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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

**x**           **QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly period ended June 30,2008**

** **

**OR**

 

**o**              **TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from           to           **

** **

**Commission File Number: 000-51556**

 

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**GUARANTY BANCORP**

(Exact name ofregistrant as specified in its charter)

 

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

 

**303-293-5563**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

 

As of July 31, 2008, there were52,599,865 shares of the registrant’s common stock outstanding, including1,612,141 shares of unvested stock grants and excluding 69,275 shares to beissued under its deferred compensation plan.

 

 

 

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**TABLE OFCONTENTS**

 
| ** **                                 | ** **                                                                                         | **Page**   |
|--------------------------------------------|----------------------------------------------------------------------------------------------------|------------|
|                                       | Forward-Looking  Statements and Factors that Could Affect Future Results                           | 3          |
| ** **                                 | ** **                                                                                         | ** ** |
| **PART I—FINANCIAL INFORMATION** | 5                                                                                                  |
|                                       |                                                                                               |       |
| ITEM 1.                               | Unaudited Condensed  Consolidated Financial Statements                                             | 5          |
|                                       |                                                                                               |       |
|                                       | Unaudited  Consolidated Balance Sheets                                                             | 5          |
|                                       |                                                                                               |       |
|                                       | Unaudited  Consolidated Statements of 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                                    | 9          |
|                                       |                                                                                               |       |
| ITEM 2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations        | 21         |
|                                       |                                                                                               |       |
| ITEM 3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                        | 39         |
|                                       |                                                                                               |       |
| ITEM 4.                               | Controls and  Procedures                                                                           | 41         |
|                                       |                                                                                               |       |
| **PART II—OTHER  INFORMATION**   | 42                                                                                                 |
|                                       |                                                                                               |       |
| ITEM 1.                               | Legal Proceedings                                                                                  | 42         |
|                                       |                                                                                               |       |
| 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                                               | 44         |
|                                       |                                                                                               |       |
| ITEM 5.                               | Other Information                                                                                  | 44         |
|                                       |                                                                                               |       |
| ITEM 6.                               | Exhibits                                                                                           | 46         |

 

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### **Forward-LookingStatements and Factors that Could Affect Future Results**

### ** **

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

 

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

 

·                  Theeffects of and changes in trade and monetary and fiscal policies and laws,including the interest rate policies of the Federal Open Market Committee ofthe Federal Reserve Board.

 

·                  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.

 

·                  Theability to increase market share and control expenses.

 

·                  Changesin the competitive environment among financial or bank holding companies andother financial service providers.

 

·                  Theeffect of changes in laws and regulations with which we and our subsidiariesmust comply.

 

·                  Changesin the securities markets.

 

·                  Theeffect of changes in accounting policies and practices, as may be adopted bythe regulatory agencies, as well as the Public Company Accounting OversightBoard, the Financial Accounting Standards Board and other accounting standardsetters.

 

·                  Changesin our organization, compensation and benefit plans.

 

·                  Thecosts and effects of legal and regulatory developments, including theresolution of legal proceedings or regulatory or other governmental inquiries,the results of regulatory examinations or reviews,and the necessity ofregulatory approval for dividend payments from the subsidiary bank to theCompany.

 

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·                  Oursuccess at managing the risks involved in the foregoing items.

 

Forward-looking statements speak only as ofthe date on which such statements are made. We do not intend to update any forward-looking statement to reflectevents or circumstances after the date on which such statement is made, or toreflect the occurrence of unanticipated events.

 

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**PART I- FINANCIAL INFORMATION**

 

**ITEM 1. Unaudited Consolidated Financial Statements**

 

**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **June 30, 2008**                                                     | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                            |       |                            |       |
| Cash and due from banks                                                                                                                                                                                                                                                                                                                                                                                                  |       | $                                                                               | 44,175     |                            | $          | 51,611 |   |
| Federal funds sold                                                                                                                                                                                                                                                                                                                                                                                                       |       | 11,672                                                                          |       | 745                             |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                |       | 55,847                                                                          |       | 52,356                          |       |
| Securities available for sale, at fair  value                                                                                                                                                                                                                                                                                                                                                                            |       | 112,118                                                                         |       | 118,964                         |       |
| Securities held to maturity (fair value of  $13,580 and $14,916 at June 30, 2008 and December 31, 2007)                                                                                                                                                                                                                                                                                                        |       | 13,772                                                                          |       | 14,889                          |       |
| Bank stocks, at cost                                                                                                                                                                                                                                                                                                                                                                                                     |       | 32,713                                                                          |       | 32,464                          |       |
| Total investments                                                                                                                                                                                                                                                                                                                                                                                                        |       | 158,603                                                                         |       | 166,317                         |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                                                            |       |                            |       |
| Loans, net of unearned discount                                                                                                                                                                                                                                                                                                                                                                                          |       | 1,789,155                                                                       |       | 1,781,647                       |       |
| Less allowance for loan losses                                                                                                                                                                                                                                                                                                                                                                                           |       | (26,506                                                                         | )          | (25,711                         | )          |
| Net loans                                                                                                                                                                                                                                                                                                                                                                                                                |       | 1,762,649                                                                       |       | 1,755,936                       |       |
| Loans, held for sale                                                                                                                                                                                                                                                                                                                                                                                                     |       | —                                                                          |       | 492                             |       |
| Premises and equipment, net                                                                                                                                                                                                                                                                                                                                                                                              |       | 65,087                                                                          |       | 69,981                          |       |
| Other real estate owned and foreclosed  assets                                                                                                                                                                                                                                                                                                                                                                           |       | 1,910                                                                           |       | 3,517                           |       |
| Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                 |       | 250,748                                                                         |       | 250,748                         |       |
| Other intangible assets, net                                                                                                                                                                                                                                                                                                                                                                                             |       | 29,179                                                                          |       | 32,933                          |       |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                                             |       | 34,536                                                                          |       | 39,384                          |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                                                                             |       | $                                                                               | 2,358,559  |                            | $          | 2,371,664 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                                                            |       |                            |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                            |       |                            |       |
| Liabilities:                                                                                                                                                                                                                                                                                                                                                                                                             |       |                                                                            |       |                            |       |
| Deposits:                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                            |       |                            |       |
| Noninterest-bearing demand                                                                                                                                                                                                                                                                                                                                                                                               |       | $                                                                               | 515,646    |                            | $          | 515,299 |   |
| Interest-bearing demand                                                                                                                                                                                                                                                                                                                                                                                                  |       | 673,611                                                                         |       | 732,156                         |       |
| Savings                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 71,474                                                                          |       | 71,944                          |       |
| Time                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 446,300                                                                         |       | 480,108                         |       |
| Total deposits                                                                                                                                                                                                                                                                                                                                                                                                           |       | 1,707,031                                                                       |       | 1,799,507                       |       |
| Securities sold under agreements to  repurchase and federal fund purchases                                                                                                                                                                                                                                                                                                                                               |       | 21,442                                                                          |       | 23,617                          |       |
| Borrowings                                                                                                                                                                                                                                                                                                                                                                                                               |       | 147,117                                                                         |       | 63,715                          |       |
| Subordinated debentures                                                                                                                                                                                                                                                                                                                                                                                                  |       | 41,239                                                                          |       | 41,239                          |       |
| Interest payable and other liabilities                                                                                                                                                                                                                                                                                                                                                                                   |       | 17,803                                                                          |       | 24,932                          |       |
| Total liabilities                                                                                                                                                                                                                                                                                                                                                                                                        |       | 1,934,632                                                                       |       | 1,953,010                       |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                                                            |       |                            |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                            |       |                            |       |
| Common stock—$.001 par value; 100,000,000  shares authorized,64,534,950 shares issued, 52,736,269 shares outstanding at  June 30, 2008 (includes 1,689,608 shares of unvested restricted stock  and69,275 shares to be issued); 64,378,450 shares issued, 52,616,991shares  outstanding at December 31, 2007 (includes 1,651,345 shares of unvested  restricted stock and 60,507 of shares to be issued). |       | 65                                                                              |       | 64                              |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                                               |       | 619,188                                                                         |       | 617,611                         |       |
| Shares to be issued for deferred  compensation obligations                                                                                                                                                                                                                                                                                                                                                               |       | 613                                                                             |       | 573                             |       |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                                                      |       | (89,997                                                                         | )          | (95,196                         | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                                                                                                     |       | (2,894                                                                          | )          | (1,472                          | )          |
| Treasury Stock, at cost, 10,989,743 and  10,983,653, respectively                                                                                                                                                                                                                                                                                                                                                        |       | (103,048                                                                        | )          | (102,926                        | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                          |       | 423,927                                                                         |       | 418,654                         |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                          |       | $                                                                               | 2,358,559  |                            | $          | 2,371,664 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Income**

 
| ** **                                            | ** ** | **Three Months Ended June 30,**                             | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                                                        | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                            | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest income:                                      |       |                                                                            |       |                                              |       |   |   |   |   |
| Loans, including fees                                 |       | $                                                                               | 28,107     |                                              | $          | 39,087 |   | $ | 59,147 |   | $ | 78,825 |   |
| Investment securities:                                |       |                                                                            |       |                                              |       |   |   |   |   |
| Taxable                                               |       | 779                                                                             |       | 608                                               |       | 1,463 |   | 1,229 |   |
| Tax-exempt                                            |       | 877                                                                             |       | 1,336                                             |       | 1,770 |   | 2,748 |   |
| Dividends                                             |       | 435                                                                             |       | 459                                               |       | 905 |   | 934 |   |
| Federal funds sold and other                          |       | 18                                                                              |       | 213                                               |       | 334 |   | 327 |   |
| Total interest income                                 |       | 30,216                                                                          |       | 41,703                                            |       | 63,619 |   | 84,063 |   |
| Interest expense:                                     |       |                                                                            |       |                                              |       |   |   |   |   |
| Deposits                                              |       | 7,411                                                                           |       | 13,738                                            |       | 17,206 |   | 27,084 |   |
| Federal funds purchased and repurchase agreements     |       | 145                                                                             |       | 448                                               |       | 282 |   | 749 |   |
| Borrowings                                            |       | 1,417                                                                           |       | 592                                               |       | 2,446 |   | 1,530 |   |
| Subordinated debentures                               |       | 852                                                                             |       | 938                                               |       | 1,644 |   | 1,870 |   |
| Total interest expense                                |       | 9,825                                                                           |       | 15,716                                            |       | 21,578 |   | 31,233 |   |
| Net interest income                                   |       | 20,391                                                                          |       | 25,987                                            |       | 42,041 |   | 52,830 |   |
| Provision for loan losses                             |       | 900                                                                             |       | 12,766                                            |       | 1,775 |   | 13,615 |   |
| Net interest income, after provision for loan  losses |       | 19,491                                                                          |       | 13,221                                            |       | 40,266 |   | 39,215 |   |
| Noninterest income:                                   |       |                                                                            |       |                                              |       |   |   |   |   |
| Customer service and other fees                       |       | 2,528                                                                           |       | 2,409                                             |       | 4,804 |   | 4,852 |   |
| Gain on sale of securities                            |       | —                                                                          |       | —                                            |       | 138 |   | — |   |
| Other                                                 |       | 604                                                                             |       | 168                                               |       | 705 |   | 292 |   |
| Total noninterest income                              |       | 3,132                                                                           |       | 2,577                                             |       | 5,647 |   | 5,144 |   |
| Noninterest expense:                                  |       |                                                                            |       |                                              |       |   |   |   |   |
| Salaries and employee benefits                        |       | 9,184                                                                           |       | 10,724                                            |       | 18,904 |   | 21,698 |   |
| Occupancy expense                                     |       | 2,131                                                                           |       | 2,056                                             |       | 4,132 |   | 4,177 |   |
| Furniture and equipment                               |       | 1,383                                                                           |       | 1,231                                             |       | 2,697 |   | 2,471 |   |
| Amortization of intangible assets                     |       | 1,877                                                                           |       | 2,195                                             |       | 3,754 |   | 4,390 |   |
| Other general and administrative                      |       | 5,122                                                                           |       | 11,416                                            |       | 8,920 |   | 15,568 |   |
| Total noninterest expense                             |       | 19,697                                                                          |       | 27,622                                            |       | 38,407 |   | 48,304 |   |
| Income (loss) before income taxes                     |       | 2,926                                                                           |       | (11,824                                           | )          | 7,506 |   | (3,945 | ) |
| Income tax expense (benefit)                          |       | 901                                                                             |       | (5,030                                            | )          | 2,236 |   | (2,560 | ) |
| Net income (loss)                                     |       | $                                                                               | 2,025      |                                              | $          | (6,794 | ) | $ | 5,270 |   | $ | (1,385 | ) |
|                                                  |       |                                                                            |       |                                              |       |   |   |   |   |
| Earnings (loss) per share–basic:                 |       | $                                                                               | 0.04       |                                              | $          | (0.13 | ) | $ | 0.10 |   | $ | (0.03 | ) |
| Earnings (loss) per share–diluted:               |       | 0.04                                                                            |       | (0.13                                             | )          | 0.10 |   | (0.03 | ) |
|                                                  |       |                                                                            |       |                                              |       |   |   |   |   |
| Weighted average shares outstanding-basic             |       | 51,004,472                                                                      |       | 53,425,770                                        |       | 50,996,350 |   | 54,105,373 |   |
| Weighted average shares outstanding-diluted           |       | 51,091,042                                                                      |       | 53,425,770                                        |       | 51,086,578 |   | 54,105,373 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 
| ** **                                    | ** ** | **Common  Stock shares  Outstanding  and to be  issued** | ** ** | **Common  Stock and  Additional  Paid-in  Capital** | ** ** | **Shares to  be Issued** | ** ** | **Treasury  Stock** | ** ** | **Retained  Earnings/  (Accumulated  Deficit)** | ** ** | **Accumulated  Other****Comprehensive****Income (Loss)** | ** ** | **Totals** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------|------------|---------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **(In thousands, except share data)**               | ** ** |
| Balance, December 31, 2006               |       | 57,236,795                                                              |       | $                                                        | 614,553    |                               | $          | 775                 |       | $                                               | (69,574    | )                                                             | $          | 42,896     |       | $ | 809 |   | $ | 589,459 |   |
| Comprehensive income:                         |       |                                                                    |       |                                                     |       |                               |       |                |       |                                            |       |                                                          |       |       |       |
| Net loss                                      |       | —                                                                  |       | —                                                   |       | —                             |       | —              |       | (1,385                                          | )          | —                                                        |       | (1,385     | )          |
| Other comprehensive loss                      |       | —                                                                  |       | —                                                   |       | —                             |       | —              |       | —                                          |       | (1,331                                                        | )          | (1,331     | )          |
| Total comprehensive loss                      |       | —                                                                  |       | —                                                   |       | —                             |       | —              |       | —                                          |       | —                                                        |       | (2,716     | )          |
| Stock compensation awards, net of forfeitures |       | (10,200                                                                 | )          | —                                                   |       | —                             |       | —              |       | —                                          |       | —                                                        |       | —     |       |
| Earned stock award compensation               |       | —                                                                  |       | 1,708                                                    |       | —                             |       | —              |       | —                                          |       | —                                                        |       | 1,708      |       |
| Repurchase of common stock                    |       | (2,422,547                                                              | )          | —                                                   |       | —                             |       | (20,806             | )          | —                                          |       | —                                                        |       | (20,806    | )          |
| Deferred compensation                         |       | (51,745                                                                 | )          | —                                                   |       | 45                                 |       | —              |       | —                                          |       | —                                                        |       | 45         |       |
| Common shares issued                          |       | —                                                                  |       | 250                                                      |       | (258                               | )          | 8                   |       | —                                          |       | —                                                        |       | —     |       |
| Balance, June 30, 2007                   |       | 54,752,303                                                              |       | $                                                        | 616,511    |                               | $          | 562                 |       | $                                               | (90,372    | )                                                             | $          | 41,511     |       | $ | (522 | ) | $ | 567,690 |   |
|                                          |       |                                                                    |       |                                                     |       |                               |       |                |       |                                            |       |                                                          |       |       |       |
| 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                                    |       | —                                                                  |       | —                                                   |       | —                             |       | —              |       | 5,270                                           |       | —                                                        |       | 5,270      |       |
| Other comprehensive loss                      |       | —                                                                  |       | —                                                   |       | —                             |       | —              |       | —                                          |       | (1,422                                                        | )          | (1,422     | )          |
| Total comprehensive income                    |       | —                                                                  |       | —                                                   |       | —                             |       | —              |       | —                                          |       | —                                                        |       | 3,848      |       |
| Stock compensation awards, net of forfeitures |       | 129,600                                                                 |       | —                                                   |       | —                             |       | —              |       | —                                          |       | —                                                        |       | —     |       |
| Earned stock award compensation               |       | —                                                                  |       | 1,550                                                    |       | —                             |       | —              |       | —                                          |       | —                                                        |       | 1,550      |       |
| Repurchase of common stock                    |       | (22,645                                                                 | )          | —                                                   |       | —                             |       | (122                | )          | —                                          |       | —                                                        |       | (122       | )          |
| Deferred compensation                         |       | 12,323                                                                  |       | —                                                   |       | 68                                 |       | —              |       | —                                          |       | —                                                        |       | 68         |       |
| Common shares issued                          |       | —                                                                  |       | 28                                                       |       | (28                                | )          | —              |       | —                                          |       | —                                                        |       | —     |       |
| Balance, June 30, 2008                   |       | 52,736,269                                                              |       | $                                                        | 619,253    |                               | $          | 613                 |       | $                                               | (103,048   | )                                                             | $          | (89,997    | )          | $ | (2,894 | ) | $ | 423,927 |   |
|                                               |            |                                                                         |            |                                                          |            |                                    |            |                     |            |                                                 |            |                                                               |            |            |            |  |  |  |  |  |  |  |  |  |

 

See “Notes to Unaudited CondensedConsolidated Financial Statements.”

 

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Tableof Contents

 

**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Cash Flows**

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | **(In thousands)**                           | ** ** |
| Cash flows from operating activities:                                              |       |                                              |       |   |   |
| Net income (loss)                                                                  |       | $                                                 | 5,270      |   | $ | (1,385 | ) |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                      |       | 6,054                                             |       | 6,704 |   |
| Provision for loan losses                                                          |       | 1,775                                             |       | 13,615 |   |
| Stock compensation                                                                 |       | 1,550                                             |       | 1,708 |   |
| Gain on sale of securities                                                         |       | (138                                              | )          | — |   |
| Loss on sale of real estate owned and  assets                                      |       | 4                                                 |       | 177 |   |
| Other real estate owned valuation  adjustments                                     |       | 734                                               |       | 158 |   |
| Write down of premises and equipment                                               |       | 1,191                                             |       | — |   |
| Other                                                                              |       | 120                                               |       | 1,553 |   |
| Net change in:                                                                     |       |                                              |       |   |   |
| Accrued interest receivable and other  assets                                      |       | 6,896                                             |       | 1,706 |   |
| Accrued interest payable and other  liabilities                                    |       | (5,644                                            | )          | (6,726 | ) |
| Net cash provided by operating activities                                          |       | 17,812                                            |       | 17,510 |   |
| Cash flows from investing activities:                                              |       |                                              |       |   |   |
| Activity in available-for-sale securities:                                         |       |                                              |       |   |   |
| Maturities, prepayments, and calls                                                 |       | 15,313                                            |       | 13,140 |   |
| Proceeds from sales                                                                |       | 14,738                                            |       | — |   |
| Purchases                                                                          |       | (25,299                                           | )          | (1,909 | ) |
| Activity in held-to-maturity securities and  bank stocks:                          |       |                                              |       |   |   |
| Maturities, prepayments, and calls                                                 |       | 1,118                                             |       | 435 |   |
| Purchases                                                                          |       | —                                            |       | (1,373 | ) |
| Loan originations and principal  collections, net                                  |       | (9,206                                            | )          | 46,822 |   |
| Proceeds from sale of loans held for sale                                          |       | 492                                               |       | — |   |
| Proceeds from sales of foreclosed assets                                           |       | 587                                               |       | 480 |   |
| Proceeds from sales of premises and  equipment                                     |       | —                                            |       | 584 |   |
| Additions to premises and equipment                                                |       | (721                                              | )          | (675 | ) |
| Net cash provided (used) by investing  activities                                  |       | (2,978                                            | )          | 57,504 |   |
| Cash flows from financing activities:                                              |       |                                              |       |   |   |
| Net decrease in deposits                                                           |       | (92,476                                           | )          | (21,693 | ) |
| Net change in short-term borrowings                                                |       | (16,331                                           | )          | (40,082 | ) |
| Proceeds from issuance of debt                                                     |       | 104,772                                           |       | — |   |
| Repayment of long-term debt                                                        |       | (5,011                                            | )          | (1,520 | ) |
| Net change in federal funds purchased and  repurchase agreements                   |       | (2,175                                            | )          | 11,922 |   |
| Repurchase of common stock                                                         |       | (122                                              | )          | (20,806 | ) |
| Net cash used by financing activities                                              |       | (11,343                                           | )          | (72,179 | ) |
| Net change in cash and cash equivalents                                            |       | 3,491                                             |       | 2,835 |   |
| Cash and cash equivalents, beginning of  period                                    |       | 52,356                                            |       | 49,620 |   |
| Cash and cash equivalents, end of period                                           |       | $                                                 | 55,847     |   | $ | 52,455 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

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Tableof Contents

 

**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements**

 

**(1)****                 ****Organization, Operations and Basis of Presentation**

 

Guaranty Bancorp(formerly Centennial Bank Holdings, Inc.) is a financial holding companyand a bank holding company registered under the Bank Holding Company Act of1956, as amended.  On May 6, 2008, thestockholders of the Company approved the proposal to change the name of theholding company from Centennial Bank Holdings, Inc. to GuarantyBancorp.   This name change was effectiveon May 12, 2008.

 

Ourprincipal business is to serve as a holding company for our subsidiaries. As ofJune 30, 2008, Guaranty Bancorp has a single bank subsidiary, GuarantyBank and Trust Company, referred to as Guaranty Bank or the Bank. At December 31,2007, Guaranty Bancorp’s subsidiaries were Guaranty Bank and Centennial Bank ofthe West, referred to as CBW.  CBW wasmerged into Guaranty Bank on January 1, 2008.

 

Referenceto “Bank” means Guaranty Bank, and “we” or “Company” means Guaranty Bancorp ona consolidated basis with the Banks, if applicable.  References to “Guaranty Bancorp” or to theholding company refer to the parent company on a stand-alone basis.

 

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

 

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

 

Theaccounting and reporting policies of the Company conform to generally acceptedaccounting principles in the United States of America. All significantintercompany balances and transactions have been eliminated. Our financial statementsreflect all adjustments that are, in the opinion of management, necessary for afair presentation of the financial position and results of operations for theperiods presented. Certain information and note disclosures normally includedin consolidated financial statements prepared in accordance with generallyaccepted accounting principles in the United States of America have beencondensed or omitted pursuant to the rules and regulations of theSecurities and Exchange Commission. The interim operating results are notnecessarily indicative of operating results for the full year.

 

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

 

Thepreparation of the consolidated financial statements in conformity withgenerally accepted accounting principles in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities as of the dates of the consolidated balance sheetsand income and expense for the periods presented. Actual results could differsignificantly from those estimates. Material estimates that are particularlysusceptible to significant changes include the assessment for impairment ofcertain investment securities, the allowance for loan losses, valuation ofother real estate owned, deferred tax assets and liabilities, goodwill andother intangible assets and stock compensation expense.  Assumptions and factors are evaluated on anannual basis or whenever events or changes in circumstance indicate that theprevious assumptions and factors have changed.  The result of the analysis could result inadjustments to the estimates.

 

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

 

Theallowance for loan losses is reported as a reduction of outstanding loanbalances.  The allowance for loan lossesis a valuation allowance for probable incurred loan losses.

 

Theallowance for loan losses is evaluated on a regular basis by management andbased upon management’s periodic review of the collectibility of the loans inlight of historical experience, the nature and volume of the loan portfolio,adverse situations that may affect borrowers’ ability to repay, estimated valueof 

 

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Tableof Contents

 

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

any underlying collateraland prevailing economic conditions.  Thisevaluation is inherently subjective as it requires estimates that are susceptibleto significant revision as more information becomes available.

 

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)******                    ******Goodwilland Other Intangible Assets***

 

Goodwillrepresents the excess of cost over the fair value of the net assets ofbusinesses acquired.  Goodwill andintangible assets acquired in a purchase business combination and determined tohave an indefinite useful life are tested for impairment and not amortized.Intangible assets with definite useful lives are amortized over their estimateduseful lives to their estimated residual values.

 

Goodwillis our only intangible asset with an indefinite life.  The annual impairment analysis of goodwillincludes identification of reporting units, the determination of the carryingvalue of each reporting unit, including the existing goodwill and intangibleassets, and estimating the fair value of each reporting unit.  We have identified one significant reportingunit – banking operations. The Company tests for impairment of goodwillannually as of October 31, or if an event occurs or circumstances changethat would more likely than not reduce the fair value of the reportingunit.  We determine the fair value of ourreporting unit and compare it to its carrying amount.  If the carrying amount of a reporting unitexceeds its fair value, we are required to perform a second step to theimpairment test to measure the extent of the impairment.

 

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

 

***(e)      Stock Incentive 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. Through June 30, 2008, 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 Companyrecognizes expense for services received in a share-based payment transactionas services are received. That cost is recognized on a straight-line basis overthe period during which an employee or director provides service in exchangefor the award. The Company has issued stock awards that vest based on serviceperiods from one to four years, performance conditions, and awards with bothservice periods and performance conditions. The performance-based share awardsexpire December 31, 2012. The compensation cost of employee and directorservices received in exchange for stock awards is based on the grant-date fairvalue of the award (as determined by quoted market prices). The stockcompensation expense recognized reflects estimated forfeitures, adjusted asnecessary based on actual forfeitures.

 

***(f)       Deferred CompensationPlans***

 

TheCompany has Deferred Compensation Plans (the “Plans”) that allow directors andcertain key employees to voluntarily defer compensation. Compensation expenseis recorded for the deferred compensation and a related liability isrecognized. Participants may elect designated investment options for thenotional investment of their deferred compensation. The recorded obligationsare adjusted for deemed income or loss related to the investments selected.Participants in certain Plans are given the opportunity to elect to have all ora portion of their deferred compensation earn a rate of return equal to thetotal return on the Company’s common stock. The Plans do not provide fordiversification of a participant’s assets allocated to Company common stock andassets allocated to Company common stock can only be settled with a fixednumber of shares of stock. In accordance with Emerging Issues Task Force Issue97-14, *Accounting for*

 

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Tableof Contents

 

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

*Deferred Compensation Arrangements Where Amounts Earned Are Held in aRabbi Trust and Invested*,the deferred compensation obligation associated with Company common stock isclassified as a component of stockholders’ equity and the related shares aretreated as shares to be issued and are included in total shares outstanding forearnings per share and balance sheet purposes only.  At June 30, 2008 and December 31,2007, the total shares outstanding included 69,275 and 60,507 shares,respectively, to be issued.  Subsequentchanges in the fair value of the common stock are not reflected in earnings orstockholders’ equity of the Company. Actual Company stock held by the Company for the satisfaction ofobligations of the Plans is classified as treasury stock.

 

***(g)      Income taxes***

 

Effective January 1,2007, the Company adopted FASB Interpretation 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”).  A tax position is recognized as a benefit only if it is “more likelythan not” that the tax position would be sustained in a tax examination, with atax examination being presumed to occur. The amount recognized is the largestamount of tax benefit that is greater than 50% likely to be realized onexamination.  For tax positions not meeting the “more likely than not”test, no tax benefit is recorded.  The adoption of FIN 48 on January 1,2007 had no effect on the Company’s financial statements.

 

TheCompany and its subsidiaries are subject to U.S. federal income tax and Stateof Colorado tax. The Company is no longer subject to examination by Federal orstate taxing authorities for years before 2004. At June 30, 2008 and December 31,2007, the Company did not have any unrecognized tax benefits. The Company doesnot expect the total amount of unrecognized tax benefits to significantlyincrease in the next twelve months. The Company recognizes interest related toincome tax matters in other interest expense and penalties related to incometax matters in other noninterest expense. At June 30, 2008 and December 31, 2007, the Company does nothave any amounts accrued for interest and penalties.

 

***(h)      Earnings per Common Share***

 

Basicearnings per share represents income available to common stockholders dividedby the weighted average number of common shares outstanding during theperiod.  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 perShare*, the Company’s obligation to issue shares of stock to participantsin its deferred compensation plan has been treated as outstanding shares ofstock in the basic earnings per share calculation.  Dilutive common shares that may be issued bythe Company relate to unvested common share grants subject to a service conditionfor the six-month periods ended June 30, 2008 and 2007.   Outstanding restricted shares with ananti-dilutive impact, which are excluded from the earnings per common sharecomputation, include performance-based shares and service-based shares that arenot considered dilutive.  For thesix-months ended June 30, 2008 and 2007, the anti-dilutive restrictedshares excluded from the earnings per common share computation are 1,599,380and 1,542,088, respectively.

 

*Earnings per common share havebeen computed based on the following:*

 
| ** **                                                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                    | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average common shares outstanding                                             |       | 51,004,472                                          |       | 53,425,770                                        |       | 50,996,350 |   | 54,105,373 |   |
| Effective of dilutive unvested stock grants                                   |       | 86,570                                              |       | —                                            |       | 90,228 |   | — |   |
| Average shares outstanding for calculating  diluted earnings per common share |       | 51,091,042                                          |       | 53,425,770                                        |       | 51,086,578 |   | 54,105,373 |   |

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

***(i)   Recently Issued Accounting Standards***

 

***Adoption of New Accounting Standards:***In September 2006,the FASB issued Statement No. 157, *Fair Value Measurements*.  This Statement defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements.  This Statementestablishes a fair value hierarchy about the assumptions used to measure fairvalue and clarifies assumptions about risk and the effect of a restriction onthe sale or use of an asset.  Thestandard is effective for fiscal years beginning after November 15, 2007.In February 2008, the FASB issued Staff Position (FSP) 157-2, *Effective Date of FASB Statement No. 157*.  This FSP delays the effective date of FAS 157for all nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value on a recurring basis (at least annually),to fiscal years beginning after November 15, 2008, and interim periodswithin those fiscal years. The adoption of FAS 157 on January 1, 2008 didnot have a material impact on the Company’s consolidated financial position,results of operations or cash flows.  See Note 8 for further disclosure regarding the implementation of thisaccounting pronouncement.

 

In February 2007, the FASB issued Statement No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities*.  Thestandard provides companies with an option to report selected financial assetsand liabilities at fair value and establishes presentation and disclosurerequirements designed to facilitate comparisons between companies that choosedifferent measurement attributes for similar types of assets andliabilities.  The new standard becameeffective for the Company on January 1, 2008.  Upon adoption of this accountingpronouncement on January 1, 2008, the Company did not elect the fair valueoption for any financial assets or financial liabilities.

 

In September 2006, theFASB Emerging Issues Task Force finalized Issue No. 06-4, *Accounting for Deferred Compensation and Postretirement Benefit Aspectsof Endorsement Split-Dollar Life Insurance Arrangements*.  This issue requires that a liability berecorded during the service period when a split-dollar life insurance agreementcontinues after participants’ employment or retirement.  The required accrued liability will be basedon either the post-employment benefit cost for the continuing life insurance orbased on the future death benefit, depending on the contractual terms of theunderlying agreement.  This issue iseffective for fiscal years beginning after December 15, 2007.  Upon adoption of this issue on January 1, 2008, the Companyrecorded a cumulative effect adjustment to reduce beginning retained earningsas of January 1, 2008 by $71,000.

 

On November 5,2007, the SEC issued Staff Accounting Bulletin No. 109, *Written Loan Commitments Recorded at Fair Value through Earnings*(“SAB109”). Previously, SAB 105, *Application of**Accounting Principles to Loan Commitments*, stated that inmeasuring the fair value of a derivative loan commitment, a company should notincorporate the expected net future cash flows related to the associatedservicing of the loan. SAB 109 supersedes SAB 105 and indicates that theexpected net future cash flows related to the associated servicing of the loanshould be included in measuring fair value for all written loan commitmentsthat are accounted for at fair value through earnings.  SAB 105 also indicated thatinternally-developed intangible assets should not be recorded as part of thefair value of a derivative loan commitment, and SAB 109 retains that view.  SAB 109 is effective for derivative loancommitments issued or modified in fiscal quarters beginning after December 15,2007.  The adoption of this SAB on January 1,2008 did not have a material impact on the Company’s consolidated financialposition, results of operations or cash flows.

 

***Newly Issued But Not YetEffective Accounting Standards:***  In December 2007, the FASBissued Statement No. 141R, *Business Combinations(Revised)* (“SFAS 141R”). SFAS 141R replaces the current standard onbusiness combinations and will significantly change 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 business combinationat fair value.  In addition, the statement will result in 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 effectivefor fiscal years beginning on or after December 15, 2008.

 

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Table of Contents

 

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

In March 2008, the FASB issued Statement No. 161,*Disclosures about Derivative Instruments andHedging Activities an Amendment of FASB Statement No. 133* (“SFAS161”).  SFAS 161 amends Statement 133 byrequiring expanded disclosures about an entity’s derivative instruments andhedging activities, but does not change Statement 133’s scope oraccounting.  This statement requiresincreased qualitative, quantitative, and credit-risk disclosures.  SFAS 161 also amends Statement No. 107to clarify that derivative instruments are subject to Statement 107’sconcentration-of-credit-risk disclosures. SFAS 161 is effective for fiscal years beginning on or after November 15,2008.  The Company does not expect theadoption of SFAS 161 to have a material impact on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

In May 2008, theFASB issued Statement No. 162 *The Hierarchy of GenerallyAccepted Accounting Principles*(“SFAS 162”).  SFAS 162 identifies the sources of accountingprinciples and the framework for selecting the principles to be used in thepreparation of financial statements of nongovernmental entities that arepresented in conformity with GAAP in the United States (the GAAP Hierarchy).The Board issued this Statement because it is the entity (not its auditor) thatis responsible for selecting accounting principles for financial statementsthat are presented in conformity with GAAP. Accordingly, the Board concluded that the GAAP hierarchy should residein the accounting literature established by the FASB as opposed to auditingliterature established by the AICPA and PCAOB. SFAS 162 is effective 60 days following the SEC’s approval of the PCAOB’samendments to AU Section 411, *The Meaning of**Present Fairly in Conformity With Generally Accepted AccountingPrinciples*.  The Company doesnot expect the adoption to have a material impact on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

InJune 2008, the FASB issued Staff Position No. EITF 03-6-1, *Determining Whether Instruments Granted in Share-Based PaymentTransactions Are Participating Securities* (“FSP EITF 03-6-1”).  The FSP addresses whether instruments grantedin share-based payment transactions are participating securities prior tovesting and, therefore, need to be included in the earnings allocation incomputing EPS under the two-class method. The FSP affects entities that accrue cash dividends on share-basedpayment awards during the awards’ service period when the dividends do not needto be returned if the employees forfeit the awards.  FSP EITF 03-6-1 is effective for fiscal yearsbeginning after December 15, 2008. However, the Company does not accrue cash dividends and therefore doesnot anticipate there to be an impact on the Company’s consolidated financialposition, results of operations or cash flows.

 

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

 

*The amortized cost and estimated fair value of debt securities are asfollows:*

 
| ** **                                                  | ** ** | **Amortized  cost**         | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair value** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                                                  | ** ** | **(In thousands)**     | ** ** |
| ** **                                                  | ** ** | **June 30, 2008** | ** ** |
| Securities available for sale:                              | ** ** | ** **                  | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **          | ** ** |
| U.S. government agencies and  government-sponsored entities |       | $                           | 2,493      |                         | $          | —                        |       | $                   | (44        | ) | $ | 2,449 |   |
| State and municipal                                         |       | 75,506                      |       | 735                          |       | (4,672                        | )          | 71,569              |       |
| Mortgage-backed                                             |       | 37,087                      |       | 51                           |       | (741                          | )          | 36,397              |       |
| Marketable equity                                           |       | 1,156                       |       | —                       |       | —                        |       | 1,156               |       |
| Other securities                                            |       | 547                         |       | —                       |       | —                        |       | 547                 |       |
| Securities available-for-sale                               |       | $                           | 116,789    |                         | $          | 786                           |       | $                   | (5,457     | ) | $ | 112,118 |   |
| Securities held to maturity:                                |       |                        |       |                         |       |                          |       |                |       |
| Mortgage-backed                                             |       | $                           | 13,772     |                         | $          | 16                            |       | $                   | (208       | ) | $ | 13,580 |   |

 
| ** **                                                  | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|
| Securities available for sale:                              | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. government agencies and  government-sponsored entities |       | $                           | 10,453     |   | $ | 13 |   | $ | (10 | ) | $ | 10,456 |   |
| State and municipal                                         |       | 79,164                      |       | 607 |   | (2,895 | ) | 76,876 |   |
| Mortgage-backed                                             |       | 30,132                      |       | 108 |   | (202 | ) | 30,038 |   |
| Marketable equity                                           |       | 1,047                       |       | — |   | — |   | 1,047 |   |
| Other securities                                            |       | 547                         |       | — |   | — |   | 547 |   |
| Securities available-for-sale                               |       | $                           | 121,343    |   | $ | 728 |   | $ | (3,107 | ) | $ | 118,964 |   |
| Securities held to maturity:                                |       |                        |       |   |   |   |   |   |   |
| Mortgage-backed                                             |       | $                           | 14,889     |   | $ | 93 |   | $ | (66 | ) | $ | 14,916 |   |

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

All individual securities that have been in acontinuous unrealized loss position for 12 months or longer at June 30,2008, have fluctuated in value since their purchase dates as a result ofchanges in market interest rates.  Thesesecurities include securities issued by U.S. government agencies andgovernment-sponsored entities that have an AAA credit rating as determined byvarious rating agencies or state and municipal bonds that have either beenrated as investment grade or higher by various rating agencies or have beensubject to an annual internal review process by management.  This annual review process was updated in thesecond quarter 2008 for the largest non-rated municipal security in ourportfolio.  This particular bond had anincrease in unrealized loss at June 30, 2008, as compared to December 31,2007, as the rates on unsecured non-bank qualified securities increased duringthe period.  The unrealized loss on thissecurity comprises nearly 100% of the overall unrealized loss on state andmunicipal bonds.  Based on the secondquarter 2008 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 not aresult of the underlying issuer’s ability to repay.   Similarly, management concluded that thecontinuous unrealized loss position on all other securities was also a resultof the level of market interest rates and not a result of the underlying issuers’ability to repay.  In addition, we havethe ability and intent to hold these securities until their fair value recoversto their cost, which may be maturity. Accordingly, we have not recognized any other-than-temporary impairmentin our consolidated statements of income.

 

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

 

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

 
| ** **                          | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **(In thousands)** | ** ** |
| Loans on real estate:               | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Residential and commercial mortgage |       | $                       | 717,533    |                        | $          | 713,478 |   |
| Construction                        |       | 232,522                 |       | 235,236                     |       |
| Equity lines of credit              |       | 46,778                  |       | 48,624                      |       |
| Commercial loans                    |       | 705,309                 |       | 679,717                     |       |
| Agricultural loans                  |       | 29,442                  |       | 39,506                      |       |
| Lease financing                     |       | 472                     |       | 4,732                       |       |
| Installment loans to individuals    |       | 39,611                  |       | 40,835                      |       |
| Overdrafts                          |       | 915                     |       | 1,329                       |       |
| SBA and other                       |       | 20,241                  |       | 21,592                      |       |
|                                |       | 1,792,823               |       | 1,785,049                   |       |
| Less:                               |       |                    |       |                        |       |
| Allowance for loan losses           |       | (26,506                 | )          | (25,711                     | )          |
| Unearned discount                   |       | (3,668                  | )          | (3,402                      | )          |
| Net Loans                           |       | $                       | 1,762,649  |                        | $          | 1,755,936 |   |

 

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

 
| ** **                                 | ** ** | **Quarter Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **2008**                                  | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | **(In thousands)**                   | ** ** |
| Balance, beginning of period               |       | $                                         | 26,048     |                                              | $          | 27,492 |   | $ | 25,711 |   | $ | 27,899 |   |
| Provision for loan losses                  |       | 900                                       |       | 12,766                                            |       | 1,775 |   | 13,615 |   |
| Loans charged off                          |       | (673                                      | )          | (5,473                                            | )          | (1,416 | ) | (7,165 | ) |
| Recoveries on loans previously charged-off |       | 231                                       |       | 809                                               |       | 436 |   | 1,245 |   |
| Balance, end of period                     |       | $                                         | 26,506     |                                              | $          | 35,594 |   | $ | 26,506 |   | $ | 35,594 |   |

 

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Table of Contents

 

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

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

 
| ** **                                     | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **(In thousands)** | ** ** |
| Impaired loans with a valuation allowance      |       | $                       | 22,454     |                   | $          | 16,663 |   |
| Impaired loans without a valuation  allowance  |       | 7,386                   |       | 6,665                  |       |
| Total impaired loans                           |       | $                       | 29,840     |                   | $          | 23,328 |   |
| Valuation allowance related to impaired  loans |       | $                       | 6,295      |                   | $          | 4,283 |   |

* *
| ** **                                            | ** ** | **Quarter Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                  | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                            | ** ** | **(In thousands)**                   | ** ** |
| Average of individually impaired loans during  period |       | $                                         | 25,320     |                                              | $          | 55,845 |   | $ | 24,689 |   | $ | 48,094 |   |
| Interest income recognized during  impairment         |       | $                                         | 30         |                                              | $          | 360 |   | $ | 47 |   | $ | 725 |   |
| Cash-basis interest income recognized                 |       | $                                         | 30         |                                              | $          | 292 |   | $ | 47 |   | $ | 590 |   |

 

The gross interest income that would have beenrecorded in the year-to-date periods ended June 30, 2008 and June 30,2007, 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 $1,432,000 and $2,212,000, respectively.  At June 30, 2008 and December 31,2007, nonaccrual loans were $29,742,000 and $19,309,000, respectively.

 

**(4)           Goodwilland Other Intangible Assets**

 

Goodwill and other intangible assets arise frombusiness combinations.  Goodwill andother intangible assets deemed to have indefinite lives generated from purchasecombinations are tested for impairment no less than annually.

 

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 or loan customers acquired.

 

The carrying amount of goodwill was $250,748,000 forthe periods ended June 30, 2008 and December 31, 2007.

 

*The following table presents the gross amounts of core deposit andcustomer relationship intangibles and the related accumulated amortization atthe dates indicated:*

 
| ** **                     | ** ** | ** **           | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|----------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **Useful life** | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **                     | ** ** | ** **           | ** ** | **(In thousands)** | ** ** |
| Core deposit intangible assets |       | 7 - 15 years         |       | $                       | 62,975     |                  | $          | 62,975 |   |
| Accumulated amortization       |       |                 |       | (33,796                 | )          | (30,042               | )          |
| Net other intangible assets    |       |                 |       | $                       | 29,179     |                  | $          | 32,933 |   |

 

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

 
| ** **           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **           | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **           | ** ** | **(In thousands)**                             | ** ** |
| Amortization expense |       | $                                                   | 1,877      |                                              | $          | 2,195 |   | $ | 3,754 |   | $ | 4,390 |   |
|                      |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 

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Table of Contents

 

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

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

 

At June 30,2008, our outstanding borrowings were $147,117,000 as compared to $63,715,000at December 31, 2007. These borrowings at June 30, 2008 consisted ofterm notes at the Federal Home Loan Bank (“FHLB”).  There was also a line of credit at the FHLBat June 30, 2008, but there was no balance outstanding on this line ofcredit on such date.  At December 31,2007, borrowings consisted of a line of credit and term notes at the FederalHome Loan Bank of $15,160,000 and $47,356,000 respectively,and a $1,199,000 Treasury Tax and Loan note balance.

 

The totalcommitment, including balances outstanding, for borrowings at the Federal HomeLoan Bank for the term notes and line of credit at June 30, 2008 and December 31,2007 was $341.5 million and $316.2 million, respectively.  The interest rate on the line of creditvaries with the federal funds rate, and was 2.55% and 5.51% at June 30,2008 and December 31, 2007, respectively. The term notes have fixed interest rates that range from 2.52% to 6.22%. A blanket pledge and security agreement withthe Federal Home Loan Bank, which encompasses certain loans and securities,serves as collateral for these borrowings.

 

We have arevolving credit agreement with U.S. Bank National Association which containsfinancial covenants, including maintaining a minimum return on average assets,a maximum nonperforming assets to total loans ratio, a minimum allowance forloan losses to nonperforming loan ratio and regulatory capital ratios thatqualify the Company as well-capitalized.  As of August 6, 2008, the amount of the line of credit wasdecreased from $70 million to $40 million. As of June 30, 2008, the Company did not have any amount drawn onthis line.  As of June 30, 2008, theCompany is in compliance with all outstanding financial covenants, asamended.  The interest rate varies basedon a spread over the federal funds rate, with a rate of 3.49% at June 30, 2008. The credit agreement is secured by Guaranty Bankstock.

 

**(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 of7.39% and 8.97% at June 30,2008 and December 31,2007, respectively. The subordinated debentures were issued in four separateseries. Each issuance has a maturity of thirty years from its date of issue.The subordinated debentures were issued to trusts established by the Company,which in turn issued $40 million of trust preferred securities. Generally andwith certain limitations, the Company is permitted to call the debenturessubsequent to the first five or ten years, as applicable, after issue ifcertain conditions are met, or at any time upon the occurrence and continuationof certain changes in either the tax treatment or the capital treatment of thetrusts, the debentures or the preferred securities.   As of June 30, 2008, the Company was in compliance with all covenants of thesesubordinated 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, 2009, the Company will be required touse a more restrictive formula to determine the amount of trust preferredsecurities that can be included in regulatory Tier I capital. At that time, theCompany will be allowed to include in Tier I capital an amount of trustpreferred securities equal to no more than 25% of the sum of all core capitalelements, which is generally defined as stockholders’ equity less certainintangibles, including goodwill, core deposit intangibles and customerrelationship intangibles, net of any related deferred income tax liability. Theregulations currently in effect limit the amount of trust preferred securitiesthat can be included in Tier I capital to 25% of the sum of core capitalelements without a deduction for permitted intangibles.

 

The Guaranty Capital Trust III trust preferredissuance on June 30, 2003, was callable as of July 7, 2008.  The Company did not call this security on July 7,2008.  After July 7, 2008, thisissuance is callable on each quarterly interest payment date.

 

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** **

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

*The following table summarizesthe terms of each subordinated debenture issuance at June 30, 2008**(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% |       | 5.36              | %          | 7/15/2008                           |       |
| Guaranty Capital Trust III |       | 6/30/2003        |       | 10,310     |       | 7/7/2033           |       | 7/7/2008        |       | Variable                    |       | LIBOR + 3.10% |       | 5.81              | %          | 7/07/2008                           |       |
|                            |            |                  |            |            |            |                    |            |                 |            |                             |            |                         |            |                   |            |                                     |            |  |

 

----

                *Call date represents the earliest date the Company can call the debentures.

 

**(7)           Commitments**

 

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

 

The 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:*

 
| ** **                   | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **(In thousands)** | ** ** |
| ** **                   | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Commitments to extend credit |       | $                       | 586,451    |                        | $          | 582,988 |   |
| Standby letters of credit    |       | 25,507                  |       | 33,573                      |       |
|                         |       |                    |       |                        |       |
| Totals                       |       | $                       | 611,958    |                        | $          | 616,561 |   |

 

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

 

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

 

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

 

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

 

**(8)****        ****Fair Value Measurements and FairValue 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 valueis an exit price, representing the amount that would be received to sell anasset or 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 hierarchy

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

that prioritizes the inputs to valuation techniques used to measurefair value. The hierarchy gives the highest priority to unadjusted quotedprices in active markets for identical assets or liabilities (level1measurements) and the lowest priority to unobservable inputs (level 3 measurements).The three levels of the fair value hierarchy under SFAS No. 157 aredescribed below:

 

       Basis of Fair ValueMeasurement:

 

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.

 

    Thefair values of securities available for sale are generally determined by matrixpricing, which is a mathematical technique widely used in the industry to valuedebt securities without relying exclusively on quoted prices for the specificsecurities but rather by relying on the securities’ relationship to otherbenchmark quoted securities (Level 2 inputs).

 

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.  Such adjustments are generally based onavailable market evidence. In the absence of such evidence, management’s bestestimate is used. Management’s best estimate consists of both internal andexternal support on certain Level 3 investments. Internal cash flow modelsusing a present value formula along with indicative exit pricing obtained frombroker/dealers were used to fair value support certain Level 3investments.  Subsequent to inception, management only changes level3 inputs and assumptions when corroborated by evidence such as transactions insimilar instruments, completed or pending third-party transactions in theunderlying investment or comparable entities, subsequent rounds of financing,recapitalizations and other transactions across the capital structure,offerings in the equity or debt markets, and changes in financial ratios or cashflows.

 

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 collateralsecuring these loans and is classified at a level 3 in the fair valuehierarchy.  Collateral may be real estate and/or business assetsincluding equipment, inventory and/or accounts receivable and is determinedbased on appraisals by qualified licensed appraisers hired by theCompany.   Appraised and reported values may be discounted basedon management’s historical knowledge, changes in market conditions from thetime of valuation, and/or management’s expertise and knowledge of the clientand client’s business.  Impaired loans are reviewed and evaluated onat least a quarterly basis for additional impairment and adjusted accordingly,based on the same factors identified above.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

The followingtable sets forth the Company’s financial assets that were accounted for at fairvalue and are classified in their entirety based on the lowest level of inputthat is significant to the fair value measurement.

 
| ** **                                | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance as of  June 30, 2008** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **(In thousands)**                                                                             | ** ** |
| Assets at June 30, 2008              |       |                                                                                                |       |                                                       |       |                                                  |       |                                                 |       |   |   |   |   |
| Investment securities, available for sale |       | $                                                                                                   | —     |                                                       | $          | 112,118                                               |       | $                                                    | —     |   | $ | 112,118 |   |

 

The following represent assets and liabilities measured at fair valueon a non-recurring basis:

 
| ** **                   | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|------------------------------|------------|-------------------------------------------------------|------------|
| ** **                   | ** ** | **(In thousands)**                               | ** ** |
| Assets at June 30, 2008 |       |                                                  |       |   |
| Impaired loans               |       | $                                                     | 22,454     |   |

 

Impaired loans with a valuation allowance based uponfair value of the underlying collateral had a carrying amount of $22,454,000 atJune 30, 2008 as compared to $14,757,000 at March 31, 2008 and$16,663,000 at December 31, 2007. The valuation allowance on impairedloans was $6,295,000 at June 30, 2008 as compared to $5,368,000 at March 31,2008 and $4,283,000 at December 31, 2007. During the three and six-monthperiods ended June 30, 2008, additional provisions for loan losses ofapproximately $0.9 million and $2.0 million were made for impaired loans,respectively.

 

**(9)           Stock-BasedCompensation**

 

Under the Company’s Amended and Restated 2005 StockIncentive Plan (the “Incentive Plan”), the Company may grant stock-basedcompensation awards to nonemployee directors, key employees, consultants andprospective employees under the terms described in the Incentive Plan. Theallowable stock-based compensation awards include the grant of Options,Restricted Stock Awards, Restricted Stock Unit Awards, Performance StockAwards, Stock Appreciation Rights and other Equity-Based Awards. The IncentivePlan provides that eligible participants may be granted shares of Companycommon stock that are subject to forfeiture until the grantee vests in thestock award based on the established conditions, which include serviceconditions and established performance measures.

 

Prior to vesting of the stock awards with a servicevesting condition, each grantee shall have the rights of a stockholder withrespect to voting of the granted stock. The recipient is not entitled todividend rights with respect to the shares of granted stock until vesting occurs.Prior to vesting of the stock awards with performance vesting conditions, eachgrantee shall have the rights of a stockholder with respect to voting of thegranted stock. The recipient is not entitled to dividend rights with respect tothe shares of granted stock until initial vesting occurs, at which time thedividend rights will exist on vested and unvested shares of granted stock,subject to termination of such rights under the terms of the Incentive Plan.

 

Other than the stock awards with service and performance-basedvesting conditions, no grants have been made under the Incentive Plan. TheIncentive Plan authorizes grants of stock-based compensation awards of up to2,500,000 shares of Company common stock, subject to adjustments provided bythe Incentive Plan. As of June 30, 2008 and December 31,2007, there were 1,689,608 and 1,651,345 shares of unvested stock granted (netof forfeitures and vestings), with 625,044 and 754,644 shares available forgrant under the Incentive Plan, respectively.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

*A summary of the status of our outstanding stock awards and the changeduring the period is presented in the table below:*

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted Average  Fair Value on  Award Date** | ** ** |
|---------------------------------------|------------|------------|------------|---------------------------------------------------------------------|------------|
| Outstanding at December 31, 2007 |       | 1,651,345  |       | $                                                                   | 10.21      |   |
| Awarded                               |       | 156,500    |       | 6.21                                                                |       |
| Forfeited                             |       | (26,900    | )          | 9.94                                                                |       |
| Vested                                |       | (91,337    | )          | 11.12                                                               |       |
| Outstanding at June 30, 2008     |       | 1,689,608  |       | $                                                                   | 9.80       |   |

 

The Company recognized $1,550,000 and $1,708,000 instock-based compensation expense for services rendered for the six months endedJune 30, 2008 and 2007, respectively. The total income tax benefitrecognized in the consolidated income statement for share-based compensationarrangements was $385,153 and $650,000 for the six months ended June 30,2008 and 2007, respectively. At June 30, 2008, compensation cost of$6,101,000 related to nonvested awards not yet recognized is expected to berecognized over a weighted-average period of 1.8 years.   During the first six months of 2008, thevalue of the vested awards was approximately $479,000.  Of the 1,689,608 shares outstanding at June 30,2008, approximately 1,223,000 shares are expected to vest.

 

**(10)****          ****Capital Ratios**

 

At June 30, 2008 and December 31, 2007,the Company had leverage ratios of 9.51% and 8.55%, Tier 1 risk-weightedcapital ratios of 9.75% and 9.62%, and total risk-weighted capital ratios of11.01% and 10.87%, respectively.

 

The Company actively monitors its regulatory capitalratios to ensure that the Company and its bank subsidiary are well capitalizedunder the applicable regulatory framework.

 

**(11)**** ****Total Comprehensive Income (Loss)**

 

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

 
| ** **                                                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**                             | ** ** |
| Net income (loss)                                                |       | $                                                   | 2,025      |                                              | $          | (6,794 | ) | $ | 5,270 |   | $ | (1,385 | ) |
| Other comprehensive loss:                                        |       |                                                |       |                                              |       |   |   |   |   |
| Change in net unrealized gains (losses),  net                    |       | (518                                                | )          | (1,940                                            | )          | (2,154 | ) | (2,147 | ) |
| Less: Reclassification adjustments for  gains included in income |       | —                                              |       | —                                            |       | (138 | ) | — |   |
| Net unrealized holding losses                                    |       | (518                                                | )          | (1,940                                            | )          | (2,292 | ) | (2,147 | ) |
| Income tax benefit                                               |       | 196                                                 |       | 738                                               |       | 870 |   | 816 |   |
| Other comprehensive loss                                         |       | (322                                                | )          | (1,202                                            | )          | (1,422 | ) | (1,331 | ) |
| Total comprehensive income (loss)                                |       | $                                                   | 1,703      |                                              | $          | (7,996 | ) | $ | 3,848 |   | $ | (2,716 | ) |

 

** (12) 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 and Items1, 1A, 6, 7, 7A and 8 of our 2007 Annual Report on Form 10-K.  Also, please see the disclosure in the “Forward-LookingStatements and Factors that Could Affect Future Results” section in this reportfor certain other factors that could cause actual results or future events todiffer materially from those anticipated in the forward-looking statementsincluded in this Report or from historical performance.

 

**Overview**

 

Guaranty Bancorp is a financial holding company anda bank holding company with the principal business to serve as a holdingcompany to its subsidiaries.  Unless thecontext requires otherwise, the terms “Company,” “us,” “we,” and “our” refersto Guaranty Bancorp on a consolidated 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 and mortgage loans, Small Business Administrationguaranteed loans and consumer loans. We derive our income primarily frominterest received on real estate-related loans, commercial loans and leases andconsumer loans and, to a lesser extent, from fees on the referral of loans,interest on investment securities and fees received in connection withservicing loan and deposit accounts. Our major operating expenses are theinterest we pay on deposits and borrowings and general operating expenses. Werely primarily on locally generated deposits to provide us with funds formaking 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.

 

As of December 31, 2007, we had two bankingsubsidiaries.  Those subsidiaries wereGuaranty Bank and Trust Company and Centennial Bank of the West, which wesometimes refer to as Guaranty Bank and CBW, respectively.  On January 1, 2008, CBW was merged intoGuaranty Bank.

 

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**Earnings Summary**

 

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

 

**Table 1**

 
| ** **                                                    | ** ** | **Three Months Ended June 30,**                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                                                     | ** ** | ** **                                        | ** ** | **Change -** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change -** | ** ** |
| ** **                                                    | ** ** | ** **                                                                     | ** ** | ** **                                        | ** ** | **Favorable ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Favorable ** | ** ** |
| ** **                                                    | ** ** | **2008**                                                                       | ** ** | **2007**                                          | ** ** | **(****Unfavorable****)** | ** ** | **2008** | ** ** | **2007** | ** ** | **(****Unfavorable****)** | ** ** |
| ** **                                                    | ** ** | **(In thousands, except share data and ratios)** | ** ** |
| **Results of Operations:**                                    |       |                                                                           |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest income                                               |       | $                                                                              | 30,216     |                                              | $          | 41,703 |   | $ | (11,487 | ) | $ | 63,619 |   | $ | 84,063 |   | $ | (20,444 | ) |
| Interest expense                                              |       | 9,825                                                                          |       | 15,716                                            |       | 5,891 |   | 21,578 |   | 31,233 |   | 9,655 |   |
| Net interest income                                           |       | 20,391                                                                         |       | 25,987                                            |       | (5,596 | ) | 42,041 |   | 52,830 |   | (10,789 | ) |
| Provision for loan losses                                     |       | 900                                                                            |       | 12,766                                            |       | 11,866 |   | 1,775 |   | 13,615 |   | 11,840 |   |
| Net interest income after provision for  loan losses          |       | 19,491                                                                         |       | 13,221                                            |       | 6,270 |   | 40,266 |   | 39,215 |   | 1,051 |   |
| Noninterest income                                            |       | 3,132                                                                          |       | 2,577                                             |       | 555 |   | 5,647 |   | 5,144 |   | 503 |   |
| Noninterest expense                                           |       | 19,697                                                                         |       | 27,622                                            |       | 7,925 |   | 38,407 |   | 48,304 |   | 9,897 |   |
| Income (loss) before income taxes                             |       | 2,926                                                                          |       | (11,824                                           | )          | 14,750 |   | 7,506 |   | (3,945 | ) | 11,451 |   |
| Income tax expense (benefit)                                  |       | 901                                                                            |       | (5,030                                            | )          | (5,931 | ) | 2,236 |   | (2,560 | ) | (4,796 | ) |
| Net income (loss)                                             |       | $                                                                              | 2,025      |                                              | $          | (6,794 | ) | $ | 8,819 |   | $ | 5,270 |   | $ | (1,385 | ) | $ | 6,655 |   |
| **Share Data:**                                               |       |                                                                           |       |                                              |       |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share                               |       | $                                                                              | 0.04       |                                              | $          | (0.13 | ) | $ | 0.17 |   | $ | 0.10 |   | $ | (0.03 | ) | $ | 0.13 |   |
| Diluted earnings (loss) per share                             |       | $                                                                              | 0.04       |                                              | $          | (0.13 | ) | $ | 0.17 |   | $ | 0.10 |   | $ | (0.03 | ) | $ | 0.13 |   |
| Average shares outstanding                                    |       | 51,004,472                                                                     |       | 53,425,770                                        |       | (2,421,298 | ) | 50,996,350 |   | 54,105,373 |   | (3,109,023 | ) |
| Diluted average shares outstanding                            |       | 51,091,042                                                                     |       | 53,425,770                                        |       | (2,334,728 | ) | 51,086,578 |   | 54,105,373 |   | (3,018,795 | ) |
|                                                          |       |                                                                           |       |                                              |       |   |   |   |   |   |   |   |   |
| **Selected Ratios:**                                          |       |                                                                           |       |                                              |       |   |   |   |   |   |   |   |   |
| Total risk based capital                                      |       | 11.01                                                                          | %          | 10.40                                             | %          | 0.61 | % | 11.01 | % | 10.40 | % | 0.61 | % |
| Nonperforming assets to total assets                          |       | 1.35                                                                           | %          | 1.40                                              | %          | -0.05 | % | 1.35 | % | 1.40 | % | -0.05 | % |
| Allowance for loan losses to nonperforming  loans             |       | 88.83                                                                          | %          | 99.88                                             | %          | -11.05 | % | 88.83 | % | 99.88 | % | -11.05 | % |
| Allowance for loan losses to loans, net of  unearned discount |       | 1.48                                                                           | %          | 1.88                                              | %          | -0.40 | % | 1.48 | % | 1.88 | % | -0.40 | % |

 

The $2.0 million second quarter 2008 netincome is $8.8 million higher than the second quarter 2007 net loss primarilydue to the after-tax impact of a $11.9 million decrease in the provision forloan losses and a $7.9 million decrease in noninterest expense, partiallyoffset by a $5.6 million decline in net interest income.  The decrease in noninterest expense is duemostly to additional charges of $6.5 million in connection with the settlementof a lawsuit and $1.0 million related to the merger of our subsidiary banksrecorded in the second quarter 2007.

 

On a year-to-date basis, net income for thefirst six months of 2008 is $6.7 million higher than the same period in 2007,due mostly to a $11.8 million reduction in the provision for loan losses and a$9.9 million reduction in noninterest expense, partially offset by a decreasein net interest income.  The decline innoninterest expense is mostly attributable to additional charges of $6.5million in connection with the settlement of a lawsuit and $1.0 million relatedto the merger of our subsidiary banks recorded in the second quarter 2007.  Additionally, salaries and employee benefitexpense decreased by $2.8 million.

 

**Net Interest Income and NetInterest Margin**

 

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

 

22

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*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**               | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **June 30,  2008**              | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)** | ** ** |
|                                      |       |                                 |       |   |   |   |   |   |   |   |   |
| Net interest income                       |       | $                                    | 20,391     |   | $ | 21,650 |   | $ | 24,184 |   | $ | 25,236 |   | $ | 25,987 |   |
| Interest rate spread                      |       | 3.50                                 | %          | 3.58 | % | 3.77 | % | 3.84 | % | 3.98 | % |
| Net interest margin                       |       | 4.20                                 | %          | 4.42 | % | 4.75 | % | 4.82 | % | 5.00 | % |
| Net interest margin, fully tax equivalent |       | 4.28                                 | %          | 4.53 | % | 4.88 | % | 4.97 | % | 5.15 | % |
|                                           |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Secondquarter 2008 net interest income of $20.4 million declined by $5.6 million fromthe second quarter 2007.  This decreaseis a result of a $4.9 million unfavorable rate variance and a $0.7 millionunfavorable volume variance (see Table 5).

 

Theunfavorable rate variance from the prior year second quarter is primarily attributableto lower yields on earnings assets, and in particular loans.  The yield on earning assets declined by 180basis points from 8.02% for the second quarter 2007 to 6.22% for the secondquarter 2008.  During that same period,the Federal Open Markets Committee (FOMC) of the Federal Reserve Boarddecreased the target federal funds rate seven times by a total of 325 basispoints.  Similarly, the prime ratedecreased by 325 basis points during this same period.  Approximately 66% of the Company’s outstandingloan balances are variable rate loans and are tied to indices such as prime,LIBOR or federal funds.  As a result ofthese rate declines, the average yield on loans for the Company decreased by201 basis points from 8.33% for the quarter ended June 30, 2007 to 6.32%for the same period in 2008. Rates paid on interest-bearing liabilities alsodeclined during this same period by 132 basis points, for a net decrease in thenet interest spread of 48 basis points over this same period.  Although the net interest spread decreased by48 basis points, the overall net interest margin declined by 80 basispoints.  The cause for the larger impacton net interest margin as compared to the interest rate spread is that the benefitfrom noninterest bearing deposits had a smaller impact in 2008 compared to 2007due to the lower interest rate environment.

 

Theunfavorable volume variance is mostly attributable to a $131.3 million decreasein average earning assets for the second quarter 2008 as compared to the sameperiod in 2007.  The average balance ofloans declined from the prior year by $94.2 million.  Most of this decline is attributable tomanagement’s decision to reduce the number of construction loans.  The construction loan balance decreased by$89.5 million from June 30, 2007 to June 30, 2008.   Additionally, approximately $48 million ofcertain nonperforming and classified loans were sold in October 2007.

 

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

 

**Table 3**

 
| ** **                                | ** ** | **Six Months Ended**       | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **June 30,  2008**              | ** ** | **June 30,  2007** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)** | ** ** |
|                                      |       |                                 |       |   |   |
| Net interest income                       |       | $                                    | 42,041     |   | $ | 52,830 |   |
| Interest rate spread                      |       | 3.54                                 | %          | 4.07 | % |
| Net interest margin                       |       | 4.31                                 | %          | 5.08 | % |
| Net interest margin, fully tax equivalent |       | 4.41                                 | %          | 5.24 | % |
|                                           |            |                                      |            |  |  |  |  |

 

For thesix-month period ended June 30, 2008, net interest income decreased by$10.8 million, or 20.4%, as compared to the same period in 2007.  This decrease is due to a $8.5 millionunfavorable rate variance and a $2.3 million unfavorable volume variance (seeTable 5).

 

Theunfavorable rate variance for year-to-date 2008 is mostly due to a decrease inthe yield on earning assets.   The yieldon earning assets decreased by 156 basis points to 6.52% for the six monthsended June 30, 2008 from 8.08% for the same period in 2007.  During that same period, the Federal OpenMarkets Committee (FOMC) of the Federal Reserve Board decreased the targetfederal funds rate seven times by a total of 325 basis points.  Similarly, 

 

23

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the prime rate decreased by 325 basis pointsduring this same period.  These rate decreaseswere partially offset by a 103 basis point decrease in the cost ofinterest-bearing liabilities.  The costof interest-bearing liabilities was 2.98% for the first six months of 2008 ascompared to 4.01% for the same period in 2007.

 

Theunfavorable volume variance is mostly a result of lower average earningassets.  Average earning assets decreasedby $136.3 million for the year-to-date 2008 as compared to the same period in2007.  Approximately $118.1 million ofthis decrease was mostly due to a decline in construction loans, as well as asale of a portion of certain nonperforming and classified loans in October 2007.  Most of the remainder of the decrease is dueto a decrease in the average balance of tax-exempt securities.

 

24

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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 4**

 
| ** **                                           | ** ** | **Quarter Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                  | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **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)             |       | $                                         | 1,788,603  |   | $ | 28,107 |   | 6.32 | % | $ | 1,882,840 |   | $ | 39,087 |   | 8.33 | % |
| Investment securities(1)                             |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                              |       | 56,151                                    |       | 779 |   | 5.58 | % | 50,425 |   | 608 |   | 4.83 | % |
| Tax-exempt                                           |       | 73,552                                    |       | 877 |   | 4.80 | % | 108,394 |   | 1,336 |   | 4.94 | % |
| Bank stocks (3)                                      |       | 32,590                                    |       | 435 |   | 5.36 | % | 32,000 |   | 459 |   | 5.75 | % |
| Other earning assets                                 |       | 2,738                                     |       | 18 |   | 2.67 | % | 11,282 |   | 213 |   | 7.57 | % |
| Total interest-earning assets                        |       | 1,953,634                                 |       | 30,216 |   | 6.22 | % | 2,084,941 |   | 41,703 |   | 8.02 | % |
| **Non-earning  assets:**                             |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                              |       | 37,456                                    |       |   |   |   |   | 51,780 |   |   |   |   |   |
| Other assets                                         |       | 359,331                                   |       |   |   |   |   | 517,916 |   |   |   |   |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Total  assets**                                    |       | $                                         | 2,350,421  |   |   |   |   |   | $ | 2,654,637 |   |   |   |   |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY:**      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand                              |       | $                                         | 153,220    |   | $ | 180 |   | 0.47 | % | $ | 158,872 |   | $ | 265 |   | 0.67 | % |
| Money market                                         |       | 540,735                                   |       | 2,491 |   | 1.85 | % | 623,639 |   | 5,904 |   | 3.80 | % |
| Savings                                              |       | 70,532                                    |       | 98 |   | 0.56 | % | 78,050 |   | 152 |   | 0.78 | % |
| Time certificates of deposit                         |       | 431,511                                   |       | 4,642 |   | 4.33 | % | 583,158 |   | 7,417 |   | 5.10 | % |
| Total interest-bearing deposits                      |       | 1,195,998                                 |       | 7,411 |   | 2.49 | % | 1,443,719 |   | 13,738 |   | 3.82 | % |
| Borrowings:                                          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase agreements                                |       | 19,406                                    |       | 98 |   | 2.04 | % | 36,459 |   | 434 |   | 4.76 | % |
| Federal funds purchased                              |       | 7,849                                     |       | 47 |   | 2.40 | % | 1,120 |   | 14 |   | 5.13 | % |
| Subordinated debentures                              |       | 41,239                                    |       | 852 |   | 8.31 | % | 41,239 |   | 938 |   | 9.12 | % |
| Borrowings                                           |       | 190,063                                   |       | 1,417 |   | 3.00 | % | 39,329 |   | 592 |   | 6.04 | % |
| Total interest-bearing liabilities                   |       | 1,454,555                                 |       | 9,825 |   | 2.72 | % | 1,561,866 |   | 15,716 |   | 4.04 | % |
| Noninterest bearing liabilities:                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                      |       | 452,315                                   |       |   |   |   |   | 478,520 |   |   |   |   |   |
| Other liabilities                                    |       | 18,802                                    |       |   |   |   |   | 32,603 |   |   |   |   |   |
| Total liabilities                                    |       | 1,925,672                                 |       |   |   |   |   | 2,072,989 |   |   |   |   |   |
| Stockholders’ equity                            |       | 424,749                                   |       |   |   |   |   | 581,648 |   |   |   |   |   |
| **Total  liabilities and stockholders’ equity** |       | $                                         | 2,350,421  |   |   |   |   |   | $ | 2,654,637 |   |   |   |   |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                  |       |                                      |       | $ | 20,391 |   |   |   |   |   | $ | 25,987 |   |   |   |
| Net interest margin                                  |       |                                      |       |   |   | 4.20 | % |   |   |   |   | 5.00 | % |
|                                                      |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (1) Yields on loans and securities have not been adjusted to a  tax-equivalent basis. Net interest margin on a fully tax-equivalent basis  would have been 4.28% and 5.15% for the three months ended June 30, 2008  and June 30, 2007, respectively. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) Net loan fees of $1.0 million and $1.6 million for the three  months ended June 30, 2008 and 2007, respectively, are included in the  yield computation.                                                                                               |
| (3) Includes Bankers Bank of the West stock, Federal  Agricultural Mortgage Corporation (Farmer Mac) stock, Federal Reserve Bank  stock and Federal Home Loan Bank stock.                                                                                       |

 

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**Table 4 (continued)**

 
| ** **                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **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)       |       | $                                                 | 1,778,098  |   | $ | 59,147 |   | 6.69 | % | $ | 1,896,185 |   | $ | 78,825 |   | 8.38 | % |
| Investment securities(1)                             |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                              |       | 53,480                                            |       | 1,463 |   | 5.50 | % | 51,226 |   | 1,229 |   | 4.84 | % |
| Tax-exempt                                           |       | 75,027                                            |       | 1,770 |   | 4.75 | % | 110,759 |   | 2,748 |   | 5.00 | % |
| Bank stocks (3)                                      |       | 32,528                                            |       | 905 |   | 5.59 | % | 31,925 |   | 934 |   | 5.90 | % |
| Other earning assets                                 |       | 22,267                                            |       | 334 |   | 3.02 | % | 7,638 |   | 327 |   | 8.63 | % |
| Total interest-earning assets                        |       | 1,961,400                                         |       | 63,619 |   | 6.52 | % | 2,097,733 |   | 84,063 |   | 8.08 | % |
| **Non-earning  assets:**                             |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                              |       | 39,157                                            |       |   |   |   |   | 54,322 |   |   |   |   |   |
| Other assets                                         |       | 362,942                                           |       |   |   |   |   | 518,931 |   |   |   |   |   |
|                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Total  assets**                                    |       | $                                                 | 2,363,499  |   |   |   |   |   | $ | 2,670,986 |   |   |   |   |   |
|                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY:**      |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                        |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                            |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand                              |       | $                                                 | 154,560    |   | $ | 461 |   | 0.60 | % | $ | 159,470 |   | $ | 515 |   | 0.65 | % |
| Money market                                         |       | 561,136                                           |       | 6,273 |   | 2.25 | % | 627,677 |   | 11,761 |   | 3.78 | % |
| Savings                                              |       | 70,855                                            |       | 212 |   | 0.60 | % | 81,295 |   | 316 |   | 0.78 | % |
| Time certificates of deposit                         |       | 450,251                                           |       | 10,260 |   | 4.58 | % | 577,576 |   | 14,492 |   | 5.06 | % |
| Total interest-bearing deposits                      |       | 1,236,802                                         |       | 17,206 |   | 2.80 | % | 1,446,018 |   | 27,084 |   | 3.78 | % |
| Borrowings:                                          |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase agreements                                |       | 18,110                                            |       | 218 |   | 2.42 | % | 30,705 |   | 732 |   | 4.81 | % |
| Federal funds purchased                              |       | 4,973                                             |       | 64 |   | 2.57 | % | 644 |   | 17 |   | 5.19 | % |
| Subordinated debentures                              |       | 41,239                                            |       | 1,644 |   | 8.02 | % | 41,239 |   | 1,870 |   | 9.14 | % |
| Borrowings                                           |       | 155,273                                           |       | 2,446 |   | 3.17 | % | 52,843 |   | 1,530 |   | 5.84 | % |
| Total interest-bearing liabilities                   |       | 1,456,397                                         |       | 21,578 |   | 2.98 | % | 1,571,449 |   | 31,233 |   | 4.01 | % |
| Noninterest bearing liabilities:                     |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                      |       | 462,564                                           |       |   |   |   |   | 480,875 |   |   |   |   |   |
| Other liabilities                                    |       | 20,893                                            |       |   |   |   |   | 33,578 |   |   |   |   |   |
| Total liabilities                                    |       | 1,939,854                                         |       |   |   |   |   | 2,085,902 |   |   |   |   |   |
| Stockholders’ equity                            |       | 423,645                                           |       |   |   |   |   | 585,084 |   |   |   |   |   |
| **Total  liabilities and stockholders’ equity** |       | $                                                 | 2,363,499  |   |   |   |   |   | $ | 2,670,986 |   |   |   |   |   |
|                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                  |       |                                              |       | $ | 42,041 |   |   |   |   |   | $ | 52,830 |   |   |   |
| Net interest margin                                  |       |                                              |       |   |   | 4.31 | % |   |   |   |   | 5.08 | % |

 

----

| (1) Yields on loans and  securities have not been adjusted to a tax-equivalent basis. Net interest  margin on a fully tax-equivalent basis would have been 4.41% and 5.24% for  the six months ended June 30, 2008 and June 30, 2007, respectively. |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) Net loan fees of $1.8  million and $3.1 million for the six months ended June 30, 2008 and  2007, respectively, are included in the yield computation.                                                                                               |
| (3) Includes Bankers Bank of  the West stock, Federal Agricultural Mortgage Corporation (Farmer Mac) stock,  Federal Reserve Bank stock and Federal Home Loan Bank stock.                                                                                     |

 

26

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The following table presents the dollar amount ofchanges in interest income and interest expense for the major categories of ourinterest-earning assets and interest-bearing liabilities. Information isprovided for each category of interest-earning assets and interest-bearingliabilities with respect to (i) changes attributable to changes in volume(i.e., changes in average balances multiplied by the prior-period average rate)and (ii) changes attributable to rate (i.e., changes in average ratemultiplied by prior-period average balances). For purposes of this table,changes attributable to both rate and volume, which cannot be segregated, havebeen allocated proportionately to the change due to volume and the change dueto rate.

 

**Table 5**

 
| ** **                        | ** ** | **Three Months Ended June 30, 2008  Compared to Three Months Ended  June 30, 2007** | ** ** | **Six Months Ended June 30, 2008  Compared to Six Months Ended  June 30, 2007** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **Net Change**                                                                                                                        | ** ** | **Rate**                                                                                                                               | ** ** | **Volume** | ** ** | **Net Change** | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| ** **                        | ** ** | **(In thousands)**                                                                                                                    | ** ** |
| **Interest  income:**             | ** ** | ** **                                                                                                                                 | ** ** | ** **                                                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross loans, net of unearned fees |       | $                                                                                                                                          | (10,980    | )                                                                                                                                      | $          | (9,105 | ) | $ | (1,875 | ) | $ | (19,678 | ) | $ | (15,002 | ) | $ | (4,676 | ) |
| Investment securities             |       |                                                                                                                                       |       | 0                                                                                                                                      |       | 0 |   |   |   |   |   |   |   |
| Taxable                           |       | 171                                                                                                                                        |       | 97                                                                                                                                     |       | 74 |   | 234 |   | 178 |   | 56 |   |
| Tax-exempt                        |       | (459                                                                                                                                       | )          | (42                                                                                                                                    | )          | (417 | ) | (978 | ) | (129 | ) | (849 | ) |
| Bank stocks                       |       | (24                                                                                                                                        | )          | (33                                                                                                                                    | )          | 9 |   | (29 | ) | (47 | ) | 18 |   |
| Other earning assets              |       | (195                                                                                                                                       | )          | (90                                                                                                                                    | )          | (105 | ) | 7 |   | (4 | ) | 11 |   |
| Total interest income             |       | (11,487                                                                                                                                    | )          | (9,173                                                                                                                                 | )          | (2,314 | ) | (20,444 | ) | (15,004 | ) | (5,440 | ) |
|                              |       |                                                                                                                                       |       |                                                                                                                                   |       |   |   |   |   |   |   |   |   |
| **Interest  expense:**            |       |                                                                                                                                       |       |                                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Deposits:                         |       |                                                                                                                                       |       |                                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Interest-bearing demand           |       | (85                                                                                                                                        | )          | (76                                                                                                                                    | )          | (9 | ) | (54 | ) | (38 | ) | (16 | ) |
| Money market                      |       | (3,413                                                                                                                                     | )          | (2,711                                                                                                                                 | )          | (702 | ) | (5,488 | ) | (4,346 | ) | (1,142 | ) |
| Savings                           |       | (54                                                                                                                                        | )          | (40                                                                                                                                    | )          | (14 | ) | (104 | ) | (67 | ) | (37 | ) |
| Time certificates of deposit      |       | (2,775                                                                                                                                     | )          | (1,033                                                                                                                                 | )          | (1,742 | ) | (4,232 | ) | (1,244 | ) | (2,988 | ) |
| Repurchase agreements             |       | (336                                                                                                                                       | )          | (185                                                                                                                                   | )          | (151 | ) | (514 | ) | (281 | ) | (233 | ) |
| Federal funds purchased           |       | 33                                                                                                                                         |       | (3                                                                                                                                     | )          | 36 |   | 47 |   | (3 | ) | 50 |   |
| Subordinated debentures           |       | (86                                                                                                                                        | )          | (86                                                                                                                                    | )          | 0 |   | (226 | ) | (226 | ) | 0 |   |
| Borrowings                        |       | 825                                                                                                                                        |       | (125                                                                                                                                   | )          | 950 |   | 916 |   | (282 | ) | 1,198 |   |
| Total interest expense            |       | (5,891                                                                                                                                     | )          | (4,259                                                                                                                                 | )          | (1,632 | ) | (9,655 | ) | (6,487 | ) | (3,168 | ) |
|                              |       |                                                                                                                                       |       |                                                                                                                                   |       |   |   |   |   |   |   |   |   |
| **Net  interest income**          |       | $                                                                                                                                          | (5,596     | )                                                                                                                                      | $          | (4,914 | ) | $ | (682 | ) | $ | (10,789 | ) | $ | (8,517 | ) | $ | (2,272 | ) |

 

**Provision for Loan Losses**

 

The provision for loan losses represents acharge against earnings. The provision is the amount required to maintain theallowance for loan losses at a level that, in our judgment, is adequate toabsorb probable incurred loan losses in the loan portfolio. The provision forloan losses is based on our reserve methodology and reflects our judgmentsabout the adequacy of the allowance for loan losses.  In determining the amount of the provision,we consider certain quantitative and qualitative factors including ourhistorical loan loss experience, the volume and type of lending we conduct, theresults of our credit review process, the amounts and severity of classified,criticized and nonperforming assets, regulatory policies, general economicconditions, underlying collateral values and other factors regardingcollectibility and impairment.  Theamount of expected loss on our loan portfolio is influenced by the collateralvalue associated with our loans. Loans with greater collateral value lessen ourexposure to loan loss provision.

 

In the second quarter 2008, the Company recorded aprovision for loan loss of $0.9 million, compared to $12.8 million in thesecond quarter 2007.  The lowernet charge-offs and level of impaired loans at June 30, 2008 as comparedto June 30, 2007, were the primary causes for the lower provision for loanlosses in the current quarter.

 

Netcharge offs in the second quarter 2008 were $0.4 million, as compared to $4.7million for the same quarter in 2007. Impaired loans were $29.8 million at June 30,2008 as compared to $55.8 million at June 30, 2007.  For a discussion of impaired loans andassociated collateral values, see “Balance Sheet Analysis—Nonperforming Assets”below.

 

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

 

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For the six months ended June 30, 2008,the Company recorded a provision for loan loss of $1.8 million as compared to$13.6 million in the same period in 2007. This decrease is primarily due to lower charge offs and the level ofimpaired loans during the first six months of 2008 as compared to the sameperiod in 2007.

 

**Noninterest Income**

 

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

 

**Table 6**

 
| ** **                      | ** ** | **Quarter Ended**  | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** |
| ** **                      | ** ** | **(In thousands)** | ** ** |
| Noninterest income:             |       |                    |       |   |   |   |   |   |   |   |   |
| Customer service and other fees |       | $                       | 2,528      |   | $ | 2,276 |   | $ | 2,267 |   | $ | 2,390 |   | $ | 2,409 |   |
| Gain on sale of securities      |       | —                  |       | 138 |   | — |   | — |   | — |   |
| Other                           |       | 604                     |       | 101 |   | 665 |   | 230 |   | 168 |   |
| Total noninterest income        |       | $                       | 3,132      |   | $ | 2,515 |   | $ | 2,932 |   | $ | 2,620 |   | $ | 2,577 |   |

 

Noninterestincome in the second quarter 2008 increased by $0.6 million from the secondquarter 2007 and by $0.6 million from the first quarter 2008.  The increase from the first quarter 2008 ismostly due to higher fee income, partially offset by the decrease in gain on saleof securities.  The $0.6 million increasein the second quarter 2008 as compared to the same period in 2007 is primarilyattributable to a $0.3 million increase in analysis fees due to a decrease inthe earnings credit on compensating balances.

 

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

 

**Table 7**

 
| ** **                      | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **June 30,  2008**        | ** ** | **June 30,  2007** | ** ** |
| ** **                      | ** ** | **(In thousands)**        | ** ** |
| Noninterest income:             |       |                           |       |   |   |
| Customer service and other fees |       | $                              | 4,804      |   | $ | 4,852 |   |
| Gain on sale of securities      |       | 138                            |       | — |   |
| Other                           |       | 705                            |       | 292 |   |
| Total noninterest income        |       | $                              | 5,647      |   | $ | 5,144 |   |

 

Noninterestincome for the first six months of 2008 increased by $0.5 million from the sameperiod in 2007.  The increase innoninterest income between the year-to-date period in 2008 and the same periodin 2007 is mostly attributable to higher fee income, gain on sale of securitiesin 2008 and a reduction in losses recorded from disposals of other real estateowned.   During 2008, a $0.1 million gainon sale of securities was realized as management sold approximately $15 millionof available-for-sale securities and purchased approximately $15 million of newavailable-for-sale securities in order to improve the overall yield onsecurities.

 

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** **

**Noninterest Expense**

 

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

 

**Table 8**

 
| ** **                        | ** ** | **Quarter Ended**  | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** |
| ** **                        | ** ** | **(In thousands)** | ** ** |
| Noninterest expense:              |       |                    |       |   |   |   |   |   |   |   |   |
| Salaries and employee benefits    |       | $                       | 9,184      |   | $ | 9,720 |   | $ | 8,442 |   | $ | 9,039 |   | $ | 10,724 |   |
| Occupancy expense                 |       | 2,131                   |       | 2,001 |   | 1,781 |   | 1,855 |   | 2,056 |   |
| Furniture and equipment           |       | 1,383                   |       | 1,314 |   | 1,205 |   | 1,188 |   | 1,231 |   |
| Impairment of goodwill            |       | —                  |       | — |   | 142,210 |   | — |   | — |   |
| Amortization of intangible assets |       | 1,877                   |       | 1,877 |   | 2,132 |   | 2,143 |   | 2,195 |   |
| Other general and administrative  |       | 5,122                   |       | 3,798 |   | 4,278 |   | 3,980 |   | 11,416 |   |
| Total noninterest expense         |       | $                       | 19,697     |   | $ | 18,710 |   | $ | 160,048 |   | $ | 18,205 |   | $ | 27,622 |   |

 

     The $8.0million decrease in noninterest expense for the second quarter 2008 as compared to the same period in 2007 is due to adecline in salary and employee benefit expense, amortization of intangibleassets and other general and administrative expense.  These categories decreased for the reasonsdiscussed below.

 

Salary andemployee benefits expense decreased by $1.5 million, or 14.4%, in the secondquarter 2008 as compared to the same period in 2007.  This decrease is primarily attributable to a14.4% reduction in full-time equivalent employees at June 30, 2008, ascompared to June 30, 2007, as well as a reduction in bonus and incentiveexpense.

 

Amortizationof intangible assets expense is $1.9 million in the second quarter 2008, ascompared to $2.2 million in the second quarter 2007, a decrease of $0.3million, or 13.6%.  This decrease ismostly attributable to the use of accelerated methods to amortize the coredeposit intangible asset.

 

Othergeneral and administrative expense decreased by $6.3 million, or 55.1%, in thesecond quarter 2008 as compared to the same period in 2007.  This decrease is primarily attributable to a$6.5 million charge related to the settlement of a lawsuit recorded in thesecond quarter 2007.   Additionally,there was a $1.0 million charge in the second quarter 2007 related to certaincosts of merging our two subsidiary banks.   These expense decreases were partially offset by a $1.3 million chargerecorded in the second quarter 2008 related to the decision to close two branchlocations.

 

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

 

**Table 9**

 
| ** **                        | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **June 30,  2008**        | ** ** | **June 30,  2007** | ** ** |
| ** **                        | ** ** | **(In thousands)**        | ** ** |
| Noninterest expense:              |       |                           |       |   |   |
| Salaries and employee benefits    |       | $                              | 18,904     |   | $ | 21,698 |   |
| Occupancy expense                 |       | 4,132                          |       | 4,177 |   |
| Furniture and equipment           |       | 2,697                          |       | 2,471 |   |
| Amortization of intangible assets |       | 3,754                          |       | 4,390 |   |
| Other general and administrative  |       | 8,920                          |       | 15,568 |   |
| Total noninterest expense         |       | $                              | 38,407     |   | $ | 48,304 |   |

 

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Overallnoninterest expense decreased by $9.9 million, or 20.5%, for the six monthsended June 30, 2008 as compared to the same period in 2007.  This decrease is mostly attributable tosecond quarter 2007 charges including a $6.5 million charge related to thesettlement of a lawsuit, as well as a $1.0 million charge related to the mergerof our subsidiaries described above.  Further, there was a $2.8 million, or 12.9% decrease in salaries andemployee benefits expense due mostly to a reduction in full-time equivalentemployees and reduced commissions and bonus expense.   Amortization of intangible assets alsodecreased by $0.6 million, or 14.5%, attributable to accelerated amortizationmethods on core deposit intangibles. Partially offsetting these increases was a $1.3 million charge in thesecond quarter 2008 related to the decision to close two branch locations.

 

In the second quarter 2008, we began a major initiative to align ourexpenses with the current size of our business. Part of this effort includes the closure of two bank branchlocations during the second half of 2008. Our initiative includes the continued focus on and evaluation of a broadarray of expense categories, including overall staffing levels and deliveryplatforms.  Through this initiative, weexpect to reduce our annual noninterest expense by up to $6.0 million oncefully implemented over the next two to three quarters.

 

**Income Tax Expense (Benefit)**

 

The effective tax rate was30.8% and -42.5% for the three month periods ending June 30, 2008 and 2007, respectively.  The primary difference between the expectedtax rate and the effective tax rates was tax-exempt income.  A tax benefit was recorded in 2007 due to thenet loss in the second quarter 2007.

 

The effective tax rate was29.8% and -64.9% for the six month periods ending June 30, 2008 and 2007, respectively.  The primary difference between the expectedtax rate and the effective tax rates was tax-exempt income.  A tax benefit was recorded in 2007 due to thenet loss for the first six months of 2007.

 

**BALANCE SHEET ANALYSIS**

 

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

 

**Table 10**

 
| ** **     | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** |
|----------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **     | ** ** | **(In thousands)** | ** ** |
| Total assets   |       | $                       | 2,358,559  |                     | $          | 2,345,079                   |       | $                            | 2,371,664  |                    | $          | 2,617,153 |   | $ | 2,640,732 |   |
| Earning assets |       | 1,959,434               |       | 1,932,526                |       | 1,949,211                   |       | 2,041,263                    |       | 2,085,865               |       |
| Deposits       |       | 1,707,031               |       | 1,710,082                |       | 1,799,507                   |       | 1,915,932                    |       | 1,938,412               |       |
|                |            |                         |            |                          |            |                             |            |                              |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At June 30, 2008, the Company had total assetsof $2.4 billion, or $13.1 million less than total assets at December 31,2007, and $282.2 million less than total assets at June 30, 2007.  The relatively small decline in assets from December 31,2007 is mostly due to a decrease in total investments as certain securitieswere not replaced when they were called or matured.   The overall modest increase in earningassets from December 31, 2007 to June 30, 2008, is due to an increasein loans, net of unearned discount.

 

The $282.2 million decrease in assets from June 30,2007, is partly due to a $150.2 million decrease in intangible assets due to agoodwill impairment recorded in the fourth quarter 2007 and the amortization ofcore deposit intangible assets.  Most ofthe remaining decrease in total assets from June 30, 2007, is due to a$104.3 million decline in loans, net of unearned discount.   Approximately $48 million of this $104.3million decline in loans from June 30, 2007 to June 30, 2008 isattributable to the sale of certain impaired and classified loans in October 2007.  A significant portion of the remainingdecrease in loans is due to the Company’s strategy of reducing itsconcentration of construction loans. Total construction loans declined by $89.5 million from June 30,2007 to June 30, 2008 while commercial loans increased by $52.4 millionover the same period.

 

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

 

**Table 11**

 
| ** **                                      | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **(In thousands)** | ** ** |
| Real estate - Mortgage                          |       | $                       | 717,533    |                     | $          | 723,246                     |       | $                            | 713,478    |                    | $          | 724,528 |   | $ | 742,802 |   |
| Real estate - Construction                      |       | 232,522                 |       | 238,926                  |       | 235,236                     |       | 290,591                      |       | 321,982                 |       |
| Equity lines of credit                          |       | 46,778                  |       | 47,659                   |       | 48,624                      |       | 49,747                       |       | 53,676                  |       |
| Commercial                                      |       | 705,309                 |       | 657,423                  |       | 679,717                     |       | 643,702                      |       | 652,911                 |       |
| Agricultural                                    |       | 29,442                  |       | 35,003                   |       | 39,506                      |       | 43,142                       |       | 47,891                  |       |
| Consumer                                        |       | 39,611                  |       | 38,151                   |       | 40,835                      |       | 40,868                       |       | 45,214                  |       |
| Leases receivable and other                     |       | 21,628                  |       | 22,205                   |       | 27,653                      |       | 30,340                       |       | 32,829                  |       |
| Total gross loans                               |       | 1,792,823               |       | 1,762,613                |       | 1,785,049                   |       | 1,822,918                    |       | 1,897,305               |       |
| Less: allowance for loan losses                 |       | (26,506                 | )          | (26,048                  | )          | (25,711                     | )          | (23,979                      | )          | (35,594                 | )          |
| Unearned discount                               |       | (3,668                  | )          | (3,316                   | )          | (3,402                      | )          | (3,730                       | )          | (3,865                  | )          |
| Loans, net of unearned discount                 |       | $                       | 1,762,649  |                     | $          | 1,733,249                   |       | $                            | 1,755,936  |                    | $          | 1,795,209 |   | $ | 1,857,846 |   |
|                                            |       |                    |       |                     |       |                        |       |                         |       |                    |       |
| Loans held for sale at lower of cost or  market |       | $                       | —     |                     | $          | —                      |       | $                            | 492        |                    | $          | 31,459 |   | $ | — |   |

 

**Nonperforming Assets**

 

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

 

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

 

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The following table summarizes the loans for whichthe accrual of interest has been discontinued, loans with payments more than 90days past due and still accruing interest, loans that have been restructured,and other real estate owned. For reporting purposes, other real estate ownedconsists of all real estate, other than bank premises, actually owned orcontrolled by us, including real estate acquired through foreclosure.

 

**Table 12**

 
| ** **                                                                            | ** ** | **Quarter Ended**  | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                            | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** |
| ** **                                                                            | ** ** | **(In thousands)** | ** ** |
| Nonaccrual loans and leases, not restructured                                         |       | $                       | 29,742     |   | $ | 20,798 |   | $ | 19,309 |   | $ | 16,831 |   | $ | 35,515 |   |
| Accruing loans past due 90 days or more                                               |       | 98                      |       | 1 |   | 527 |   | 9 |   | 122 |   |
| Other real estate owned                                                               |       | 1,910                   |       | 1,715 |   | 3,517 |   | 3,401 |   | 1,385 |   |
| Total nonperforming assets                                                            |       | $                       | 31,750     |   | $ | 22,514 |   | $ | 23,353 |   | $ | 20,241 |   | $ | 37,022 |   |
|                                                                                  |       |                    |       |   |   |   |   |   |   |   |   |
| Nonperforming loans                                                                   |       | $                       | 29,840     |   | $ | 20,799 |   | $ | 19,836 |   | $ | 16,840 |   | $ | 35,637 |   |
| Other impaired loans                                                                  |       | —                  |       | — |   | 3,492 |   | 510 |   | 20,208 |   |
| Total impaired loans                                                                  |       | $                       | 29,840     |   | $ | 20,799 |   | $ | 23,328 |   | $ | 17,350 |   | $ | 55,845 |   |
| Allocated allowance for loan losses                                                   |       | (6,295                  | )          | (5,368 | ) | (4,283 | ) | (4,028 | ) | (14,113 | ) |
| Net investment in impaired loans                                                      |       | $                       | 23,545     |   | $ | 15,431 |   | $ | 19,045 |   | $ | 13,322 |   | $ | 41,732 |   |
|                                                                                  |       |                    |       |   |   |   |   |   |   |   |   |
| Loans past due 30-89 days                                                             |       | $                       | 20,169     |   | $ | 42,682 |   | $ | 28,407 |   | $ | 29,584 |   | $ | 25,456 |   |
|                                                                                  |       |                    |       |   |   |   |   |   |   |   |   |
| Loans charged-off                                                                     |       | $                       | 673        |   | $ | 743 |   | $ | 1,729 |   | $ | 20,079 |   | $ | 5,473 |   |
| Recoveries                                                                            |       | (231                    | )          | (205 | ) | (436 | ) | (438 | ) | (809 | ) |
| Net charge-offs                                                                       |       | $                       | 442        |   | $ | 538 |   | $ | 1,293 |   | $ | 19,641 |   | $ | 4,664 |   |
|                                                                                  |       |                    |       |   |   |   |   |   |   |   |   |
| Provision for loan losses                                                             |       | $                       | 900        |   | $ | 875 |   | $ | 3,025 |   | $ | 8,026 |   | $ | 12,766 |   |
|                                                                                  |       |                    |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses                                                             |       | $                       | 26,506     |   | $ | 26,048 |   | $ | 25,711 |   | $ | 23,979 |   | $ | 35,594 |   |
|                                                                                  |       |                    |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to loans, net of unearned  discount                         |       | 1.48                    | %          | 1.48 | % | 1.44 | % | 1.32 | % | 1.88 | % |
| Allowance for loan losses to nonaccrual loans                                         |       | 89.12                   | %          | 125.24 | % | 133.16 | % | 142.47 | % | 100.22 | % |
| Allowance for loan losses to nonperforming assets                                     |       | 83.48                   | %          | 115.70 | % | 110.10 | % | 118.47 | % | 96.14 | % |
| Allowance for loan losses to nonperforming loans                                      |       | 88.83                   | %          | 125.24 | % | 129.62 | % | 142.39 | % | 99.88 | % |
| Nonperforming assets to loans, net of unearned  discount, and other real estate owned |       | 1.77                    | %          | 1.28 | % | 1.31 | % | 1.11 | % | 1.96 | % |
| Annualized net charge-offs to average loans                                           |       | 0.10                    | %          | 0.12 | % | 0.28 | % | 4.16 | % | 0.99 | % |
| Nonaccrual loans to loans, net of unearned discount                                   |       | 1.66                    | %          | 1.18 | % | 1.08 | % | 0.93 | % | 1.88 | % |
| Loans 30-89 days past due to loans, net of unearned  discount                         |       | 1.13                    | %          | 2.43 | % | 1.59 | % | 1.63 | % | 1.34 | % |

 

Nonperforming assets at June 30, 2008,decreased by $5.3 million, or 14.2%, from June 30, 2007, and increased by$9.2 million, or 41.0%, from March 31, 2008.  The decrease from June 30, 2007 ismostly due to the sale of certain nonperforming and classified loans on October 31,2007.   Approximately 82% of the $9.2million increase in nonperforming assets from March 31, 2008 is due to theaddition of one loan relationship to nonperforming status during the secondquarter 2008.   At June 30, 2008,six loan relationships comprised approximately 67% of total nonperformingloans.  Of the $29.8 million ofnonperforming loans at June 30, 2008, approximately fifty percent wassecured by residential real estate, including residential land and landdevelopment loans.

 

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**Allowancefor Loan Losses**

 

The allowance for loan losses is maintained at alevel that, in our judgment, is adequate to absorb probable incurred losses inthe loan portfolio. The amount of the allowance is based on management’sevaluation of the collectibility of the loan portfolio, historical lossexperience, and other significant factors affecting loan portfoliocollectibility, including the volume and severity of delinquent and classifiedloans, trends in volume and terms of loans, levels and trends in creditconcentrations, effects of changes in underwriting standards, policies,procedures and practices, national and local economic trends and conditions,changes in capabilities and experience of lending management and staff, andother external factors including industry conditions, competition andregulatory requirements.

 

The ratio of allowance for loan losses tototal loans was 1.48% at June 30,2008, as compared to 1.44% at December 31, 2007 and 1.88% at June 30, 2007.

 

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, total impaired loans at June 30, 2008increased over the amounts at March 31, 2008, which is reflected in ahigher specific allowance.  However, thespecific allowance as a percentage of total impaired loans did decline in thesecond quarter 2008 based on underlying collateral values of the nonperformingloans.

 

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. Loans typically segregated by risk rating are those that have beenassigned risk ratings using regulatory definitions of “watch”, “substandard”, “doubtful”and “loss”.  Loans graded as eitherdoubtful or loss are generally partially or fully charged-off.  Other loans segregated by risk weighting areevaluated for trends in volume and severity.

 

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.

 

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

 

**Table 13**

 
| ** **                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                   | ** ** | **(In thousands)**                           | ** ** |
| Balance, beginning of period |       | $                                                 | 25,711     |   | $ | 27,899 |   |
| Loan charge-offs:            |       |                                              |       |   |   |
| Real estate - Mortgage       |       | 767                                               |       | 1,638 |   |
| Real estate - Construction   |       | 258                                               |       | 5,053 |   |
| Commercial                   |       | 243                                               |       | 259 |   |
| Agricultural                 |       | 18                                                |       | — |   |
| Consumer                     |       | 130                                               |       | 192 |   |
| Lease receivable and other   |       | —                                            |       | 23 |   |
| Total loan charge-offs       |       | 1,416                                             |       | 7,165 |   |
| Recoveries:                  |       |                                              |       |   |   |
| Real estate - mortgage       |       | 195                                               |       | 486 |   |
| Real estate - construction   |       | 59                                                |       | 55 |   |
| Commercial                   |       | 116                                               |       | 229 |   |
| Agricultural                 |       | 7                                                 |       | 13 |   |
| Consumer                     |       | 59                                                |       | 79 |   |
| Lease receivable and other   |       | —                                            |       | 383 |   |
| Total loan recoveries        |       | 436                                               |       | 1,245 |   |
| Net loan charge-offs         |       | 980                                               |       | 5,920 |   |
| Provision for loan losses    |       | 1,775                                             |       | 13,615 |   |
| Balance, end of period       |       | $                                                 | 26,506     |   | $ | 35,594 |   |

 

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

 

**Securities**

 

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

 

*The carrying value of our portfolio of investment securities at June 30, 2008**and December 31, 2007 wasas follows:*

 

**Table 14**

 
| ** **                                                  | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                                  | ** ** | **2008**                | ** ** | **2007**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                                                  | ** ** | **(In thousands)** | ** ** |
| Securities available-for-sale:                              |       |                    |       |                  |       |           |       |       |       |
| U.S. Government agencies and  government-sponsored entities |       | $                       | 2,449      |                  | $          | 10,456         |       | $          | (8,007     | ) | (76.6 | )% |
| Obligations of states and political  subdivisions           |       | 71,569                  |       | 76,876                |       | (5,307         | )          | (6.9       | )%         |
| Mortgage backed                                             |       | 36,397                  |       | 30,038                |       | 6,359          |       | 21.2       | %          |
| Marketable equity                                           |       | 1,156                   |       | 1,047                 |       | 109            |       | 10.4       | %          |
| Other                                                       |       | 547                     |       | 547                   |       | 0              |       | 0.0        | %          |
| Total securities available-for-sale                         |       | $                       | 112,118    |                  | $          | 118,964        |       | $          | (6,846     | ) | (5.8 | )% |
|                                                        |       |                    |       |                  |       |           |       |       |       |
| Securities held-to-maturity:                                |       |                    |       |                  |       |           |       |       |       |
| Mortgage-backed                                             |       | $                       | 13,772     |                  | $          | 14,889         |       | $          | (1,117     | ) | (7.5 | )% |

 

The carrying value of our investment securitiesat June 30, 2008 was $112.1million, compared to the December 31, 2007 carrying value of $119.0million. The decrease in the level of our investments from December 31,2007, is primarily due to a decrease in the holdings of U.S. government agenciesand government-sponsored entities, as well as municipal bonds.    The change in U.S. Government agencies andgovernment-sponsored entities and mortgage-backed securities from December 31,2007 to June 30, 2008 is a result of a decision to sell certain securitiesat a $0.1 million gain and replace them with higher yielding securities in thefirst quarter 2008.  The reduction inmunicipal bonds is a result of our decision to not repurchase new municipalbonds as these bonds mature or are called in order to reduce our overallconcentration of municipal securities.

 

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**Deposits**

 

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

 

**Table 15**

 
| ** **                   | ** ** | **At June 30, 2008**  | ** ** | **At December 31, 2007** | ** ** |
|------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                   | ** ** | **Balance**                          | ** ** | **% of  Total**                    | ** ** | **Balance** | ** ** | **% of  Total** | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Noninterest bearing deposits |       | $                                    | 515,646    |                                    | 30.21      | % | $ | 515,299 |   | 28.64 | % |
| Interest bearing demand      |       | 149,019                              |       | 8.73                                    | %          | 160,100 |   | 8.90 | % |
| Money market                 |       | 524,592                              |       | 30.73                                   | %          | 572,056 |   | 31.79 | % |
| Savings                      |       | 71,474                               |       | 4.19                                    | %          | 71,944 |   | 4.00 | % |
| Time                         |       | 446,300                              |       | 26.14                                   | %          | 480,108 |   | 26.67 | % |
|                         |       |                                 |       |                                    |       |   |   |   |   |
| Total deposits               |       | $                                    | 1,707,031  |                                    | 100.00     | % | $ | 1,799,507 |   | 100.00 | % |

 

At the endof the second quarter 2008, deposits were $1.7 billion as compared to $1.8billion at December 31, 2007, reflecting a decrease of $92.5 million.  Approximately $33.8 million, or 36.5% of thisdecline, from December 31, 2007, is from a decrease in time deposits dueto a strategic decision to mitigate the impact of margin compression.  Approximately $47.5 million, or 51.4% of thisdecline, from December 31, 2007, is from a decrease in money marketdeposits.

 

Average noninterestbearing deposits for the second quarter 2008 were $452,315,000 compared to theactual balance of $515,646,000 at June 30, 2008.  On the last day of the second quarter 2008,the Bank received a short-term $62 million noninterest bearing deposit from asingle depositor.  Average noninterestbearing deposits were 27.4% of average total deposits for the quarter ended June 30,2008, as compared to 24.9% of average total deposits for the same quarter in2007.

 

**Borrowings and SubordinatedDebentures**

 

At June 30,2008, our outstanding borrowings were $147,117,000 as compared to $63,715,000at December 31, 2007.  The increasein borrowings is due to an increase in term notes at the Federal Home Loan Bank(“FHLB”) as part of a strategic funding decision to mitigate the impact ofmargin compression when the pricing was compared to internet or brokered timedeposits.

 

Theborrowings at June 30, 2008 consisted of 18 separate fixed-rate term notesat the FHLB with maturities ranging from 2 to 115 months.  Approximately $122 million of the FHLB termadvances at June 30, 2008 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 ofcredit at the FHLB at June 30, 2008, but there was no balance outstandingon this line of credit on such date.  At December 31,2007, borrowings consisted of a line of credit and term notes at the FederalHome Loan Bank of $15,160,000 and $47,356,000 respectively,and a $1,199,000 Treasury Tax and Loan note balance.  The Treasury Tax and Loan note option withthe Federal Reserve Bank was cancelled due to the dissolution of CentennialBank of the West during its merger into Guaranty Bank and Trust Company in January 2008.  Management determined not to open a newTreasury Tax and Loan note with the Federal Reserve Bank with Guaranty Bank andTrust Company.

 

The totalcommitment, including balances outstanding, for borrowings at the Federal HomeLoan Bank for the term notes and line of credit at June 30, 2008 and December 31,2007 was $341.5 million and $316.2 million, respectively. The interest rate onthe line of credit varies with the federal funds rate, and was 2.55% and 5.51%at June 30, 2008 and December 31, 2007, 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 certainloans and securities, serves as collateral for these borrowings.

 

We have arevolving credit agreement with U.S. Bank National Association which containsfinancial covenants, including maintaining a minimum return on average assets,a maximum nonperforming assets to total loans ratio, a minimum allowance for loanlosses to nonperforming loan ratio, and regulatory capital ratios that qualifythe Company as well-capitalized.   As of August 6,2008, the amount of the line of credit was decreased from $70 million to $40million.  As of June 30, 2008, theCompany did not have any amount drawn on this line.  As of June 30, 2008, the Company is incompliance with all outstanding financial covenants, as amended.  The interest rate varies based on a spreadover the federal funds rate, with a rate of 3.49% at June 30, 2008. The credit 

 

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agreement is secured by Guaranty Bankstock.  U.S. Bank performs various commercialbanking services for the Company for which they receive usual and customaryfees.

 

At June 30, 2008, we had a$41,239,000 aggregate principal balance of subordinated debentures outstandingwith a weighted average cost of 7.39%. The subordinated debentures were issued in four separate series. Eachissuance has a maturity of thirty years from its date of issue. Thesubordinated debentures were issued to trusts established by us, which in turnissued $40 million of trust preferred securities. Generally and with certainlimitations, the Company is permitted to call the debentures subsequent to thefirst five or ten years, as applicable, after issue if certain conditions aremet, or at any time upon the occurrence and continuation of certain changes in eitherthe tax treatment or the capital treatment of the trusts, the debentures or thepreferred securities.  The GuarantyCapital Trust III issuance of $10.0 million has a variable rate of LIBOR plus3.10% and is callable without penalty on July 7, 2008, and every quarterthereafter.   Management did not callthese debentures on July 7, 2008, but will continue to evaluate whether tocall 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 thismodification, beginning March 31, 2009, the Company will be required touse a more restrictive formula to determine the amount of trust preferredsecurities that can be included in regulatory Tier I capital. At that time, theCompany will be allowed to include in Tier I capital an amount of trustpreferred securities equal to no more than 25% of the sum of all core capitalelements, which is generally defined as stockholders’ equity less certainintangibles, including goodwill, core deposit intangibles and customerrelationship intangibles, net of any related deferred income tax liability. Theregulations currently in effect limit the amount of trust preferred securitiesthat can be included in Tier I capital to 25% of the sum of core capital elementswithout a deduction for permitted intangibles. The Company expects that its Tier I capital ratios will be at or abovethe existing well-capitalized levels on March 31, 2009, the first date onwhich the modified capital regulations must be applied.

 

**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 and debt-covenant purposes,the Company maintains capital above the minimum core standards.  The Company maintains capital at awell-capitalized level.   Under theregulations adopted by the federal regulatory authorities, a bank iswell-capitalized if the institution has a total risk-based capital ratio of10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and aleverage ratio of 5.0% or greater, and is not subject to any order or writtendirective by any such regulatory authority to meet and maintain a specificcapital level for any capital measure. Our subsidiary bank is required to maintain similar capital levels undercapital adequacy guidelines.  At June 30, 2008, our subsidiary bank was “well-capitalized”.

 

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

 

**Table 16**

 
| ** **                        | ** ** | ** **        | ** ** | ** **            | ** ** | ** **      | ** ** | **Minimum**             | ** ** |
|-----------------------------------|------------|-------------------|------------|-----------------------|------------|-----------------|------------|-------------------------|------------|
| ** **                        | ** ** | ** **        | ** ** | ** **            | ** ** | ** **      | ** ** | **Requirement**         | ** ** |
| ** **                        | ** ** | ** **        | ** ** | ** **            | ** ** | **Minimum**     | ** ** | **For “Well** | ** ** |
| ** **                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **Capital**     | ** ** | **Capitalized”**   | ** ** |
| ** **                        | ** ** | **2008**          | ** ** | **2007**              | ** ** | **Requirement** | ** ** | **Institution**         | ** ** |
|                              |       |              |       |                  |       |            |       |                    |       |
| Leverage ratio                    |       | 9.51              | %          | 8.55                  | %          | 4.00            | %          | 5.00                    | %          |
| Tier 1 risk weighted ratio        |       | 9.75              | %          | 9.62                  | %          | 4.00            | %          | 6.00                    | %          |
| Total risk weighted capital ratio |       | 11.01             | %          | 10.87                 | %          | 8.00            | %          | 10.00                   | %          |

 

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** **

**Contractual Obligations and Off-Balance SheetArrangements**

 

The Company is a party to credit-related financialinstruments with off-balance sheet risk in the normal course of business tomeet the financing needs of its customers. These financial instruments includecommitments to extend credit, stand-by letters of credit, and commercialletters of credit. Such commitments involve, to varying degrees, elements ofcredit and interest rate risk in excess of the amount recognized in theconsolidated 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 June 30, 2008, the following financial instruments wereoutstanding whose contract amounts represented credit risk:*

 

**Table 17**

 
| ** **                   | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **(In thousands)** | ** ** |
| Commitments to extend credit |       | $                       | 586,451    |                        | $          | 582,988 |   |
| Standby letters of credit    |       | 25,507                  |       | 33,573                      |       |
|                         |       |                    |       |                        |       |
| Totals                       |       | $                       | 611,958    |                        | $          | 616,561 |   |

 

**Liquidity**

 

We believe that our level of liquid assets is sufficientto meet our current and presently anticipated funding needs.

 

We rely on dividends from our Bank as a primarysource of liquidity for the holding company. We plan to continue to utilize theavailable dividends from the Bank for holding company operations, subject toregulatory and other restrictions.  Theability of the Bank to pay dividends or make other capital distributions to usis subject to the regulatory authority of the Federal Reserve Board and theColorado Division of Banking.  Because ofthe net loss in 2007 as a result of the goodwill impairment charge, the Bank isrequired to obtain permission from the Federal Reserve Board and the ColoradoDivision of Banking prior to making any dividend to the holding company.   As the net loss in 2007 did not have anyimpact on the Bank’s liquidity, cash flows or regulatory capital, it isexpected that permission will be granted if the Bank remains more thanwell-capitalized and if the payment of dividends is not deemed to be an unsafeor unsound practice.  We requireliquidity for the payment of interest on the subordinated debentures, foroperating expenses, principally salaries and benefits, for repurchases of ourcommon stock, and, if declared by our board of directors, for the payment ofdividends to our stockholders.

 

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

 

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, sales of loans, discountwindow borrowings from the Federal Reserve Bank, and our lines of credit withthe Federal Home Loan Bank of Topeka and U.S. Bank are employed to meet currentand presently anticipated funding needs.

 

**Application of Critical Accounting Policiesand Accounting Estimates**

 

Management’s Discussion and Analysisof financial condition and results of operations discusses the Company’s condensedconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these condensed consolidated financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent liabilities at thedate of the condensed consolidated financial statements and the reportedamounts of revenues and expenses during the reporting period. On an on-goingbasis, management evaluates its estimates and judgments, including thoserelated to customers and suppliers, allowance for loan losses, bad debts,investments, financing operations, long-lived assets, contingencies and litigation.Management bases its estimates and judgments on historical experience and onvarious other factors that are believed to be reasonable under thecircumstances, the results of which have formed the basis for making suchjudgments about the carrying value of assets and liabilities that are notreadily apparent from other sources. Actual 

 

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resultsmay differ from the recorded estimates under different assumptions orconditions.  A summary of criticalaccounting policies and estimates are listed in the “Management’s Discussionand Analysis of Financial Condition and Results of Operations” section of theCompany’s 2007 Annual Report Form 10-K for the fiscal year ended December 31,2007.  There have been no changes tothese critical accounting policies in 2008.

 

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**ITEM 3.**                      **Quantitative and QualitativeDisclosure 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, includingthe terms and pricing of loans and deposits and managing the deployment of oursecurities, are used to reduce mismatches in interest rate re-pricingopportunities of portfolio assets and their funding sources.

 

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.

 

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.

 

In 2008, this disclosure alternative was changedfrom prior year annual and quarterly reports filed by the Company, which usedthe Gap analysis disclosure method.   Thestatic gap analysis looked at the dollar amount of mismatches between assetsand liabilities, at certain time periods, whose interest rates are subject topricing at their contractual maturity date or repricing period.   As this Gap analysis looked at contractualdates that assets and liabilities are subject to repricing, it caused theentire balance of interest-bearing NOW accounts, money market accounts andsavings accounts to be treated as immediately repriceable.  As our actual experience with repricing ofthese liabilities differed from the contractual maturities, management haschosen to disclose the sensitivity analysis alternative, which measures theimpact on net interest income of hypothetical changes in interest rates.    As discussed above, this tool is usedinternally by ALCO in monitoring interest rate risk of the Company and thus,the Company has chosen to change this disclosure alternative regarding marketrisk.  Summarized comparable information,under the new disclosure method, is provided for the preceding year.

 

**Net Interest Income Modeling**

 

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

 

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*The following table shows the net interest income increase or decreaseover the next twelve months as of June 30, 2008 and 2007:*

 

**Table 18**

 

**MARKET RISK:**

 
| ** **                 | ** ** | **Annualized Net Interest Income** | ** ** |
|----------------------------|------------|---------------------------------------------------|------------|
| ** **                 | ** ** | **June 30, 2008**                       | ** ** | **June 30, 2007** | ** ** |
| ** **                 | ** ** | **Amount of Change**                    | ** ** | **Amount of Change** | ** ** |
| ** **                 | ** ** | **(In thousands)**                           | ** ** |
| **Rates in  Basis Points** |       |                                              |       |   |   |
| 200                        |       | $                                                 | 7,024      |   | $ | 6,915 |   |
| 100                        |       | 3,279                                             |       | 3,477 |   |
| Static                     |       | —                                            |       | — |   |
| (100)                      |       | (3,518                                            | )          | (3,461 | ) |
| (200)                      |       | (6,893                                            | )          | (6,840 | ) |
|                            |            |                                                   |            |  |  |  |  |

 

Overall, the company ispositioned to have a short-term favorable interest income impact in a risingrate environment and have an adverse interest income impact in the short-termin a falling rate environment.

 

If rates increase, netinterest income is anticipated to increase and similarly, if rates decrease,net interest income is expected to decrease, meaning the Company is assetsensitive.  At June 30, 2008, a 200basis point increase in rates would be anticipated to increase net interestincome by $7.0 million as compared to $6.9 million at June 30, 2007.  The Company is slightly more asset sensitiveto an increase or decrease in rates than a year ago.

 

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

 

Asof the end of the period covered by this report, an evaluation was carried outby the Company’s management, with the participation of the Chief ExecutiveOfficer and the Chief Financial Officer, of the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rule 15d-15(e) underthe Securities Exchange Act of 1934). The Company’s disclosure controls weredesigned to provide a reasonable assurance that information required to bedisclosed in reports that we file or submit under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the Securities and ExchangeCommission. It should be noted that the design of any system of controls isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions, regardless of how remote.However, the controls have been designed to provide reasonable assurance ofachieving the controls’ stated goals. Based on that evaluation, the Company’sChief Executive Officer and Chief Financial Officer, have concluded that theCompany’s disclosure controls and procedures are effective at June 30,2008 to ensure that information required to be disclosed in the reports that wefile or submit under the Securities Exchange Act of 1934 was (i) accumulatedand communicated to management, including the Company’s Chief Executive Officerand Chief Financial Officer, to allow timely decisions regarding requireddisclosure and (ii) recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the Securities andExchange Commission.

 

Therehave been no changes in the Company’s internal control over financial reporting(as defined in Rule 15d-15(f) under the Securities Exchange Act of1934) during our most recent fiscal quarter that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PART II—OTHER INFORMATION**

 

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

 

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 be ascertainedwith certainty, in the opinion of management, based upon information currentlyavailable to us, any resulting liability is not likely to have a materialadverse effect on the Company’s consolidated financial position, results ofoperations or cash flows.

 

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**ITEM 1A.   Risk Factors**

 

In addition to the other information set forth in this report, youshould carefully consider the factors discussed in Part I, “Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2007, which could materially affect our business, financial condition and/oroperating results.  The risks describedin our Annual Report on Form 10-K are not the only risks facing theCompany. Additional risks and uncertainties not currently known to us or thatwe currently deem to be immaterial also may materially affect our business,financial condition and/or operating results.

 

**ITEM 2.**   **Unregistered Sales of EquitySecurities and Use of Proceeds**

 

(a)                                  None.

 

(b)                                 None.

 

(c)   The following table providesinformation with respect to purchases made by or on behalf of the Company orany “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under theSecurities Exchange Act of 1934), of our common stock during the second quarter2008.

 
| ** **                    | ** ** | **Total  Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans (1)** | ** ** | **Maximum Number of  Shares that May Yet be  Purchased Under the Plans  at The End of the Period(1)** | ** ** |
|-------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1 to April 30 |       | —                       |       | $                                                | —     |                                                                                                                    | —     |                                                                                                                                                                        | 1,349,858  |   |
| May 1 to May 31     |       | 5,270                        |       | 5.99                                             |       | —                                                                                                                  |       | 1,200,000                                                                                                                                                                   |       |
| June 1 to June 30   |       | 8,288                        |       | 4.59                                             |       | —                                                                                                                  |       | 1,200,000                                                                                                                                                                   |       |
|                          |       |                         |       |                                             |       |                                                                                                                    |       |                                                                                                                                                                        |       |
|                          |       | 13,558                       |       | $                                                | 5.13       |                                                                                                                    | —     | (2)                                                                                                                                                                         | 1,200,000  |   |

 

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(1)          In May 2007, we announced the authorization of a stock repurchaseprogram to repurchase up to 2,000,000 shares of our common stock from time totime over a one-year period in the open market or through private transactionsin accordance with the applicable regulations of the Securities and ExchangeCommission.  When this repurchase programlapsed in May 2008, 149,858 shares expired under the repurchaseprogram.  In October 2007, weannounced the authorization of a new stock repurchase program to repurchase upto 1,200,000 shares of our common stock from time to time over a one-yearperiod in the open market or through private transactions in accordance withapplicable regulations of the Securities and Exchange Commission.  The company has 1,200,000 shares remainingunder this repurchase program.

 

(2)          The difference of 13,558 shares between “Total Shares Purchased” and“Total Number of Shares Purchased as Part of Publicly Announced Plans”relates to the net settlement of vested, restricted stock awards.

 

**ITEM 3.**   **Defaults Upon SeniorSecurities**

 

None.

 

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**ITEM 4.**   **Submission of Matters to aVote of Security Holders**

 

OnMay 6, 2008, the Company held its Annual Meeting of Stockholders for whichthe Board of Directors solicited proxies. At the Annual Meeting, thestockholders voted on the following proposals stated in the Proxy Statement datedMarch 21, 2008.

 

Theproposals voted on and approved by the stockholders at the Annual Meeting wereas follows:

 

1)              Election of nine members of the Board ofDirectors who shall hold office until the next annual meeting of stockholdersand until their successors are duly elected and qualified.   All nominees for director were elected.

 
| **Election of Directors:** | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-  Votes** | ** ** |
|--------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-----------------|------------|
| Edward B. Cordes                     |       | 45,110,592 |       | 1,153,025   |       | 384,331     |       | —          |       |
| John M. Eggemeyer, III          |       | 45,021,643 |       | 1,218,720   |       | 407,588     |       | —          |       |
| William R. Farr                      |       | 43,638,265 |       | 2,515,778   |       | 493,908     |       | —          |       |
| Stephen D. Joyce                     |       | 45,241,514 |       | 940,125     |       | 466,312     |       | —          |       |
| Gail H. Klapper                      |       | 37,585,358 |       | 8,659,038   |       | 403,555     |       | —          |       |
| Daniel M. Quinn                      |       | 45,360,179 |       | 859,200     |       | 428,572     |       | —          |       |
| Kathleen Smythe                      |       | 44,895,226 |       | 1,324,519   |       | 428,206     |       | —          |       |
| Matthew P. Wagner                    |       | 44,788,069 |       | 1,363,456   |       | 496,426     |       | —          |       |
| Albert C. Yates                      |       | 44,980,242 |       | 1,286,535   |       | 381,174     |       | —          |       |

 

2)              Amendment of the Company’s Certificate ofIncorporation to change the Company’s name to “Guaranty Bancorp”.

 

| ** ** | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
|------------|------------|------------|------------|-------------|------------|-------------|------------|---------------|------------|
|       |       | 45,934,698 |       | 178,167     |       | 535,086     |       | —        |       |

 

3)              Amendment of the Company’s Certificate ofIncorporation to allow stockholders to call special meetings of stockholders.

 

| ** ** | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
|------------|------------|------------|------------|-------------|------------|-------------|------------|---------------|------------|
|       |       | 39,947,537 |       | 812,644     |       | 231,283     |       | 5,565,487     |       |

 

4)              Ratification of the appointment of CroweChizek and Company LLC as the Company’s independent registered publicaccounting firm for the year ending December 31, 2008.

 

| ** ** | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
|------------|------------|------------|------------|-------------|------------|-------------|------------|---------------|------------|
|       |       | 46,137,589 |       | 191,971     |       | 318,391     |       | —        |       |

 

Additionally,the stockholders voted on a shareholder proposal as stated in the SupplementalProxy Material dated April 14, 2008. This proposal regarding engaging a professional advisory firm to developa strategy to enhance shareholder value was voted on and not approved by thestockholders as follows:

 

| ** ** | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
|------------|------------|-----------|------------|-------------|------------|-------------|------------|---------------|------------|
|       |       | 5,630,039 |       | 30,831,711  |       | 219,652     |       | 8,801,587     |       |

 

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

 

OnAugust 6, 2008, the Company entered into Amendment No. 8 to theRevolving Credit Agreement with U.S. Bank National Association to modify thereturn on equity covenant, addan asset quality covenant and to reduce the amount available under the line ofcredit from $70 million to $40 million.

 

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OnAugust 4, 2008, the Company’s Compensation, Nominating and GovernanceCommittee approved an amendment and restatement of the Company’s DeferredCompensation Plan, to be effective January 1, 2009.  Previous amendments to the plan were alsoapproved by the committee in December 2007. The summary of the planamendments below is subject to, and qualified in its entirety to, the full textof the plan, a copy of which is filed as Exhibit 10.2 hereto andincorporated herein by reference.  Theplan was amended and restated primarily to conform to the final IRS Code Section 409Aregulations and recent IRS guidance.  Inparticular, the definitions of “Change in Control” and “Separation FromService” have been conformed to the definitions prescribed by the 409Aregulations. Other amendments include (i) clarification that, for directorcompensation deferrals, only non-employee directors are eligible, (ii) clarificationof the payment of specified date accounts (i.e., In-Service Accounts) attermination of employment, both before and after retirement, (iii) eliminationof the funding requirement upon a change in control, (iv) clarification ofthe ability to assign liabilities in a corporate transaction and (v) eliminationof the disability benefit payment, which is now covered in the terminationbenefit payment prior to retirement.

 

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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                  |       | Amendment  No. 8 to Revolving Credit Agreement, dated August 6, 2008, between  U.S. Bank, National Association and the Registrant.                                                              |
|                  |       |                                                                                                                                                                                                      |
| 10.2                  |       | Amended  and Restated Guaranty Bancorp Deferred Compensation Plan, effective  January 1, 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**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| Date:  August 7, 2008 | GUARANTY BANCORP                                        |
|----------------------------|---------------------------------------------------------|
|                       |                                                    |
|                       |                                                    |
|                       | /s/    PAUL W. TAYLOR               |
|                       | Paul W. Taylor                                          |
| * *                   | *Executive Vice President and Chief Financial  Officer* |

 

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