Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For the quarterly period ended March 31, 2009**

 

**OR**

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

 

**For the transition period from                to               **

 

**Commission File Number: 000-51556**

 

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**GUARANTYBANCORP**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**                              | ** ** | **41-2150446**                          |
|-------------------------------------------|------------|-----------------------------------------|
| (State or other jurisdiction              |       | (I.R.S. Employer Identification Number) |
| of incorporation or organization)         |       |                                    |
|                                      |       |                                    |
| **1331  Seventeenth St., Suite 300** |       |                                    |
| **Denver,  CO**                           |       | **80202**                               |
| (Address of principal executive offices)  | ** ** | (Zip Code)                              |

 

**303-293-5563**

(Registrant’s telephone number, including area code)

 

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934, as amended during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).

 

Yeso No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12B-2 of the Exchange Act.
| Large  Accelerated Filer  o                                     |   | Accelerated Filer x         |
|---------------------------------------------------------------------------|--------|-----------------------------|
| Non-accelerated  Filer  o(Do not check if smaller reporting company) |   | Smaller reporting Company o |

 

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

 

As of April 30, 2009 there were 52,464,335 shares of theregistrant’s common stock outstanding, including 1,169,075 shares of unvestedstock grants and excluding 41,454 shares to be issued under its deferredcompensation plan.

 

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##### **Table of Contents**

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**TABLE OF CONTENTS**

 
|                                       |                                                                                               | **Page**   |
|--------------------------------------------|----------------------------------------------------------------------------------------------------|------------|
|                                       | Forward-Looking  Statements and Factors that Could Affect Future Results                           | 3          |
| ** **                                 | ** **                                                                                         | ** ** |
| **PART I—FINANCIAL INFORMATION** | 5                                                                                                  |
|                                       |                                                                                               |       |
| ITEM 1.                               | Unaudited  Condensed Consolidated Financial Statements                                             | 5          |
|                                       |                                                                                               |       |
|                                       | Unaudited Consolidated Balance Sheets                                                              | 5          |
|                                       |                                                                                               |       |
|                                       | Unaudited Consolidated Statements of Income                                                        | 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                                    | 10         |
|                                       |                                                                                               |       |
| ITEM 2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations        | 24         |
|                                       |                                                                                               |       |
| ITEM 3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                        | 40         |
|                                       |                                                                                               |       |
| ITEM 4.                               | Controls  and Procedures                                                                           | 42         |
|                                       |                                                                                               |       |
| **PART II—OTHER INFORMATION**    | 43                                                                                                 |
|                                       |                                                                                               |       |
| ITEM 1.                               | Legal Proceedings                                                                                  | 43         |
|                                       |                                                                                               |       |
| ITEM 1A.                              | Risk Factors                                                                                       | 43         |
|                                       |                                                                                               |       |
| ITEM 2.                               | Unregistered  Sales of Equity Securities and Use of Proceeds                                       | 43         |
|                                       |                                                                                               |       |
| ITEM 3.                               | Defaults  Upon Senior Securities                                                                   | 43         |
|                                       |                                                                                               |       |
| ITEM 4.                               | Submission  of Matters to a Vote of Security Holders                                               | 43         |
|                                       |                                                                                               |       |
| ITEM 5.                               | Other Information                                                                                  | 43         |
|                                       |                                                                                               |       |
| ITEM 6.                               | Exhibits                                                                                           | 44         |

 

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### **Table of Contents**

 

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

### ** **

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

 

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

 

·                  Local,regional, national and international economic conditions and the impact theymay have on us and our customers, and our assessment of that impact on ourestimates including, but not limited to the allowance for loan losses.

 

·                  Changesin the level of nonperforming assets and charge-offs.

 

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

 

·                  Changesimposed by regulatory agencies to increase our capital to a level greater thanthe level required for well-capitalized financial institutions.

 

·                  Thefailure to maintain capital above the level required to be well-capitalizedunder the regulatory capital adequacy guidelines, including the failure toraise capital as needed, including through the U.S. Treasury’s Capital PurchaseProgram or Capital Assistance Program.

 

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

 

·                  Inflationand interest rate, securities market and monetary fluctuations.

 

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

 

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

 

·                  Revenuesare lower than expected.

 

·                  Changesin consumer spending, borrowings and savings habits.

 

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

 

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

 

·                  Technologicalchanges.

 

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

 

·                  The ability toincrease market share and control expenses.

 

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

 

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

 

·                  Changes in thesecurities markets.

 

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

 

·                  Changes in ourorganization, compensation and benefit plans.

 

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

 

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

 

Forward-looking statementsspeak only as of the date on which such statements are made. We do not intendto update any forward-looking statement to reflect events or circumstancesafter the date on which such statement is made, or to reflect the occurrence ofunanticipated events.

 

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1. Unaudited Consolidated Financial Statements**

 

**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **March 31,  2009**                                                        | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                            |       |                        |       |
| Cash and due from banks                                                                                                                                                                                                                                                                                                                                                                                               |       | $                                                                               | 34,982     |                        | $          | 32,189 |   |
| Federal funds sold                                                                                                                                                                                                                                                                                                                                                                                                    |       | 1,000                                                                           |       | 13,522                      |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                             |       | 35,982                                                                          |       | 45,711                      |       |
| Securities available for sale, at fair value                                                                                                                                                                                                                                                                                                                                                                          |       | 99,107                                                                          |       | 102,874                     |       |
| Securities held to maturity (fair value of $12,460 and $13,505 at  March 31, 2009 and December 31, 2008)                                                                                                                                                                                                                                                                                                    |       | 11,946                                                                          |       | 13,114                      |       |
| Bank stocks, at cost                                                                                                                                                                                                                                                                                                                                                                                                  |       | 28,334                                                                          |       | 28,276                      |       |
| Total investments                                                                                                                                                                                                                                                                                                                                                                                                     |       | 139,387                                                                         |       | 144,264                     |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                                                            |       |                        |       |
| Loans, net of unearned discount                                                                                                                                                                                                                                                                                                                                                                                       |       | 1,757,103                                                                       |       | 1,826,333                   |       |
| Less allowance for loan losses                                                                                                                                                                                                                                                                                                                                                                                        |       | (37,598                                                                         | )          | (44,988                     | )          |
| Net loans                                                                                                                                                                                                                                                                                                                                                                                                             |       | 1,719,505                                                                       |       | 1,781,345                   |       |
| Loans held for sale                                                                                                                                                                                                                                                                                                                                                                                                   |       | 5,175                                                                           |       | 5,760                       |       |
| Premises and equipment, net                                                                                                                                                                                                                                                                                                                                                                                           |       | 62,386                                                                          |       | 63,018                      |       |
| Other real estate owned and foreclosed assets                                                                                                                                                                                                                                                                                                                                                                         |       | 14,524                                                                          |       | 484                         |       |
| Other intangible assets, net                                                                                                                                                                                                                                                                                                                                                                                          |       | 23,918                                                                          |       | 25,500                      |       |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                                          |       | 35,518                                                                          |       | 36,659                      |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                                                                          |       | $                                                                               | 2,036,395  |                        | $          | 2,102,741 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                                                            |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                                                                                                                         |       |                                                                            |       |                        |       |
| Liabilities:                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                                            |       |                        |       |
| Deposits:                                                                                                                                                                                                                                                                                                                                                                                                             |       |                                                                            |       |                        |       |
| Noninterest-bearing demand                                                                                                                                                                                                                                                                                                                                                                                            |       | $                                                                               | 422,509    |                        | $          | 433,761 |   |
| Interest-bearing demand                                                                                                                                                                                                                                                                                                                                                                                               |       | 425,274                                                                         |       | 460,856                     |       |
| Savings                                                                                                                                                                                                                                                                                                                                                                                                               |       | 72,157                                                                          |       | 68,064                      |       |
| Time                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 719,857                                                                         |       | 735,970                     |       |
| Total deposits                                                                                                                                                                                                                                                                                                                                                                                                        |       | 1,639,797                                                                       |       | 1,698,651                   |       |
| Securities sold under agreements to repurchase and federal funds  purchased                                                                                                                                                                                                                                                                                                                                           |       | 16,291                                                                          |       | 21,781                      |       |
| Borrowings                                                                                                                                                                                                                                                                                                                                                                                                            |       | 164,499                                                                         |       | 166,404                     |       |
| Subordinated debentures                                                                                                                                                                                                                                                                                                                                                                                               |       | 41,239                                                                          |       | 41,239                      |       |
| Interest payable and other liabilities                                                                                                                                                                                                                                                                                                                                                                                |       | 10,996                                                                          |       | 13,086                      |       |
| Total liabilities                                                                                                                                                                                                                                                                                                                                                                                                     |       | 1,872,822                                                                       |       | 1,941,161                   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                                                            |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                            |       |                        |       |
| Common stock—$.001 par value; 100,000,000 shares  authorized,64,542,950 shares issued, 52,570,986 shares outstanding at  March31, 2009 (includes 1,237,978 shares of unvested restricted stock and 41,454  shares to be issued); 64,542,950 shares issued, 52,654,131shares outstanding  at December 31, 2008 (includes 1,420,345 shares of unvested restricted  stock and 109,214 of shares to be issued). |       | 65                                                                              |       | 65                          |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                                            |       | 617,249                                                                         |       | 617,188                     |       |
| Shares to be issued for deferred compensation obligations                                                                                                                                                                                                                                                                                                                                                             |       | 81                                                                              |       | 710                         |       |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                                                   |       | (351,567                                                                        | )          | (352,003                    | )          |
| Accumulated other comprehensive income (loss)                                                                                                                                                                                                                                                                                                                                                                         |       | 166                                                                             |       | (1,302                      | )          |
| Treasury Stock, at cost, 10,943,319 and 10,996,513, respectively                                                                                                                                                                                                                                                                                                                                                      |       | (102,421                                                                        | )          | (103,078                    | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                       |       | 163,573                                                                         |       | 161,580                     |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                       |       | $                                                                               | 2,036,395  |                        | $          | 2,102,741 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Income**

 
| ** **                                                                | ** ** | **Three Months Ended March 31,**                                   | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2009**                                                                               | ** ** | **2008** | ** ** |
| ** **                                                                | ** ** | **(In thousands, except share and per share data)** | ** ** |
| Interest income:                                                          |       |                                                                                   |       |   |   |
| Loans, including fees                                                     |       | $                                                                                      | 23,076     |   | $ | 31,040 |   |
| Investment securities:                                                    |       |                                                                                   |       |   |   |
| Taxable                                                                   |       | 726                                                                                    |       | 615 |   |
| Tax-exempt                                                                |       | 767                                                                                    |       | 893 |   |
| Dividends                                                                 |       | 288                                                                                    |       | 470 |   |
| Federal funds sold and other                                              |       | 3                                                                                      |       | 385 |   |
| Total interest income                                                     |       | 24,860                                                                                 |       | 33,403 |   |
| Interest expense:                                                         |       |                                                                                   |       |   |   |
| Deposits                                                                  |       | 7,125                                                                                  |       | 9,795 |   |
| Securities sold under agreement to repurchase and federal funds purchased |       | 38                                                                                     |       | 137 |   |
| Borrowings                                                                |       | 1,321                                                                                  |       | 1,029 |   |
| Subordinated debentures                                                   |       | 658                                                                                    |       | 792 |   |
| Total interest expense                                                    |       | 9,142                                                                                  |       | 11,753 |   |
| Net interest income                                                       |       | 15,718                                                                                 |       | 21,650 |   |
| Provision for loan losses                                                 |       | 2,505                                                                                  |       | 875 |   |
| Net interest income, after provision for loan losses                      |       | 13,213                                                                                 |       | 20,775 |   |
| Noninterest income:                                                       |       |                                                                                   |       |   |   |
| Customer service and other fees                                           |       | 2,679                                                                                  |       | 2,276 |   |
| Gain on sale of securities                                                |       | —                                                                                 |       | 138 |   |
| Other                                                                     |       | 236                                                                                    |       | 101 |   |
| Total noninterest income                                                  |       | 2,915                                                                                  |       | 2,515 |   |
| Noninterest expense:                                                      |       |                                                                                   |       |   |   |
| Salaries and employee benefits                                            |       | 6,739                                                                                  |       | 9,720 |   |
| Occupancy expense                                                         |       | 1,921                                                                                  |       | 2,001 |   |
| Furniture and equipment                                                   |       | 1,131                                                                                  |       | 1,314 |   |
| Amortization of intangible assets                                         |       | 1,582                                                                                  |       | 1,877 |   |
| Other general and administrative                                          |       | 4,108                                                                                  |       | 3,798 |   |
| Total noninterest expense                                                 |       | 15,481                                                                                 |       | 18,710 |   |
| Income before income taxes                                                |       | 647                                                                                    |       | 4,580 |   |
| Income tax expense                                                        |       | 211                                                                                    |       | 1,335 |   |
| Net income                                                                |       | $                                                                                      | 436        |   | $ | 3,245 |   |
|                                                                      |       |                                                                                   |       |   |   |
| Earnings per share–basic:                                            |       | $                                                                                      | 0.01       |   | $ | 0.06 |   |
| Earnings per share–diluted:                                          |       | 0.01                                                                                   |       | 0.06 |   |
|                                                                      |       |                                                                                   |       |   |   |
| Weighted average shares outstanding-basic                                 |       | 51,277,748                                                                             |       | 50,988,229 |   |
| Weighted average shares outstanding-diluted                               |       | 51,277,930                                                                             |       | 51,049,525 |   |

 

See “Notes to Unaudited Consolidated Financial Statements.”

 

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** **

**GUARANTY BANCORP AND SUBSIDIARIES**

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

 
| ** **                                    | ** ** | **Common  Stock shares  Outstanding  and to be  issued** | ** ** | **Common  Stock and  Additional  Paid-in  Capital** | ** ** | **Shares to  be Issued** | ** ** | **Treasury  Stock** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Totals** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------|------------|---------------------|------------|--------------------------|------------|-----------------------------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **(In thousands, except share data)**               | ** ** |
| Balance, December 31, 2007               |       | 52,616,991                                                              |       | $                                                        | 617,675    |                               | $          | 573                 |       | $                        | (102,926   | )                                                         | $          | (95,196    | )          | $ | (1,472 | ) | $ | 418,654 |   |
| Adjustment to apply EITF 06-04                |       |                                                                    |       |                                                     |       |                               |       |                |       | (71                      | )          |                                                      |       | (71        | )          |
| Comprehensive income:                         |       |                                                                    |       |                                                     |       |                               |       |                |       |                     |       |                                                      |       |       |       |
| Net income                                    |       | —                                                                  |       | —                                                   |       | —                             |       | —              |       | 3,245                    |       | —                                                    |       | 3,245      |       |
| Other comprehensive loss                      |       | —                                                                  |       | —                                                   |       | —                             |       | —              |       | —                   |       | (1,100                                                    | )          | (1,100     | )          |
| Total comprehensive income                    |       | —                                                                  |       | —                                                   |       | —                             |       | —              |       | —                   |       | —                                                    |       | 2,145      |       |
| Stock compensation awards, net of forfeitures |       | 115,600                                                                 |       | —                                                   |       | —                             |       | —              |       | —                   |       | —                                                    |       | —     |       |
| Earned stock award compensation, net          |       |                                                                    |       | 772                                                      |       | —                             |       | —              |       | —                   |       | —                                                    |       | 772        |       |
| Repurchase of common stock                    |       | (9,087                                                                  | )          | —                                                   |       | —                             |       | (51                 | )          | —                   |       | —                                                    |       | (51        | )          |
| Deferred compensation                         |       | 2,616                                                                   |       | —                                                   |       | 12                                 |       | —              |       | —                   |       | —                                                    |       | 12         |       |
| Balance, March 31, 2008                  |       | 52,726,120                                                              |       | $                                                        | 618,447    |                               | $          | 585                 |       | $                        | (102,977   | )                                                         | $          | (92,022    | )          | $ | (2,572 | ) | $ | 421,461 |   |
|                                          |       |                                                                    |       |                                                     |       |                               |       |                |       |                     |       |                                                      |       |       |       |
| Balance, December 31, 2008               |       | 52,654,131                                                              |       | $                                                        | 617,253    |                               | $          | 710                 |       | $                        | (103,078   | )                                                         | $          | (352,003   | )          | $ | (1,302 | ) | $ | 161,580 |   |
| Comprehensive income:                         |       |                                                                    |       |                                                     |       |                               |       |                |       |                     |       |                                                      |       |       |       |
| Net income                                    |       | —                                                                  |       | —                                                   |       | —                             |       | —              |       | 436                      |       | —                                                    |       | 436        |       |
| Other comprehensive income                    |       | —                                                                  |       | —                                                   |       | —                             |       | —              |       | —                   |       | 1,468                                                     |       | 1,468      |       |
| Total comprehensive income                    |       | —                                                                  |       | —                                                   |       | —                             |       | —              |       | —                   |       | —                                                    |       | 1,904      |       |
| Stock compensation awards, net of forfeitures |       | (106,334                                                                | )          | —                                                   |       | —                             |       | —              |       | —                   |       | —                                                    |       | —     |       |
| Earned stock award compensation, net          |       |                                                                    |       | 61                                                       |       | —                             |       | —              |       | —                   |       | —                                                    |       | 61         |       |
| Repurchase of common stock                    |       | (13,486                                                                 | )          | —                                                   |       | —                             |       | (24                 | )          | —                   |       | —                                                    |       | (24        | )          |
| Deferred compensation                         |       | 36,675                                                                  |       | —                                                   |       | 52                                 |       | —              |       | —                   |       | —                                                    |       | 52         |       |
| Common shares issued                          |       | —                                                                  |       | —                                                   |       | (681                               | )          | 681                 |       | —                   |       | —                                                    |       | —     |       |
| Balance, March 31, 2009                  |       | 52,570,986                                                              |       | $                                                        | 617,314    |                               | $          | 81                  |       | $                        | (102,421   | )                                                         | $          | (351,567   | )          | $ | 166 |   | $ | 163,573 |   |

 

See “Notes to Unaudited Consolidated Financial Statements.”

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Cash Flows**

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                                                                         | ** ** | **(In thousands)**                              | ** ** |
| Cash flows from operating activities:                                              |       |                                                 |       |   |   |
| Net income                                                                         |       | $                                                    | 436        |   | $ | 3,245 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                      |       | 2,465                                                |       | 2,904 |   |
| Provision for loan losses                                                          |       | 2,505                                                |       | 875 |   |
| Stock compensation, net                                                            |       | 61                                                   |       | 772 |   |
| Gain on sale of securities                                                         |       | —                                               |       | (138 | ) |
| Loss (gain) on sale or disposal of real estate owned and assets                    |       | (32                                                  | )          | 5 |   |
| Real estate valuation adjustments                                                  |       | —                                               |       | 633 |   |
| Other                                                                              |       | (500                                                 | )          | (173 | ) |
| Net change in:                                                                     |       |                                                 |       |   |   |
| Other assets                                                                       |       | 307                                                  |       | 5,515 |   |
| Interest payable and other liabilities                                             |       | (2,090                                               | )          | (4,973 | ) |
| Net cash provided by operating activities                                          |       | 3,152                                                |       | 8,665 |   |
| Cash flows from investing activities:                                              |       |                                                 |       |   |   |
| Activity in available-for-sale securities:                                         |       |                                                 |       |   |   |
| Sales, maturities, prepayments, and calls                                          |       | 7,463                                                |       | 25,826 |   |
| Purchases                                                                          |       | (56                                                  | )          | (25,204 | ) |
| Activity in held-to-maturity securities and bank stocks:                           |       |                                                 |       |   |   |
| Maturities, prepayments and calls                                                  |       | —                                               |       | 784 |   |
| Loan originations and principal collections, net                                   |       | 45,471                                               |       | 21,808 |   |
| Collections on and proceeds from sale of loans held for sale                       |       | 585                                                  |       | 492 |   |
| Proceeds from sales of other real estate owned and foreclosed assets               |       | 251                                                  |       | 582 |   |
| Additions to premises and equipment                                                |       | (322                                                 | )          | (568 | ) |
| Net cash provided by investing activities                                          |       | 53,392                                               |       | 23,720 |   |
| Cash flows from financing activities:                                              |       |                                                 |       |   |   |
| Net decrease in deposits                                                           |       | (58,854                                              | )          | (89,425 | ) |
| Net change in short-term borrowings                                                |       | —                                               |       | (16,359 | ) |
| Proceeds from issuance of long-term debt                                           |       | —                                               |       | 70,000 |   |
| Repayment of long-term debt                                                        |       | (1,905                                               | )          | (131 | ) |
| Net change in federal funds purchased and repurchase agreements                    |       | (5,490                                               | )          | 12,783 |   |
| Repurchase of common stock                                                         |       | (24                                                  | )          | (51 | ) |
| Net cash used by financing activities                                              |       | (66,273                                              | )          | (23,183 | ) |
| Net change in cash and cash equivalents                                            |       | (9,729                                               | )          | 9,202 |   |
| Cash and cash equivalents, beginning of period                                     |       | 45,711                                               |       | 52,356 |   |
| Cash and cash equivalents, end of period                                           |       | $                                                    | 35,982     |   | $ | 61,558 |   |

 

See “Notes to Unaudited Consolidated Financial Statements.”

 

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Tableof Contents

 

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

 

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

 

Our principal business is to serve as a holding company forour subsidiaries. As of March 31, 2009, Guaranty Bancorp has a single banksubsidiary, Guaranty Bank and Trust Company, referred to as Guaranty Bank orthe Bank.

 

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

 

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 expected to be repaid from cash flow fromoperations of business.  There are nosignificant concentrations of loans to any one industry or customer.  However, the customers’ ability to repaytheir loans is dependent on the real estate and general economic conditions ofthe area, among other factors.

 

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

 

The accounting and reporting policies of the Company conform togenerally accepted accounting principles in the United States of America. Allsignificant intercompany balances and transactions have been eliminated. Ourfinancial statements reflect all adjustments that are, in the opinion of management,necessary for a fair presentation of the financial position and results ofoperations for the periods presented. Certain information and note disclosuresnormally included in consolidated financial statements prepared in accordancewith generally accepted accounting principles in the United States of Americahave been condensed or omitted pursuant to the rules and regulations ofthe Securities and Exchange Commission. The interim operating results are notnecessarily indicative of operating results for the full year.  For further information, refer to theconsolidated financial statements and notes included in the Company’s annualreport on Form 10-K for the year ended December 31, 2008.

 

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

 

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

 

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

 

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

 

The allowance for loan losses is evaluated on a regular basis bymanagement and based upon management’s periodic review of the collectibility ofthe loans in light of historical experience, the nature and 

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed ConsolidatedFinancial Statements (Continued)**

 

volumeof the loan portfolio, adverse situations that may affect borrowers’ ability torepay, estimated value of any underlying collateral and prevailing economicconditions.  This evaluation isinherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available.  An allowance for loan losses is maintained ata level deemed appropriate by management to adequately provide for known andinherent risks in the loan portfolio and other extensions of credit.

 

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

 

Theallowance consists of specific and general components. The specific componentrelates to loans that are individually classified as impaired. The generalcomponent covers all other loans and is based on historical loss experienceadjusted for current factors. A loan is considered impaired when, based oncurrent information and events, it is probable that the Company will be unableto collect the scheduled payments of principal or interest when due accordingto the contractual terms of the loan agreement. Factors considered bymanagement in determining impairment include payment status and the probabilityof collecting scheduled principal and interest payments when due. Loans thatexperience insignificant payment delays and payment shortfalls generally arenot classified as impaired.

 

Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and the borrower, including the length of the delay, thereasons for the delay, the borrower’s prior payment record, and the amount ofthe shortfall in relation to the principal and interest owed. The allocatedallowance for impaired loans is measured on a loan-by-loan basis forcommercial, real estate and agricultural loans by either the present value ofexpected future cash flows discounted at the loan’s effective interest rate,the loan’s obtainable market price, or the fair value of the collateral if theloan is collateral dependent. Groups of smaller balance homogenous loans arecollectively evaluated for impairment.

 

Inaddition to the allowance for loan losses, the Company records a reserve forunfunded commitments.  Similar to theallowance for loan losses, the reserve for unfunded commitments is evaluated ona regular basis by management.  Thisreserve is recorded in other liabilities and the provision for unfundedcommitments is included in other noninterest expense.

 

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

 

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

 

***(e)******                 ******StockIncentive Plan***

 

TheCompany’s Amended and Restated 2005 Stock Incentive Plan (“Plan”) provides forup to 2,500,000 grants of stock options, stock awards, stock units awards,performance stock awards, stock appreciation rights, and other equity basedawards to key employees, nonemployee directors, consultants and prospectiveemployees. As of March 31, 2009, the Company has only granted stockawards. The Company accounts for the equity based compensation using theprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R,Share Based Payment. The Company recognizes stock compensation cost forservices received in a share based payment transaction over the requiredservice period, generally defined as the vesting period. For awards with gradedvesting, compensation cost is recognized on a straight-line basis over therequisite service period for the entire award. The compensation cost ofemployee and director services received in exchange for stock awards is basedon the grant-date fair value of the award (as determined by quoted marketprices). Stock compensation expense recognized reflects estimated forfeitures,adjusted as necessary for actual forfeitures. The Company has issued stockawards that vest based on service periods from one to four years, and stockawards that vest based on performance conditions. The maximum contractual termfor the performance based share awards is December 31, 2012. As of March 31,2009, none

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

of the performance basedrestricted stock awards were expected to vest prior to the end of thecontractual term. Should this expectation change, additional expense could berecorded in future periods.

 

***(f)******                   ******DeferredCompensation Plans***

 

TheCompany has Deferred Compensation Plans (the “Plans”) that allow directors andcertain key employees to voluntarily defer compensation. Compensation expenseis recorded for the deferred compensation and a related liability isrecognized. Participants may elect designated investment options for thenotional investment of their deferred compensation. The recorded obligationsare adjusted for deemed income or loss related to the investments selected.Participants in the 2005 Deferred Compensation Plan (2005 Plan) are given theopportunity to elect to have all or a portion of their deferred compensationearn a rate of return equal to the total return on the Company’s common stock.The 2005 Plan does not provide for diversification of a participant’s assetsallocated to Company common stock and assets allocated to Company common stockcan only be settled with a fixed number of shares of stock. In accordance withEmerging Issues Task Force Issue 97-14, *Accounting for DeferredCompensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust andInvested*, the deferred compensation obligation associated withCompany common stock is classified as a component of stockholders’ equity andthe related shares are treated as shares to be issued and are included in totalshares outstanding for accounting purposes. At March 31, 2009 and December 31,2008, there were 41,454 and 109,214 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 2005 Plan is classified as treasury stock.

 

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

 

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 carryforwards. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.

 

At March 31, 2009 and December 31,2008, the Company did not have any tax benefit disallowed under FASBInterpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). A taxposition is recognized as a benefit only if it is “more likely than not” thatthe tax position would be sustained in a tax examination, with a taxexamination being presumed to occur. The amount recognized is the largestamount of tax benefit that is greater than 50% likely of being realized onexamination. For tax positions not meeting the “more likely than not” test, notax benefit is recorded.

 

The Company and its subsidiary aresubject to U.S federal income tax and State of Colorado tax.  The Company is no longer subject toexamination by Federal or State taxing authorities for years before 2005. At March 31,2009 and December 31, 2008, the company did not have any unrecognized taxbenefits. The Company does not expect the amount of any unrecognized taxbenefits to significantly increase in the next twelve months.  The Company recognizes interest related toincome tax matters as interest expense and penalties related to income taxmatter as other noninterest expense. At March 31, 2009 and December 31,2008, the Company does not have any amounts accrued for interest and penalties.

 

***(h)******                ******DerivativeFinancial Instruments***

 

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

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

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

 

Basic earnings per share representsincome available to common stockholders divided by the weighted average numberof common shares outstanding during the period. Diluted earnings per sharereflect additional common shares that would have been outstanding if potentialdilutive common shares had been issued. In accordance with SFAS No. 128(As Amended), *Earnings per Share*, the Company’sobligation to issue shares of stock to participants in its deferredcompensation plan has been treated as outstanding shares of stock in the basicearnings per share calculation.  TheCompany’s unvested restricted stock awards do not contain nonforfeitable rights to dividends, andtherefore, are not included under the two-class method of computing basicearnings per share.  Dilutivecommon shares that may be issued by the Company relate to unvested common sharegrants subject to a service condition for the three months ended March 31,2009 and 2008. For the three months ended March 31, 2009 and 2008 theanti-dilutive restricted shares excluded from earnings per share computationwere 1,237,796 and 1,670,715 respectively. Earnings per common share have beencomputed based on the following:

 
| ** **                                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                                                                          |       |                                  |       |   |   |
| Average common shares outstanding                                             |       | 51,277,748                            |       | 50,988,229 |   |
| Effective of dilutive unvested stock grants                                   |       | 182                                   |       | 61,296 |   |
| Average shares outstanding for calculating diluted earnings per  common share |       | 51,277,930                            |       | 51,049,525 |   |

 

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

 

***Adoption of New Accounting Standards:*** In February 2008, the FASB issued Staff Position (FSP) 157-2, *Effective Date of FASB Statement No. 157.* This FSPdelays the effective date of SFAS 157 for all nonfinancial assets andnonfinancial liabilities, except those that are recognized or disclosed at fairvalue on a recurring basis (at least annually) to fiscal years beginning after November 15,2008, and interim periods within those fiscal years. The impact of adoption on January 1,2009, was not material.

 

In December 2007,the FASB issued Statement No. 141R, (revised 2007) *BusinessCombinations* (“SFAS 141R”). SFAS 141R replaces the current standardon business combinations and has significantly changed the accounting for andreporting of business combinations in consolidated financial statements. Thisstatement requires an entity to measure the business acquired at fair value andto recognize goodwill attributable to any noncontrolling interests (previouslyreferred to as minority interests) rather than just the portion attributable tothe acquirer. The statement will also result in fewer exceptions to theprinciple of measuring assets acquired and liabilities assumed in a businesscombination at fair value. In addition, the statement requires payments tothird parties for consulting, legal, audit, and similar services associatedwith an acquisition to be recognized as expenses when incurred rather thancapitalized as part of the business combination. SFAS 141R is effective forfiscal years beginning on or after December 15, 2008.

 

In March 2008,the FASB issued SFAS No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities, an amendment of SFAS No. 133”. SFAS No. 161amends and expands the disclosure requirements of SFAS No. 133 forderivative instruments and hedging activities. SFAS No. 161 requiresqualitative disclosure about objectives and strategies for using derivative andhedging instruments, quantitative disclosures about fair value amounts of theinstruments and gains and losses on such instruments, as well as disclosuresabout credit-risk features in derivative agreements. SFAS No. 161 iseffective for financial statements issued for fiscal years and interim periods beginningafter November 15, 2008, with early application encouraged.  The Companyadopted this standard on January 1, 2009 and the standard requires moredisclosure about the Company’s derivative activities. Please see note 10 formore information.

 

In June 2008,the FASB issued FASB Staff Position EITF 03-6-1—*DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities*. (FSP EITF 03-6-1). This FASB Staff Position (FSP) addresses whetherinstruments granted in share-based payment transactions are participatingsecurities prior to vesting and, therefore, need to be included in the earningsallocation in computing earnings per share (EPS) under the two-class method ofFASB Statement No. 128, *Earnings Per Share*.  FSP EITF 03-6-1 provides that u****nvested share-basedpayment awards that contain nonforfeitable rights****

**** ****

****12****

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**** ****

**GUARANTY BANCORPAND SUBSIDIARIES**

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

**** ****

****todividends or dividend equivalents (whether paid or unpaid) are participatingsecurities and shall be included in the computation of EPS pursuant to the two-classmethod. ****This FSP was effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those years. All prior-period EPS data presented were tobe adjusted retrospectively (including interim financial statements, summariesof earnings, and selected financial data) to conform with the provisions ofthis FSP.  Since the Company’s unvestedrestricted stock awards do not contain nonforfeitable rights to dividends, theyare not included under the scope of this pronouncement, and therefore, theimpact of adoption was not material.

 

***Newly Issued But Not Yet Effective Accounting Standards:*** In April 2009, the FASB issued FSP 115-2 & 124-2 *Recognition and Presentation of Other-Than Temporary Impairments.*  The FSP eliminates the requirement for theissuer to evaluate whether it has the intent and ability to hold an impairedinvestment until maturity.  Conversely,the new FSP requires the issuer to recognize an OTTI in the event that theissuer intends to sell the impaired security or in the event that it is morelikely than not that the issuer will sell the security prior to recovery.  In the event that the sale of the security inquestion prior to its maturity is not probable but the entity does not expectto recover its amortized cost basis in that security,  then the entity will be required to recognizean OTTI.  In the event that the recoveryof the security’s cost basis prior to maturity is not probable and an OTTI isrecognized, the FSP provides that any component of the OTTI relating to adecline in the creditworthiness of the debtor should be reflected in earnings,with the remainder being recognized in Other Comprehensive Income.  Conversely, in the event that the issuerintends to sell the security before the recovery of its cost basis or if it ismore likely than not that the Company will have to sell the security beforerecovery of its cost basis, then the entire OTTI will be recognized inearnings. The FSP is effective for interim and annual reporting periods endingafter June 15, 2009.  The Companydoes not expect the adoption to have a material impact on the Company’sconsolidated financial position, results of operations or cash flows.

 

In April 2009,the FASB issued FSP 157-4 *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly*.  The FSP provides additional guidance fordetermining fair value based on observable transactions.  The FSP provides that if evidence suggeststhat an observable transaction was not executed in an orderly way that little,if any, weight should be assigned to this indication of an Asset or Liability’sfair value.  Conversely, if evidencesuggests that the observable transaction was executed in an orderly way, thetransaction price of the observable transaction may be appropriate to use indetermining the fair value of the Asset/Liability in question, with appropriateweighting given to this indication based on facts and circumstances. Finally,if there is no way for the entity to determine whether the observabletransaction was executed in an orderly way, relatively less weight should beascribed to this indicator of fair value. The FSP is effective for interim andannual reporting periods ending after June 15, 2009.  The Company does not expect the adoption tohave a material impact on the Company’s consolidated financial position,results of operations or cash flows.

 

In April 2009,the FASB issued FSP 107-1 & APB 28-1 *InterimDisclosures about Fair Value of Financial Instruments*.  The FSP provides that publicly tradedcompanies shall provide information concerning the fair value of its financialinstruments whenever it issues summarized financial information for interimreporting periods.  In periods afterinitial adoption this FSP requires comparative disclosures only for periodsending after initial adoption. The FSP is effective for interim reportingperiods ending after June 15, 2009.

 

***(k)******             Reclassifications***

 

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

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

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

 

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

* *
|                                                       | ** ** | **Fair Value**     | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|------------------------------|------------|-------------------------------|------------|
|                                                       | ** ** | **(In thousands)** | ** ** |
| March 31,  2009:                                      | ** ** | ** **         | ** ** | ** **                   | ** ** | ** **                    | ** ** |
| U.S. government agencies and government-sponsored entities |       | $                  | 2,509      |                         | $          | 16                            |       | $ | — |   |
| State and municipal                                        |       | 63,963             |       | 835                          |       | (1,413                        | )          |
| Mortgage-backed                                            |       | 30,615             |       | 831                          |       | —                        |       |
| Marketable equity                                          |       | 1,476              |       | —                       |       | —                        |       |
| Other securities                                           |       | 544                |       | —                       |       | —                        |       |
| Total                                                      |       | $                  | 99,107     |                         | $          | 1,682                         |       | $ | (1,413 | ) |
|                                                       |       |               |       |                         |       |                          |       |
| December 31, 2008:                                    |       |               |       |                         |       |                          |       |
| U.S. Treasury securities                                   |       | $                  | 3,495      |                         | $          | 1                             |       | $ | — |   |
| U.S. government agencies and government-sponsored entities |       | 2,510              |       | 17                           |       | —                        |       |
| State and municipal                                        |       | 63,015             |       | 456                          |       | (2,836                        | )          |
| Mortgage-backed                                            |       | 31,965             |       | 299                          |       | (40                           | )          |
| Marketable equity                                          |       | 1,345              |       | —                       |       | —                        |       |
| Other securities                                           |       | 544                |       | —                       |       | —                        |       |
| Total                                                      |       | $                  | 102,874    |                         | $          | 773                           |       | $ | (2,876 | ) |

 

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

 
| ** **              | ** ** | **Amortized  Cost** | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair value** | ** ** |
|-------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
| ** **              | ** ** | **(In thousands)**  | ** ** |
| March 31, 2009:    |       |                |       |                         |       |                          |       |           |       |
| Mortgage-backed         |       | $                   | 11,946     |                         | $          | 514                           |       | $              | —     |   | $ | 12,460 |   |
|                    |       |                |       |                         |       |                          |       |           |       |
| December 31, 2008: |       |                |       |                         |       |                          |       |           |       |
| Mortgage-backed         |       | $                   | 13,114     |                         | $          | 391                           |       | $              | —     |   | $ | 13,505 |   |

 

At March 31, 2009, the company owned threesecurities in unrealized loss positions. Generally, the fair value of our available for sale securitiesfluctuates as a result of changes in market interest rates.  Of the three securities in unrealized losspositions at March 31, 2009, one single security accounts for over 99% ofthe total unrealized loss.  The Companyowns securities issued by U.S. government agencies and government-sponsoredentities that have an AAA credit rating as determined by various ratingagencies or state and municipal bonds that have either been rated as investmentgrade or higher by various rating agencies or have been subject to an annualinternal review process by management.  This annual review process considers a review of the issuers’ currentfinancial statements, including the related cash flows and interest payments.This annual review process was updated in the first quarter 2009 for thelargest non-rated municipal security in our portfolio.  The unrealized loss on this securitycomprises over 99% of the overall unrealized loss on state and municipalbonds.  We updated our annual creditanalysis of this particular bond in the first quarter 2009 and concluded thatthe continuous unrealized loss position on this security was a result of thelevel of market interest rates and not a result of the underlying issuer’sability to repay.   Similarly, managementconcluded that the continuous unrealized loss position on all other securitieswas also a result of the level of market interest rates and not a result of theunderlying issuers’ ability to repay.  Inaddition, we have the ability and intent to hold these securities until theirfair value recovers to their cost, which may be maturity.  Accordingly, we have not recognized anyother-than-temporary impairment in our consolidated statements of income.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

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

 

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

 
| ** **                       | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **(In thousands)**       | ** ** |
| Loans on real estate:            |       |                     |       |                        |       |
| Residential and commercial       |       | $                        | 658,982    |                        | $          | 680,030 |   |
| Construction                     |       | 250,665                  |       | 268,306                     |       |
| Equity lines of credit           |       | 52,679                   |       | 50,270                      |       |
| Commercial loans                 |       | 714,218                  |       | 746,241                     |       |
| Agricultural loans               |       | 22,686                   |       | 22,738                      |       |
| Lease financing                  |       | 3,547                    |       | 3,549                       |       |
| Installment loans to individuals |       | 38,220                   |       | 38,352                      |       |
| Overdrafts                       |       | 987                      |       | 855                         |       |
| SBA and other                    |       | 18,294                   |       | 19,592                      |       |
|                             |       | 1,760,278                |       | 1,829,933                   |       |
| Less:                            |       |                     |       |                        |       |
| Allowance for loan losses        |       | (37,598                  | )          | (44,988                     | )          |
| Unearned discount                |       | (3,175                   | )          | (3,600                      | )          |
| Net Loans                        |       | $                        | 1,719,505  |                        | $          | 1,781,345 |   |

 

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

 
| ** **                                 | ** ** | **Quarter Ended March 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| ** **                                 | ** ** | **(In thousands)**               | ** ** |
| Balance, beginning of period               |       | $                                | 44,988     |   | $ | 25,711 |   |
| Provision for loan losses                  |       | 2,505                            |       | 875 |   |
| Loans charged-off                          |       | (10,262                          | )          | (743 | ) |
| Recoveries on loans previously charged-off |       | 367                              |       | 205 |   |
| Balance, end of period                     |       | $                                | 37,598     |   | $ | 26,048 |   |

 

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

 
| ** **                                    | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **(In thousands)**       | ** ** |
| Impaired loans with a valuation allowance     |       | $                        | 27,884     |                        | $          | 42,191 |   |
| Impaired loans without a valuation allowance  |       | 30,326                   |       | 12,631                      |       |
| Total impaired loans                          |       | $                        | 58,210     |                        | $          | 54,822 |   |
| Valuation allowance related to impaired loans |       | $                        | 6,342      |                        | $          | 11,064 |   |

* *
| ** **                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                                                 | ** ** | **(In  thousands)**                   | ** ** |
| Average of individually impaired loans during period |       | $                                     | 56,516     |   | $ | 22,114 |   |
| Interest income recognized during impairment         |       | $                                     | 11         |   | $ | 17 |   |
| Cash-basis interest income recognized                |       | $                                     | 11         |   | $ | 17 |   |

 

The gross interest income that would have beenrecorded in the year-to-date periods ended March 31, 2009 and March 31,2008, if the loans had been current in accordance with their original terms andhad been outstanding throughout the period (or since origination, if held forpart of the period) was $1,518,000 and $633,000, respectively.  At March 31, 2009 and December 31,2008, nonaccrual loans were $57,299,000 and $54,594,000, respectively.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

**(4)****                    ****Other Intangible Assets**

 

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

 

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

 
| ** **                     | ** ** | **Useful life** | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------|------------|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | ** **      | ** ** | **(In thousands)**       | ** ** |
| Core deposit intangible assets |       | 7  - 15 years   |       | $                        | 62,975     |                        | $          | 62,975 |   |
| Accumulated amortization       |       |            |       | (39,057                  | )          | (37,475                     | )          |
| Other intangible assets, net   |       |            |       | $                        | 23,918     |                        | $          | 25,500 |   |

 

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

 
| ** **           | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------|------------|---------------------------------------|------------|
| ** **           | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **           | ** ** | **(In thousands)**                    | ** ** |
| Amortization expense |       | $                                     | 1,582      |   | $ | 1,877 |   |
|                      |            |                                       |            |  |  |  |  |

 

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

 

At March 31,2009, our outstanding borrowings were $164,499,000 as compared to $166,404,000at December 31, 2008. These borrowings at March 31, 2009 consisted ofterm notes at the Federal Home Loan Bank (“FHLB”).  There was also a line of credit at the FHLBat March 31, 2009, but there was no balance outstanding on this line ofcredit on such date.  At December 31,2008, borrowings consisted of term notes at the Federal Home Loan Bank of$166,404,000.

 

The totalcommitment, including balances outstanding, for borrowings at the FHLB for theterm notes and line of credit at March 31, 2009 and December 31, 2008was $412.3 million and $428.3 million, respectively.  The interest rate on the line of creditvaries with the federal funds rate, and was 0.48% at March 31, 2009.  The term notes have fixed interest rates thatrange from 2.52% to 6.22%. A blanket pledge andsecurity agreement with the FHLB, which encompasses certain loans andsecurities, serves as collateral for these borrowings.

 

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

 

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

 

The Company had $41,239,000 in aggregate principalbalances of subordinated debentures outstanding with a weighted average cost of6.38% and 8.68% at March 31, 2009and December 31,2008, respectively. The subordinated debentures were issued in four separateseries. Each issuance has a maturity of thirty years from its date of issue.The subordinated debentures were issued to trusts established by the Company,which in turn issued $40 million of trust preferred securities. Generally andwith certain limitations, the Company is permitted to call the debenturessubsequent to the first five or ten years, as applicable, after issue if certainconditions are met, or at any time upon the occurrence and continuation ofcertain changes in either the tax treatment or the capital treatment of 

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

thetrusts, the debentures or the preferred securities.   As of March 31, 2009, the Company wasin compliance with all covenants of these subordinated debentures.

 

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

 

The Guaranty Capital Trust III trust preferredissuance on June 30, 2003, became callable at each quarterly interestpayment date starting on July 7, 2008. The Company did not call this security on any of its quarterly interestpayment dates.   The CenBank Trust IIItrust preferred issuance became callable at each quarterly interest paymentdate starting on April 15, 2009.  The Company did not call this security as of April 15, 2009.

 

*The following table summarizes the terms of each subordinated debentureissuance at March 31, 2009**(dollars in thousands):*

 
| ** **                 | ** ** | **Date  Issued** | ** ** | **Amount** | ** ** | **Maturity  Date** | ** ** | **Call  Date*** | ** ** | **Fixed or  Variable** | ** ** | **Rate Adjuster**  | ** ** | **Current  Rate** | ** ** | **Next Rate  Reset Date** | ** ** |
|----------------------------|------------|------------------|------------|------------|------------|--------------------|------------|-----------------|------------|------------------------|------------|--------------------|------------|-------------------|------------|---------------------------|------------|
| ** **                 | ** ** | ** **       | ** ** | ** ** | ** ** | ** **         | ** ** | ** **      | ** ** | ** **             | ** ** | ** **         | ** ** | ** **        | ** ** | ** **                | ** ** |
| CenBank Trust I            |       | 9/7/2000         |       | $          | 10,310     |               | 9/7/2030   |            | 9/7/2010   |                   | Fixed      |               | N/A        |              | 10.60      | %                         | N/A        |   |
| CenBank Trust II           |       | 2/22/2001        |       | 5,155      |       | 2/22/2031          |       | 2/22/2011       |       | Fixed                  |       | N/A                |       | 10.20             | %          | N/A                       |       |
| CenBank Trust III          |       | 4/8/2004         |       | 15,464     |       | 4/15/2034          |       | 4/15/2009       |       | Variable               |       | LIBOR + 2.65% |       | 3.74              | %          | 4/15/2009                 |       |
| Guaranty Capital Trust III |       | 6/30/2003        |       | 10,310     |       | 7/7/2033           |       | 4/7/2009        |       | Variable               |       | LIBOR + 3.10% |       | 4.19              | %          | 4/07/2009                 |       |
|                            |            |                  |            |            |            |                    |            |                 |            |                        |            |                    |            |                   |            |                           |            |  |

 

----

* Call date represents the earliest date the Companycan call the debentures.

 

**(7)****                                ****Commitments**

 

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

 

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

 

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

 
| ** **                   | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **(In thousands)**       | ** ** |
|                         |       |                     |       |                        |       |
| Commitments to extend credit |       | $                        | 385,280    |                        | $          | 390,277 |   |
| Standby letters of credit    |       | 22,373                   |       | 24,792                      |       |
| Commercial letters of credit |       | 11,000                   |       | 11,000                      |       |
|                         |       |                     |       |                        |       |
| Totals                       |       | $                        | 418,653    |                        | $          | 426,069 |   |

 

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

 

Commitments to extend credit under overdraftprotection agreements are commitments for possible future extensions of creditto existing deposit customers. These lines of credit are uncollateralized andusually do not 

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

containa specified maturity date and might not be drawn upon to the total extent towhich the Company is committed.

 

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

 

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

 

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

 

Effective January 1, 2008, the Companyadopted FASB Statement No. 157, *Fair Value Measurements*(“SFAS No. 157”).  SFAS No. 157 clarifies that fair value isan exit price, representing the amount that would be received to sell an assetor paid to transfer a liability in an orderly transaction between marketparticipants. Under SFAS No. 157, fair value measurements are not adjustedfor transaction costs. SFAS No. 157 establishes a fair value hierarchythat prioritizes the inputs to valuation techniques used to measure fair value.The hierarchy gives the highest priority to unadjusted quoted prices in activemarkets for identical assets or liabilities (level 1 measurements) and thelowest priority to unobservable inputs (level 3 measurements). The three levelsof the fair value hierarchy under SFAS No. 157 are described below:

 

Basis of Fair Value Measurement:

 

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

 

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

 

Level 3 -Prices or valuation techniques that require inputs that are both significant tothe fair value measurement and are unobservable (i.e., supported by little orno market activity).

 

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

 

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

 

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

 

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

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

fair value for certain Level 3 investments. 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, recapitalizations and other transactions acrossthe capital structure, offerings in the equity or debt markets, and changes infinancial ratios or cash flows.

 

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

 

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

 
| ** **                                | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant   Other  Observable  Inputs   (Level 2)** | ** ** | **Significant  Unobservable  Inputs   (Level 3)** | ** ** | **Balance** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------|------------|
| ** **                                | ** ** | **(In thousands)**                                                                             | ** ** |
| Assets/Liabilities at March 31, 2009 |       |                                                                                                |       |                                                                   |       |                                                        |       |        |       |
| Investment securities, available for sale |       | $                                                                                                   | —     |                                                                   | $          | 61,810                                                      |       | $           | 37,297     |   | $ | 99,107 |   |
| Derivative Assets                         |       | $                                                                                                   | —     |                                                                   | $          | —                                                      |       | $           | 331        |   | $ | 331 |   |
| Derivative Liabilities                    |       | $                                                                                                   | —     |                                                                   | $          | —                                                      |       | $           | 242        |   | $ | 242 |   |
|                                      |       |                                                                                                |       |                                                                   |       |                                                        |       |        |       |
| Assets at December 31, 2008          |       |                                                                                                |       |                                                                   |       |                                                        |       |        |       |
| Investment securities, available for sale |       | $                                                                                                   | —     |                                                                   | $          | 66,977                                                      |       | $           | 35,897     |   | $ | 102,874 |   |

 

See Note 10,Derivatives and Hedging Activity, for further discussion of the valuation ofthe derivatives as of March 31, 2009.

 

The tablebelow presents a reconciliation and income statement classification of gainsand losses for all assets measured at fair value on a recurring basis usingsignificant unobservable inputs (Level 3) for three months ending March 31,2009.

 

**Fair Value Measurements Using Significant Unobservable Inputs (Level 3)**

 
| ** **                                         | ** ** | **Net Derivative  Assets and  Liabilities** | ** ** | **Available for Sale  Securities** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                         | ** ** | **(In thousands)**                               | ** ** |
| Balance December 31, 2008                     |       | $                                                     | —     |                                         | $          | 35,897 |   |
| Total unrealized gains (losses) included  in:      |       |                                                  |       |                                         |       |
| Net Income                                         |       | 89                                                    |       | —                                       |       |
| Other Comprehensive Income                         |       | —                                                |       | 1,400                                        |       |
| Purchases, sales, issuances, and  settlements, net |       | —                                                |       | —                                       |       |
| Transfers in and (out) of level three              |       | —                                                |       | —                                       |       |
| Balance March 31, 2009                        |       | $                                                     | 89         |                                         | $          | 37,297 |   |

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 

The followingrepresents assets and liabilities measured at fair value on a non-recurringbasis as of March 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 March 31, 2009    |       |                                                                                                |       |                                                           |       |                                                      |       |        |       |
| Impaired loans                   |       | $                                                                                                   | —     |                                                           | $          | —                                                    |       | $           | 21,542     |   | $ | 21,542 |   |
|                             |       |                                                                                                |       |                                                           |       |                                                      |       |        |       |
| Assets at December 31, 2008 |       |                                                                                                |       |                                                           |       |                                                      |       |        |       |
| Impaired loans                   |       | $                                                                                                   | —     |                                                           | $          | —                                                    |       | $           | 31,127     |   | $ | 31,127 |   |

 

Impaired loans with a valuation allowance based uponfair value of the underlying collateral had a carrying amount of $27,884,000 atMarch 31, 2009 as compared to $42,191,000 at December 31, 2008 and$14,757,000 at March 31, 2008.  Thevaluation allowance on impaired loans was $6,342,000 at March 31, 2009 ascompared to $11,064,000 at December 31, 2008 and $5,368,000 at March 31,2008.  During the three-month periodsended March 31, 2009 and 2008, an additional provision for loan losses ofapproximately $2.5 million and $1.1 million was made for impaired loans,respectively.

 

Impaired loans are evaluated and valued atthe time the loan is identified as impaired, at the lower of cost or fairvalue. Fair value is measured based on the value of the collateral securingthese loans and is classified at a level 3 in the fair value hierarchy.Collateral may be real estate and/or business assets including equipment,inventory and/or accounts receivable and is determined based on appraisalsperformed by qualified licensed appraisers hired by the Company. Appraised andreported values may be discounted based on management’s historical knowledge,changes in market conditions from the time of valuation, and/or management’sexpertise and knowledge of the client and client’s business. Such discounts aretypically significant and result in a Level 3 classification of the inputs fordetermining fair value. Impaired loans are reviewed and evaluated on at least aquarterly basis for additional impairment and adjusted accordingly, based onthe same factors identified above.

 

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

 

Nonfinancialassets and liabilities measured at fair value on a nonrecurring basis aresummarized below:

 
| ** **                    | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant   Other  Observable  Inputs   (Level 2)** | ** ** | **Significant  Unobservable  Inputs   (Level 3)** | ** ** | **Balance** | ** ** |
|-------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------|------------|
| ** **                    | ** ** | **(In thousands)**                                                                             | ** ** |
| Assets at March 31, 2009 |       |                                                                                                |       |                                                                   |       |                                                        |       |        |       |
| Other real estate owned       |       | $                                                                                                   | —     |                                                                   | $          | —                                                      |       | $           | 14,524     |   | $ | 14,524 |   |
|                               |            |                                                                                                     |            |                                                                        |            |                                                             |            |             |            |  |  |  |  |

 

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

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

**(9)           Stock-BasedCompensation**

 

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

 

Prior to vesting of the stock awards with eitherservice or performance vesting conditions, each grantee shall have the rightsof a stockholder with respect to voting of the granted stock. The recipient isnot entitled to dividend rights with respect to the shares of granted stockuntil vesting occurs, at which time, the dividend rights will exist on vested andunvested shares of granted stock, subject to termination of such rights underthe terms of the Incentive Plan.

 

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

 

The Incentive Plan authorized grants of stock basedcompensation awards of up to 2,500,000 shares of authorized Company commonstock, subject to adjustments provided by the Incentive Plan. As of March 31,2009 and December 31, 2008, there were 1,237,978 and 1,420,345 shares ofunvested stock granted (net of forfeitures), with 836,746 and 730,412 sharesavailable for grant under the Incentive Plan, respectively.  Of the 1,237,978 shares unearned at March 31,2009, approximately 517,000 shares are expected to vest.  The Company does not expect any of the680,000 performance awards to vest.

 

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

 
| ** **                         | ** ** | **Shares** | ** ** | **Weighted Average  Fair Value on  Award Date** | ** ** |
|------------------------------------|------------|------------|------------|---------------------------------------------------------------------|------------|
|                               |       |       |       |                                                                |       |
| Unearned at December 31, 2008 |       | 1,420,345  |       | $                                                                   | 9.65       |   |
| Awarded                            |       | —     |       | —                                                              |       |
| Forfeited                          |       | (106,334   | )          | 10.29                                                               |       |
| Vested                             |       | (76,033    | )          | 8.91                                                                |       |
| Unearned at March 31, 2009    |       | 1,237,978  |       | $                                                                   | 9.64       |   |

 

The Company recognized $61,000 and $772,000 instock-based compensation expense for services rendered for the three monthsended March 31, 2009 and 2008, respectively.  The total income tax effect recognized in theconsolidated income statement for share-based compensation arrangements was a$186,000 expense for the three months ended March 31, 2009 compared to a$208,000 benefit for the same period in 2008, including $209,000 in expenserelated to the write-off of the deferred tax asset for the difference betweenthe grant date value of the award as compared to fair value of the award uponvesting.  At March 31, 2009,compensation cost of $2,760,000 related to nonvested awards not yet recognizedis expected to be recognized over a weighted-average period of 1.9 years.   The fair value of awards that vested in thefirst quarter 2009 was approximately $127,000.

 

**(10)     Derivatives andHedging Activities**

 

*Risk Management Objective of UsingDerivatives*

 

The Company is exposed to certain risks arising from both its businessoperations and economic conditions.  TheCompany principally manages its exposures to a wide variety of business andoperational risks through management of its core business activities. TheCompany manages economic risks, including interest rate, liquidity, and creditrisk, primarily by managing the amount, sources, and duration of its assets andliabilities.  The Company’s existinginterest rate derivatives result from a service provided to certain qualifyingcustomers and, therefore, are not used to manage interest rate risk in theCompany’s assets or liabilities. The Company manages a 

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

matched bookwith respect to its derivative instruments in order to minimize its net riskexposure resulting from such transactions.

 

*FairValues of Derivative Instruments on the Consolidated Balance Sheet*

 

The table below presents the fair value ofthe Company’s derivative financial instruments as well as their classificationon the Consolidated Balance Sheet as of March 31, 2009.

 
| ** **                                                             | ** ** | **Asset  Derivatives**  | ** ** | **Liability  Derivatives** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                             | ** ** | **(In thousands)** | ** ** |
| **As of  March 31, 2009:**                                        |       |                    |       |                       |       |
| Derivatives not designated as hedging instruments under SFAS 133       |       |                    |       |                       |       |
| Interest  Rate Products                                                |       | $                       | 331        |                       | $          | 242 |   |
|                                                                   |       |                    |       |                       |       |
| Total derivatives not designated as hedging instruments under SFAS 133 |       | $                       | 331        |                       | $          | 242 |   |

 

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

 

*Non-designated Hedges*

 

None of the Company’s derivatives aredesignated in qualifying hedging relationships under SFAS 133.  Derivatives not designated as hedges are notspeculative and result from a service the Company provides to certaincustomers, which the Company implemented during the first quarter of 2009.  The Company executes interest rate swaps withcommercial banking customers to facilitate the customer’s respective riskmanagement strategies.  Those interestrate swaps are simultaneously hedged by offsetting interest rate swaps that theCompany executes with a third party, such that the Company minimizes its netrisk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet thestrict hedge accounting requirements of SFAS 133, changes in the fair value ofboth the customer swaps and the offsetting swaps are recognized directly inearnings.  As of March 31, 2009, theCompany had two interest rate swaps with customers with a total notional amountof $24,419,000, and two offsetting interest rate swaps with a total notionalamount of $24,419,000; for an aggregate notional amount of $48,838,000 relatedto this program.  During the three monthsended March 31, 2009, the Company recognized net gains of $89,000 relatedto changes in fair value of these swaps.

 

*Effectof Derivative Instruments on the Consolidated Income Statement*

 

The tables below present the effect of theCompany’s derivative financial instruments on the Consolidated Income Statementfor the three months ended March 31, 2009:

 
| ** **                                                                 | ** ** | ** **                                                                                             | ** ** | **Amount of Gain  Recognized in  Income on** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **Derivatives Not**                                                   | ** ** | ** **                                                                                             | ** ** | **Derivative**                                                   | ** ** |
| **Designated as Hedging  Instruments Under SFAS  133** | ** ** | **Location of Gain or (Loss)  Recognized in Income on  Derivative** | ** ** | **Three Months  Ended  March 31, 2009**           | ** ** |
| ** **                                                                 | ** ** | ** **                                                                                             | ** ** | **(In thousands)**                                          | ** ** |
| Interest Rate Products                                                     |       | Other non-interest income                                                                              |       | $                                                                | 89         |   |
|                                                                       |       |                                                                                                   |       |                                                             |       |
| Total                                                                      |       |                                                                                                   |       | $                                                                | 89         |   |

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 

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

 

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

 
| ** **                             | ** ** | **Ratio at  March 31,  2009** | ** ** | **Ratio at  December 31,  2008** | ** ** | **Minimum  Capital  Requirement** | ** ** | **Minimum  Requirement for  “Well  Capitalized”  Institution** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------------------------|------------|
|                                   |       |                                    |       |                                       |       |                              |       |                                                                          |       |
| Total Risk-Based Capital Ratio         |       |                                    |       |                                       |       |                              |       |                                                                          |       |
| Consolidated                           |       | 10.82                                   | %          | 10.61                                      | %          | 8.00                              | %          | N/A                                                                           |       |
| Guaranty Bank & Trust Company |       | 10.77                                   | %          | 10.52                                      | %          | 8.00                              | %          | 10.00                                                                         | %          |
| Tier 1 Risk-Based Capital Ratio        |       |                                    |       |                                       |       |                              |       |                                                                          |       |
| Consolidated                           |       | 9.56                                    | %          | 9.35                                       | %          | 4.00                              | %          | N/A                                                                           |       |
| Guaranty Bank & Trust Company |       | 9.51                                    | %          | 9.26                                       | %          | 4.00                              | %          | 6.00                                                                          | %          |
| Leverage Ratio                         |       |                                    |       |                                       |       |                              |       |                                                                          |       |
| Consolidated                           |       | 9.20                                    | %          | 8.98                                       | %          | 4.00                              | %          | N/A                                                                           |       |
| Guaranty Bank & Trust Company |       | 9.16                                    | %          | 8.90                                       | %          | 4.00                              | %          | 5.00                                                                          | %          |

 

**(12)  Total Comprehensive Income**

 

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

 
| ** **                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**                              | ** ** |
| Net income                                                       |       | $                                                    | 436        |   | $ | 3,245 |   |
| Other comprehensive income (loss):                               |       |                                                 |       |   |   |
| Change in net unrealized gains (losses),  net                    |       | 2,372                                                |       | (1,912 | ) |
| Less: Reclassification adjustments for  gains included in income |       | —                                               |       | (138 | ) |
| Net unrealized holding gains (losses)                            |       | 2,372                                                |       | (1,774 | ) |
| Income tax benefit (expense)                                     |       | (904                                                 | )          | 674 |   |
| Other comprehensive income (loss)                                |       | 1,468                                                |       | (1,100 | ) |
| Total comprehensive income                                       |       | $                                                    | 1,904      |   | $ | 2,145 |   |

 

**(13) Contingencies**

 

Inthe ordinary course of our business, we are party to various legal actions,which we believe are incidental to the operation of our business. Although theultimate outcome and amount of liability, if any, with respect to these otherlegal actions to which we are currently a party, cannot presently beascertained with certainty, in the opinion of management, based uponinformation currently available to us, any resulting liability is not likely tohave a material adverse effect on the Company’s consolidated financialposition, results of operations or cash flows.

 

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

 

This MD&A should be readtogether with our unaudited Condensed Consolidated Financial Statements andunaudited Statistical Information included elsewhere in this Report, Part II,Item 1A of this Report, and Items 1, 1A, 6, 7, 7A and 8 of our 2008 AnnualReport on Form 10-K.  Also, pleasesee the disclosure in the “Forward-Looking Statements and Factors that CouldAffect Future Results” section in this report for certain other factors thatcould cause actual results or future events to differ materially from thoseanticipated in the forward-looking statements included in this Report or fromhistorical performance.

 

**Overview**

 

Guaranty Bancorp is a bank holding company with itsprincipal business to serve as a holding company to its bank subsidiary.  Unless the context requires otherwise, theterms “Company,” “us,” “we,” and “our” refers to Guaranty Bancorp on aconsolidated basis.

 

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

 

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

 

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

 

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**Earnings Summary**

 

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

 

**Table 1**

 
| ** **                                           | ** ** | **Three Months Ended March 31,**                           | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | **Change -** | ** ** |
| ** **                                           | ** ** | **2009**                                                                       | ** ** | **2008** | ** ** | **Favorable  (Unfavorable)** | ** ** |
| ** **                                           | ** ** | **(In thousands, except share data and ratios)** | ** ** |
| **Results of Operations:**                           |       |                                                                           |       |   |   |   |   |
| Interest income                                      |       | $                                                                              | 24,860     |   | $ | 33,403 |   | $ | (8,543 | ) |
| Interest expense                                     |       | 9,142                                                                          |       | 11,753 |   | 2,611 |   |
| Net interest income                                  |       | 15,718                                                                         |       | 21,650 |   | (5,932 | ) |
| Provision for loan losses                            |       | 2,505                                                                          |       | 875 |   | (1,630 | ) |
| Net interest income after provision for  loan losses |       | 13,213                                                                         |       | 20,775 |   | (7,562 | ) |
| Noninterest income                                   |       | 2,915                                                                          |       | 2,515 |   | 400 |   |
| Noninterest expense                                  |       | 15,481                                                                         |       | 18,710 |   | 3,229 |   |
| Income before income taxes                           |       | 647                                                                            |       | 4,580 |   | (3,933 | ) |
| Income tax expense                                   |       | 211                                                                            |       | 1,335 |   | 1,124 |   |
| Net income                                           |       | $                                                                              | 436        |   | $ | 3,245 |   | $ | (2,809 | ) |
| **Share Data:**                                      |       |                                                                           |       |   |   |   |   |
| Basic earnings per share                             |       | $                                                                              | 0.01       |   | $ | 0.06 |   | $ | (0.05 | ) |
| Diluted earnings per share                           |       | $                                                                              | 0.01       |   | $ | 0.06 |   | $ | (0.05 | ) |
| Average shares outstanding                           |       | 51,277,748                                                                     |       | 50,988,229 |   | 289,519 |   |
| Diluted average shares outstanding                   |       | 51,277,930                                                                     |       | 51,049,525 |   | 228,405 |   |

 
| ** **                                                    | ** ** | ** **               | ** ** | ** **                  | ** ** | **Change -**            | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                                    | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** | **Favorable  (Unfavorable)** | ** ** |
| **Selected Balance Sheet Ratios:**                            |       |                     |       |                        |       |                         |       |
| Total risk based capital                                      |       | 10.82                    | %          | 10.61                       | %          | 0.21                         | %          |
| Nonperforming loans to loans, net of  unearned discount       |       | 3.31                     | %          | 3.00                        | %          | 0.31                         | %          |
| Allowance for loan losses to loans, net of  unearned discount |       | 2.14                     | %          | 2.46                        | %          | (0.32                        | )%         |

 

The $0.4 million first quarter 2009 netincome is $2.8 million lower than the first quarter 2008 net income of $3.2million, primarily due to a $5.9 million reduction in net interest income, aswell as a $1.6 million increase in the provision for loan losses.  These items were partially offset by a $3.2million reduction in noninterest expense and a $0.4 million increase innoninterest income.

 

Net interest income decreased by $5.9 millionfor the first quarter 2009 as compared to the same period in 2008 mostly due tolower rates attributable to a greater than 400 basis point decrease in thetargeted federal funds rate by the Federal Open Markets Committee (FOMC) of theFederal Reserve Board since the beginning of the first quarter 2008. Thetargeted federal funds rate was 4.25% at January 1, 2008 and fell tobetween 0% and 0.25% on December 16, 2008, where it remains today.

 

The provision for loan losses is the amountrequired to maintain the allowance for loan losses at a level that, in ourjudgment, is adequate to absorb probable incurred loan losses in the loanportfolio.  The increase in the provisionfor loan losses in the first quarter 2009 as compared to the same period in2008 is primarily a result of the increase in net charge-offs, which in turnedincreased the amount required to maintain the allowance for loan losses at anappropriate level.

 

Noninterest expense declined from the firstquarter 2008 primarily as a result of a major effort announced in mid-2008 tobetter align our expenses with the current size of our business.  This effort resulted in a decline in thenumber of full-time equivalent employees from 465 at March 31, 2008 to 373at March 31, 2009.

 

**NetInterest Income and Net Interest Margin**

 

Net interest income, whichis our primary source of income, represents the difference between interestearned on assets and interest paid on liabilities.  The interest rate spread is the differencebetween the yield on our interest-

 

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bearing assets and liabilities.  Net interest margin is net interest incomeexpressed as a percentage of average interest-earning assets.

 

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

 

**Table 2**

 
| ** **                                | ** ** | **Quarter Ended**               | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **March 31,  2009**             | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)** | ** ** |
|                                      |       |                                 |       |   |   |   |   |   |   |   |   |
| Net interest income                       |       | $                                    | 15,718     |   | $ | 17,679 |   | $ | 19,842 |   | $ | 20,391 |   | $ | 21,650 |   |
| Interest rate spread                      |       | 2.62                                 | %          | 2.92 | % | 3.37 | % | 3.50 | % | 3.58 | % |
| Net interest margin                       |       | 3.26                                 | %          | 3.55 | % | 4.02 | % | 4.20 | % | 4.42 | % |
| Net interest margin, fully tax equivalent |       | 3.34                                 | %          | 3.64 | % | 4.11 | % | 4.28 | % | 4.53 | % |
|                                           |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Firstquarter 2009 net interest income of $15.7 million declined by $5.9 million fromthe first quarter 2008.  This decrease isa result of a $5.8 million unfavorable rate variance and a $0.1 million unfavorablevolume variance (see Table 4).

 

The $5.8million unfavorable rate variance from the prior year first quarter isprimarily attributable to lower yields on earnings assets, and in particularloans.   The yield on earning assetsdeclined by 166 basis points from 6.82% for the first quarter 2008 to 5.16% forthe first quarter 2009.  The Federal OpenMarkets Committee (FOMC) of the Federal Reserve Board decreased the targetfederal funds rate seven times by a total of greater than 400 basis points during2008.  Similarly, the prime ratedecreased by 400 basis points from January 2008 to the end of 2008.

 

Interestincome decreased by $8.5 million from $33.4 million in the first quarter 2008to $24.9 million in the first quarter 2009. Approximately 63% of the Company’s outstanding loan balances arevariable rate loans and are tied to indices such as prime or LIBOR.  As a result of the decline in rates discussedabove, the average yield on loans for the Company decreased by 189 basis pointsfrom 7.06% for the quarter ended March 31, 2008 to 5.17% for the sameperiod in 2009.  The Company remainsasset sensitive at the end of the first quarter 2009 and expects that asinterest rates rise, net interest income will also increase.

 

Rates paidon interest-bearing liabilities also declined during this same period by 70basis points, for a net decrease in the net interest spread of 96 basis pointsover this same period.   Overall netinterest margin declined by 116 basis points. The cause for the larger impact on net interest margin as compared tothe interest rate spread is that the benefit from noninterest bearing depositshad a smaller impact in 2009 compared to 2008 due to the extremely low interestrate environment.

 

The $0.1million unfavorable volume variance is mostly attributable to a $14.2 milliondecrease in average total earning assets for the first quarter 2009 as comparedto the same period in 2008.  The averagebalance of loans increased from the same period in the prior year by $41.1million, however, other earning assets declined primarily due to the decreasein the average balance of federal funds sold.

 

Although netinterest margin decreased to 3.26% for the first quarter 2009 from 3.55% in thefourth quarter 2008, net interest margin began to recover during the later partof the first quarter 2009.   In thefourth quarter of 2008, the prime rate dropped by 175 basis points, including a75 basis point drop in December 2008. The detrimental impact of these rate changes on loan yields continuedinto early 2009 due to the repricing of loans with monthly, quarterly andannual loan repricing dates.  January andFebruary 2009 net interest margins were 3.19% and 3.13%,respectively.   Management had begunaddressing the falling interest rates in 2008 and into 2009 through theutilization of loan floors and higher pricing on renewed and new loans.   Net interest margin improved to 3.46% in March 2009,primarily as a result of these efforts.

 

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The following table presents, for the periodsindicated, average assets, liabilities and stockholders’ equity, as well as thenet interest income from average interest-earning assets and the resultantannualized yields expressed in percentages. Nonaccrual loans are included in the calculation of average loans whileaccrued interest thereon is excluded from the computation of yields earned.

 

**Table 3**

 
| ** **                                          | ** ** | **Quarter Ended March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | **Average  Balance**                       | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**       | ** ** |
| **ASSETS:**                                         | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest-earning assets:**                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross loans, net of unearned fees (1)(2)       |       | $                                          | 1,808,727  |   | $ | 23,076 |   | 5.17 | % | $ | 1,767,582 |   | $ | 31,040 |   | 7.06 | % |
| Investment securities (1)                           |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 48,944                                     |       | 726 |   | 6.02 | % | 50,810 |   | 615 |   | 4.87 | % |
| Tax-exempt                                          |       | 63,813                                     |       | 767 |   | 4.88 | % | 76,501 |   | 893 |   | 4.69 | % |
| Bank Stocks (3)                                     |       | 28,274                                     |       | 288 |   | 4.13 | % | 32,466 |   | 470 |   | 5.82 | % |
| Other earning assets                                |       | 5,175                                      |       | 3 |   | 0.27 | % | 41,796 |   | 385 |   | 3.71 | % |
| Total interest-earning assets                       |       | 1,954,933                                  |       | 24,860 |   | 5.16 | % | 1,969,155 |   | 33,403 |   | 6.82 | % |
| **Non-earning assets:**                             |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                             |       | 29,947                                     |       |   |   |   |   | 40,858 |   |   |   |   |   |
| Other assets                                        |       | 80,800                                     |       |   |   |   |   | 366,526 |   |   |   |   |   |
|                                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| **Total assets**                                    |       | $                                          | 2,065,680  |   |   |   |   |   | $ | 2,376,539 |   |   |   |   |   |
|                                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**      |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand                             |       | $                                          | 140,136    |   | $ | 88 |   | 0.25 | % | $ | 155,900 |   | $ | 282 |   | 0.73 | % |
| Money market                                        |       | 297,386                                    |       | 630 |   | 0.86 | % | 581,538 |   | 3,781 |   | 2.62 | % |
| Savings                                             |       | 70,120                                     |       | 55 |   | 0.32 | % | 71,178 |   | 114 |   | 0.65 | % |
| Time certificates of deposit                        |       | 719,600                                    |       | 6,352 |   | 3.58 | % | 468,990 |   | 5,618 |   | 4.82 | % |
| Total interest-bearing deposits                     |       | 1,227,242                                  |       | 7,125 |   | 2.35 | % | 1,277,606 |   | 9,795 |   | 3.08 | % |
| Borrowings:                                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase agreements                               |       | 17,007                                     |       | 37 |   | 0.89 | % | 16,813 |   | 120 |   | 2.87 | % |
| Federal funds purchased                             |       | 285                                        |       | 1 |   | 0.87 | % | 2,098 |   | 17 |   | 3.20 | % |
| Subordinated debentures                             |       | 41,239                                     |       | 658 |   | 6.47 | % | 41,239 |   | 792 |   | 7.72 | % |
| Borrowings                                          |       | 171,848                                    |       | 1,321 |   | 3.12 | % | 120,483 |   | 1,029 |   | 3.43 | % |
| Total interest-bearing liabilities                  |       | 1,457,621                                  |       | 9,142 |   | 2.54 | % | 1,458,239 |   | 11,753 |   | 3.24 | % |
| Noninterest bearing liabilities:                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                     |       | 432,080                                    |       |   |   |   |   | 472,802 |   |   |   |   |   |
| Other liabilities                                   |       | 12,122                                     |       |   |   |   |   | 22,958 |   |   |   |   |   |
| Total liabilities                                   |       | 1,901,823                                  |       |   |   |   |   | 1,953,999 |   |   |   |   |   |
| Stockholders’ Equity                           |       | 163,857                                    |       |   |   |   |   | 422,540 |   |   |   |   |   |
| **Total liabilities and stockholders’ equity** |       | $                                          | 2,065,680  |   |   |   |   |   | $ | 2,376,539 |   |   |   |   |   |
|                                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                 |       |                                       |       | $ | 15,718 |   |   |   |   |   | $ | 21,650 |   |   |   |
| Net interest margin                                 |       |                                       |       |   |   | 3.26 | % |   |   |   |   | 4.42 | % |

 

----

(1) Yields on loans andsecurities have not been adjusted to a tax-equivalent basis.  Net interest margin on a fully tax-equivalentbasis would have been 3.34% and 4.53% for the three months ended March 31,2009 and March 31, 2008, respectively.

(2) Net loan fees of $0.8million and $0.7 million for the three months ended March 31, 2009 and2008 are included in the yield computation.

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

 

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The following table presents the dollar amount of changes in interestincome and interest expense for the major categories of our interest-earningassets and interest-bearing liabilities. Information is provided for eachcategory of interest-earning assets and interest-bearing liabilities withrespect to (i) changes attributable to volume (i.e., changes in averagebalances multiplied by the prior-period average rate) and (ii) changesattributable to rate (i.e., changes in average rate multiplied by prior-periodaverage balances). For purposes of this table, changes attributable to bothrate and volume, which cannot be segregated, have been allocatedproportionately to the change due to volume and the change due to rate.

 

**Table 4**

 
| ** **                        | ** ** | **Three Months Ended March 31, 2009 Compared to  Three Months Ended March 31, 2008** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **Net Change**                                                                                                                              | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| ** **                        | ** ** | **(In thousands)**                                                                                                                          | ** ** |
| **Interest income:**              | ** ** | ** **                                                                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross Loans, net of unearned fees |       | $                                                                                                                                                | (7,964     | ) | $ | (8,705 | ) | $ | 741 |   |
| Investment Securities             |       |                                                                                                                                             |       |   |   |   |   |
| Taxable                           |       | 111                                                                                                                                              |       | 133 |   | (22 | ) |
| Tax-exempt                        |       | (126                                                                                                                                             | )          | 27 |   | (153 | ) |
| Bank Stocks                       |       | (182                                                                                                                                             | )          | (127 | ) | (55 | ) |
| Other earning assets              |       | (382                                                                                                                                             | )          | (197 | ) | (185 | ) |
| Total interest income             |       | (8,543                                                                                                                                           | )          | (8,869 | ) | 326 |   |
|                              |       |                                                                                                                                             |       |   |   |   |   |
| **Interest expense:**             |       |                                                                                                                                             |       |   |   |   |   |
| Deposits:                         |       |                                                                                                                                             |       |   |   |   |   |
| Interest-bearing demand           |       | (194                                                                                                                                             | )          | (168 | ) | (26 | ) |
| Money market                      |       | (3,151                                                                                                                                           | )          | (1,827 | ) | (1,324 | ) |
| Savings                           |       | (59                                                                                                                                              | )          | (57 | ) | (2 | ) |
| Time certificates of deposit      |       | 734                                                                                                                                              |       | (712 | ) | 1,446 |   |
| Repurchase agreements             |       | (83                                                                                                                                              | )          | (84 | ) | 1 |   |
| Federal funds purchased           |       | (16                                                                                                                                              | )          | (7 | ) | (9 | ) |
| Subordinated debentures           |       | (134                                                                                                                                             | )          | (134 | ) | 0 |   |
| Borrowings                        |       | 292                                                                                                                                              |       | (90 | ) | 382 |   |
| Total interest expense            |       | (2,611                                                                                                                                           | )          | (3,079 | ) | 468 |   |
|                              |       |                                                                                                                                             |       |   |   |   |   |
| **Net interest income**           |       | $                                                                                                                                                | (5,932     | ) | $ | (5,790 | ) | $ | (142 | ) |

 

**Provision for Loan Losses**

 

The provision for loan losses represents acharge against earnings. The provision is the amount required to maintain theallowance for loan losses at a level that, in our judgment, is adequate toabsorb probable incurred loan losses in the loan portfolio. The provision forloan losses is based on our reserve methodology and reflects our judgments aboutthe adequacy of the allowance for loan losses. In determining the amount of the provision, we consider certainquantitative and qualitative factors including our historical loan lossexperience, the volume and type of lending we conduct, the results of ourcredit review process, the amounts and severity of classified, criticized andnonperforming assets, regulatory policies, general economic conditions,underlying collateral values and other factors regarding collectibility andimpairment.  The amount of expected losson our loan portfolio is influenced by the collateral value associated with ourloans. Loans with greater collateral value lessen our exposure to loan lossprovision.

 

In the first quarter 2009, the Company recorded aprovision for loan losses of $2.5 million, compared to $0.9 million in thefirst quarter 2008.  The Companydetermined that the provision for loan losses made during first quarter wassufficient to maintain our allowance for loan losses at a level necessary forthe probable incurred losses inherent in the loan portfolio as of March 31,2009.  Netcharge offs in the first quarter 2009 were $9.9 million, as compared to $0.5million for the same quarter in 2008.  Webelieve that continued economic weakness will likely result in a continuationof the elevated provision for loan losses in future periods.

 

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

 

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

 

**Noninterest Income**

 

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

 

**Table 5**

 
| ** **                      | ** ** | **Quarter Ended**   | ** ** |
|---------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** |
| ** **                      | ** ** | **(In thousands)**  | ** ** |
| Noninterest income:             |       |                     |       |   |   |   |   |   |   |   |   |
| Customer service and other fees |       | $                        | 2,679      |   | $ | 2,357 |   | $ | 2,521 |   | $ | 2,528 |   | $ | 2,276 |   |
| Gain on sale of securities      |       | —                   |       | — |   | — |   | — |   | 138 |   |
| Other                           |       | 236                      |       | (91 | ) | 186 |   | 604 |   | 101 |   |
| Total noninterest income        |       | $                        | 2,915      |   | $ | 2,266 |   | $ | 2,707 |   | $ | 3,132 |   | $ | 2,515 |   |

 

Noninterest income for the first quarter 2009increased by $0.6 million from the fourth quarter 2008 and increased by $0.4million from the first quarter 2008.  Theincrease in other noninterest income in the first quarter 2009 as compared tothe first quarter 2008 was primarily the result of increases in customer feeincome, partially as a result of a reduction in the earnings credit rate oncommercial deposit accounts. Additionally, the Company recognized approximately $0.2 million in feesassociated with entering into two separate interest rate swap transactions withcustomers during the first quarter 2009.

 

Fluctuations in other noninterest income areprimarily the result of the volatility of the fair value of assets held by theCompany for purposes of funding its nonqualified deferred compensationplan.   The loss in other noninterestincome during the fourth quarter 2008 was primarily a result of a $0.3 millionfair value write-down (contra-income) related to the average balance of $1.1million of assets held for purposes of funding the Company’s deferredcompensation plan.   These assets arerequired to be marked-to-market through the income statement.  These write-downs of the assets held for thedeferred compensation plan are almost entirely offset by a reduction to ourdeferred compensation liability account, which reduces our overall compensationcost.  Therefore, this volatility on themarket value of our deferred compensation plan asset and liability accounts hadonly a nominal overall impact on net income.

 

**Noninterest Expense**

 

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

 

**Table 6**

 
|                              | ** ** | **Quarter Ended**   | ** ** |
|-----------------------------------|------------|--------------------------|------------|
| ** **                        | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** |
| ** **                        | ** ** | **(In thousands)**  | ** ** |
| Noninterest expense:              |       |                     |       |   |   |   |   |   |   |   |   |
| Salaries and employee benefits    |       | $                        | 6,739      |   | $ | 6,255 |   | $ | 5,927 |   | $ | 9,184 |   | $ | 9,720 |   |
| Occupancy expense                 |       | 1,921                    |       | 1,725 |   | 1,958 |   | 2,131 |   | 2,001 |   |
| Furniture and equipment           |       | 1,131                    |       | 1,203 |   | 1,390 |   | 1,383 |   | 1,314 |   |
| Impairment of goodwill            |       | —                   |       | — |   | 250,748 |   | — |   | — |   |
| Amortization of intangible assets |       | 1,582                    |       | 1,803 |   | 1,877 |   | 1,877 |   | 1,877 |   |
| Other general and administrative  |       | 4,108                    |       | 4,381 |   | 3,982 |   | 5,122 |   | 3,798 |   |
| Total noninterest expense         |       | $                        | 15,481     |   | $ | 15,367 |   | $ | 265,882 |   | $ | 19,697 |   | $ | 18,710 |   |

 

Noninterest expense for the first quarter2009 remained relatively flat as compared to the fourth quarter 2008, anddecreased by $3.2 million from the first quarter 2008.

 

Salary and employee benefits expense decreased by $3.0 million in thefirst quarter 2009 as compared to the same quarter in 2008.  The decline in salaries and employee benefitsexpense from the first quarter 2008 is mostly attributable to a $1.5 milliondecrease in base salary and benefits expense as a result of a reduction infull-time equivalent employees from the first quarter 2008.  In the second quarter 2008, the Companyannounced a major effort to better align our expenses with the current size ofour business.  This effort resulted in areduction of full-

 

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timeequivalent employees from 465 at March 31, 2008 to 373 at March 31,2009.   Additionally, there was a $0.7million reduction in equity-based compensation expense, which is mostlyattributable to a reduction in the costs of performance based restricted stockexpense as well as an increase in the rate of forfeitures during 2008 and2009.   The remaining decrease tosalaries and employee benefits expense is due to lower bonus and incentiveexpense in 2009 as compared to 2008.

 

Amortization of intangible asset expense is$1.6 million in the first quarter 2009 as compared to $1.9 million in the firstquarter 2008, a decrease of 15.8%.   Thisdecrease is attributable to the use of accelerated methods to amortize the coredeposit intangible asset.

 

Other general and administrative expenseincreased by $0.3 million in the first quarter 2009 as compared to the firstquarter 2008.  The increase in othergeneral and administrative expense in the first quarter 2009 as compared to thesame period in 2008 is mostly due to an increase in Federal Deposit InsuranceCorporation (FDIC) insurance premiums.  In January 2009, the FDIC finalized new rules that increasedthe FDIC insurance premiums by 7 basis points, which effectively doubled theamount of FDIC insurance premiums paid by the Company.   Additionally, the FDIC’s Temporary LiquidityProgram implemented an additional insurance assessment of 10 basis points onnoninterest bearing transaction accounts in excess of the insured amounts.  The FDIC has proposed a one-time assessmentof up to 20 basis points for deposits as of June 30, 2009, to be paid in September 2009.  If enacted at the full 20 basis pointproposal, this assessment could cost the Company over $3.0 million ofadditional FDIC insurance in the second quarter 2009.

 

**Income Tax Expense**

 

The effective tax rate was 32.6% for the threemonths ending March 31, 2009 as compared to an effective tax rate of 29.1%for the same period in 2008.  The primarydifference between the expected rate and the effective tax rate for both yearsis tax-exempt income.

 

**BALANCE SHEET ANALYSIS**

 

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

 

**Table 7**

 
| ** **     | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** |
|----------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **     | ** ** | **(In thousands)**  | ** ** |
| Total assets   |       | $                        | 2,036,395  |                        | $          | 2,102,741                    |       | $                       | 2,052,944  |                     | $          | 2,358,559 |   | $ | 2,345,079 |   |
| Earning assets |       | 1,902,670                |       | 1,989,884                   |       | 1,927,128                    |       | 1,959,434               |       | 1,932,526                |       |
| Deposits       |       | 1,639,797                |       | 1,698,651                   |       | 1,635,101                    |       | 1,707,031               |       | 1,710,082                |       |
|                |            |                          |            |                             |            |                              |            |                         |            |                          |            |  |  |  |  |  |

 

AtMarch 31, 2009, the Company had total assets of $2.0 billion, or $66.3million less than total assets at December 31, 2008, and $308.7 millionless than total assets at March 31, 2008. The decline in assets from December 31, 2008, is primarily a resultof a $69 million decrease in total loans outstanding, of which $36 million wasa decrease in real estate loans and most of the remaining decrease was a resultof a reduction in lower yielding syndicated and participated loans.

 

The$308.7 million decrease in assets at March 31, 2009 as compared to March 31,2008, is primarily due to the $250.7 million in goodwill impairment recorded inthe third quarter 2008.  Most of theremaining decrease is attributable to declines in investments as well as cashand due from banks.

 

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

 

**Table 8**

 
| ** **                                      | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                      | ** ** | **(In thousands)**  | ** ** |
| Real estate - Residential and Commercial        |       | $                        | 658,982    |                        | $          | 680,030                      |       | $                       | 693,800    |                     | $          | 717,533 |   | $ | 723,246 |   |
| Real estate - Construction                      |       | 250,665                  |       | 268,306                     |       | 248,883                      |       | 232,522                 |       | 238,926                  |       |
| Equity lines of credit                          |       | 52,679                   |       | 50,270                      |       | 49,205                       |       | 46,778                  |       | 47,659                   |       |
| Commercial                                      |       | 714,218                  |       | 746,241                     |       | 706,678                      |       | 705,309                 |       | 657,423                  |       |
| Agricultural                                    |       | 22,686                   |       | 22,738                      |       | 23,989                       |       | 29,442                  |       | 35,003                   |       |
| Consumer                                        |       | 38,220                   |       | 38,352                      |       | 38,777                       |       | 39,611                  |       | 38,151                   |       |
| Leases receivable and other                     |       | 22,828                   |       | 23,996                      |       | 22,099                       |       | 21,628                  |       | 22,205                   |       |
| Total gross loans                               |       | 1,760,278                |       | 1,829,933                   |       | 1,783,431                    |       | 1,792,823               |       | 1,762,613                |       |
| Less: allowance for loan losses                 |       | (37,598                  | )          | (44,988                     | )          | (44,765                      | )          | (26,506                 | )          | (26,048                  | )          |
| Unearned discount                               |       | (3,175                   | )          | (3,600                      | )          | (3,758                       | )          | (3,668                  | )          | (3,316                   | )          |
| Loans, net of unearned discount                 |       | $                        | 1,719,505  |                        | $          | 1,781,345                    |       | $                       | 1,734,908  |                     | $          | 1,762,649 |   | $ | 1,733,249 |   |
|                                            |       |                     |       |                        |       |                         |       |                    |       |                     |       |
| Loans held for sale at lower of cost or  market |       | $                        | 5,175      |                        | $          | 5,760                        |       | $                       | —     |                     | $          | — |   | $ | — |   |

 

Therewere $962.3 million of real estate loans at March 31, 2009, compared to$998.6 million at December 31, 2008 and $1.0 billion at March 31,2008.  Management continues its effortsto decrease its exposure to residential real-estate and residential land andland development loans.

 

**Nonperforming Assets**

 

Credit risk related to nonperforming assets arises as a result oflending activities. To manage this risk, we employ frequent monitoringprocedures and take prompt corrective action when necessary. We employ a riskrating system that identifies the potential risk associated with loans in ourloan portfolio. This monitoring and rating system is designed to helpmanagement determine current and potential problems so that corrective actionscan be taken promptly.

 

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

 

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

 

**Table 9**

 
| ** **                                                                            | ** ** | **Quarter Ended**               | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                            | ** ** | **March 31,  2009**             | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Nonaccrual loans and leases, not  restructured                                        |       | $                                    | 57,299     |   | $ | 54,594 |   | $ | 54,654 |   | $ | 29,742 |   | $ | 20,798 |   |
| Accruing loans past due 90 days or more                                               |       | 911                                  |       | 228 |   | 324 |   | 98 |   | 1 |   |
| Total nonperforming loans                                                             |       | $                                    | 58,210     |   | $ | 54,822 |   | $ | 54,978 |   | $ | 29,840 |   | $ | 20,799 |   |
| Other real estate owned and foreclosed  assets                                        |       | 14,524                               |       | 484 |   | 1,199 |   | 1,910 |   | 1,715 |   |
| Total nonperforming assets                                                            |       | $                                    | 72,734     |   | $ | 55,306 |   | $ | 56,177 |   | $ | 31,750 |   | $ | 22,514 |   |
|                                                                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Impaired loans                                                                        |       | $                                    | 58,210     |   | $ | 54,822 |   | $ | 54,978 |   | $ | 29,840 |   | $ | 20,799 |   |
| Allocated allowance for loan losses                                                   |       | (6,342                               | )          | (11,064 | ) | (12,825 | ) | (6,295 | ) | (5,368 | ) |
| Net investment in impaired loans                                                      |       | $                                    | 51,868     |   | $ | 43,758 |   | $ | 42,153 |   | $ | 23,545 |   | $ | 15,431 |   |
| Loans past due 30-89 days                                                             |       | $                                    | 31,957     |   | $ | 35,169 |   | $ | 20,660 |   | $ | 20,169 |   | $ | 42,682 |   |
| Loans charged-off                                                                     |       | $                                    | 10,262     |   | $ | 2,032 |   | $ | 12,779 |   | $ | 673 |   | $ | 743 |   |
| Recoveries                                                                            |       | (367                                 | )          | (1,005 | ) | (288 | ) | (231 | ) | (205 | ) |
| Net charge-offs                                                                       |       | $                                    | 9,895      |   | $ | 1,027 |   | $ | 12,491 |   | $ | 442 |   | $ | 538 |   |
| Provision for loan losses                                                             |       | $                                    | 2,505      |   | $ | 1,250 |   | $ | 30,750 |   | $ | 900 |   | $ | 875 |   |
| Allowance for loan losses                                                             |       | $                                    | 37,598     |   | $ | 44,988 |   | $ | 44,765 |   | $ | 26,506 |   | $ | 26,048 |   |
|                                                                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to loans, net of  unearned discount                         |       | 2.14                                 | %          | 2.46 | % | 2.52 | % | 1.48 | % | 1.48 | % |
| Allowance for loan losses to nonaccrual  loans                                        |       | 65.62                                | %          | 82.41 | % | 81.91 | % | 89.12 | % | 125.24 | % |
| Allowance for loan losses to nonperforming  assets                                    |       | 51.69                                | %          | 81.34 | % | 79.69 | % | 83.48 | % | 115.70 | % |
| Allowance for loan losses to nonperforming  loans                                     |       | 64.59                                | %          | 82.06 | % | 81.42 | % | 88.83 | % | 125.24 | % |
| Nonperforming assets to loans, net of  unearned discount, and other real estate owned |       | 4.11                                 | %          | 3.03 | % | 3.15 | % | 1.77 | % | 1.28 | % |
| Annualized net charge-offs to average loans                                           |       | 2.22                                 | %          | 0.22 | % | 2.75 | % | 0.10 | % | 0.12 | % |
| Nonaccrual loans to loans, net of unearned  discount                                  |       | 3.26                                 | %          | 2.99 | % | 3.07 | % | 1.66 | % | 1.18 | % |
| Loans 30-89 days past due to loans, net of  unearned discount                         |       | 1.82                                 | %          | 1.93 | % | 1.16 | % | 1.13 | % | 2.43 | % |

 

Nonperforming assets at March 31,2009 increased by $17.4 million from December 31, 2008.  This increase is attributable to a $3.4million increase in nonperforming loans, and a $14.0 million increase in otherreal estate owned.   At March 31,2009, approximately $31.2 million, or 54%, of all nonperforming loansoutstanding were residential construction, land and land development.   At December 31, 2008, approximately$36.8 million, or 67.1%, of all nonperforming loans were residentialconstruction, land and land development loans.

 

Net charge-offs in the firstquarter 2009 were $9.9 million, as compared to $1.0 million in the fourthquarter 2008, and $0.5 million in the first quarter 2008.   Of the $9.9 million in net chargeoffs in thefirst quarter 2009, approximately $6.1 million were provided for as the resultof specific allowance allocation on impaired loans as of December 31,2008.   Most of the remainder of thefirst quarter chargeoffs relate to a single relationship that went onnonaccrual status during the first quarter 2009 and was moved to other realestate owned at the end of the quarter. This was a result of reaching a settlement agreement with the borrowerin March 2009 that included the bank receiving deeds in lieu offoreclosure.   After the chargeoffs onloans with a specific allowance allocation at December 31, 2008, andtransfers to other real estate owned, the Company added approximately $17.3million in new impaired loans during the quarter.  The majority of this increase was from threeloans that were adequately 

 

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collateralized, therefore,there was not an overall increase in the specific allowance allocation relatedto impaired loans during the quarter.

 

**Allowance for Loan Losses**

 

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

 

The ratio of allowance for loan losses tototal loans was 2.14% at March 31, 2009, as compared to 2.46% at December 31, 2008 and 1.48% at March 31, 2008.

 

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

 

For the specific portionof the allowance computation, there is a lower specific allowance allocation asof March 31, 2009 as compared to December 31, 2008, even though totalimpaired loans increased over the same period. This decrease is primarily a result of $6.1 million in chargeoffs duringthe first quarter 2009 for amounts that had a specific allowance allocation asof December 31, 2008.   The increasein impaired loans during the quarter was mostly on loans that were adequatelycollateralized, therefore, no increase to the specific allowance allocation wasrequired during the first quarter 2009.

 

In estimating the allowance for probable incurredlosses on other loans, we group the balance of the loan portfolio into segmentsthat have common characteristics, such as loan type or risk weighting.  For each nonspecific allowance portfoliosegment, we apply loss factors to calculate the required allowance based uponactual historical loss rates adjusted for qualitative factors affecting loanportfolio collectibility as described above. During the first quarter 2009, the historical loss factor increased dueto the charge-offs incurred during the first quarter.  Management also looks at risk weightings ofloans and computes a factor for the volume and severity of classified loansusing assigned risk ratings under regulatory definitions of “watch”, “substandard”‘,“doubtful” and “loss”.  Loans graded aseither doubtful or loss are treated as impaired and are included as part of thespecific reserve computed above.  Loanssegregated by risk weighting categories watch or substandard are evaluated fortrends in volume and severity.

 

The provision for loan losses recorded in2009 was required in order for the Company to maintain the allowance for loanlosses (2.14% of total loans as of March 31, 2009) at a level necessaryfor the probable incurred losses inherent in the loan portfolio as of March 31,2009.  Forfurther discussion of the provision for loan losses, see “Provision for LoanLosses” above.

 

The specific allowance for impaired loans and theallowance calculated for probable incurred losses on other loans are combinedto determine the required allowance for loan losses.  The amount calculated is compared to theactual allowance for loan losses balance at each quarter end and any shortfallis charged to income as an additional provision for loan losses.  Forfurther discussion of the provision for loan losses, see “Provision for LoanLosses” above.

 

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

 

**Table 10**

 
| ** **                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                               | ** ** | **(In thousands)**                              | ** ** |
| Balance, beginning of period             |       | $                                                    | 44,988     |   | $ | 25,711 |   |
| Loan charge-offs:                        |       |                                                 |       |   |   |
| Real estate - Residential and Commercial |       | 606                                                  |       | 370 |   |
| Real estate - Construction               |       | 9,252                                                |       | 87 |   |
| Commercial                               |       | 258                                                  |       | 179 |   |
| Agricultural                             |       | —                                               |       | 9 |   |
| Consumer                                 |       | 98                                                   |       | 98 |   |
| Lease receivable and other               |       | 48                                                   |       | — |   |
| Total loan charge-offs                   |       | 10,262                                               |       | 743 |   |
| Recoveries:                              |       |                                                 |       |   |   |
| Real estate - Residential and Commercial |       | 176                                                  |       | 135 |   |
| Real estate - Construction               |       | 47                                                   |       | 3 |   |
| Commercial                               |       | 117                                                  |       | 34 |   |
| Agricultural                             |       | 2                                                    |       | 6 |   |
| Consumer                                 |       | 25                                                   |       | 27 |   |
| Total loan recoveries                    |       | 367                                                  |       | 205 |   |
| Net loan charge-offs                     |       | 9,895                                                |       | 538 |   |
| Provision for loan losses                |       | 2,505                                                |       | 875 |   |
| Balance, end of period                   |       | $                                                    | 37,598     |   | $ | 26,048 |   |

 

Management continues to monitor the allowancefor loan losses closely and will adjust the allowance when necessary, based onits analysis, which includes an ongoing evaluation of substandard loans and theircollateral positions.

 

**Securities**

 

We manage our investment portfolio principally to provide liquidity,balance our overall interest rate risk and to provide collateral for publicdeposits and customer repurchase agreements.

 

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

 

**Table 11**

 
| ** **                                                  | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                                  | ** ** | **2009**                | ** ** | **2008**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                                                  | ** ** | **(In thousands)** | ** ** |
| Securities available-for-sale:                              |       |                    |       |                  |       |           |       |       |       |
| U.S. Treasury securities                                    |       | $                       | —     |                  | $          | 3,495          |       | $          | (3,495     | ) | (100.0 | )% |
| U.S. Government agencies and  government-sponsored entities |       | 2,509                   |       | 2,510                 |       | (1             | )          | (0.0       | )%         |
| State and municipal                                         |       | 63,963                  |       | 63,015                |       | 948            |       | 1.5        | %          |
| Mortgage backed                                             |       | 30,615                  |       | 31,965                |       | (1,350         | )          | (4.2       | )%         |
| Marketable equity                                           |       | 1,476                   |       | 1,345                 |       | 131            |       | 9.7        | %          |
| Other securities                                            |       | 544                     |       | 544                   |       | 0              |       | 0.0        | %          |
| Total securities available-for-sale                         |       | $                       | 99,107     |                  | $          | 102,874        |       | $          | (3,767     | ) | (3.7 | )% |
|                                                        |       |                    |       |                  |       |           |       |       |       |
| Securities held-to-maturity:                                |       |                    |       |                  |       |           |       |       |       |
| Mortgage-backed                                             |       | $                       | 11,946     |                  | $          | 13,114         |       | $          | (1,168     | ) | (8.9 | )% |

 

The Company does not own any preferred stockof either the Federal Home Loan Mortgage Corporation (FHLMC) or FederalNational Mortgage Association (FNMA). Further, all mortgage-backed securities are sponsored by either U.S.government agencies or government-sponsored entities, and none are privateissuances.

 

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The carrying value of our available-for-saleinvestment securities at March 31, 2009 was $99.1 million, compared to theDecember 31, 2008 carrying value of $102.9 million. The decrease in thelevel of our investments from December 31, 2008, is primarily due to adecision not to replace maturities of U.S. Treasury, U.S. government agenciesand government-sponsored entities, as well as municipal bonds because these bondswere in excess of our requirements for collateral on public deposits andcustomer repurchase agreements.

 

Included in the obligations of state and politicalsubdivisions is an individual non-rated municipal bond with a fair value of$37.3 million and an unrealized loss of $1.4 million.  This unrealized loss comprises 3.7% of theoriginal cost of this security and comprises nearly 100% of the grossunrealized loss of all investment securities at March 31, 2009.  Management performs an annual review processfor all non-rated municipal securities in our portfolio, but updated itsanalysis for this particular security during the first quarter due to therelative size of the unrealized loss on this security. Based on the firstquarter 2009 credit analysis of this particular bond, including a review of theissuer’s current financial statements, the related cash flows and interestpayments, management concluded that the continuous unrealized loss position onthis security was a result of the level of market interest rates and lack ofmarketability and not a result of the underlying issuer’s ability torepay.   Similarly, management concludedthat the continuous unrealized loss position on all other securities was also aresult of the level of market interest rates and not a result of the underlyingissuers’ ability to repay.   In addition,we have the ability and intent to hold these securities until their fair valuerecovers to their cost, which may be maturity. Accordingly, we have not recognized any other-than-temporary impairmentin our consolidated statements of income.

 

**Deposits**

** **

*The following table sets forth the amounts ofour deposits outstanding at the dates indicated:*

* *

**Table 12**

** **
| ** **                   | ** ** | **At March 31, 2009** | ** **      | **At December 31, 2008** | ** ** |
|------------------------------|------------|----------------------------|-----------------|-------------------------------|------------|
| ** **                   | ** ** | **Balance**                | ** **      | **% of Total**                | ** ** | **Balance** | ** ** | **% of Total** | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)** | ** **      |
| Noninterest bearing deposits |       | $                          |  422,509   |                          | 25.77      | % | $ |  433,761 |   | 25.52 | % |
| Interest bearing demand      |       | 140,110                    |            | 8.54                          | %          | 145,492 |   | 8.57 | % |
| Money market                 |       | 285,164                    |            | 17.39                         | %          | 315,364 |   | 18.57 | % |
| Savings                      |       | 72,157                     |            | 4.40                          | %          | 68,064 |   | 4.01 | % |
| Time                         |       | 719,857                    |            | 43.90                         | %          | 735,970 |   | 43.33 | % |
|                         |       |                       |            |                          |       |   |   |   |   |
| Total deposits               |       | $                          |  1,639,797 |                          | 100.00     | % | $ |  1,698,651 |   | 100.00 | % |

** **

At the end of the first quarter 2009, deposits were $1.6 billion ascompared to $1.7 billion at December 31, 2008, reflecting a decrease of$58.9 million.  Approximately $11.2million of this decline is attributable to noninterest bearing deposits.  A decrease of $30.2 million relates to adecline in money market accounts and $16.1 million of the decline relates totime deposits.  The decline in thesedeposit balances reflects both a decline in our customers’ available balancesand increased competition for such deposits.  Noninterest bearing deposits still comprised approximately 26% of totaldeposits at March 31, 2009, which helps mitigate overall deposit fundingcosts.  The $58.9 million decrease inoverall deposits from December 31, 2008 correlates to our $69.2 milliondecrease in overall loans during the same period.

 

**Borrowings and Subordinated Debentures**

** **

At March 31,2009, our outstanding borrowings were $164,499,000 as compared to $166,404,000at December 31, 2008.

 

Theborrowings at March 31, 2009 consisted of 16 separate fixed-rate termnotes at the FHLB with maturities ranging from 20 to 106 months.  Approximately $140 million of the FHLB termadvances at March 31, 2009 have Bermudan conversion options to a variablerate.  The initial fixed rate periodsrange from one to five years and can be prepaid without penalty at or afterconversion.  There was also a line of creditat the FHLB at March 31, 2009, but there was no balance outstanding onthis line of credit as of that date.

 

The totalcommitment, including balances outstanding, for borrowings at the Federal HomeLoan Bank for the term notes and line of credit at March 31, 2009 and December 31,2008 was $412.3 million and $428.3 million, respectively. The interest rate onthe line of credit varies with the federal funds rate, and was 0.48% and 0.65%at March 31, 2009 and December 31, 2008, respectively.  The term notes have fixed interest rates thatrange from 2.52% to 6.22%. A blanket pledge andsecurity agreement with the Federal Home Loan Bank, which encompasses 

 

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certain loans and securities, serves ascollateral for these borrowings. However, as of March 31, 2009 and December 31, 2008, therewere no investment securities pledged as collateral under the blanket pledgeand security agreement.

 

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

 

At March 31, 2009, we had a $41,239,000aggregate principal balance of subordinated debentures outstanding with aweighted average cost of 6.38%.  Thesubordinated debentures were issued in four separate series. Each issuance hasa maturity of thirty years from its date of issue. The subordinated debentureswere issued to trusts established by us, which in turn issued $40 million oftrust preferred securities. Generally and with certain limitations, the Companyis permitted to call the debentures subsequent to the first five or ten years,as applicable, after issue if certain conditions are met, or at any time uponthe occurrence and continuation of certain changes in either the tax treatmentor the capital treatment of the trusts, the debentures or the preferredsecurities.  The Guaranty Capital TrustIII issuance of $10.0 million has a variable rate of LIBOR plus 3.10% and wascallable without penalty on July 7, 2008, and every quarterthereafter.  The CenBank Trust IIIissuance of $15.0 million has a variable rate of LIBOR plus 2.65% and wascallable without penalty on April 15, 2009, and every quarterthereafter.   Management did not calleither of these securities on the latest call date, but will continue toevaluate whether to call these debentures each quarter.

 

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

 

**Capital Resources**

** **

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

 

For regulatory purposes, the Companymaintains capital above the minimum core standards.  The Company actively monitors itsregulatory capital ratios to ensure that the Company and its bank subsidiaryare more than well capitalized under the applicable regulatory framework.  Under the regulations adopted by the federalregulatory authorities, a bank is well-capitalized if the institution has atotal risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capitalratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is notsubject to any order or written directive by any such regulatory authority tomeet and maintain a specific capital level for any capital measure.  Our subsidiary bank is required to maintainsimilar capital levels under capital adequacy guidelines.  At March 31, 2009, our subsidiary bankwas “well-capitalized”.

 

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* *

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

* *

**Table 13**

 
| ** **                             | ** ** | **Ratio at   March 31,  2009** | ** ** | **Ratio at  December 31,  2008** | ** ** | **Minimum  Capital  Requirement** | ** ** | **Minimum  Requirement  for “Well  Capitalized”  Institution** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------------------------|------------|
|                                   |       |                                |       |                                  |       |                              |       |                                                                     |       |
| Total Risk-Based Capital Ratio         |       |                                |       |                                  |       |                              |       |                                                                     |       |
| Consolidated                           |       | 10.82                               | %          | 10.61                                 | %          | 8.00                              | %          | N/A                                                                      |       |
| Guaranty Bank & Trust Company |       | 10.77                               | %          | 10.52                                 | %          | 8.00                              | %          | 10.00                                                                    | %          |
| Tier 1 Risk-Based Capital Ratio        |       |                                |       |                                  |       |                              |       |                                                                     |       |
| Consolidated                           |       | 9.56                                | %          | 9.35                                  | %          | 4.00                              | %          | N/A                                                                      |       |
| Guaranty Bank & Trust Company |       | 9.51                                | %          | 9.26                                  | %          | 4.00                              | %          | 6.00                                                                     | %          |
| Leverage Ratio                         |       |                                |       |                                  |       |                              |       |                                                                     |       |
| Consolidated                           |       | 9.20                                | %          | 8.98                                  | %          | 4.00                              | %          | N/A                                                                      |       |
| Guaranty Bank & Trust Company |       | 9.16                                | %          | 8.90                                  | %          | 4.00                              | %          | 5.00                                                                     | %          |

** **

On October 3, 2008,Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), whichprovided the U. S. Treasury with broad authority to implement certain actionsto help restore stability and liquidity to U.S. markets.  One of the provisions resulting from the Actis the Treasury Capital Purchase Program (CPP), which provides direct equityinvestment of perpetual preferred stock by the Treasury in qualified financialinstitutions.  The program is voluntaryand requires an institution to comply with a number of restrictions andprovisions, including limits on executive compensation, stock redemptions anddeclaration of dividends.  Applicationswere required to be submitted by November 14, 2008 and are subject toapproval by the Treasury.  The CPPprovides for a minimum investment of 1 percent of Risk-Weighted Assets, with amaximum investment equal to the lesser of 3 percent of Total Risk-WeightedAssets or $25 billion.  The perpetualpreferred stock investment will have a dividend rate of 5% per year until thefifth anniversary of the Treasury investment, and a dividend of 9%thereafter.  The CPP also requires theTreasury to receive warrants for common stock equal to 15% of the capitalinvested by the Treasury.  The Companyfiled an application to participate in this program, and as of the filing dateof this report has not received a response from Treasury regarding itsapplication.

 

**ContractualObligations and Off-Balance Sheet Arrangements**

** **

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

 

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

 

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

* *

**Table 14**

 
| ** **                   | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **(In thousands)**       | ** ** |
|                         |       |                     |       |                        |       |
| Commitments to extend credit |       | $                        | 385,280    |                        | $          | 390,277 |   |
| Standby letters of credit    |       | 22,373                   |       | 24,792                      |       |
| Commercial letters of credit |       | 11,000                   |       | 11,000                      |       |
|                         |       |                     |       |                        |       |
| Totals                       |       | $                        | 418,653    |                        | $          | 426,069 |   |

 

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** **

**Liquidity**

 

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

 

Concerns over deposit fluctuations with respect to the overall bankingindustry were addressed by the FDIC in September and October 2008.The FDIC temporarily increased the individual account deposit insurance from$100,000 per account to $250,000 per account through December 31, 2009.The FDIC also implemented a Temporary Liquidity Guarantee Program, whichprovides for full FDIC coverage for transaction accounts, regardless of dollaramounts. The Bank elected to opt-in to this program, thus, our customers receivefull coverage for transaction accounts under the program.

 

Additionally, the Company has become a member of theCertificate of Deposit Account Registry Service (CDARS®) program. ThroughCDARS®, the Bank’s customers can increase their FDIC insurance by up to $50million 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 $100,000 amount (or $250,000 if the time deposit maturesprior to December 31, 2009) and placed with other banks that are membersof the network. The reciprocal member bank issues certificate of deposits inamounts that ensure that the entire deposit is eligible for FDIC insurance.

 

When the level of liquid assets (our primaryliquidity) does not meet our liquidity needs, other available sources of liquidassets (our secondary liquidity), including the purchase of federal funds,sales of securities under agreements to repurchase, purchase of brokeredcertificates of deposit, sales of loans, discount window borrowings from theFederal Reserve Bank, and our lines of credit with the Federal Home Loan Bankof Topeka (FHLB) are employed to meet current and presently anticipated fundingneeds. At March 31, 2009, the Company had approximately $247.8 million ofavailability on its FHLB line, $64 million of availability on its federal fundslines with correspondent banks, and $1.3 million of availability with theFederal Reserve discount window. The Company can also increase its amount ofbrokered deposits. However, if we would become less than well-capitalized underthe capital adequacy guidelines, regulatory approval would have to be obtainedin order to continue purchasing brokered deposits. Additionally, as describedabove, the Company joined the CDARS® program and can purchase certificates ofdeposit through this program. At March 31, 2009 the Company is eligible topurchase certificates of deposit of up to five percent of its total assetsthrough CDARS®. These sources provide significant secondary liquidity to theCompany to service its depositors’ needs.

 

The FDIC also implemented a Debt Guarantee Programwhere it guarantees all newly-issued senior unsecured debt up to prescribedlimits by a participating bank on or after October 14, 2008 through andincluding June 30, 2009. The Company and its subsidiary bank elected toopt-in to this program, which could provide up to $38 million of additionalunsecured senior debt to the Company and its subsidiary bank in the form ofgreater than 30 day term notes. As of March 31, 2009, no guaranteed seniorunsecured debt had been issued by the Company and the Company does not intendto issue unsecured senior debt prior to June 30, 2009.

 

The holding company relies on dividends from itsBank as a primary source of liquidity. We plan to continue to utilize theavailable dividends from the Bank for holding company operations, subject toregulatory and other restrictions. The ability of the Bank to pay dividends ormake other capital distributions to the holding company is subject to theregulatory authority of the Federal Reserve Board and the Colorado Division ofBanking. Because of the accumulated deficit at December 31, 2008 as aresult of goodwill impairment charges in 2008 and 2007, the Bank is required toobtain permission from the Federal Reserve Board and the Colorado Division ofBanking prior to making any dividend to the holding company.  The holding company requires liquidity forthe payment of interest on the subordinated debentures, for operating expenses,principally salaries and benefits, for repurchases of our common stock, and, ifdeclared by our board of directors, for the payment of dividends to ourstockholders.   Failure to obtainpermission to pay a dividend from the Bank to the Holding from either theFederal Reserve Board or the Colorado Division of Banking could result in theHolding Company electing to defer interest on its trust preferred securities.

 

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**Application of Critical Accounting Policiesand Accounting Estimates**

 

Management’sDiscussion and Analysis of financial condition and results of operationsdiscusses the Company’s condensed consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of these condensed consolidatedfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent liabilities at the date of the condensed consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. On an on-going basis, management evaluates its estimates andjudgments, including those related to customers and suppliers, allowance forloan losses, bad debts, investments, financing operations, long-lived assets,contingencies and litigation. Management bases its estimates and judgments onhistorical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which have formed the basisfor making such judgments about the carrying value of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom the recorded estimates under different assumptions or conditions.  A summary of critical accounting policies andestimates are listed in the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” section of the Company’s 2008 AnnualReport Form 10-K for the fiscal year ended December 31, 2008.  There have been no changes to the criticalaccounting policies listed in the Company’s 2008 Annual Report Form 10-Kduring 2009.  During the first quarter2009, the Company began offering customers interest rate swaps, and adopted thefollowing accounting policy:

 

*Accounting Policy for Derivative Instrumentsand Hedging Activities*

* *

Statement of Financial Accounting Standards No. 161,*Disclosures about Derivative Instruments andHedging Activities, an amendment of FASB Statement No. 133 (SFAS 161)*,amends and expands the disclosure requirements of FASB Statement No. 133  (SFAS 133) with the intent to provide usersof financial statements with an enhanced understanding of: (a) how and whyan entity uses derivative instruments, (b) how derivative instruments andrelated hedged items are accounted for under SFAS 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows. SFAS 161 requires qualitative disclosures about objectives andstrategies for using derivatives, quantitative disclosures about the fair valueof and gains and losses on derivative instruments, and disclosures aboutcredit-risk-related contingent features in derivative instruments.

 

As required by SFAS 133, the Company recordsall derivatives on the balance sheet at fair value.  The accounting forchanges in the fair value of derivatives depends on the intended use of thederivative, whether the Company has elected to designate a derivative in a hedgingrelationship and apply hedge accounting and whether the hedging relationshiphas satisfied the criteria necessary to apply hedge accounting. Currently, noneof the Company’s derivatives are designated in qualifying SFAS 133 hedgingrelationships, as the derivatives are not used to manage risks within theCompany’s assets or liabilities. As such, all changes in fair value of theCompany’s derivatives are recognized directly in earnings.

 

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

 

Market risk is the risk of loss in a financialinstrument arising from adverse changes in market prices and rates, foreigncurrency exchange rates, commodity prices and equity prices. Our market riskarises primarily from interest rate risk inherent in our lending and deposittaking activities. To that end, management actively monitors and manages ourinterest rate risk exposure. We do not have any market risk sensitiveinstruments entered into for trading purposes. We manage our interest ratesensitivity by matching the re-pricing opportunities on our earning assets tothose on our funding liabilities. We use various asset/liability strategies tomanage the re-pricing characteristics of our assets and liabilities, which aredesigned to ensure that exposure to interest rate fluctuations is limited toour guidelines of acceptable levels of risk-taking. Hedging strategies,including the terms and pricing of loans and deposits and managing thedeployment of our securities, are used to reduce mismatches in interest rate repricingopportunities of portfolio assets and their funding sources.

 

**Credit Risk-related ContingentFeatures**

** **

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

 

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

 

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

 

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

 

As of March 31, 2009, the fair value ofderivatives in a net liability position, which includes accrued interest butexcludes any adjustment for nonperformance risk related to these agreements,was $313,000. The Company has minimum collateral posting thresholds withcertain of its derivative counterparties, but has not been required to postcollateral against its obligations under these agreements. If the Company hadbreached any of these provisions at March 31, 2009, it would have beenrequired to settle its obligations under the agreements at the terminationvalue.

 

**Net Interest Income Modeling**

** **

Our Asset Liability Management Committee, or ALCO,addresses interest rate risk. The committee is comprised of members of oursenior management. The ALCO monitors interest rate risk by analyzing thepotential impact on net interest income and the net portfolio of equity valuefrom potential changes in interest rates, and considers the impact ofalternative strategies or changes in balance sheet structure. The ALCO managesour balance sheet in part to maintain the potential impact on net portfoliovalue and net interest income within acceptable ranges despite changes ininterest rates.

 

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

 

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

 

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

 

*The following table shows the net interest income increase or decreaseover the next twelve months as of March 31, 2009 and 2008:*

* *

**Table 15**

** **

**MARKET RISK:**

 
| ** **                | ** ** | **Annualized Net Interest Income**        | ** ** |
|---------------------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | **March 31, 2009  Amount of Change** | ** ** | **March 31, 2008  Amount of Change** | ** ** |
| ** **                | ** ** | **(In thousands)**                        | ** ** |
| **Rates in Basis Points** | ** ** | ** **                                | ** ** | ** ** | ** ** |
| 200                       |       | $                                         | 7,951      |   | $ | 6,905 |   |
| 100                       |       | 3,723                                     |       | 3,543 |   |
| Static                    |       | —                                    |       | — |   |
| (100)                     |       | 2,144                                     |       | (3,488 | ) |
| (200)                     |       | 3,642                                     |       | (6,350 | ) |
|                           |            |                                           |            |  |  |  |  |

** **

Overall, the Company believes it is asset-sensitive,which is consistent with the decline in net interest income during 2008 as aresult of lower rates.   At March 31,2009, the company is positioned to have a short-term favorable interest incomeimpact in a rising rate environment as well as a falling rate environment. Thisis because of the extremely low rate environment at March 31, 2009. Theprime rate has historically been set at a rate of 300 basis points over thetarget federal funds rate. The target federal funds rate is currently set bythe FOMC at a rate between 0 and 25 basis points. The Company’s interest raterisk modeling has an assumption that prime would continue to be set at a rateof 300 basis points over the target federal funds rate, therefore, a 200 basispoint decline in overall rates would only have between a 0 and 25 basis pointdecline in both federal funds and the prime rate.  Further, other rates that are currently below1% or 2% (e.g. U.S. Treasuries, LIBOR, etc.) are modeled to not fall below0% with an overall 100 or 200 basis point decrease in rates. Many of ourvariable rate loans are set to an index tied to prime, federal funds or LIBOR,therefore, a further decrease in rates would not have a substantial impact onloan yields. Additionally, current deposit rates, especially time depositrates, would continue to decrease in a falling rate environment. As a fallingrate environment would potentially impact the cost of liabilities to a greaterdegree than earning assets for the above reasons, a falling rate environment isexpected 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 could experience a continued decrease in net interest incomeas a result of falling yields on earning assets tied to prime.

 

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

 

As of the end of the period covered by this report,an evaluation was carried out by the Company’s management, with theparticipation of the Chief Executive Officer and the Chief Financial Officer,of the effectiveness of the Company’s disclosure controls and procedures (asdefined in Rule 15d-15(e) under the Securities Exchange Act of 1934).The Company’s disclosure controls were designed to provide a reasonableassurance that information required to be disclosed in reports that we file orsubmit under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission. It should be noted that thedesign of any system of controls is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions, regardless of how remote. However, the controls have been designedto provide reasonable assurance of achieving the controls’ stated goals. Basedon that evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer, have concluded that the Company’s disclosure controls and proceduresare effective at March 31, 2009 to ensure that information required to bedisclosed in the reports that we file or submit under the Securities ExchangeAct of 1934 was (i) accumulated and communicated to management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, to allowtimely decisions regarding required disclosure and (ii) recorded,processed, summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission.

 

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

 

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** **

**PART II—OTHER INFORMATION**

 

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

 

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

 

**ITEM 1A.    RiskFactors**

** **

In addition to the other information setforth in this report, you should carefully consider the factors discussed in Part I,“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the yearended December 31, 2008, which could materially affect our business,financial condition and/or operating results. 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), of ourcommon stock during the first quarter 2009. These purchases relate to the net settlement of vested, restricted stockawards.  The Company does not have anyexisting publicly announced repurchase plans or programs.

 
| ** **                          | ** ** | **Total  Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| January 1 to January 31   |       | 8,700                        |       | $                                 |  2.04 |   |
| February 1 to February 28 |       | 2,922                        |       | 1.49                              |       |
| March 1 to March 31       |       | 1,864                        |       | 1.54                              |       |
|                                |       |                         |       |                              |       |
|                                |       | 13,486                       |       | $                                 |  1.89 |   |

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

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**ITEM 6.       Exhibits**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                        |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                                                   |
| 3.1                |       | Amended and Restated Certification of Incorporation of the  Registrant (incorporated by reference to Exhibit 3.1 to Registrant’s  Form S-1 Registration Statement (No. 333-124855)).                               |
|               |       |                                                                                                                                                                                                                                   |
| 3.2                |       | Certificate of Amendment to Registrant’s Certificate of Incorporation  (incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K  filed on May 7, 2008.)                                             |
|               |       |                                                                                                                                                                                                                                   |
| 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               |       | Severance Agreement and  Release, dated as of February 12, 2009, between Registrant and Sherri L.  Heronema (incorporated by reference to Exhibit 10.1 to Registrant’s  Form 8-K filed on February 17, 2009). |
|               |       |                                                                                                                                                                                                                                   |
| 31.1               |       | Section 302  Certification of Chief Executive Officer.                                                                                                                                                                            |
|               |       |                                                                                                                                                                                                                                   |
| 31.2               |       | Section 302  Certification of Chief Financial Officer.                                                                                                                                                                            |
|               |       |                                                                                                                                                                                                                                   |
| 32.1               |       | Section 906  Certification of Chief Executive Officer.                                                                                                                                                                            |
|               |       |                                                                                                                                                                                                                                   |
| 32.2               |       | Section 906  Certification of Chief Financial Officer.                                                                                                                                                                            |

 

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** **

**SIGNATURES**

** **

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

 

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

 

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