurchase agreements             |   | 6                                                                                              |   | 1 |   | 5 |   |
| Federal funds purchased           |   | (1                                                                                             | )      | (1 | ) | — |   |
| Subordinated debentures           |   | (26                                                                                            | )      | (26 | ) | — |   |
| Borrowings                        |   | (20                                                                                            | )      | 44 |   | (64 | ) |
| Total interest expense            |   | (2,453                                                                                         | )      | (2,411 | ) | (42 | ) |
| **Net interest income**           |   | $                                                                                              | 914    |   | $ | 4,790 |   | $ | (3,876 | ) |

 

**Provisionfor Loan Losses**

 

The provisionfor loan losses represents a charge against earnings.  The provision is the amount required tomaintain the allowance for loan losses at a level that, in our judgment, isadequate to absorb probable incurred loan losses in the loan portfolio.  The provision for loan losses is based on ourallowance methodology and reflects our judgments about the adequacy of theallowance for loan losses.  Indetermining the amount of the provision, we consider certain quantitative andqualitative factors, including our historical loan loss experience, the volumeand type of lending we conduct, the results of our credit review process, theamounts and severity of classified, criticized and nonperforming assets,regulatory policies, general economic conditions, underlying collateral valuesand other factors regarding collectability and impairment.  The amount of expected loss on our loanportfolio is influenced by the collateral value associated with our loans.  Loans with greater collateral value lessenour exposure to loan loss provision.

 

In the first quarter 2010,the Company recorded a provision for loan losses of $4.0 million, compared to$2.5 million in the first quarter 2009 and $10.0 million in the fourth quarter2009.  Of the $4.0 million of provisionfor loan losses in the first quarter 2010, approximately $8.1 million wasrelated to a change in the specific component of the allowance for loan losses,partially offset by a $4.1 million decrease in the general component of theallowance for loan losses.  The specificcomponent of the allowance for loan losses related to charge-offs on impairedloans coupled with a higher allocation for impaired loans.  The decrease in the general component of theallowance for loan losses is primarily due to continued declines in the overalllevels of classified, special mention and watch list loans, as well as a decreasein the balance of loans that are allocated a general component of the allowancefor loan losses.

 

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The Companydetermined that the provision for loan losses made during the first quarter2010 was sufficient to maintain our allowance for loan losses at a level whichreflects the probable incurred losses inherent in the loan portfolio as of March 31,2010.

 

Net charge-offs in the first quarter 2010 were$4.0 million, as compared to $9.9 million for the same quarter in 2009, and $7.1million in the fourth quarter 2009.

 

For a discussion of impaired loans andassociated collateral values, see “Balance Sheet Analysis—Nonperforming Assets”below.

 

For further discussion of the methodology and factorsimpacting management’s estimate of the allowance for loan losses, see “BalanceSheet Analysis— Allowance for Loan Losses” below.

 

**NoninterestIncome**

 

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

 

**Table 5**

 
| ** **                        | ** ** | **Quarter Ended**        | ** ** |
|-----------------------------------|------------|--------------------------|------------|
| ** **                        | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** |
| ** **                        | ** ** | **(In thousands)**       | ** ** |
| Noninterest income:               |       |                     |       |   |   |   |   |   |   |   |   |
| Customer service and other fees   |       | $                        | 2,214      |   | $ | 2,206 |   | $ | 2,281 |   | $ | 2,354 |   | $ | 2,679 |   |
| Gain (loss) on sale of securities |       | 14                       |       | (1 | ) | (1 | ) | — |   | — |   |
| Other                             |       | 194                      |       | 127 |   | 242 |   | 277 |   | 215 |   |
| Total noninterest income          |       | $                        | 2,422      |   | $ | 2,332 |   | $ | 2,522 |   | $ | 2,631 |   | $ | 2,894 |   |

 

Noninterest income for the first quarter 2010remained relatively flat as compared to the fourth quarter 2009, and declinedby approximately $0.5 million from the first quarter 2009.

 

The decline in noninterest income in the firstquarter 2010 as compared to the same quarter in 2009 is mostly due to customerservice and other fees, which declined primarily as a result of a $0.2 milliondecrease in analysis account fees due to lower activity, as well as a net $0.3million decline in all other fee income.

 

**NoninterestExpense**

 

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

 

**Table 6**

 
| ** **                        | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                        | ** ** | **(In thousands)**       | ** ** |
| Noninterest expense:              |       |                     |       |                        |       |                         |       |                    |       |                     |       |
| Salaries and employee benefits    |       | $                        | 6,563      |                        | $          | 6,560                        |       | $                       | 6,536      |                     | $          | 6,712 |   | $ | 6,739 |   |
| Occupancy expense                 |       | 1,890                    |       | 1,854                       |       | 1,908                        |       | 1,926                   |       | 1,921                    |       |
| Furniture and equipment           |       | 976                      |       | 1,060                       |       | 1,103                        |       | 1,147                   |       | 1,131                    |       |
| Amortization of intangible assets |       | 1,300                    |       | 1,556                       |       | 1,559                        |       | 1,581                   |       | 1,582                    |       |
| Other real estate owned           |       | 2,749                    |       | 3,281                       |       | 1,654                        |       | 915                     |       | 48                       |       |
| Insurance and assessment          |       | 1,812                    |       | 1,612                       |       | 1,688                        |       | 2,195                   |       | 1,041                    |       |
| Professional fees                 |       | 877                      |       | 963                         |       | 516                          |       | 896                     |       | 849                      |       |
| Other general and administrative  |       | 1,959                    |       | 2,860                       |       | 2,517                        |       | 2,346                   |       | 2,149                    |       |
| Total noninterest expense         |       | $                        | 18,126     |                        | $          | 19,746                       |       | $                       | 17,481     |                     | $          | 17,718 |   | $ | 15,460 |   |

 

Noninterest expense increased by $2.7 million, or 17.2%, to $18.1million for the first quarter 2010, as compared to the first quarter 2009, anddecreased by $1.6 million from the fourth quarter 2009.

 

The $2.7 million increase in noninterest expense inthe first quarter 2010 as compared to the same period in 2009 is mostly due toa $2.7 million increase in other real estate owned expense and a $0.8 millionincrease in 

 

37

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insuranceand assessments.  These increases werepartially offset by a $0.2 million decrease in salaries and employee benefits,a combined $0.2 million decrease in occupancy and furniture &equipment expense, a $0.3 million decrease in amortization of intangible assetsand a $0.2 million decrease in other general and administrative expense.  The $2.7 million increase in other realestate owned expense in the first quarter 2010 as compared to the same periodin 2009 is due to write-downs on other real estate owned properties resultingfrom valuation adjustments and sales.  The$0.8 million increase in insurance and assessments is mostly due to higher FDICinsurance premiums in 2010 as compared to 2009.

 

The $1.6 million decline in noninterest expense inthe first quarter 2010 as compared to the fourth quarter 2009 is due mostly toa $0.9 million decline in other general and administrative expense, a $0.5million decline in other real estate owned expense and a $0.3 million declinein amortization of intangible assets. The decrease in other general and administrative expenses is due toseveral decreases in miscellaneous other expenses.  The decline in other real estate ownedexpense is due to a decline in write-downs on other real estate ownedproperties resulting from valuation adjustments and sales.  The decrease in intangible asset amortizationis due to accelerated amortization on our core deposit intangible assets.

 

**IncomeTaxes**

 

Theeffective tax benefit was 39.9% for the three months ending March 31, 2010as compared to an effective tax rate of 32.6% for the same period in 2009.  The primary difference between the expectedbenefit and the effective tax benefit for the three months ended March 31,2010 is tax-exempt income.

 

Income tax expense is thetotal of the current year income tax due or refundable and the change indeferred tax assets and liabilities.  Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and operatingloss and tax credit carryforwards.  Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled.  Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date.  Deferred tax assets are reduced by avaluation allowance when, in the opinion of management, it is more likely thannot that some portion, or all, of the deferred tax asset will not be realized.  In assessing the realization of deferred taxassets, management evaluates both positive and negative evidence, including theexistence of any cumulative losses in the current year and the prior two years,the amount of taxes paid in available carry-back years, the forecasts of futureincome, applicable tax planning strategies, and assessments of current andfuture economic and business conditions. This analysis is updated quarterly and adjusted as necessary.  At the end of the first quarter 2010, basedon the Company’s ability to carryback up to $9.4 million of potential taxlosses generated in future years to prior years and various tax planningstrategies, including sale leaseback of certain locations, the Company hasdetermined that a valuation allowance for deferred tax assets is not required.

 

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

 

**BALANCE SHEET ANALYSIS**

 

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

 

**Table 7**

 
| ** **              | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** |
|-------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **              | ** ** | **(In thousands)**       | ** ** |
| Cash and due from banks |       | $                        | 222,723    |                        | $          | 234,483                      |       | $                       | 148,194    |                     | $          | 47,096 |   | $ | 35,982 |   |
| Total investments       |       | 252,393                  |       | 248,236                     |       | 209,297                      |       | 124,952                 |       | 139,387                  |       |
| Total loans             |       | 1,435,071                |       | 1,519,608                   |       | 1,587,265                    |       | 1,651,572               |       | 1,757,103                |       |
| Total assets            |       | 2,030,331                |       | 2,127,580                   |       | 2,057,378                    |       | 1,944,867               |       | 2,036,395                |       |
| Earning assets          |       | 1,898,553                |       | 1,985,059                   |       | 1,921,726                    |       | 1,800,472               |       | 1,902,670                |       |
| Deposits                |       | 1,602,884                |       | 1,693,290                   |       | 1,632,436                    |       | 1,560,730               |       | 1,639,797                |       |
|                         |            |                          |            |                             |            |                              |            |                         |            |                          |            |  |  |  |  |  |

 

38

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At March 31, 2010, the Company had total assetsof $2.0 billion, or $97.2 million less than the $2.1 billion of total assets atDecember 31, 2009.  The decline inassets from December 31, 2009 is mostly due to an $84.5 million decline inloans, net of unearned discount.  Most ofthis decrease was in commercial loans.  Thedecline in commercial loans is partly attributable to planned efforts by thebank to reduce lower yielding syndicated and participated loans.

 

Although total assets remained relatively flat at March 31,2010 as compared to March 31, 2009, there was a change in the mix ofassets as total loans declined by $322 million, while investment securitiesincreased by $113 million and cash and cash equivalents increased by $187million.  The increase in cash and cashequivalents is primarily a result of management’s decision to improve the bank’soverall liquidity position.  Managementcontinues to evaluate alternatives to utilize this additional low-yieldingliquidity in the existing interest-rate environment in order to improve ourfuture net interest margin.

 

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

 

**Table 8**

 
| ** **                                     | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                     | ** ** | **(In thousands)**       | ** ** |
| Real estate - Residential and Commercial       |       | $                        | 748,135    |                        | $          | 760,719                      |       | $                       | 715,005    |                     | $          | 682,923 |   | $ | 658,982 |   |
| Real estate - Construction                     |       | 111,231                  |       | 105,612                     |       | 163,074                      |       | 190,197                 |       | 250,665                  |       |
| Equity lines of credit                         |       | 53,014                   |       | 54,852                      |       | 56,591                       |       | 55,812                  |       | 52,679                   |       |
| Commercial                                     |       | 448,908                  |       | 521,016                     |       | 573,562                      |       | 639,462                 |       | 714,218                  |       |
| Agricultural                                   |       | 17,203                   |       | 18,429                      |       | 19,428                       |       | 22,764                  |       | 22,686                   |       |
| Consumer                                       |       | 34,986                   |       | 36,175                      |       | 38,704                       |       | 37,878                  |       | 38,220                   |       |
| Leases receivable and other                    |       | 24,022                   |       | 25,366                      |       | 23,671                       |       | 25,506                  |       | 22,828                   |       |
| Total gross loans                              |       | 1,437,499                |       | 1,522,169                   |       | 1,590,035                    |       | 1,654,542               |       | 1,760,278                |       |
| Less: allowance for loan losses                |       | (52,015                  | )          | (51,991                     | )          | (49,038                      | )          | (43,041                 | )          | (37,598                  | )          |
| Unearned discount                              |       | (2,428                   | )          | (2,561                      | )          | (2,770                       | )          | (2,970                  | )          | (3,175                   | )          |
| Loans, net of unearned discount                |       | $                        | 1,383,056  |                        | $          | 1,467,617                    |       | $                       | 1,538,227  |                     | $          | 1,608,531 |   | $ | 1,719,505 |   |
|                                           |       |                     |       |                        |       |                         |       |                    |       |                     |       |
| Loans held for sale at lower of cost or market |       | $                        | 11,506     |                        | $          | 9,862                        |       | $                       | 5,500      |                     | $          | 5,250 |   | $ | 5,175 |   |

 

There were $912.4 million ofreal estate loans at March 31, 2010, compared to $921.2 million at December 31,2009 and $962.3 million at March 31, 2009.

 

Under joint guidancefrom the FDIC, the Federal Reserve and the Office of the Comptroller of theCurrency on sound risk management practices for financial institutions withconcentrations in commercial real estate lending, a financial institution isactively involved in commercial real estate lending if total reported loanssecured by multifamily and non-farm residential properties, loans forconstruction, land development and other land and loans otherwise sensitive tothe general commercial real estate market, including loans to commercial realestate related entities, represent 300% or more of total capital.  For our Bank, the total reported commercialreal estate loans to total capital is 327% at March 31, 2010, as comparedto 329% at December 31, 2009, and 399% at March 31, 2009.  Loans secured by commercial realestate, as prescribed under the regulatory concentration guidelines, decreasedby $9.4 million, or 1.3%, to $733.2 million at March 31, 2010, as comparedto $742.6 million at December 31, 2009. Management employsheightened risk management practices, including board and management oversightand strategic planning, development of underwriting standards, risk assessmentand monitoring through market analysis and stress testing.  Loans secured by commercial real estateare recorded on the balance sheet as either a commercial real estate loan orcommercial loan depending on the purpose of the loan, not the underlyingcollateral.  The overall decline in loansin 2009 and 2010 is partially attributable to management’s efforts to mitigateoverall risk within the loan portfolio through the reduction of real estateloans and loans secured by real estate.  Further,management has worked to reduce the volume of lower yielding syndicated andparticipated loans.

 

39

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The $139.4 million decrease in construction loans, andthe $89.2 million increase in residential and commercial real estate loans at March 31,2010 as compared to March 31, 2009 is partially due to reclassifying $124.0million of construction loans to residential and commercial real estate loansbecause of the completion of the underlying building projects and thecommencement of amortization on these loans. A portion of the remainder of the decrease in construction loans was aresult of payoffs on existing loans, as well as moving loans to other realestate owned during 2009 and 2010.

 

Withrespect to group concentrations, most of the Company’s business activity iswith customers in the state of Colorado. At March 31, 2010, the Company did not have any significantconcentrations in any particular industry.

 

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

 

**NonperformingAssets**

 

Credit risk related to nonperformingassets arises as a result of lending activities.  To manage this risk, we employ frequentmonitoring procedures and take prompt corrective action when necessary.  We employ a risk rating system thatidentifies the potential risk associated with loans in our loan portfolio.  This monitoring and rating system is designedto help management determine current and potential problems so that correctiveactions can be taken promptly.

 

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

 

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The following tablesummarizes the loans for which the accrual of interest has been discontinued,loans with payments more than 90 days past due and still accruing interest andother real estate owned.  For reportingpurposes, other real estate owned consists of all real estate, other than bankpremises, actually owned or controlled by us, including real estate acquiredthrough foreclosure.

 

**Table 9**

 
| ** **                                                                            | ** ** | **Quarter Ended**          | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                            | ** ** | **March 31,  2010**   | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                  |       |                       |       |   |   |   |   |   |   |   |   |
| Nonaccrual loans and leases, not restructured                                         |       | $                          | 70,500     |   | $ | 59,584 |   | $ | 81,035 |   | $ | 52,483 |   | $ | 57,299 |   |
| Other impaired loans                                                                  |       | 558                        |       | 123 |   | 150 |   | 2,671 |   | 911 |   |
| Total nonperforming loans                                                             |       | $                          | 71,058     |   | $ | 59,707 |   | $ | 81,185 |   | $ | 55,154 |   | $ | 58,210 |   |
| Other real estate owned and foreclosed assets                                         |       | 30,918                     |       | 37,192 |   | 32,246 |   | 34,746 |   | 14,524 |   |
| Total nonperforming assets                                                            |       | $                          | 101,976    |   | $ | 96,899 |   | $ | 113,431 |   | $ | 89,900 |   | $ | 72,734 |   |
|                                                                                  |       |                       |       |   |   |   |   |   |   |   |   |
| Impaired loans                                                                        |       | $                          | 71,058     |   | $ | 59,707 |   | $ | 81,185 |   | $ | 55,154 |   | $ | 58,210 |   |
| Allocated allowance for loan losses                                                   |       | (10,802                    | )          | (6,603 | ) | (7,515 | ) | (7,291 | ) | (6,342 | ) |
| Net investment in impaired loans                                                      |       | $                          | 60,256     |   | $ | 53,104 |   | $ | 73,670 |   | $ | 47,863 |   | $ | 51,868 |   |
| Accruing loans past due 90 days or more                                               |       | $                          | 558        |   | $ | 123 |   | $ | 9,140 |   | $ | 2,671 |   | $ | 911 |   |
| Loans past due 30-89 days                                                             |       | $                          | 21,956     |   | $ | 21,709 |   | $ | 52,443 |   | $ | 39,836 |   | $ | 31,957 |   |
| Loans charged-off                                                                     |       | $                          | 4,271      |   | $ | 7,618 |   | $ | 14,618 |   | $ | 13,509 |   | $ | 10,262 |   |
| Recoveries                                                                            |       | (295                       | )          | (566 | ) | (615 | ) | (347 | ) | (367 | ) |
| Net charge-offs                                                                       |       | $                          | 3,976      |   | $ | 7,052 |   | $ | 14,003 |   | $ | 13,162 |   | $ | 9,895 |   |
| Provision for loan losses                                                             |       | $                          | 4,000      |   | $ | 10,005 |   | $ | 20,000 |   | $ | 18,605 |   | $ | 2,505 |   |
| Allowance for loan losses                                                             |       | $                          | 52,015     |   | $ | 51,991 |   | $ | 49,038 |   | $ | 43,041 |   | $ | 37,598 |   |
|                                                                                  |       |                       |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to loans, net of unearned  discount                         |       | 3.62                       | %          | 3.42 | % | 3.09 | % | 2.61 | % | 2.14 | % |
| Allowance for loan losses to nonaccrual loans                                         |       | 73.78                      | %          | 87.26 | % | 60.51 | % | 82.01 | % | 65.62 | % |
| Allowance for loan losses to nonperforming assets                                     |       | 51.01                      | %          | 53.65 | % | 43.23 | % | 47.88 | % | 51.69 | % |
| Allowance for loan losses to nonperforming loans                                      |       | 73.20                      | %          | 87.08 | % | 60.40 | % | 78.04 | % | 64.59 | % |
| Nonperforming assets to loans, net of unearned discount,  and other real estate owned |       | 6.96                       | %          | 6.22 | % | 7.00 | % | 5.33 | % | 4.11 | % |
| Annualized net charge-offs to average loans                                           |       | 1.08                       | %          | 1.77 | % | 3.42 | % | 3.05 | % | 2.22 | % |
| Nonaccrual loans to loans, net of unearned discount                                   |       | 4.91                       | %          | 3.92 | % | 5.11 | % | 3.18 | % | 3.26 | % |
| Loans 30-89 days past due to loans, net of unearned  discount                         |       | 1.53                       | %          | 1.43 | % | 3.30 | % | 2.41 | % | 1.82 | % |

 

Nonperforming assets at March 31,2010 increased by $5.1 million from December 31, 2009, primarily as aresult of a $10.9 million increase in nonaccrual loans, partially offset by a$6.3 million decrease in other real estate owned.

 

At March 31, 2010,approximately $39.9 million, or 56%, of all nonperforming loans outstandingwere residential construction, land and land development.  At December 31, 2009, approximately$25.8 million, or 43%, of all nonperforming loans were residentialconstruction, land and land development loans. The increase in nonperforming loans is primarily a result of onesyndicated credit that was downgraded by the lead bank, of which 

 

41

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our share is $19.1 million.  The amount of the allowance for loan lossesallocated to this loan is $1.4 million.  Theunderlying collateral on this syndicated credit is a for-rent multifamilyproject which is essentially leasing to plan; however, the loan was placed onnonaccrual status due to the lead bank’s ongoing negotiations to reach abroader settlement with the borrower on this property and other projects fromthe same borrower in which we do not participate.

 

At March 31, 2010,approximately $16.1 million, or 23%, of all nonperforming loans outstandingwere commercial real estate loans.  At December 31,2009, approximately $12.2 million, or 21%, of all nonperforming loans werecommercial real estate loans.

 

TheCompany has an internal risk rating system of classified loans as pass, watch,special mention, substandard, doubtful and loss.  These internal guidelines are based on thedefinitions in the Uniform Agreement on the Classification of Assets andAppraisal of Securities Held by Banks and Thrifts issued by the Office of theComptroller of the Currency, the Federal Deposit Insurance Corporation, theBoard of Governors of the Federal Reserve System, and the Office of ThriftSupervision.  In particular, loansinternally classified as substandard, doubtful or loss are considered adverselyclassified loans.  During the firstquarter 2010, the amount of loans that the Company has internally considered tobe adversely classified, other than impaired loans as described above, hasdeclined to $72.0 million at March 31, 2010 as compared to $101.0 millionat December 31, 2009 and $103.7 million at March 31, 2009.  Each internal risk classification isjudgmental, but based on both objective and subjective factors/criteria.  The internal risk ratings focus on anevaluation of the borrowers’ ability to meet future debt service andperformance to plan under stress versus only their current condition.  As described below under “Allowance for LoanLosses”, the Company adjusts the general component of its allowance for loanlosses for the trends in the volume and severity of adversely classified loans.

 

Net charge-offs in thefirst quarter 2010 were $4.0 million, as compared to $7.1 million in the fourthquarter 2009, and $9.9 million in the first quarter 2009.  Impaired loans as of March 31, 2010totaled $71.1 million, as compared to $59.7 million at December 31, 2009,and $58.2 million at March 31, 2009.

 

Otherreal estate owned is $30.9 million at March 31, 2010, compared to $37.2million at December 31, 2009.  Thebalance at March 31, 2010 is comprised of approximately 25 separateproperties of which $13.2 million is land; $16.9 million is commercial realestate including multi-family units; and $0.8 million is residential realestate.  The balance at December 31,2009 is comprised of approximately 27 separate properties of which $15.4million is land; $20.5 million is commercial real estate, includingmulti-family units; and $1.3 million is residential real estate.

 

At March 31,2010, no additional funds are committed to be advanced in connection withimpaired loans.

 

At March 31,2010, there were fourteen construction loans to eleven borrowers with aremaining interest reserve of approximately $2.6 million.  Additionally, at March 31, 2010, theamount of troubled debt restructurings is immaterial.

 

**Allowancefor Loan Losses**

 

The allowance for loanlosses is maintained at a level that, in our judgment, is adequate to absorbprobable incurred losses in the loan portfolio. The amount of the allowance is based on management’s evaluation of thecollectibility of the loan portfolio, historical loss experience, and othersignificant factors affecting loan portfolio collectibility, including thevolume and severity of delinquent and classified loans, trends in volume andterms of loans, levels and trends in credit concentrations, effects of changesin underwriting standards, policies, procedures and practices, national andlocal economic trends and conditions, changes in capabilities and experience oflending management and staff, and other external factors, including industryconditions, competition and regulatory requirements.

 

The ratio ofallowance for loan losses to total loans was 3.62% at March 31, 2010, as compared to 3.42% at December 31, 2009 and 2.14% at March 31,2009.

 

Our methodology forevaluating the adequacy of the allowance for loan losses has two basicelements: first, the identification of impaired loans and the measurement of anestimated loss for each individual loan is identified; second, estimating anallowance for probable incurred losses on other loans.  The specific allowance for impaired loans andthe remaining allowance are combined to determine the required allowance forloan losses.

 

42

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The specific allowance forimpaired loans and the allowance calculated for probable incurred losses onother loans are combined to determine the required allowance for loanlosses.  The amount calculated iscompared to the actual allowance for loan losses balance at each quarter endand any shortfall is charged to income as an additional provision for loanlosses.  Forfurther discussion of the provision for loan losses, see “Provision for LoanLosses” above.

 

In estimating the allowancefor probable incurred losses on other loans, we group the balance of the loanportfolio into segments that have common characteristics, such as loan type orrisk rating.  For each nonspecificallowance portfolio segment, we apply loss factors to calculate the requiredallowance based upon actual historical loss rates adjusted for qualitativefactors affecting loan portfolio collectibility as described above.  Management also looks at risk ratings ofloans and computes a factor for the volume and severity of classified loansusing assigned risk ratings under regulatory definitions of “watch”, “substandard”‘,“doubtful” and “loss”.  Loans graded aseither doubtful or loss are treated as impaired and are included as part of thespecific reserve computed above.  Loanssegregated by risk ratting categories watch or substandard are evaluated fortrends in volume and severity.

 

The provisionfor loan losses recorded in 2010 was required in order for the Company tomaintain the allowance for loan losses (3.62% of total loans as of March 31,2010) at a level necessary for the probable incurred losses inherent in theloan portfolio as of March 31, 2010. For furtherdiscussion of the provision for loan losses, see “Provision for Loan Losses”above.

 

Approximately$10.8 million, or 20.8%, of the $52.0 million allowance for loan losses at March 31,2010, relates to loans with specific allowance allocations.  This compares to a specific reserve of $6.6million, or 12.7%, of the total allowance for loan losses at December 31,2009.  The increase in the percent of theportfolio from specific reserves is attributable to lower collateral valuesassociated with three land and land development loans obtained from appraisalsreceived as part of the Company’s ongoing credit management process.  The general reserve as a percent of overallloans, net of unearned discount, was 2.87% at March 31, 2010, as comparedto 2.99% at December 31, 2009.  Thedecrease in the general reserve as a percent of loans, net of unearneddiscount, is due to continued declines in internally classified loans asdiscussed above under Nonperforming Assets.

 

43

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

 

**Table 10**

 
| ** **                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                               | ** ** | **(In thousands)**                    | ** ** |
| Balance, beginning of period             |       | $                                     | 51,991     |   | $ | 44,988 |   |
| Loan charge-offs:                        |       |                                  |       |   |   |
| Real estate - Residential and Commercial |       | 578                                   |       | 606 |   |
| Real estate - Construction               |       | 2,668                                 |       | 9,252 |   |
| Commercial                               |       | 878                                   |       | 258 |   |
| Consumer                                 |       | 98                                    |       | 98 |   |
| Lease receivable and other               |       | 49                                    |       | 48 |   |
| Total loan charge-offs                   |       | 4,271                                 |       | 10,262 |   |
| Recoveries:                              |       |                                  |       |   |   |
| Real estate - Residential and Commercial |       | 60                                    |       | 176 |   |
| Real estate - Construction               |       | 64                                    |       | 47 |   |
| Commercial                               |       | 144                                   |       | 117 |   |
| Agricultural                             |       | —                                |       | 2 |   |
| Consumer                                 |       | 22                                    |       | 25 |   |
| Lease receivable and other               |       | 5                                     |       | — |   |
| Total loan recoveries                    |       | 295                                   |       | 367 |   |
| Net loan charge-offs                     |       | 3,976                                 |       | 9,895 |   |
| Provision for loan losses                |       | 4,000                                 |       | 2,505 |   |
| Balance, end of period                   |       | $                                     | 52,015     |   | $ | 37,598 |   |

 

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

 

**Securities**

 

We manage our investmentportfolio principally to provide liquidity, balance our overall interest raterisk and to provide collateral for public deposits and customer repurchaseagreements.

 

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

 

**Table 11**

** **
| ** **                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                                   | ** ** | **2010**           | ** ** | **2009**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                                                   | ** ** | **(In thousands)** | ** ** |
| Securities available-for-sale:                               |       |               |       |                  |       |           |       |       |       |
| U.S. Government agencies and government- sponsored  entities |       | $                  | 20,072     |                  | $          | 17,129         |       | $          | 2,943      |   | 17.2 | % |
| State and municipal                                          |       | 58,184             |       | 60,827                |       | (2,643         | )          | (4.3       | )%         |
| Mortgage backed securities – agency/residential         |       | 129,476            |       | 127,340               |       | 2,136          |       | 1.7        | %          |
| Mortgage backed securities – private/residential        |       | 9,879              |       | 13,959                |       | (4,080         | )          | (29.2      | )%         |
| Marketable equity                                            |       | 1,519              |       | 1,519                 |       | —         |       | —     |       |
| Other securities                                             |       | 360                |       | 360                   |       | —         |       | —     |       |
| Total securities available-for-sale                          |       | $                  | 219,490    |                  | $          | 221,134        |       | $          | (1,644     | ) | (0.7 | )% |
|                                                         |       |               |       |                  |       |           |       |       |       |
| Securities held-to-maturity:                                 |       |               |       |                  |       |           |       |       |       |
| Mortgage backed securities – agency/residential         |       | $                  | 15,760     |                  | $          | 9,942          |       | $          | 5,818      |   | 58.5 | % |

 

The Companydoes not own any collateralized debt obligations (CDOs) or securities backed bysub-prime mortgage loans.

 

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At March 31, 2010, there were threeprivate-label mortgage backed securities with a carrying value of approximately$9.9 million.  Each of the private-labelmortgage backed securities is a senior tranche and was AAA rated as of March 31,2010.  All other mortgage-backedsecurities are sponsored by either U.S. government agencies orgovernment-sponsored entities.

 

The carrying value of our available-for-saleinvestment securities at March 31, 2010 was $219.5 million, compared tothe December 31, 2009 carrying value of $221.1 million.  The net change represented a sale of aprivate-label mortgage backed security during the quarter, with purchases ofadditional U.S. Government-sponsored entity bonds.

 

Fair values for municipal securities 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.  Characteristics utilized by matrix pricinginclude insurer, credit support, state of issuance, and bond rating.  These factors are used to incorporateadditional spreads and municipal curves. A separate curve structure is used for bank-qualified municipal bondsversus general market municipals. For the bank-qualified municipal bonds,active quotes are obtained when available.

 

Fair values for U.S. Treasury securities, U.S.government agencies and government-sponsored entities and mortgage backedsecurities are determined using a combination of daily closing prices,evaluations, income data, security master (descriptive) data, and terms andconditions data.  Additional data used tocompute the fair value of U.S. mortgage-backed pass-through issues (FHLMC,FNMA, GNMA, and SBA pools) includes daily composite seasoned, pool-specific,and generic coupon evaluations, and factors and descriptive data for individualpass-through pools.   Additional dataused to compute the fair value of U.S. collateralized mortgage obligationsinclude daily evaluations and descriptive data.   Additional data used to compute the fairvalue of mortgage backed securities — private/residential include independentbond ratings.

 

One municipal bondrelated to a hospital was priced using significant unobservable inputs.  Management reviewed the financials of thehospital, had discussions with hospital management and reviewed the underlyingcollateral for the municipal bond to determine an appropriate benchmarkrisk-adjusted interest rate based on transactions with similar risks.

 

Management concluded that the unrealized lossposition on the Company’s securities was a result of the level of marketinterest rates and not a result of the underlying issuers’ ability torepay.   In addition, we do not have theintention to sell the securities with an unrealized loss and do not believethat it is more likely than not that we will be required to sell the securitiesprior to a recovery in their value.  Accordingly, we have not recognized any other-than-temporary impairmentin our consolidated statements of income.

 

At March 31, 2010and December 31, 2009, we held $17.1 million and $17.2 million,respectively, of other equity securities consisting of bank stocks with nomaturity date, which are not reflected in the above schedule. Bank stocks arecomprised mostly of stock of the Federal Reserve Bank of Kansas City, theFederal Home Loan Bank of Topeka and Bankers’ Bank of the West.  These stocks have restrictions placed ontheir transferability as only members of the entities can own the stock.

 

**Deposits**

 

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

 

**Table 12**

 
| ** **                   | ** ** | **At March 31, 2010** | ** ** | **At December 31, 2009** | ** ** |
|------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                   | ** ** | **Balance**                | ** ** | **% of Total**                | ** ** | **Balance** | ** ** | **% of Total** | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Noninterest bearing deposits |       | $                          | 363,059    |                          | 22.66      | % | $ | 366,103 |   | 21.62 | % |
| Interest bearing demand      |       | 165,315                    |       | 10.31                         | %          | 171,844 |   | 10.15 | % |
| Money market                 |       | 321,603                    |       | 20.06                         | %          | 352,127 |   | 20.80 | % |
| Savings                      |       | 74,537                     |       | 4.65                          | %          | 71,816 |   | 4.24 | % |
| Time                         |       | 678,370                    |       | 42.32                         | %          | 731,400 |   | 43.19 | % |
|                         |       |                       |       |                          |       |   |   |   |   |
| Total deposits               |       | $                          | 1,602,884  |                          | 100.00     | % | $ | 1,693,290 |   | 100.00 | % |

 

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At the end of the first quarter 2010, deposits were $1.6 billion ascompared to $1.7 billion at December 31, 2009, reflecting a decrease of$90.4 million.

 

Excluding time deposits, deposits declined by $37.4 million during thefirst quarter of 2010 primarily as a result of a decrease in our customers’available balances due to seasonality and customer cash flow needs.  Although overall balances declined during thefirst quarter 2010, there was a net increase in the number of transaction andsavings accounts.   Noninterest bearingdeposits comprised approximately 22.7% of total deposits at March 31,2010, as compared to 21.6% at December 31, 2009.  Noninterest bearing deposits help mitigateoverall deposits funding costs, but due to the extremely low rate environment,the impact of noninterest bearing deposits on the overall cost of funds iscurrently less significant than in a higher rate environment.

 

Time deposits declined by $53.0 million during the first quarter of2010.   There was a $23.7 milliondecrease in brokered deposits to $267.5 million, including $36.4 million ofreciprocal deposits with other banks through the Certificate of Deposit AccountRegistry Service (CDARS), during this time frame.  During the second quarter 2010, it isanticipated that approximately $11.6 million of brokered deposits at an averagerate of 4.17% will mature and not be replaced, and in the third quarter 2010,another $53.8 million of brokered deposits at an average rate of 0.92% willmature.  Management intends to utilize aportion of its cash and cash equivalents at March 31, 2010 to replace allor most of the time deposits that are redeemed during the third quarter 2010.

 

**Borrowings and Subordinated Debentures**

 

At March 31,2010, our outstanding borrowings were $164,310,000 as compared to $164,364,000at December 31, 2009.

 

Theborrowings at March 31, 2010 consisted of 16 separate fixed-rate termnotes with the FHLB at our Bank level, with maturities ranging from 8 to 94months.  Approximately $140 million ofthe FHLB term advances at March 31, 2010 have Bermudan conversion optionsto a variable rate.  The initial fixedrate periods range from one to five years and can be prepaid without penalty ator after conversion.  The Bank also had aline of credit with the FHLB at March 31, 2010, but there was no balanceoutstanding on this line of credit as of that date.

 

The totalcommitment, including balances outstanding, for borrowings at the Federal HomeLoan Bank for the term notes and line of credit at March 31, 2010 and December 31,2009 was $264.2 million and $195.3 million, respectively. The interest rate onthe line of credit varies with the federal funds rate, and was 0.20% and 0.18%at March 31, 2010 and December 31, 2009, respectively.  The term notes have fixed interest rates thatrange from 2.52% to 6.22%. The weighted-average rate on the FHLB term notes was 3.17% at March 31,2010.

 

At March 31, 2010, we had a $41,239,000 aggregateprincipal balance of junior subordinated debentures outstanding with a weightedaverage cost of 5.85%.  The subordinateddebentures were issued in four separate series. Each issuance has a maturity ofthirty years from its date of issue. The subordinated debentures were issued totrusts established by us, which in turn issued $40 million of trust preferredsecurities. Generally and with certain limitations, the Company is permitted tocall the debentures subsequent to the first five or ten years, as applicable,after issue if certain conditions are met, or at any time upon the occurrenceand continuation of certain changes in either the tax treatment or the capitaltreatment of the trusts, the debentures or the preferred securities.  The Guaranty Capital Trust III issuance of$10.3 million has a variable rate of LIBOR plus 3.10% and has been callablewithout penalty each quarter since July 7, 2008, and continues to becallable quarterly. The CenBank Trust III issuance of $15.5 million has a variablerate of LIBOR plus 2.65% and has been callable without penalty since April 15,2009, and continues to be callable quarterly.  Management did not call either of these securities on the latest calldate, but will continue to evaluate whether to call these debentures eachquarter.  Under the terms of the WrittenAgreement, regulatory approval would be required prior to calling any trustpreferred issuance.

 

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 first quarter of 2010.  Such a deferral is not an event ofdefault and the interest continues to accrue. Prior to paying any interest on the subordinated debentures, the Companymust obtain prior written approval from the Federal Reserve under the terms ofthe Written Agreement. 

 

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The Company is prohibited frompaying any dividends on its other classes of stock for so long as interest isdeferred, 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 this modificationis not expected to have a material impact on the inclusion of trust preferredsecurities 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.

 

For regulatory purposes, the Companymaintains capital above the minimum core standards.  The Company actively monitors itsregulatory capital ratios to ensure that the Company and the Bank are more thanwell 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.  The Bank is required to maintain similarcapital levels under capital adequacy guidelines.  At March 31, 2010, the Bank’s capitalratios exceed the highest regulatory capital requirement of “well-capitalized”.

 

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

 

**Table 13**

 
| ** **                      | ** ** | **Ratio at  March 31, 2010** | ** ** | **Ratio at**

**December 31, 2009** | ** ** | **Minimum**

**Capital**

**Requirement** | ** ** | **Minimum**

**Requirement**

**for “Well**

**Capitalized”**

**Institution** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
|                            |       |                              |       |                                     |       |                                      | ** ** | ** **                                                                               | ** ** |
| Total Risk-Based Capital Ratio  |       |                              |       |                                     |       |                                      | ** ** | ** **                                                                               | ** ** |
| Consolidated                    |       | 14.28                             | %          | 13.80                                    | %          | 8.00                                      | %          | N/A                                                                                      |       |
| Guaranty Bank and Trust Company |       | 13.40                             | %          | 12.82                                    | %          | 8.00                                      | %          | 10.00                                                                                    | %          |
| Tier 1 Risk-Based Capital Ratio |       |                              |       |                                     |       |                                      |       |                                                                                     |       |
| Consolidated                    |       | 9.64                              | %          | 9.43                                     | %          | 4.00                                      | %          | N/A                                                                                      |       |
| Guaranty Bank and Trust Company |       | 12.12                             | %          | 11.55                                    | %          | 4.00                                      | %          | 6.00                                                                                     | %          |
| Leverage Ratio                  |       |                              |       |                                     |       |                                      |       |                                                                                     |       |
| Consolidated                    |       | 7.94                              | %          | 7.89                                     | %          | 4.00                                      | %          | N/A                                                                                      |       |
| Guaranty Bank and Trust Company |       | 9.90                              | %          | 9.66                                     | %          | 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 the Bank.  This issuance and thecontribution of capital into the bank subsidiary have improved the Company’sand the Bank’s regulatory capital ratios.

 

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In December 2009,the Company filed a universal shelf registration statement on Form S-3with the Securities and Exchange Commission (SEC) to register up to $100 million in securities. The SEC declared theregistration statement effective on February 11, 2010.The Company does not have any current plans to raise additional capital,however, the shelf registration provides us with the ability to raise capital,subject to SEC rules, if  the Board ofDirectors decides to do so.

 

**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 14**

 
| ** **                         | ** ** | **March 31,  2010** | ** ** | **December 31  2009** | ** ** |
|------------------------------------|------------|--------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **(In thousands)**       | ** ** |
| Commitments to extend credit:      |       |                     |       |                            |       |
| Variable                           |       | $                        | 283,390    |                            | $          | 264,616 |   |
| Fixed                              |       | 30,690                   |       | 40,486                          |       |
| Total commitments to extend credit |       | $                        | 314,080    |                            | $          | 305,102 |   |
|                               |       |                     |       |                            |       |
| Standby letters of credit          |       | $                        | 13,204     |                            | $          | 14,917 |   |
| Commercial letters of credit       |       | $                        | 11,000     |                            | $          | 11,000 |   |

 

**Liquidity**

 

The Bank relies on deposits as its principal sourceof funds and, therefore, must be in a position to service depositors’ needs asthey arise. Fluctuations in the balances of a few large depositors may causetemporary increases and decreases in liquidity from time to time. We deal withsuch fluctuations by using existing liquidity sources.

 

The Bank’s primary sources of liquidity are itsliquid assets.  At March 31, 2010,the Company had $222.7 million of cash and cash equivalents, including $199.6million of interest bearing deposits at banks (most of which was held at theFederal Reserve Bank of Kansas City) that could be used for the Bank’simmediate liquidity needs.  Further, theCompany had $22.0 million of investment securities that were overpledged at March 31,2010 and $54.4 million of unpledged securities.

 

The FDIC temporarily increased the individualaccount deposit insurance from $100,000 per account to $250,000 per accountthrough December 31, 2009, which has subsequently been extended through December 31,2013.  The FDIC also implemented aTransaction Account Guarantee (TAG) program, which provides for full FDICcoverage for transaction accounts, regardless of dollar amounts.  The Bank elected to opt-in to this program,thus, our customers receive full coverage for transaction accounts under theprogram.  The TAG program has beenextended by the FDIC through December 31, 2010, with an option to extendit through 2011.  The Bank expects tocontinue to participate in the TAG program for its duration.  As of March 31, 2010, the Bank hadapproximately 259 accounts with approximately $92.5 million of balances inexcess of $250,000 covered under the TAG program.  Concerns regarding the overall bankingindustry or the Company could have an adverse effect on future deposit levels.

 

In order to address the concern 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. The 

 

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individualcustomer’s large deposit is broken into amounts below the $100,000 amount (or$250,000 if the time deposit matures prior to December 31, 2013) and placedwith other banks that are members of the network. The reciprocal member bankissues certificate of deposits in amounts that ensure that the entire depositis eligible for FDIC insurance.   As of March 31,2010, the Company had approximately $36.4 million of deposits in the CDARS®program.  For regulatory purposes, CDARS®is considered a brokered deposit even though reciprocal deposits are generallyfrom customers in the local market.

 

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 loans, discount window borrowings from the Federal Reserve, and ourlines of credit with the Federal Home Loan Bank of Topeka (FHLB) and othercorrespondent banks are employed to meet current and presently anticipatedfunding needs.   In addition to the$199.6 million of interest bearing deposits at banks, the $22.0 million of overpledgedinvestment securities and $54.4 million of unpledged securities at March 31,2010 as discussed above, the Bank had approximately $99.9 million ofavailability on its FHLB line, $35.0 million of availability on its securedfederal funds lines with correspondent banks, and $10.3 million of availabilitywith the Federal Reserve discount window.

 

Under the terms of the Written Agreement, the Bankcannot obtain any new brokered deposits, but can continue to rollover or renewexisting brokered deposits. Additionally, the Bank submitted a written plan to improve the Bank’sliquidity position, including measures to diversify funding sources and reducereliance on brokered deposits.  Since thedate of the examination on which the Written Agreement is based in part, theCompany has diversified its funding sources, primarily through increasing itsprimary funding sources such as additional interest bearing deposits in banksand investment securities. During 2010, approximately $66.5 million of brokereddeposits (excluding CDARS®) are expected to mature, although the Company mayrenew or rollover a portion of those brokered deposits.  As needed for liquidity and balance sheetplanning, the Bank will continue to monitor and update its rates in order torollover and obtain new time deposits from its local markets and/or directlythrough the internet.

 

The holding company relies primarily on cash flowfrom the Bank as a primary source of liquidity. The Bank pays a management feefor its share of expenses paid by the holding company, as well as for servicesprovided by the holding company.  Inaddition, the Bank could pay dividends or make other capital distributions tothe holding company.  The WrittenAgreement prohibits the Bank from paying dividends without the prior writtenapproval of the Federal Reserve and CDB. Accordingly, the Bank’s ability to pay dividends to the holding companyand the holding company’s ability to pay cash dividends on its common orpreferred stock will be restricted until the Written Agreement is terminated.

 

The holding company requires liquidity for thepayment of interest on the subordinated debentures (if approved by ourregulators), for operating expenses, principally salaries and benefits, forrepurchases of our common stock, and, if declared by our board of directors, forthe payment of dividends to our stockholders. The Written Agreement prohibits the Company from paying dividendswithout the prior written approval of the Federal Reserve.  Accordingly, our ability to pay dividends toour stockholders will be restricted until the Written Agreement isterminated.  Under the terms of our trustpreferred financings, we may defer payment of interest on the trust preferredsecurities for a period of up to sixty consecutive months as long as we are incompliance with all covenants of the agreement. On July 31, 2009, we gavenotice that we would defer regularly scheduled interest payments on each of oursubordinated debentures until further notice. In addition, we are currentlyrestricted from making payments of principal or interest on our subordinateddebentures or trust preferred securities under the terms of our WrittenAgreement without the prior approval of the Federal Reserve.

 

On March 31, 2010, a non-bank subsidiary of theholding company purchased two loans held-for-sale from the Bank for $6.2million and a foreclosed asset for $7.5 million.  It is anticipated that each of these assetswill be sold in the second quarter at book value.  After these transactions settled, the holdingcompany held approximately $4.4 million of cash.  Based on cash flow projections for theholding company, we estimate that this cash is sufficient to meet the operatingneeds of the holding company for over three years assuming that the holdingcompany continues to defer interest on its trust preferred securities.

 

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

 

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

 

Market risk is the risk of loss 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 have not entered into any market risk sensitiveinstruments for trading purposes. We manage our interest rate sensitivity bymatching the re-pricing opportunities on our earning assets to those on ourfunding liabilities. We use various asset/liability strategies to manage there-pricing characteristics of our assets and liabilities designed to ensurethat exposure to interest rate fluctuations is limited to our guidelines ofacceptable levels of risk-taking. Balance sheet hedging strategies, including the terms and pricing ofloans and deposits and managing the deployment of our securities, are used toreduce mismatches in interest rate re-pricing opportunities of portfolio assetsand their funding sources.

 

**Credit Risk-related ContingentFeatures**

 

During the first quarter 2009, 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 March 31, 2010, the fair value ofderivatives in a net liability position, which excludes any adjustment fornonperformance risk related to these agreements, was $256,000. The Company hasminimum collateral posting thresholds with certain of its derivativecounterparties, but has not been required to post collateral against itsobligations under these agreements. If the Company had breached any of theseprovisions at March 31, 2010, it would have been required to settle itsobligations under the agreements at the termination value.

 

**Net Interest Income Modeling**

 

Our Asset Liability Management Committee, or ALCO,addresses interest rate risk. The committee is composed of members of oursenior management. The ALCO monitors interest rate risk by analyzing thepotential impact on the net portfolio of equity value and net interest incomefrom potential changes in interest rates, and considers the impact ofalternative strategies or changes in balance sheet structure. The ALCO managesour balance sheet in part to maintain the potential impact on net portfoliovalue and net interest income within acceptable ranges despite changes ininterest 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-approved limits, the board may direct management to adjustthe asset and liability mix to bring interest rate risk within board-approvedlimits.

 

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We monitor and evaluate our interest rate riskposition on at least a quarterly basis using net interest income simulationanalysis under 100 and 200 basis point change scenarios (see below). Each ofthese analyses 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 and repricingstrategies.  Asset prepayments and othermarket risks are developed from industry estimates of prepayment speeds andother market changes.  Since the resultsof these simulations can be significantly influenced by assumptions utilized,management evaluates the sensitivity of the simulation results to changes inassumptions.

 

*The following table shows the net interest income increase or decreaseover the next twelve months as of March 31, 2010 and 2009:*

 

**Table 15**

 
| ** **                | ** ** | **Annualized  Net Interest Income** | ** ** |
|---------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **March 31,  2010**            | ** ** | **March 31,  2009** | ** ** |
| **MARKET RISK:**          | ** ** | **Amount of  Change**               | ** ** | **Amount of  Change** | ** ** |
| ** **                | ** ** | **(In  thousands)**                 | ** ** |
| **Rates in Basis Points** |       |                                |       |   |   |
| 200                       |       | $                                   | 4,074      |   | $ | 7,951 |   |
| 100                       |       | 1,355                               |       | 3,723 |   |
| Static                    |       | —                              |       | — |   |
| (100)                     |       | 791                                 |       | 2,144 |   |
| (200)                     |       | 140                                 |       | 3,642 |   |
|                           |            |                                     |            |  |  |  |  |

 

Overall, the Company believes it is asset sensitive,but is less asset sensitive than one year ago. At March 31, 2010, the Company is positioned to have a short-termfavorable interest income impact in a 200 basis point or 100 basis point risingrate environment.  The primary reason forbeing less asset sensitive at March 31, 2010 as compared to March 31,2009, is the impact of minimum rates, or floors, on many variable rate loans inthe loan portfolio.  This minimum pricingwill cause interest rates on variable rate loans to reprice less rapidly in arising rate environment than was projected in the prior year.  Many of these variable rate loans are basedon a spread to prime, which is currently at 3.25%. The most common minimum rateis between 5.0% and 5.5%.  As rates rise,the loan rate may continue to be at the minimum rate.   Because of the low rate environment,management also performed a rate shock of an increase of 300 basis points onits net interest income.  This 300 basispoint rate shock reflects an increase of $7.4 million of net interest income,or $3.3 million greater than the 200 basis point rate shock in the tableabove.  Management would anticipate thatdeposits rates, other than time deposit rates, would increase immediately in arising rate environment.

 

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 March 31, 2010.  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 extent during a fallingrate environment. As a falling rate environment would potentially impact thecost of liabilities, especially time deposit rates, to a greater degree thanearning assets for the above reasons, a falling rate environment would beexpected to have a favorable impact on net interest margin. However, if theactual prime rate falls below a 300 basis point spread to target federal fundsrate, the Company may not have an increase in net interest income in a fallingrate environment.

 

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| **ITEM 4.** | **Controls  and 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 reasonable assurancethat information required to be disclosed in reports that we file or submitunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in the rules and forms ofthe Securities and Exchange Commission. It should be noted that the design ofany system of controls is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions,regardless of how remote. However, the controls have been designed to providereasonable assurance of achieving the controls’ stated goals. Based on thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officer,have concluded that the Company’s disclosure controls and procedures areeffective at March 31, 2010 to ensure that information required to bedisclosed in the reports that we file or submit under the Securities ExchangeAct of 1934 was (i) accumulated and communicated to management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, to allowtimely 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.** | **Legal  Proceedings** |
|------------------|------------------------|

 

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, 2009.   The risksdescribed in our Annual Report on Form 10-K are not the only risks facingthe Company. Additional risks and uncertainties not currently known to us orthat we currently deem to be immaterial also may materially affect ourbusiness, financial condition and/or operating results.

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

 

(a)                                  None.

 

(b)                                 None.

 

(c)   The following table provides information with respect to purchasesmade by or on behalf of the Company or any “affiliated purchaser” (as definedin Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), ofour voting common stock during the first quarter 2010.  These purchases relate to the net settlementof vested, restricted stock awards.  TheCompany does not have any existing publicly announced repurchase plans orprograms.

 
| ** **                           | ** ** | **Total Shares**

**Purchased** | ** ** | **Average Price**

**Paid per Share** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|
| January 1  to January 31   |       | 5,282                           |       | $                                     | 1.22       |   |
| February 1  to February 28 |       | 435                             |       | 1.40                                  |       |
| March 1  to March 31       |       | 6,712                           |       | 1.47                                  |       |
|                                 |       | 12,429                          |       | $                                     | 1.36       |   |

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

 

None.

 
| **ITEM 4.** | **Other  Information** |
|------------------|------------------------|

 

None.

 

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| **ITEM 5.** | **Exhibits** |
|------------------|--------------|

 

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

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| Date: April 28,  2010 | GUARANTY BANCORP                                                                  |
|----------------------------|-----------------------------------------------------------------------------------|
|                       |                                                                              |
|                       | /s/    PAUL W. TAYLOR                                         |
|                       | Paul W. Taylor                                                                    |
| * *                   | *Executive  Vice President, Chief Financial and  Operating Officer and Secretary* |

 

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