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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

**x**** ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

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

 

**OR**

 

**o****  ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                    to                    **

 

**Commission File Number: 000-51556**

 

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**GUARANTYBANCORP**

(Exactname of registrant as specified in its charter)

 

| **DELAWARE**                                                     | ** ** | **41-2150446**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State  or other jurisdiction  of incorporation or organization) |       | (I.R.S.  Employer Identification Number) |

 

| **1331  Seventeenth St., Suite 345  Denver, CO** | ** ** | **80202**   |
|-------------------------------------------------------|------------|-------------|
| (Address  of principal executive offices)             |       | (Zip  Code) |

 

**303-293-5563**

(Registrant’stelephone number, including area code)

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934, as amended duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) preceding12 months (or for such shorter period that the registrant was required tosubmit and post such files).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12B-2of the Exchange Act.

 

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

 

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

 

Asof July 31, 2010, there were 52,752,801 shares of the registrant’s votingcommon stock outstanding, including 1,215,835 shares of unvested stock grantsand excluding 156,567 shares to be issued under its deferred compensation plan.

 

 

 

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**TABLE OFCONTENTS**

 
| ** **                                 | ** **                                                                                         | **Page**   |
|--------------------------------------------|----------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** **                                                                                         | ** ** |
|                                       | Forward-Looking  Statements and Factors that Could Affect Future Results                           | 3          |
|                                       |                                                                                               |       |
| **PART I—FINANCIAL INFORMATION** | 5                                                                                                  |
| ** **                                 | ** **                                                                                         |       |
| ITEM 1.                               | Unaudited Condensed  Consolidated Financial Statements                                             | 5          |
|                                       |                                                                                               |       |
|                                       | Unaudited  Consolidated Balance Sheets                                                             | 5          |
|                                       |                                                                                               |       |
|                                       | Unaudited  Consolidated Statements of Operations                                                   | 6          |
|                                       |                                                                                               |       |
|                                       | Unaudited Consolidated Statement of Changes in  Stockholders’ Equity and Comprehensive Income | 7          |
|                                       |                                                                                               |       |
|                                       | Unaudited Consolidated Statements of Cash Flows                                                    | 8          |
|                                       |                                                                                               |       |
|                                       | Notes to Unaudited Condensed Consolidated Financial  Statements                                    | 9          |
|                                       |                                                                                               |       |
| ITEM 2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations        | 31         |
|                                       |                                                                                               |       |
| ITEM 3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                        | 54         |
|                                       |                                                                                               |       |
| ITEM 4.                               | Controls and  Procedures                                                                           | 56         |
|                                       |                                                                                               |       |
| **PART II—OTHER  INFORMATION**   | 57                                                                                                 |
| ** **                                 | ** **                                                                                         |       |
| ITEM 1.                               | Legal Proceedings                                                                                  | 57         |
|                                       |                                                                                               |       |
| ITEM 1A.                              | Risk Factors                                                                                       | 57         |
|                                       |                                                                                               |       |
| ITEM 2.                               | Unregistered  Sales of Equity Securities and Use of Proceeds                                       | 57         |
|                                       |                                                                                               |       |
| ITEM 3.                               | Defaults  Upon Senior Securities                                                                   | 57         |
|                                       |                                                                                               |       |
| ITEM 4                                     | [Removed and  Reserved]                                                                            | 57         |
|                                       |                                                                                               |       |
| ITEM 5.                               | Other Information                                                                                  | 57         |
|                                       |                                                                                               |       |
| ITEM 6.                               | Exhibits                                                                                           | 59         |

 

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

 

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

 

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

 

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

 

·      Changes in the level ofnonperforming assets and charge-offs and other credit quality measures, andtheir impact on the adequacy of our allowance for loan losses and our provisionfor loan losses.

 

·      The effects of and changesin trade, monetary and fiscal policies and laws, including the interest ratepolicies of the Federal Open Market Committee of the Federal Reserve Board andthe impact of the Federal Deposit Insurance Corporation’s Temporary LiquidityGuaranty Program.

 

·      The effects of theprovisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act,including any new regulatory interpretations and guidance issued under suchAct.

 

·      The effects of theregulatory written agreement that the Company and its subsidiary bank, GuarantyBank and Trust Company (the “Bank”), have entered into with their regulators.

 

·      The ability to receiveregulatory approval for the Bank to declare and pay dividends to the Company.

 

·      Changes imposed byregulatory agencies to increase our capital to a level greater than the levelrequired for well-capitalized financial institutions, or the effect of otherpotential future regulatory actions against the Company or the Bank, whetherthrough informal understandings or formal agreements entered into withregulatory agencies.

 

·      The failure to maintaincapital above the level required to be well-capitalized under the regulatorycapital adequacy guidelines, the availability of capital from private orgovernment sources, or the failure to raise additional capital as needed.

 

·      Changes in sources and usesof funds, including loans, deposits and borrowings, including the ability forour bank subsidiary to retain and grow core deposits, to purchase brokereddeposits and maintain unsecured federal funds lines with correspondent banksand secured lines of credits.

 

·      Inflation and interest rate,securities market and monetary fluctuations.

 

·      Political instability, actsof war or terrorism and natural disasters.

 

·      The timely development andacceptance of new products and services and perceived overall value of theseproducts and services by customers.

 

·      Revenues are lower thanexpected.

 

·      Changes in consumerspending, borrowings and savings habits.

 

·      Competition for loans anddeposits and failure to attract or retain loans and deposits.

 

·      Changes in the financialperformance and/or condition of the Bank’s borrowers and the ability of theBank’s borrowers to perform under the terms of their loans and other terms ofcredit agreements.

 

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·      Technological changes.

 

·      Acquisitions of acquiredbusinesses and greater than expected costs or difficulties related to theintegration of acquired businesses.

 

·      The ability to increasemarket share and control expenses.

 

·      Changes in the competitiveenvironment among financial or bank holding companies and other financialservice providers.

 

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

 

·      Changes in business strategyor development plans.

 

·      Changes in the securitiesmarkets.

 

·      The effect of changes inaccounting 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 the deferred taxasset valuation allowance in future quarters.

 

·      Changes in our organization,compensation and benefit plans.

 

·      The costs and effects oflegal and regulatory developments, including the resolution of legalproceedings or regulatory or other governmental inquiries, and the results ofregulatory examinations or reviews.

 

·      Our success at managing therisks involved in the foregoing items.

 

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

 

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**PART I- FINANCIAL INFORMATION**

 

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

 

**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **June 30,  2010**                                                     | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **(Dollars in thousands, except per share  data)** | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                        |       |                        |       |
| Cash  and due from banks                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | $                                                                           | 184,507    |                        | $          | 234,483 |   |
| Federal  funds sold                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 194                                                                         |       | —                      |       |
| Cash  and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 184,701                                                                     |       | 234,483                     |       |
| Securities  available for sale, at fair value                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 281,215                                                                     |       | 221,134                     |       |
| Securities  held to maturity (fair value of $14,599 and $10,428 at June 30, 2010 and  December 31, 2009)                                                                                                                                                                                                                                                                                                                                                                    |       | 13,897                                                                      |       | 9,942                       |       |
| Bank  stocks, at cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | 17,181                                                                      |       | 17,160                      |       |
| Total  investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 312,293                                                                     |       | 248,236                     |       |
| Loans,  net of unearned discount                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 1,374,208                                                                   |       | 1,519,608                   |       |
| Less  allowance for loan losses                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | (46,866                                                                     | )          | (51,991                     | )          |
| Net  loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 1,327,342                                                                   |       | 1,467,617                   |       |
| Loans  held for sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 1,150                                                                       |       | 9,862                       |       |
| Premises  and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 58,799                                                                      |       | 60,267                      |       |
| Other  real estate owned and foreclosed assets                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 30,298                                                                      |       | 37,192                      |       |
| Other  intangible assets, net                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 16,622                                                                      |       | 19,222                      |       |
| Other  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 52,593                                                                      |       | 50,701                      |       |
| Total  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | $                                                                           | 1,983,798  |                        | $          | 2,127,580 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                                                        |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                                                        |       |                        |       |
| Liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                                        |       |                        |       |
| Deposits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                                                                        |       |                        |       |
| Noninterest-bearing  demand                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | $                                                                           | 338,169    |                        | $          | 366,103 |   |
| Interest-bearing  demand                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 495,052                                                                     |       | 523,971                     |       |
| Savings                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | 75,338                                                                      |       | 71,816                      |       |
| Time                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 635,712                                                                     |       | 731,400                     |       |
| Total  deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 1,544,271                                                                   |       | 1,693,290                   |       |
| Securities  sold under agreements to repurchase and federal funds purchased                                                                                                                                                                                                                                                                                                                                                                                                           |       | 17,247                                                                      |       | 22,990                      |       |
| Borrowings                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 164,276                                                                     |       | 164,364                     |       |
| Subordinated  debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 41,239                                                                      |       | 41,239                      |       |
| Interest  payable and other liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | 27,760                                                                      |       | 13,059                      |       |
| Total  liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 1,794,793                                                                   |       | 1,934,942                   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                                                        |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                        |       |                        |       |
| Preferred  stock—$0.001 par value; 9% non-cumulative; 73,280 shares authorized, 63,168  shares issued and outstanding at June 30, 2010; 73,280 shares  authorized, 60,434 shares issued and outstanding at December 31 2009;  liquidation preference of $63,168 at June 30, 2010; liquidation  preference of $60,434 at December 31, 2009.                                                                                                                   |       | 61,961                                                                      |       | 59,227                      |       |
| Common  stock—$0.001 par value; 150,000,000 shares authorized, 64,967,450 voting  shares issued, 52,913,800 voting shares outstanding at June 30, 2010  (includes 1,221,835 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                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 618,931                                                                     |       | 618,343                     |       |
| Shares  to be issued for deferred compensation obligations                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 237                                                                         |       | 199                         |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | (391,548                                                                    | )          | (382,599                    | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 1,844                                                                       |       | (143                        | )          |
| Treasury  Stock, at cost, 10,869,870 and 10,873,533 shares, respectively                                                                                                                                                                                                                                                                                                                                                                                                              |       | (102,485                                                                    | )          | (102,454                    | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 189,005                                                                     |       | 192,638                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | $                                                                           | 1,983,798  |                        | $          | 2,127,580 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Operations**

 
| ** **                                                                 | ** ** | **Three  Months Ended June 30,**                                                  | ** ** | **Six  Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                 | ** ** | **2010**                                                                               | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                 | ** ** | **(In thousands, except share and per share data)** | ** ** |
| Interest  income:                                                          |       |                                                                                   |       |                                |       |   |   |   |   |
| Loans,  including fees                                                     |       | $                                                                                      | 19,449     |                                | $          | 23,208 |   | $ | 40,233 |   | $ | 46,284 |   |
| Investment  securities:                                                    |       |                                                                                   |       |                                |       |   |   |   |   |
| Taxable                                                                    |       | 1,615                                                                                  |       | 590                                 |       | 3,131 |   | 1,316 |   |
| Tax-exempt                                                                 |       | 704                                                                                    |       | 765                                 |       | 1,424 |   | 1,532 |   |
| Dividends                                                                  |       | 182                                                                                    |       | 198                                 |       | 367 |   | 486 |   |
| Federal  funds sold and other                                              |       | 103                                                                                    |       | 14                                  |       | 219 |   | 17 |   |
| Total  interest income                                                     |       | 22,053                                                                                 |       | 24,775                              |       | 45,374 |   | 49,635 |   |
| Interest  expense:                                                         |       |                                                                                   |       |                                |       |   |   |   |   |
| Deposits                                                                   |       | 3,994                                                                                  |       | 6,910                               |       | 8,707 |   | 14,035 |   |
| Securities  sold under agreement to repurchase and federal funds purchased |       | 33                                                                                     |       | 31                                  |       | 76 |   | 69 |   |
| Borrowings                                                                 |       | 1,314                                                                                  |       | 1,312                               |       | 2,615 |   | 2,633 |   |
| Subordinated  debentures                                                   |       | 579                                                                                    |       | 662                                 |       | 1,211 |   | 1,320 |   |
| Total  interest expense                                                    |       | 5,920                                                                                  |       | 8,915                               |       | 12,609 |   | 18,057 |   |
| Net  interest income                                                       |       | 16,133                                                                                 |       | 15,860                              |       | 32,765 |   | 31,578 |   |
| Provision  for loan losses                                                 |       | 8,400                                                                                  |       | 18,605                              |       | 12,400 |   | 21,110 |   |
| Net  interest income, after provision for loan losses                      |       | 7,733                                                                                  |       | (2,745                              | )          | 20,365 |   | 10,468 |   |
| Noninterest  income:                                                       |       |                                                                                   |       |                                |       |   |   |   |   |
| Customer  service and other fees                                           |       | 2,254                                                                                  |       | 2,354                               |       | 4,468 |   | 5,033 |   |
| Gain on  sale of securities                                                |       | 1                                                                                      |       | —                              |       | 15 |   | — |   |
| Gain on  sale of loans                                                     |       | 1,196                                                                                  |       | —                              |       | 1,196 |   | — |   |
| Other                                                                      |       | 274                                                                                    |       | 277                                 |       | 468 |   | 492 |   |
| Total  noninterest income                                                  |       | 3,725                                                                                  |       | 2,631                               |       | 6,147 |   | 5,525 |   |
| Noninterest  expense:                                                      |       |                                                                                   |       |                                |       |   |   |   |   |
| Salaries  and employee benefits                                            |       | 6,472                                                                                  |       | 6,712                               |       | 13,035 |   | 13,451 |   |
| Occupancy  expense                                                         |       | 1,836                                                                                  |       | 1,926                               |       | 3,726 |   | 3,847 |   |
| Furniture  and equipment                                                   |       | 967                                                                                    |       | 1,147                               |       | 1,943 |   | 2,278 |   |
| Amortization  of intangible assets                                         |       | 1,300                                                                                  |       | 1,581                               |       | 2,600 |   | 3,163 |   |
| Other  real estate owned, net                                              |       | 3,115                                                                                  |       | 915                                 |       | 5,864 |   | 963 |   |
| Insurance  and assessments                                                 |       | 1,825                                                                                  |       | 2,195                               |       | 3,637 |   | 3,236 |   |
| Professional  fees                                                         |       | 739                                                                                    |       | 896                                 |       | 1,616 |   | 1,745 |   |
| Other  general and administrative                                          |       | 2,165                                                                                  |       | 2,346                               |       | 4,124 |   | 4,495 |   |
| Total  noninterest expense                                                 |       | 18,419                                                                                 |       | 17,718                              |       | 36,545 |   | 33,178 |   |
| Loss  before income taxes                                                  |       | (6,961                                                                                 | )          | (17,832                             | )          | (10,033 | ) | (17,185 | ) |
| Income  tax benefit                                                        |       | (2,607                                                                                 | )          | (6,975                              | )          | (3,834 | ) | (6,764 | ) |
| Net  loss                                                                  |       | (4,354                                                                                 | )          | (10,857                             | )          | (6,199 | ) | (10,421 | ) |
| Preferred  stock dividends                                                 |       | (1,390                                                                                 | )          | —                              |       | (2,750 | ) | — |   |
| Net  loss allocable to common stockholders                                 |       | $                                                                                      | (5,744     | )                                   | $          | (10,857 | ) | $ | (8,949 | ) | $ | (10,421 | ) |
|                                                                       |       |                                                                                   |       |                                |       |   |   |   |   |
| Loss  per common share—basic:                                         |       | $                                                                                      | (0.11      | )                                   | $          | (0.21 | ) | $ | (0.17 | ) | $ | (0.20 | ) |
| Loss  per common share—diluted:                                       |       | (0.11                                                                                  | )          | (0.21                               | )          | (0.17 | ) | (0.20 | ) |
|                                                                       |       |                                                                                   |       |                                |       |   |   |   |   |
| Weighted  average common shares outstanding-basic                          |       | 51,660,603                                                                             |       | 51,339,542                          |       | 51,633,972 |   | 51,312,847 |   |
| Weighted  average common shares outstanding-diluted                        |       | 51,660,603                                                                             |       | 51,339,542                          |       | 51,663,972 |   | 51,312,847 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 
| ** **                                     | ** ** | **Preferred  Shares  Outstanding**     | ** ** | **Preferred  Stock** | ** ** | **Common  Stock  Shares  Outstanding  and to be  issued** | ** ** | **Common  Stock and  Additional  Paid-in  Capital** | ** ** | **Shares to  be  Issued** | ** ** | **Treasury  Stock** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Totals** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|----------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------|------------|---------------------|------------|--------------------------|------------|------------------------------------------------------|------------|------------|------------|
|                                           |       | **(In  thousands, except share data)** |       |
| Balance,  December 31, 2008               |       | —                                 |       | $                    | —     |                                                      | 52,654,131 |                                                | $          | 617,253                   |       | $                   | 710        |                     | $          | (103,078                                             | )          | $          | (352,003   | ) | $ | (1,302 | ) | $ | 161,580 |   |
| Comprehensive  loss:                           |       |                                   |       |                 |       |                                                      |       |                                                |       |                      |       |                |       |                     |       |                                                 |       |       |       |
| Net  loss                                      |       | —                                 |       | —               |       | —                                                    |       | —                                              |       | —                    |       | —              |       | (10,421                  | )          | —                                               |       | (10,421    | )          |
| Other  comprehensive income                    |       | —                                 |       | —               |       | —                                                    |       | —                                              |       | —                    |       | —              |       | —                   |       | 1,993                                                |       | 1,993      |       |
| Total  comprehensive loss                      |       |                                   |       |                 |       |                                                      |       |                                                |       |                      |       |                |       |                     |       |                                                 |       | (8,428     | )          |
| Stock  compensation awards, net of forfeitures |       | —                                 |       | —               |       | (186,333                                                  | )          | —                                              |       | —                    |       | —              |       | —                   |       | —                                               |       | —     |       |
| Earned  stock award compensation, net          |       | —                                 |       | —               |       |                                                      |       | 411                                                 |       | —                    |       | —              |       | —                   |       | —                                               |       | 411        |       |
| Repurchase  of common stock                    |       | —                                 |       | —               |       | (24,111                                                   | )          | —                                              |       | —                    |       | (47                 | )          | —                   |       | —                                               |       | (47        | )          |
| Deferred  compensation                         |       | —                                 |       | —               |       | 61,837                                                    |       | —                                              |       | 91                        |       | —              |       | —                   |       | —                                               |       | 91         |       |
| Common  shares issued                          |       | —                                 |       | —               |       | —                                                    |       | —                                              |       | (681                      | )          | 681                 |       | —                   |       | —                                               |       | —     |       |
| Balance,  June 30, 2009                   |       | —                                 |       | $                    | —     |                                                      | 52,505,524 |                                                | $          | 617,664                   |       | $                   | 120        |                     | $          | (102,444                                             | )          | $          | (362,424   | ) | $ | 691 |   | $ | 153,607 |   |
|                                           |       |                                   |       |                 |       |                                                      |       |                                                |       |                      |       |                |       |                     |       |                                                 |       |       |       |
| 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                                      |       | —                                 |       | —               |       | —                                                    |       | —                                              |       | —                    |       | —              |       | (6,199                   | )          | —                                               |       | (6,199     | )          |
| Other  comprehensive income                    |       | —                                 |       | —               |       | —                                                    |       | —                                              |       | —                    |       | —              |       | —                   |       | 1,987                                                |       | 1,987      |       |
| Total  comprehensive loss                      |       |                                   |       |                 |       |                                                      |       |                                                |       |                      |       |                |       |                     |       |                                                 |       | (4,212     | )          |
| Stock  compensation awards, net of forfeitures |       | —                                 |       | —               |       | (42,566                                                   | )          | —                                              |       | —                    |       | —              |       | —                   |       | —                                               |       | —     |       |
| Earned  stock award compensation, net          |       | —                                 |       | —               |       | —                                                    |       | 588                                                 |       | —                    |       | —              |       | —                   |       | —                                               |       | 588        |       |
| Repurchase  of common stock                    |       | —                                 |       | —               |       | (23,098                                                   | )          | —                                              |       | —                    |       | (31                 | )          | —                   |       | —                                               |       | (31        | )          |
| Deferred  compensation                         |       | —                                 |       | —               |       | 26,761                                                    |       | —                                              |       | 38                        |       | —              |       | —                   |       | —                                               |       | 38         |       |
| Common  shares issued                          |       | —                                 |       | —               |       | —                                                    |       | —                                              |       | —                    |       | —              |       | —                   |       | —                                               |       | —     |       |
| Preferred  share dividends                     |       | 2,734                                  |       | 2,734                |       | —                                                    |       | —                                              |       | —                    |       | —              |       | (2,750                   | )          | —                                               |       | (16        | )          |
| Balance,  June 30, 2010                   |       | 63,168                                 |       | $                    | 61,961     |                                                      | 52,913,800 |                                                | $          | 618,996                   |       | $                   | 237        |                     | $          | (102,485                                             | )          | $          | (391,548   | ) | $ | 1,844 |   | $ | 189,005 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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Table of Contents

 

**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Cash Flows**

 
| ** **                                                                       | ** ** | **Six  Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                       | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| ** **                                                                       | ** ** | **(In  thousands)**                 | ** ** |
| Cash  flows from operating activities:                                           |       |                                |       |   |   |
| Net  loss                                                                        |       | $                                   | (6,199     | ) | $ | (10,421 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |       |                                |       |   |   |
| Depreciation  and amortization                                                   |       | 4,260                               |       | 4,937 |   |
| Provision  for loan losses                                                       |       | 12,400                              |       | 21,110 |   |
| Stock  compensation, net                                                         |       | 588                                 |       | 411 |   |
| Gain on  sale of securities                                                      |       | (15                                 | )          | — |   |
| Gain on  sale of loans                                                           |       | (1,196                              | )          | — |   |
| Loss,  net and valuation adjustments on real estate owned                        |       | 5,044                               |       | 838 |   |
| Other                                                                            |       | (58                                 | )          | (674 | ) |
| Net  change in:                                                                  |       |                                |       |   |   |
| Other  assets                                                                    |       | (3,112                              | )          | (4,547 | ) |
| Interest  payable and other liabilities                                          |       | 14,701                              |       | (1,325 | ) |
| Net  cash provided by operating activities                                       |       | 26,413                              |       | 10,329 |   |
| Cash  flows from investing activities:                                           |       |                                |       |   |   |
| Activity  in available for sale securities:                                      |       |                                |       |   |   |
| Sales,  maturities, prepayments, and calls                                       |       | 30,819                              |       | 8,826 |   |
| Purchases                                                                        |       | (87,974                             | )          | (61 | ) |
| Activity  in held-to-maturity securities and bank stocks:                        |       |                                |       |   |   |
| Maturities,  prepayments and calls                                               |       | 2,636                               |       | 14,109 |   |
| Purchases                                                                        |       | (6,485                              | )          | (85 | ) |
| Loan  originations and principal collections, net                                |       | 107,989                             |       | 112,844 |   |
| Proceeds  from sale of loans held for sale                                       |       | 17,263                              |       | 2,710 |   |
| Proceeds  from sales of other real estate owned and foreclosed assets            |       | 14,646                              |       | 2,067 |   |
| Proceeds  from sales of premises and equipment                                   |       | —                              |       | 1 |   |
| Additions  to premises and equipment                                             |       | (192                                | )          | (732 | ) |
| Net  cash provided by investing activities                                       |       | 78,702                              |       | 139,679 |   |
| Cash  flows from financing activities:                                           |       |                                |       |   |   |
| Net  decrease in deposits                                                        |       | (149,019                            | )          | (137,921 | ) |
| Repayment  of long-term debt                                                     |       | (88                                 | )          | (1,945 | ) |
| Net  change in federal funds purchased and repurchase agreements                 |       | (5,743                              | )          | (8,710 | ) |
| Repurchase  of common stock                                                      |       | (31                                 | )          | (47 | ) |
| Cash  dividends on preferred stock                                               |       | (16                                 | )          | — |   |
| Net  cash used by financing activities                                           |       | (154,897                            | )          | (148,623 | ) |
| Net  change in cash and cash equivalents                                         |       | (49,782                             | )          | 1,385 |   |
| Cash  and cash equivalents, beginning of period                                  |       | 234,483                             |       | 45,711 |   |
| Cash  and cash equivalents, end of period                                        |       | $                                   | 184,701    |   | $ | 47,096 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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Table of Contents

 

**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements**

 

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

 

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

 

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

 

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

 

The Bank is a full-servicecommunity bank offering an array of banking products and services to thecommunities it serves along the Front Range of Colorado, including acceptingtime and demand deposits and originating commercial loans (including energyloans), real estate loans, Small Business Administration guaranteed loans andconsumer loans.  The Bank also providestrust services, 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 of Presentation***

 

Theaccounting and reporting policies of the Company conform to generally acceptedaccounting principles in the United States of America. All significantintercompany balances and transactions have been eliminated. Our financial statementsreflect all adjustments that are, in the opinion of management, necessary for afair presentation of the financial position and results of operations for theperiods presented. We have evaluated all subsequent events through the date thefinancial statements were issued.

 

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

 

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

 

Thepreparation of the consolidated financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities asof the dates of the consolidated balance sheets and income and expense for theperiods presented. Actual results could differ significantly from those estimates.Material estimates that are particularly susceptible to significant changesinclude the assessment for impairment of certain investment securities, theallowance for loan losses, deferred tax assets and liabilities, impairment ofgoodwill 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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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 

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

 

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

 

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

 

***(e)******               ******Other Intangible 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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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 

TheCompany’s Amended and Restated 2005 Stock Incentive Plan provides for up to8,500,000 grants of stock options, stock awards, stock units awards,performance stock awards, stock appreciation rights, and other equity basedawards to key employees, nonemployee directors, consultants and prospectiveemployees. As of June 30, 2010, the Company has only granted stock awards.The Company recognizes stock compensation cost for services received in ashare-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 June 30, 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)******               ******Deferred Compensation Plan***

 

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

 

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

 

Income tax expense is the total ofthe current year income tax due or refundable and the change in deferred taxassets and liabilities. Deferred tax assets and liabilities are recognized forthe future tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss and tax credit carry forwards. Deferredtax assets and liabilities are measured using enacted tax rates expected 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 is recognizedin income in the period that includes the enactment date.

 

Deferred tax assets are reduced bya valuation allowance when, in the opinion of management, it is more likelythan not that some portion, or all, of the deferred tax asset will not be realized.In assessing the realization of deferred tax assets, management evaluates bothpositive and negative evidence, including the existence of any cumulativelosses in the current year and the prior two years, the amount of taxes paid inavailable carry-back years, the forecasts of future income, applicable taxplanning strategies, and assessments of current and future economic andbusiness conditions. This analysis is updated quarterly and adjusted asnecessary.  At June 30, 2010 and December 31,2009, the Company had a net deferred tax asset of $9,718,000 and $10,170,000,respectively.  At the end of the secondquarter 2010, based on the Company’s ability to carryback approximately$9,400,000 of potential tax losses generated in future years to prior years andvarious tax planning strategies, the Company has determined that a valuationallowance for deferred tax assets is not required.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

At June 30, 2010 and December 31, 2009,the Company did not have any uncertain tax positions for which a tax benefit isdisallowed under current accounting guidance. A tax position is recognized as a benefit only if it is “more likelythan not” that the tax position would be sustained in a tax examination, with atax examination being presumed to occur. The amount recognized is the largestamount of tax benefit that is greater than 50% likely of being realized onexamination.  For tax positions notmeeting the “more likely than not” test, no tax benefit is recorded.

 

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

 

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

 

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

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 

Basic loss per common share represents lossallocable to common stockholders divided by the weighted average number ofcommon shares outstanding during the period. Diluted loss per common sharereflects additional common shares that would have been outstanding if potentialdilutive common shares had been issued. The Company’s obligation to issueshares of stock to participants in its Deferred Compensation Plan has beentreated as outstanding shares of stock in the basic earnings per common sharecalculation.  The Company’s unvestedrestricted stock awards do not containnonforfeitable rights to dividends and, therefore, are not subject to thetwo-class method of computing basic loss per common share.  The Company’s outstanding shares of preferredstock do not participate in the earnings or loss of the Company, and therefore,are not subject to the two-class method of computing basic loss per share.Potential dilutive common shares that may be issued by the Company relate toconvertible preferred stock and unvested common share grants subject to aservice condition for the three and six months ending June 30, 2010 and2009.   The loss per common share hasbeen computed based on the following:

 
| ** **                                                                    | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                    | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                    | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average  common shares outstanding                                            |       | 51,660,603                            |       | 51,339,542                          |       | 51,633,972 |   | 51,312,847 |   |
| Effect  of dilutive preferred stock(1)                                        |       | —                                |       | —                              |       | — |   | — |   |
| Effect  of dilutive unvested stock grants (2)                                 |       | —                                |       | —                              |       | — |   | — |   |
| Average  shares outstanding for calculating diluted earnings per common share |       | 51,660,603                            |       | 51,339,542                          |       | 51,633,972 |   | 51,312,847 |   |

 

----

(1) The Company has 63,168 sharesoutstanding of convertible preferred stock at June 30, 2010 and none at June 30,2009.  These 63,168 shares areconvertible into 35,093,333 shares of common stock of the Company based on aconversion price of $1.80.  The impact ofthe future conversion of these shares is anti-dilutive for the three and sixmonths ended June 30, 2010 due to the net loss for those periods.

 

(2) Theimpact of unvested stock grants of 1,221,835 and 1,110,744 at June 30,2010 and 2009, respectively, is anti-dilutive for the three and six monthsended June 30, 2010 and 2009, respectively, due to the net loss for thoseperiods.

 

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

 

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

 

In January 2010, the FASBissued guidance clarifying the accounting for shareholder distributions wherethe shareholder has the ability to elect to have his/her distribution in theform of cash (up to a pre-determined maximum), stock or a combination of thetwo.  The update provided that the stockportion of a distribution where the shareholder had the ability to elect thedistribution as stock or cash (up to a pre-determined maximum) should beaccounted for as a share issuance and thereby eliminate diversity in practice.The provisions of this update became effective for financial statements datedon or after December 15, 2009. The adoption of this standard did not havea material impact on the Company’s consolidated financial position, results ofoperations or cash flows.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

In January 2010, the FASBissued 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.

 

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

 

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

 

In July 2010,the FASB updated disclosure requirements with respect to the credit quality offinancing receivables and the allowance for credit losses.  According tothe guidance, there are two levels of detail at which credit information willbe presented - the portfolio segment level and class level.  The portfoliosegment level is defined as the level where financing receivables areaggregated in developing a Company’s systematic method for calculating itsallowance for credit losses.  The class level is the second level at whichcredit information will be presented and represents the categorization offinancing related receivables at a slightly less aggregated level than theportfolio segment level.  Companies will now be required to provide thefollowing disclosures as a result of this update: a rollforward of theallowance for credit losses at the portfolio segment level with the endingbalances further categorized according to impairment method along with thebalance reported in the related financing receivables at period end; additionaldisclosure of nonaccrual and impaired financing receivables by class as ofperiod end; credit quality and past due/aging information by class as of periodend; information surrounding the nature and extent of loan modifications andtroubled-debt restructurings and their effect on the allowance for creditlosses during the period; and detail of any significant purchases or sales offinancing receivables during the period.  The increased period-enddisclosure requirements become effective for periods ending on or after December 15,2010.  The increased disclosures foractivity within a reporting period become effective for periods beginning on orafter December 15, 2010.  The provisions of this update will expandthe Company’s current disclosures with respect to our allowance for loanlosses.

 

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

 

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

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 

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

 
| ** **                                                  | ** ** | **Fair value**         | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Amortized  cost** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                                                  | ** ** | **(In thousands)**     | ** ** |
| ** **                                                  | ** ** | **June 30, 2010** | ** ** |
| Debt securities available for sale:                         | ** ** | ** **                  | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **          | ** ** |
| U.S. government agencies and government-sponsored  entities |       | $                           | 72,017     |                         | $          | 185                           |       | $                   | —     |   | $ | 71,832 |   |
| State and municipal                                         |       | 57,594                      |       | 946                          |       | (2,429                        | )          | 59,077              |       |
| Mortgage-backed - agency / residential                      |       | 140,069                     |       | 4,084                        |       | —                        |       | 135,985             |       |
| Mortgage-backed - private / residential                     |       | 9,656                       |       | 208                          |       | (20                           | )          | 9,468               |       |
| Marketable equity                                           |       | 1,519                       |       | —                       |       | —                        |       | 1,519               |       |
| Other securities                                            |       | 360                         |       | —                       |       | —                        |       | 360                 |       |
| Total                                                       |       | $                           | 281,215    |                         | $          | 5,423                         |       | $                   | (2,449     | ) | $ | 278,241 |   |

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

 

*The carrying amount, unrecognizedgains and losses, and fair value of securities held to maturity were as followsat the dates presented:*

* *
| ** **                                            | ** ** | **Amortized  Cost** | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair  value** | ** ** |
|-------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| ** **                                            | ** ** | **(In  thousands)** | ** ** |
| June 30,  2010:                                  |       |                |       |                         |       |                          |       |            |       |
| Mortgage-backed  securities – agency/residential |       | $                   | 13,897     |                         | $          | 702                           |       | $               | —     |   | $ | 14,599 |   |
|                                                  |       |                |       |                         |       |                          |       |            |       |
| December 31,  2009:                              |       |                |       |                         |       |                          |       |            |       |
| Mortgage-backed  securities – agency/residential |       | $                   | 9,942      |                         | $          | 486                           |       | $               | —     |   | $ | 10,428 |   |

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

The amortized cost and estimatedfair value of available for sale debt securities by contractual maturity at June 30,2010 are shown below. Expected maturities will differ from contractualmaturities because borrowers may have the right to prepay obligations with orwithout prepayment penalties.

 
| ** **                                                          | ** ** | **Available  for sale (AFS)** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                          | ** ** | **Amortized  cost**           | ** ** | **Fair  value** | ** ** |
| ** **                                                          | ** ** | **(In  thousands)**           | ** ** |
| Debt  securities available for sale:                                |       |                          |       |   |   |
| Due in  one year or less                                            |       | $                             | 23,480     |   | $ | 23,516 |   |
| Due  after one year through five years                              |       | 20,590                        |       | 21,077 |   |
| Due  after five years through ten years                             |       | 35,764                        |       | 36,171 |   |
| Due  after ten years                                                |       | 51,074                        |       | 48,846 |   |
| Total  AFS, excluding MBS, marketable equity and other securities   |       | 130,908                       |       | 129,610 |   |
| Mortgage-backed  securities, marketable equity and other securities |       | 147,333                       |       | 151,605 |   |
| Total  available for sale                                           |       | $                             | 278,241    |   | $ | 281,215 |   |

 
| ** **                                            | ** ** | **Held to  maturity** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **Amortized  cost**   | ** ** | **Fair  value** | ** ** |
| ** **                                            | ** ** | **(In  thousands)**   | ** ** |
| Securities  held to maturity:                         |       |                  |       |   |   |
| Mortgage-backed  securities – agency/residential |       | $                     | 13,897     |   | $ | 14,599 |   |
|                                                       |            |                       |            |  |  |  |  |

 

The following tables presentthe fair value and the unrealized loss on securities that were temporarilyimpaired as of June 30, 2010 and December 31, 2009 aggregated bymajor security type and length of time in a continuous unrealized lossposition:

 
| ** **                                             | ** ** | **Less than  12 months** | ** ** | **12 months  or more** | ** ** | **Total**       | ** ** |
|--------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|-----------------|------------|
| **June 30,  2010**                                | ** ** | **Fair  value**               | ** ** | **Unrealized  losses**      | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** |
| ** **                                             | ** ** | **(In  thousands)**           | ** ** |
| Description  of securities:                            |       |                          |       |                        |       |            |       |   |   |   |   |   |   |
| *Available for Sale*                                   |       |                          |       |                        |       |            |       |   |   |   |   |   |   |
| State  and municipal                                   |       | $                             | 35,591     |                        | $          | (2,429          | )          | — |   | — |   | $ | 35,591 |   | $ | (2,429 | ) |
| Mortgage-backed  securities – private/residential |       | 975                           |       | (20                         | )          | —          |       | — |   | 975 |   | (20 | ) |
| Total  temporarily impaired                            |       | $                             | 36,566     |                        | $          | (2,449          | )          | $ | — |   | $ | — |   | $ | 36,566 |   | $ | (2,449 | ) |
|                                                        |            |                               |            |                             |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

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

 

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

 

16

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Table of Contents

 

**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

more likely than not will berequired to sell the debt security before its anticipated recovery. Theassessment of whether an other-than-temporary decline exists involves a highdegree of subjectivity and judgment and is based on the information availableto management at a point in time.

 

At June 30 2010, the Companyowned one private label mortgage-backed security (MBS) and one municipal bond inunrealized loss positions.  The municipalbond in an unrealized loss position at June 30, 2010, is a revenue bondguaranteed by the revenues from a local hospital.  No security was in an unrealized lossposition for greater than twelve months at June 30, 2010.  Generally, the fair value of our availablefor sale securities fluctuates as a result of changes in market interestrates.  The municipal bond mentionedabove accounts for approximately 99% of the total unrealized loss at June 30,2010.

 

All of the Company’smortgage-backed securities are backed by either a U.S. Government agency orgovernment-sponsored agency, except for three private-label mortgage-backedsecurities with a total fair value of $9.7 million.  Each of these private-label securities aresenior tranches that were rated AAA by at least one major rating agency at June 30,2010.  The unrealized loss reflected byone of our private label securities is attributable to changes in interestrates and liquidity and not reflective of credit quality.

 

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

 

We do not intend to sell either ofthe debt securities in our portfolio with an unrealized loss and do not believethat it is more likely than not that we will be required to sell eithersecurity in an unrealized loss position prior to a recovery in its value. Thefair value of these debt securities is expected to recover as the bondsapproach maturity. Accordingly, we have not recognized any OTTI in ourconsolidated statements of operations.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 

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

* *
| ** **                        | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(In  thousands)**     | ** ** |
| Loans  on real estate:            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Residential  and commercial       |       | $                       | 754,019    |                        | $          | 760,719 |   |
| Construction                      |       | 83,389                  |       | 105,612                     |       |
| Equity  lines of credit           |       | 51,221                  |       | 54,852                      |       |
| Commercial  loans                 |       | 411,605                 |       | 521,016                     |       |
| Agricultural  loans               |       | 17,968                  |       | 18,429                      |       |
| Lease  financing                  |       | 4,014                   |       | 4,011                       |       |
| Installment  loans to individuals |       | 31,936                  |       | 36,175                      |       |
| Overdrafts                        |       | 668                     |       | 358                         |       |
| SBA and  other                    |       | 21,607                  |       | 20,997                      |       |
|                              |       | 1,376,427               |       | 1,522,169                   |       |
| Less:                             |       |                    |       |                        |       |
| Allowance  for loan losses        |       | (46,866                 | )          | (51,991                     | )          |
| Unearned  discount                |       | (2,219                  | )          | (2,561                      | )          |
| Net  Loans                        |       | $                       | 1,327,342  |                        | $          | 1,467,617 |   |

 

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

* *
| ** **                                  | ** ** | **Quarter  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **                                  | ** ** | **2010**                         | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                  | ** ** | **(In  thousands)**              | ** ** |
| Balance,  beginning of period               |       | $                                | 52,015     |                                | $          | 37,598 |   | $ | 51,991 |   | $ | 44,988 |   |
| Provision  for loan losses                  |       | 8,400                            |       | 18,605                              |       | 12,400 |   | 21,110 |   |
| Loans  charged-off                          |       | (13,918                          | )          | (13,509                             | )          | (18,189 | ) | (23,771 | ) |
| Recoveries  on loans previously charged-off |       | 369                              |       | 347                                 |       | 664 |   | 714 |   |
| Balance,  end of period                     |       | $                                | 46,866     |                                | $          | 43,041 |   | $ | 46,866 |   | $ | 43,041 |   |

 

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

* *
| ** **                                     | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **(In  thousands)**     | ** ** |
| Impaired  loans with a valuation allowance     |       | $                       | 11,151     |                        | $          | 21,039 |   |
| Impaired  loans without a valuation allowance  |       | 54,253                  |       | 38,668                      |       |
| Total  impaired loans                          |       | $                       | 65,404     |                        | $          | 59,707 |   |
| Valuation  allowance related to impaired loans |       | $                       | 3,716      |                        | $          | 6,603 |   |

 

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

* *
| ** **                                            | ** ** | **Quarter  Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **                                            | ** ** | **2010**                         | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                            | ** ** | **(In  thousands)**              | ** ** |
| Average  of individually impaired loans during period |       | $                                | 68,231     |                                | $          | 56,682 |   | $ | 65,390 |   | $ | 56,062 |   |
| Interest  income recognized during impairment         |       | $                                | —     |                                | $          | 150 |   | $ | — |   | $ | 160 |   |
| Cash-basis  interest income recognized                |       | $                                | —     |                                | $          | 150 |   | $ | — |   | $ | 160 |   |

 

The gross interest income thatwould have been recorded in the year-to-date periods ended June 30, 2010and June 30, 2009, if the loans had been current in accordance with theiroriginal terms and had been outstanding throughout the period (or sinceorigination, if held for part of the period), was $2,597,000 and $2,226,000,respectively.  At June 30, 2010 and December 31,2009, nonaccrual loans were $64,339,000 and $59,584,000, respectively.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

**(4)       Other Real Estate Owned**

 

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

* *
| Balance  as of December 31, 2008: |   | $       | 484    |   |
|----------------------------------------|--------|---------|--------|--------|
| Additions  to OREO                     |   | 37,167  |   |
| Sales  Proceeds                        |   | (2,067  | )      |
| Losses  and write-downs, net of gains  |   | (838    | )      |
| Balance  as of June 30, 2009:     |   | $       | 34,746 |   |
|                                   |   |    |   |
| Balance  as of December 31, 2009: |   | $       | 37,192 |   |
| Additions  to OREO                     |   | 12,796  |   |
| Sales  Proceeds                        |   | (14,646 | )      |
| Losses  and write-downs, net of gains  |   | (5,044  | )      |
| Balance  as of June 30, 2010:     |   | $       | 30,298 |   |

 

**(5)       Other Intangible Assets**

 

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

 

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

 
| ** **                      | ** ** | ** **       | ** ** | **June 30,**   | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **Useful  life** | ** ** | **2010**            | ** ** | **2009**              | ** ** |
| ** **                      | ** ** | ** **       | ** ** | **(In  thousands)** | ** ** |
| Core  deposit intangible assets |       | 7 - 15 years     |       | $                   | 62,975     |                  | $          | 62,975 |   |
| Accumulated  amortization       |       |             |       | (46,353             | )          | (43,753               | )          |
| Other  intangible assets, net   |       |             |       | $                   | 16,622     |                  | $          | 19,222 |   |

 

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

* *
| ** **            | ** ** | **Quarter  Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|-----------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | **2010**                         | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **            | ** ** | **(In  thousands)**              | ** ** |
| Amortization  expense |       | $                                | 1,300      |                                | $          | 1,581 |   | $ | 2,600 |   | $ | 3,163 |   |
|                       |            |                                  |            |                                     |            |  |  |  |  |  |  |  |  |

 

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

 

At June 30,2010, our outstanding borrowings were $164,276,000 as compared to $164,364,000at December 31, 2009. These borrowings at June 30, 2010 consisted ofterm notes at the Federal Home Loan Bank (“FHLB”).  We also maintain a line of credit at theFHLB. However, as of June 30, 2010 and December 31, 2009, there wasno balance outstanding on this line of credit.

 

The Bankhas executed a specific pledging and security agreement with the FHLB in theamount of $298,905,000 at June 30, 2010 and $195,338,000 at December 31,2009, which encompasses certain loans and securities as collateral for theseborrowings.  The maximum credit allowancefor future borrowings, including term notes and the line of credit, was$134,629,000 at June 30, 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% atJune 30, 2010.  The term notes havefixed interest rates that range from 2.52% to 6.22%, with a weighted average rateof 3.17%.

 

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Table of Contents

 

**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 

The Company had a $41,239,000aggregate balance of subordinated debentures outstanding with a weightedaverage cost of 5.88% and 5.87% at June 30, 2010 and December 31, 2009, respectively. 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 the Company (“Trusts”), which in turn issued $40 millionof trust preferred securities. Generally and with certain limitations, theCompany is permitted to call the debentures subsequent to the first five or tenyears, as applicable, after issue if certain conditions are met, or at any timeupon the occurrence and continuation of certain changes in either the taxtreatment or the capital treatment of the Trusts, the debentures or thepreferred securities.  As of June 30,2010, the Company was in compliance with all covenants of these subordinateddebentures.

 

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

 

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

 

Although the securities issued byeach of the Trusts are not included as a component of stockholders’ equity inthe consolidated balance sheets, the securities are treated as capital forregulatory purposes. Specifically, under applicable regulatory guidelines, the$40 million of securities issued by the trusts qualify as Tier 1 capital, alongwith the $62.0 million of 9% Series A Convertible Preferred Stock, up to amaximum of 25% of capital on an aggregate basis. Any amount that exceeds 25%qualifies as Tier 2 capital.  At June 30,2010, approximately $41.7 million of the combined $102.0 million of the Trusts’securities and preferred stock outstanding qualified as Tier 1 capital. Theremaining $60.2 million is treated as Tier 2 capital.

 

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

 

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

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 
| ** **                  | ** ** | **Date  Issued** | ** ** | **Amount** | ** ** | **Maturity  Date** | ** ** | **Call  Date*** | ** ** | **Fixed or  Variable** | ** ** | **Rate  Adjuster**      | ** ** | **Current  Rate** | ** ** | **Next Rate  Reset Date** | ** ** |
|-----------------------------|------------|------------------|------------|------------|------------|--------------------|------------|-----------------|------------|------------------------|------------|-------------------------|------------|-------------------|------------|---------------------------|------------|
|                        |       |             |       |       |       |               |       |            |       |                   |       |                    |       |              |       |                      |       |
| CenBank  Trust I            |       | 9/7/2000         |       | $          | 10,310     |               | 9/7/2030   |            | 9/7/2010   |                   | Fixed      |                    | N/A        |              | 10.60      | %                         | N/A        |   |
| CenBank  Trust II           |       | 2/22/2001        |       | 5,155      |       | 2/22/2031          |       | 2/22/2011       |       | Fixed                  |       | N/A                     |       | 10.20             | %          | N/A                       |       |
| CenBank  Trust III          |       | 4/8/2004         |       | 15,464     |       | 4/15/2034          |       | 10/15/2010      |       | Variable               |       | LIBOR + 2.65% |       | 2.95              | %          | 10/15/2010                |       |
| Guaranty  Capital Trust III |       | 6/30/2003        |       | 10,310     |       | 7/7/2033           |       | 10/7/2010       |       | Variable               |       | LIBOR + 3.10% |       | 3.40              | %          | 10/7/2010                 |       |
|                             |            |                  |            |            |            |                    |            |                 |            |                        |            |                         |            |                   |            |                           |            |  |

 

----

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

 

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

 

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

 

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

 

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

 
| ** **                          | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **(In  thousands)**     | ** ** |
| Commitments  to extend credit:      |       |                    |       |                        |       |
| Variable                            |       | $                       | 269,855    |                        | $          | 264,616 |   |
| Fixed                               |       | 24,482                  |       | 40,486                      |       |
| Total  commitments to extend credit |       | $                       | 294,337    |                        | $          | 305,102 |   |
|                                |       |                    |       |                        |       |
| Standby  letters of credit          |       | $                       | 13,087     |                        | $          | 14,917 |   |
| Commercial  letters of credit       |       | $                       | 11,000     |                        | $          | 11,000 |   |

 

At June 30, 2010, the rates onthe fixed rate commitments to extend credit ranged from 2.10% to 9.25%.

 

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

 

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

 

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

 

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

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 

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

 

Basis of Fair Value Measurement:

 

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

 

Level 2 - Significant otherobservable inputs other than Level 1 prices such as quoted prices in marketsthat are not active, quoted prices for similar assets, or other inputs that areobservable, either directly or indirectly, for substantially the full term ofthe asset.

 

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

 

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

 

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

 

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

 

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

 

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

 

Level3 is for positions that are not traded in active markets or are subject totransfer restrictions, and/or where valuations are adjusted to reflectilliquidity and/or non-transferability. Such adjustments are generally based onavailable market evidence. In the absence of such evidence, management’s bestestimate is used.  Management’s bestestimate consists of both internal and external support on the Level 3investment.  Internal cash flow modelsusing a present value formula along with indicative exit pricing obtained frombroker/dealers were used to determine the fair value for the Level 3investment.  Subsequent to inception,management only changes Level 3 inputs and assumptions when corroborated byevidence such as transactions in similar instruments, completed or pendingthird-party transactions in the underlying investment or comparable entities,subsequent rounds of financing,

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

recapitalizationsand other transactions across the capital structure, offerings in the equity ordebt markets, and changes in financial ratios or cash flows.

 

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

 

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

 
| ** **                                                  | ** ** | **Quoted  Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant  Other Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|-------------|------------|
| ** **                                                  | ** ** | **(In thousands)**                                                     | ** ** |
| **Assets/Liabilities at June 30, 2010**                |       |                                                                   |       |                                                 |       |                                             |       |        |       |
| U.S. government agencies and government-sponsored  entities |       | $                                                                      | —     |                                                 | $          | 72,017                                           |       | $           | —     |   | $ | 72,017 |   |
| State and municipal                                         |       | —                                                                 |       | 22,003                                               |       | 35,591                                           |       | 57,594      |       |
| Mortgage-backed securities — agency/residential        |       | —                                                                 |       | 140,069                                              |       | —                                           |       | 140,069     |       |
| Mortgage-backed securities — private/residential       |       | —                                                                 |       | 9,656                                                |       | —                                           |       | 9,656       |       |
| Marketable equity                                           |       | —                                                                 |       | 1,519                                                |       | —                                           |       | 1,519       |       |
| Other securities                                            |       | —                                                                 |       | 360                                                  |       | —                                           |       | 360         |       |
| Derivative  assets                                          |       | —                                                                 |       | —                                               |       | 423                                              |       | 423         |       |
| Derivative  liabilities                                     |       | —                                                                 |       | —                                               |       | (387                                             | )          | (387        | )          |
|                                                        |       |                                                                   |       |                                                 |       |                                             |       |        |       |
| **Assets/Liabilities at December 31, 2009**            |       |                                                                   |       |                                                 |       |                                             |       |        |       |
| U.S. government agencies and government-sponsored  entities |       | $                                                                      | —     |                                                 | $          | 17,129                                           |       | $           | —     |   | $ | 17,129 |   |
| State and municipal                                         |       | —                                                                 |       | 23,374                                               |       | 37,453                                           |       | 60,827      |       |
| Mortgage-backed securities — agency/residential        |       | —                                                                 |       | 127,340                                              |       | —                                           |       | 127,340     |       |
| Mortgage-backed securities — private/residential       |       | —                                                                 |       | 13,959                                               |       | —                                           |       | 13,959      |       |
| Marketable equity                                           |       | —                                                                 |       | 1,519                                                |       | —                                           |       | 1,519       |       |
| Other securities                                            |       | —                                                                 |       | 360                                                  |       | —                                           |       | 360         |       |
| Derivative  assets                                          |       | —                                                                 |       | —                                               |       | 206                                              |       | 206         |       |
| Derivative  liabilities                                     |       | —                                                                 |       | —                                               |       | (151                                             | )          | (151        | )          |

 

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

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 

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

 
| ** **                                         | ** ** | **Three  months ended  June 30, 2010**  | ** ** | **Six  months ended  June 30, 2010** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                         | ** ** | **Net  Derivative  Assets and  Liabilities** | ** ** | **State and  Municipal  Securities**      | ** ** | **Net  Derivative  Assets and  Liabilities** | ** ** | **State and  Municipal  Securities** | ** ** |
| ** **                                         | ** ** | **(In  thousands)**                          | ** ** |
| Beginning  balance                                 |       | $                                            | 37         |                                      | $          | 34,878 |   | $ | 55 |   | $ | 37,453 |   |
| Total  unrealized gains (losses) included in:      |       |                                         |       |                                      |       |   |   |   |   |
| Net  Loss                                          |       | (1                                           | )          | —                                    |       | (19 | ) | — |   |
| Other  comprehensive income (loss)                 |       | —                                       |       | 713                                       |       | — |   | (1,862 | ) |
| Purchases,  sales, issuances, and settlements, net |       | —                                       |       | —                                    |       | — |   | — |   |
| Transfers  in and (out) of level three             |       | —                                       |       | —                                    |       | — |   | — |   |
| Balance  June 30, 2010                        |       | $                                            | 36         |                                      | $          | 35,591 |   | $ | 36 |   | $ | 35,591 |   |

 

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

 

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

 
| ** **                        | ** ** | **Quoted  Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant  Other  Observable  Inputs (Level 2)** | ** ** | **Significant  Unobservable  Inputs (Level 3)** | ** ** | **Balance** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|-------------|------------|
| ** **                        | ** ** | **(In  thousands)**                                                    | ** ** |
| Assets  at June 30, 2010     |       |                                                                   |       |                                                 |       |                                            |       |        |       |
| Impaired  loans                   |       | $                                                                      | —     |                                                 | $          | —                                          |       | $           | 36,174     |   | $ | 36,174 |   |
| Loans  held for sale              |       | $                                                                      | —     |                                                 | $          | —                                          |       | $           | 1,150      |   | $ | 1,150 |   |
|                              |       |                                                                   |       |                                                 |       |                                            |       |        |       |
| Assets  at December 31, 2009 |       |                                                                   |       |                                                 |       |                                            |       |        |       |
| Impaired  loans                   |       | $                                                                      | —     |                                                 | $          | —                                          |       | $           | 23,357     |   | $ | 23,357 |   |
| Loans  held for sale              |       | $                                                                      | —     |                                                 | $          | —                                          |       | $           | 9,862      |   | $ | 9,862 |   |

 

Impaired loans, which are usuallymeasured for impairment using the fair value of collateral, had a carryingamount of $65,404,000 at June 30, 2010, after partial charge-offs of$20,165,000.  In addition, these loanshave a specific valuation allowance of $3,716,000 at June 30, 2010.  Of the $65,404,000 impaired loan portfolio atJune 30, 2010, $39,890,000 were carried at fair value as a result of theaforementioned charge-offs and specific valuation allowances. The remainingimpaired loans valued at $25,514,000 were carried at cost at June 30,2010, as the fair value of the collateral on these loans exceeded the bookvalue for each individual credit. Charge-offs and changes in specific valuationallowances during 2010 on impaired loans carried at fair value at June 30,2010 resulted in additional provision for loan losses of $6,463,000 during thesecond quarter 2010 and $14,593,000 for the six months ended June 30,2010.  This provision was offset by areduction to the general component of the allowance for loan losses.   At December 31, 2009, impaired loanshad a carrying amount of $59,707,000 after a partial charge-off of$9,372,000.  In addition, these loans hada specific valuation allowance of $6,603,000 at December 31, 2009.  Of the $59,707,000 impaired loan portfolio atDecember 31, 2009, $30,235,000 were carried at fair value as a result ofthe aforementioned charge-offs and specific valuation allowances.   The remaining $29,472,000 were carried atcost at December 31, 2009, as the fair value of the collateral on theseloans exceeded the book value for each individual credit.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 

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

 

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

 
| ** **                                     | ** ** | **Quoted  Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant  Other Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|-------------|------------|
| ** **                                     | ** ** | **(In  thousands)**                                                    | ** ** |
| Assets  at June 30, 2010                  |       |                                                                   |       |                                                 |       |                                             |       |        |       |
| Other  real estate owned and foreclosed assets |       | $                                                                      | —     |                                                 | $          | —                                           |       | $           | 30,298     |   | $ | 30,298 |   |
|                                           |       |                                                                   |       |                                                 |       |                                             |       |        |       |
| Assets  at December 31, 2009              |       |                                                                   |       |                                                 |       |                                             |       |        |       |
| Other  real estate owned and foreclosed assets |       | $                                                                      | —     |                                                 | $          | —                                           |       | $           | 37,192     |   | $ | 37,192 |   |

 

Other real estate owned is valuedat the time the loan is foreclosed upon and the asset is transferred to otherreal estate owned.  The value is basedprimarily on third party appraisals, less costs to sell.   The appraisals are generally discountedbased on management’s historical knowledge, changes in market conditions fromthe time of valuation, and/or management’s expertise and knowledge of theclient and client’s business. Such discounts are typically significant andresult in a Level 3 classification of the inputs for determining fair value.Other real estate owned is reviewed and evaluated on at least an annual basisfor additional impairment and adjusted accordingly, based on the same factorsidentified above. Other real estate owned had a carrying amount of $30,298,000at June 30, 2010, which is made up of an outstanding balance of$33,442,000, with a valuation allowance of $3,144,000.

 

***Fair Value of FinancialInstruments***

 

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

 
| ** **                                                                  | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                  | ** ** | **Carrying  amount**    | ** ** | **Fair  value**             | ** ** | **Carrying  amount** | ** ** | **Fair  value** | ** ** |
| ** **                                                                  | ** ** | **(In  thousands)**     | ** ** |
| Financial  assets:                                                          |       |                    |       |                        |       |   |   |   |   |
| Cash  and cash equivalents                                                  |       | $                       | 184,701    |                        | $          | 184,701 |   | $ | 234,483 |   | $ | 234,483 |   |
| Securities  available for sale                                              |       | 281,215                 |       | 281,215                     |       | 221,134 |   | 221,134 |   |
| Securities  held to maturity                                                |       | 13,897                  |       | 14,599                      |       | 9,942 |   | 10,428 |   |
| Bank  stocks                                                                |       | 17,181                  |       | n/a                         |       | 17,160 |   | n/a |   |
| Loans,  net                                                                 |       | 1,327,342               |       | 1,358,205                   |       | 1,467,617 |   | 1,494,649 |   |
| Loans  held for sale                                                        |       | 1,150                   |       | 1,150                       |       | 9,862 |   | 9,862 |   |
| Accrued  interest receivable                                                |       | 6,349                   |       | 6,349                       |       | 6,675 |   | 6,675 |   |
| Interest  rate swaps, net                                                   |       | 36                      |       | 36                          |       | 55 |   | 55 |   |
|                                                                        |       |                    |       |                        |       |   |   |   |   |
| Financial  liabilities:                                                     |       |                    |       |                        |       |   |   |   |   |
| Deposits                                                                    |       | 1,544,271               |       | 1,549,443                   |       | 1,693,290 |   | 1,700,549 |   |
| Securities  sold under agreements to repurchase and federal funds purchased |       | 17,247                  |       | 17,247                      |       | 22,990 |   | 22,990 |   |
| Subordinated  debentures                                                    |       | 41,239                  |       | 33,800                      |       | 41,239 |   | 33,768 |   |
| Long-term  borrowings                                                       |       | 164,276                 |       | 174,720                     |       | 164,364 |   | 171,345 |   |
| Accrued  interest payable                                                   |       | 4,344                   |       | 4,344                       |       | 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.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

Those techniques are significantlyaffected by the assumptions used, including the discount rate and estimates offuture cash flows. Accordingly, the fair value estimates may not be realized inan immediate settlement of the instrument.

 

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

 

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

 

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

 

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

 

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

 

Fair values for securities availablefor sale and held to maturity are generally determined by matrix pricing, whichis a mathematical technique widely used in the industry to value debtsecurities without relying exclusively on quoted prices for the specificsecurities but rather by relying on the securities’ relationship to otherbenchmark quoted securities.

 

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

 

***(c) Loans***

 

Loans, net excludes loansheld-for-sale as these fair values are disclosed on a separate line on thetable.   For variable-rate loans thatreprice frequently and with no significant change in credit risk, fair valuesare based on carrying values. Fair values for other loans (e.g., commercialreal estate loans and investment property mortgage loans and commercial andindustrial loans) are estimated using discounted cash flow analyses, usinginterest rates currently being offered for loans with similar terms toborrowers of similar credit quality. Impaired loans are valued at the lower of cost or fair value asdescribed above in this note.

 

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

 

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

 

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

 

***(e) Deposits***

 

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

 

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

 

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

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 

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

 

***(h) Subordinated Debentures***

 

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

 

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

 

The carrying amounts of accruedinterest approximate fair value.

 

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

 

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

 

**(10)****             ****Stock-Based Compensation**

 

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

 

Prior to vesting of the stockawards with a service vesting condition, each grantee shall have the rights ofa stockholder with respect to voting of the granted stock. The recipient is notentitled to dividend rights with respect to the shares of granted stock untilvesting occurs. Prior to vesting of the stock awards with performance vestingconditions, each grantee shall have the rights of a stockholder with respect tovoting of the granted stock. 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 theIncentive Plan.

 

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

 

The Incentive Plan authorizesgrants of stock based compensation awards of up to 8,500,000 shares of Companyvoting common stock, subject to adjustments provided by the Incentive Plan. Asof June 30, 2010 and December 31, 2009 there were 1,221,835 and1,381,105 shares of unvested stock granted (net of forfeitures), with 6,567,381and 524,815 shares available for grant under the Incentive Plan,respectively.  Of the 1,221,835 sharesunearned at June 30, 2010, approximately 527,000 shares are expected tovest.  The Company does not expect any ofthe 630,000 shares of performance awards to vest.

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 
| ** **                          | ** ** | **Shares** | ** ** | **Weighted  Average Fair  Value on Award Date** | ** ** |
|-------------------------------------|------------|------------|------------|-------------------------------------------------|------------|
| Unearned  at December 31, 2009 |       | 1,381,105  |       | $                                               | 7.15       |   |
| Awarded                             |       | 15,000     |       | 1.33                                            |       |
| Forfeited                           |       | (57,566    | )          | 5.77                                            |       |
| Vested                              |       | (116,704   | )          | 8.95                                            |       |
| Unearned  at June 30, 2010     |       | 1,221,835  |       | $                                               | 6.97       |   |

 

The Company recognized $588,000 and$411,000 in stock-based compensation expense for services rendered for the sixmonths ended June 30, 2010 and June 30, 2009, respectively.  The total income tax effect recognized in theconsolidated income statement for share-based compensation arrangements was a$115,000 expense for the six months ended June 30, 2010, compared to a$184,000 expense for the same period in 2009. The 2010 income tax effect related to share-based compensationarrangements included $338,000 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 June 30, 2010, compensation cost of $1,052,000related to nonvested awards not yet recognized is expected to be recognizedover a weighted-average period of 2.6 years. The fair value of awards that vested in the second quarter 2010 wasapproximately $156,000.

 

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

 

*Risk Management Objective ofUsing Derivatives*

 

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

 

*Fair Values of DerivativeInstruments on the Consolidated Balance Sheet*

 

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

 
| ** **                                                    | ** ** | **Asset  Derivatives** | ** ** | **Liability  Derivatives** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                    | ** ** | **(In  thousands)**    | ** ** |
| As of June 30, 2010:                                     |       |                   |       |                       |       |
|                                                          |       |                   |       |                       |       |
| Derivatives  **not** designated as hedging  instruments       |       |                   |       |                       |       |
| Interest  Rate Products                                       |       | $                      | 423        |                       | $          | 387 |   |
|                                                          |       |                   |       |                       |       |
| Total  derivatives **not** designated as  hedging instruments |       | $                      | 423        |                       | $          | 387 |   |

 

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

 

*Non-designated Hedges*

 

None of the Company’s derivativesare designated as qualifying hedging relationships. Derivatives not designatedas hedges are not speculative and result from a service the Company provides tocertain customers, which the Company implemented during the first quarter of2009.  The Company executes interest rateswaps with commercial banking customers to facilitate the customer’s respectiverisk management strategies.  Thoseinterest rate swaps are simultaneously hedged by offsetting interest rate swapsthat the Company executes with a third party, such that the Company minimizesits net risk exposure resulting from such transactions.  As the interest rate swaps

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

associated with this program do notmeet the strict hedge accounting requirements under FASC Topic 815, changes inthe fair value of both the customer swaps and the offsetting swaps arerecognized directly in earnings.  As of June 30,2010, the Company had two interest rate swaps with customers with a totalnotional amount of $23,216,000, and two offsetting interest rate swaps with atotal notional amount of $23,216,000; for an aggregate notional amount of$46,433,000 related to this program.

 

*Effect of Derivative Instrumentson the Consolidated Income Statement*

 

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

 
| ** **                                              | ** ** | **Location  of Gain or (Loss)**           | ** ** | **Amount of  Gain (Loss) Recognized in Income  on Derivatives** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **Derivatives Not  Designated  as Hedging Instruments** | ** ** | **Recognized  in Income on  Derivatives** | ** ** | **Three  Months Ended  June 30, 2010**                     | ** ** | **Six  Months Ended  June 30, 2010** | ** ** |
| ** **                                              | ** ** | ** **                                | ** ** | **(In  thousands)**                                             | ** ** |
| Interest  Rate Products                                 |       | Other non-interest income                 |       | $                                                               | (1         | ) | $ | (19 | ) |
|                                                    |       |                                      |       |                                                            |       |   |   |
| Total                                                   |       |                                      |       | $                                                               | (1         | ) | $ | (19 | ) |

 

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

 

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

 
| ** **                      | ** ** | **Ratio at  June 30,  2010** | ** ** | **Ratio at  December 31,  2009** | ** ** | **Minimum  Capital  Requirement** | ** ** | **Minimum  Requirement for  “Well  Capitalized”  Institution** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------------------------|------------|
|                            |       |                              |       |                                  |       |                              |       |                                                                     |       |
| Total Risk-Based Capital Ratio  |       |                              |       |                                  |       |                              |       |                                                                     |       |
| Consolidated                    |       | 14.80                             | %          | 13.80                                 | %          | 8.00                              | %          | N/A                                                                      |       |
| Guaranty Bank and Trust Company |       | 13.82                             | %          | 12.82                                 | %          | 8.00                              | %          | 10.00                                                                    | %          |
| Tier 1 Risk-Based Capital Ratio |       |                              |       |                                  |       |                              |       |                                                                     |       |
| Consolidated                    |       | 9.77                              | %          | 9.43                                  | %          | 4.00                              | %          | N/A                                                                      |       |
| Guaranty Bank and Trust Company |       | 12.55                             | %          | 11.55                                 | %          | 4.00                              | %          | 6.00                                                                     | %          |
| Leverage Ratio                  |       |                              |       |                                  |       |                              |       |                                                                     |       |
| Consolidated                    |       | 7.87                              | %          | 7.89                                  | %          | 4.00                              | %          | N/A                                                                      |       |
| Guaranty Bank and Trust Company |       | 10.18                             | %          | 9.66                                  | %          | 4.00                              | %          | 5.00                                                                     | %          |

 

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

 

On January 22, 2010, theCompany and the Bank entered into a Written Agreement with the Federal ReserveBank of Kansas City (“Federal Reserve”) and the Colorado Division of Banking (“CDB”).  The Written Agreement requires the Bank to submitwritten plans within certain timeframes to the Federal Reserve and the CDB thataddressed the following items: board oversight, credit risk managementpractices, commercial real estate concentrations, problem assets, reserves forloan and lease losses, capital, liquidity, brokered deposits, earnings andoverall condition.  The Agreement alsorequires the Company to submit to the Federal Reserve a written plan thataddresses capital and a written statement of the Company’s annual cash flowprojections.  All written plans requiredto be submitted under the Written Agreement were timely submitted and approvedby the Federal Reserve and/or Division, respectively.

 

In addition, the Written Agreementplaces restrictions on the Bank accepting any new brokered deposits, butcontinues to permit contractual rollovers and renewals of brokereddeposits.  The Written Agreement alsoprovides that written approval must be obtained from the federal regulatorsprior to appointing any new director or senior executive officer or changingthe responsibilities of any senior executive officer and making indemnificationand severance payments.  Further, theWritten Agreement provides that prior written approval must be obtained fromthe Federal Reserve, and in the case of the Bank, the CDB, prior to payingdividends.  Prior written approval mustalso

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

be obtained from the FederalReserve before the Company can incur, increase or guarantee any debt, take anyother form of payment representing a reduction in capital from the Bank, ormake any distributions of interest, principal or other sums on subordinateddebentures or trust preferred securities.

 

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

 

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

 
| ** **                                                       | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                       | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                       | ** ** | **(In  thousands)**                   | ** ** |
| Net  loss                                                        |       | $                                     | (4,354     | )                                   | $          | (10,857 | ) | $ | (6,199 | ) | $ | (10,421 | ) |
| Other  comprehensive income:                                     |       |                                  |       |                                |       |   |   |   |   |
| Change  in net unrealized gains, net                             |       | 3,527                                 |       | 847                                 |       | 3,206 |   | 3,219 |   |
| Less:  Reclassification adjustments for gains included in income |       | (1                                    | )          | —                              |       | (15 | ) | — |   |
| Net  unrealized holding gains                                    |       | 3,528                                 |       | 847                                 |       | 3,221 |   | 3,219 |   |
| Income  tax expense                                              |       | (1,343                                | )          | (322                                | )          | (1,234 | ) | (1,226 | ) |
| Other  comprehensive income                                      |       | 2,185                                 |       | 525                                 |       | 1,987 |   | 1,993 |   |
| Total  comprehensive loss                                        |       | $                                     | (2,169     | )                                   | $          | (10,332 | ) | $ | (4,212 | ) | $ | (8,428 | ) |

 

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

 

On August 11, 2009, theCompany issued 59,053 shares of 9% non-cumulative Series A ConvertiblePreferred Stock, which resulted in additional capital of $57,846,000, net ofexpenses.  The liquidation preference forthe Series A Convertible Preferred Stock is $1,000 per share.  The Series A Convertible Preferred Stockis not redeemable.  Each share of Series AConvertible Preferred Stock will automatically convert into shares of theCompany’s common stock on the fifth anniversary of the issuance date of the Series AConvertible Preferred Stock, or August 11, 2014, subject to certainlimitations. The preferred stock holders may elect to convert their shares of Series AConvertible Preferred Stock into shares of the Company’s common stock prior tothe mandatory conversion of the Series A Convertible Preferred Stockfollowing the earlier of the second anniversary of the issuance date the Series AConvertible Preferred Stock, or August 11, 2011, and the occurrence ofcertain events resulting in the conversion, exchange or reclassification of theCompany’s common stock. Each share of Series A Convertible Preferred Stockwill be convertible into shares of the Company’s common stock at a conversionprice of $1.80 per share, adjustable downward in $0.04 increments to $1.50 pershare in the event of certain nonpayments of dividends (whether paid in cash orin kind) on the Series A Convertible Preferred Stock. The conversion priceof the Series A Convertible Preferred Stock is subject to customaryanti-dilution adjustments. Due to the conversion price adjustment resultingfrom nonpayment of dividends, for purposes of the risk-based and leveragecapital guidelines of the Board of Governors of the Federal Reserve System, andfor purposes of regulatory reporting, the Series A Convertible PreferredStock is treated as cumulative preferred stock (e.g., a restricted core capitalelement for Tier 1 capital purposes). The Company has paid quarterly dividends in the form of additionalshares of Series A Convertible Preferred Stock since November 2009.  The outstanding balance of Series AConvertible Preferred Stock was $61,961,000 and $59,227,000 at June 30,2010 and December 31, 2009, respectively. The liquidation preference for the Series A Convertible PreferredShares was $63,168,000 and $60,434,000 at June 30, 2010 and December 31,2009, respectively.

 

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

 

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

 

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**ITEM 2.**       **Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

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

 

**Overview**

 

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

 

Through the Bank, we providebanking and other financial services throughout our targeted Colorado marketsto consumers and to small and medium-sized businesses, including the owners andemployees of those businesses.  These bankingproducts and services include accepting time and demand deposits, originatingcommercial loans, including energy loans, real estate loans includingconstruction loans, Small Business Administration guaranteed loans and consumerloans. We derive our income primarily from interest, including loan originationfees, received on real estate-related loans, commercial loans and leases andconsumer loans and, to a lesser extent, interest on investment securities andother fees received in connection with servicing loan and deposit accounts. Ourmajor operating 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 fromother financial institutions and our operating results, like those of otherfinancial institutions operating exclusively or primarily in Colorado, aresignificantly influenced by economic conditions in Colorado, including thestrength of the real estate market. In addition, both the fiscal and regulatorypolicies of the federal government and regulatory authorities that governfinancial institutions and market interest rates also impact our financialcondition, results of operations and cash flows.

 

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

 

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

 

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**Earnings Summary**

 

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

 

**Table 1**

 
| ** **                                           | ** ** | **Three  Months Ended June 30,**             | ** ** | **Six  Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                          | ** ** | **2009**                            | ** ** | **Change -  Favorable  (Unfavorable)** | ** ** | **2010** | ** ** | **2009** | ** ** | **Change -  Favorable  (Unfavorable)** | ** ** |
| ** **                                           | ** ** | **(In  thousands, except share data and ratios)** | ** ** |
| **Results of Operations:**                           |       |                                              |       |                                |       |   |   |   |   |   |   |   |   |
| Interest  income                                     |       | $                                                 | 22,053     |                                | $          | 24,775 |   | $ | (2,722 | ) | $ | 45,374 |   | $ | 49,635 |   | $ | (4,261 | ) |
| Interest  expense                                    |       | 5,920                                             |       | 8,915                               |       | 2,995 |   | 12,609 |   | 18,057 |   | 5,448 |   |
| Net  interest income                                 |       | 16,133                                            |       | 15,860                              |       | 273 |   | 32,765 |   | 31,578 |   | 1,187 |   |
| Provision  for loan losses                           |       | 8,400                                             |       | 18,605                              |       | 10,205 |   | 12,400 |   | 21,110 |   | 8,710 |   |
| Net  interest income after provision for loan losses |       | 7,733                                             |       | (2,745                              | )          | 10,478 |   | 20,365 |   | 10,468 |   | 9,897 |   |
| Noninterest  income                                  |       | 3,725                                             |       | 2,631                               |       | 1,094 |   | 6,147 |   | 5,525 |   | 622 |   |
| Noninterest  expense                                 |       | 18,419                                            |       | 17,718                              |       | (701 | ) | 36,545 |   | 33,178 |   | (3,367 | ) |
| Loss  before income taxes                            |       | (6,961                                            | )          | (17,832                             | )          | 10,871 |   | (10,033 | ) | (17,185 | ) | 7,152 |   |
| Income  tax benefit                                  |       | (2,607                                            | )          | (6,975                              | )          | (4,368 | ) | (3,834 | ) | (6,764 | ) | (2,930 | ) |
| Net  loss                                            |       | (4,354                                            | )          | (10,857                             | )          | 6,503 |   | (6,199 | ) | (10,421 | ) | 4,222 |   |
| Preferred  stock dividends                           |       | (1,390                                            | )          | —                              |       | (1,390 | ) | (2,750 | ) | — |   | (2,750 | ) |
| Net  loss applicable to common stockholders          |       | $                                                 | (5,744     | )                                   | $          | (10,857 | ) | $ | 5,113 |   | $ | (8,949 | ) | $ | (10,421 | ) | $ | 1,472 |   |
|                                                 |       |                                              |       |                                |       |   |   |   |   |   |   |   |   |
| **Common Share Data:**                               |       |                                              |       |                                |       |   |   |   |   |   |   |   |   |
| Basic  loss per common share                         |       | $                                                 | (0.11      | )                                   | $          | (0.21 | ) | $ | 0.10 |   | $ | (0.17 | ) | $ | (0.20 | ) | $ | 0.03 |   |
| Diluted  loss per common share                       |       | $                                                 | (0.11      | )                                   | $          | (0.21 | ) | $ | 0.10 |   | $ | (0.17 | ) | $ | (0.20 | ) | $ | 0.03 |   |
| Average  common shares outstanding                   |       | 51,660,603                                        |       | 51,339,542                          |       | 321,061 |   | 51,633,972 |   | 51,312,847 |   | 321,125 |   |
| Diluted  average common shares outstanding           |       | 51,660,603                                        |       | 51,339,542                          |       | 321,061 |   | 51,633,972 |   | 51,312,847 |   | 321,125 |   |

** **
| ** **                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **Percent** | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------|------------|
| ** **                                                    | ** ** | **2010**          | ** ** | **2009**              | ** ** | **Change**  | ** ** |
| **Selected Balance Sheet Ratios:**                            |       |              |       |                  |       |        |       |
| Total  risk based capital to risk weighted assets             |       | 14.80             | %          | 13.80                 | %          | 7.25        | %          |
| Loans,  net of unearned discount to deposits                  |       | 88.99             | %          | 89.74                 | %          | (0.84       | )%         |
| Allowance  for loan losses to loans, net of unearned discount |       | 3.41              | %          | 3.42                  | %          | 0.32        | %          |

 

The$4.4 million second quarter 2010 net loss (excluding the preferred stockdividend) is a $6.5 million improvement from the second quarter 2009 net lossof $10.9 million.  The primary reasonsfor the reduction in loss in the second quarter 2010 as compared to the sameperiod last year are a $10.2 million reduction in the provision for loanlosses, increases in net interest income and noninterest income and decreasesin most categories of noninterest expense. These items were partially offset bya $2.2 million increase in write-downs and losses on other real estate owned.

 

On August 11, 2009, theCompany issued 59,053 shares of Series A Convertible Preferred Stock, parvalue $0.001 per share, at a price of $1,000 per share.  The Company received $57.9 million, net ofexpense, from the issuance of these shares, which significantly increased ourcapital.  The May 15, 2010 quarterlydividend on the preferred stock is included in the net loss allocable to commonstockholders.

 

In the second quarter 2010, netinterest income increased by $0.3 million as compared to the same quarter in2009.  On a year-to-date basis, netinterest income improved by $1.2 million in 2010 as compared to the same periodin 2009.  Although average earning assetsdeclined on both a quarter-to-date and year-to-date basis in comparison to thesame periods in 2009, overall net interest income increased due to an increasein net interest margin resulting primarily from higher loan yields and lowerdeposit costs.

 

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The provision for loan lossesdecreased in the second quarter 2010 by approximately $10.2 million compared tothe same quarter in 2009.  The provisionfor loan losses also decreased by $8.7 million on a year-to-date basis in 2010as compared to the same period in 2009. The overall declines in the quarter-to-date and year-to-date 2010provision for loan losses as compared to the same periods in 2009 reflect botha lower specific component of the allowance for loan losses as well as a loweramount of year-to-date charge-offs in 2010.

 

Noninterest expense increased by$0.7 million in the second quarter 2010 as compared to the same quarter in2009.  This increase is primarilyattributable to a $2.2 million increase in other real estate owned expense as aresult of write-downs on other realestate owned properties caused by valuation adjustments and sales, partiallyoffset by decreases in all other categories of noninterest expense.  Similarly, noninterest expense increased by$3.4 million on a year-to-date basis in 2010 as compared to 2009 primarily as aresult of a $4.9 million increase in other real estate owned expense and a $0.4million increase in insurance and assessments, partially offset by decreases inall other areas of noninterest expense.

 

**NetInterest Income and Net Interest Margin**

 

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

 

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

 

**Table 2**

 
| ** **                                | ** ** | **Quarter  Ended**          | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **June 30,  2010**     | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** |
| ** **                                | ** ** | **(Dollars  in thousands)** | ** ** |
| Net  interest income                      |       | $                           | 16,133     |   | $ | 16,632 |   | $ | 16,284 |   | $ | 14,911 |   | $ | 15,860 |   |
| Interest  rate spread                     |       | 3.09                        | %          | 3.10 | % | 2.81 | % | 2.65 | % | 2.77 | % |
| Net  interest margin                      |       | 3.47                        | %          | 3.50 | % | 3.26 | % | 3.14 | % | 3.38 | % |
| Net interest margin, fully tax equivalent |       | 3.55                        | %          | 3.58 | % | 3.34 | % | 3.23 | % | 3.46 | % |
|                                           |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Secondquarter 2010 net interest income of $16.1 million increased by $0.3 millionfrom the second quarter 2009.  Thisincrease is a result of a $2.9 million favorable rate variance, which wasmostly offset by a $2.7 million unfavorable volume variance (see Table 5).

 

The $2.9million favorable rate variance in the second quarter 2010 compared to thesecond quarter 2009 is primarily attributable to a 9 basis point increase innet interest margin. This increase in net interest margin is mostly due to a 13basis point increase in loan yields in the second quarter 2010 as compared tothe same period in 2009, as well as an 86 basis point decline in the cost offunds over the same period.  There wereno overall declines in the targeted federal funds rates or the prime ratethroughout 2009 or 2010.  The increase inloan yields throughout 2009 and into 2010 is a result of favorable repricing onmatured loans, primarily as a result of the implementation of a minimum rate,or floor, on variable rate loans. Similarly, the decline in the cost of funds is a result of lower depositcosts that are primarily attributable to lower costs on renewed and new timedeposits throughout 2009 and into 2010.

 

The $2.7million unfavorable volume variance for the second quarter 2010 as compared tothe same period in 2009 is mostly attributable to a shift in earning assetsfrom higher yielding loan balances to lower yielding investments and overnightcash balances, as well as an overall $14.7 million decrease in average totalearning assets.  The average balance ofloans decreased in the second quarter 2010 as compared to the same period inthe prior year by $314.4 million. Offsetting this decrease, the Company’saverage investment securities and overnight funds for the second quarter 2010increased by $158.5 million and $145.4 million, respectively, as compared tothe same quarter in 2009.  In the secondquarter 2010, investment securities and overnight funds had an average yield of3.45% and 0.25%, respectively, as compared to a yield of 5.50% for loans.  In July 2010, the Company settled andpurchased an additional $62 million of government-sponsored agency securities,and did not renew $25.5 million of brokered deposits.  In addition to the $25.5 million of brokereddeposits that matured in July 2010, it is expected that we will not renewbetween $70 million and $90 million of time deposits throughout the remainderof 2010.

 

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

 

On alinked quarter basis, net interest margin decreased by three basis points inthe second quarter 2010 as compared to the first quarter 2010.  This was primarily a result of a 15 basispoint decline in loan yields from 5.65% to 5.50% due mostly to significantlyhigher-yielding loans placed on nonaccrual status during the first and secondquarter of 2010, as well as certain recoveries of interest income in the firstquarter that did not occur in the second quarter.  The decrease in loan yields was mostly offsetby a favorable change in earnings asset mix in the second quarter 2010 ascompared to the first quarter 2010, with a $28.7 million reduction in averageovernight funds.  In addition, theoverall cost of funds decreased by 15 basis points in the second quarter 2010as compared to the first quarter 2010 due mostly to a 23 basis point decline inthe cost of time deposits.

 

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

 

**Table 3**

 
| ** **                                | ** ** | **Six  Months Ended**   | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
| ** **                                | ** ** | ** **              | ** ** | ** ** | ** ** |
| Net  interest income                      |       | $                       | 32,765     |   | $ | 31,578 |   |
| Interest  rate spread                     |       | 3.10                    | %          | 2.69 | % |
| Net  interest margin                      |       | 3.48                    | %          | 3.32 | % |
| Net interest margin, fully tax equivalent |       | 3.56                    | %          | 3.40 | % |
|                                           |            |                         |            |  |  |  |  |

 

For thesix-month period ended June 30, 2010, net interest income increased by$1.2 million, or 3.8%, as compared to the same period in 2009.  This increase is due to a $7.7 millionfavorable rate variance and a $6.5 million unfavorable volume variance (seeTable 5).

 

Thefavorable rate variance of $7.7 million for year-to-date 2010 is primarilyattributable to a 30 basis point increase in the yield on loans combined withan 81 basis point decrease in the cost of interest-bearing liabilities.  The Federal Open Markets Committee (FOMC) ofthe Federal Reserve Board has not changed the target federal funds rate since December 2008.  The improvement in loan yields and decreasein deposit costs is due mostly to the renewal of loans at higher rates and therenewal of deposits at lower rates in 2009 and 2010.  The overall cost of time deposits decreasedfrom 3.51% for the first six months of 2009 to 2.10% for the same period in2010, a decrease of 141 basis points.

 

The $6.5million unfavorable volume variance for the year-to-date period in 2010 ascompared to the same period in 2009 is the combination of a $20.6 milliondecrease in average earning assets and a shift in allocation from higheryielding loan balances to lower yielding investment securities and overnightfunding balances.  Average loan balances decreasedby $315.2 million for the first six months of 2010 as compared to the sameperiod in 2009.  Average investmentsecurities increased by $137.2 million, while average overnight fundingbalances increased $165.2 million for the year-to-date period in 2010 ascompared to the same period in 2009.  Theyields on investment securities and overnight funds were 3.69% and 0.25% forthe first six months of 2010 as compared to a loan yield of 5.57% during thesame period.  This shift from higheryielding loans to lower yielding investments and overnight funds negativelyimpacted our margin in 2010.

 

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

 

**Table 4**

 
| ** **                                          | ** ** | **Quarter  Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **2010**                    | ** ** | **2009** | ** ** |
| ** **                                          | ** ** | **Average  Balance**        | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** |
| ** **                                          | ** ** | **(Dollars  in thousands)** | ** ** |
| **ASSETS:**                                         | ** ** | ** **                  | ** ** | ** ** |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest-earning assets:**                        | ** ** | ** **                  | ** ** | ** ** |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  loans, net of unearned fees (1)(2)(3)        |       | $                           | 1,418,768  |   | $ | 19,449 |   | 5.50 | % | $ | 1,733,168 |   | $ | 23,208 |   | 5.37 | % |
| Investment  securities (1)                          |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 211,670                     |       | 1,615 |   | 3.06 | % | 45,645 |   | 590 |   | 5.18 | % |
| Tax-exempt                                          |       | 57,668                      |       | 704 |   | 4.90 | % | 65,146 |   | 765 |   | 4.71 | % |
| Bank  Stocks (4)                                    |       | 17,131                      |       | 182 |   | 4.28 | % | 21,440 |   | 198 |   | 3.70 | % |
| Other  earning assets                               |       | 161,611                     |       | 103 |   | 0.25 | % | 16,175 |   | 14 |   | 0.33 | % |
| Total  interest-earning assets                      |       | 1,866,848                   |       | 22,053 |   | 4.74 | % | 1,881,574 |   | 24,775 |   | 5.28 | % |
| **Non-earning assets:**                             |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Cash  and due from banks                            |       | 23,276                      |       |   |   |   |   | 28,947 |   |   |   |   |   |
| Other  assets                                       |       | 109,403                     |       |   |   |   |   | 100,793 |   |   |   |   |   |
| **Total assets**                                    |       | $                           | 1,999,527  |   |   |   |   |   | $ | 2,011,314 |   |   |   |   |   |
|                                                |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**      |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                      |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                            |       | $                           | 170,065    |   | $ | 85 |   | 0.20 | % | $ | 146,802 |   | $ | 90 |   | 0.25 | % |
| Money  market                                       |       | 325,245                     |       | 667 |   | 0.82 | % | 275,598 |   | 676 |   | 0.98 | % |
| Savings                                             |       | 74,360                      |       | 46 |   | 0.25 | % | 72,085 |   | 57 |   | 0.32 | % |
| Time  certificates of deposit                       |       | 648,506                     |       | 3,196 |   | 1.98 | % | 708,622 |   | 6,087 |   | 3.44 | % |
| Total  interest-bearing deposits                    |       | 1,218,176                   |       | 3,994 |   | 1.31 | % | 1,203,107 |   | 6,910 |   | 2.30 | % |
| Borrowings:                                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase  agreements                              |       | 17,674                      |       | 32 |   | 0.74 | % | 14,243 |   | 31 |   | 0.88 | % |
| Federal  funds purchased (5)                        |       | 239                         |       | 1 |   | 0.91 | % | 248 |   | — |   | 0.54 | % |
| Subordinated  debentures                            |       | 41,239                      |       | 579 |   | 5.63 | % | 41,239 |   | 662 |   | 6.45 | % |
| Borrowings                                          |       | 164,283                     |       | 1,314 |   | 3.21 | % | 166,504 |   | 1,312 |   | 3.16 | % |
| Total  interest-bearing liabilities                 |       | 1,441,611                   |       | 5,920 |   | 1.65 | % | 1,425,341 |   | 8,915 |   | 2.51 | % |
| Noninterest  bearing liabilities:                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                    |       | 352,171                     |       |   |   |   |   | 410,517 |   |   |   |   |   |
| Other  liabilities                                  |       | 14,045                      |       |   |   |   |   | 10,472 |   |   |   |   |   |
| Total  liabilities                                  |       | 1,807,827                   |       |   |   |   |   | 1,846,330 |   |   |   |   |   |
| Stockholders’  Equity                          |       | 191,700                     |       |   |   |   |   | 164,984 |   |   |   |   |   |
| **Total liabilities and stockholders’ equity** |       | $                           | 1,999,527  |   |   |   |   |   | $ | 2,011,314 |   |   |   |   |   |
| Net  interest income                                |       |                        |       | $ | 16,133 |   |   |   |   |   | $ | 15,860 |   |   |   |
| Net  interest margin                                |       |                        |       |   |   | 3.47 | % |   |   |   |   | 3.38 | % |

 

----

(1) Yields on loans and securitieshave not been adjusted to a tax-equivalent basis.  Net interest margin on a fully tax-equivalentbasis would have been 3.55% and 3.46% for the three months ended June 30, 2010and June 30, 2009, respectively.  Thetax-equivalent basis was computed by calculating the deemed interest onmunicipal 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 averagebalances and rates include nonaccrual loans.

 

(3) Net loan fees of $0.5 millionand $1.1 million for the three months ended June 30, 2010 and 2009,respectively, are included in

the yield computation.

 

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

 

(5) The interest expense related tofederal funds purchased for the second quarter 2010 and the second quarter 2009rounded to zero.

 

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**Table 4 (Continued)**

 
| ** **                                          | ** ** | **Six  Months Ended June 30,**       | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                          | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                                          | ** ** | **Average  Balance**                 | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)** | ** ** |
| **ASSETS:**                                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest-earning assets:**                        | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  loans, net of unearned fees (1)(2)(3)        |       | $                                    | 1,455,494  |   | $ | 40,233 |   | 5.57 | % | $ | 1,770,738 |   | $ | 46,284 |   | 5.27 | % |
| Investment  securities (1)                          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 190,129                              |       | 3,131 |   | 3.32 | % | 47,286 |   | 1,316 |   | 5.61 | % |
| Tax-exempt                                          |       | 58,855                               |       | 1,424 |   | 4.88 | % | 64,483 |   | 1,532 |   | 4.79 | % |
| Bank  Stocks (4)                                    |       | 17,123                               |       | 367 |   | 4.33 | % | 24,838 |   | 486 |   | 3.95 | % |
| Other  earning assets                               |       | 175,878                              |       | 219 |   | 0.25 | % | 10,704 |   | 17 |   | 0.31 | % |
| Total  interest-earning assets                      |       | 1,897,479                            |       | 45,374 |   | 4.82 | % | 1,918,049 |   | 49,635 |   | 5.22 | % |
| **Non-earning assets:**                             |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cash  and due from banks                            |       | 24,404                               |       |   |   |   |   | 29,445 |   |   |   |   |   |
| Other  assets                                       |       | 111,159                              |       |   |   |   |   | 90,853 |   |   |   |   |   |
| **Total assets**                                    |       | $                                    | 2,033,042  |   |   |   |   |   | $ | 2,038,347 |   |   |   |   |   |
|                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                            |       | $                                    | 167,413    |   | $ | 164 |   | 0.20 | % | $ | 143,487 |   | $ | 178 |   | 0.25 | % |
| Money  market                                       |       | 330,383                              |       | 1,393 |   | 0.85 | % | 286,432 |   | 1,306 |   | 0.92 | % |
| Savings                                             |       | 73,641                               |       | 91 |   | 0.25 | % | 71,108 |   | 112 |   | 0.32 | % |
| Time  certificates of deposit                       |       | 678,535                              |       | 7,059 |   | 2.10 | % | 714,081 |   | 12,439 |   | 3.51 | % |
| Total  interest-bearing deposits                    |       | 1,249,972                            |       | 8,707 |   | 1.40 | % | 1,215,108 |   | 14,035 |   | 2.33 | % |
| Borrowings:                                         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase  agreements                              |       | 18,452                               |       | 75 |   | 0.82 | % | 15,617 |   | 68 |   | 0.88 | % |
| Federal  funds purchased                            |       | 146                                  |       | 1 |   | 0.89 | % | 266 |   | 1 |   | 0.71 | % |
| Subordinated  debentures                            |       | 41,239                               |       | 1,211 |   | 5.92 | % | 41,239 |   | 1,320 |   | 6.46 | % |
| Borrowings                                          |       | 164,305                              |       | 2,615 |   | 3.21 | % | 169,161 |   | 2,633 |   | 3.14 | % |
| Total  interest-bearing liabilities                 |       | 1,474,114                            |       | 12,609 |   | 1.72 | % | 1,441,391 |   | 18,057 |   | 2.53 | % |
| Noninterest  bearing liabilities:                   |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                    |       | 352,551                              |       |   |   |   |   | 421,239 |   |   |   |   |   |
| Other  liabilities                                  |       | 13,576                               |       |   |   |   |   | 11,294 |   |   |   |   |   |
| Total  liabilities                                  |       | 1,840,241                            |       |   |   |   |   | 1,873,924 |   |   |   |   |   |
| Stockholders’  Equity                          |       | 192,801                              |       |   |   |   |   | 164,423 |   |   |   |   |   |
| **Total liabilities and stockholders’ equity** |       | $                                    | 2,033,042  |   |   |   |   |   | $ | 2,038,347 |   |   |   |   |   |
| Net  interest income                                |       |                                 |       | $ | 32,765 |   |   |   |   |   | $ | 31,578 |   |   |   |
| Net  interest margin                                |       |                                 |       |   |   | 3.48 | % |   |   |   |   | 3.32 | % |

 

----

(1) Yields on loans and securitieshave not been adjusted to a tax-equivalent basis.  Net interest margin on a fully tax-equivalentbasis would have been 3.56% and 3.40% for the six months ended June 30, 2010and June 30, 2009, respectively.  Thetax-equivalent basis was computed by calculating the deemed interest onmunicipal bonds and tax-exempt loans that would have been earned on a fully taxablebasis 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 averagebalances and rates include nonaccrual loans.

 

(3) Net loan fees of $1.1 millionand $1.9 million for the six months ended June 30, 2010 and 2009, respectively,are included in the yield computation.

 

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

 

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The following table presents thedollar amount of changes in interest income and interest expense for the majorcategories of our interest-earning assets and interest-bearing liabilities.Information is provided for each category of interest-earning assets andinterest-bearing liabilities with respect to (i) changes attributable tochanges in volume (i.e., changes in average balances multiplied by theprior-period average rate) and (ii) changes attributable to rate (i.e., changesin average rate multiplied by prior-period average balances). For purposes ofthis table, changes attributable to both rate and volume, which cannot besegregated, have been allocated proportionately to the change due to volume andthe change due to rate.

 

**Table 5**

 
| ** **                         | ** ** | **Three  Months Ended June 30, 2010  Compared to Three Months Ended  June 30, 2009** | ** ** | **Six  Months Ended June 30, 2010  Compared to Six Months Ended  June 30, 2009** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Net  Change**                                                                      | ** ** | **Rate**                                                                         | ** ** | **Volume** | ** ** | **Net  Change** | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| ** **                         | ** ** | **(In  thousands)**                                                                  | ** ** |
| **Interest income:**               | ** ** | ** **                                                                           | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  Loans, net of unearned fees |       | $                                                                                    | (3,759     | )                                                                                | $          | 566 |   | $ | (4,325 | ) | $ | (6,051 | ) | $ | 2,889 |   | $ | (8,940 | ) |
| Investment  Securities             |       |                                                                                 |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Taxable                            |       | 1,025                                                                                |       | (130                                                                             | )          | 1,155 |   | 1,815 |   | (284 | ) | 2,099 |   |
| Tax-exempt                         |       | (61                                                                                  | )          | 32                                                                               |       | (93 | ) | (108 | ) | 29 |   | (137 | ) |
| Bank  Stocks                       |       | (16                                                                                  | )          | 48                                                                               |       | (64 | ) | (119 | ) | 53 |   | (172 | ) |
| Other  earning assets              |       | 89                                                                                   |       | (3                                                                               | )          | 92 |   | 202 |   | (2 | ) | 204 |   |
| Total  interest income             |       | (2,722                                                                               | )          | 513                                                                              |       | (3,235 | ) | (4,261 | ) | 2,685 |   | (6,946 | ) |
| **Interest expense:**              |       |                                                                                 |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Deposits:                          |       |                                                                                 |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand           |       | (5                                                                                   | )          | (35                                                                              | )          | 30 |   | (14 | ) | (68 | ) | 54 |   |
| Money  market                      |       | (9                                                                                   | )          | 91                                                                               |       | (100 | ) | 87 |   | (84 | ) | 171 |   |
| Savings                            |       | (11                                                                                  | )          | (13                                                                              | )          | 2 |   | (21 | ) | (25 | ) | 4 |   |
| Time  certificates of deposit      |       | (2,891                                                                               | )          | (2,411                                                                           | )          | (480 | ) | (5,380 | ) | (4,788 | ) | (592 | ) |
| Repurchase  agreements             |       | 1                                                                                    |       | (2                                                                               | )          | 3 |   | 7 |   | (4 | ) | 11 |   |
| Federal  funds purchased           |       | 1                                                                                    |       | 1                                                                                |       | — |   | — |   | — |   | — |   |
| Subordinated  debentures           |       | (83                                                                                  | )          | (83                                                                              | )          | — |   | (109 | ) | (109 | ) | — |   |
| Borrowings                         |       | 2                                                                                    |       | 20                                                                               |       | (18 | ) | (18 | ) | 67 |   | (85 | ) |
| Total  interest expense            |       | (2,995                                                                               | )          | (2,432                                                                           | )          | (563 | ) | (5,448 | ) | (5,011 | ) | (437 | ) |
| **Net interest income**            |       | $                                                                                    | 273        |                                                                             | $          | 2,945 |   | $ | (2,672 | ) | $ | 1,187 |   | $ | 7,696 |   | $ | (6,509 | ) |

 

**Provisionfor Loan Losses**

 

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

 

In the second quarter 2010, theCompany recorded a provision for loan losses of $8.4 million, compared to $18.6million in the second quarter 2009.   Ona year-to-date basis in 2010, the Company recorded a provision for loan lossesof $12.4 million as compared to $21.1 million for the same period in 2009.

 

Of the $8.4 million of provisionfor loan losses in the second quarter 2010, approximately $6.5 million wasrelated to the specific component of the allowance for loan losses, with anadditional $1.9 million relating to the general component of the allowance forloan losses.  The specific component ofthe allowance for loan losses decreased relative to March 31, 2010 and December31, 2009 as certain impaired loans with a specific allocated component of theallowance at the end of the previous quarter were charged off during the secondquarter 2010.   At June 30, 2010, totalimpaired loans had partial charge-offs of approximately $20.2 million.  The general component

 

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of the provision for loan losses isprimarily related to the impact of historical charge-offs on the variousgeneral components of the allowance for loan losses during the second quarter2010.

 

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

 

Net charge-offs in the secondquarter 2010 were $13.5 million, as compared to $13.2 million for the samequarter in 2009.  Net charge-offs for thefirst six months of 2010 were $17.5 million as compared to $23.1 million in thesame period in 2009.

 

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

 

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

 

**NoninterestIncome**

 

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

 

**Table 6**

 
| ** **                         | ** ** | **Quarter  Ended**  | ** ** |
|------------------------------------|------------|---------------------|------------|
| ** **                         | ** ** | **June 30,  2010**  | ** ** | **March 31,  2010** | ** ** | **December  31,  2009** | ** ** | **September  30,  2009** | ** ** | **June 30,  2009** | ** ** |
| ** **                         | ** ** | **(In  thousands)** | ** ** |
| Noninterest  income:               |       |                |       |   |   |   |   |   |   |   |   |
| Customer  service and other fees   |       | $                   | 2,254      |   | $ | 2,214 |   | $ | 2,206 |   | $ | 2,281 |   | $ | 2,354 |   |
| Gain  (loss) on sale of securities |       | 1                   |       | 14 |   | (1 | ) | (1 | ) | — |   |
| Gain on  sale of loans             |       | 1,196               |       | — |   | — |   | — |   | — |   |
| Other                              |       | 274                 |       | 194 |   | 127 |   | 242 |   | 277 |   |
| Total  noninterest income          |       | $                   | 3,725      |   | $ | 2,422 |   | $ | 2,332 |   | $ | 2,522 |   | $ | 2,631 |   |

 

Noninterestincome for the second quarter 2010 increased by $1.3 million from the firstquarter 2010 and increased $1.1 million from the second quarter 2009.   These increases were mostly attributable tothe gain on the sale of two loans held for sale during the second quarter2010.  Without the gain on sale of theheld for sale loans, non-interest income in the second quarter 2010 wasconsistent with both the first quarter 2010 and the second quarter 2009.

 

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

 

**Table 7**
| ** **                       | ** ** | **Six  Months Ended**   | ** ** |
|----------------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **June 30,  2010**      | ** ** | **June 30,  2009** | ** ** |
| ** **                       | ** ** | **(In thousands)** | ** ** |
| Noninterest  income:             |       |                    |       |   |   |
| Customer  service and other fees |       | $                       | 4,468      |   | $ | 5,033 |   |
| Gain on  sale of securities      |       | 15                      |       | — |   |
| Gain on  sale of loans           |       | 1,196                   |       | — |   |
| Other                            |       | 468                     |       | 492 |   |
| Total  noninterest income        |       | $                       | 6,147      |   | $ | 5,525 |   |

 

Forthe six months ended June 30, 2010, noninterest income, excluding the $1.2million gain on sale of loans, decreased by $0.6 million compared to the sameperiod in 2009.   This decrease is mostlydue to lower account analysis fees, as well as other service charges as somecustomers migrated to lower fee transaction accounts.

 

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**NoninterestExpense**

 

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

 

**Table 8**

 
| ** **                         | ** ** | **Quarter  Ended**  | ** ** |
|------------------------------------|------------|---------------------|------------|
| ** **                         | ** ** | **June 30,  2010**  | ** ** | **March 31,  2010** | ** ** | **December  31,  2009** | ** ** | **September  30,  2009** | ** ** | **June 30,  2009** | ** ** |
| ** **                         | ** ** | **(In  thousands)** | ** ** |
| Noninterest  expense:              |       |                |       |   |   |   |   |   |   |   |   |
| Salaries  and employee benefits    |       | $                   | 6,472      |   | $ | 6,563 |   | $ | 6,560 |   | $ | 6,536 |   | $ | 6,712 |   |
| Occupancy  expense                 |       | 1,836               |       | 1,890 |   | 1,854 |   | 1,908 |   | 1,926 |   |
| Furniture  and equipment           |       | 967                 |       | 976 |   | 1,060 |   | 1,103 |   | 1,147 |   |
| Amortization  of intangible assets |       | 1,300               |       | 1,300 |   | 1,556 |   | 1,559 |   | 1,581 |   |
| Other  real estate owned           |       | 3,115               |       | 2,749 |   | 3,281 |   | 1,654 |   | 915 |   |
| Insurance  and assessment          |       | 1,825               |       | 1,812 |   | 1,612 |   | 1,688 |   | 2,195 |   |
| Professional  fees                 |       | 739                 |       | 877 |   | 963 |   | 516 |   | 896 |   |
| Other  general and administrative  |       | 2,165               |       | 1,959 |   | 2,860 |   | 2,517 |   | 2,346 |   |
| Total  noninterest expense         |       | $                   | 18,419     |   | $ | 18,126 |   | $ | 19,746 |   | $ | 17,481 |   | $ | 17,718 |   |

 

Noninterestexpense for the second quarter 2010 increased by $0.7 million from the secondquarter 2009.  The $0.7 million increasein noninterest expense in the second quarter 2010 as compared to the sameperiod in 2009 is the result of a $2.2 million increase in other real estateowned expense, mostly offset by declines in all other categories of expense.

 

The $2.2million increase in other real estate owned expense in the second quarter 2010as compared to the same period in 2009 is mostly due to an increase inwrite-downs on other real estate owned properties resulting from valuationadjustments and sales.

 

The $0.2million decline in overall salaries and employee benefit expense in the second quarter2010 as compared to the same period in 2009 is due mostly to a reduction infull time equivalent staff, as well as reductions in bonuses, incentives andrestricted stock expense.

 

Overalloccupancy and furniture and equipment expense declined by $0.3 million in thesecond quarter 2010 as compared to the same period in 2009 due to lowerdepreciation and lease expense resulting from the reduction of leased space inour headquarters building.

 

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

 

Overallinsurance and assessments decreased by $0.4 million in the second quarter 2010as compared to the same quarter in 2009. This reduction in cost is the result of a one-time FDIC insuranceassessment in the second quarter 2009 for which the Company recorded anadditional $0.9 million of expense. Although there was no similar assessment in2010, our ongoing FDIC assessment rates are higher in 2010 as compared to 2009.

 

The $0.2million decline in professional fees in the second quarter 2010 as compared tothe same quarter in 2009 is due mostly to lower legal costs.

 

The $0.2million decline in other general and administrative expenses in the secondquarter 2010 as compared to the second quarter 2009 is primarily a result oflower data processing costs.

 

Thesecond quarter 2010 noninterest expense was $0.3 million greater than the firstquarter 2010.   This increase innoninterest expense in the second quarter 2010 as compared to the first quarter2010 is due mostly to a $0.4 million increase in expenses related to other realestate owned and a $0.2 million increase in other general and administrative expenses.The increase in other real estate owned expense is due to an increase inwrite-downs on other real estate owned properties resulting from valuationadjustments and sales. The increase in other general and administrativeexpenses is due mostly to higher workout related expenses.  All other categories of expense declined orremained relatively flat in the second quarter 2010 as compared to the firstquarter 2010.

 

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

 

**Table 9**

 
| ** **                         | ** ** | **Six  Months Ended**   | ** ** |
|------------------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
| ** **                         | ** ** | **(In  thousands)**     | ** ** |
| Noninterest  expense:              |       |                    |       |   |   |
| Salaries  and employee benefits    |       | $                       | 13,035     |   | $ | 13,451 |   |
| Occupancy  expense                 |       | 3,726                   |       | 3,847 |   |
| Furniture  and equipment           |       | 1,943                   |       | 2,278 |   |
| Amortization  of intangible assets |       | 2,600                   |       | 3,163 |   |
| Other  real estate owned           |       | 5,864                   |       | 963 |   |
| Insurance  and assessment          |       | 3,637                   |       | 3,236 |   |
| Professional  fees                 |       | 1,616                   |       | 1,745 |   |
| Other  general and administrative  |       | 4,124                   |       | 4,495 |   |
| Total  noninterest expense         |       | $                       | 36,545     |   | $ | 33,178 |   |

 

Noninterestexpense for the six months ended June 30, 2010 increased by $3.4 millioncompared to the same period in 2009 primarily due to a $4.9 million increase inexpenses associated with other real estate owned and a $0.4 million increase ininsurance and assessments.  All othercategories of noninterest expense declined in the first six-months of 2010 ascompared to the same period in 2009.

 

The$0.4 million year-to-date decline in salaries and employee benefits expense in2010 as compared to 2009 is due to a $0.8 million reduction in base salary andbonus expense, offset by a $0.2 million increase in restricted stock expenseand a $0.2 million increase in employee benefits expense.  The overall reduction in salary and bonusexpense is a result of a decrease in full-time equivalents by twelve from thesecond quarter of 2009, as well as severance payments made in the first half of2009, including the related forfeitures of restricted stock expense in2009.  The increase in employee benefitsexpense is primarily the result of increased claims on the Company’s partiallyself-insured medical insurance plan.

 

The$0.3 million decrease in furniture and equipment for the first six months of2010 as compared to the same period in 2009 is primarily the result of reduceddepreciation expense resulting from certain fixed assets becoming fullydepreciated.

 

On ayear-to-date basis in 2010, amortization of intangible asset expense decreasedby $0.6 million, or 17.8%,  as comparedto 2009 due to the use of accelerated methods to amortize the core depositintangible asset.

 

Other realestate owned expense increased on a year-to-date basis in 2010 as compared to2009 primarily as a result of a $4.2 million increase in write-downs resultingfrom valuation adjustments related mostly to the decision to dispose of certainproperties.

 

Insuranceand assessment expense increased $0.4 million in the first half of 2010compared to the same period in 2009, primarily as a result of increased FDICinsurance premiums.  The increase inpremiums was partially offset by a $0.9 million one-time special assessment in2009 that did not occur in 2010.

 

Othergeneral and administrative expense decreased by $0.4 million for theyear-to-date period ended June 30, 2010 as compared to the same period in2009.  This decrease is primarily attributable to reduceddata processing expense in 2010 resulting from the outsourcing of theorganization’s core processing functions.

 

**IncomeTaxes**

 

Theeffective tax benefit was 37.4% for the three months ending June 30, 2010as compared to an effective tax benefit of 39.1% for the same period in2009.  The primary difference between theexpected benefit and the effective tax benefit for the three months ended June 30,2010 is tax-exempt income.

 

Incometax expense is the total of the current year income tax due or refundable andthe change in deferred tax assets and liabilities. Deferred tax assets andliabilities are recognized for the future tax consequences attributable to

 

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differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective tax bases and operating loss and tax creditcarryforwards. Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date. 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 necessary.  At the end of thesecond quarter 2010, based on the Company’s ability to carryback up to $9.4million of potential tax losses generated in future years to prior years andvarious tax planning strategies, including sale leaseback of certain locations,the Company has determined that a valuation allowance for deferred tax assetsis not required.

 

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

 

**BALANCE SHEET ANALYSIS**

 

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

 

**Table 10**

 
| ** **                 | ** ** | **June 30,  2010** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** |
|----------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                 | ** ** | **(In  thousands)**     | ** ** |
| Cash  and cash equivalents |       | $                       | 184,701    |                     | $          | 222,723                     |       | $                            | 234,483    |                    | $          | 148,194 |   | $ | 47,096 |   |
| Total  investments         |       | 312,293                 |       | 252,393                  |       | 248,236                     |       | 209,297                      |       | 124,952                 |       |
| Total  loans               |       | 1,374,208               |       | 1,435,071                |       | 1,519,608                   |       | 1,587,265                    |       | 1,651,572               |       |
| Total  assets              |       | 1,983,798               |       | 2,030,331                |       | 2,127,580                   |       | 2,057,378                    |       | 1,944,867               |       |
| Earning  assets            |       | 1,848,132               |       | 1,898,553                |       | 1,985,059                   |       | 1,921,726                    |       | 1,800,472               |       |
| Deposits                   |       | 1,544,271               |       | 1,602,884                |       | 1,693,290                   |       | 1,632,436                    |       | 1,560,730               |       |
|                            |            |                         |            |                          |            |                             |            |                              |            |                         |            |  |  |  |  |  |

 

AtJune 30, 2010, the Company had total assets of $2.0 billion, or $143.8million less than the $2.1 billion of total assets at December 31,2009.  The decline in assets from December 31,2009 is mostly due to an $145.4 million decline in loans, net of unearneddiscount.  Most of this decrease was incommercial loans.  The decline incommercial loans is partly attributable to planned efforts by the bank toreduce lower yielding syndicated and participated loans.

 

Althoughtotal assets remained relatively flat at June 30, 2010 as compared to June 30,2009, there was a change in the mix of assets as total loans declined by $277.4million, while investment securities increased by $187.3 million and cash andcash equivalents increased by $137.6 million. 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.

 

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

 

**Table 11**

 
| ** **                                      | ** ** | **June 30,  2010** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **(In  thousands)**     | ** ** |
| Real  estate - Residential and Commercial       |       | $                       | 754,019    |                     | $          | 748,135                     |       | $                            | 760,719    |                    | $          | 715,005 |   | $ | 682,923 |   |
| Real  estate - Construction                     |       | 83,389                  |       | 111,231                  |       | 105,612                     |       | 163,074                      |       | 190,197                 |       |
| Equity  lines of credit                         |       | 51,221                  |       | 53,014                   |       | 54,852                      |       | 56,591                       |       | 55,812                  |       |
| Commercial                                      |       | 411,605                 |       | 448,908                  |       | 521,016                     |       | 573,562                      |       | 639,462                 |       |
| Agricultural                                    |       | 17,968                  |       | 17,203                   |       | 18,429                      |       | 19,428                       |       | 22,764                  |       |
| Consumer                                        |       | 31,936                  |       | 34,986                   |       | 36,175                      |       | 38,704                       |       | 37,878                  |       |
| Leases  receivable and other                    |       | 26,289                  |       | 24,022                   |       | 25,366                      |       | 23,671                       |       | 25,506                  |       |
| Total  gross loans                              |       | 1,376,427               |       | 1,437,499                |       | 1,522,169                   |       | 1,590,035                    |       | 1,654,542               |       |
| Less:  allowance for loan losses                |       | (46,866                 | )          | (52,015                  | )          | (51,991                     | )          | (49,038                      | )          | (43,041                 | )          |
| Unearned  discount                              |       | (2,219                  | )          | (2,428                   | )          | (2,561                      | )          | (2,770                       | )          | (2,970                  | )          |
| Loans,  net of unearned discount                |       | $                       | 1,327,342  |                     | $          | 1,383,056                   |       | $                            | 1,467,617  |                    | $          | 1,538,227 |   | $ | 1,608,531 |   |
|                                            |       |                    |       |                     |       |                        |       |                         |       |                    |       |
| Loans  held for sale at lower of cost or market |       | $                       | 1,150      |                     | $          | 11,506                      |       | $                            | 9,862      |                    | $          | 5,500 |   | $ | 5,250 |   |

 

There were $888.6 million of realestate loans at June 30, 2010, compared to $921.2 million at December 31,2009 and $928.9 million at June 30, 2009.

 

Underjoint guidance from the FDIC, the Federal Reserve and the Office of theComptroller of the Currency on sound risk management practices for financialinstitutions with concentrations in commercial real estate lending, a financialinstitution may be actively involved in commercial real estate lending if,among other factors, (i) total reported loans for construction, landdevelopment, and other land represent 100% or more of capital, or (ii) totalreported loans secured by multifamily and non-farm residential properties,loans for construction, land development and other land and loans otherwisesensitive to the general commercial real estate market, including loans tocommercial real estate related entities, represent 300% or more of totalcapital.  For our Bank, the totalreported loans for construction, land development and land represented 101% ofcapital at June 30, 2010, as compared to 110% at December 31, 2009,and 164% at June 30, 2009.  For ourBank, the total reported commercial real estate loans represented 315% ofcapital at June 30, 2010, as compared to 329% at December 31, 2009,and 391% at June 30, 2009.  Both the construction and commercial real estateconcentrations have decreased significantly over the past twelve months.  Loans secured by commercial real estate, asprescribed under the regulatory concentration guidelines, decreased by $45.3million, or 6.1%, to $697.3 million at June 30, 2010, as compared to$742.6 million at December 31, 2009. Management employs heightenedrisk management practices, including board and management oversight andstrategic planning, development of underwriting standards, risk assessment andmonitoring through market analysis and stress testing.  Loanssecured by commercial real estate are recorded on the balance sheet as either acommercial real estate loan or commercial loan depending on the purpose of theloan, not the underlying collateral. The overall decline in loans in 2009 and2010 is partially attributable to management’s efforts to mitigate overall riskwithin the loan portfolio through the reduction of real estate loans and loanssecured by real estate.  Further,management has worked to reduce the volume of lower yielding syndicated andparticipated loans.

 

The$106.8 million decrease in construction loans, and the $71.1 million increasein residential and commercial real estate loans at June 30, 2010 ascompared to June 30, 2009 is partially due to reclassifying $77.6 millionof construction loans to residential and commercial real estate loans becauseof the completion of the underlying building projects and the commencement ofamortization on these loans.  A portionof the remainder of the decrease in construction loans was a result of payoffson existing loans, as well as moving loans to other real estate owned during2009 and 2010.

 

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

 

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

 

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**NonperformingAssets**

 

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

 

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

 

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

 

**Table 12**

 
| ** **                                                                            | ** ** | **Quarter  Ended**          | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                            | ** ** | **June 30,  2010**     | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** |
| ** **                                                                            | ** ** | **(Dollars  in thousands)** | ** ** |
|                                                                                  |       |                        |       |   |   |   |   |   |   |   |   |
| Nonaccrual  loans and leases, not restructured                                        |       | $                           | 64,339     |   | $ | 70,500 |   | $ | 59,584 |   | $ | 81,035 |   | $ | 52,483 |   |
| Other  impaired loans                                                                 |       | 1,065                       |       | 558 |   | 123 |   | 150 |   | 2,671 |   |
| Total  nonperforming loans                                                            |       | $                           | 65,404     |   | $ | 71,058 |   | $ | 59,707 |   | $ | 81,185 |   | $ | 55,154 |   |
| Other  real estate owned and foreclosed assets                                        |       | 30,298                      |       | 30,918 |   | 37,192 |   | 32,246 |   | 34,746 |   |
| Total  nonperforming assets                                                           |       | $                           | 95,702     |   | $ | 101,976 |   | $ | 96,899 |   | $ | 113,431 |   | $ | 89,900 |   |
|                                                                                  |       |                        |       |   |   |   |   |   |   |   |   |
| Impaired  loans                                                                       |       | $                           | 65,404     |   | $ | 71,058 |   | $ | 59,707 |   | $ | 81,185 |   | $ | 55,154 |   |
| Allocated  allowance for loan losses                                                  |       | (3,716                      | )          | (10,802 | ) | (6,603 | ) | (7,515 | ) | (7,291 | ) |
| Net  investment in impaired loans                                                     |       | $                           | 61,688     |   | $ | 60,256 |   | $ | 53,104 |   | $ | 73,670 |   | $ | 47,863 |   |
| Accruing  loans past due 90 days or more                                              |       | $                           | 1,065      |   | $ | 558 |   | $ | 123 |   | $ | 9,140 |   | $ | 2,671 |   |
| Loans  past due 30-89 days                                                            |       | $                           | 33,050     |   | $ | 21,956 |   | $ | 21,709 |   | $ | 52,443 |   | $ | 39,836 |   |
| Loans  charged-off                                                                    |       | $                           | 13,918     |   | $ | 4,271 |   | $ | 7,618 |   | $ | 14,618 |   | $ | 13,509 |   |
| Recoveries                                                                            |       | (369                        | )          | (295 | ) | (566 | ) | (615 | ) | (347 | ) |
| Net  charge-offs                                                                      |       | $                           | 13,549     |   | $ | 3,976 |   | $ | 7,052 |   | $ | 14,003 |   | $ | 13,162 |   |
| Provision  for loan losses                                                            |       | $                           | 8,400      |   | $ | 4,000 |   | $ | 10,005 |   | $ | 20,000 |   | $ | 18,605 |   |
| Allowance  for loan losses                                                            |       | $                           | 46,866     |   | $ | 52,015 |   | $ | 51,991 |   | $ | 49,038 |   | $ | 43,041 |   |
|                                                                                  |       |                        |       |   |   |   |   |   |   |   |   |
| Allowance  for loan losses to loans, net of unearned discount                         |       | 3.41                        | %          | 3.62 | % | 3.42 | % | 3.09 | % | 2.61 | % |
| Allowance  for loan losses to nonaccrual loans                                        |       | 72.84                       | %          | 73.78 | % | 87.26 | % | 60.51 | % | 82.01 | % |
| Allowance  for loan losses to nonperforming assets                                    |       | 48.97                       | %          | 51.01 | % | 53.65 | % | 43.23 | % | 47.88 | % |
| Allowance  for loan losses to nonperforming loans                                     |       | 71.66                       | %          | 73.20 | % | 87.08 | % | 60.40 | % | 78.04 | % |
| Nonperforming  assets to loans, net of unearned discount, and other real estate owned |       | 6.81                        | %          | 6.96 | % | 6.22 | % | 7.00 | % | 5.33 | % |
| Annualized  net charge-offs to average loans                                          |       | 3.83                        | %          | 1.08 | % | 1.77 | % | 3.42 | % | 3.05 | % |
| Nonaccrual  loans to loans, net of unearned discount                                  |       | 4.68                        | %          | 4.91 | % | 3.92 | % | 5.11 | % | 3.18 | % |
| Loans  30-89 days past due to loans, net of unearned discount                         |       | 2.40                        | %          | 1.53 | % | 1.43 | % | 3.30 | % | 2.41 | % |

 

Nonperformingassets at June 30, 2010 decreased by $1.2 million from December 31,2009, primarily as a result of a $6.9 million decrease in other real estateowned, partially offset by a $5.7 million increase in nonperforming loans.

 

AtJune 30, 2010, residential construction, land and land development loansaccounted for $23.8 million, or 36.4%, of all nonperforming loans.  At December 31, 2009, approximately$25.8 million, or 43%, of all nonperforming loans were residentialconstruction, land and land development loans.

 

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AtJune 30, 2010, approximately $27.0 million, or 41.2%, of all nonperformingloans outstanding were commercial real estate loans.  At December 31, 2009, approximately$12.2 million, or 21%, of all nonperforming loans were commercial real estateloans.  The primary reason for thesignificant increase between year end and June 30, 2010 are two loans to asingle borrower totaling $10.3 million.

 

The Company has an internal riskrating system of classified loans as pass, watch, special mention, substandard,doubtful and loss.  These internal guidelines are based on the definitionsin the Uniform Agreement on the Classification of Assets and Appraisal ofSecurities Held by Banks and Thrifts issued by the Office of the Comptroller ofthe Currency, the Federal Deposit Insurance Corporation, the Board of Governorsof the Federal Reserve System, and the Office of Thrift Supervision.  Inparticular, loans internally classified as substandard, doubtful or loss areconsidered adversely classified loans.  Duringthe second quarter 2010, the amount of loans that the Company has internallyconsidered to be adversely classified has declined to $94.1 million at June 30,2010 as compared to $101.0 million at December 31, 2009 and $118.9 millionat June 30, 2009.

 

In addition to adversely classifiedloans, the Company has loans that are considered to be Special Mention or Watchloans.  The amount of loans that theCompany has internally considered to be Special Mention or Watch decreased byapproximately 44% from December 31, 2009 to June 30, 2010.  Each internal risk classification isjudgmental, but based on both objective and subjective factors/criteria. The internal risk ratings focus on an evaluation of the borrowers’ ability tomeet future debt service and performance to plan under stress versus only theircurrent condition.  As described below under “Allowance for LoanLosses”, the Company adjusts the general component of its allowance for loanlosses for the trends in the volume and severity of adversely classified andwatch list loans.

 

Netcharge-offs in the second quarter 2010 were $13.5 million, as compared to $13.2million in the second quarter 2009. Impaired loans as of June 30, 2010 totaled $65.4 million, ascompared to $59.7 million at December 31, 2009, and $55.2 million at June 30,2009.

 

Other real estate owned is $30.3million at June 30, 2010, compared to $37.2 million at December 31,2009. The balance at June 30, 2010 is comprised of approximately 29separate properties of which $22.7 million is land; $7.1 million is commercialreal estate including multi-family units; and $0.5 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 June 30, 2010, noadditional funds are committed to be advanced in connection with impairedloans.

 

At June 30, 2010, there weretwelve construction loans to eleven borrowers with a remaining interest reserveof approximately $1.9 million. Additionally, at June 30, 2010, the amount of troubled debtrestructurings is immaterial.

 

**Allowancefor Loan Losses**

 

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

 

The ratio of allowance for loanlosses to total loans was 3.41% at June 30, 2010, as compared to 3.42% at December 31, 2009 and 2.61% at June 30, 2009.

 

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

 

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

 

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

 

The provision for loan lossesrecorded in 2010 was required in order for the Company to maintain theallowance for loan losses (3.41% of total loans as of June 30, 2010) at alevel necessary for the probable incurred losses inherent in the loan portfolioas of June 30, 2010.  For furtherdiscussion of the provision for loan losses, see “Provision for Loan Losses”above.

 

Approximately $3.7 million, or7.9%, of the $46.9 million allowance for loan losses at June 30, 2010,relates to loans with specific allowance allocations.  This compares to a specific reserve of $6.6million, or 12.7%, of the total allowance for loan losses at December 31,2009.  The decrease in the percent of theportfolio from specific reserves is attributable to partial charge offs takenin the first half of 2010, which reduced the book balance of select loans tothe point where a specific reserve was no longer considered necessary as of June 30,2010.  At June 30, 2010, theimpaired loans had approximately $20.2 million of previous partial charge-offsas compared to approximately $9.4 million of previous charge-offs related toimpaired loans at December 31, 2009.

 

The general component of theallowance for loan losses as a percent of overall loans, net of unearneddiscount, was 3.14% at June 30, 2010, as compared to 2.99% at December 31,2009.  The increase in the generalreserve as a percent of loans, net of unearned discount, is primarily a resultof the impact of charge-offs recognized in the second quarter 2010 on ourhistorical loss component of the general reserve.

 

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

 

**Table 13**

 
| ** **                                | ** ** | **Six  Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                                | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **(In  thousands)**                 | ** ** |
| Balance,  beginning of period             |       | $                                   | 51,991     |   | $ | 44,988 |   |
| Loan  charge-offs:                        |       |                                |       |   |   |
| Real  estate - Residential and Commercial |       | 2,278                               |       | 2,491 |   |
| Real  estate - Construction               |       | 14,490                              |       | 17,836 |   |
| Commercial                                |       | 1,188                               |       | 1,939 |   |
| Agricultural                              |       | 54                                  |       | — |   |
| Consumer                                  |       | 130                                 |       | 178 |   |
| Lease  receivable and other               |       | 49                                  |       | 1,327 |   |
| Total  loan charge-offs                   |       | 18,189                              |       | 23,771 |   |
| Recoveries:                               |       |                                |       |   |   |
| Real  estate - Residential and Commercial |       | 268                                 |       | 306 |   |
| Real  estate - Construction               |       | 130                                 |       | 52 |   |
| Commercial                                |       | 215                                 |       | 312 |   |
| Agricultural                              |       | —                              |       | 3 |   |
| Consumer                                  |       | 43                                  |       | 41 |   |
| Lease  receivable and other               |       | 8                                   |       | — |   |
| Total  loan recoveries                    |       | 664                                 |       | 714 |   |
| Net  loan charge-offs                     |       | 17,525                              |       | 23,057 |   |
| Provision  for loan losses                |       | 12,400                              |       | 21,110 |   |
| Balance,  end of period                   |       | $                                   | 46,866     |   | $ | 43,041 |   |

 

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

 

**Securities**

 

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

 

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

 

**Table 14**

** **
| ** **                                                  | ** ** | **June 30,**   | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                                  | ** ** | **2010**            | ** ** | **2009**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                                                  | ** ** | **(In  thousands)** | ** ** |
| Debt  securities available for sale:                        |       |                |       |                  |       |           |       |       |       |
| U.S.  Government agencies and government-sponsored entities |       | $                   | 72,017     |                  | $          | 17,129         |       | $          | 54,888     |   | 320.4 | % |
| State  and municipal                                        |       | 57,594              |       | 60,827                |       | (3,233         | )          | (5.3       | )%         |
| Mortgage  backed securities — agency/residential       |       | 140,069             |       | 127,340               |       | 12,729         |       | 10.0       | %          |
| Mortgage  backed securities — private/residential      |       | 9,656               |       | 13,959                |       | (4,303         | )          | (30.8      | )%         |
| Marketable  equity                                          |       | 1,519               |       | 1,519                 |       | —         |       | —     |       |
| Other  securities                                           |       | 360                 |       | 360                   |       | —         |       | —     |       |
| Total  securities available for sale                        |       | $                   | 281,215    |                  | $          | 221,134        |       | $          | 60,081     |   | (27.2 | )% |
|                                                        |       |                |       |                  |       |           |       |       |       |
| Securities  held-to-maturity:                               |       |                |       |                  |       |           |       |       |       |
| Mortgage  backed securities — agency/residential       |       | $                   | 13,897     |                  | $          | 9,942          |       | $          | 3,955      |   | 39.8 | % |

 

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

 

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At June 30, 2010, there werethree private-label mortgage backed securities with a carrying value ofapproximately $9.7 million.  Each of theprivate-label mortgage backed securities is a senior tranche and was AAA ratedas of June 30, 2010.  All othermortgage-backed securities are sponsored by either U.S. government agencies orgovernment-sponsored entities.

 

The carrying value of our availablefor sale investment securities at June 30, 2010 was $281.2 million,compared to the December 31, 2009 carrying value of $221.1 million.Year-to-date activity in our investment portfolio has been concentrated on thepurchase of U.S. Government Agency Collateralized Mortgage Obligations or U.S.Government Agency Mortgage Backed Securities.

 

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

 

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

 

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

 

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

 

At both June 30, 2010 and December 31,2009, we held $17.2 million, of other equity securities consisting of bankstocks with no maturity date, which are not reflected in the above schedule.Bank stocks are comprised mostly of stock of the Federal Reserve Bank of KansasCity, the Federal 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.

 

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**Deposits**

 

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

 

**Table 15**

 
| ** **                    | ** ** | **At  June 30, 2010**  | ** ** | **At  December 31, 2009** | ** ** |
|-------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| ** **                    | ** ** | **Balance**                 | ** ** | **% of  Total**                | ** ** | **Balance** | ** ** | **% of  Total** | ** ** |
| ** **                    | ** ** | **(Dollars  in thousands)** | ** ** |
| Noninterest  bearing deposits |       | $                           | 338,169    |                           | 21.89      | % | $ | 366,103 |   | 21.62 | % |
| Interest  bearing demand      |       | 171,721                     |       | 11.12                          | %          | 171,844 |   | 10.15 | % |
| Money  market                 |       | 323,331                     |       | 20.94                          | %          | 352,127 |   | 20.80 | % |
| Savings                       |       | 75,338                      |       | 4.88                           | %          | 71,816 |   | 4.24 | % |
| Time                          |       | 635,712                     |       | 41.17                          | %          | 731,400 |   | 43.19 | % |
|                          |       |                        |       |                           |       |   |   |   |   |
| Total  deposits               |       | $                           | 1,544,271  |                           | 100.00     | % | $ | 1,693,290 |   | 100.00 | % |

 

At theend of the second quarter 2010, deposits were $1.5 billion as compared to $1.7billion at December 31, 2009, reflecting a decrease of $149.0 million.

 

Excludingtime deposits, deposits declined by $53.3 million during the first half of 2010primarily as a result of a decrease in our customers’ available balances duepartly to seasonality and customer cash flow needs.  Although overall balances declined during2010, there was a net increase in the number of transaction and savingsaccounts.

 

Noninterestbearing deposits comprised approximately 21.9% of total deposits at June 30,2010, as compared to 21.6% at December 31, 2009.  Noninterest bearing deposits help reduceoverall 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.

 

Timedeposits declined by $95.7 million for the year-to-date period ending June 30,2010.  There was a $35.7 million decreasein brokered deposits to $219.5 million, excluding reciprocal deposits withother banks through the Certificate of Deposit Account Registry Service(CDARS), during the first six months of 2010. During the remainder of 2010, approximately $54.9 million of brokered depositswill mature and management will determine whether to renew these deposits or tolet them roll off.

 

**Borrowingsand Subordinated Debentures**

 

At June 30,2010, our outstanding borrowings were $164,276,000 as compared to $164,364,000at December 31, 2009.

 

Theborrowings at June 30, 2010 consisted of 16 separate fixed-rate term noteswith the FHLB at our Bank level, with remaining maturities ranging from 5 to 91months.  Approximately $140 million ofthe FHLB term advances at June 30, 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 June 30, 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 June 30, 2010 and December 31,2009 was $298.9 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 June 30, 2010 and December 31, 2009, respectively.  The term notes have fixed interest rates thatrange from 2.52% to 6.22%. The weighted-average rate onthe FHLB term notes was 3.17% at June 30, 2010.

 

AtJune 30, 2010, we had a $41,239,000 aggregate principal balance of juniorsubordinated debentures outstanding with a weighted average cost of 5.88%.  The subordinated debentures were issued infour separate series. Each issuance has a maturity of thirty years from itsdate of issue. The subordinated debentures were issued to trusts established byus, which in turn issued $40 million of trust preferred securities. Generallyand with certain limitations, the Company is permitted to call the debenturessubsequent to the first five or ten years, as applicable, after issue ifcertain conditions are met, or at any time upon the occurrence and continuationof certain changes in either the tax treatment or the capital treatment of thetrusts, the debentures or the preferred securities.  The Guaranty 

 

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CapitalTrust III issuance of $10.3 million has a variable rate of LIBOR plus 3.10% andhas been callable without penalty each quarter since July 7, 2008, andcontinues to be callable quarterly. The CenBank Trust III issuance of $15.5million has a variable rate of LIBOR plus 2.65% and has been callable withoutpenalty since April 15, 2009, and continues to be callable quarterly.   Management did not call either of thesesecurities on the latest call date, but will continue to evaluate whether tocall these debentures each quarter. Under the terms of the Written Agreement, regulatory approval would berequired prior to calling any trust preferred issuance.

 

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

 

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

 

**Capital Resources**

 

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

 

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

 

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

 

**Table 16**

 
| ** **                       | ** ** | **Ratio at  June 30,   2010** | ** ** | **Ratio at   December   31, 2009** | ** ** | **Ratio at  June 30,   2009** | ** ** | **Minimum  Capital   Requirement** | ** ** | **Minimum   Requirement   for “Well   Capitalized”   Institution** | ** ** |
|----------------------------------|------------|------------------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | ** **                         | ** ** | ** **                              | ** ** | ** **                         | ** ** | ** **                         | ** ** | ** **                                                                   | ** ** |
| Total  Risk-Based Capital Ratio  |       |                               |       |                                    |       |                               |       |                               | ** ** | ** **                                                                   | ** ** |
| Consolidated                     |       | 14.80                              | %          | 13.80                                   | %          | 10.73                              | %          | 8.00                               | %          | N/A                                                                          |       |
| Guaranty  Bank and Trust Company |       | 13.84                              | %          | 12.82                                   | %          | 10.71                              | %          | 8.00                               | %          | 10.00                                                                        | %          |
| Tier 1  Risk-Based Capital Ratio |       |                               |       |                                    |       |                               |       |                               |       |                                                                         |       |
| Consolidated                     |       | 9.77                               | %          | 9.43                                    | %          | 9.46                               | %          | 4.00                               | %          | N/A                                                                          |       |
| Guaranty  Bank and Trust Company |       | 12.57                              | %          | 11.55                                   | %          | 9.44                               | %          | 4.00                               | %          | 6.00                                                                         | %          |
| Leverage  Ratio                  |       |                               |       |                                    |       |                               |       |                               |       |                                                                         |       |
| Consolidated                     |       | 7.87                               | %          | 7.89                                    | %          | 8.96                               | %          | 4.00                               | %          | N/A                                                                          |       |
| Guaranty  Bank and Trust Company |       | 10.20                              | %          | 9.66                                    | %          | 8.95                               | %          | 4.00                               | %          | 5.00                                                                         | %          |

 

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

 

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

 

**Contractual Obligations andOff-Balance Sheet Arrangements**

 

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

 

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

 

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

 

**Table 17**

 
| ** **                          | ** ** | **June 30,    2010** | ** ** | **December 31,    2009** | ** ** |
|-------------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                          | ** ** | **(In  thousands)**       | ** ** |
| Commitments  to extend credit:      |       |                      |       |                          |       |
| Variable                            |       | $                         | 269,855    |                          | $          | 264,616 |   |
| Fixed                               |       | 24,482                    |       | 40,486                        |       |
| Total  commitments to extend credit |       | $                         | 294,337    |                          | $          | 305,102 |   |
|                                |       |                      |       |                          |       |
| Standby  letters of credit          |       | $                         | 13,087     |                          | $          | 14,917 |   |
| Commercial  letters of credit       |       | $                         | 11,000     |                          | $          | 11,000 |   |

 

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**Liquidity**

 

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

 

The Bank’s primary sources ofliquidity are its liquid assets.  At June 30,2010, the Company had $184.7 million of cash and cash equivalents, including$160.3 million of interest bearing deposits at banks (most of which was held atthe Federal Reserve Bank of Kansas City) that could be used for the Bank’simmediate liquidity needs.  Further, theCompany had $11.7 million of excess pledging related to customer accounts thatrequire collateral at June 30, 2010 and $39.6 million of securities thatare unavailable for pledging.

 

When the level of liquid assets(our primary liquidity) does not meet our liquidity needs, other availablesources of liquid assets (our secondary liquidity), including the purchase offederal funds, sales of loans, discount window borrowings from the FederalReserve, and our lines of credit with the Federal Home Loan Bank of Topeka(FHLB) and other correspondent banks are employed to meet current and presentlyanticipated funding needs. The Bank had approximately $134.6 million ofavailability on its FHLB line, $35.0 million of availability on its securedfederal funds lines with correspondent banks, and $29.6 million of availabilitywith the Federal Reserve discount window.

 

The FDIC temporarily increased theindividual account deposit insurance from $100,000 per account to $250,000 peraccount through December 31, 2013, which became permanent with theenactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act(Dodd-Frank Act) on July 21, 2010. The FDIC also implemented a Transaction Account Guarantee (TAG) program,which provides for full FDIC coverage for transaction accounts, regardless ofdollar amounts.  The Bank elected toopt-in to this program, thus, our customers receive full coverage fortransaction accounts under the program. The TAG program has been extended by the FDIC through December 31,2010 and the Dodd-Frank Act further extended coverage for non-interest bearingaccounts through December 31, 2012. The Bank expects to continue to participate in the TAG program for itsduration.  As of June 30, 2010, theBank had approximately 257 accounts with approximately $85.6 million ofbalances in excess of $250,000 covered under the TAG program.  Concerns regarding the overall bankingindustry or the Company could have an adverse effect on future deposit levels.

 

In order to address the concern ofFDIC insurance of larger depositors, the Bank became a member of theCertificate of Deposit Account Registry Service (CDARS®) program in 2008.Through CDARS®, the Bank’s customers can increase their FDIC insurance by up to$50 million through reciprocal certificate of deposit accounts. This isaccomplished by the Bank entering into reciprocal depository relationships withother member banks. The individual customer’s large deposit is broken intoamounts below the $250,000 insured amount and placed with other banks that aremembers of the network. The reciprocal member bank issues certificate ofdeposits in amounts that ensure that the entire deposit is eligible for FDICinsurance.   As of June 30, 2010,the Company had approximately $36.0 million of deposits in the CDARS®program.  For regulatory purposes, CDARS®is considered a brokered deposit even though reciprocal deposits are generallyfrom customers in the local market.

 

Under the terms of the WrittenAgreement, the Bank cannot obtain any new brokered deposits, but can continueto rollover or renew existing brokered deposits.  Additionally, the Bank submitted a writtenplan to improve the Bank’s liquidity position, including measures to diversifyfunding sources and reduce reliance on brokered deposits.  Since the date of the examination on whichthe Written Agreement is based in part, the Company has diversified its fundingsources, primarily through increasing its primary funding sources such asadditional interest-bearing deposits in banks and investment securities. Duringthe remainder of 2010, approximately $54.9 million of brokered deposits(excluding CDARS®) are expected to mature, although the Company may renew orrollover a portion of those brokered deposits. As needed for liquidity and balance sheet planning, the Bank willcontinue to monitor and update its rates in order to rollover and obtain newtime deposits from its local markets and/or directly through the internet.

 

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

 

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the holding company.  In addition, the Bank could pay dividends ormake other capital distributions to the holding company.  The Written Agreement prohibits the Bank frompaying dividends without the prior written approval of the Federal Reserve andCDB.  Accordingly, the Bank’s ability topay dividends to the holding company and the holding company’s ability to paycash dividends on its common or preferred stock will be restricted until theWritten Agreement is terminated.

 

The holding company requiresliquidity for the payment of interest on the subordinated debentures (ifapproved by our regulators), for operating expenses, principally salaries andbenefits, for repurchases of our common stock, and, if declared by our board ofdirectors, for the payment of dividends to our stockholders.  The Written Agreement prohibits the Companyfrom paying dividends without the prior written approval of the FederalReserve.  Accordingly, our ability to paydividends to our 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.

 

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

 

**Application of CriticalAccounting Policies and Accounting Estimates**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses the Company’s condensed consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of these condensed consolidatedfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent liabilities at the date of the condensed consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. On an on-going basis, management evaluates its estimates andjudgments, including those related to customers and suppliers, allowance forloan losses, bad debts, investments, financing operations, derivatives,long-lived assets, contingencies and litigation. Management bases its estimatesand judgments on historical experience and on various other factors that arebelieved to be reasonable under the circumstances, the results of which haveformed the basis for making such judgments about the carrying value of 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.  Quantitativeand Qualitative Disclosure about Market Risk**

 

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

 

**Credit Risk-related ContingentFeatures**

 

During the first quarter 2009, theCompany entered into interest rate swap contracts with certain commercialbanking customers to facilitate the customer’s respective risk managementstrategies.  Those interest rate swapsare simultaneously hedged by offsetting interest rate swaps that the Companyexecutes with a third party, such that the Company minimizes its net risk exposureresulting from such transactions.  Thus,these existing interest rate derivatives result from a service provided tocertain qualifying customers and, therefore, are not used to manage interestrate risk in the Company’s assets or liabilities. The Company manages a matchedbook with respect to its derivative instruments in order to minimize its netrisk exposure resulting from such transactions.

 

The Company evaluates its creditrisk associated with its interest rate swaps by evaluating the maximum potentialcredit exposure prior to the execution of the interest rate swap.  This maximum potential credit exposure isevaluated by executive management in relation to the Company’s Derivatives andHedging Policy.  On a quarterly basis,the actual credit risk for all swaps is reported to the Company’sasset-liability management committee and compared to the maximum exposureapproved in the Company’s Derivatives and Hedging Policy.

 

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

 

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

 

Asof June 30, 2010, the fair value of derivatives in a net liabilityposition, which excludes any adjustment for nonperformance risk related tothese agreements, was $387,000. The Company has minimum collateral postingthresholds with certain of its derivative counterparties, but has not beenrequired to post collateral against its obligations under these agreements. Ifthe Company had breached any of these provisions at June 30, 2010, itwould have been required to settle its obligations under the agreements at thetermination value.

 

**Net Interest Income Modeling**

 

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

 

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

 

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

 

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

 

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

 

**Table 18**

 

**MARKET RISK:**

 
| ** **                | ** ** | **Annualized  Net Interest Income** | ** ** |
|---------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **June 30,  2010**             | ** ** | **June 30,  2009** | ** ** |
| ** **                | ** ** | **Amount of  Change**               | ** ** | **Amount of  Change** | ** ** |
| ** **                | ** ** | **(In  thousands)**                 | ** ** |
| **Rates in Basis Points** |       |                                |       |   |   |
| 200                       |       | $                                   | 3,886      |   | $ | 95 |   |
| 100                       |       | 1,392                               |       | 1,645 |   |
| Static                    |       | —                              |       | — |   |
| (100)                     |       | 572                                 |       | 4,860 |   |
| (200)                     |       | 541                                 |       | 7,705 |   |
|                           |            |                                     |            |  |  |  |  |

 

Overall, the Company believes it isasset sensitive, but less asset sensitive than one year ago.  At June 30, 2010, the Company ispositioned to have a short-term favorable interest income impact in a 200 basispoint or 100 basis point rising rate environment.  The primary reason for being less assetsensitive at June 30, 2010 as compared to June 30, 2009, is theimpact of minimum rates, or floors, on many variable rate loans in the loanportfolio.  This minimum pricing willcause interest rates on variable rate loans to reprice less rapidly in a risingrate 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 $7.6 million of net interest income,or $3.7 million greater than the 200 basis point rate shock in the tableabove.  Management anticipates thatdeposits rates, other than time deposit rates, would increase immediately in arising rate environment.

 

In a falling rate environment, theCompany is also projected 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 June 30, 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.  Controlsand Procedures**

 

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

 

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

 

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**PART II—OTHERINFORMATION**

 

**ITEM 1.  LegalProceedings**

 

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

 

**ITEM 1A.  Risk Factors**

 

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

 

**ITEM 2.  UnregisteredSales 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 second 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** | ** ** |
|--------------------------------|------------|-------------------------------|------------|-------------------------------------|------------|
| April 1  to April 30 |       | 1,554                         |       | $                                   | 1.52       |   |
| May 1  to May 31     |       | —                        |       | —                              |       |
| June 1  to June 30   |       | 9,115                         |       | 1.25                                |       |
|                           |       | 10,669                        |       | $                                   | 1.29       |   |

 

**ITEM 3.  DefaultsUpon Senior Securities**

 

None.

 

**ITEM 4.  [Removedand Reserved]**

 

**ITEM 5.  OtherInformation**

 

*Castle Creek Fund Transfer*

 

On July 30, 2010, Castle CreekCapital Partners III, L.P. (“Fund III”) sold and transferred (the “Transfer”)all of its equity holdings in the Company to Castle Creek Capital Partners IV,L.P. (“Fund IV”).  As part of theTransfer, Fund III sold and transferred to Fund IV 2,644,963 shares of theCompany’s voting common stock and 10,700 shares of the Company’s Series Aconvertible preferred stock.  Such sharesrepresent an aggregate voting interest in the Company of 9.5%.  John M. Eggemeyer, a director of the Company,is a controlling person of each of Fund III and Fund IV.

 

While Fund III is a registered bankholding company, Fund IV is not. Accordingly, Fund IV, including its controlling and affiliated persons,is subject to and must conform to the existing regulations and guidance of theBoard of Governors of the Federal Reserve System with respect to equityinvestments in bank holding companies 

 

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such as the Company.  As a result of the Transfer and inconformance with the Federal Reserve’s regulations and guidance, Mr. Eggemeyer,effective July 30, 2010, will no longer serve (1) as Chairman of theCompany’s Board of Directors, although he will continue as a director of theCompany, (2) as Chairman of the Board’s Corporate Risk Committee and(3) on the Board’s Executive Committee. On August 3, 2010, the Company’s Board of Directors elected Daniel M.Quinn, the Company’s President and CEO, as its Chairman.

 

In addition, as a result of theTransfer and in conformance with the Federal Reserve’s regulations andguidance, on July 30, 2010, the Company received a letter from CastleCreek Financial LLC (“Castle Creek”) terminating the existing ServicesAgreement, dated as of November 8, 2006, by and between Castle Creek andthe Company. Mr. Eggemeyer is a co-founder and chief executive of CastleCreek.  Pursuant to the ServicesAgreement, the Company engaged Castle Creek as the financial advisor to theCompany and any entities the Company may form, acquire or invest in, inconnection with any effort by the Company to acquire or invest in otherfinancial institutions, effect a sale of the Company or a material amount ofthe Company’s assets or pursue a financing or recapitalization transaction.  The Services Agreement is included as Exhibit 10.16to the Company’s Annual Report on Form 10-K for the year ended December 31,2009.  The Company accepted andacknowledged such termination on August 3, 2010. Accordingly, the ServicesAgreement has been terminated effective August 3, 2010, subject to theprovisions of Section 6 of the Services Agreement.  Pursuant to theterms of Section 6 of the Services Agreement, Castle Creek will still beentitled to fees should the Company engage in a transaction (i) on whichCastle Creek provided advice or participated in discussions with any of theinvestors in such transaction or (ii) with any of the parties as to whichCastle Creek advised the Company or with whom the Company engaged indiscussions regarding a possible transaction prior to the termination of theagreement with Castle Creek, provided that such transaction is completed within18 months following the termination of the Services Agreement. Inaddition, certain provisions of the Services Agreement survive the terminationof the agreement, including the Company’s obligations to indemnify Castle Creekand the non-disclosure obligations of Castle Creek.

 

*Resignation of Director*

 

On July 29, 2010, Matthew P.Wagner, a director of the Company, notified the Company of his decision toresign as a member of the Company’s Board of Directors effective as of August 3,2010.  Mr. Wagner’s decision toresign was not the result of any disagreement with the Company or itsmanagement.

 

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**ITEM 6.  Exhibits**

 
| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                                                                  |
|---------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                             |
| 3.1                       |       | Second Amended and Restated  Certification of Incorporation of the Registrant (incorporated by reference  to Exhibit 3.1 to Registrant’s Form 8-K filed on August 12,  2009).                |
|                      |       |                                                                                                                                                                                                             |
| 3.2                       |       | Certificate of Designations for  Series A Convertible Preferred Stock of the Registrant (incorporated by  reference to Exhibit 4.1 to Registrant’s Form 8-K filed on August 12,  2009). |
|                      |       |                                                                                                                                                                                                             |
| 3.3                       |       | Amended and Restated Bylaws of  the Registrant (incorporated by reference to Exhibit 3.2 to Registrant’s  Form 8-K filed on May 7, 2008).                                                    |
|                      |       |                                                                                                                                                                                                             |
| 10.1                      |       | Termination letter, dated as of  July 29, 2010, concerning the Services Agreement, dated as of  November 8, 2006, by and between Castle Creek Financial LLC and the  Registrant (filed herewith).      |
|                      |       |                                                                                                                                                                                                             |
| 31.1                      |       | Section 302 Certification of  Chief Executive Officer.                                                                                                                                                      |
|                      |       |                                                                                                                                                                                                             |
| 31.2                      |       | Section 302 Certification of  Chief Financial Officer.                                                                                                                                                      |
|                      |       |                                                                                                                                                                                                             |
| 32.1                      |       | Section 906 Certification of  Chief Executive Officer.                                                                                                                                                      |
|                      |       |                                                                                                                                                                                                             |
| 32.2                      |       | Section 906 Certification of  Chief Financial Officer.                                                                                                                                                      |

 

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**SIGNATURES**

 

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

 
| Date: August 4, 2010 | GUARANTY BANCORP                                                                 |
|---------------------------|----------------------------------------------------------------------------------|
|                      |                                                                             |
|                      |                                                                             |
|                      | /s/    PAUL  W. TAYLOR                                       |
|                      | Paul W. Taylor                                                                   |
|                      | *Executive  Vice President, Chief Financial and Operating Officer and Secretary* |

 

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