Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

| **x**                                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|-------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                        |
| **For the quarterly period  ended September 30, 2008** |
|                                                        |
| **OR**                                                      |
|                                                        |
| **o**                                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition periodfrom                    to                    **

 

**Commission File Number:000-51556**

 

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**GUARANTY BANCORP**

(Exactname of registrant as specified in its charter)

 

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

 

**303-293-5563**

(Registrant’stelephone number, including area code)

 

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

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler”, “accelerated filer” and “smaller reporting company” in Rule 12B-2 ofthe 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.): Yes o No x

 

As of November 6,2008, there were 52,581,206 shares of the registrant’s common stockoutstanding, including 1,554,912 shares of unvested stock grants and excluding78,298 shares to be issued under its deferred compensation plan.

 

 

 

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**TABLE OFCONTENTS**

 
| ** **                                 | ** **                                                                                         | **Page** |
|--------------------------------------------|----------------------------------------------------------------------------------------------------|----------|
|                                       | Forward-Looking  Statements and Factors that Could Affect Future Results                           | 3        |
|                                       |                                                                                               |     |
| **PART I—FINANCIAL INFORMATION** | 5                                                                                                  |
|                                       |                                                                                               |     |
| ITEM 1.                               | Unaudited Condensed Consolidated Financial Statements                                              | 5        |
|                                       |                                                                                               |     |
|                                       | Unaudited Consolidated Balance Sheets                                                              | 5        |
|                                       |                                                                                               |     |
|                                       | Unaudited Consolidated Statements of 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        | 23       |
|                                       |                                                                                               |     |
| ITEM 3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                        | 43       |
|                                       |                                                                                               |     |
| ITEM 4.                               | Controls  and Procedures                                                                           | 45       |
|                                       |                                                                                               |     |
| **PART II—OTHER  INFORMATION**   | 46                                                                                                 |
|                                       |                                                                                               |     |
| ITEM 1.                               | Legal Proceedings                                                                                  | 46       |
|                                       |                                                                                               |     |
| ITEM 1A.                              | Risk Factors                                                                                       | 47       |
|                                       |                                                                                               |     |
| ITEM 2.                               | Unregistered  Sales of Equity Securities and Use of Proceeds                                       | 49       |
|                                       |                                                                                               |     |
| ITEM 3.                               | Defaults  Upon Senior Securities                                                                   | 49       |
|                                       |                                                                                               |     |
| ITEM 4.                               | Submission  of Matters to a Vote of Security Holders                                               | 49       |
|                                       |                                                                                               |     |
| ITEM 5.                               | Other  Information                                                                                 | 49       |
|                                       |                                                                                               |     |
| ITEM 6.                               | Exhibits                                                                                           | 50       |

 

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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 to differmaterially from those in such statements. Factors that could cause actualresults to differ from those discussed in the forward-looking statementsinclude, but are not limited to:

 

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

 

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

 

·                  The effects ofand changes in trade and monetary and fiscal policies and laws, including theinterest rate policies of the Federal Open Market Committee of the FederalReserve Board, the Federal Deposit Insurance Corporation’s Temporary LiquidityGuaranty Program and U.S. Treasury’s Capital Purchase Program and TroubledAsset Repurchase Program authorized by the Emergency Economic Stabilization Actof 2008.

 

·                  The failure toobtain approval to participate in the U.S. Treasury’s Capital Purchase Programand, if such approval is obtained, the failure to complete the sale ofpreferred stock under the program.

 

·                  Changes insources and uses of funds, including loans, deposits and borrowings, includingthe ability for the Bank to retain and grow core deposits, to purchase brokereddeposits and maintain unsecured federal funds lines with correspondent banksand secured lines of credits.

 

·                  Inflation andinterest rate, securities market and monetary fluctuations.

 

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

 

·                  The timelydevelopment and acceptance of new products and services and perceived overallvalue of these products and services by customers.

 

·                  Revenues arelower than expected.

 

·                  Changes inconsumer spending, borrowings and savings habits.

 

·                  Changes in thefinancial performance and/or condition of our borrowers.

 

·                  Credit qualitydeterioration, which could cause an increase in the provision for loan losses.

 

·                  Technologicalchanges.

 

·                  Acquisitions ofacquired businesses and greater than expected costs or difficulties related tothe integration of acquired businesses.

 

·                  The ability toincrease market share and control expenses.

 

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

 

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

 

·                  Changes in thesecurities markets.

 

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

 

·                  Changes in ourorganization, compensation and benefit plans.

 

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

 

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

 

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

 

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**PART I- FINANCIAL INFORMATION**

 

**ITEM 1.Unaudited Consolidated Financial Statements**

 

**GUARANTY BANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **September 30,  2008**                       | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **(Dollars  in thousands, except per share data)** | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **                                         | ** ** | ** **                  | ** ** |
| Cash and due from banks                                                                                                                                                                                                                                                                                                                                                                                                          |       | $                                                  | 37,548     |                        | $          | 51,611 |   |
| Federal funds sold                                                                                                                                                                                                                                                                                                                                                                                                               |       | 3,799                                              |       | 745                         |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                        |       | 41,347                                             |       | 52,356                      |       |
| Securities available for sale, at fair  value                                                                                                                                                                                                                                                                                                                                                                                    |       | 97,250                                             |       | 118,964                     |       |
| Securities held to maturity (fair value of  $13,559 and $14,916 at September 30, 2008 and December 31, 2007)                                                                                                                                                                                                                                                                                                           |       | 13,556                                             |       | 14,889                      |       |
| Bank stocks, at cost                                                                                                                                                                                                                                                                                                                                                                                                             |       | 32,843                                             |       | 32,464                      |       |
| Total investments                                                                                                                                                                                                                                                                                                                                                                                                                |       | 143,649                                            |       | 166,317                     |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                                               |       |                        |       |
| Loans, net of unearned discount                                                                                                                                                                                                                                                                                                                                                                                                  |       | 1,779,673                                          |       | 1,781,647                   |       |
| Less allowance for loan losses                                                                                                                                                                                                                                                                                                                                                                                                   |       | (44,765                                            | )          | (25,711                     | )          |
| Net loans                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 1,734,908                                          |       | 1,755,936                   |       |
| Loans, held for sale                                                                                                                                                                                                                                                                                                                                                                                                             |       | —                                             |       | 492                         |       |
| Premises and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                      |       | 63,973                                             |       | 69,981                      |       |
| Other real estate owned and foreclosed  assets                                                                                                                                                                                                                                                                                                                                                                                   |       | 1,199                                              |       | 3,517                       |       |
| Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                         |       | —                                             |       | 250,748                     |       |
| Other intangible assets, net                                                                                                                                                                                                                                                                                                                                                                                                     |       | 27,302                                             |       | 32,933                      |       |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 40,566                                             |       | 39,384                      |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                                                                                     |       | $                                                  | 2,052,944  |                        | $          | 2,371,664 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                                               |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** **                                         | ** ** | ** **                  | ** ** |
| Liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                               |       |                        |       |
| Deposits:                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                               |       |                        |       |
| Noninterest-bearing demand                                                                                                                                                                                                                                                                                                                                                                                                       |       | $                                                  | 403,495    |                        | $          | 515,299 |   |
| Interest-bearing demand                                                                                                                                                                                                                                                                                                                                                                                                          |       | 625,855                                            |       | 732,156                     |       |
| Savings                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 68,910                                             |       | 71,944                      |       |
| Time                                                                                                                                                                                                                                                                                                                                                                                                                             |       | 536,841                                            |       | 480,108                     |       |
| Total deposits                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 1,635,101                                          |       | 1,799,507                   |       |
| Securities sold under agreements to  repurchase and federal fund purchases                                                                                                                                                                                                                                                                                                                                                       |       | 42,604                                             |       | 23,617                      |       |
| Borrowings                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 166,508                                            |       | 63,715                      |       |
| Subordinated debentures                                                                                                                                                                                                                                                                                                                                                                                                          |       | 41,239                                             |       | 41,239                      |       |
| Interest payable and other liabilities                                                                                                                                                                                                                                                                                                                                                                                           |       | 13,086                                             |       | 24,932                      |       |
| Total liabilities                                                                                                                                                                                                                                                                                                                                                                                                                |       | 1,898,538                                          |       | 1,953,010                   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                                               |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                                                                                                                                                       |       |                                               |       |                        |       |
| Common stock—$.001 par value; 100,000,000  shares authorized, 64,542,950 shares issued, 52,661,738 shares outstanding at  September 30, 2008 (includes 1,566,812 shares of unvested restricted  stock and 78,298 shares to be issued); 64,378,450 shares issued, 52,616,991  shares 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                                                                                                                                                                                                                                                                                                                                                                                                       |       | 616,973                                            |       | 617,611                     |       |
| Shares to be issued for deferred  compensation obligations                                                                                                                                                                                                                                                                                                                                                                       |       | 664                                                |       | 573                         |       |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                                                              |       | (355,826                                           | )          | (95,196                     | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                                                                                                             |       | (4,385                                             | )          | (1,472                      | )          |
| Treasury Stock, at cost, 10,987,807 and  10,983,653, respectively                                                                                                                                                                                                                                                                                                                                                                |       | (103,085                                           | )          | (102,926                    | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                  |       | 154,406                                            |       | 418,654                     |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                  |       | $                                                  | 2,052,944  |                        | $          | 2,371,664 |   |

 

See “Notes to Unaudited ConsolidatedFinancial Statements.”

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Income (Loss)**

 
| ** **                                                   | ** ** | **Three  Months Ended September 30,**         | ** ** | **Nine  Months Ended September 30,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                           | ** ** | **2007**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | **(Dollars  in thousands, except per share data)** | ** ** |
| Interest income:                                             |       |                                               |       |                                      |       |   |   |   |   |
| Loans, including fees                                        |       | $                                                  | 27,675     |                                      | $          | 38,369 |   | $ | 86,822 |   | $ | 117,194 |   |
| Investment securities:                                       |       |                                               |       |                                      |       |   |   |   |   |
| Taxable                                                      |       | 749                                                |       | 617                                       |       | 2,212 |   | 1,846 |   |
| Tax-exempt                                                   |       | 846                                                |       | 1,343                                     |       | 2,616 |   | 4,091 |   |
| Dividends                                                    |       | 441                                                |       | 490                                       |       | 1,346 |   | 1,424 |   |
| Federal funds sold and other                                 |       | 8                                                  |       | 265                                       |       | 342 |   | 592 |   |
| Total interest income                                        |       | 29,719                                             |       | 41,084                                    |       | 93,338 |   | 125,147 |   |
| Interest expense:                                            |       |                                               |       |                                      |       |   |   |   |   |
| Deposits                                                     |       | 7,454                                              |       | 13,933                                    |       | 24,660 |   | 41,017 |   |
| Federal funds purchased and repurchase  agreements           |       | 160                                                |       | 428                                       |       | 442 |   | 1,177 |   |
| Borrowings                                                   |       | 1,485                                              |       | 543                                       |       | 3,931 |   | 2,073 |   |
| Subordinated debentures                                      |       | 778                                                |       | 944                                       |       | 2,422 |   | 2,814 |   |
| Total interest expense                                       |       | 9,877                                              |       | 15,848                                    |       | 31,455 |   | 47,081 |   |
| Net interest income                                          |       | 19,842                                             |       | 25,236                                    |       | 61,883 |   | 78,066 |   |
| Provision for loan losses                                    |       | 30,750                                             |       | 8,026                                     |       | 32,525 |   | 21,641 |   |
| Net interest income (loss), after provision  for loan losses |       | (10,908                                            | )          | 17,210                                    |       | 29,358 |   | 56,425 |   |
| Noninterest income:                                          |       |                                               |       |                                      |       |   |   |   |   |
| Customer service and other fees                              |       | 2,521                                              |       | 2,390                                     |       | 7,325 |   | 7,242 |   |
| Gain on sale of securities                                   |       | —                                             |       | —                                    |       | 138 |   | — |   |
| Other                                                        |       | 186                                                |       | 230                                       |       | 891 |   | 522 |   |
| Total noninterest income                                     |       | 2,707                                              |       | 2,620                                     |       | 8,354 |   | 7,764 |   |
| Noninterest expense:                                         |       |                                               |       |                                      |       |   |   |   |   |
| Salaries and employee benefits                               |       | 5,927                                              |       | 9,039                                     |       | 24,831 |   | 30,737 |   |
| Occupancy expense                                            |       | 1,958                                              |       | 1,855                                     |       | 6,090 |   | 6,032 |   |
| Furniture and equipment                                      |       | 1,390                                              |       | 1,188                                     |       | 4,087 |   | 3,659 |   |
| Impairment of goodwill                                       |       | 250,748                                            |       | —                                    |       | 250,748 |   | — |   |
| Amortization of intangible assets                            |       | 1,877                                              |       | 2,143                                     |       | 5,631 |   | 6,533 |   |
| Other general and administrative                             |       | 3,982                                              |       | 3,980                                     |       | 12,902 |   | 19,548 |   |
| Total noninterest expense                                    |       | 265,882                                            |       | 18,205                                    |       | 304,289 |   | 66,509 |   |
| Income (loss) before income taxes                            |       | (274,083                                           | )          | 1,625                                     |       | (266,577 | ) | (2,320 | ) |
| Income tax expense (benefit)                                 |       | (8,254                                             | )          | 122                                       |       | (6,018 | ) | (2,438 | ) |
| Net income (loss)                                            |       | $                                                  | (265,829   | )                                         | $          | 1,503 |   | $ | (260,559 | ) | $ | 118 |   |
|                                                         |       |                                               |       |                                      |       |   |   |   |   |
| Earnings (loss) per share–basic:                        |       | $                                                  | (5.21      | )                                         | $          | 0.03 |   | $ | (5.11 | ) | $ | — |   |
| Earnings (loss) per share–diluted:                      |       | (5.21                                              | )          | 0.03                                      |       | (5.11 | ) | — |   |
|                                                         |       |                                               |       |                                      |       |   |   |   |   |
| Weighted average shares outstanding-basic                    |       | 51,067,439                                         |       | 52,699,409                                |       | 51,020,220 |   | 53,631,569 |   |
| Weighted average shares outstanding-diluted                  |       | 51,067,439                                         |       | 52,742,028                                |       | 51,020,220 |   | 53,771,405 |   |

 

See “Notes to Unaudited ConsolidatedFinancial Statements.”

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

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

 
| ** **                                     | ** ** | **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 income                                     |       | —                                                    |       | —                                              |       | —                    |       | —              |       | 118                                             |       | —                                               |       | 118        |       |
| Other  comprehensive loss                      |       | —                                                    |       | —                                              |       | —                    |       | —              |       | —                                          |       | (2,210                                               | )          | (2,210     | )          |
| Total  comprehensive loss                      |       | —                                                    |       | —                                              |       | —                    |       | —              |       | —                                          |       | —                                               |       | (2,092     | )          |
| Stock  compensation awards, net of forfeitures |       | (20,767                                                   | )          | —                                              |       | —                    |       | —              |       | —                                          |       | —                                               |       | —     |       |
| Stock award  compensation, net                 |       |                                                      |       | 2,121                                               |       | —                    |       | —              |       | —                                          |       | —                                               |       | 2,121      |       |
| Repurchase of  common stock                    |       | (3,352,885                                                | )          | —                                              |       | —                    |       | (26,893             | )          | —                                          |       | —                                               |       | (26,893    | )          |
| Deferred  compensation                         |       | 7,669                                                     |       | —                                              |       | 61                        |       | —              |       | —                                          |       | —                                               |       | 61         |       |
| Common shares  issued                          |       | —                                                    |       | 251                                                 |       | (285                      | )          | 34                  |       | —                                          |       | —                                               |       | —     |       |
| Balance,  September 30, 2007              |       | 53,870,812                                                |       | $                                                   | 616,925    |                      | $          | 551                 |       | $                                               | (96,433    | )                                                    | $          | 43,014     |       | $ | (1,401 | ) | $ | 562,656 |   |
|                                           |       |                                                      |       |                                                |       |                      |       |                |       |                                            |       |                                                 |       |       |       |
| 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 loss                                       |       | —                                                    |       | —                                              |       | —                    |       | —              |       | (260,559                                        | )          | —                                               |       | (260,559   | )          |
| Other comprehensive  loss                      |       | —                                                    |       | —                                              |       | —                    |       | —              |       | —                                          |       | (2,913                                               | )          | (2,913     | )          |
| Total  comprehensive loss                      |       | —                                                    |       | —                                              |       | —                    |       | —              |       | —                                          |       | —                                               |       | (263,472   | )          |
| Stock  compensation awards, net of forfeitures |       | 53,133                                                    |       | —                                              |       | —                    |       | —              |       | —                                          |       | —                                               |       | —     |       |
| Stock award  compensation, net                 |       |                                                      |       | (665                                                | )          | —                    |       | —              |       | —                                          |       | —                                               |       | (665       | )          |
| Repurchase of  common stock                    |       | (29,732                                                   | )          | —                                              |       | —                    |       | (159                | )          | —                                          |       | —                                               |       | (159       | )          |
| Deferred  compensation                         |       | 21,346                                                    |       | —                                              |       | 119                       |       | —              |       | —                                          |       | —                                               |       | 119        |       |
| Common shares  issued                          |       | —                                                    |       | 28                                                  |       | (28                       | )          | —              |       | —                                          |       | —                                               |       | —     |       |
| Balance,  September 30, 2008              |       | 52,661,738                                                |       | $                                                   | 617,038    |                      | $          | 664                 |       | $                                               | (103,085   | )                                                    | $          | (355,826   | )          | $ | (4,385 | ) | $ | 154,406 |   |

 

See “Notes to UnauditedCondensed Consolidated Financial Statements.”

 

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**GUARANTY BANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Cash Flows**

 
| ** **                                                                                | ** ** | **Nine  Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                | ** ** | **2008**                                  | ** ** | **2007** | ** ** |
| ** **                                                                                | ** ** | **(In  thousands)**                       | ** ** |
| Cash flows from operating activities:                                                     |       |                                      |       |   |   |
| Net income (loss)                                                                         |       | $                                         | (260,559   | ) | $ | 118 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                                      |       |   |   |
| Depreciation and amortization                                                             |       | 8,944                                     |       | 9,744 |   |
| Provision for loan losses                                                                 |       | 32,525                                    |       | 21,641 |   |
| Stock compensation                                                                        |       | (665                                      | )          | 2,123 |   |
| Gain on sale of securities                                                                |       | (138                                      | )          | — |   |
| Loss (gain) on sale of real estate owned  and assets                                      |       | (10                                       | )          | 163 |   |
| Other real estate owned valuation  adjustments                                            |       | 1,185                                     |       | 158 |   |
| Impairment of goodwill                                                                    |       | 250,748                                   |       | — |   |
| Write down of premises and equipment                                                      |       | 1,070                                     |       | — |   |
| Other                                                                                     |       | 183                                       |       | (224 | ) |
| Net change in:                                                                            |       |                                      |       |   |   |
| Accrued interest receivable and other  assets                                             |       | 1,508                                     |       | (4,991 | ) |
| Accrued interest payable and other  liabilities                                           |       | (12,203                                   | )          | (6,989 | ) |
| Net cash provided by operating activities                                                 |       | 22,588                                    |       | 21,743 |   |
| Cash flows from investing activities:                                                     |       |                                      |       |   |   |
| Activity in available-for-sale securities:                                                |       |                                      |       |   |   |
| Maturities, prepayments, and calls                                                        |       | 17,938                                    |       | 16,121 |   |
| Proceeds from sales                                                                       |       | 24,901                                    |       | — |   |
| Purchases                                                                                 |       | (25,592                                   | )          | (5,625 | ) |
| Activity in held-to-maturity securities and  bank stocks:                                 |       |                                      |       |   |   |
| Maturities, prepayments, and calls                                                        |       | 1,334                                     |       | 1,043 |   |
| Purchases                                                                                 |       | —                                    |       | (1,373 | ) |
| Loan originations and principal collections,  net                                         |       | (15,100                                   | )          | 67,517 |   |
| Proceeds from sale of loans held for sale                                                 |       | 492                                       |       | — |   |
| Proceeds from sales of foreclosed assets                                                  |       | 3,596                                     |       | 1,016 |   |
| Proceeds from sales of premises and  equipment                                            |       | 2,462                                     |       | 585 |   |
| Additions to premises and equipment                                                       |       | (843                                      | )          | (912 | ) |
| Net cash provided by investing activities                                                 |       | 9,188                                     |       | 78,372 |   |
| Cash flows from financing activities:                                                     |       |                                      |       |   |   |
| Net decrease in deposits                                                                  |       | (164,406                                  | )          | (44,173 | ) |
| Net change in short-term borrowings                                                       |       | (16,359                                   | )          | (14,941 | ) |
| Proceeds from issuance of debt                                                            |       | 125,169                                   |       | — |   |
| Repayment of long-term debt                                                               |       | (6,017                                    | )          | (1,629 | ) |
| Net change in federal funds purchased and  repurchase agreements                          |       | 18,987                                    |       | (7,559 | ) |
| Repurchase of common stock                                                                |       | (159                                      | )          | (26,893 | ) |
| Net cash used by financing activities                                                     |       | (42,785                                   | )          | (95,195 | ) |
| Net change in cash and cash equivalents                                                   |       | (11,009                                   | )          | 4,920 |   |
| Cash and cash equivalents, beginning of  period                                           |       | 52,356                                    |       | 49,620 |   |
| Cash and cash equivalents, end of period                                                  |       | $                                         | 41,347     |   | $ | 54,540 |   |

 

See“Notes to Unaudited Consolidated Financial Statements.”

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes to Unaudited Condensed ConsolidatedFinancial Statements**

 

** (1)****              ****Organization, Operations andBasis 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 ofSeptember 30, 2008, Guaranty Bancorp has a single bank subsidiary,Guaranty Bank 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, investmentmanagement accounts 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 financialstatements reflect all adjustments that are, in the opinion of management,necessary for a fair presentation of the financial position and results ofoperations for the periods presented. Certain information and note disclosuresnormally included in consolidated financial statements prepared in accordancewith generally accepted accounting principles in the United States of Americahave been condensed or omitted pursuant to the rules and regulations ofthe Securities and Exchange Commission. The interim operating results are notnecessarily indicative of operating results for the full year.

 

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

 

Thepreparation of the consolidated financial statements in conformity withgenerally accepted accounting principles in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities as of the dates of the consolidated balancesheets and income and expense for the periods presented. Actual results coulddiffer significantly from those estimates. Material estimates that areparticularly susceptible to significant changes include the assessment forimpairment of certain investment securities, the allowance for loan losses,valuation of other real estate owned, deferred tax assets and liabilities,carrying value of goodwill and other intangible assets and stock compensationexpense.  Assumptions and factors areevaluated on an annual basis or whenever events or changes in circumstanceindicate that the previous assumptions and factors have changed.  The result of the analysis could result inadjustments to the estimates.

 

***(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 and based upon management’s periodic reviewof the collectibility of the loans in light of historical experience, thenature and volume of the loan portfolio, adverse situations that may affectborrowers’ ability to repay, estimated value of 

 

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**GUARANTY BANCORPAND SUBSIDIARIES**

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

 

any underlying collateraland prevailing economic conditions.  Thisevaluation is inherently subjective as it requires estimates that aresusceptible to 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***

 

Goodwill represents theexcess of cost over the fair value of the net assets of businessesacquired.  Goodwill and intangible assetsacquired in a business combination and determined to have an indefinite usefullife are tested for impairment and not amortized. Intangible assets withdefinite useful lives are amortized over their estimated useful lives to theirestimated residual values.

 

Goodwill is our onlyintangible asset with an indefinite life. The annual impairment analysis of goodwill includes identification ofreporting units, the determination of the carrying value of each reportingunit, including the existing goodwill and intangible assets, and the estimationof the fair value of each reporting unit. We have identified one significant reporting unit – banking operations.The Company tests for impairment of goodwill annually as of October 31, orif an event occurs or circumstances change that would more likely than notreduce the fair value of the reporting unit. We determine the fair value of our reporting unit and compare it to itscarrying amount.  If the carrying amountof a reporting unit exceeds its fair value, we are required to perform a secondstep to the impairment test to measure the extent of the impairment.

 

During the third quarter2008, management determined that there was a significant adverse change in thebusiness climate that made it more likely than not that the fair value of thereporting unit had fallen below its carrying amount.   We determined the fair value of ourreporting unit and compared it to its carrying amount and determined that steptwo of the goodwill impairment test should be performed during the thirdquarter.  The second step of the goodwillimpairment test is performed to determine the amount of the goodwill impairment,if any.  Step two required us to computethe implied fair value of the reporting unit goodwill and compare it againstthe actual carrying amount of the reporting unit goodwill.  The implied fair value of the reporting unitgoodwill was determined in the same manner that goodwill recognized in abusiness combination is determined.  Thatis, the fair value of the reporting unit was allocated to all of the individualassets and liabilities of the reporting unit, including any unrecognizedidentifiable intangible assets, as if the reporting unit had been acquired in abusiness combination and the fair value of the reporting unit determined in thefirst step was the price paid to acquire the reporting unit.  The allocation process is only performed forpurposes of testing goodwill for impairment, as the other assets andliabilities are not written up or down, nor is any additional unrecognizedidentifiable asset recorded as part of this process.  After this step was performed, the Companywrote-off the goodwill asset with a charge to earnings.

 

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

 

***(e)      StockIncentive Plan***

 

TheCompany’s Amended and Restated 2005 Stock Incentive Plan (“Plan”) provides 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 September 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

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

share awards expire December 31,2012. The compensation cost of employee and director services received inexchange for stock awards is based on the grant-date fair value of the award(as determined by quoted market prices). Stock compensation expense, net reflects estimated forfeitures, adjustedas necessary based on actual forfeitures as well as expense forperformance-based shares based on management’s expectation of the probabilityof meeting the performance criteria.

 

***(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 Deferred Compensation ArrangementsWhere Amounts Earned Are Held in a Rabbi Trust and Invested*, thedeferred 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 September 30, 2008 and December 31,2007, the total shares outstanding included 78,298 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 2005. At September 30, 2008 and December 31, 2007, the Company didnot have any unrecognized tax benefits. The Company does not expect the totalamount of unrecognized tax benefits to significantly increase in the nexttwelve months. The Company recognizes interest related to income tax matters inother interest expense and penalties related to income tax matters in othernoninterest expense.  At September 30,2008 and December 31, 2007, the Company does not have any amounts accruedfor 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 toparticipants in its deferred compensation plan has been treated as outstandingshares of stock 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 servicecondition for the nine-month periods ended September 30, 2008 and2007.   Outstanding restricted shareswith an anti-dilutive impact, which are excluded from the earnings per commonshare computation, include performance-based shares and service-based sharesthat are not considered dilutive.  Forthe three and nine-months ended September 30, 2007, the anti-dilutiverestricted shares excluded from the earnings per common share computation are1,566,812 and 1,511,508, respectively. As a result of the net loss for the three and nine-months ended September 30,2008, 

 

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** **

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

all unvested restricted shares wereconsidered to be anti-dilutive and thus were excluded from earnings per sharecomputations for the three and nine months ended September 30, 2008

 

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

 
| ** **                                                                    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                  | ** ** | **2007**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                          |       |                                      |       |                                     |       |   |   |   |   |
| Average common shares outstanding                                             |       | 51,067,439                                |       | 52,699,409                               |       | 51,020,220 |   | 53,631,569 |   |
| Effect of dilutive unvested stock grants                                      |       | —                                    |       | 42,619                                   |       | — |   | 139,836 |   |
| Average shares outstanding for calculating  diluted earnings per common share |       | 51,067,439                                |       | 52,742,028                               |       | 51,020,220 |   | 53,771,405 |   |

 

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

 

***Adoption of New AccountingStandards:***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.

 

OnOctober 10, 2008, the FASB issued Staff Position FAS 157-3, *Determining the Fair Value of a Financial Asset When the Market forThat Asset Is Not Active*.   This FSP clarifies the application ofFASB Statement No. 157, *Fair ValueMeasurements,*in a market that is not active and provides an exampleto illustrate key considerations in determining the fair value of a financialasset when the market for that financial asset is not active. FSP FAS157-3 waseffective upon issuance on October 10, 2008, including prior periods forwhich financial statements have not been issued.  The adoption of this FSP did not have amaterial impact on the Company’s consolidated financial position, results ofoperations or cash flows.

 

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*

 

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** **

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

*Principlesto Loan Commitments*, stated that in measuringthe 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 that internally-developedintangible assets should not be recorded as part of the fair value of aderivative 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 amaterial impact on the Company’s consolidated financial position, results ofoperations 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 businesscombination at fair value.  In addition, the statement will result inpayments to third parties for consulting, legal, audit, and similar servicesassociated with an acquisition to be recognized as expenses when incurredrather than capitalized as part of the business combination.  SFAS 141R iseffective for fiscal years beginning on or after December 15, 2008.

 

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.  As the Company does not have anyderivatives or hedging activities, the Company does not expect the adoption ofSFAS 161 to have a material impact on the Company’s consolidated financialposition, 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.

 

InSeptember 2008, FASB Emerging Issues Task Force issued Issue No. 08-5,*Issuer’s Accounting forLiabilities Measured at Fair Value With a Third-Party Credit Enhancement*.   TheTask Force reached a consensus that an issuer of a liability with a third-partycredit enhancement that is inseparable from the liability must treat theliability and the credit enhancement as two units of accounting. Under theconsensus, the fair value measurement of the liability does not include the effectof the third-party credit enhancement; therefore, changes in the issuer’scredit standing without the support of the credit enhancement affect the fairvalue measurement of the issuer’s liability. Entities will need to providedisclosures about the existence of any third-party credit enhancements relatedto their liabilities that are within the scope of this Issue (i.e., that aremeasured at fair value). The consensus is effective beginning in the firstreporting period on or after December 15, 2008. Entities must apply thisIssue prospectively, with the effect of initial application included in thechange in fair value of the liability in the period of adoption. The Companydoes not expect the adoption to have a material impact on the Company’sconsolidated financial position, results of operations or cash flows.

 

OnSeptember 12, 2008, The FASB issued Staff Position FSP No. FAS 133-1and FIN 45-4, *Disclosures and CreditDerivatives and Certain Guarantees:  AnAmendment of FASB Statement No. 133 and FASB Interpretation No. 45;and Clarification of the Effective Date of FASB Statement No. 161*(Issued September 12, 2008).****This FSP is intended to improve disclosures about credit derivatives byrequiring more information 

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

about the potential adverse effects of changes incredit risk on the financial position, financial performance, and cash flows ofthe sellers of credit derivatives. It amends FAS 133, *Accounting for Derivative Instruments and HedgingActivities,* to require disclosures by sellers of credit derivatives,including credit derivatives embedded in hybrid instruments.  The FSP also amends FIN 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness to Others,*to require an additional disclosure about the current status of thepayment/performance risk of a guarantee. This amendment of FIN 45 reflects theBoard’s belief that instruments with similar risks should have similardisclosures.  This FSP amended paragraph13(a) of FIN 45 to require that the “current status (that is, as of thedate of the statement of financial position) of the payment performance risk ofthe guarantee” be disclosed. The provisions that amend FAS 133 and FIN 45 areeffective for reporting periods (annual or interim) ending after November 15,2008. The Company doesnot expect the adoption to have a material impact on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

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

 

*Theamortized cost and estimated fair value of debt securities are as follows:*

 
| ** **                                                  | ** ** | **Amortized  Cost**         | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
| ** **                                                  | ** ** | **(In thousands)**          | ** ** |
| ** **                                                  | ** ** | **September 30, 2008** | ** ** |
| Securities available for sale:                              |       |                        |       |                         |       |                          |       |           |       |
| U.S. government agencies and  government-sponsored entities |       | $                           | 2,493      |                         | $          | —                        |       | $              | (57        | ) | $ | 2,436 |   |
| State and municipal                                         |       | 67,553                      |       | 406                          |       | (6,946                        | )          | 61,013         |       |
| Mortgage-backed                                             |       | 32,519                      |       | 5                            |       | (485                          | )          | 32,039         |       |
| Marketable equity                                           |       | 1,215                       |       | —                       |       | —                        |       | 1,215          |       |
| Other securities                                            |       | 547                         |       | —                       |       | —                        |       | 547            |       |
| Securities available-for-sale                               |       | $                           | 104,327    |                         | $          | 411                           |       | $              | (7,488     | ) | $ | 97,250 |   |
| Securities held to maturity:                                |       |                        |       |                         |       |                          |       |           |       |
| Mortgage-backed                                             |       | $                           | 13,556     |                         | $          | 71                            |       | $              | (68        | ) | $ | 13,559 |   |

 
| ** **                                                  | ** ** | **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 |   |

 

All individual securities that have been in acontinuous unrealized loss position for 12 months or longer at September 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 thethird quarter 2008 for the largest non-rated municipal security in ourportfolio.  This particular bond had anincrease in unrealized loss at September 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 84% of the overall unrealized loss on state and municipalbonds.  Based on the third quarter 2008credit analysis of this particular bond, including a review of the issuer’scurrent financial statements, the related cash flows and interest payments,management concluded that the continuous unrealized loss position on thissecurity was a result of the level of market interest rates and not a result ofthe underlying issuer’s ability to repay.  Similarly, management concluded that the continuous unrealized lossposition on all other securities was also a result of the level of marketinterest rates and not a result of the underlying issuers’ ability torepay.  In addition, we have the abilityand intent to hold these securities until their fair value recovers to theircost, which may be maturity. Accordingly, we have not recognized any other-than-temporary impairmentin our consolidated statements of income.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

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

 

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

 
| ** **                       | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                             |       | **(In thousands)**           |       |
| Loans on real estate:            |       |                         |       |                        |       |
| Residential and commercial       |       | $                            | 693,800    |                        | $          | 713,478 |   |
| Construction                     |       | 248,883                      |       | 235,236                     |       |
| Equity lines of credit           |       | 49,205                       |       | 48,624                      |       |
| Commercial loans                 |       | 706,678                      |       | 679,717                     |       |
| Agricultural loans               |       | 23,989                       |       | 39,506                      |       |
| Lease financing                  |       | 472                          |       | 4,732                       |       |
| Installment loans to individuals |       | 38,777                       |       | 40,835                      |       |
| Overdrafts                       |       | 2,226                        |       | 1,329                       |       |
| SBA and other                    |       | 19,401                       |       | 21,592                      |       |
|                             |       | 1,783,431                    |       | 1,785,049                   |       |
| Less:                            |       |                         |       |                        |       |
| Allowance for loan losses        |       | (44,765                      | )          | (25,711                     | )          |
| Unearned discount                |       | (3,758                       | )          | (3,402                      | )          |
| Net Loans                        |       | $                            | 1,734,908  |                        | $          | 1,755,936 |   |

 

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

 
| ** **                                 | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|
| ** **                                 | ** ** | **2008**                             | ** ** | **2007**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | **(In thousands)**                   | ** ** |
| Balance, beginning of period               |       | $                                    | 26,506     |                                     | $          | 35,594 |   | $ | 25,711 |   | $ | 27,899 |   |
| Provision for loan losses                  |       | 30,750                               |       | 8,026                                    |       | 32,525 |   | 21,641 |   |
| Loans charged off                          |       | (12,779                              | )          | (20,079                                  | )          | (14,195 | ) | (27,244 | ) |
| Recoveries on loans previously charged-off |       | 288                                  |       | 438                                      |       | 724 |   | 1,683 |   |
| Balance, end of period                     |       | $                                    | 44,765     |                                     | $          | 23,979 |   | $ | 44,765 |   | $ | 23,979 |   |

 

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

 
|                                          |   | **September 30,  2008** |   | **December 31,  2007** |   |
|-----------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                          |   | **(In thousands)**           |   |
| Impaired loans with a valuation allowance     |   | $                            | 43,826 |                        | $      | 16,663 |   |
| Impaired loans without a valuation  allowance |   | 11,152                       |   | 6,665                       |   |
| Total impaired loans                          |   | $                            | 54,978 |                        | $      | 23,328 |   |
| Valuation allowance related to impaired loans |   | $                            | 12,825 |                        | $      | 4,283 |   |

* *
| ** **                                            | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                              | ** ** | **2007**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                            | ** ** | **(In thousands)**                    | ** ** |
| Average of individually impaired loans during  period |       | $                                     | 42,409     |                                       | $          | 38,093 |   | $ | 32,261 |   | $ | 37,846 |   |
| Interest income recognized during  impairment         |       | $                                     | 65         |                                       | $          | 353 |   | $ | 113 |   | $ | 1,079 |   |
| Cash-basis interest income recognized                 |       | $                                     | 65         |                                       | $          | 287 |   | $ | 113 |   | $ | 876 |   |

 

The gross interest income that would have beenrecorded in the year-to-date periods ended September 30, 2008 and September 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 $3,841,000 and $1,580,000, respectively.  At September 30, 2008 and December 31,2007, nonaccrual loans were $54,654,000 and $19,309,000, respectively.

 

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** **

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

**(4)           Goodwilland Other Intangible Assets**

 

Changes in the carrying amount of the Company’sgoodwill for the nine-months ended September 30, 2008 and the twelvemonths ended December 31, 2007 were as follows (amounts in thousands):

 
| Balance as of December 31, 2006  |   | $        | 392,958 |   |
|---------------------------------------|--------|----------|---------|--------|
| Impairment                            |   | (142,210 | )       |
| Balance as of December 31, 2007  |   | 250,748  |    |
| Impairment                            |   | (250,748 | )       |
| Balance as of September 30, 2008 |   | $        | —  |   |

 

Goodwill for the Company’s single reporting unit istested annually for impairment, unless an event occurs or circumstances changethat would more likely than not reduce the fair value of the reporting unit.

 

In accordance with paragraph 28 of SFASNo. 142 *Goodwill and Other Intangible Assets*,one of the criteria to determine if an impairment test is necessary prior tothe annual testing date is an adverse change in the business climate.  Due to the uncertaintyin the interest rate environment, continued softness in the real estate market,the recent market volatility of the financial services industry and theoverall impact of these factors on the Company, management determined that theCompany’s single reporting unit was operating under an adverse business climateas of September 30, 2008. Furthermore, management believed that the adverse business climate madeit more likely than not that the fair value of the reporting unit had fallenbelow its carrying value.  As a result,the Company completed its goodwill impairment test as of September 30,2008.  The method for estimating the value of the reporting unit included aweighted average of the discounted cash flows method and the guideline changeof control transactions method updated for recent economic conditions affectingthe Company’s markets and the overall financial services industry, including thecontinued softness in the real estate market. At the completion of the Company’s analysis it was determined that therewas goodwill impairment of $250,748,000.

 

On the October 31, 2007, testing date it wasdetermined that the carrying value of the reporting unit was greater than thefair value of the reporting unit. The method for estimating the value of thereporting unit included a weighted average of the discounted cash flows methodand the guideline change of control transactions method.  The amount of the 2007 goodwill impairmentwas $142,210,000.

 

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

 
|                           |   | **Useful life**    | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** |   |
|--------------------------------|--------|--------------------|------------|------------------------------|------------|-----------------------------|--------|
|                           |   | **(In thousands)** |       |
| Core deposit intangible assets |   | 7 - 15 years       |       | $                            | 62,975     |                        | $      | 62,975 |   |
| Accumulated amortization       |   |               |       | (35,673                      | )          | (30,042                     | )      |
| Net other intangible assets    |   |               |       | $                            | 27,302     |                        | $      | 32,933 |   |

 

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

 
| ** **           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **           | ** ** | **2008**                                  | ** ** | **2007**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **           | ** ** | **(In thousands)**                        | ** ** |
| Amortization expense |       | $                                         | 1,877      |                                     | $          | 2,143 |   | $ | 5,631 |   | $ | 6,533 |   |
|                      |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |

 

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

 

At September 30,2008, our outstanding borrowings were $166,508,000 as compared to $63,715,000at December 31, 2007. These borrowings at September 30, 2008consisted of term notes at the Federal Home Loan Bank (“FHLB”).  There was also a line of credit at the FHLBat September 30, 2008, but there was no balance outstanding on this lineof credit on such date.  At December 31,2007, borrowings consisted of a line of credit and 

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

term notes at the Federal Home Loan Bank of$15,160,000 and $47,356,000respectively, and a $1,199,000 Treasury Tax and Loan note balance.

 

The totalcommitment, including balances outstanding, for borrowings at the FHLB for theterm notes and line of credit at September 30, 2008 and December 31,2007 was $430.3 million and $316.2 million, respectively.  The interest rate on the line of creditvaries with the federal funds rate, and was 2.61% at September 30,2008.  The term notes have fixed interestrates that range from 2.52% to 6.22%. A blanket pledge and security agreement with the FHLB, which encompassescertain loans and securities, serves as collateral for these borrowings.

 

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, regulatory capital ratios that qualifythe Company as well-capitalized and a minimum total-risked based capitalamount.   As of November 7, 2008,the amount of the line of credit was decreased from $40 million to $20million.  As of September 30, 2008,the Company did not have any amount drawn on this line.  As of September 30, 2008, the Company isin compliance with all outstanding financial covenants, as amended.  The interest rate varies based on a spreadover the Prime rate, with a floor of 5.0%. The rate as of November 7, 2008 was 5.0%.  The credit agreement is secured by GuarantyBank stock.

 

**(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 of7.44% and 8.97% at September 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 September 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 toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

*The following table summarizesthe terms of each subordinated debenture issuance at September 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% |       | 5.44              | %          | 10/15/2008                |       |
| Guaranty Capital  Trust III |       | 6/30/2003        |       | 10,310     |       | 7/7/2033           |       | 7/7/2008        |       | Variable               |       | LIBOR+ 3.10% |       | 5.89              | %          | 10/07/2008                |       |
|                             |            |                  |            |            |            |                    |            |                 |            |                        |            |                   |            |                   |            |                           |            |  |

 

----

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

 

 **(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:*

 
|                         |   | **September 30,  2008** |    | **December 31,  2007** |   |
|------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                         |   | **(In thousands)**           |    |
|                         |   |                         |    |                        |   |
| Commitments to extend credit |   | $                            | 505,293 |                        | $      | 582,988 |   |
| Standby letters of credit    |   | 28,731                       |    | 33,573                      |   |
|                         |   |                         |    |                        |   |
| Totals                       |   | $                            | 534,024 |                        | $      | 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 toUnaudited Condensed Consolidated Financial 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 (level 1measurements) and the lowest priority to unobservable inputs (level 3measurements). The three levels of the fair value hierarchy under SFAS No. 157are described 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 withinthe fair value hierarchy is based on the lowest level of input that issignificant to 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 3 investments.  Subsequentto inception, management only changes level 3 inputs and assumptions whencorroborated by evidence such as transactions in similar instruments, completedor pending third-party transactions in the underlying investment or comparableentities, subsequent rounds of financing, recapitalizations and othertransactions across the capital structure, offerings in the equity or debtmarkets, and changes in financial ratios or cash flows.

 

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 toUnaudited Condensed Consolidated Financial 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  September 30, 2008** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **(In thousands)**                                                    | ** ** |
| Assets at September 30, 2008              |       |                                                                  |       |                                                    |       |                                              |       |                                       |       |
|  Investment securities,available for sale |       | $                                                                     | —     |                                                    | $          | 97,250                                            |       | $                                          | —     |   | $ | 97,250 |   |
|                                                |            |                                                                       |            |                                                         |            |                                                   |            |                                            |            |  |  |  |  |

 

Thefollowing represent assets and liabilities measured at fair value on anon-recurring basis as of September 30, 2008.

 
| ** **                        | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | ** **                                       | ** ** |
| Assets at September 30, 2008 |       |                                             |       |
| Impaired loans                    |       | $                                                | 43,826     |   |
|                                   |            |                                                  |            |  |

 

Impaired loans with a valuation allowance based uponfair value of the underlying collateral had a carrying amount of $43,826,000 atSeptember 30, 2008 as compared to $22,454,000 at June 30, 2008 and$16,663,000 at December 31, 2007. The valuation allowance on impairedloans was $12,825,000 at September 30, 2008 as compared to $6,295,000 at June 30,2008 and $4,283,000 at December 31, 2007.  During the three and nine month ended September 30, 2008,additional provision of loan losses of approximately $19 million and $21million was made for impaired loans.

 

* ***(9)          Stock-Based Compensation**

 

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 vestingoccurs. Prior to vesting of the stock awards with performance vesting conditions,each grantee shall have the rights of a stockholder with respect to voting ofthe granted stock. The recipient is not entitled to dividend rights withrespect to the shares of granted stock until initial vesting occurs, at whichtime the dividend rights will exist on vested and unvested shares of grantedstock, subject to termination of such rights under the terms of the IncentivePlan.

 

Other than the stock awards with service andperformance-based vesting conditions, no grants have been made under the IncentivePlan. The Incentive Plan authorizes grants of stock-based compensation awardsof up to 2,500,000 shares of Company common stock, subject to adjustmentsprovided by the Incentive Plan. As of September 30, 2008 and December 31, 2007, there were 1,566,812and 1,651,345 shares of unvested stock granted (net of forfeitures andvestings), with 701,511 and 754,644 shares available for grant under theIncentive Plan, respectively.

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial 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                                |       | 164,500    |       | 6.16                                            |       |
| Forfeited                              |       | (111,367   | )          | 10.22                                           |       |
| Vested                                 |       | (137,666   | )          | 10.82                                           |       |
| Outstanding at September 30, 2008 |       | 1,566,812  |       | $                                               | 9.73       |   |

 

The Company recognized $2,049,000 in expense forstock-based compensation for services rendered for the nine months ended September 30,2008, less a $2,714,000 cumulative adjustment related to performance-basedshares not expected to vest prior to their expiration date as well as acumulative forfeiture adjustment on remaining service-based restrictedawards.  The performance-based shareshave a performance criterion that must be met on or before the expiration dateof December 31, 2012 in order for the performance-based shares topartially vest.  Based on management’slatest analysis completed during the third quarter 2008, management determinedthat it was not probable that the Company would meet this specific performancecriterion on or before December 31, 2012 and thus recorded a cumulativeadjustment for the performance based shares in the third quarter of 2008.  Should this expectation change, additionalexpense could be recorded in future periods. The Company recognized $2,123,000 in stock-based compensation forservices rendered for the nine months ended September 30, 2007.  The total income tax effect recognized in theconsolidated income statement for share-based compensation arrangements was a$538,000 expense for the nine months ended September 30, 2008 compared toa $751,000 benefit for the same period in 2007.   At September 30, 2008, compensationcost of $4,957,000 related to nonvested awards not yet recognized is expectedto be recognized over a weighted-average period of 2.3 years.   During the first nine months of 2008, thevalue of the vested awards was approximately $740,000.

 

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

 

The Company’s capital ratiosexceed the highest regulatory capital requirement of “well-capitalized” at September 30,2008 and December 31, 2007 as follows:

 
| ** **                      | ** ** | **Ratio at   September 30,  2008** | ** ** | **Ratio at  December 31,  2007** | ** ** | **Minimum  Capital  Requirement** | ** ** | **Minimum  Requirement for  “Well  Capitalized”  Institution** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                      | ** ** | ** **                              | ** ** | ** **                            | ** ** | ** **                        | ** ** | ** **                                                               | ** ** |
| Total Risk-Based Capital Ratio  |       | 10.5                                    | %          | 10.9                                  | %          | 8.00                              | %          | 10.00                                                                    | %          |
| Tier 1 Risk-Based Capital Ratio |       | 9.2                                     | %          | 9.6                                   | %          | 4.00                              | %          | 6.00                                                                     | %          |
| Leverage Ratio                  |       | 7.8                                     | %          | 8.6                                   | %          | 4.00                              | %          | 5.00                                                                     | %          |

 

**(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 September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                  | ** ** | **2007**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**                        | ** ** |
| Net income (loss)                                                |       | $                                         | (265,829   | )                                        | $          | 1,503 |   | $ | (260,559 | ) | $ | 118 |   |
| Other comprehensive loss:                                        |       |                                      |       |                                     |       |   |   |   |   |
| Change in net unrealized gains (losses),  net                    |       | (2,406                                    | )          | (1,416                                   | )          | (4,560 | ) | (3,563 | ) |
| Less: Reclassification adjustments for gains  included in income |       | —                                    |       | —                                   |       | (138 | ) | — |   |
| Net unrealized holding losses                                    |       | (2,406                                    | )          | (1,416                                   | )          | (4,698 | ) | (3,563 | ) |
| Income tax benefit                                               |       | 915                                       |       | 537                                      |       | 1,785 |   | 1,353 |   |
| Other comprehensive loss                                         |       | (1,491                                    | )          | (879                                     | )          | (2,913 | ) | (2,210 | ) |
| Total comprehensive income (loss)                                |       | $                                         | (267,320   | )                                        | $          | 624 |   | $ | (263,472 | ) | $ | (2,092 | ) |

 

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**GUARANTYBANCORP AND SUBSIDIARIES**

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

 

** (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.

 

**(13)****          ****U.S. Treasury Capital PurchaseProgram**

 

OnOctober 3, 2008, Congress passed the Emergency Economic Stabilization Actof 2008 (EESA), which provides the U. S. Treasury with broad authority toimplement certain actions to help restore stability and liquidity to U.S. markets.  One of the provisions resulting from the Actis the Treasury Capital Purchase Program (CPP), which provides direct equityinvestment of perpetual preferred stock by the Treasury in qualified financialinstitutions.  The program is voluntaryand requires an institution to comply with a number of restrictions andprovisions, including limits on executive compensation, stock redemptions anddeclaration of dividends.  Applicationsmust be submitted by November 14, 2008 and are subject to approval by theTreasury.  The CPP provides for a minimuminvestment of 1 percent of Risk-Weighted Assets, with a maximum investmentequal to the lesser of 3 percent of Total Risk-Weighted Assets or $25 billion.  The perpetual preferred stock investment willhave a dividend rate of 5% per year until the fifth anniversary of the Treasuryinvestment, and a dividend of 9% thereafter. The CPP also requires the Treasury to receive warrants for common stockequal to 15% of the capital invested by the Treasury.  The Company has filed an application toparticipate in this program. Participation in the program is not automatic and is subject to approvalby the Treasury. The Company does not expect to have to seek stockholderapproval in connection with participation in the CPP.

 

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

 

This MD&A should be readtogether with our unaudited Condensed Consolidated Financial Statements andunaudited Statistical Information included elsewhere in this Report, Part II,Item 1A of this Report, and Items 1, 1A, 6, 7, 7A and 8 of our 2007 AnnualReport on Form 10-K.  Also, pleasesee the disclosure in the “Forward-Looking Statements and Factors that CouldAffect Future Results” section in this report for certain other factors thatcould cause actual results or future events to differ materially from thoseanticipated in the forward-looking statements included in this Report or fromhistorical performance.

 

**Overview**

 

Guaranty Bancorp is a financial holding company anda bank holding company with its 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 loans, Small Business Administration guaranteed loansand consumer loans. We derive our income primarily from interest received onreal estate-related loans, commercial loans and leases and consumer loans and,to a lesser extent, from fees on the referral of loans, interest on investmentsecurities and fees received in connection with servicing loan and depositaccounts. Our major operating expenses are the interest we pay on deposits andborrowings and general operating expenses. We rely primarily on locallygenerated deposits to provide us with funds for making loans.

 

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

 

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

 

In September and October 2008, the U.S.Government along with the U.S. Treasury Department, Federal Deposit InsuranceCorporation (FDIC) and the Federal Reserve Bank took actions to improveliquidity in the financial services industry. These actions included Congressional approval on October 3, 2008 ofthe $750 billion Emergency Stabilization Act of 2008 (EESA).  The first phase of implementation of EESAincluded a $250 million Treasury Capital Purchase Program.  The Company has applied for up tothree-percent of its total risk-weighted assets in capital, which will be inthe form of non-cumulative perpetual preferred stock of the institution with adividend rate of 5% until the fifth anniversary of the investment, and 9%thereafter.  If the Company’s applicationis approved and the investment is completed, Treasury will also receivewarrants for common stock of the Company equal to 15% of the capitalinvested.   Further, the FDIC temporarilyincreased deposit premium coverage from $100,000 per account to $250,000 peraccount through December 31, 2009. The FDIC also implemented a Temporary Liquidity Guarantee Program, whichprovides for full FDIC coverage for non-interest bearing deposit transactionaccounts, regardless of dollar amounts. Institutions are automatically enrolled in this program unless theychoose to opt-out.  The Company does notintend to opt-out of this program.   TheFDIC also implemented a Debt Guarantee Program where it will guarantee allnewly-issued senior unsecured debt up to prescribed limits by a participatingbank on or after October 14, 2008 through and including June 30,2009.  Again, institutions areautomatically enrolled in this program unless they choose to opt-out.  The Company does not intend to opt-out ofthis program, which will provide coverage of up to $31.2 million of seniorunsecured debt.   This limit wasdetermined based on borrowings outstanding as of September 30, 2008.

 

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**Earnings Summary**

 

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

 

**Table 1**

 
| ** **                                                    | ** ** | **Three Months Ended September 30,**        | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                         | ** ** | **2007**                                 | ** ** | **Change -  Favorable  (Unfavorable)** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change -  Favorable  (Unfavorable)** | ** ** |
| ** **                                                    | ** ** | **(In thousands, except share data and ratios)** | ** ** |
| **Results of Operations:**                                    | ** ** | ** **                                       | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                               |       | $                                                | 29,719     |                                     | $          | 41,084 |   | $ | (11,365 | ) | $ | 93,338 |   | $ | 125,147 |   | $ | (31,809 | ) |
| Interest expense                                              |       | 9,877                                            |       | 15,848                                   |       | 5,971 |   | 31,455 |   | 47,081 |   | 15,626 |   |
| Net interest income                                           |       | 19,842                                           |       | 25,236                                   |       | (5,394 | ) | 61,883 |   | 78,066 |   | (16,183 | ) |
| Provision for loan losses                                     |       | 30,750                                           |       | 8,026                                    |       | (22,724 | ) | 32,525 |   | 21,641 |   | (10,884 | ) |
| Net interest income after provision for  loan losses          |       | (10,908                                          | )          | 17,210                                   |       | (28,118 | ) | 29,358 |   | 56,425 |   | (27,067 | ) |
| Noninterest income                                            |       | 2,707                                            |       | 2,620                                    |       | 87 |   | 8,354 |   | 7,764 |   | 590 |   |
| Noninterest expense                                           |       | 265,882                                          |       | 18,205                                   |       | (247,677 | ) | 304,289 |   | 66,509 |   | (237,780 | ) |
| Income (loss) before income taxes                             |       | (274,083                                         | )          | 1,625                                    |       | (275,708 | ) | (266,577 | ) | (2,320 | ) | (264,257 | ) |
| Income tax expense (benefit)                                  |       | (8,254                                           | )          | 122                                      |       | 8,376 |   | (6,018 | ) | (2,438 | ) | 3,580 |   |
| Net income (loss)                                             |       | $                                                | (265,829   | )                                        | $          | 1,503 |   | $ | (267,332 | ) | $ | (260,559 | ) | $ | 118 |   | $ | (260,677 | ) |
| **Share Data:**                                               | ** ** | ** **                                       | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic earnings (loss) per share                               |       | $                                                | (5.21      | )                                        | $          | 0.03 |   | $ | (5.24 | ) | $ | (5.11 | ) | $ | — |   | $ | (5.11 | ) |
| Diluted earnings (loss) per share                             |       | $                                                | (5.21      | )                                        | $          | 0.03 |   | $ | (5.24 | ) | $ | (5.11 | ) | $ | — |   | $ | (5.11 | ) |
| Average shares outstanding                                    |       | 51,067,439                                       |       | 52,699,409                               |       | (1,631,970 | ) | 51,020,220 |   | 53,631,569 |   | (2,611,349 | ) |
| Diluted average shares outstanding                            |       | 51,067,439                                       |       | 52,742,028                               |       | (1,674,589 | ) | 51,020,220 |   | 53,771,405 |   | (2,751,185 | ) |
|                                                          |       |                                             |       |                                     |       |   |   |   |   |   |   |   |   |
| **Selected Ratios:**                                          | ** ** | ** **                                       | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total risk based capital                                      |       | 10.45                                            | %          | 10.35                                    | %          | 0.10 | % | 10.45 | % | 10.35 | % | 0.10 | % |
| Nonperforming assets to total assets                          |       | 2.74                                             | %          | 0.77                                     | %          | 1.97 | % | 2.74 | % | 0.77 | % | 1.97 | % |
| Allowance for loan losses to nonperforming  loans             |       | 81.42                                            | %          | 142.39                                   | %          | -60.97 | % | 81.42 | % | 142.39 | % | -60.97 | % |
| Allowance for loan losses to loans, net of  unearned discount |       | 2.52                                             | %          | 1.32                                     | %          | 1.20 | % | 2.52 | % | 1.32 | % | 1.20 | % |

 

The $265.8 million third quarter 2008 netloss is $267.3 million lower than the third quarter 2007 net income primarilydue to the $250.7 million goodwill impairment. The non-cash goodwill impairment charge is not tax deductible, thus, theentire amount of the impairment reduces net income.  Further, the goodwill impairment had no impacton liquidity, regulatory capital or cash flow. Additionally, the Company increased its provision for loan losses by$22.7 million in the third quarter 2008 as compared to the same quarter in2007.  This increase in the provision forloan losses is due to an increase in the amount of nonperforming loans, ahigher specific allocation related to such loans and the impact of charge-offsand the current economic climate on our historical loss and economic concernscomponents of our allowance for loan losses computation.   Net interest income decreased by $5.4million for the third quarter 2008 as compared to the same period in 2007mostly due to lower rates attributable to a 275 basis point decrease by theFederal Open Markets Committee (FOMC) of the Federal Reserve Board.  Without the $250.7 million goodwillimpairment, noninterest expense would have decreased by approximately $3.1million due to a reduction in salary and employee benefit expense.

 

On a year-to-date basis in 2008, the Companyhas a net loss of $260.6 million as compared to net income of $0.1 million forthe same period in 2007. The significant decline is primarily due to the $250.7million of goodwill impairment recorded in the third quarter of 2008.  Additionally, the Company increased itsprovision for loan losses by $10.9 million for the nine-months ended September 30,2008 as compared to the same period in 2007. This increase is primarily attributable to an increase in nonperformingassets and related charge-offs in the third quarter 2008.   Net interest income decreased by $16.2million for the year-to-date period ended September 30, 2008 as comparedto the same period in 2007 due mostly to lower rates.  Without the $250.7 million goodwillimpairment, 

 

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noninterest expense would have decreased by $13.0 million for thenine-months ended September 30, 2008 as compared to the same period in2007.   This decrease in noninterestexpense is mostly due to lower salaries and benefits expense in 2008 ascompared to 2007, and additional charges of $7.5 million recorded in the secondquarter 2007 in connection with the settlement of a lawsuit and restructuringcharges related to the merger of our subsidiary banks.

 

**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 our interest-bearingassets and liabilities.  Net interestmargin is net interest income expressed as a percentage of averageinterest-earning assets.

 

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

 

**Table 2**

 
| ** **                                | ** ** | **Quarter Ended**            | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)**   | ** ** |
|                                      |       |                         |       |   |   |   |   |   |   |   |   |
| Net interest income                       |       | $                            | 19,842     |   | $ | 20,391 |   | $ | 21,650 |   | $ | 24,184 |   | $ | 25,236 |   |
| Interest rate spread                      |       | 3.37                         | %          | 3.50 | % | 3.58 | % | 3.77 | % | 3.84 | % |
| Net interest margin                       |       | 4.02                         | %          | 4.20 | % | 4.42 | % | 4.75 | % | 4.82 | % |
| Net interest margin, fully tax equivalent |       | 4.11                         | %          | 4.28 | % | 4.53 | % | 4.88 | % | 4.97 | % |
|                                           |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thirdquarter 2008 net interest income of $19.8 million declined by $5.4 million fromthe third quarter 2007.  This decrease isa result of a $4.8 million unfavorable rate variance and a $0.6 millionunfavorable volume variance (see Table 5).

 

Theunfavorable rate variance from the prior year third quarter is primarilyattributable to lower yields on earnings assets, and in particular loans.   The yield on earning assets declined by 182basis points from 7.84% for the third quarter 2007 to 6.02% for the thirdquarter 2008.  During that same period,the Federal Open Markets Committee (FOMC) of the Federal Reserve Boarddecreased the target federal funds rate six times by a total of 275 basispoints.  Similarly, the prime ratedecreased by 275 basis points during this same period.  Approximately 64% of the Company’soutstanding loan balances are variable rate loans and are tied to indices suchas prime, LIBOR or federal funds.  As aresult of these rate declines, the average yield on loans for the Companydecreased by 204 basis points from 8.13% for the quarter ended September 30,2007 to 6.09% for the same period in 2008. Rates paid on interest-bearingliabilities also declined during this same period by 135 basis points, for anet decrease in the net interest spread of 47 basis points over this sameperiod.   Although the net interestspread decreased by 47 basis points, the overall net interest margin declinedby 80 basis points.  The cause for thelarger impact on net interest margin as compared to the interest rate spread isthat the benefit from noninterest bearing deposits had a smaller impact in 2008compared to 2007 due to the lower interest rate environment.

 

Theunfavorable volume variance is mostly attributable to a $113.5 million decreasein average earning assets for the third quarter 2008 as compared to the sameperiod in 2007.  The average balance ofloans declined from the same period in the prior year by $64.6 million.  Most of this decline is attributable tomanagement’s decision to reduce the number of construction loans.  The construction loan balance decreased by$42.6 million from September 30, 2007 to September 30, 2008.   Additionally, approximately $48 million ofcertain nonperforming and classified loans were sold in October 2007.

 

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

 

**Table 3**

 
| ** **                                | ** ** | **Nine Months Ended**        | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **September 30,  2008** | ** ** | **September 30,  2007** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)**   | ** ** |
|                                      |       |                         |       |   |   |
| Net interest income                       |       | $                            | 61,883     |   | $ | 78,066 |   |
| Interest rate spread                      |       | 3.48                         | %          | 4.00 | % |
| Net interest margin                       |       | 4.21                         | %          | 4.99 | % |
| Net interest margin, fully tax equivalent |       | 4.31                         | %          | 5.15 | % |
|                                           |            |                              |            |  |  |  |  |

 

For the nine-monthperiod ended September 30, 2008, net interest income decreased by $16.2million, or 20.7%, as compared to the same period in 2007.  This decrease is due to a $14.1 millionunfavorable rate variance and a $2.1 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 165 basis points to 6.35% for the nine monthsended September 30, 2008 from 8.00% 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 six times by a total of 275 basis points.  Similarly, the prime rate decreased by 275basis points during this same period. These rate decreases also impacted the Bank’s cost of funds.  The cost of interest-bearing liabilities was2.87% for the first nine months of 2008 as compared to 4.00% for the sameperiod in 2007.

 

The unfavorable volume variance is mostly a result of lower averageearning assets.  Average earning assetsdecreased by $128.9 million for the year-to-date 2008 as compared to the sameperiod in 2007.  Approximately $112.8million of this decrease was due to a decline in average construction loans, aswell as a sale 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.   

 

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The following tablepresents, for the periods indicated, average assets, liabilities andstockholders’ equity, as well as the net interest income from averageinterest-earning assets and the resultant annualized yields expressed inpercentages.  Nonaccrual loans areincluded in the calculation of average loans while accrued interest thereon isexcluded from the computation of yields earned.

 

**Table 4**

 
| ** **                                          | ** ** | **Quarter Ended September 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)            |       | $                                              | 1,807,325  |   | $ | 27,675 |   | 6.09 | % | $ | 1,871,939 |   | $ | 38,369 |   | 8.13 | % |
| Investment securities (1)                           |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 53,273                                         |       | 749 |   | 5.59 | % | 50,779 |   | 617 |   | 4.82 | % |
| Tax-exempt                                          |       | 69,272                                         |       | 846 |   | 4.86 | % | 106,566 |   | 1,343 |   | 5.00 | % |
| Bank Stocks (3)                                     |       | 32,714                                         |       | 441 |   | 5.37 | % | 32,181 |   | 490 |   | 6.05 | % |
| Other earning assets                                |       | 1,662                                          |       | 8 |   | 1.87 | % | 16,326 |   | 265 |   | 6.43 | % |
| Total interest-earning assets                       |       | 1,964,246                                      |       | 29,719 |   | 6.02 | % | 2,077,791 |   | 41,084 |   | 7.84 | % |
| **Non-earning assets:**                             |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                             |       | 35,770                                         |       |   |   |   |   | 44,189 |   |   |   |   |   |
| Other assets                                        |       | 351,897                                        |       |   |   |   |   | 504,933 |   |   |   |   |   |
|                                                |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Total assets**                                    |       | $                                              | 2,351,913  |   |   |   |   |   | $ | 2,626,913 |   |   |   |   |   |
|                                                |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**      |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                       |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand                             |       | $                                              | 148,536    |   | $ | 177 |   | 0.47 | % | $ | 151,656 |   | $ | 122 |   | 0.32 | % |
| Money market                                        |       | 517,001                                        |       | 2,343 |   | 1.80 | % | 653,997 |   | 6,272 |   | 3.81 | % |
| Savings                                             |       | 70,512                                         |       | 99 |   | 0.56 | % | 75,374 |   | 146 |   | 0.77 | % |
| Time certificates of deposit                        |       | 484,706                                        |       | 4,835 |   | 3.97 | % | 579,339 |   | 7,393 |   | 5.06 | % |
| Total interest-bearing deposits                     |       | 1,220,755                                      |       | 7,454 |   | 2.43 | % | 1,460,366 |   | 13,933 |   | 3.79 | % |
| Borrowings:                                         |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase agreements                               |       | 20,317                                         |       | 105 |   | 2.05 | % | 35,475 |   | 425 |   | 4.75 | % |
| Federal funds purchased                             |       | 9,981                                          |       | 55 |   | 2.21 | % | 258 |   | 3 |   | 5.39 | % |
| Subordinated debentures                             |       | 41,239                                         |       | 778 |   | 7.50 | % | 41,239 |   | 944 |   | 9.08 | % |
| Borrowings                                          |       | 192,088                                        |       | 1,485 |   | 3.08 | % | 35,326 |   | 543 |   | 6.09 | % |
| Total interest-bearing liabilities                  |       | 1,484,380                                      |       | 9,877 |   | 2.65 | % | 1,572,664 |   | 15,848 |   | 4.00 | % |
| Noninterest bearing liabilities:                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                     |       | 426,128                                        |       |   |   |   |   | 458,143 |   |   |   |   |   |
| Other liabilities                                   |       | 17,838                                         |       |   |   |   |   | 26,848 |   |   |   |   |   |
| Total liabilities                                   |       | 1,928,346                                      |       |   |   |   |   | 2,057,655 |   |   |   |   |   |
| Stockholders’ Equity                           |       | 423,567                                        |       |   |   |   |   | 569,258 |   |   |   |   |   |
| **Total liabilities and stockholders’ equity** |       | $                                              | 2,351,913  |   |   |   |   |   | $ | 2,626,913 |   |   |   |   |   |
|                                                |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                 |       |                                           |       | $ | 19,842 |   |   |   |   |   | $ | 25,236 |   |   |   |
| Net interest margin                                 |       |                                           |       |   |   | 4.02 | % |   |   |   |   | 4.82 | % |

 

----

(1) Yields on loans and securities havenot been adjusted to a tax-equivalent basis. Net interest margin on a fullytax-equivalent basis would have been 4.11% and 4.97% for the three months endedSeptember 30, 2008 and September 30, 2007, respectively.

 

(2) Net loan fees of $0.9 million and$1.2 million for the three months ended September 30, 2008 and 2007,respectively, are included in the yield computation.

 

(3) Includes Bankers Bank of the Weststock, Federal Agricultural Mortgage Corporation (Farmer Mac) stock, FederalReserve Bank stock and Federal Home Loan Bank stock.

 

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**Table 4 (Continued)**

 
| ** **                                          | ** ** | **Nine Months Ended September 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)            |       | $                                        | 1,787,912  |   | $ | 86,822 |   | 6.49 | % | $ | 1,888,013 |   | $ | 117,194 |   | 8.30 | % |
| Investment securities (1)                           |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 53,411                                   |       | 2,212 |   | 5.53 | % | 51,075 |   | 1,846 |   | 4.83 | % |
| Tax-exempt                                          |       | 73,094                                   |       | 2,616 |   | 4.78 | % | 109,347 |   | 4,091 |   | 5.00 | % |
| Bank Stocks (3)                                     |       | 32,590                                   |       | 1,346 |   | 5.52 | % | 32,011 |   | 1,424 |   | 5.95 | % |
| Other earning assets                                |       | 15,348                                   |       | 342 |   | 2.98 | % | 10,769 |   | 592 |   | 7.35 | % |
| Total interest-earning assets                       |       | 1,962,355                                |       | 93,338 |   | 6.35 | % | 2,091,215 |   | 125,147 |   | 8.00 | % |
| **Non-earning assets:**                             | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and due from banks                             |       | 38,020                                   |       |   |   |   |   | 50,907 |   |   |   |   |   |
| Other assets                                        |       | 359,209                                  |       |   |   |   |   | 514,207 |   |   |   |   |   |
|                                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| **Total assets**                                    |       | $                                        | 2,359,584  |   |   |   |   |   | $ | 2,656,329 |   |   |   |   |   |
|                                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**      | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing liabilities:                       |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand                             |       | $                                        | 152,537    |   | $ | 639 |   | 0.56 | % | $ | 156,837 |   | $ | 637 |   | 0.54 | % |
| Money market                                        |       | 546,317                                  |       | 8,615 |   | 2.11 | % | 636,547 |   | 18,034 |   | 3.79 | % |
| Savings                                             |       | 70,740                                   |       | 311 |   | 0.59 | % | 79,299 |   | 462 |   | 0.78 | % |
| Time certificates of deposit                        |       | 461,820                                  |       | 15,095 |   | 4.37 | % | 578,170 |   | 21,884 |   | 5.06 | % |
| Total interest-bearing deposits                     |       | 1,231,414                                |       | 24,660 |   | 2.67 | % | 1,450,853 |   | 41,017 |   | 3.78 | % |
| Borrowings:                                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase agreements                               |       | 18,851                                   |       | 323 |   | 2.29 | % | 32,312 |   | 1,157 |   | 4.79 | % |
| Federal funds purchased                             |       | 6,655                                    |       | 119 |   | 2.39 | % | 716 |   | 20 |   | 3.74 | % |
| Subordinated debentures                             |       | 41,239                                   |       | 2,422 |   | 7.85 | % | 41,239 |   | 2,814 |   | 9.12 | % |
| Borrowings                                          |       | 167,634                                  |       | 3,931 |   | 3.13 | % | 46,941 |   | 2,073 |   | 5.90 | % |
| Total interest-bearing liabilities                  |       | 1,465,793                                |       | 31,455 |   | 2.87 | % | 1,572,061 |   | 47,081 |   | 4.00 | % |
| Noninterest bearing liabilities:                    |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                     |       | 450,330                                  |       |   |   |   |   | 473,214 |   |   |   |   |   |
| Other liabilities                                   |       | 19,842                                   |       |   |   |   |   | 31,332 |   |   |   |   |   |
| Total liabilities                                   |       | 1,935,965                                |       |   |   |   |   | 2,076,607 |   |   |   |   |   |
| Stockholders’ Equity                           |       | 423,619                                  |       |   |   |   |   | 579,722 |   |   |   |   |   |
| **Total liabilities and stockholders’ equity** |       | $                                        | 2,359,584  |   |   |   |   |   | $ | 2,656,329 |   |   |   |   |   |
|                                                |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                 |       |                                     |       | $ | 61,883 |   |   |   |   |   | $ | 78,066 |   |   |   |
| Net interest margin                                 |       |                                     |       |   |   | 4.21 | % |   |   |   |   | 4.99 | % |

 

----

(1) Yields on loans and securities havenot been adjusted to a tax-equivalent basis. Net interest margin on a fullytax-equivalent basis would have been 4.31% and 5.15% for the nine months endedSeptember 30, 2008 and September 30, 2007, respectively.

 

(2) Net loan fees of $2.6 million and $4.3million for the nine months ended September 30, 2008 and 2007,respectively, are included in the yield computation.

 

(3) Includes Bankers Bank of the Weststock, Federal Agricultural Mortgage Corporation (Farmer Mac) stock, FederalReserve Bank stock and Federal Home Loan Bank stock.

 

28

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

 

**Table 5**

 
| ** **                        | ** ** | **Three Months Ended September 30, 2008  Compared to Three Months Ended  September 30, 2007** | ** ** | **Nine Months Ended September 30, 2008  Compared to Nine Months Ended  September 30, 2007** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **Net Change**                                                                                                                                  | ** ** | **Rate**                                                                                                                                           | ** ** | **Volume** | ** ** | **Net Change** | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| ** **                        | ** ** | **(In thousands)**                                                                                                                              | ** ** |
| **Interest  income:**             | ** ** | ** **                                                                                                                                           | ** ** | ** **                                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross Loans, net of unearned fees |       | $                                                                                                                                                    | (10,694    | )                                                                                                                                                  | $          | (9,410 | ) | $ | (1,284 | ) | $ | (30,372 | ) | $ | (24,423 | ) | $ | (5,949 | ) |
| Investment Securities             |       |                                                                                                                                                 |       |                                                                                                                                               |       |   |   |   |   |   |   |   |   |
| Taxable                           |       | 132                                                                                                                                                  |       | 101                                                                                                                                                |       | 31 |   | 366 |   | 279 |   | 87 |   |
| Tax-exempt                        |       | (497                                                                                                                                                 | )          | (40                                                                                                                                                | )          | (457 | ) | (1,475 | ) | (171 | ) | (1,304 | ) |
| Bank Stocks                       |       | (49                                                                                                                                                  | )          | (57                                                                                                                                                | )          | 8 |   | (78 | ) | (104 | ) | 26 |   |
| Other earning assets              |       | (257                                                                                                                                                 | )          | (113                                                                                                                                               | )          | (144 | ) | (250 | ) | (880 | ) | 630 |   |
| Total interest income             |       | (11,365                                                                                                                                              | )          | (9,519                                                                                                                                             | )          | (1,846 | ) | (31,809 | ) | (25,299 | ) | (6,510 | ) |
|                              |       |                                                                                                                                                 |       |                                                                                                                                               |       |   |   |   |   |   |   |   |   |
| **Interest  expense:**            |       |                                                                                                                                                 |       |                                                                                                                                               |       |   |   |   |   |   |   |   |   |
| Deposits:                         |       |                                                                                                                                                 |       |                                                                                                                                               |       |   |   |   |   |   |   |   |   |
| Interest-bearing demand           |       | 55                                                                                                                                                   |       | 57                                                                                                                                                 |       | (2 | ) | 2 |   | 16 |   | (14 | ) |
| Money market                      |       | (3,929                                                                                                                                               | )          | (2,812                                                                                                                                             | )          | (1,117 | ) | (9,419 | ) | (7,137 | ) | (2,282 | ) |
| Savings                           |       | (47                                                                                                                                                  | )          | (38                                                                                                                                                | )          | (9 | ) | (151 | ) | (105 | ) | (46 | ) |
| Time certificates of deposit      |       | (2,558                                                                                                                                               | )          | (1,463                                                                                                                                             | )          | (1,095 | ) | (6,789 | ) | (2,743 | ) | (4,046 | ) |
| Repurchase agreements             |       | (320                                                                                                                                                 | )          | (183                                                                                                                                               | )          | (137 | ) | (834 | ) | (464 | ) | (370 | ) |
| Federal funds purchased           |       | 52                                                                                                                                                   |       | (1                                                                                                                                                 | )          | 53 |   | 99 |   | (4 | ) | 103 |   |
| Subordinated debentures           |       | (166                                                                                                                                                 | )          | (166                                                                                                                                               | )          | 0 |   | (392 | ) | (392 | ) | 0 |   |
| Borrowings                        |       | 942                                                                                                                                                  |       | (119                                                                                                                                               | )          | 1,061 |   | 1,858 |   | (414 | ) | 2,272 |   |
| Total interest expense            |       | (5,971                                                                                                                                               | )          | (4,725                                                                                                                                             | )          | (1,246 | ) | (15,626 | ) | (11,243 | ) | (4,383 | ) |
|                              |       |                                                                                                                                                 |       |                                                                                                                                               |       |   |   |   |   |   |   |   |   |
| **Net  interest income**          |       | $                                                                                                                                                    | (5,394     | )                                                                                                                                                  | $          | (4,794 | ) | $ | (600 | ) | $ | (16,183 | ) | $ | (14,056 | ) | $ | (2,127 | ) |

 

**Provision for Loan Losses**

 

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

 

In the third quarter 2008, the Company recorded aprovision for loan losses of $30.8 million, compared to $8.0 million in thethird quarter 2007.  The Companyhas determined that the provision for loan losses made during the third quarterof $30.8 million is necessary to have an allowance for loan losses (2.52% oftotal loans as of September 30, 2008) at a level necessary for theprobable incurred losses inherent in the loan portfolio as of September 30,2008.  Specifically, the increase inimpaired loans (impaired loanswere $55.0 million at September 30, 2008 as compared to $17.4 million at September 30,2007) and a corresponding higher specific allocationrelated to such loans accounted for approximately $19.0 million of provisionfor loan losses made during the quarter. Of this $19 million, $12.5 million was charged off during the thirdquarter of 2008. In addition to the $19 million, the impact of the level ofcharge-offs and the current economic climate on our historical loss andeconomic concerns components of our allowance for loan losses resulted in anadditional provision for loan losses of $12.8 million. The provision for loanlosses was driven primarily from an increase in nonperforming assets andrelated charge-offs, primarily due to weakness in the performance ofresidential construction, land and land development loans. We believe thatcontinued economic weakness will likely result in elevated credit costs.

 

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

 

Netcharge offs in the third quarter 2008 were $12.5 million, as compared to $19.6million for the same quarter in 2007. Charge-offs were higher in the third quarter 2007 due to the sale of aportfolio of certain impaired and classified loans in bulk sale, rather thancontinuing to work out each credit individually.

 

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

 

For the nine months ended September 30,2008, the Company recorded a provision for loan loss of $32.5 million ascompared to $21.6 million in the same period in 2007.  The increase in nonperforming loans and acorresponding higher specific allocation related to such loans, the impact ofcharge-offs and the current economic climate on our historical loss andeconomic concerns components of our allowance were the primary causes for theincrease in the provision for loan losses.

 

**Noninterest Income**

 

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

 

**Table 6**

 
| ** **                      | ** ** | **Quarter Ended**       | ** ** |
|---------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** |
| ** **                      | ** ** | **(In thousands)**      | ** ** |
| Noninterest income:             |       |                         |       |   |   |   |   |   |   |   |   |
| Customer service and other fees |       | $                            | 2,521      |   | $ | 2,528 |   | $ | 2,276 |   | $ | 2,267 |   | $ | 2,390 |   |
| Gain on sale of securities      |       | —                       |       | — |   | 138 |   | — |   | — |   |
| Other                           |       | 186                          |       | 604 |   | 101 |   | 665 |   | 230 |   |
| Total noninterest income        |       | $                            | 2,707      |   | $ | 3,132 |   | $ | 2,515 |   | $ | 2,932 |   | $ | 2,620 |   |

 

Noninterest income for thirdquarter 2008 decreased by $0.4 million from the second quarter 2008 andincreased by $0.1 million from the third quarter 2007.  The $0.4 million decrease from the secondquarter 2008 is mostly attributable to a decrease resulting from a miscellaneousrecovery reported as other noninterest income in the second quarter 2008.

 

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

 

**Table 7**

 
| ** **                      | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **September 30,  2008**    | ** ** | **September 30,  2007** | ** ** |
| ** **                      | ** ** | **(In thousands)**         | ** ** |
| Noninterest income:             |       |                            |       |   |   |
| Customer service and other fees |       | $                               | 7,325      |   | $ | 7,242 |   |
| Gain on sale of securities      |       | 138                             |       | — |   |
| Other                           |       | 891                             |       | 522 |   |
| Total noninterest income        |       | $                               | 8,354      |   | $ | 7,764 |   |

 

Noninterestincome for the first nine months of 2008 increased by $0.6 million from thesame period in 2007.  The increase innoninterest income between the year-to-date period in 2008 and the same periodin 2007 is mostly attributable to a gain on sale of securities in 2008 as wellas a miscellaneous recovery recorded in the second quarter 2008.  During 2008, a $0.1 million gain on sale ofsecurities was realized as management sold approximately $15 million ofavailable-for-sale securities and purchased approximately $15 million of new available-for-salesecurities in order to improve the overall yield on securities.

 

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**Noninterest Expense**

 

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

 

**Table 8**

 
| ** **                        | ** ** | **Quarter Ended**       | ** ** |
|-----------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** |
| ** **                        | ** ** | **(In thousands)**      | ** ** |
| Noninterest expense:              |       |                         |       |   |   |   |   |   |   |   |   |
| Salaries and employee benefits    |       | $                            | 5,927      |   | $ | 9,184 |   | $ | 9,720 |   | $ | 8,442 |   | $ | 9,039 |   |
| Occupancy expense                 |       | 1,958                        |       | 2,131 |   | 2,001 |   | 1,781 |   | 1,855 |   |
| Furniture and equipment           |       | 1,390                        |       | 1,383 |   | 1,314 |   | 1,205 |   | 1,188 |   |
| Impairment of goodwill            |       | 250,748                      |       | — |   | — |   | 142,210 |   | — |   |
| Amortization of intangible assets |       | 1,877                        |       | 1,877 |   | 1,877 |   | 2,132 |   | 2,143 |   |
| Other general and administrative  |       | 3,982                        |       | 5,122 |   | 3,798 |   | 4,278 |   | 3,980 |   |
| Total noninterest expense         |       | $                            | 265,882    |   | $ | 19,697 |   | $ | 18,710 |   | $ | 160,048 |   | $ | 18,205 |   |

 

Noninterestexpense for the third quarter 2008 increased by $246.2 million from the secondquarter 2008 and by $247.7 million from the third quarter 2007.  Excluding the $250.7 million goodwillimpairment charge in the third quarter 2008, noninterest expense would havedecreased by $4.6 million from the second quarter of 2008, and would havedecreased by $3.1 million from the third quarter 2007.

 

As previously disclosed, we began a majorinitiative in the second quarter 2008 to align our expenses with the currentsize of our business, pursuant to which we expect to ultimately reduce ourannual noninterest expenses by up to $6.0 million once this initiative is fullyimplemented over the next one to two quarters. Part of this effort included the closure of two bank branchlocations during the second half of 2008. These closures occurred in August and October 2008, and theassociated savings with these closures was not yet recognized in the thirdquarter.  During the third quarter 2008,we also implemented workforce reductions, which resulted in a $0.7 millionseverance charge for the quarter.  Weexpect to realize approximately $1.2 million per quarter in lower compensationcosts going forward as a result of these reductions.  Further, we expect to reduce our overallinformation systems costs by approximately $0.3 to $0.4 million per quarter,but will not recognize any savings associated with this particular effort untilat least first quarter 2009.

 

Salary andemployee benefits expense decreased by $3.1 million in the third quarter 2008as compared to the same quarter in 2007. The $3.1 million decline in salaries and employee benefits expense fromthe third quarter 2007 primarily relates to a $2.7 million reduction inrestricted stock expense, mostly due to performance-based shares that are nolonger expected to meet their performance target prior to the expiration dateof December 31, 2012.  This $2.7million reduction was partially offset by $0.7 million of severance cost duringthe third quarter 2008.  The remainingdecrease is mostly due to an overall decrease in base salary expense as aresult of fewer employees in the third quarter 2008 as compared to the samequarter in 2007.   Salaries and employeebenefits expense decreased by $3.3 million in the third quarter 2008 ascompared to the second quarter 2008, primarily due to a $2.7 million reductionin restricted stock expense as well as an overall decline in salary expense,net of a $0.7 million severance charge recorded in the third quarter 2008 as aresult of workforce reductions during such quarter. The remaining decrease ismostly due to an overall decrease in the base salary expense as a result offewer employees in the third quarter 2008 as compared to the second quarter2008.

 

Amortizationof intangible asset expense is $1.9 million in the third quarter 2008 ascompared to $2.1 million in the third quarter 2008, a decrease of 12.4%.   This decrease is mostly attributable to theuse of accelerated methods to amortize the core deposit intangible asset.

 

Othergeneral and administrative expense remained relatively flat in the thirdquarter 2008 as compared to the third quarter 2007, and decreased by $1.1million from the second quarter 2008. The $1.1 million decrease in other general and administrative expensefrom the second quarter 2008 is primarily due to a $1.3 million loss recordedin the second quarter 2008 related to the decision to close two branchlocations.   On October 7, 2008, theFDIC proposed new rules that would increase the FDIC insurance premiums by7 basis points, which would effectively double the amount of FDIC insurancepremiums the Company pays.   If enacted,this proposed regulation will increase the Company’s 2009 FDIC insurancepremiums by approximately $1.0 million. Additionally, the FDIC’s Temporary Liquidity Program implementsadditional insurance assessments of 10 basis points on noninterest bearingtransaction accounts in excess of the insured amounts, which could add anadditional insurance cost of up to $0.3 million during 2009.

 

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

 

**Table 9**

 
| ** **                        | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **September 30,  2008**    | ** ** | **September 30,  2007** | ** ** |
| ** **                        | ** ** | **(In thousands)**         | ** ** |
| Noninterest expense:              |       |                            |       |   |   |
| Salaries and employee benefits    |       | $                               | 24,831     |   | $ | 30,737 |   |
| Occupancy expense                 |       | 6,090                           |       | 6,032 |   |
| Furniture and equipment           |       | 4,087                           |       | 3,659 |   |
| Impairment of goodwill            |       | 250,748                         |       | — |   |
| Amortization of intangible assets |       | 5,631                           |       | 6,533 |   |
| Other general and administrative  |       | 12,902                          |       | 19,548 |   |
| Total noninterest expense         |       | $                               | 304,289    |   | $ | 66,509 |   |

 

Noninterest expense for the nine months ended September 30, 2008increased by $237.8 million over the same period in 2007.  Excluding the $250.7 million goodwillimpairment charge, noninterest expense for the nine months ended September 30,2008 would have decreased by $13.0 million, or 19.5%, over the same period in2007. This decrease in the year-to-date noninterest expense is mostly due to a$5.9 million decrease in salaries and employee benefits and a $6.6 milliondecrease in other general and administrative expense.

 

The $5.9 million decline in salaries and employee benefits expense isdue to a $2.7 million reduction in restricted stock expense primarily due tothe reasons discussed above, a $1.0 million decrease to accruals for bonus andincentives and a $2.8 million decrease in base salaries and benefits.  This decrease in base salary and benefitexpense is due primarily to a decrease of 89 full-time equivalent employeesfrom September 2007 to September 2008. These decreases were partiallyoffset by a $0.7 million increase related to severance costs.

 

 The $6.6 million decline inother general and administrative expense is mostly attributable to the $6.5million charge for a settlement of a lawsuit in the second quarter 2007, a $1.0million restructuring charge taken for the merger of the Company’s subsidiarybanks in 2007 and a $1.1 million decrease in professional fees mostly due toexternal and internal audit related expenses. These items were partially offset by a $1.3 million charge in the secondquarter 2008 related to the decision to close two branches as well as a $1.0million increase in expenses associated with other real estate owned.

 

**Income Tax Expense (Benefit)**

 

The effective tax benefitwas 3.0% for the three months ending September 30, 2008 as compared to aneffective tax rate of 7.5% for the same period in 2007.  The primary differences between the expectedrate and the effective tax rate for the third quarter 2008 are the charge forgoodwill impairment, which is not tax deductible as well as tax-exemptincome.  Without the goodwill impairmentcharge, the effective tax rate for the third quarter 2008 would have beenapproximately 35.4%.  The lower tax ratein 2007 was due to the relatively high level of tax-exempt income compared tonet income.

 

For the year-to-dateperiod ended September 30, 2008, the effective tax rate was 2.3%.  The primary differences between the expectedrate and the effective tax rate for 2008 are the charge for goodwillimpairment, which is not tax deductible as well as tax-exempt income.  The primary difference between the expectedtax rate and the effective tax rates for 2007 was tax-exempt income. The largertax benefit rate in 2007 was due to the relatively high level of tax-exemptincome compared to net income.

 

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**BALANCE SHEET ANALYSIS**

 

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

 

**Table 10**

 
| ** **     | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** |
|----------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **     | ** ** | **(In thousands)**      | ** ** |
| Total assets   |       | $                            | 2,052,944  |                    | $          | 2,358,559                |       | $                           | 2,345,079  |                         | $          | 2,371,664 |   | $ | 2,617,153 |   |
| Earning assets |       | 1,927,128                    |       | 1,959,434               |       | 1,932,526                |       | 1,949,211                   |       | 2,041,263                    |       |
| Deposits       |       | 1,635,101                    |       | 1,707,031               |       | 1,710,082                |       | 1,799,507                   |       | 1,915,932                    |       |
|                |            |                              |            |                         |            |                          |            |                             |            |                              |            |  |  |  |  |  |

 

At September 30, 2008, the Company had totalassets of $2.1 billion, or $318.7 million less than total assets at December 31,2007, and $564.2 million less than total assets at September 30,2007.  The decline in assets from December 31,2007 is mostly due to the $250.7 million impairment of goodwill describedabove.   In addition, primarily as aresult of economic conditions, the Bank’s allowance for loan loss has increasedby approximately $19.1 million as of September 30, 2008 relative to December 31,2007.  During this same period, loans,net of unearned discount were down approximately 1%.  The Bank also reduced its asset balances ininvestments for liquidity purposes. Sales and maturities of securities during 2008 resulted in a $22.7million decrease in investments.  Cashbalances accounted for approximately $11.0 million of the overall decline intotal assets and amortization of the Bank’s core deposit intangible assetsaccounts for another $5.6 million of the decrease.

 

The $564.2 million decrease in assets from September 30,2007, is primarily due to $142.2 and $250.7 goodwill impairments recorded inthe fourth quarter 2007 and third quarter 2008, respectively.  In addition, loans, net of unearned discountdecreased by $39.5 million from September 30, 2007 in part due to adecision to reduce the Company’s construction loan balances.  As reflected in Table 11 below, constructionloans decreased by $41.7 million in the third quarter 2008 as compared to thethird quarter 2007.  The increase inconstruction loans at September 30, 2008 as compared to December 31,2007 is due to draws on existing income-producing commercial constructionprojects.  There was also a reduction inloans held for sale of $31.5 million, as most of these loans held for sale weresold in the 4th quarter 2007. The allowance for loan losses increased by $20.8 million over the sameperiod.  Investments have decreased by$43.5 million for liquidity purposes and cash holdings have declined by $13.2million to reduce nonearning assets. The continued depreciation andamortization of the Company’s fixed assets and core deposit intangible assetsaccount for the majority of the remaining decrease in assets.

 

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

 

**Table 11**

 
| ** **                                      | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **(In thousands)**      | ** ** |
| Real estate – Residential and Commercial   |       | $                            | 693,800    |                    | $          | 717,533                  |       | $                           | 723,246    |                         | $          | 713,478 |   | $ | 724,528 |   |
| Real estate - Construction                      |       | 248,883                      |       | 232,522                 |       | 238,926                  |       | 235,236                     |       | 290,591                      |       |
| Equity lines of credit                          |       | 49,205                       |       | 46,778                  |       | 47,659                   |       | 48,624                      |       | 49,747                       |       |
| Commercial                                      |       | 706,678                      |       | 705,309                 |       | 657,423                  |       | 679,717                     |       | 643,702                      |       |
| Agricultural                                    |       | 23,989                       |       | 29,442                  |       | 35,003                   |       | 39,506                      |       | 43,142                       |       |
| Consumer                                        |       | 38,777                       |       | 39,611                  |       | 38,151                   |       | 40,835                      |       | 40,868                       |       |
| Leases receivable and other                     |       | 22,099                       |       | 21,628                  |       | 22,205                   |       | 27,653                      |       | 30,340                       |       |
| Total gross loans                               |       | 1,783,431                    |       | 1,792,823               |       | 1,762,613                |       | 1,785,049                   |       | 1,822,918                    |       |
| Less: allowance for loan losses                 |       | (44,765                      | )          | (26,506                 | )          | (26,048                  | )          | (25,711                     | )          | (23,979                      | )          |
| Unearned discount                               |       | (3,758                       | )          | (3,668                  | )          | (3,316                   | )          | (3,402                      | )          | (3,730                       | )          |
| Loans, net of unearned discount                 |       | $                            | 1,734,908  |                    | $          | 1,762,649                |       | $                           | 1,733,249  |                         | $          | 1,755,936 |   | $ | 1,795,209 |   |
|                                            |       |                         |       |                    |       |                     |       |                        |       |                         |       |
| Loans held for sale at lower of cost or  market |       | $                            | —     |                    | $          | —                   |       | $                           | —     |                         | $          | 492 |   | $ | 31,459 |   |

 

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**Nonperforming Assets**

 

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

 

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

 

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

 

**Table 12**

 
|                                                                                  |   | **Quarter Ended**       |       |
|---------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                  |   | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** |   |
|                                                                                  |   | **(In thousands)**      |       |
|                                                                                  |   |                         |       |   |   |   |   |   |   |   |   |
| Nonaccrual loans and leases, not restructured                                         |   | $                            | 54,654     |   | $ | 29,742 |   | $ | 20,798 |   | $ | 19,309 |   | $ | 16,831 |   |
| Accruing loans past due 90 days or more                                               |   | 324                          |       | 98 |   | 1 |   | 527 |   | 9 |   |
| Other real estate owned                                                               |   | 1,199                        |       | 1,910 |   | 1,715 |   | 3,517 |   | 3,401 |   |
| Total nonperforming assets                                                            |   | $                            | 56,177     |   | $ | 31,750 |   | $ | 22,514 |   | $ | 23,353 |   | $ | 20,241 |   |
|                                                                                  |   |                         |       |   |   |   |   |   |   |   |   |
| Nonperforming loans                                                                   |   | $                            | 54,978     |   | $ | 29,840 |   | $ | 20,799 |   | $ | 19,836 |   | $ | 16,840 |   |
| Other impaired loans                                                                  |   | —                       |       | — |   | — |   | 3,492 |   | 510 |   |
| Total impaired loans                                                                  |   | $                            | 54,978     |   | $ | 29,840 |   | $ | 20,799 |   | $ | 23,328 |   | $ | 17,350 |   |
| Allocated allowance for loan losses                                                   |   | (12,825                      | )          | (6,295 | ) | (5,368 | ) | (4,283 | ) | (4,028 | ) |
| Net investment in impaired loans                                                      |   | $                            | 42,153     |   | $ | 23,545 |   | $ | 15,431 |   | $ | 19,045 |   | $ | 13,322 |   |
| Loans past due 30-89 days                                                             |   | $                            | 20,660     |   | $ | 20,169 |   | $ | 42,682 |   | $ | 28,407 |   | $ | 29,584 |   |
| Loans charged-off                                                                     |   | $                            | 12,779     |   | $ | 673 |   | $ | 743 |   | $ | 1,729 |   | $ | 20,079 |   |
| Recoveries                                                                            |   | (288                         | )          | (231 | ) | (205 | ) | (436 | ) | (438 | ) |
| Net charge-offs                                                                       |   | $                            | 12,491     |   | $ | 442 |   | $ | 538 |   | $ | 1,293 |   | $ | 19,641 |   |
| Provision for loan losses                                                             |   | $                            | 30,750     |   | $ | 900 |   | $ | 875 |   | $ | 3,025 |   | $ | 8,026 |   |
| Allowance for loan losses                                                             |   | $                            | 44,765     |   | $ | 26,506 |   | $ | 26,048 |   | $ | 25,711 |   | $ | 23,979 |   |
|                                                                                  |   |                         |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to loans, net of unearned  discount                         |   | 2.52                         | %          | 1.48 | % | 1.48 | % | 1.44 | % | 1.32 | % |
| Allowance for loan losses to nonaccrual loans                                         |   | 81.91                        | %          | 89.12 | % | 125.24 | % | 133.16 | % | 142.47 | % |
| Allowance for loan losses to nonperforming  assets                                    |   | 79.69                        | %          | 83.48 | % | 115.70 | % | 110.10 | % | 118.47 | % |
| Allowance for loan losses to nonperforming  loans                                     |   | 81.42                        | %          | 88.83 | % | 125.24 | % | 129.62 | % | 142.39 | % |
| Nonperforming assets to loans, net of unearned  discount, and other real estate owned |   | 3.15                         | %          | 1.77 | % | 1.28 | % | 1.31 | % | 1.11 | % |
| Annualized net charge-offs to average loans                                           |   | 2.75                         | %          | 0.10 | % | 0.12 | % | 0.28 | % | 4.16 | % |
| Nonaccrual loans to loans, net of unearned  discount                                  |   | 3.07                         | %          | 1.66 | % | 1.18 | % | 1.08 | % | 0.93 | % |
| Loans 30-89 days past due to loans, net of  unearned discount                         |   | 1.16                         | %          | 1.13 | % | 2.43 | % | 1.59 | % | 1.63 | % |

 

Nonperforming assets at September 30,2008, increased by $35.9 million from September 30, 2007, and increased by$24.4 million, or 76.9%, from June 30, 2008.  At September 30, 2007, nonperformingassets had decreased by $16.8 million from the second quarter 2007 due to themovement to loans held for sale for certain nonperforming and classified loans.The recent increase in nonperforming assets is primarily due to residential construction,land development and land loans.  At September 30,2008, approximately $40.0 million, or 73% of all nonperforming loansoutstanding were residential construction, land development and landloans.  At September 30, 2008,thirteen loan relationships comprised approximately 88% of nonperforming loans.

 

Net charge-offs in the thirdquarter 2008 were $12.5 million, as compared to $0.4 million in the secondquarter 2008, and $19.6 million in the third quarter 2007.  The third quarter 2008 net charge-offsincluded $10.8 million specifically related to residential construction, landand land development loans. Impaired loans as of September 30,2008 totaled $55.0 million, as compared to $29.8 million at June 30, 2008and $20.8 million at December 31, 2007.

 

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**Allowance for Loan Losses**

 

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

 

The ratio of allowance for loan losses tototal loans was 2.52% at September 30,2008, as compared to 1.44% at December 31, 2007 and 1.32% at September 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 September 30, 2008increased over the amounts at June 30, 2008, which is reflected in ahigher specific allowance.

 

In estimating the allowance for probable incurredlosses on other loans, we group the balance of the loan portfolio into segmentsthat have common characteristics, such as loan type or risk weighting.  For each nonspecific allowance portfoliosegment, we apply loss factors to calculate the required allowance based uponactual historical loss rates adjusted for qualitative factors affecting loanportfolio collectibility as described above. During the third quarter 2008, the historical loss factor increased dueto the charge-offs incurred during the third quarter.  This also had a direct impact on the economicconcerns factor which looks at historical losses by type of loan and applies aloss factor based on both historical losses and management’s estimate of the economicclimate for the remaining loans in the portfolio.  Management also looks at risk weightings ofloans and computes a factor for the volume and severity of classified loansusing assigned risk ratings under regulatory definitions of “watch”, “substandard”‘,“doubtful” and “loss”.  Loans graded aseither doubtful or loss are treated as impaired and are included as part of thespecific reserve computed above.  Loanssegregated by risk weighting categories watch or substandard are evaluated fortrends in volume and severity.

 

The provision for loan losses recorded in2008 was required in order for the Company to have an allowance for loan losses(2.52% of total loans as of September 30, 2008) at a level necessary forthe probable incurred losses inherent in the loan portfolio as of September 30,2008.  Forfurther discussion of the provision for loan losses, see “Provision for loanlosses” above.

 

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

 

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*The following tableprovides a summary of the activity within the allowance for loan losses accountfor the periods presented:*

 

**Table 13**

 
| ** **                                    | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| ** **                                    | ** ** | **(In thousands)**                                 | ** ** |
| Balance, beginning of period                  |       | $                                                       | 25,711     |   | $ | 27,899 |   |
| Loan charge-offs:                             |       |                                                    |       |   |   |
| Real estate – Residential and Commercial |       | 2,077                                                   |       | 11,574 |   |
| Real estate - Construction                    |       | 11,056                                                  |       | 12,338 |   |
| Commercial                                    |       | 863                                                     |       | 2,182 |   |
| Agricultural                                  |       | 18                                                      |       | 21 |   |
| Consumer                                      |       | 181                                                     |       | 347 |   |
| Lease receivable and other                    |       | —                                                  |       | 782 |   |
| Total loan charge-offs                        |       | 14,195                                                  |       | 27,244 |   |
| Recoveries:                                   |       |                                                    |       |   |   |
| Real estate – Residential and Commercial |       | 389                                                     |       | 816 |   |
| Real estate - Construction                    |       | 69                                                      |       | 71 |   |
| Commercial                                    |       | 161                                                     |       | 272 |   |
| Agricultural                                  |       | 11                                                      |       | 394 |   |
| Consumer                                      |       | 94                                                      |       | 109 |   |
| Lease receivable and other                    |       | —                                                  |       | 21 |   |
| Total loan recoveries                         |       | 724                                                     |       | 1,683 |   |
| Net loan charge-offs                          |       | 13,471                                                  |       | 25,561 |   |
| Provision for loan losses                     |       | 32,525                                                  |       | 21,641 |   |
| Balance, end of period                        |       | $                                                       | 44,765     |   | $ | 23,979 |   |

 

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

 

**Securities**

 

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

 

*The carrying value of ourportfolio of investment securities at September 30, 2008**and December 31, 2007 wasas follows:*

 

**Table 14**

 
| ** **                                                 | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                                 | ** ** | **2008**                | ** ** | **2007**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                                                 | ** ** | **(In thousands)** | ** ** |
| Securities available-for-sale:                             |       |                    |       |                  |       |           |       |       |       |
| U.S. Government agencies and government-sponsored entities |       | $                       | 2,436      |                  | $          | 10,456         |       | $          | (8,020     | ) | (76.7 | )% |
| Obligations of states and political subdivisions           |       | 61,013                  |       | 76,876                |       | (15,863        | )          | (20.6      | )%         |
| Mortgage backed                                            |       | 32,039                  |       | 30,038                |       | 2,001          |       | 6.7        | %          |
| Marketable equity                                          |       | 1,215                   |       | 1,047                 |       | 168            |       | 16.0       | %          |
| Other                                                      |       | 547                     |       | 547                   |       | 0              |       | 0.0        | %          |
| Total securities available-for-sale                        |       | $                       | 97,250     |                  | $          | 118,964        |       | $          | (21,714    | ) | (18.3 | )% |
|                                                       |       |                    |       |                  |       |           |       |       |       |
| Securities held-to-maturity:                               |       |                    |       |                  |       |           |       |       |       |
| Mortgage-backed                                            |       | $                       | 13,556     |                  | $          | 14,889         |       | $          | (1,333     | ) | (9.0 | )% |

 

The Companydoes not own any preferred stock of either the Federal Home Loan MortgageCorporation (FHLMC) or Federal National Mortgage Association (FNMA).  Further, all mortgage-backed securities aresponsored by either U.S. government agencies or government-sponsored entities,and none are private issuances.

 

The carryingvalue of our investment securities at September 30, 2008 was $97.3 million, compared to the December 31, 2007carrying value of $119.0 million. The decrease in the level of our investmentsfrom December 31, 2007, is primarily due to a decrease in the holdingsof  U.S. government agencies andgovernment-sponsored entities, as well as municipal bonds.  The change in U.S. Government agencies and government-sponsoredentities 

 

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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 improve liquidity andreduce our overall concentration of municipal securities.

 

Included in the obligationsof states and political subdivisions is an individual non-rated municipal bondwith a fair value of $33.5 million and an unrealized loss of $5.9 million.  This unrealized loss comprises 14.9% of theoriginal cost of this security and comprises 78.3% of the gross unrealized lossof all investment securities at September 30, 2008.  Management performs an annual review processfor all non-rated municipal security in our portfolio, but updated its analysisfor this particular security during the third quarter due to the relative sizeof the unrealized loss as the unrealized loss on this security comprises 84% ofthe overall unrealized loss on state and municipal bonds.  Based on the third quarter 2008 creditanalysis of this particular bond, including a review of the issuer’s currentfinancial statements, the related cash flows and interest payments, managementconcluded that the continuous unrealized loss position on this security was aresult of the level of market interest rates and lack of marketability and nota result 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 underlyingissuers’ ability to repay.  In addition,we have the ability and intent to hold these securities until their fair valuerecovers to their cost, which may be maturity. Accordingly, we have not recognized any other-than-temporary impairmentin our consolidated statements of income.

 

**Deposits**

 

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

 

**Table 15**

 
| ** **                   | ** ** | **At September 30, 2008** | ** ** | **At December 31, 2007** | ** ** |
|------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                   | ** ** | **Balance**                              | ** ** | **% of  Total**                    | ** ** | **Balance** | ** ** | **% of  Total** | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)**     | ** ** |
| Noninterest bearing deposits |       | $                                        | 403,495    |                                    | 24.69      | % | $ | 515,299 |   | 28.64 | % |
| Interest bearing demand      |       | 142,164                                  |       | 8.69                                    | %          | 160,100 |   | 8.90 | % |
| Money market                 |       | 483,691                                  |       | 29.58                                   | %          | 572,056 |   | 31.79 | % |
| Savings                      |       | 68,910                                   |       | 4.21                                    | %          | 71,944 |   | 4.00 | % |
| Time                         |       | 536,841                                  |       | 32.83                                   | %          | 480,108 |   | 26.67 | % |
|                         |       |                                     |       |                                    |       |   |   |   |   |
| Total deposits               |       | $                                        | 1,635,101  |                                    | 100.00     | % | $ | 1,799,507 |   | 100.00 | % |

 

At the end of the third quarter 2008, deposits were $1.6 billion ascompared to $1.8 billion at December 31, 2007, reflecting a decrease of$164.4 million.  Approximately $111.8million or 68% of this decline is attributable to a decrease in the balance ofnoninterest bearing deposits.  A decreaseof $88.4 million or 53.8% of the decrease relates to a decline in money marketaccounts.  The decline in these depositbalances reflects both a decline in our customers’ available balances andincreased competition for such deposits.  Noninterest bearing deposits still comprised approximately 25% of total depositsat September 30, 2008, which helps mitigate overall deposit fundingcosts.  These decreases were offset by anincrease in time deposits over the same period in the amount of $56.7million.  The increase in time depositsis primarily a result of a strategic decision to mitigate the impact of overallmarket liquidity concerns arising in the third quarter 2008.

 

**Borrowingsand Subordinated Debentures**

 

At September 30, 2008, our outstanding borrowings were$166,508,000 as compared to $63,715,000 at December 31, 2007.  The increase in borrowings is due to anincrease in term notes at the Federal Home Loan Bank (“FHLB”) as part of astrategic funding decision to complement increased time deposits describedabove with lower costing FHLB advances to mitigate the impact of margincompression when the pricing is compared to internet or brokered time deposits.

 

The borrowings at September 30, 2008 consisted of 18 separatefixed-rate term notes at the FHLB with maturities ranging from 6 to 123months.  Approximately $142 million ofthe FHLB term advances at September 30, 2008 have Bermudan conversionoptions to a variable rate.  The initialfixed rate periods range from one to five years and can be prepaid withoutpenalty at or after conversion.  Therewas also a line of credit at the FHLB at September 30, 2008, but there wasno balance outstanding on this line of credit at September 30, 2008.  At December 31, 2007, borrowingsconsisted of a line of credit and term notes at the Federal Home Loan Bank of

 

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$15,160,000and $47,356,000respectively, and a $1,199,000 Treasury Tax and Loan note balance. The Treasury Tax and Loan note option with the Federal Reserve Bank wascancelled due to the merger of Centennial Bank of the West into Guaranty Bankand Trust Company in January 2008. Management determined not to open a new Treasury Tax and Loan note withthe Federal Reserve Bank with Guaranty Bank and Trust Company.

 

The total commitment, including balances outstanding, for borrowings atthe Federal Home Loan Bank for the term notes and line of credit at September 30,2008 and December 31, 2007 was $430.3 million and $316.2 million,respectively. The interest rate on the line of credit varies with the federalfunds rate, and was 2.61% and 5.51% at September 30, 2008 and December 31,2007, respectively.  The term notes havefixed 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. However, as of September 30, 2008 and December 31, 2007, therewere no investment securities pledged as collateral under the blanket pledgeand security agreement.

 

We have a revolving credit agreement with U.S. Bank NationalAssociation which contains financial covenants, including maintaining a minimumreturn on average assets, a maximum nonperforming assets to total loans ratio,a minimum allowance for loan losses to nonperforming loan ratio, regulatorycapital ratios that qualify the Company as well-capitalized and a minimumtotal-risked based capital amount.  As ofNovember 7, 2008, the amount of the line of credit was decreased from $40million to $20 million.  As of September 30,2008, the Company did not have any amount drawn on this line.  As of September 30, 2008, the Company isin compliance with all outstanding financial covenants, as amended.  The interest rate varies based on a spreadover the Prime rate, with a floor of 5.0%. The rate as of November 7, 2008 was 5.0%. The credit agreement issecured by Guaranty Bank stock.  U.S.Bank performs various commercial banking services for the Company for whichthey receive usual and customary fees.

 

At September 30, 2008, we had a $41,239,000 aggregate principal balance of subordinateddebentures outstanding with a weighted average cost of 7.44%.  The subordinated debentures were issued infour separate series. Each issuance has a maturity of thirty years from itsdate of issue. The subordinated debentures were issued to trusts established byus, which in turn issued $40 million of trust preferred securities. Generallyand with certain limitations, the Company is permitted to call the debenturessubsequent to the first five or ten years, as applicable, after issue ifcertain conditions are met, or at any time upon the occurrence and continuationof certain changes in either the tax treatment or the capital treatment of thetrusts, the debentures or the preferred securities.  The Guaranty Capital Trust III issuance of$10.0 million has a variable rate of LIBOR plus 3.10% and is callable withoutpenalty on July 7, 2008, and every quarter thereafter.   Management did not call these debentures on July 7,2008, but will continue to evaluate whether to call these debentures eachquarter.

 

These securities arecurrently included in Tier I capital for purposes of determining the Company’sTier I and total risk-based capital ratios. The Board of Governors of theFederal Reserve System, which is the holding company’s banking regulator, haspromulgated a modification of the capital regulations affecting trust preferredsecurities. Under this modification, beginning March 31, 2009, the Companywill be required to use a more restrictive formula to determine the amount oftrust preferred securities that can be included in regulatory Tier I capital.At that time, the Company will be allowed to include in Tier I capital anamount of trust preferred securities equal to no more than 25% of the sum ofall core capital elements, which is generally defined as stockholders’ equityless certain intangibles, including goodwill, core deposit intangibles andcustomer relationship intangibles, net of any related deferred income taxliability. The regulations currently in effect limit the amount of trustpreferred securities that can be included in Tier I capital to 25% of the sumof core capital elements without a deduction for permitted intangibles.  The Company expects that its Tier I capitalratios will be at or above the existing well-capitalized levels on March 31,2009, the first date on which the modified capital regulations must be applied.

 

**CapitalResources**

 

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

 

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For regulatoryand debt-covenant purposes, the Company maintains capital above the minimumcore standards.  The Company activelymonitors its regulatory capital ratios to ensure that the Company and its banksubsidiary are more than well capitalized under the applicable regulatoryframework.  Under the regulationsadopted by the federal regulatory authorities, a bank is well-capitalized ifthe institution has a total risk-based capital ratio of 10.0% or greater, aTier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of5.0% or greater, and is not subject to any order or written directive by anysuch regulatory authority to meet and maintain a specific capital level for anycapital measure.  Our subsidiary bank isrequired to maintain similar capital levels under capital adequacyguidelines.  At September 30, 2008, our subsidiary bank was “well-capitalized”.

 

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

 

**Table 16**

 
| ** **                        | ** ** | ** **             | ** ** | ** **            | ** ** | ** **      | ** ** | **Minimum**             | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|-----------------|------------|-------------------------|------------|
| ** **                        | ** ** | ** **             | ** ** | ** **            | ** ** | ** **      | ** ** | **Requirement**         | ** ** |
| ** **                        | ** ** | ** **             | ** ** | ** **            | ** ** | **Minimum**     | ** ** | **For “Well** | ** ** |
| ** **                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **Capital**     | ** ** | **Capitalized”**   | ** ** |
| ** **                        | ** ** | **2008**               | ** ** | **2007**              | ** ** | **Requirement** | ** ** | **Institution**         | ** ** |
|                              |       |                   |       |                  |       |            |       |                    |       |
| Leverage ratio                    |       | 7.79                   | %          | 8.55                  | %          | 4.00            | %          | 5.00                    | %          |
| Tier 1 risk weighted ratio        |       | 9.19                   | %          | 9.62                  | %          | 4.00            | %          | 6.00                    | %          |
| Total risk weighted capital ratio |       | 10.45                  | %          | 10.87                 | %          | 8.00            | %          | 10.00                   | %          |

 

On October 3, 2008,Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), whichprovides the U. S. Treasury with broad authority to implement certain actionsto help restore stability and liquidity to U.S. markets.  One of the provisions resulting from the Actis the Treasury Capital Purchase Program (CPP), which provides direct equityinvestment of perpetual preferred stock by the Treasury in qualified financialinstitutions.  The program is voluntaryand requires an institution to comply with a number of restrictions andprovisions, including limits on executive compensation, stock redemptions anddeclaration of dividends.  Applicationsmust be submitted by November 14, 2008 and are subject to approval by theTreasury.  The CPP provides for a minimuminvestment of 1 percent of Risk-Weighted Assets, with a maximum investmentequal to the lesser of 3 percent of Total Risk-Weighted Assets or $25billion.  The perpetual preferred stockinvestment will have a dividend rate of 5% per year until the fifth anniversaryof the Treasury investment, and a dividend of 9% thereafter.  The CPP also requires the Treasury to receivewarrants for common stock equal to 15% of the capital invested by the Treasury.  The Company has filed an application toparticipate in this program. Participation in the program is not automatic and is subject to approvalby the Treasury.  The Company believesthat, if approved, it would be eligible to receive up to approximately $59million of capital under this program. The Company does not expect to have to seek stockholder approval inconnection with participation in the CPP.

 

**ContractualObligations and Off-Balance Sheet Arrangements**

 

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

 

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

 

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*At September 30,2008, the following financial instruments were outstanding whose contractamounts represented credit risk:*

 

**Table 17**

 
| ** **                   | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **(In thousands)**      | ** ** |
| Commitments to extend credit |       | $                            | 505,293    |                        | $          | 582,988 |   |
| Standby letters of credit    |       | 28,731                       |       | 33,573                      |       |
|                         |       |                         |       |                        |       |
| Totals                       |       | $                            | 534,024    |                        | $          | 616,561 |   |

 

**Liquidity**

 

The Bank relies on depositsas its principal source of funds and, therefore, must be in a position toservice depositors’ needs as they arise. Fluctuations in the balances of a fewlarge depositors may cause temporary increases and decreases in liquidity fromtime to time. We deal with such fluctuations by using existing liquiditysources.

 

Concerns over depositfluctuations with respect to the overall banking industry were addressed by theFDIC in September and October 2008.  The FDIC temporarily increased the individual account deposit insurancefrom $100,000 per account to $250,000 per account through December 31,2009.  The FDIC also implemented aTemporary Liquidity Guarantee Program which provides for full FDIC coverage fornon-interest bearing deposit transaction accounts, regardless of dollaramounts.  Institutions are automaticallyenrolled in this program unless they choose to opt-out.  The Company does not intend to opt-out ofthis program, thus, our customers will receive full coverage for non-interestbearing deposit transaction accounts under the program.

 

Additionally, the Companyhas become a member of the Certificate of Deposit Account Registry Service(CDARSTM) program.  Through CDARSTM, theBank’s customers can increase their FDIC insurance by up to $50 million throughreciprocal certificate of deposit accounts.   This is accomplished by the Bank entering into reciprocal depositoryrelationships with other member banks. The individual customer’s large deposit is broken into amounts below the$100,000 amount and placed with other banks that are members of thenetwork.  The reciprocal member bankissues certificate of deposits in amounts under $100,000, so the entire depositis eligible for FDIC insurance.   At September 30,2008, the Company did not have any amounts outstanding under the CDARSTMprogram, but began entering into reciprocal agreements on behalf of ourcustomers in October 2008.

 

When the level of liquidassets (our primary liquidity) does not meet our liquidity needs, otheravailable sources of liquid assets (our secondary liquidity), including thepurchase of federal funds, sales of securities under agreements to repurchase,purchase of brokered certificates of deposit, sales of loans, discount windowborrowings from the Federal Reserve Bank, and our lines of credit with theFederal Home Loan Bank of Topeka (FHLB) and U.S. Bank are employed to meetcurrent and presently anticipated funding needs.   At September 30, 2008, the Company hadapproximately $131.3 million of availability on its FHLB line, $135.5 millionof availability on its federal funds lines with correspondent banks, and $20.0million of availability on its U.S. Bank line.  Further, at September 30, 2008, the Company had purchased $122.0million of brokered certificates of deposit, an increase of $61.8 million over December 31,2007.  Additionally, as described above,the Company joined the CDARSTM program and can purchase certificates of depositthrough this program.  At September 30,2008, the Company had not purchased any deposits through CDARSTM, but iseligible to purchase certificates of deposit of up to ten percent of its totalassets through CDARSTM.  These sourcesprovide significant secondary liquidity to the Company to service itsdepositors’ needs.

 

The FDIC also implemented aDebt Guarantee Program where it will guarantee all newly-issued seniorunsecured debt up to prescribed limits by a participating bank on or after October 14,2008 through and including June 30, 2009. Institutions are automatically enrolled in this program unless theychoose to opt-out.  The Company does notintend to opt-out of this program which will provide coverage of up to $31.2million of senior unsecured debt, based on its $25 million of outstandingfederal funds purchased as of September 30, 2008.

 

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We rely on dividends fromour Bank as a primary source of liquidity for the holding company. We plan tocontinue to utilize the available dividends from the Bank for holding companyoperations, subject to regulatory and other restrictions.  The ability of the Bank to pay dividends ormake other capital distributions to us is subject to the regulatory authorityof the Federal Reserve Board and the Colorado Division of Banking.  Because of the net losses in 2007 and 2008 asa result of the goodwill impairment charges, the Bank is required to obtainpermission from the Federal Reserve Board and the Colorado Division of Bankingprior to making any dividend to the holding company.   As the goodwill impairment charges did nothave any impact on the Bank’s liquidity, cash flows or regulatory capital, itis expected 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.

 

**Applicationof Critical Accounting Policies and Accounting Estimates**

 

                Management’sDiscussion and Analysis of financial condition and results of operationsdiscusses the Company’s condensed consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of these condensed consolidatedfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent liabilities at the date of the condensed consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. On an on-going basis, management evaluates its estimates andjudgments, including those related to customers and suppliers, allowance forloan losses, bad debts, investments, financing operations, long-lived assets,contingencies and litigation. Management bases its estimates and judgments onhistorical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which have formed the basisfor making such judgments about the carrying value of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom the recorded estimates under different assumptions or conditions.  A summary of critical accounting policies andestimates are listed in the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” section of the Company’s 2007 AnnualReport Form 10-K for the fiscal year ended December 31, 2007.  There have been no changes to these criticalaccounting policies in 2008.

 

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

 

Market risk is the risk ofloss in a financial instrument arising from adverse changes in market prices andrates, foreign currency exchange rates, commodity prices and equity prices. Ourmarket risk arises primarily from interest rate risk inherent in our lendingand deposit taking activities. To that end, management actively monitors andmanages our interest rate risk exposure. We do not have any market risksensitive instruments entered into for trading purposes. We manage our interestrate sensitivity by matching the re-pricing opportunities on our earning assetsto those on our funding liabilities. We use various asset/liability strategiesto manage the re-pricing characteristics of our assets and liabilities, whichare designed to ensure that exposure to interest rate fluctuations is limitedto our guidelines of acceptable levels of risk-taking. Hedging strategies,including the terms and pricing of loans and deposits and managing thedeployment of our securities, are used to reduce mismatches in interest ratere-pricing opportunities of portfolio assets and their funding sources.

 

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

 

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

 

We monitor and evaluate ourinterest rate risk position on a quarterly basis using net interest incomesimulation analysis under 100 and 200 basis point change scenarios (see below).Each of these analyses measures different interest rate risk factors inherentin the financial statements.

 

In 2008, this disclosurealternative was changed from prior year annual and quarterly reports filed bythe Company, which used the Gap analysis disclosure method.   The static gap analysis looked at the dollaramount of mismatches between assets and liabilities, at certain time periods,whose interest rates are subject to pricing at their contractual maturity dateor repricing period.   As this Gapanalysis looked at contractual dates that assets and liabilities are subject torepricing, it caused the entire balance of interest-bearing NOW accounts, moneymarket accounts and savings accounts to be treated as immediatelyrepriceable.  As our actual experiencewith repricing of these liabilities differed from the contractual maturities,management has chosen to disclose the sensitivity analysis alternative, whichmeasures the impact on net interest income of hypothetical changes in interestrates.  As discussed above, this tool isused internally by ALCO in monitoring interest rate risk of the Company andthus, the Company has chosen to change this disclosure alternative regardingmarket risk.  Summarized comparableinformation, under the new disclosure method, is provided for the precedingyear.

 

**Net Interest Income Modeling**

 

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

 

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*The following table showsthe net interest income increase or decrease over the next twelve months asof   September 30, 2008 and 2007:*

 

**  Table 18**

 

**MARKET RISK:**

 
| ** **                               | ** ** | **Annualized Net Interest Income** | ** ** |
|------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                               | ** ** | **September 30, 2008**                  | ** ** | **September 30, 2007** | ** ** |
| ** **                               | ** ** | **Amount of Change**                    | ** ** | **Amount of Change** | ** ** |
| ** **                               | ** ** | **(In thousands)**                           | ** ** |
| **Rates in Basis Points** | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| 200                                      |       | $                                                 | 8,037      |   | $ | 6,527 |   |
| 100                                      |       | 3,645                                             |       | 3,284 |   |
| Static                                   |       | —                                            |       | — |   |
| (100)                                    |       | (3,943                                            | )          | (3,343 | ) |
| (200)                                    |       | (9,165                                            | )          | (6,501 | ) |
|                                          |            |                                                   |            |  |  |  |  |

 

Overall,the company is positioned to have a short-term favorable interest income impactin a rising rate environment and have an adverse interest income impact in theshort-term in a falling rate environment.

 

Ifrates increase, net interest income is anticipated to increase and similarly,if rates decrease, net interest income is expected to decrease, meaning theCompany is asset sensitive.  At September 30,2008, a 200 basis point increase in rates would be anticipated to increase netinterest income by $8.0 million as compared to $6.5 million at September 30,2007.  The Company is slightly more assetsensitive to an increase or decrease in rates than a year ago due mostly to theincreased in fixed term borrowings.

 

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

 

As of the end of the period covered by this report,an evaluation was carried out by the Company’s management, with the participationof the Chief Executive Officer and the Chief Financial Officer, of theeffectiveness of the Company’s disclosure controls and procedures (as definedin Rule 15d-15(e) under the Securities Exchange Act of 1934). TheCompany’s disclosure controls were designed to provide a reasonable assurancethat information required to be disclosed in reports that we file or submitunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in the rules and forms ofthe Securities and Exchange Commission. It should be noted that the design ofany system of controls is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions,regardless of how remote. However, the controls have been designed to providereasonable assurance of achieving the controls’ stated goals. Based on thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officer,have concluded that the Company’s disclosure controls and procedures areeffective at September 30, 2008 to ensure that information required to bedisclosed in the reports that we file or submit under the Securities ExchangeAct of 1934 was (i) accumulated and communicated to management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, to allowtimely decisions regarding required disclosure and (ii) recorded,processed, summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission.

 

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

 

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**PART II—OTHER INFORMATION**

 

**ITEM 1.  LegalProceedings**

 

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**

 

The following risk factors inherent to our businessare in addition to the risk factors discussed in Part 1, “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.  You should carefullyconsider the risks and uncertainties described below and in the Form 10-Kfor the year ended December 31, 2007. Additional risks and uncertaintiesnot currently known to us or that we currently deem to be immaterial also maymaterially affect our business, financial condition and/or operating results.

 

*Our business is subject to general economic risks that could adverselyimpact our results of operations and financial condition.*

 

Change in economic conditions, particularly a further economic slowdownalong the Front Range in Colorado, including Northern Colorado, could hurt ourbusiness.   Our business is directlyaffected by market conditions, trends in the industry and finance, legislativeand regulatory changes, and changes in governmental monetary and fiscalpolicies and inflation, all of which are beyond our control.  In 2007, the housing and real estate sectorsexperienced an economic slowdown that has continued into 2008.  Further deterioration in economic conditions,in particular within our primary market areas could result in the followingconsequences, among others, any of which could hurt our business materially:loan delinquencies may increase; problem assets and foreclosures may increase;demand for our products and services may decline; and collateral for loans madeby us, especially real estate, may decline in value, in turn reducing acustomer’s borrowing power and reducing the value of assets and collateralsecuring our loans.

 

*Downturns in the real estate markets in our primary market areas couldhurt our business.*

 

Our business activities and credit exposure are primarily concentratedalong the Front Range of Colorado.  Whilewe do not have any sub-prime loans, our construction, land development and landloan portfolio, along with our commercial and multi-family loan portfolios andcertain of our other loans have been affected by the downturn in theresidential real estate market.  Weanticipate that further declines in the real estate markets in our primarymarket areas would hurt our business.  Ifreal estate values continue to decline the collateral for our loans willprovide less security.  As a result, ourability to recover on defaulted loans by selling the underlying real estatewill be diminished, and we would be more likely to suffer losses on defaultedloans.  The events and conditionsdescribed in this risk factor could therefore have a material adverse effect onour business, results of operations and financial condition.

 

*We may suffer losses in our loan portfolio despite our underwritingpractices.*

 

We seek to mitigate the risks inherent in our loan portfolio by adheringto specific underwriting practices. Although we believe that our underwriting criteria are appropriate forthe various kinds of loans we make, we may incur losses on loans that met ourunderwriting criteria, and these losses may exceed the amounts set aside asreserves in our allowance for loan losses. Recent negative developments in the financial industry and creditmarkets may continue to adversely impact our financial condition and results ofoperations.

 

Due to recent economic conditions affecting the real estate market,many lending institutions, including us, have experienced substantial declinesin the performance of their loans, including construction, land developmentloans and land loans.  The value of realestate collateral supporting many construction and land development loans, landloans, commercial loans and multi-family loans have declined and may continueto decline.  Bank and holding companystock prices have been negatively affected by this trend, as has the ability ofbanks and holding companies to raise capital or borrow in the debt marketscompared to recent years.  Theseconditions may have a material effect on our financial condition and results ofoperations.

 

*We may be required to make further increases in our provisions for loanlosses and to charge off additional loans in the future, which could adverselyaffect our results of operations.*

 

During the third quarter 2008, we experienced increases innonperforming loans and related credit losses. Generally, our non-performing loans and assets reflect operatingdifficulties of individual borrowers resulting from weakness in the economy ofthe Front Range of Colorado.  Inaddition, slowing sales have been a contributing factor to the increase innonperforming loans as well as the increase in delinquencies. If current trendsin the housing and real estate markets continue, we expect that we willcontinue to experience increased delinquencies and credit 

 

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losses, particularly with respect to construction, land development andland loans.  Moreover, if a recessionoccurs, we expect that it would negatively impact economic conditions in ourmarket areas and that we could experience significantly higher delinquenciesand credit losses.  An increase in ourcredit losses or our provision for loan losses would adversely affect ourfinancial condition and results of operations.

 

*Liquidity risk could impair our ability to fund operations andjeopardize our financial condition.*

 

Liquidity is essential to our business. An inability to raise funds through deposits, brokered deposits,borrowings, the sale of loans and other sources could have a substantial negativeeffect on our liquidity.  Our access tofunding sources in amounts adequate to finance our activities or the terms ofwhich are acceptable to us could be impaired by factors that affect usspecifically or the financial services industry or economy in general.  Factors that could detrimentally impact ouraccess to liquidity sources include a decrease in the level of our businessactivity as a result of a downturn in the markets in which our loans areconcentrated or adverse regulatory action against us.  Our ability to borrow could also be impairedby factors that are not specific to us, such as a disruption in the financialmarkets or negative views and expectations about the prospects for thefinancial services industry in light of the recent turmoil faced by bankingorganizations and the continued deterioration in credit markets.

 

We rely on retail and commercial deposits, brokered deposits, andadvances from the Federal Home Loan Bank (“FHLB”) of Topeka and otherborrowings to fund our operations.  Although we have historically been able toreplace maturing deposits and advances as necessary, we might not be able toreplace such funds in the future if, among other things, our results ofoperations or financial condition or the results of operations or financialcondition of the FHLB of Topeka or market conditions were to change. Inaddition, if we fall below the FDIC’s thresholds to be considered “wellcapitalized” we will be unable to continue with uninterrupted access to thebrokered funds markets.

 

Although we consider these sources of funds adequate for our liquidityneeds, there can be no assurance in this regard and we may be compelled to seekadditional sources of financing in the future. Likewise, we may seek additionaldebt in the future to achieve our long-term business objectives, in connectionwith future acquisitions or for other reasons. There can be no assurance additional borrowings, if sought, would beavailable to us or, if available, would be on favorable terms.  If additional financing sources areunavailable or not available on reasonable terms, our financial condition,results of operations and future prospects could be materially adverselyaffected.

 

*We may elect or be compelled to seek additional capital in the future,but capital may not be available when it is needed.*

 

We are required by federal and state regulatory authorities to maintainadequate levels of capital to support our operations.  In addition, we may elect to raise additionalcapital to support our business or to finance acquisitions, if any, or we mayotherwise elect to raise additional capital. In that regard, a number offinancial institutions have recently raised considerable amounts of capital asa result of a deterioration in their results of operations and financialcondition arising from the turmoil in the mortgage loan market, deterioratingeconomic conditions, declines in real estate values and other factors.

 

On October 3, 2008, Congress approved the $750 billion EmergencyStabilization Act of 2008 (EESA).  Thefirst phase of implementation of EESA included a $250 million Treasury CapitalPurchase Program.  The Company appliedfor up to three-percent of its total risk-weighted assets in capital, whichwould be in the form of non-cumulative perpetual preferred stock of theinstitution with a dividend rate of 5% until the fifth anniversary of theinvestment, and 9% thereafter.  If theCompany’s application is approved and the investment is completed, Treasurywill also receive warrants for common stock of the Company equal to 15% of thecapital invested. There is no guarantee that the Treasury will select theCompany to participate in its Capital Purchase Program.

 

Our ability to raise additional capital, if needed, will depend onconditions in the capital markets, economic conditions and a number of otherfactors, many of which are outside our control, and on our financialperformance.  Accordingly, we cannot beassured of our ability to raise additional capital if needed or on termsacceptable to us.  If we cannot raiseadditional capital when needed, it may have a material adverse effect on ourfinancial condition, results of operations and prospects.

 

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**ITEM 2.  UnregisteredSales of Equity Securities and Use of Proceeds**

 

(a)                                  None.

 

(b)                                 None.

 

(c)   The following table provides information withrespect to purchases made by or on behalf of the Company or any “affiliated purchaser”(as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of1934), of our common stock during the third quarter 2008.

 
| ** **                            | ** ** | **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)** | ** ** |
|---------------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1 to July 31           |       | 4,662                        |       | $                                                | 4.87       |                                                                                                                    | —     |                                                                                                                                                                              | 1,200,000  |   |
| August 1 to August 31       |       | 2,176                        |       | 5.97                                             |       | —                                                                                                                  |       | 1,200,000                                                                                                                                                                         |       |
| September 1 to September 30 |       | 249                          |       | 5.74                                             |       | —                                                                                                                  |       | 1,200,000                                                                                                                                                                         |       |
|                                  |       |                         |       |                                             |       |                                                                                                                    |       |                                                                                                                                                                              |       |
|                                  |       | 7,087                        |       | $                                                | 5.29       |                                                                                                                    | —     |                                                                                                                                                                              | 1,200,000  |   |

 

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(1)          In October 2007, we announced theauthorization of a new stock repurchase program to repurchase up to 1,200,000shares of our common stock from time to time over a one-year period in the openmarket or through private transactions in accordance with applicableregulations of the Securities and Exchange Commission.  This repurchase program lapsed in October 2008,with 1,200,000 shares expiring thereunder.

 

(2)          The difference of 7,087 shares between “TotalShares Purchased” and “Total Number of Shares Purchased as Part ofPublicly Announced Plans” relates to the net settlement of vested, restrictedstock awards.

 

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

 

None.

 

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

 

None.

 

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

 

On November 6, 2008, the Company entered intoAmendment No. 9 to the Revolving Credit Agreement with U.S. Bank NationalAssociation, which became effective November 7, 2008, to modify the return onaverage assets covenant, nonperforming assets covenant and add a new covenantwith respect to a minimum level of total risk-based capital. This amendment alsoadded a notification requirement regarding participation in the U.S. Treasury’sCapital Purchase Program established pursuant to the Emergency EconomicStabilization Act of 2008.   Further,this amendment added a 5% floor to the interest rate, changed the interest ratebase rate from the targeted federal funds rate to the Prime rate, and reducedthe amount available under the line of credit from $40 million to $20 million.The description of this amendment is subject to, and qualified in its entiretyto, the full text of the amendment, a copy of which is filed asExhibit 10.1 hereto and incorporated herein by reference.

 

On October 27,2008, the Company’s Compensation, Nominating and Governance Committee approvedamendments to the Company’s Employee Severance Pay Plan and Executive CashIncentive Plan, each to be effective January 1, 2009.  Each plan was amended to conform to the finalIRS Code Section 409A regulations and recent IRS guidance.  The description of these amendments issubject to, and qualified in its entirety to, the full text of the amendments,copies of which are filed as Exhibit 10.2 and Exhibit 10.3,respectively, hereto and incorporated herein by reference.

 

On October 28,2008, the Company’s Board of Directors approved (1) an amendment to theCompany’s 2005 Stock Incentive Plan and (2) an amendment and restatement ofthe Company’s Change in Control Severance Plan, each to be effective January 1,2009.  Each plan was amended primarily toconform to the final IRS Code Section 409A regulations and recent IRSguidance. The description of these amendments is subject to, and qualified inits entirety to, the full text of the amendments, copies of which are filed as Exhibit 10.4and Exhibit 10.5, respectively, hereto and incorporated herein byreference.

 

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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. 9 to Revolving  Credit Agreement, dated November 6, 2008, between U.S. Bank, National  Association and the Registrant.                                                            |
|                      |       |                                                                                                                                                                                                      |
| 10.2                      |       | Amendment to Guaranty Bancorp  Employee Severance Pay Plan, effective as of January 1, 2009.                                                                                                         |
|                      |       |                                                                                                                                                                                                      |
| 10.3                      |       | Amendment to Guaranty Bancorp  Executive Cash Incentive Plan, effective as of January 1, 2009.                                                                                                       |
|                      |       |                                                                                                                                                                                                      |
| 10.4                      |       | Amendment to Guaranty Bancorp 2005  Stock Incentive Plan, effective as of January 1, 2009                                                                                                            |
|                      |       |                                                                                                                                                                                                      |
| 10.5                      |       | Guaranty Bancorp Change in Control  Severance Plan, as amended and restated 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**

 

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

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

 

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