Table of Contents

** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**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 June 30, 2009** |
| ** **                                             |                                                                                                    |
| **OR**                                                 |
| ** **                                             | ** **                                                                                              |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                    to                    **

 

**Commission File Number: 000-51556**

 

----

 

**GUARANTYBANCORP**

(Exactname of registrant as specified in its charter)

 

| **DELAWARE**                                                    | ** ** | **41-2150446**                          |
|-----------------------------------------------------------------|------------|-----------------------------------------|
| (State or other jurisdiction

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

 

**303-293-5563**

(Registrant’stelephone number, including area code)

 

----

 

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

 

Indicate by check mark whether the registranthas submitted electronically and posted on its corporate Web site, if anyInteractive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of thischapter) preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes  o No  o

 

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

 

| Large Accelerated  Filer  o                                            |   | Accelerated Filer  x          |
|----------------------------------------------------------------------------------|--------|-----------------------------------------|
|                                                                             |   |                                    |
| Non-accelerated Filer  o

(Do not check if  smaller reporting company) |   | Smaller reporting  Company  o |

 

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

 

As of July 30, 2009 there were52,438,908 shares of the registrant’s common stock outstanding, including1,106,911 shares of unvested stock grants and excluding 66,616 shares to beissued under its deferred compensation plan.

 

 

 

----

Tableof Contents

 

**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        | 28         |
|                                       |                                                                                               |       |
| ITEM 3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                        | 48         |
|                                       |                                                                                               |       |
| ITEM 4.                               | Controls and  Procedures                                                                           | 50         |
|                                       |                                                                                               |       |
| **PART II—OTHER  INFORMATION**   | 51                                                                                                 |
|                                       |                                                                                               |       |
| ITEM 1.                               | Legal Proceedings                                                                                  | 51         |
|                                       |                                                                                               |       |
| ITEM 1A.                              | Risk Factors                                                                                       | 51         |
|                                       |                                                                                               |       |
| ITEM 2.                               | Unregistered  Sales of Equity Securities and Use of Proceeds                                       | 52         |
|                                       |                                                                                               |       |
| ITEM 3.                               | Defaults  Upon Senior Securities                                                                   | 52         |
|                                       |                                                                                               |       |
| ITEM 4.                               | Submission  of Matters to a Vote of Security Holders                                               | 52         |
|                                       |                                                                                               |       |
| ITEM 5.                               | Other Information                                                                                  | 53         |
|                                       |                                                                                               |       |
| ITEM 6.                               | Exhibits                                                                                           | 54         |

 

2

----

Table of Contents

 

### **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. Examples of forward-looking statements include,but are not limited to: (i) projections of revenues, expenses, income orloss, earnings or loss per share, the payment or nonpayment of dividends,capital structure and other financial items; (ii) statements of plans,objectives and expectations of the Company or its management or board ofdirectors, including those relating to products or services; (iii) statementsof future economic performance; and (iv) statements of assumptionsunderlying such statements. Words such as “believes”, “anticipates”, “expects”,“intends”, “targeted”, “projected”, “continue”, “remain”, “will”, “should”, “may”and other similar expressions are intended to identify forward-lookingstatements but are not the exclusive means of identifying such statements.

 

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

 

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

 

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

 

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

 

·                  Changesimposed by regulatory agencies to increase our capital to a level greater thanthe level required for well-capitalized financial institutions, or otherchanges to the Company and its operations imposed through informalunderstandings or formal agreements entered into with bank regulatory agencies.

 

·                  Thefailure to maintain capital above the level required to be well-capitalizedunder the regulatory capital adequacy guidelines, including the failure toconsummate the previously announced capital raise of up to $60 million inpreferred stock or the failure to raise additional capital as needed, includingthrough the U.S. Treasury’s Capital Purchase Program or Capital Assistance Program.

 

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

 

·                  Inflationand interest rate, securities market and monetary fluctuations.

 

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

 

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

 

·                  Revenuesare lower than expected.

 

·                  Changesin consumer spending, borrowings and savings habits.

 

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

 

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

 

·                  Technologicalchanges.

 

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

 

·                  Theability to increase market share and control expenses.

 

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

 

3

----

Table of Contents

 

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

 

·                  Changesin the securities markets.

 

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

 

·                  Changesin our organization, compensation and benefit plans.

 

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

 

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

 

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

 

4

----

Table of Contents

** **

**PART I- FINANCIAL INFORMATION**

 

**ITEM 1. Unaudited Consolidated Financial Statements**

 

**GUARANTYBANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **June 30,  2009**                            | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **(Dollars in  thousands, except per share data)** | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                                               |       |                        |       |
| Cash and  due from banks                                                                                                                                                                                                                                                                                                                                                                                                     |       | $                                                  | 28,403     |                        | $          | 32,189 |   |
| Federal  funds sold                                                                                                                                                                                                                                                                                                                                                                                                          |       | 18,693                                             |       | 13,522                      |       |
| Cash and  cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                   |       | 47,096                                             |       | 45,711                      |       |
| Securities  available for sale, at fair value                                                                                                                                                                                                                                                                                                                                                                                |       | 97,461                                             |       | 102,874                     |       |
| Securities  held to maturity (fair value of $11,336 and $13,505 at June 30, 2009 and  December 31, 2008)                                                                                                                                                                                                                                                                                                           |       | 10,929                                             |       | 13,114                      |       |
| Bank  stocks, at cost                                                                                                                                                                                                                                                                                                                                                                                                        |       | 16,562                                             |       | 28,276                      |       |
| Total  investments                                                                                                                                                                                                                                                                                                                                                                                                           |       | 124,952                                            |       | 144,264                     |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                               |       |                        |       |
| Loans,  net of unearned discount                                                                                                                                                                                                                                                                                                                                                                                             |       | 1,651,572                                          |       | 1,826,333                   |       |
| Less  allowance for loan losses                                                                                                                                                                                                                                                                                                                                                                                              |       | (43,041                                            | )          | (44,988                     | )          |
| Net loans                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 1,608,531                                          |       | 1,781,345                   |       |
| Loans  held for sale                                                                                                                                                                                                                                                                                                                                                                                                         |       | 5,250                                              |       | 5,760                       |       |
| Premises  and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                 |       | 61,903                                             |       | 63,018                      |       |
| Other  real estate owned and foreclosed assets                                                                                                                                                                                                                                                                                                                                                                               |       | 34,746                                             |       | 484                         |       |
| Other  intangible assets, net                                                                                                                                                                                                                                                                                                                                                                                                |       | 22,337                                             |       | 25,500                      |       |
| Other  assets                                                                                                                                                                                                                                                                                                                                                                                                                |       | 40,052                                             |       | 36,659                      |       |
| Total  assets                                                                                                                                                                                                                                                                                                                                                                                                                |       | $                                                  | 1,944,867  |                        | $          | 2,102,741 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                               |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                                                                                                                                |       |                                               |       |                        |       |
| Liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                               |       |                        |       |
| Deposits:                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                               |       |                        |       |
| Noninterest-bearing  demand                                                                                                                                                                                                                                                                                                                                                                                                  |       | $                                                  | 352,185    |                        | $          | 433,761 |   |
| Interest-bearing  demand                                                                                                                                                                                                                                                                                                                                                                                                     |       | 448,256                                            |       | 460,856                     |       |
| Savings                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 72,143                                             |       | 68,064                      |       |
| Time                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 688,146                                            |       | 735,970                     |       |
| Total  deposits                                                                                                                                                                                                                                                                                                                                                                                                              |       | 1,560,730                                          |       | 1,698,651                   |       |
| Securities  sold under agreements to repurchase and federal funds purchased                                                                                                                                                                                                                                                                                                                                                  |       | 13,071                                             |       | 21,781                      |       |
| Borrowings                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 164,459                                            |       | 166,404                     |       |
| Subordinated  debentures                                                                                                                                                                                                                                                                                                                                                                                                     |       | 41,239                                             |       | 41,239                      |       |
| Interest  payable and other liabilities                                                                                                                                                                                                                                                                                                                                                                                      |       | 11,761                                             |       | 13,086                      |       |
| Total  liabilities                                                                                                                                                                                                                                                                                                                                                                                                           |       | 1,791,260                                          |       | 1,941,161                   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                               |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                               |       |                        |       |
| Common  stock—$0.001 par value; 100,000,000 shares authorized,64,542,950 shares  issued, 52,505,524 shares outstanding at June 30, 2009 (includes  1,110,744 shares of unvested restricted stock and 66,616 shares to be  issued); 64,542,950 shares issued, 52,654,131shares outstanding at  December 31, 2008 (includes 1,420,345 shares of unvested restricted  stock and 109,214 of shares to be issued). |       | 65                                                 |       | 65                          |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                                                                                                  |       | 617,599                                            |       | 617,188                     |       |
| Shares to  be issued for deferred compensation obligations                                                                                                                                                                                                                                                                                                                                                                   |       | 120                                                |       | 710                         |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                                                                         |       | (362,424                                           | )          | (352,003                    | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                                                                                                                                                                                                               |       | 691                                                |       | (1,302                      | )          |
| Treasury  Stock, at cost, 10,928,782 and 10,996,513, respectively                                                                                                                                                                                                                                                                                                                                                            |       | (102,444                                           | )          | (103,078                    | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                             |       | 153,607                                            |       | 161,580                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                             |       | $                                                  | 1,944,867  |                        | $          | 2,102,741 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

5

----

Tableof Contents

 

**GUARANTYBANCORP AND SUBSIDIARIES**

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

 
| ** **                                                                 | ** ** | **Three  Months Ended June 30,**                | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                             | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                 | ** ** | **(In  thousands, except share and per share data)** | ** ** |
| Interest  income:                                                          |       |                                                 |       |                                |       |   |   |   |   |
| Loans,  including fees                                                     |       | $                                                    | 23,208     |                                | $          | 28,107 |   | $ | 46,284 |   | $ | 59,147 |   |
| Investment  securities:                                                    |       |                                                 |       |                                |       |   |   |   |   |
| Taxable                                                                    |       | 590                                                  |       | 779                                 |       | 1,316 |   | 1,463 |   |
| Tax-exempt                                                                 |       | 765                                                  |       | 877                                 |       | 1,532 |   | 1,770 |   |
| Dividends                                                                  |       | 198                                                  |       | 435                                 |       | 486 |   | 905 |   |
| Federal  funds sold and other                                              |       | 14                                                   |       | 18                                  |       | 17 |   | 334 |   |
| Total  interest income                                                     |       | 24,775                                               |       | 30,216                              |       | 49,635 |   | 63,619 |   |
| Interest expense:                                                          |       |                                                 |       |                                |       |   |   |   |   |
| Deposits                                                                   |       | 6,910                                                |       | 7,411                               |       | 14,035 |   | 17,206 |   |
| Securities  sold under agreement to repurchase and federal funds purchased |       | 31                                                   |       | 145                                 |       | 69 |   | 282 |   |
| Borrowings                                                                 |       | 1,312                                                |       | 1,417                               |       | 2,633 |   | 2,446 |   |
| Subordinated  debentures                                                   |       | 662                                                  |       | 852                                 |       | 1,320 |   | 1,644 |   |
| Total  interest expense                                                    |       | 8,915                                                |       | 9,825                               |       | 18,057 |   | 21,578 |   |
| Net  interest income                                                       |       | 15,860                                               |       | 20,391                              |       | 31,578 |   | 42,041 |   |
| Provision  for loan losses                                                 |       | 18,605                                               |       | 900                                 |       | 21,110 |   | 1,775 |   |
| Net  interest income, after provision for loan losses                      |       | (2,745                                               | )          | 19,491                              |       | 10,468 |   | 40,266 |   |
| Noninterest  income:                                                       |       |                                                 |       |                                |       |   |   |   |   |
| Customer  service and other fees                                           |       | 2,354                                                |       | 2,528                               |       | 5,033 |   | 4,804 |   |
| Gain on  sale of securities                                                |       | —                                               |       | —                              |       | — |   | 138 |   |
| Other                                                                      |       | 273                                                  |       | 604                                 |       | 509 |   | 705 |   |
| Total  noninterest income                                                  |       | 2,627                                                |       | 3,132                               |       | 5,542 |   | 5,647 |   |
| Noninterest  expense:                                                      |       |                                                 |       |                                |       |   |   |   |   |
| Salaries  and employee benefits                                            |       | 6,712                                                |       | 9,184                               |       | 13,451 |   | 18,904 |   |
| Occupancy  expense                                                         |       | 1,926                                                |       | 2,131                               |       | 3,847 |   | 4,132 |   |
| Furniture  and equipment                                                   |       | 1,147                                                |       | 1,383                               |       | 2,278 |   | 2,697 |   |
| Amortization  of intangible assets                                         |       | 1,581                                                |       | 1,877                               |       | 3,163 |   | 3,754 |   |
| Other  general and administrative                                          |       | 6,348                                                |       | 5,122                               |       | 10,456 |   | 8,920 |   |
| Total  noninterest expense                                                 |       | 17,714                                               |       | 19,697                              |       | 33,195 |   | 38,407 |   |
| Income  (loss) before income taxes                                         |       | (17,832                                              | )          | 2,926                               |       | (17,185 | ) | 7,506 |   |
| Income  tax expense (benefit)                                              |       | (6,975                                               | )          | 901                                 |       | (6,764 | ) | 2,236 |   |
| Net  income (loss)                                                         |       | $                                                    | (10,857    | )                                   | $          | 2,025 |   | $ | (10,421 | ) | $ | 5,270 |   |
|                                                                       |       |                                                 |       |                                |       |   |   |   |   |
| Earnings  (loss) per share—basic:                                     |       | $                                                    | (0.21      | )                                   | $          | 0.04 |   | $ | (0.20 | ) | $ | 0.10 |   |
| Earnings  (loss) per share—diluted:                                   |       | (0.21                                                | )          | 0.04                                |       | (0.20 | ) | 0.10 |   |
|                                                                       |       |                                                 |       |                                |       |   |   |   |   |
| Weighted  average shares outstanding-basic                                 |       | 51,339,542                                           |       | 51,004,472                          |       | 51,312,847 |   | 50,996,350 |   |
| Weighted  average shares outstanding-diluted                               |       | 51,339,542                                           |       | 51,091,042                          |       | 51,312,847 |   | 51,086,578 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

6

----

Tableof Contents

 

**GUARANTYBANCORP 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** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Totals** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------|------------|---------------------|------------|--------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                         | ** ** | **(In thousands, except share data)**                    | ** ** |
| Balance, December 31, 2007                    |       | 52,616,991                                               |       | $                                                   | 617,675    |                     | $          | 573                 |       | $                        | (102,926   | )                                                    | $          | (95,196    | )          | $ | (1,472 | ) | $ | 418,654 |   |
| Adjustment to apply EITF 06-04, ASC  715-60-55-176 |       |                                                     |       |                                                |       |                     |       |                |       | (71                      | )          |                                                 |       | (71        | )          |
| Comprehensive income:                              |       |                                                     |       |                                                |       |                     |       |                |       |                     |       |                                                 |       |       |       |
| Net income                                         |       | —                                                   |       | —                                              |       | —                   |       | —              |       | 5,270                    |       | —                                               |       | 5,270      |       |
| Other comprehensive loss                           |       | —                                                   |       | —                                              |       | —                   |       | —              |       | —                   |       | (1,422                                               | )          | (1,422     | )          |
| Total comprehensive income                         |       |                                                     |       |                                                |       |                     |       |                |       |                     |       |                                                 |       | 3,848      |       |
| Stock compensation awards, net of forfeitures      |       | 129,600                                                  |       | —                                              |       | —                   |       | —              |       | —                   |       | —                                               |       | —     |       |
| Earned stock award compensation,  net              |       |                                                     |       | 1,550                                               |       | —                   |       | —              |       | —                   |       | —                                               |       | 1,550      |       |
| Repurchase of common stock                         |       | (22,645                                                  | )          | —                                              |       | —                   |       | (122                | )          | —                   |       | —                                               |       | (122       | )          |
| Deferred compensation                              |       | 12,323                                                   |       | —                                              |       | 68                       |       | —              |       | —                   |       | —                                               |       | 68         |       |
| Common shares issued                               |       | —                                                   |       | 28                                                  |       | (28                      | )          | —              |       | —                   |       | —                                               |       | —     |       |
| Balance, June 30, 2008                        |       | 52,736,269                                               |       | $                                                   | 619,253    |                     | $          | 613                 |       | $                        | (103,048   | )                                                    | $          | (89,997    | )          | $ | (2,894 | ) | $ | 423,927 |   |
|                                               |       |                                                     |       |                                                |       |                     |       |                |       |                     |       |                                                 |       |       |       |
| Balance, December 31, 2008                    |       | 52,654,131                                               |       | $                                                   | 617,253    |                     | $          | 710                 |       | $                        | (103,078   | )                                                    | $          | (352,003   | )          | $ | (1,302 | ) | $ | 161,580 |   |
| Comprehensive loss                                 |       |                                                     |       |                                                |       |                     |       |                |       |                     |       |                                                 |       |       |       |
| Net loss                                           |       | —                                                   |       | —                                              |       | —                   |       | —              |       | (10,421                  | )          | —                                               |       | (10,421    | )          |
| Other comprehensive income                         |       | —                                                   |       | —                                              |       | —                   |       | —              |       | —                   |       | 1,993                                                |       | 1,993      |       |
| Total comprehensive loss                           |       |                                                     |       |                                                |       |                     |       |                |       |                     |       | —                                               |       | (8,428     | )          |
| Stock compensation awards, net of forfeitures      |       | (186,333                                                 | )          | —                                              |       | —                   |       | —              |       | —                   |       | —                                               |       | —     |       |
| Earned stock award compensation,  net              |       |                                                     |       | 411                                                 |       | —                   |       | —              |       | —                   |       | —                                               |       | 411        |       |
| Repurchase of common stock                         |       | (24,111                                                  | )          | —                                              |       | —                   |       | (47                 | )          | —                   |       | —                                               |       | (47        | )          |
| Deferred compensation                              |       | 61,837                                                   |       | —                                              |       | 91                       |       | —              |       | —                   |       | —                                               |       | 91         |       |
| Common shares issued                               |       | —                                                   |       | —                                              |       | (681                     | )          | 681                 |       | —                   |       | —                                               |       | —     |       |
| Balance, June 30, 2009                        |       | 52,505,524                                               |       | $                                                   | 617,664    |                     | $          | 120                 |       | $                        | (102,444   | )                                                    | $          | (362,424   | )          | $ | 691 |   | $ | 153,607 |   |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

7

----

Table of Contents

 

**GUARANTY BANCORP AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Cash Flows**

 
| ** **                                                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| ** **                                                                                | ** ** | **(In thousands)**                 | ** ** |
| Cash flows from operating activities:                                                     |       |                               |       |   |   |
| Net income (loss)                                                                         |       | $                                  | (10,421    | ) | $ | 5,270 |   |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities: |       |                               |       |   |   |
| Depreciation and amortization                                                             |       | 4,937                              |       | 6,054 |   |
| Provision for loan losses                                                                 |       | 21,110                             |       | 1,775 |   |
| Stock compensation, net                                                                   |       | 411                                |       | 1,550 |   |
| Gain on sale of securities                                                                |       | —                             |       | (138 | ) |
| Loss (gain) on sale or disposal of real estate owned and  assets                          |       | (17                                | )          | 4 |   |
| Real estate valuation adjustments                                                         |       | 855                                |       | 734 |   |
| Write down of premises and equipment                                                      |       | —                             |       | 1,191 |   |
| Other                                                                                     |       | (674                               | )          | 120 |   |
| Net change in:                                                                            |       |                               |       |   |   |
| Other assets                                                                              |       | (4,547                             | )          | 6,896 |   |
| Interest payable and other liabilities                                                    |       | (1,325                             | )          | (5,644 | ) |
| Net cash provided by operating activities                                                 |       | 10,329                             |       | 17,812 |   |
| Cash flows from investing activities:                                                     |       |                               |       |   |   |
| Activity in available-for-sale securities:                                                |       |                               |       |   |   |
| Sales, maturities, prepayments, and calls                                                 |       | 8,826                              |       | 30,051 |   |
| Purchases                                                                                 |       | (61                                | )          | (25,299 | ) |
| Activity in held-to-maturity securities and bank stocks:                                  |       |                               |       |   |   |
| Maturities, prepayments and calls                                                         |       | 14,109                             |       | 1,118 |   |
| Purchases                                                                                 |       | (85                                | )          | — |   |
| Loan originations and principal collections, net                                          |       | 112,844                            |       | (9,206 | ) |
| Collections on and proceeds from sale of loans held for  sale                             |       | 2,710                              |       | 492 |   |
| Proceeds from sales of other real estate owned and  foreclosed assets                     |       | 2,067                              |       | 587 |   |
| Proceeds from sales of premises and equipment                                             |       | 1                                  |       | — |   |
| Additions to premises and equipment                                                       |       | (732                               | )          | (721 | ) |
| Net cash provided (used) by investing activities                                          |       | 139,679                            |       | (2,978 | ) |
| Cash flows from financing activities:                                                     |       |                               |       |   |   |
| Net decrease in deposits                                                                  |       | (137,921                           | )          | (92,476 | ) |
| Net change in short-term borrowings                                                       |       | —                             |       | (16,331 | ) |
| Proceeds from issuance of long-term debt                                                  |       | —                             |       | 104,772 |   |
| Repayment of long-term debt                                                               |       | (1,945                             | )          | (5,011 | ) |
| Net change in federal funds purchased and repurchase  agreements                          |       | (8,710                             | )          | (2,175 | ) |
| Repurchase of common stock                                                                |       | (47                                | )          | (122 | ) |
| Net cash used by financing activities                                                     |       | (148,623                           | )          | (11,343 | ) |
| Net change in cash and cash equivalents                                                   |       | 1,385                              |       | 3,491 |   |
| Cash and cash equivalents, beginning of period                                            |       | 45,711                             |       | 52,356 |   |
| Cash and cash equivalents, end of period                                                  |       | $                                  | 47,096     |   | $ | 55,847 |   |

 

See“Notes to Unaudited Consolidated Financial Statements.”

 

8

----

Tableof Contents

 

**GUARANTY BANCORP AND SUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements**

 

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

 

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

 

Our principal business is to serve as a holding company forour subsidiaries. As of June 30, 2009, Guaranty Bancorp had a single banksubsidiary, Guaranty Bank and Trust Company, referred to as Guaranty Bank orthe Bank.

 

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

 

The Bank is a full-servicecommunity bank offering an array of banking products and services to consumersand small to medium-sized businesses in the communities it serves along theFront Range of Colorado, including accepting time and demand deposits andoriginating commercial loans (including energy loans), real estate loans, SmallBusiness Administration 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. However, the customers’ ability to repay their loans is dependent on thereal estate and general economic conditions of the area, among other factors.

 

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

 

The accounting and reporting policies of the Company conform to generallyaccepted accounting 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. We have evaluated allsubsequent events through July 31, 2009, the date the financial statementswere issued.

 

Certain information and note disclosures normally included inconsolidated financial statements prepared in accordance with generallyaccepted accounting principles in the United States of America have beencondensed or omitted pursuant to the rules and regulations of theSecurities and Exchange Commission. The interim operating results are notnecessarily indicative of operating results for the full year.  For further information, refer to theconsolidated financial statements and notes included in the Company’s annualreport on Form 10-K for the year ended December 31, 2008.

 

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

 

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

 

9

----

Table of Contents

 

**GUARANTYBANCORP AND SUBSIDIARIES**

**Notesto Unaudited Condensed Consolidated Financial Statements (Continued)**

** **

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

 

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

 

The allowance for loan losses is evaluated on a regular basis bymanagement and based upon management’s periodic review of the collectibility ofthe loans in light of historical experience, the nature and volume of the loanportfolio, adverse situations that may affect borrowers’ ability to repay,estimated value of any underlying collateral and prevailing economicconditions.  This evaluation isinherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available.  An allowance for loan losses is maintained ata level deemed appropriate by management to adequately provide for known andinherent risks in the loan portfolio and other extensions of credit.

 

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

 

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

 

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

 

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

 

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

 

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

 

***(e)      StockIncentive Plan***

 

TheCompany’s Amended and Restated 2005 Stock Incentive Plan (“Plan”) provides forup to 2,500,000 grants of stock options, stock awards, stock units awards,performance stock awards, stock appreciation rights, and other equity basedawards to key employees, nonemployee directors, consultants and prospectiveemployees. As of June 30, 2009, the Company has only granted stock awards.The Company accounts for the equity based compensation using the provisions ofStatement of Financial Accounting 

 

10

----

Tableof Contents

 

Standards (“SFAS”) No. 123R,Share Based Payment (found at Accounting Standards Codification (ASC) 718-10 inthe Financial Accounting Standard Board’s (FASB) Generally Accepted AccountingPrincipals (GAAP) Codification). The Company recognizes stock compensation costfor services received in a share based payment transaction over the requiredservice period, generally defined as the vesting period. For awards with gradedvesting, compensation cost is recognized on a straight-line basis over therequisite service period for the entire award. The compensation cost ofemployee and director services received in exchange for stock awards is based onthe grant-date fair value of the award (as determined by quoted market prices).Stock compensation expense recognized reflects estimated forfeitures, adjustedas necessary for actual forfeitures. The Company has issued stock awards thatvest based on service periods from one to four years, and stock awards thatvest based on performance conditions. The maximum contractual term for theperformance based share awards is December 31, 2012. As of June 30,2009, none of the performance based restricted stock awards were expected tovest prior to the end of the contractual term. Should this expectation change,additional expense could be recorded in future periods.

 

***(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 the 2005 Deferred Compensation Plan (2005 Plan) are given theopportunity to elect to have all or a portion of their deferred compensationearn a rate of return equal to the total return on the Company’s common stock.The 2005 Plan does not provide for diversification of a participant’s assetsallocated to Company common stock and assets allocated to Company common stockcan only be settled with a fixed number of shares of stock. In accordance withEmerging Issues Task Force Issue 97-14, *Accounting for DeferredCompensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust andInvested* (found at ASC 710-10-35-1 in the FASB’s GAAP Codification),the deferred compensation obligation associated with Company common stock isclassified as a component of stockholders’ equity and the related shares aretreated as shares to be issued and are included in total shares outstanding foraccounting purposes. At June 30, 2009 and December 31, 2008, therewere 66,616 and 109,214 shares, respectively, to be issued.  Subsequent changes in the fair value of thecommon stock are not reflected in operations or stockholders’ equity of theCompany. Actual Company common stock held by the Company for the satisfactionof obligations of the 2005 Plan is classified as treasury stock.

 

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

 

Incometax expense is the total of the current year income tax due or refundable andthe change in deferred tax assets and liabilities. Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and taxcredit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date. Deferred tax assets are reduced by a valuation allowance,when in the opinion of management it is more likely than not that some portionor all of the deferred tax asset will not be realized. In determining therealizability of the deferred tax assets, management evaluates both positiveand negative evidence, including the existence of any cumulative losses in thecurrent year and prior two years, the amount of taxes paid in availablecarry-back years, the forecasts of future income, applicable tax planningstrategies, and assessments of current and future economic and businessconditions.

 

At June 30, 2009 and December 31,2008, the Company did not have any tax benefit disallowed under FASBInterpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) (found at ASC 740-10-05-6 in the FASB’s GAAPCodification).  A tax position isrecognized as a benefit only if it is “more likely than not” that the taxposition would be sustained in a tax examination, with a tax examination beingpresumed to occur. The amount recognized is the largest amount of tax benefitthat is greater than 50% likely of being realized on examination. For taxpositions not meeting the “more likely than not” test, no tax benefit isrecorded.

 

11

----

Tableof Contents

 

The Company and its subsidiary aresubject to U.S federal income tax and State of Colorado tax.  The Company is no longer subject toexamination by Federal or State taxing authorities for years before 2005. At June 30,2009 and December 31, 2008, the company did not have any unrecognized taxbenefits. The Company does not expect the amount of any unrecognized taxbenefits to significantly increase in the next twelve months.  The Company recognizes interest related toincome tax matters as interest expense and penalties related to income taxmatters as other noninterest expense. At June 30, 2009 and December 31,2008, the Company does not have any amounts accrued for interest and penalties.

 

***(h)        DerivativeFinancial Instruments***

 

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

 

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

 

Basic earnings per share representsincome available to common stockholders divided by the weighted average numberof common shares outstanding during the period. Diluted earnings per sharereflect additional common shares that would have been outstanding if potentialdilutive common shares had been issued. In accordance with SFAS No. 128(As Amended), *Earnings per Share* (found at ASC260-10 in the FASB’s GAAP Codification), the Company’s obligation to issueshares of stock to participants in its deferred compensation plan has beentreated as outstanding shares of stock in the basic earnings per sharecalculation.  The Company’s unvestedrestricted stock awards do not contain nonforfeitable rights to dividends, and therefore, are notsubject to the two-class method of computing basic earnings per share.  Dilutive common shares that may beissued by the Company relate to unvested common share grants subject to aservice condition for the six months ended June 30, 2009 and 2008. For thethree and six months ended June 30, 2008, the anti-dilutive restricted sharesexcluded from earnings per share computation were 1,603,038 and 1,599,380respectively. Earnings per common share have been computed based on thefollowing:

 
| ** **                                                                    | ** ** | **Three  Months Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                          | ** ** | ** **                            |       |                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average  common shares outstanding                                            |       | 51,339,542                            |       | 51,004,472                          |       | 51,312,847 |   | 50,996,350 |   |
| Effect of  dilutive unvested stock grants (1)                                 |       | —                                |       | 86,570                              |       | — |   | 90,228 |   |
| Average  shares outstanding for calculating diluted earnings per common share |       | 51,339,542                            |       | 51,091,042                          |       | 51,312,847 |   | 51,086,578 |   |

 

----

(1) Impact of the 1,110,744 ofunvested stock grants is antidilutive for the three and six months ended June 30,2009 due to the net loss for those periods.

 

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

 

***Adoption of New AccountingStandards:***  In February 2008, the FASB issued StaffPosition (FSP) 157-2, *Effective Date of FASBStatement No. 157*(SFAS 157),**(foundat ASC 820-10-15-1A in the FASB’s GAAP Codification)*.*This FSP delays the effective date of SFAS 157 for all nonfinancial assets andnonfinancial liabilities, except those that are recognized or disclosed at fairvalue on a recurring basis (at least annually) to fiscal years beginning after November 15,2008, and interim periods within those fiscal years. The impact of adoption on January 1,2009, was not material.

 

In December 2007, the FASB issued Statement No. 141R,(revised 2007) *Business Combinations* (SFAS141R), (found at ASC 805-10 in the FASB’s GAAP Codification). SFAS 141Rreplaces the current standard on business combinations and has significantlychanged the accounting for and reporting of business combinations inconsolidated financial statements. This statement requires an entity to measurethe business 

 

12

----

Table of Contents

 

acquiredat fair value and to recognize goodwill attributable to any noncontrollinginterests (previously referred to as minority interests) rather than just theportion attributable to the acquirer. The statement will also result in fewerexceptions to the principle of measuring assets acquired and liabilitiesassumed in a business combination at fair value. In addition, the statementrequires payments to third parties for consulting, legal, audit, and similarservices associated with an acquisition to be recognized as expenses whenincurred rather than capitalized as part of the business combination. SFAS 141Ris effective for fiscal years beginning on or after December 15, 2008.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133*  (SFAS 161), (found at ASC 815-10 in the FASB’sGAAP Codification). SFAS No. 161 amends and expands the disclosurerequirements of SFAS No. 133 for derivative instruments and hedgingactivities. SFAS No. 161 requires qualitative disclosure about objectivesand strategies for using derivative and hedging instruments, quantitativedisclosures about fair value amounts of the instruments and gains and losses onsuch instruments, as well as disclosures about credit-risk features inderivative agreements. SFAS No. 161 is effective for financial statementsissued for fiscal years and interim periods beginning after November 15,2008, with early application encouraged. The Company adopted this standard on January 1, 2009and the standard requires more disclosure about the Company’s derivativeactivities. Please see note 10 for more information.

 

In June 2008, the FASB issued FASB Staff Position EITF 03-6-1—*Determining Whether Instruments Granted in Share-Based PaymentTransactions Are Participating Securities*  (FSP EITF 03-6-1), (found at ASC 260-10-45-60in the FASB’s GAAP Codification). This FASB Staff Position (FSP) addresseswhether instruments granted in share-based payment transactions areparticipating securities prior to vesting and, therefore, need to be includedin the earnings allocation in computing earnings per share (EPS) under thetwo-class method of FASB Statement No. 128, *Earnings PerShare*.  FSP EITF 03-6-1provides that u****nvested share-based payment awards that contain nonforfeitable rights todividends or dividend equivalents (whether paid or unpaid) are participatingsecurities and shall be included in the computation of EPS pursuant to thetwo-class method. ****ThisFSP was effective for financial statements issued for fiscal years beginningafter December 15, 2008, and interim periods within those years. Allprior-period EPS data presented were to be adjusted retrospectively (includinginterim financial statements, summaries of earnings, and selected financialdata) to conform with the provisions of this FSP.  Since the Company’s unvested restricted stockawards do not contain nonforfeitable rights to dividends, they are not includedunder the scope of this pronouncement, and therefore, the impact of adoptionwas not material.

 

In April 2009, the FASB issued FSP SFAS 115-2 & 124-2 *Recognition and Presentation of Other-Than Temporary Impairment*(foundat ASC 320-10-35**in the FASB’s GAAP Codification)*.*  The FSP eliminatesthe requirement for the issuer to evaluate whether it has the intent andability to hold an impaired investment until maturity.  Conversely, the new FSP requires the issuerto recognize an OTTI in the event that the issuer intends to sell the impairedsecurity or in the event that it is more likely than not that the issuer willsell the security prior to recovery.  Inthe event that the sale of the security in question prior to its maturity isnot probable but the entity does not expect to recover its amortized cost basisin that security,  then the entity willbe required to recognize an OTTI.  In theevent that the recovery of the security’s cost basis prior to maturity is notprobable and an OTTI is recognized, the FSP provides that any component of theOTTI relating to a decline in the creditworthiness of the debtor should bereflected in earnings, with the remainder being recognized in OtherComprehensive Income.  Conversely, in theevent that the issuer intends to sell the security before the recovery of itscost basis or if it is more likely than not that the Company will have to sellthe security before recovery of its cost basis, then the entire OTTI will berecognized in earnings. The FSP is effective for interim and annual reportingperiods ending after June 15, 2009. The adoption of this guidance did not have a material impact on theCompany’s consolidated financial position, results of operations or cash flows.

 

InApril 2009, the FASB issued FSP 157-4 *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly*(foundat ASC 820-10-65-4 in the FASB’s GAAP Codification).  The FSP provides additional guidance fordetermining fair value based on observable transactions.  The FSP provides that if evidence suggeststhat an observable transaction was not executed in an orderly way that little,if any, weight should be assigned to this indication of an Asset or Liability’sfair value.  Conversely, if evidencesuggests that the observable transaction was executed in an orderly way, thetransaction price of the observable transaction may be appropriate to use indetermining the fair value of the Asset/Liability in question, with appropriateweighting given to this indication based on facts and circumstances. Finally,if there is no way for the entity to determine whether the observable 

 

13

----

Tableof Contents

 

transaction was executed inan orderly way, relatively less weight should be ascribed to this indicator offair value. The FSP is effective for interim and annual reporting periodsending after June 15, 2009.  Theadoption of this guidance did not have a material impact on the Company’sconsolidated financial position, results of operations or cash flows.

 

InApril 2009, the FASB issued FSP SFAS 107-1 & APB 28-1 *Interim Disclosures about Fair Value of Financial Instruments*(foundat ASC 320-10-50 in the FASB’s GAAP Codification).  The FSP provides that publicly tradedcompanies shall provide information concerning the fair value of its financialinstruments whenever it issues summarized financial information for interimreporting periods.  In periods afterinitial adoption this FSP requires comparative disclosures only for periodsending after initial adoption. The FSP is effective for interim reportingperiods ending after June 15, 2009. 

 

InMay 2009, the FASB issued Statement No. 165 *SubsequentEvents*(SFAS 165) * *(found at ASC 855 in the FASB’sGAAP Codification).  The statement setsforth guidance concerning the recognition or disclosure of events or transactionsthat occur subsequent to the balance sheet date but prior to the release of thefinancial statements.  The statement alsodefines “available to be issued” financial statements as financial statementsthat have received all the required approvals from management and otherconstituents.  The statement sets forththat management of a public company must evaluate subsequent events forrecognition and/or disclosure through the date of issuance, whereas privatecompanies need only evaluate subsequent events through the date the financialstatements became available to be issued. The statement also delineates between and defines the recognition anddisclosure requirements for Recognized Subsequent Events and Non-RecognizedSubsequent Events.  Recognized SubsequentEvents provide additional evidence about conditions that existed as of thebalance sheet date and will be recognized in the entity’s financialstatements.  Non-Recognized SubsequentEvents provide evidence about conditions that did not exist as of the balancesheet date and if material will warrant disclosure of the nature of thesubsequent event and the financial impact. An entity shall disclose the date through which subsequent events havebeen evaluated and whether that date is the date the financial statements wereissued or available to be issued.  Thisstatement is effective for interim and annual reporting periods ending after June 15,2009.  The adoption of this guidance didnot have a material impact on the Company’s consolidated financial position,results of operations or cash flows.

 

***Newly Issued But Not Yet Effective AccountingStandards:***

 

On July 1, 2009, the FASB’s GAAP Codification became effective asthe sole authoritative source of US GAAP. This codification was issued under FASB Statement No. 168, **The***FASB Accounting Standards**Codification**TM* **and the Hierarchy of Generally Accepted AccountingPrinciples—a replacement of FASB Statement No. 162****(SFAS 168)*. ***ThisCodification** reorganizes current GAAP fornon-governmental entities into a topical index to facilitate accountingresearch and to provide users additional assurance that they have referencedall related literature pertaining to a given topic.  Existing GAAP prior to the Codification wasnot altered in compilation of the GAAP Codification. The GAAP Codificationencompasses all FASB Statements of Financial Accounting Standards (SFAS),Emerging Issues Task Force (EITF) statements, FASB Staff Positions (FSP), FASBInterpretations (FIN), FASB Derivative Implementation Guides (DIG), AmericanInstitute of Certified Public Accountants (AICPA) Statement of Positions(SOPS), Accounting Principals Board (APB) Opinions and Accounting ResearchBulletins (ARBs) along with the remaining body of GAAP effective as of June 30,2009.  Financial Statements issued forall interim and annual periods ending after September 15, 2009 will needto reference accounting guidance embodied in the Codification as opposed toreferencing the previously authoritative pronouncements.  Accounting literature included in thecodification is referenced by Topic, Subtopic, Section and Paragraph.

 

In June 2009, the FASB issued Statement No. 166 *Accounting for the Transfer of Financial Assets and Amendment of FASBStatement No. 140 Instruments*(SFAS 166)*.*UnderFASB’s Codification at ASC 105-10-65-1-d, SFAS 166 will remain authoritativeuntil integrated into the FASB Codification*.*The statementremoves the concept of a special purpose entity (SPE) from Statement 140 andremoves the exception of applying FASB Interpretation 46 *VariableInterest Entities,* to Variable Interest Entities that are SPEs. Itlimits the circumstances in which a transferor derecognizes a financialasset.  The statement amends therequirements for the transfer of a financial asset to meet the requirements for“sale” accounting.   The statement iseffective for all interim and annual periods beginning after November 15,2009. The Company does not expect the adoption to have a material impact on theCompany’s consolidated financial position, results of operations or cash flows.

 

14

----

Tableof Contents

 

In June 2009, the FASB issued Statement No. 167 *Amendments to FASB Interpretation No. 46(R) *(SFAS167).  Under FASB’s Codification at ASC105-10-65-1-d, SFAS 167 will remain authoritative until integrated into theFASB Codification.  This Statement amendsInterpretation 46(R) to require an enterprise to perform an analysis todetermine whether the enterprise’s variable interest give it a controllingfinancial interest in the variable interest entity.  The statement is effective for all interimand annual periods beginning after November 15, 2009. The Company does notexpect the adoption to have a material impact on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

***(k)   Reclassifications***

** **

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

 

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

 

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

* *
| ** **                                                 | ** ** | **Fair Value**     | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Amortized   Cost** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------|------------|
| ** **                                                 | ** ** | **(In thousands)** | ** ** |
| June 30, 2009:                                        | ** ** | ** **         | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **           | ** ** |
| U.S. government agencies and government-sponsored entities |       | $                  | 2,453      |                         | $          | —                        |       | $                    | (40        | ) | $ | 2,493 |   |
| State and municipal                                        |       | 64,822             |       | 583                          |       | (171                          | )          | 64,410               |       |
| Mortgage-backed                                            |       | 28,123             |       | 744                          |       | —                        |       | 27,379               |       |
| Marketable equity                                          |       | 1,519              |       | —                       |       | —                        |       | 1,519                |       |
| Other securities                                           |       | 544                |       | —                       |       | —                        |       | 544                  |       |
| Total                                                      |       | $                  | 97,461     |                         | $          | 1,327                         |       | $                    | (211       | ) | $ | 96,345 |   |
|                                                       |       |               |       |                         |       |                          |       |                 |       |
| December 31, 2008:                                    | ** ** | ** **         | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **           | ** ** |
| U.S. Treasury securities                                   |       | $                  | 3,495      |                         | $          | 1                             |       | $                    | —     |   | $ | 3,494 |   |
| U.S. government agencies and government-sponsored entities |       | 2,510              |       | 17                           |       | —                        |       | 2,493                |       |
| State and municipal                                        |       | 63,015             |       | 456                          |       | (2,836                        | )          | 65,395               |       |
| Mortgage-backed                                            |       | 31,965             |       | 299                          |       | (40                           | )          | 31,706               |       |
| Marketable equity                                          |       | 1,345              |       | —                       |       | —                        |       | 1,345                |       |
| Other securities                                           |       | 544                |       | —                       |       | —                        |       | 544                  |       |
| Total                                                      |       | $                  | 102,874    |                         | $          | 773                           |       | $                    | (2,876     | ) | $ | 104,977 |   |

 

*The carrying amount, unrecognized gains and losses, and fair value ofsecurities held to maturity were as follows at the dates presented:*

* *
| ** **              | ** ** | **Amortized  Cost** | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair value** | ** ** |
|-------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
| ** **              | ** ** | **(In thousands)**  | ** ** |
| June 30, 2009:     |       |                |       |                         |       |                          |       |           |       |
| Mortgage-backed         |       | $                   | 10,929     |                         | $          | 407                           |       | $              | —     |   | $ | 11,336 |   |
|                    |       |                | ** ** | ** **                   | ** ** | ** **                    |       |           |       |
| December 31, 2008: |       |                |       |                         |       |                          |       |           |       |
| Mortgage-backed         |       | $                   | 13,114     |                         | $          | 391                           |       | $              | —     |   | $ | 13,505 |   |

 

The amortized cost and estimated fair value of available for sale debtsecurities by contractual maturity at June 30, 2009 are shown below.Expected maturities will differ from contractual maturities because borrowersmay have the right to prepay obligations with or without prepayment penalties.

 

15

----

Tableof Contents

 
| ** **                                               | ** ** | **Available for sale (AFS)** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **Amortized cost**           | ** ** | **Fair value** | ** ** |
| ** **                                               | ** ** | **(In thousands)**           | ** ** |
| Debt securities available for sale:                      |       |                         |       |   |   |
| Due in one year or less                                  |       | $                            | 2,142      |   | $ | 2,157 |   |
| Due after one year through five years                    |       | 13,876                       |       | 14,199 |   |
| Due after five years through ten years                   |       | 3,192                        |       | 3,281 |   |
| Due after ten years                                      |       | 48,237                       |       | 48,182 |   |
| Total AFS excluding MBS and marketable equity securities |       | 67,447                       |       | 67,819 |   |
| Mortgage-backed and marketable equity securities         |       | 28,898                       |       | 29,642 |   |
| Total available for sale                                 |       | $                            | 96,345     |   | $ | 97,461 |   |

 
| ** **                   | ** ** | **Held to maturity** | ** ** |
|------------------------------|------------|----------------------|------------|
| ** **                   | ** ** | **Amortized cost**   | ** ** | **Fair value** | ** ** |
| ** **                   | ** ** | **(In thousands)**   | ** ** |
| Securities held to maturity: |       |                 |       |   |   |
| Mortgage-backed securities   |       | $                    | 10,929     |   | $ | 11,336 |   |
|                              |            |                      |            |  |  |  |  |

 

The following tables present the fair value and the unrealized loss onsecurities that were temporarily impaired as of June 30, 2009 and December 31,2008 by aggregated major security type and length of time in a continuousunrealized loss position:

 
| ** **                                                  | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**       | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|-----------------|------------|
| **June 30, 2009**                                      | ** ** | **Fair value**               | ** ** | **Unrealized  losses**     | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** |
| ** **                                                  | ** ** | **(In thousands)**           | ** ** |
| Description of securities:                                  |       |                         |       |                       |       |            |       |   |   |   |   |   |   |
| U.S.  government agencies and government-sponsored entities |       | $                            | 2,454      |                       | $          | (40             | )          | $ | — |   | $ | — |   | $ | 2,454 |   | $ | (40 | ) |
| State and municipal                                         |       | 1,061                        |       | (11                        | )          | 38,550          |       | (160 | ) | 39,611 |   | (171 | ) |
| Total temporarily impaired                                  |       | $                            | 3,515      |                       | $          | (51             | )          | $ | 38,550 |   | $ | (160 | ) | $ | 42,065 |   | $ | (211 | ) |

 
| ** **                 | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**       | ** ** |
|----------------------------|------------|------------------------------|------------|----------------------------|------------|-----------------|------------|
| **December 31, 2008** | ** ** | **Fair value**               | ** ** | **Unrealized  losses**     | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** |
| ** **                 | ** ** | **(In thousands)**           | ** ** |
| Description of securities: |       |                         |       |                       |       |            |       |   |   |   |   |   |   |
| Mortgage-backed            |       | $                            | 4,348      |                       | $          | (40             | )          | $ | — |   | $ | — |   | $ | 4,348 |   | $ | (40 | ) |
| State and municipal        |       | 2,670                        |       | (23                        | )          | 35,897          |       | (2,813 | ) | 38,567 |   | (2,836 | ) |
| Total temporarily impaired |       | $                            | 7,018      |                       | $          | (63             | )          | $ | 35,897 |   | $ | (2,813 | ) | $ | 42,915 |   | $ | (2,876 | ) |

 

At June 30, 2009, the Company owned fivesecurities in unrealized loss positions. Generally, the fair value of our available for sale securitiesfluctuates as a result of changes in market interest rates.  Of the five securities in unrealized losspositions at June 30, 2009, one single security accounts for approximately76% of the total unrealized loss.  TheCompany owns 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 considers areview of the issuers’ current financial statements, including the related cashflows and interest payments. This annual review process was updated in thesecond quarter 2009 for the largest non-rated municipal security in ourportfolio.  The unrealized loss on thissecurity comprises approximately 94% of the overall unrealized loss on stateand municipal bonds.  We updated ourannual credit analysis of this particular bond in the first quarter 2009 andconcluded that the unrealized loss position on this security was a result ofthe level of market interest rates and not a result of the underlying issuer’sability to repay.   Similarly, managementconcluded that the continuous unrealized loss position on all other securitieswas also a result of the level of market interest rates and not a result of theunderlying issuers’ ability to repay.  Inaddition, we do not intend to sell the securities with an unrealized loss anddo not believe that it is more likely than not that we will be required to sellthe security prior to a recovery in its value.

 

16

----

Tableof Contents

 

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

 

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

 
| ** **                       | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **(In thousands)**      | ** ** |
| Loans on real estate:            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Residential and commercial       |       | $                       | 682,923    |                        | $          | 680,030 |   |
| Construction                     |       | 190,197                 |       | 268,306                     |       |
| Equity lines of credit           |       | 55,812                  |       | 50,270                      |       |
| Commercial loans                 |       | 639,462                 |       | 746,241                     |       |
| Agricultural loans               |       | 22,764                  |       | 22,738                      |       |
| Lease financing                  |       | 4,722                   |       | 3,549                       |       |
| Installment loans to individuals |       | 37,878                  |       | 38,352                      |       |
| Overdrafts                       |       | 569                     |       | 855                         |       |
| SBA and other                    |       | 20,215                  |       | 19,592                      |       |
|                             |       | 1,654,542               |       | 1,829,933                   |       |
| Less:                            |       |                    |       |                        |       |
| Allowance for loan losses        |       | (43,041                 | )          | (44,988                     | )          |
| Unearned discount                |       | (2,970                  | )          | (3,600                      | )          |
| Net Loans                        |       | $                       | 1,608,531  |                        | $          | 1,781,345 |   |

 

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

 
| ** **                                  | ** ** | **Quarter  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **                                  | ** ** | **2009**                         | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **(In  thousands)**              | ** ** |
| Balance,  beginning of period               |       | $                                | 37,598     |                                | $          | 26,048 |   | $ | 44,988 |   | $ | 25,711 |   |
| Provision  for loan losses                  |       | 18,605                           |       | 900                                 |       | 21,110 |   | 1,775 |   |
| Loans  charged-off                          |       | (13,509                          | )          | (673                                | )          | (23,771 | ) | (1,416 | ) |
| Recoveries  on loans previously charged-off |       | 347                              |       | 231                                 |       | 714 |   | 436 |   |
| Balance,  end of period                     |       | $                                | 43,041     |                                | $          | 26,506 |   | $ | 43,041 |   | $ | 26,506 |   |

 

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

 
| ** **                                     | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **(In thousands)**      | ** ** |
| Impaired loans with a  valuation allowance     |       | $                       | 33,096     |                        | $          | 42,191 |   |
| Impaired loans without a  valuation allowance  |       | 22,058                  |       | 12,631                      |       |
| Total impaired loans                           |       | $                       | 55,154     |                        | $          | 54,822 |   |
| Valuation allowance related  to impaired loans |       | $                       | 7,291      |                        | $          | 11,064 |   |

* *
| ** **                                            | ** ** | **Quarter  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **                                            | ** ** | **2009**                         | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                            | ** ** | **(In  thousands)**              | ** ** |
| Average  of individually impaired loans during period |       | $                                | 56,682     |                                | $          | 25,320 |   | $ | 56,062 |   | $ | 24,689 |   |
| Interest  income recognized during impairment         |       | $                                | 150        |                                | $          | 30 |   | $ | 160 |   | $ | 47 |   |
| Cash-basis  interest income recognized                |       | $                                | 150        |                                | $          | 30 |   | $ | 160 |   | $ | 47 |   |

 

The gross interest income that would have beenrecorded in the year-to-date periods ended June 30, 2009 and June 30,2008, if the loans had been current in accordance with their original terms andhad been outstanding throughout the period (or since origination, if held forpart of the period) was $2,226,000 and $1,038,000, respectively.  At June 30, 2009 and December 31,2008, nonaccrual loans were $52,483,000 and $54,594,000, respectively.

 

17

----

Tableof Contents

 

**(4)       OtherIntangible Assets**

 

Other intangible assets with definite lives areamortized over their respective estimated useful lives to their estimatedresidual values.  The amortizationexpense represents the estimated decline in the value of the underlyingdeposits from customers acquired.  As of June 30,2009 and December 31, 2008, the Company’s only intangible asset was ourCore Deposit Intangible.

 

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

 
| ** **                      | ** ** | ** **       | ** ** | **June 30,**   | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **Useful  life** | ** ** | **2009**            | ** ** | **2008**              | ** ** |
| ** **                      | ** ** | ** **       | ** ** | **(In  thousands)** | ** ** |
| Core  deposit intangible assets |       | 7 - 15 years     |       | $                   | 62,975     |                  | $          | 62,975 |   |
| Accumulated  amortization       |       |             |       | (40,638             | )          | (37,475               | )          |
| Other  intangible assets, net   |       |             |       | $                   | 22,337     |                  | $          | 25,500 |   |

 

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

 
| ** **            | ** ** | **Three  Months Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **            | ** ** | **(In  thousands)**                   | ** ** |
| Amortization  expense |       | $                                     | 1,581      |                                | $          | 1,877 |   | $ | 3,163 |   | $ | 3,754 |   |
|                       |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |

 

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

 

At June 30,2009, our outstanding borrowings were $164,459,000 as compared to $166,404,000at December 31, 2008. These borrowings at June 30, 2009 consisted ofterm notes at the Federal Home Loan Bank (“FHLB”).  There was also a line of credit at the FHLBat June 30, 2009, but there was no balance outstanding on this line ofcredit on such date.

 

The totalcommitment, including balances outstanding, for borrowings at the FHLB for theterm notes and line of credit at June 30, 2009 and December 31, 2008was $404.0 million and $428.3 million, respectively.  The interest rate on the line of creditvaries with the federal funds rate, and was 0.25% at June 30, 2009.  The term notes have fixed interest rates thatrange from 2.52% to 6.22%. A blanket pledge andsecurity agreement with the FHLB, which encompasses certain loans andsecurities, serves as collateral for these borrowings.

 

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

 

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

 

The Company had $41,239,000 in aggregate principalbalances of subordinated debentures outstanding with a weighted average cost of6.40% and 8.68% at June 30, 2009and December 31,2008, respectively. The subordinated debentures were issued in four separateseries. Each issuance has a maturity of thirty years from its date of issue.The subordinated debentures were issued to trusts established by the Company,which in turn issued $40 million of trust preferred securities. Generally andwith certain limitations, the Company is permitted to call the debentures 

 

18

----

Tableof Contents

 

subsequentto the first five or ten years, as applicable, after issue if certainconditions are met, or at any time upon the occurrence and continuation ofcertain changes in either the tax treatment or the capital treatment of thetrusts, the debentures or the preferred securities.   As of June 30, 2009, the Company was incompliance with all covenants of these subordinated debentures.

 

Under the terms of each subordinated debenturesagreement, the Company has the ability to elect to defer interest on thedebentures for a period of up to sixty months as long as it is in compliancewith all covenants of the agreement.  On July 31,2009, the Company notified the trustees of the four trusts that it will deferinterest on all four of its subordinated debentures.  Such a deferral is not anevent of default under each subordinated debentures agreement and interest onthe debentures continues to accrue during such deferral period.

 

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

 

The Guaranty Capital TrustIII trust preferred issuance on June 30, 2003, became callable at each quarterlyinterest payment date starting on July 7, 2008.  The Company did not call this security on anyof its quarterly interest payment dates.  The CenBank Trust III trust preferred issuance became callable at eachquarterly interest payment date starting on April 15, 2009.   The Company did not call this security onany of its quarterly interest payment dates.

 

*The following table summarizes the terms of each subordinated debentureissuance at June 30, 2009**(dollars in thousands):*

 
| ** **                 | ** ** | **Date  Issued** | ** ** | **Amount** | ** ** | **Maturity  Date** | ** ** | **Call  Date*** | ** ** | **Fixed or  Variable** | ** ** | **Rate Adjuster**  | ** ** | **Current  Rate** | ** ** | **Next Rate  Reset Date** | ** ** |
|----------------------------|------------|------------------|------------|------------|------------|--------------------|------------|-----------------|------------|------------------------|------------|--------------------|------------|-------------------|------------|---------------------------|------------|
| ** **                 |       |             | ** ** | ** ** |       |               |       |            |       |                   | ** ** | ** **         |       |              |       |                      |       |
| CenBank Trust I            |       | 9/7/2000         |       | $          | 10,310     |               | 9/7/2030   |            | 9/7/2010   |                   | Fixed      |               | N/A        |              | 10.60      | %                         | N/A        |   |
| CenBank Trust II           |       | 2/22/2001        |       | 5,155      |       | 2/22/2031          |       | 2/22/2011       |       | Fixed                  |       | N/A                |       | 10.20             | %          | N/A                       |       |
| CenBank Trust III          |       | 4/8/2004         |       | 15,464     |       | 4/15/2034          |       | 7/15/2009       |       | Variable               |       | LIBOR + 2.65% |       | 3.78              | %          | 7/15/2009                 |       |
| Guaranty Capital Trust III |       | 6/30/2003        |       | 10,310     |       | 7/7/2033           |       | 7/7/2009        |       | Variable               |       | LIBOR + 3.10% |       | 4.23              | %          | 7/7/2009                  |       |
|                            |            |                  |            |            |            |                    |            |                 |            |                        |            |                    |            |                   |            |                           |            |  |

 

----

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

 

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

 

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

 

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

 

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

 
| ** **                    | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **(In  thousands)**     | ** ** |
|                          | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Commitments  to extend credit |       | $                       | 365,609    |                        | $          | 390,277 |   |
| Standby  letters of credit    |       | 17,482                  |       | 24,792                      |       |
| Commercial  letters of credit |       | 11,000                  |       | 11,000                      |       |
|                          |       |                    |       |                        |       |
| Totals                        |       | $                       | 394,091    |                        | $          | 426,069 |   |

 

Commitments to extend credit are agreements to lendto a customer as long as there is no violation of any condition established inthe contract. Commitments generally have fixed expiration dates or othertermination

 

19

----

Tableof Contents

 

clausesand may require payment of a fee. Several of the commitments may expire withoutbeing drawn upon. Therefore, the total commitment amounts do not necessarilyrepresent future cash requirements. The amount of collateral obtained, if it isdeemed necessary by the Company, is based on management’s credit evaluation ofthe 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 supporting thosecommitments 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”, found at ASC 820-10 in the FASB’s GAAPCodification).  SFAS No. 157 clarifies that fair value is anexit price, representing the amount that would be received to sell an asset orpaid to transfer a liability in an orderly transaction between marketparticipants. Under SFAS No. 157, fair value measurements are not adjustedfor transaction costs. SFAS No. 157 establishes a fair value hierarchythat prioritizes the inputs to valuation techniques used to measure fair value.The hierarchy gives the highest priority to unadjusted quoted prices in activemarkets for identical assets or liabilities (level 1 measurements) and thelowest priority to unobservable inputs (level 3 measurements). The three levelsof the fair value hierarchy under SFAS No. 157 are described below:

 

Basis of Fair Value Measurement:

 

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

 

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

 

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

 

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

 

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

 

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

 

20

----

Table of Contents

 

Level 3 is for positions that are not tradedin active markets or are subject to transfer restrictions, and/or wherevaluations are adjusted to reflect illiquidity and/or non-transferability. Suchadjustments are generally based on available market evidence. In the absence ofsuch evidence, management’s best estimate is used. Management’s best estimateconsists of both internal and external support on the Level 3 investment.Internal cash flow models using a present value formula along with indicativeexit pricing obtained from broker/dealers were used to determine fair value forcertain Level 3 investments. Subsequent to inception, management only changeslevel 3 inputs and assumptions when corroborated by evidence such astransactions in similar instruments, completed or pending third partytransactions in the underlying investment or comparable entities, subsequentrounds of financing, recapitalizations and other transactions across thecapital structure, offerings in the equity or debt markets, and changes infinancial ratios or cash flows.

 

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

 

Assets and liabilities measured at fair valueon a recurring basis are summarized below:

 
| ** **                                | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant   Other  Observable  Inputs   (Level 2)** | ** ** | **Significant  Unobservable  Inputs   (Level 3)** | ** ** | **Balance** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------|------------|-------------|------------|
| ** **                                | ** ** | **(In thousands)**                                                    | ** ** |
| Assets/Liabilities at June 30, 2009  |       |                                                                  |       |                                                    |       |                                              |       |        |       |
| Investment securities, available for sale |       | $                                                                     | —     |                                                    | $          | 58,911                                            |       | $           | 38,550     |   | $ | 97,461 |   |
| Derivative Assets                         |       | —                                                                |       | —                                                  |       | 123                                               |       | 123         |       |
| Derivative Liabilities                    |       | —                                                                |       | —                                                  |       | 35                                                |       | 35          |       |
|                                      |       |                                                                  |       |                                                    |       |                                              |       |        |       |
| Assets at December 31, 2008          |       |                                                                  |       |                                                    |       |                                              |       |        |       |
| Investment securities, available for sale |       | $                                                                     | —     |                                                    | $          | 66,977                                            |       | $           | 35,897     |   | $ | 102,874 |   |

 

SeeNote 10, Derivatives and Hedging Activity, for further discussion of the valuationof the derivatives as of June 30, 2009.

 

Thetable below presents a reconciliation of gains and losses for all assetsmeasured at fair value on a recurring basis using significant unobservableinputs (Level 3) for the three and six months ending June 30, 2009.

 

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

 
| ** **                                         | ** ** | **Three  months ended   June 30, 2009** | ** ** | **Six months  ended   June 30, 2009** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **Net  Derivative  Assets and  Liabilities** | ** ** | **Available  for Sale  Securities**        | ** ** | **Net  Derivative  Assets and  Liabilities** | ** ** | **Available  for  Sale Securities** | ** ** |
| ** **                                         | ** ** | **(In  thousands)**                          | ** ** |
| Beginning  Balance                                 |       | $                                            | 89         |                                       | $          | 37,297 |   | $ | — |   | $ | 35,897 |   |
| Total  unrealized gains (losses) included in:      |       |                                         |       |                                       |       |   |   |   |   |
|                                               |       |                                         |       |                                       |       |   |   |   |   |
| Net  Income                                        |       | (1                                           | )          | —                                     |       | 88 |   | — |   |
| Other  Comprehensive Income                        |       | —                                       |       | 1,253                                      |       | — |   | 2,653 |   |
| Purchases,  sales, issuances, and settlements, net |       | —                                       |       | —                                     |       | — |   | — |   |
| Transfers  in and (out) of level three             |       | —                                       |       | —                                     |       | — |   | — |   |
| Balance  June 30, 2009                        |       | $                                            | 88         |                                       | $          | 38,550 |   | $ | 88 |   | $ | 38,550 |   |

 

21

----

Tableof Contents

 

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

 

Thefollowing represents assets and liabilities measured at fair value on anon-recurring basis as of June 30, 2009.

 
| ** **                        | ** ** | **Quoted  Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant  Other  Observable  Inputs (Level 2)** | ** ** | **Significant  Unobservable  Inputs (Level 3)** | ** ** | **Balance** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|-------------|------------|
| ** **                        | ** ** | **(In  thousands)**                                                    | ** ** |
| Assets at  June 30, 2009     |       |                                                                   |       |                                                 |       |                                            |       |        |       |
| Impaired  loans                   |       | $                                                                      | —     |                                                 | $          | —                                          |       | $           | 25,805     |   | $ | 25,805 |   |
|                              |       |                                                                   |       |                                                 |       |                                            |       |        |       |
| Assets at  December 31, 2008 |       |                                                                   |       |                                                 |       |                                            |       |        |       |
| Impaired  loans                   |       | $                                                                      | —     |                                                 | $          | —                                          |       | $           | 31,127     |   | $ | 31,127 |   |

 

Impaired loans with a valuation allowance based uponfair value of the underlying collateral had a carrying amount of $33,096,000 atJune 30, 2009 as compared to $42,191,000 at December 31, 2008 and$22,454,000 at June 30, 2008.  Thevaluation allowance on impaired loans was $7,291,000 at June 30, 2009 ascompared to $11,064,000 at December 31, 2008 and $6,295,000 at June 30,2008.  During the six month periods endedJune 30, 2009 and 2008, an additional provision for loan losses ofapproximately $16.6 million and $2.0 million was made for impaired loans,respectively.   During the three monthperiods ended June 30, 2009 and 2008, an additional provision for loanlosses of approximately $14.1 million and $0.9 million was made for impairedloans, respectively.

 

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

 

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

 

Nonfinancial assets and liabilities measuredat fair value on a nonrecurring basis are summarized below:

 
| ** **                                    | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant   Other  Observable  Inputs   (Level 2)** | ** ** | **Significant  Unobservable  Inputs   (Level 3)** | ** ** | **Balance** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------|------------|-------------|------------|
| ** **                                    | ** ** | **(In thousands)**                                                    | ** ** |
| Assets at June 30, 2009                  |       |                                                                  |       |                                                    |       |                                              |       |        |       |
| Other real estate owned and foreclosed assets |       | $                                                                     | —     |                                                    | $          | —                                            |       | $           | 34,746     |   | $ | 34,746 |   |
|                                               |            |                                                                       |            |                                                         |            |                                                   |            |             |            |  |  |  |  |

 

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

 

22

----

Table ofContents

 

***FairValue of Financial Instruments***

 

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

 
| ** **                                                                  | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                  | ** ** | **Carrying  amount**   | ** ** | **Fair value**             | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** |
| ** **                                                                  | ** ** | **(In thousands)**     | ** ** |
| Financial  assets:                                                          |       |                   |       |                       |       |   |   |   |   |
| Cash  and cash equivalents                                                  |       | $                      | 47,096     |                       | $          | 47,096 |   | $ | 45,711 |   | $ | 45,711 |   |
| Securities  available for sale                                              |       | 97,461                 |       | 97,461                     |       | 102,874 |   | 102,874 |   |
| Securities  held to maturity                                                |       | 10,929                 |       | 11,336                     |       | 13,114 |   | 13,505 |   |
| Bank  stocks                                                                |       | 16,562                 |       | n/a                        |       | 28,276 |   | n/a |   |
| Loans,  net                                                                 |       | 1,608,531              |       | 1,604,418                  |       | 1,781,345 |   | 1,777,496 |   |
| Loans  held for sale                                                        |       | 5,250                  |       | 5,250                      |       | 5,760 |   | 5,760 |   |
| Accrued  interest receivable                                                |       | 6,532                  |       | 6,532                      |       | 7,202 |   | 7,202 |   |
| Interest  rate swaps, net                                                   |       | 88                     |       | 88                         |       | — |   | — |   |
|                                                                        |       |                   |       |                       |       |   |   |   |   |
| Financial  liabilities:                                                     |       |                   |       |                       |       |   |   |   |   |
| Deposits                                                                    |       | 1,560,730              |       | 1,571,348                  |       | 1,698,651 |   | 1,712,160 |   |
| Federal  funds purchased and securities sold under agreements to repurchase |       | 13,071                 |       | 13,071                     |       | 21,781 |   | 21,781 |   |
| Subordinated  debentures                                                    |       | 41,239                 |       | 36,001                     |       | 41,239 |   | 35,938 |   |
| Long-term  borrowings                                                       |       | 164,459                |       | 174,456                    |       | 166,404 |   | 178,785 |   |
| Accrued  interest payable                                                   |       | 3,276                  |       | 3,276                      |       | 3,927 |   | 3,927 |   |
|                                                                             |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

The fair value of afinancial instrument is the current amount that would be exchanged betweenwilling parties, other than in a forced liquidation. Fair value is bestdetermined based upon quoted market prices. However, in many instances, thereare no quoted market prices for the Company’s various financial instruments. Incases where quoted market prices are not available, fair values are based onestimates using present value or other valuation techniques. Those techniquesare significantly affected by the assumptions used, including the discount rateand estimates of future cash flows. Accordingly, the fair value estimates maynot be realized in an immediate settlement of the instrument. Statement ofFinancial Accounting Standards No. 107 excludes certain financial instrumentsand all nonfinancial instruments from its disclosure requirements. Accordingly,the aggregate fair value amounts presented may not necessarily represent theunderlying fair value of the Company.

 

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

 

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

** **

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

 

***(b) Securitiesand Bank Stocks***

** **

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

 

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

 

23

----

**Tableof Contents**

** **

***(c) Loans***

** **

Loans, net exclude loansheld-for-sale as these fair values are disclosed on a separate line on thetable.  For variable-rate loans thatreprice frequently and with no significant change in credit risk, fair valuesare based on carrying values. Fair values for other loans (e.g., commercialreal estate and investment property mortgage loans, commercial and industrialloans) are estimated using discounted cash flow analyses, using interest ratescurrently being offered for loans with similar terms to borrowers of similarcredit quality.  Impaired loans arevalued at the lower of cost or fair value. Fair value is measured based on the value of the collateral securingthese loans, which isbased on appraised valuesand discounted based on management’s historicalknowledge, changes in market conditions from the time of valuation, and/ormanagement’s expertise and knowledge of the client and client’s business.

 

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

 

***(d) InterestRate Swaps, net***

** **

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

 

***(e) Deposits***

** **

The fair values disclosedfor demand deposits (e.g., interest and non-interest checking, passbooksavings, and certain types of money market accounts) are, by definition, equalto the amount payable on demand at the reporting date (i.e., their carryingamount). The carrying amounts of variable-rate, fixed-term money marketaccounts and certificates of deposit approximate their fair values at thereporting date. Fair values for fixed-rate certificates of deposit areestimated using a discounted cash flows calculation that applies interest ratescurrently being offered on certificates to a schedule of aggregated expectedmonthly maturities on time deposits.

 

***(f) Short-termBorrowings***

** **

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

 

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

** **

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

 

***(h) SubordinatedDebentures***

** **

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

 

***(i) AccruedInterest Payable***

** **

The carrying amounts ofaccrued interest approximate fair value.

 

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

** **

The fair value ofoff-balance sheet instruments is not material.

 

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

 

Under the Company’s Amended and Restated 2005 StockIncentive Plan (the “Incentive Plan”), the Company’s Board of Directors maygrant stock based compensation awards to nonemployee directors, key employees,consultants and prospective employees under the terms described in theIncentive Plan. The allowable

 

24

----

Table of Contents

 

stockbased compensation awards include the grant of Options, Restricted StockAwards, Restricted Stock Unit Awards, Performance Stock Awards, StockAppreciation Rights and other Equity Based Awards. The Incentive Plan providesthat eligible participants may be granted shares of Company common stock thatare subject to forfeiture until the grantee vests in the stock award based onthe established conditions, which may include service conditions, establishedperformance measures or both.

 

Prior to vesting of the stock awards with eitherservice or performance vesting conditions, each grantee shall have the rightsof a stockholder with respect to voting of the granted stock. The recipient isnot entitled to dividend rights with respect to the shares of granted stockuntil vesting occurs, at which time, the dividend rights will exist on vestedand unvested shares of granted stock for performance based awards and vestedshares only for service based awards, subject to termination of such rightsunder the terms of the Incentive Plan.

 

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

 

The Incentive Plan authorized grants of stock basedcompensation awards of up to 2,500,000 shares of authorized Company commonstock, subject to adjustments provided by the Incentive Plan. As of June 30,2009 and December 31, 2008, there were 1,110,744 and 1,420,345 shares ofunvested stock granted (net of forfeitures), with 916,745 and 730,412 sharesavailable for grant under the Incentive Plan, respectively.  Of the 1,110,744 shares unearned at June 30,2009, approximately 448,000 shares are expected to vest.  The Company does not expect any of the630,000 shares of performance awards to vest.

 

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

 
| ** **                          | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value on  Award Date** | ** ** |
|-------------------------------------|------------|------------|------------|--------------------------------------------------|------------|
| Unearned  at December 31, 2008 |       | 1,420,345  |       | $                                                | 9.65       |   |
| Awarded                             |       | —     |       | —                                           |       |
| Forfeited                           |       | (186,333   | )          | 10.20                                            |       |
| Vested                              |       | (123,268   | )          | 9.32                                             |       |
| Unearned  at June 30, 2009     |       | 1,110,744  |       | $                                                | 9.60       |   |

 

The Company recognized $411,000 and $1,550,000 instock-based compensation expense for services rendered for the six months endedJune 30, 2009 and 2008, respectively. The total income tax effect recognized in the consolidated incomestatement for share-based compensation arrangements was a $184,000 expense forthe six months ended June 30, 2009 compared to a $385,000 benefit for thesame period in 2008.   The 2009 incometax effect related to share-based compensation arrangements included $340,000in expense related to the write-off of the deferred tax asset for thedifference between the grant date value of the award as compared to fair valueof the award upon vesting.  At June 30,2009, compensation cost of $2,219,000 related to nonvested awards not yetrecognized is expected to be recognized over a weighted-average period of 1.7years.   The fair value of awards thatvested in the second quarter 2009 was approximately $228,000.

 

**(10)****              Derivativesand Hedging Activities**

 

*Risk Management Objective of UsingDerivatives*

 

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

 

25

----

Tableof Contents

 

*Fair Values of DerivativeInstruments on the Consolidated Balance Sheet*

 

The table below presents the fair value ofthe Company’s derivative financial instruments as well as their classificationon the Consolidated Balance Sheet as of June 30, 2009.

 
| ** **                                                                              | ** ** | **Asset  Derivatives** | ** ** | **Liability  Derivatives** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                              | ** ** | **(In thousands)**     | ** ** |
| **As of June 30, 2009:**                                                           | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Derivatives **not**  designated as hedging instruments under SFAS 133(ASC 815-10)       |       |                   |       |                       |       |
| Interest Rate Products                                                                  |       | $                      | 123        |                       | $          | 35 |   |
|                                                                                    |       |                   |       |                       |       |
| Total derivatives **not**  designated as hedging instruments under SFAS 133(ASC 815-10) |       | $                      | 123        |                       | $          | 35 |   |

 

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

 

*Non-designated Hedges*

 

None of the Company’s derivatives aredesignated as qualifying hedging relationships under SFAS 133 (found at ASC815-10 in the FASB’s GAAP Codification). Derivatives not designated as hedges are not speculative and result froma service the Company provides to certain customers, which the Companyimplemented during the first quarter of 2009. The Company executes interest rate swaps with commercial bankingcustomers to facilitate the customer’s respective risk managementstrategies.  Those interest rate swapsare simultaneously hedged by offsetting interest rate swaps that the Companyexecutes with a third party, such that the Company minimizes its net riskexposure resulting from such transactions. As the interest rate swaps associated with this program do not meet thestrict hedge accounting requirements of SFAS 133, changes in the fair value ofboth the customer swaps and the offsetting swaps are recognized directly inearnings.  As of June 30, 2009, theCompany had two interest rate swaps with customers with a total notional amountof $24,378,500, and two offsetting interest rate swaps with a total notionalamount of $24,378,500; for an aggregate notional amount of $48,757,000 relatedto this program.  During the three monthsended June 30, 2009, the Company recognized a net loss of $1,000 relatedto changes in fair value of these swaps. During the six months ended June 30, 2009, the Company recognizednet gains of $88,000 related to changes in fair value of these swaps.

 

*Effect of Derivative Instrumentson the Consolidated Income Statement*

 

The tables below present the effect of theCompany’s derivative financial instruments on the Consolidated Income Statementfor the six months ended June 30, 2009:

 
| **Derivatives Not**       | ** ** | ** **                 | ** ** | **Amount of Gain (Loss) Recognized in** | ** ** |
|---------------------------|------------|----------------------------|------------|-----------------------------------------|------------|
| **Designated as Hedging** | ** ** | **Location of Gain or**    | ** ** | **Income on Derivative**                | ** ** |
| **Instruments Under**     | ** ** | **(Loss) Recognized in**   | ** ** | **Three Months Ended**                  | ** ** | **Six Months Ended** | ** ** |
| **SFAS 133**              | ** ** | **Income on Derivative**   | ** ** | **June 30, 2009**                  | ** ** | **June 30, 2009** | ** ** |
| ** **                | ** ** | ** **                 | ** ** | **(In thousands)**                      | ** ** |
| Interest  Rate Products   |       | Other non-interest  income |       | $                                       | (1         | ) | $ | 88 |   |
|                      |       |                       |       |                                    |       |   |   |
| Total                     |       |                       |       | $                                       | (1         | ) | $ | 88 |   |

 

26

----

Table of Contents

 

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

 

The Company’s capital ratios exceed the highestregulatory capital requirement of “well-capitalized” at June 30, 2009 and December 31,2008 as follows:

 
| ** **                       | ** ** | **Ratio at   June 30,  2009** | ** ** | **Ratio at  December 31,  2008** | ** ** | **Minimum  Capital  Requirement** | ** ** | **Minimum  Requirement for  “Well  Capitalized”  Institution** | ** ** |
|----------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                       |       |                               |       |                                  |       |                              |       |                                                                     |       |
| Total Risk-Based Capital  Ratio  |       |                               |       |                                  |       |                              |       |                                                                     |       |
| Consolidated                     |       | 10.73                              | %          | 10.61                                 | %          | 8.00                              | %          | N/A                                                                      |       |
| Guaranty Bank and Trust  Company |       | 10.71                              | %          | 10.52                                 | %          | 8.00                              | %          | 10.00                                                                    | %          |
| Tier 1 Risk-Based Capital  Ratio |       |                               |       |                                  |       |                              |       |                                                                     |       |
| Consolidated                     |       | 9.46                               | %          | 9.35                                  | %          | 4.00                              | %          | N/A                                                                      |       |
| Guaranty Bank and Trust  Company |       | 9.44                               | %          | 9.26                                  | %          | 4.00                              | %          | 6.00                                                                     | %          |
| Leverage Ratio                   |       |                               |       |                                  |       |                              |       |                                                                     |       |
| Consolidated                     |       | 8.96                               | %          | 8.98                                  | %          | 4.00                              | %          | N/A                                                                      |       |
| Guaranty Bank and Trust  Company |       | 8.95                               | %          | 8.90                                  | %          | 4.00                              | %          | 5.00                                                                     | %          |

 

**(12)  TotalComprehensive Income**

 

*The followingtable presents the components of other comprehensive loss and totalcomprehensive income (loss) for the periods presented:*

 
| ** **                                                       | ** ** | **Three  Months Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                       | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                       | ** ** | **(In  thousands)**                   | ** ** |
| Net  income (loss)                                               |       | $                                     | (10,857    | )                                   | $          | 2,025 |   | $ | (10,421 | ) | $ | 5,270 |   |
| Other  comprehensive income (loss):                              |       |                                  |       |                                |       |   |   |   |   |
| Change in  net unrealized gains (losses), net                    |       | 847                                   |       | (518                                | )          | 3,219 |   | (2,154 | ) |
| Less:  Reclassification adjustments for gains included in income |       | —                                |       | —                              |       | — |   | (138 | ) |
| Net  unrealized holding gains (losses)                           |       | 847                                   |       | (518                                | )          | 3,219 |   | (2,292 | ) |
| Income  tax benefit (expense)                                    |       | (322                                  | )          | 196                                 |       | (1,226 | ) | 870 |   |
| Other  comprehensive income (loss)                               |       | 525                                   |       | (322                                | )          | 1,993 |   | (1,422 | ) |
| Total  comprehensive income (loss)                               |       | $                                     | (10,332    | )                                   | $          | 1,703 |   | $ | (8,428 | ) | $ | 3,848 |   |

 

**(13) Contingencies**

 

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

 

27

----

Table ofContents

 

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

 

ThisMD&A should be read together with our unaudited Condensed ConsolidatedFinancial Statements and unaudited Statistical Information included elsewherein this Report, Part II, Item 1A of this Report, and Items 1, 1A, 6, 7, 7Aand 8 of our 2008 Annual Report on Form 10-K.  Also, please see the disclosure in the “Forward-LookingStatements and Factors that Could Affect Future Results” section in this Reportfor certain other factors that could cause actual results or future events todiffer materially from those anticipated in the forward-looking statementsincluded in this Report or from historical performance.

 

**Overview**

 

Guaranty Bancorp is a bank holding company with itsprincipal business to serve as a holding company to its bank subsidiary.  Unless the context requires otherwise, the terms“Company,” “us,” “we,” and “our” refers to Guaranty Bancorp on a consolidatedbasis.  References to the “Bank” refer toGuaranty Bank and Trust Company, our bank subsidiary.

 

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.

 

In May 2009, theCompany signed definitive agreements to sell up to $60 million of capital inthe form of preferred stock, subject to stockholder and regulatory approvalsand customary closing conditions.   At aSpecial Meeting of Stockholders held on June 29, 2009, our stockholdersapproved: (1) the issuance of up to 60,000 shares of 9% mandatorilyconvertible preferred stock and (2) our proposed Second Amended andRestated Certificate of Incorporation, which would increase the totalauthorized number of shares of our common stock from 100,000,000 to 150,000,000and establish a class of non-voting stock. On July 27, 2009, each of the principal investors obtained thenecessary regulatory approvals or non-objections.   The closing is expected to occur on or aboutthe week of August 10, 2009, subject to the remaining customary closingconditions.

 

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, includingloan origination fees, received on real estate-related loans, commercial loansand leases and consumer loans and, to a lesser extent, interest on investmentsecurities and other fees received in connection with servicing loan anddeposit accounts. Our major operating expenses are the interest we pay ondeposits and borrowings and general operating expenses. We rely primarily onlocally generated 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.

 

28

----

Tableof Contents

 

**Earnings Summary**

 

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

 

**Table 1**

 
| ** **                                           | ** ** | **Three  Months Ended June 30,**             | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | ** **                                        | ** ** | ** **                          | ** ** | **Change -** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change -** | ** ** |
| ** **                                           | ** ** | ** **                                        | ** ** | ** **                          | ** ** | **Favorable** | ** ** | ** ** | ** ** | ** ** | ** ** | **Favorable** | ** ** |
| ** **                                           | ** ** | **2009**                                          | ** ** | **2008**                            | ** ** | **(Unfavorable)** | ** ** | **2009** | ** ** | **2008** | ** ** | **(Unfavorable)** | ** ** |
| ** **                                           | ** ** | **(In  thousands, except share data and ratios)** | ** ** |
| **Results of Operations:**                           |       |                                              |       |                                |       |   |   |   |   |   |   |   |   |
| Interest  income                                     |       | $                                                 | 24,775     |                                | $          | 30,216 |   | $ | (5,441 | ) | $ | 49,635 |   | $ | 63,619 |   | $ | (13,984 | ) |
| Interest  expense                                    |       | 8,915                                             |       | 9,825                               |       | 910 |   | 18,057 |   | 21,578 |   | 3,521 |   |
| Net  interest income                                 |       | 15,860                                            |       | 20,391                              |       | (4,531 | ) | 31,578 |   | 42,041 |   | (10,463 | ) |
| Provision  for loan losses                           |       | 18,605                                            |       | 900                                 |       | (17,705 | ) | 21,110 |   | 1,775 |   | (19,335 | ) |
| Net  interest income after provision for loan losses |       | (2,745                                            | )          | 19,491                              |       | (22,236 | ) | 10,468 |   | 40,266 |   | (29,798 | ) |
| Noninterest  income                                  |       | 2,627                                             |       | 3,132                               |       | (505 | ) | 5,542 |   | 5,647 |   | (105 | ) |
| Noninterest  expense                                 |       | 17,714                                            |       | 19,697                              |       | 1,983 |   | 33,195 |   | 38,407 |   | 5,212 |   |
| Income  (loss) before income taxes                   |       | (17,832                                           | )          | 2,926                               |       | (20,758 | ) | (17,185 | ) | 7,506 |   | (24,691 | ) |
| Income  tax expense                                  |       | (6,975                                            | )          | 901                                 |       | 7,876 |   | (6,764 | ) | 2,236 |   | 9,000 |   |
| Net  income (loss)                                   |       | $                                                 | (10,857    | )                                   | $          | 2,025 |   | $ | (12,882 | ) | $ | (10,421 | ) | $ | 5,270 |   | $ | (15,691 | ) |
| **Share Data:**                                      |       |                                              |       |                                |       |   |   |   |   |   |   |   |   |
| Basic  earnings (loss) per share                     |       | $                                                 | (0.21      | )                                   | $          | 0.04 |   | $ | (0.25 | ) | $ | (0.20 | ) | $ | 0.10 |   | $ | (0.30 | ) |
| Diluted  earnings (loss) per share                   |       | $                                                 | (0.21      | )                                   | $          | 0.04 |   | $ | (0.25 | ) | $ | (0.20 | ) | $ | 0.10 |   | $ | (0.30 | ) |
| Average  shares outstanding                          |       | 51,339,542                                        |       | 51,004,472                          |       | 335,070 |   | 51,312,847 |   | 50,996,350 |   | 316,497 |   |
| Diluted  average shares outstanding                  |       | 51,339,542                                        |       | 51,091,042                          |       | 248,500 |   | 51,312,847 |   | 51,086,578 |   | 226,269 |   |

* *
| ** **                                                    | ** ** | ** **        | ** ** | ** **            | ** ** | **Change -**      | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **Favorable**     | ** ** |
| ** **                                                    | ** ** | **2009**          | ** ** | **2008**              | ** ** | **(Unfavorable)** | ** ** |
| **Selected Balance Sheet Ratios:**                            |       |              |       |                  |       |              |       |
| Total  risk based capital                                     |       | 10.73             | %          | 10.61                 | %          | 0.12              | %          |
| Nonperforming  loans to loans, net of unearned discount       |       | 3.34              | %          | 3.00                  | %          | (0.34             | )%         |
| Allowance  for loan losses to loans, net of unearned discount |       | 2.61              | %          | 2.46                  | %          | 0.15              | %          |

 

The $10.9 million second quarter 2009 netloss is $12.9 million lower than the second quarter 2008 net income of $2.0million, primarily due to a $17.7 million increase in the provision for loanlosses, as well as a $4.5 reduction in net interest income.  These items were partially offset by a $7.9millionreduction in tax expense and a $2.0 million reduction in noninterestexpense.  The causes for these changesare discussed below.

 

Net interest income decreased by $4.5 millionfor the second quarter 2009 as compared to the same period in 2008 mostly dueto lower rates attributable to a greater than 200 basis point decrease in thetargeted federal funds rate by the Federal Open Markets Committee (FOMC) of theFederal Reserve Board since the beginning of the second quarter 2008. Thetargeted federal funds rate was 2.25% at April 1, 2008 and fell to between0% and 0.25% on December 16, 2008, where it remains today.

 

The provision for loan losses is the amountrequired to maintain the allowance for loan losses at a level that, in ourjudgment, is adequate to absorb probable incurred loan losses in the loanportfolio.  The increase in the provisionfor loan losses in the second quarter 2009 as compared to the same period in2008 is primarily a result of the increase in net charge-offs and the impact ofcontinued stress on commercial real estate values and performance on ourgeneral component of the allowance for loan losses, which in turn increased theamount required to maintain the allowance for loan losses at an appropriatelevel.

 

Noninterest expense declined from the secondquarter 2008 primarily as a result of a major effort announced in mid-2008 tobetter align our expenses with the current size of our business.  This effort resulted in a decline in thenumber of full-time equivalent employees from 441 at June 30, 2008 to 380at June 30, 2009.

 

29

----

Tableof Contents

 

On a year-to-date basis in 2009, the Companyreported a net loss of $10.4 million as compared to net income of $5.3 millionfor the same period in 2008.  The primarycause for the decrease over 2008 is a $19.3 million increase in the provisionfor loan losses and $10.5 million reduction in net interest income, partiallyoffset by lower noninterest and tax expense. The primary causes for these changes are described in the respectivesections below.

 

**Net Interest Income and NetInterest Margin**

 

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

 

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

 

**Table 2**

 
| ** **                                | ** ** | **Quarter  Ended**          | ** **   |
|-------------------------------------------|------------|-----------------------------|--------------|
| ** **                                | ** ** | **June 30,  2009**     | ** **   | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** |
| ** **                                | ** ** | **(Dollars in  thousands)** | ** **   |
|                                      |       |                        |         |   |   |   |   |   |   |   |   |
| Net  interest income                      |       | $                           |  15,860 |   | $ |  15,718 |   | $ |  17,679 |   | $ |  19,842 |   | $ |  20,391 |   |
| Interest  rate spread                     |       | 2.77                        | %            | 2.62 | % | 2.92 | % | 3.37 | % | 3.50 | % |
| Net  interest margin                      |       | 3.38                        | %            | 3.26 | % | 3.55 | % | 4.02 | % | 4.20 | % |
| Net interest margin, fully tax equivalent |       | 3.46                        | %            | 3.34 | % | 3.64 | % | 4.11 | % | 4.28 | % |
|                                           |            |                             |              |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Secondquarter 2009 net interest income of $15.9 million declined by $4.5 million fromthe second quarter 2008.  This decreaseis a result of a $2.4 million unfavorable rate variance and a $2.1 millionunfavorable volume variance. (see Table 5).

 

The $2.4 millionunfavorable rate variance from the prior year second quarter is primarilyattributable to lower yields on earnings assets, and in particular loans.   The yield on earning assets declined by 94basis points from 6.22% for the second quarter 2008 to 5.28% for the secondquarter 2009.  The FOMC decreased thetarget federal funds rate by a total of greater than 200 basis points since thebeginning of the second quarter 2008.  Thetargeted federal funds rate was 2.25% at April 1, 2008 and fell to between0% and 0.25% on December 16, 2008, where it remains today.  Similarly, the prime rate decreased by 200basis points from April 2008 to the end of 2008.

 

Interestincome decreased by $5.4 million from $30.2 million in the second quarter 2008to $24.8 million in the second quarter 2009. Approximately 59% of the Company’s outstanding loan balances arevariable rate loans and are tied to indices such as prime or LIBOR.  As a result of the decline in rates discussedabove, the average yield on loans for the Company decreased by 95 basis pointsfrom 6.32% for the quarter ended June 30, 2008 to 5.37% for the sameperiod in 2009.  The Company remainsasset sensitive at the end of the second quarter 2009 and expects that asinterest rates rise, net interest income will also increase.

 

Rates paidon interest-bearing liabilities also declined during this same period by 21basis points, for a net decrease in the net interest spread of 73 basis pointsover this same period.   Overall netinterest margin declined by 82 basis points. The cause for the larger impact on net interest margin as compared tothe interest rate spread is that the benefit from noninterest bearing depositshad a smaller impact in 2009 compared to 2008 due to the extremely low interestrate environment.

 

The $2.1million unfavorable volume variance is mostly attributable to a $72.1 milliondecrease in average total earning assets for the second quarter 2009 ascompared to the same period in 2008.  Theaverage balance of loans decreased from the same period in the prior year by$55.4 million.

 

On a linkedquarter basis, net interest margin increased from 3.26% for the first quarter2009 to 3.38% in the second quarter 2009. Although there were no changes in the federal funds rate or prime ratesduring this time, the results of management efforts to address falling interestrates in 2008 began to take effect through higher yields on loans due to theutilization of loan floors and higher minimum pricing on renewed and new loans.   These efforts 

 

30

----

Table of Contents

 

resulted in an overall increase of $0.1million in net interest income in the second quarter 2009 as compared to thefirst quarter 2009 despite a $73.4 million decrease in average earning assets.

 

**Table 3**

 
| ** **                                | ** ** | **Six Months  Ended**   | ** **   |
|-------------------------------------------|------------|-------------------------|--------------|
| ** **                                | ** ** | **June 30,  2009** | ** **   | **June 30,  2008** | ** ** |
|                                      |       |                    |         |   |   |
| Net  interest income                      |       | $                       |  31,578 |   | $ |  42,041 |   |
| Interest  rate spread                     |       | 2.69                    | %            | 3.54 | % |
| Net  interest margin                      |       | 3.32                    | %            | 4.31 | % |
| Net interest margin, fully tax equivalent |       | 3.40                    | %            | 4.41 | % |
|                                           |            |                         |              |  |  |  |  |

 

For thesix-month period ended June 30, 2009, net interest income decreased by$10.5 million, or 24.9%, as compared to the same period in 2008.  This decrease is due to an $8.0 millionunfavorable rate variance and a $2.5 million unfavorable volume variance (seeTable 5).

 

Theunfavorable rate variance for year-to-date 2009 is mostly due to a decrease inthe yield on earning assets by 130 basis points to 5.22% for the six monthsended June 30, 2009 from 6.52% for the same period in 2008.  The FOMC decreased the target federal fundsrate seven times by a total of greater than 400 basis points during 2008.  Similarly, the prime rate decreased by 400basis points from January 2008 to the end of 2008.  These rate decreases also impacted the Bank’scost of funds.  The cost ofinterest-bearing liabilities was 2.53% for the first six months of 2009 ascompared to 2.98% for the same period in 2008.

 

Theunfavorable volume variance is mostly a result of lower average earningassets.  Average earning assets decreasedby $43.4 million for the year-to-date 2009 as compared to the same period in2008.

 

31

----

Tableof Contents

 

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

 

**Table 4**

 
| ** **                                          | ** ** | **Quarter  Ended June 30,** | ** **      |
|-----------------------------------------------------|------------|----------------------------------|-----------------|
| ** **                                          | ** ** | **2009**                         | ** **      | **2008** | ** ** |
| ** **                                          | ** ** | **Average  Balance**             | ** **      | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** |
| ** **                                          | ** ** | **(Dollars in  thousands)**      | ** **      |
| **ASSETS:**                                         | ** ** | ** **                       | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest-earning assets:**                        | ** ** | ** **                       | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  loans, net of unearned fees (1)(2)(3)   |       | $                                |  1,733,168 |   | $ |  23,208 |   | 5.37 | % | $ |  1,788,603 |   | $ |  28,107 |   | 6.32 | % |
| Investment  securities (1)                          |       |                             |            |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 45,645                           |            | 590 |   | 5.18 | % | 56,151 |   | 779 |   | 5.58 | % |
| Tax-exempt                                          |       | 65,146                           |            | 765 |   | 4.71 | % | 73,552 |   | 877 |   | 4.80 | % |
| Bank  Stocks (4)                                    |       | 21,440                           |            | 198 |   | 3.70 | % | 32,590 |   | 435 |   | 5.36 | % |
| Other  earning assets                               |       | 16,175                           |            | 14 |   | 0.33 | % | 2,738 |   | 18 |   | 2.67 | % |
| Total  interest-earning assets                      |       | 1,881,574                        |            | 24,775 |   | 5.28 | % | 1,953,634 |   | 30,216 |   | 6.22 | % |
| **Non-earning assets:**                             |       |                             |            |   |   |   |   |   |   |   |   |   |   |
| Cash and  due from banks                            |       | 28,947                           |            |   |   |   |   | 37,456 |   |   |   |   |   |
| Other  assets                                       |       | 100,793                          |            |   |   |   |   | 359,331 |   |   |   |   |   |
|                                                |       |                             |            |   |   |   |   |   |   |   |   |   |   |
| **Total assets**                                    |       | $                                |  2,011,314 |   |   |   |   |   | $ |  2,350,421 |   |   |   |   |   |
|                                                |       |                             |            |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**      | ** ** | ** **                       | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing  liabilities:                      |       |                             |            |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                             |            |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                            |       | $                                |  146,802   |   | $ |  90 |   | 0.25 | % | $ |  153,220 |   | $ |  180 |   | 0.47 | % |
| Money  market                                       |       | 275,598                          |            | 676 |   | 0.98 | % | 540,735 |   | 2,491 |   | 1.85 | % |
| Savings                                             |       | 72,085                           |            | 57 |   | 0.32 | % | 70,532 |   | 98 |   | 0.56 | % |
| Time  certificates of deposit                       |       | 708,622                          |            | 6,087 |   | 3.44 | % | 431,511 |   | 4,642 |   | 4.33 | % |
| Total  interest-bearing deposits                    |       | 1,203,107                        |            | 6,910 |   | 2.30 | % | 1,195,998 |   | 7,411 |   | 2.49 | % |
| Borrowings:                                         |       |                             |            |   |   |   |   |   |   |   |   |   |   |
| Repurchase  agreements                              |       | 14,243                           |            | 31 |   | 0.88 | % | 19,406 |   | 98 |   | 2.04 | % |
| Federal  funds purchased (5)                        |       | 248                              |            | — |   | 0.54 | % | 7,849 |   | 47 |   | 2.40 | % |
| Subordinated  debentures                            |       | 41,239                           |            | 662 |   | 6.45 | % | 41,239 |   | 852 |   | 8.31 | % |
| Borrowings                                          |       | 166,504                          |            | 1,312 |   | 3.16 | % | 190,063 |   | 1,417 |   | 3.00 | % |
| Total  interest-bearing liabilities                 |       | 1,425,341                        |            | 8,915 |   | 2.51 | % | 1,454,555 |   | 9,825 |   | 2.72 | % |
| Noninterest  bearing liabilities:                   |       |                             |            |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                    |       | 410,517                          |            |   |   |   |   | 452,315 |   |   |   |   |   |
| Other  liabilities                                  |       | 10,472                           |            |   |   |   |   | 18,802 |   |   |   |   |   |
| Total  liabilities                                  |       | 1,846,330                        |            |   |   |   |   | 1,925,672 |   |   |   |   |   |
| Stockholders’  Equity                          |       | 164,984                          |            |   |   |   |   | 424,749 |   |   |   |   |   |
| **Total liabilities and stockholders’ equity** |       | $                                |  2,011,314 |   |   |   |   |   | $ |  2,350,421 |   |   |   |   |   |
|                                                |       |                             |            |   |   |   |   |   |   |   |   |   |   |
| Net  interest income                                |       |                             |            | $ |  15,860 |   |   |   |   |   | $ |  20,391 |   |   |   |
| Net  interest margin                                |       |                             |            |   |   | 3.38 | % |   |   |   |   | 4.20 | % |

 

----

(1) Yields on loans andsecurities have not been adjusted to a tax-equivalent basis.  Net interest margin on a fully tax-equivalentbasis would have been 3.46% and 4.28% for the three months ended June 30,2009 and June 30, 2008, respectively.  The tax-equivalent basis was computed by calculating the deemed intereston municipal bonds and tax-exempt loans that would have been earned on a fullytaxable basis to yield the same after-tax income, net of the interest expensedisallowance under Internal Revenue Code Sections 265 and 291, using a combinedfederal and state marginal tax rate of 38%.

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

(3) Net loan fees of $1.1million and $1.0 million for the three months ended June 30, 2009 and 2008are included in the yield computation.

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

(5) The interest expenserelated to federal funds purchased for the second quarter 2009 rounded to zero.

 

32

----

Tableof Contents

 
| ** **                                          | ** ** | **Six Months  Ended June 30,** | ** **      |
|-----------------------------------------------------|------------|-------------------------------------|-----------------|
| ** **                                          | ** ** | **2009**                            | ** **      | **2008** | ** ** |
| ** **                                          | ** ** | **Average  Balance**                | ** **      | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  Income or  Expense** | ** ** | **Average  Yield or  Cost** | ** ** |
| ** **                                          | ** ** | **(Dollars in  thousands)**         | ** **      |
| **ASSETS:**                                         | ** ** | ** **                          | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest-earning assets:**                        | ** ** | ** **                          | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  loans, net of unearned fees (1)(2)(3)   |       | $                                   |  1,770,738 |   | $ |  46,284 |   | 5.27 | % | $ |  1,778,098 |   | $ |  59,147 |   | 6.69 | % |
| Investment  securities (1)                          |       |                                |            |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 47,286                              |            | 1,316 |   | 5.61 | % | 53,480 |   | 1,463 |   | 5.50 | % |
| Tax-exempt                                          |       | 64,483                              |            | 1,532 |   | 4.79 | % | 75,027 |   | 1,770 |   | 4.75 | % |
| Bank  Stocks (4)                                    |       | 24,838                              |            | 486 |   | 3.95 | % | 32,528 |   | 905 |   | 5.59 | % |
| Other  earning assets                               |       | 10,704                              |            | 17 |   | 0.31 | % | 22,267 |   | 334 |   | 3.02 | % |
| Total  interest-earning assets                      |       | 1,918,049                           |            | 49,635 |   | 5.22 | % | 1,961,400 |   | 63,619 |   | 6.52 | % |
| **Non-earning assets:**                             |       |                                |            |   |   |   |   |   |   |   |   |   |   |
| Cash and  due from banks                            |       | 29,445                              |            |   |   |   |   | 39,157 |   |   |   |   |   |
| Other  assets                                       |       | 90,853                              |            |   |   |   |   | 362,942 |   |   |   |   |   |
|                                                |       |                                |            |   |   |   |   |   |   |   |   |   |   |
| **Total assets**                                    |       | $                                   |  2,038,347 |   |   |   |   |   | $ |  2,363,499 |   |   |   |   |   |
|                                                |       |                                |            |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**      | ** ** | ** **                          | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing  liabilities:                      |       |                                |            |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                                |            |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                            |       | $                                   |  143,487   |   | $ |  178 |   | 0.25 | % | $ |  154,560 |   | $ |  461 |   | 0.60 | % |
| Money  market                                       |       | 286,432                             |            | 1,306 |   | 0.92 | % | 561,136 |   | 6,273 |   | 2.25 | % |
| Savings                                             |       | 71,108                              |            | 112 |   | 0.32 | % | 70,855 |   | 212 |   | 0.60 | % |
| Time  certificates of deposit                       |       | 714,081                             |            | 12,439 |   | 3.51 | % | 450,251 |   | 10,260 |   | 4.58 | % |
| Total  interest-bearing deposits                    |       | 1,215,108                           |            | 14,035 |   | 2.33 | % | 1,236,802 |   | 17,206 |   | 2.80 | % |
| Borrowings:                                         |       |                                |            |   |   |   |   |   |   |   |   |   |   |
| Repurchase  agreements                              |       | 15,617                              |            | 68 |   | 0.88 | % | 18,110 |   | 218 |   | 2.42 | % |
| Federal  funds purchased                            |       | 266                                 |            | 1 |   | 0.71 | % | 4,973 |   | 64 |   | 2.57 | % |
| Subordinated  debentures                            |       | 41,239                              |            | 1,320 |   | 6.46 | % | 41,239 |   | 1,644 |   | 8.02 | % |
| Borrowings                                          |       | 169,161                             |            | 2,633 |   | 3.14 | % | 155,273 |   | 2,446 |   | 3.17 | % |
| Total  interest-bearing liabilities                 |       | 1,441,391                           |            | 18,057 |   | 2.53 | % | 1,456,397 |   | 21,578 |   | 2.98 | % |
| Noninterest  bearing liabilities:                   |       |                                |            |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                    |       | 421,239                             |            |   |   |   |   | 462,564 |   |   |   |   |   |
| Other  liabilities                                  |       | 11,294                              |            |   |   |   |   | 20,893 |   |   |   |   |   |
| Total  liabilities                                  |       | 1,873,924                           |            |   |   |   |   | 1,939,854 |   |   |   |   |   |
| Stockholders’  Equity                          |       | 164,423                             |            |   |   |   |   | 423,645 |   |   |   |   |   |
| **Total liabilities and stockholders’ equity** |       | $                                   |  2,038,347 |   |   |   |   |   | $ |  2,363,499 |   |   |   |   |   |
|                                                |       |                                |            |   |   |   |   |   |   |   |   |   |   |
| Net  interest income                                |       |                                |            | $ |  31,578 |   |   |   |   |   | $ |  42,041 |   |   |   |
| Net  interest margin                                |       |                                |            |   |   | 3.32 | % |   |   |   |   | 4.31 | % |

 

----

(1) Yields on loans andsecurities have not been adjusted to a tax-equivalent basis.  Net interest margin on a fully tax-equivalentbasis would have been 3.40% and 4.41% for the six months ended June 30,2009 and June 30, 2008, respectively. The tax-equivalent basis was computed by calculating the deemed intereston municipal bonds and tax-exempt loans that would have been earned on a fullytaxable basis to yield the same after-tax income, net of the interest expensedisallowance under Internal Revenue Code Sections 265 and 291, using a combinedfederal and state marginal tax rate of 38%.

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

(3) Net loan fees of $1.9million and $1.8 million for the six months ended June 30, 2009 and 2008are included in the yield computation.

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

 

33

----

Tableof Contents

 

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 June 30, 2009  Compared to Three Months Ended  June 30, 2008** | ** **   | **Six Months  Ended June 30, 2009  Compared to Six Months Ended  June 30, 2008** | ** ** |
|------------------------------------|------------|------------------------------------------------------------------------------------------------|--------------|--------------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Net Change**                                                                                 | ** **   | **Rate**                                                                                   | ** ** | **Volume** | ** ** | **Net Change** | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| ** **                         | ** ** | **(In  thousands)**                                                                            | ** **   |
| **Interest income:**               | ** ** | ** **                                                                                     | ** **   | ** **                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  Loans, net of unearned fees |       | $                                                                                              |  (4,899 | )                                                                                          | $          |  (4,050 | ) | $ |  (849 | ) | $ |  (12,863 | ) | $ |  (12,619 | ) | $ |  (244 | ) |
| Investment  Securities             |       |                                                                                           |         |                                                                                       |       |   |   |   |   |   |   |   |   |
| Taxable                            |       | (189                                                                                           | )            | (51                                                                                        | )          | (138 | ) | (147 | ) | 26 |   | (173 | ) |
| Tax-exempt                         |       | (112                                                                                           | )            | (13                                                                                        | )          | (99 | ) | (238 | ) | 13 |   | (251 | ) |
| Bank Stocks                        |       | (237                                                                                           | )            | (112                                                                                       | )          | (125 | ) | (419 | ) | (233 | ) | (186 | ) |
| Other  earning assets              |       | (4                                                                                             | )            | 1                                                                                          |       | (5 | ) | (317 | ) | (201 | ) | (116 | ) |
| Total  interest income             |       | (5,441                                                                                         | )            | (4,225                                                                                     | )          | (1,216 | ) | (13,984 | ) | (13,014 | ) | (970 | ) |
|                               |       |                                                                                           |         |                                                                                       |       |   |   |   |   |   |   |   |   |
| **Interest expense:**              |       |                                                                                           |         |                                                                                       |       |   |   |   |   |   |   |   |   |
| Deposits:                          |       |                                                                                           |         |                                                                                       |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand           |       | (90                                                                                            | )            | (83                                                                                        | )          | (7 | ) | (283 | ) | (252 | ) | (31 | ) |
| Money  market                      |       | (1,815                                                                                         | )            | (886                                                                                       | )          | (929 | ) | (4,967 | ) | (2,719 | ) | (2,248 | ) |
| Savings                            |       | (41                                                                                            | )            | (43                                                                                        | )          | 2 |   | (100 | ) | (101 | ) | 1 |   |
| Time  certificates of deposit      |       | 1,445                                                                                          |         | (661                                                                                       | )          | 2,106 |   | 2,179 |   | (1,465 | ) | 3,644 |   |
| Repurchase  agreements             |       | (67                                                                                            | )            | (46                                                                                        | )          | (21 | ) | (150 | ) | (123 | ) | (27 | ) |
| Federal  funds purchased           |       | (47                                                                                            | )            | (24                                                                                        | )          | (23 | ) | (63 | ) | (27 | ) | (36 | ) |
| Subordinated  debentures           |       | (190                                                                                           | )            | (190                                                                                       | )          | — |   | (324 | ) | (324 | ) | — |   |
| Borrowings                         |       | (105                                                                                           | )            | 89                                                                                         |       | (194 | ) | 187 |   | (29 | ) | 216 |   |
| Total  interest expense            |       | (910                                                                                           | )            | (1,844                                                                                     | )          | 934 |   | (3,521 | ) | (5,040 | ) | 1,519 |   |
|                               |       |                                                                                           |         |                                                                                       |       |   |   |   |   |   |   |   |   |
| **Net interest income**            |       | $                                                                                              |  (4,531 | )                                                                                          | $          |  (2,381 | ) | $ |  (2,150 | ) | $ |  (10,463 | ) | $ |  (7,974 | ) | $ |  (2,489 | ) |

 

**Provision for Loan Losses**

 

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

 

In the second quarter 2009, the Company recorded aprovision for loan losses of $18.6 million, compared to $0.9 million in thesecond quarter 2008.  The Companydetermined that the provision for loan losses made during second quarter wassufficient to maintain our allowance for loan losses at a level necessary forthe probable incurred losses inherent in the loan portfolio as of June 30,2009.  Netcharge offs in the second quarter 2009 were $13.2 million, as compared to $0.4million for the same quarter in 2008. The second quarter 2009 provision for loan losses in excess of secondquarter 2009 net charge-offs was due primarily to the impact of continuedstress on commercial real estate values and performance on our generalcomponent of the allowance for loan losses. We believe that continued economic weakness willlikely result in a continuation of the elevated provision for loan losses infuture periods.

 

34

----

Tableof Contents

 

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

 

 Forthe six months ended June 30, 2009, the Company recorded a provision forloan loss of $21.1 million as compared to $1.8 million in the same period in2008.  The increase in nonperformingloans and a correspondingly higher specific allocation related to such loans,the impact of charge-offs and the current economic climate on our historicalloss and economic concerns components of our allowance were the primary causesfor the increase in the provision for loan losses.

 

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

 

**Noninterest Income**

 

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

 

**Table 6**

 
|                             |   | **Quarter Ended**       |        |
|----------------------------------|--------|-------------------------|-------------|
|                             |   | **June 30,  2009** |        | **March 31,  2009** |   | **December 31,  2008** |   | **September 30,  2008** |   | **June 30,  2008** |   |
|                             |   | **(In thousands)**      |        |
| Noninterest  income:             |   |                    |        |   |   |   |   |   |   |   |   |
| Customer  service and other fees |   | $                       |  2,354 |   | $ |  2,679 |   | $ |  2,357 |   | $ |  2,521 |   | $ |  2,528 |   |
| Other                            |   | 273                     |        | 236 |   | (91 | ) | 186 |   | 604 |   |
| Total  noninterest income        |   | $                       |  2,627 |   | $ |  2,915 |   | $ |  2,266 |   | $ |  2,707 |   | $ |  3,132 |   |

 

Noninterest income for the second quarter 2009decreased by $0.3 million from the first quarter 2009 and decreased by $0.5million from the second quarter 2008. The decrease in customer service and other fees in the second quarter2009 as compared to the second quarter 2008 was primarily the result ofdecreases in customer fee income from ATM and non-sufficient fund charges,partially offset by higher analysis fees as a result of a reduction in theearnings credit rate on commercial deposit accounts.

 

Fluctuations in other noninterest income over thepast several quarters are primarily the result of the volatility of the fairvalue of assets held by the Company for purposes of funding its nonqualifieddeferred compensation plan.   Inparticular, the loss in other noninterest income during the fourth quarter 2008was primarily a result of a $0.3 million fair value write-down (contra-income)related to the average balance of $1.1 million of assets held for purposes offunding the Company’s deferred compensation plan.   These assets are required to bemarked-to-market through the income statement. These write-downs of the assets held for the deferred compensation planare almost entirely offset by a reduction to our deferred compensationliability account, which reduces our overall compensation cost.  Therefore, this volatility on the marketvalue of our deferred compensation plan asset and liability accounts had only anominal overall impact on net income.

 

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

 

**Table 7**

 
|                             |   | **Six Months Ended**    |        |
|----------------------------------|--------|-------------------------|-------------|
|                             |   | **June 30,  2009** |        | **June 30,  2008** |   |
|                             |   | **(In thousands)**      |        |
| Noninterest  income:             |   |                    |        |   |   |
| Customer  service and other fees |   | $                       |  5,033 |   | $ |  4,804 |   |
| Gain on  sale of securities      |   | —                  |        | 138 |   |
| Other                            |   | 509                     |        | 705 |   |
| Total  noninterest income        |   | $                       |  5,542 |   | $ |  5,647 |   |

 

35

----

Tableof Contents

 

Noninterest income for the first six months of 2009decreased by $0.1 million from the same period in 2008.  The overall increase in customer service andother fees is primarily attributable to higher analysisfees as a result of a reduction in the earnings credit rate on commercialdeposit accounts, whereas the fluctuation in other noninterest income isprimarily due to the volatility of the fair value of assets held by the Companyfor purposes of funding its nonqualified deferred compensation plan asdescribed in the paragraph above.  During 2008, a $0.1 million gain on saleof securities was realized as management sold approximately $15 million ofavailable-for-sale securities and purchased approximately $15 million of newavailable-for-sale securities in order to improve the overall yield on securities.

 

**Noninterest Expense**

 

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

 

**Table 8**

 
| ** **                         | ** ** | **Quarter  Ended**      | ** **   |
|------------------------------------|------------|-------------------------|--------------|
| ** **                         | ** ** | **June 30,  2009** | ** **   | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** |
| ** **                         | ** ** | **(In thousands)**      | ** **   |
| Noninterest  expense:              |       |                    |         |   |   |   |   |   |   |   |   |
| Salaries  and employee benefits    |       | $                       |  6,712  |   | $ |  6,739 |   | $ |  6,255 |   | $ |  5,927 |   | $ |  9,184 |   |
| Occupancy  expense                 |       | 1,926                   |         | 1,921 |   | 1,725 |   | 1,958 |   | 2,131 |   |
| Furniture  and equipment           |       | 1,147                   |         | 1,131 |   | 1,203 |   | 1,390 |   | 1,383 |   |
| Impairment of goodwill             |       | —                  |         | — |   | — |   | 250,748 |   | — |   |
| Amortization  of intangible assets |       | 1,581                   |         | 1,582 |   | 1,803 |   | 1,877 |   | 1,877 |   |
| Other  general and administrative  |       | 6,348                   |         | 4,108 |   | 4,381 |   | 3,982 |   | 5,122 |   |
| Total  noninterest expense         |       | $                       |  17,714 |   | $ |  15,481 |   | $ |  15,367 |   | $ |  265,882 |   | $ |  19,697 |   |

 

Noninterestexpense for the second quarter 2009 decreased by $2.0 million, or 10.1%, ascompared to the second quarter 2008, and increased by $2.2 million from thefirst quarter 2009.

 

Salary andemployee benefits expense decreased by $2.5 million, or 26.9%, in the secondquarter 2009 as compared to the same quarter in 2008.  The decline in salaries and employee benefitsexpense from the second quarter 2008 is mostly attributable to a $1.2 milliondecrease in base salary and benefits expense as a result of a reduction infull-time equivalent employees from the second quarter 2008.  In the second quarter 2008, the Companyannounced a major effort to better align our expenses with the current size ofour business.  This effort resulted in areduction of full-time equivalent employees from 441 at June 30, 2008 to380 at June 30, 2009.  Additionally, there was a $0.4 million reduction in equity-basedcompensation expense, which is mostly attributable to a reduction in the costsof performance based restricted stock expense as well as an increase in therate of forfeitures during 2008 and 2009.  The remaining decrease in salaries and employee benefits expense is dueto lower bonus and incentive expense in 2009 as compared to 2008.

 

Occupancyexpense and furniture and equipment expense decreased by $0.2 million each inthe second quarter 2009 as compared to the same quarter in 2008 primarily as aresult of the decision to close two branches in 2008, as well as theoutsourcing of a portion of our data processing.

 

Amortizationof intangible asset expense is $1.6 million in the second quarter 2009 ascompared to $1.9 million in the second quarter 2008, a decrease of 15.8%.   This decrease is attributable to the use ofaccelerated methods to amortize the core deposit intangible asset.

 

36

----

Tableof Contents

 

Othergeneral and administrative expense increased by $1.2 million in the secondquarter 2009 as compared to the second quarter 2008.  The increase in other general andadministrative expense in the second quarter 2009 as compared to the sameperiod in 2008 is mostly due to a $1.5 million increase in Federal DepositInsurance Corporation (FDIC) insurance premiums.  In January 2009, the FDIC finalized new rules thatincreased the FDIC insurance premiums by 7 basis points starting in the firstquarter 2009, with additional increases effective in the second quarter2009.  These changes more than doubledthe amount of FDIC insurance premiums paid by the Company.   Additionally, the FDIC’s Temporary LiquidityGuarantee Program implemented an additional insurance assessment of 10 basispoints on noninterest bearing transaction accounts in excess of the baseinsured amounts.  The FDIC also chargedall banks with a one-time assessment of 5 basis points on assets less Tier 1Capital as of June 30, 2009.  Thisadditional assessment increased FDIC insurance costs by $0.9 million for thesecond quarter 2009.   In addition to the $1.5 million in increasedFDIC insurance premiums and assessments described above, there wasapproximately $0.9 million in write-downs of other real estate owned.   These increases were partially offset by adecrease resulting from a $1.3 million charge in the second quarter 2008related to the decision to close two branches.

 

Compared tothe linked prior quarter, all of the categories of other noninterest expenseremained relatively flat in the second quarter 2009 as compared to the firstquarter 2009 with the exception of other general and administrativeexpenses.   Other general andadministrative expenses increased by $2.2 million in the second quarter 2009 ascompared to the first quarter 2009, accounting for all of the increase in othernoninterest expense over the same time period.  This increase is primarily related to a $1.2 million increase in FDICinsurance assessments due both to higher rates starting on April 1, 2009,as well as the special assessment imposed by the FDIC on all banks during thesecond quarter 2009.   Additionally,there were $0.9 million in write downs of other real estate owned during thesecond quarter 2009.

 

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

 

**Table 9**

 
| ** **                         | ** ** | **Six Months  Ended**   | ** ** |
|------------------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **June 30,  2009** | ** ** | **June 30,  2008** | ** ** |
| ** **                         | ** ** | **(In  thousands)**     | ** ** |
| Noninterest  expense:              |       |                    |       |   |   |
| Salaries  and employee benefits    |       | $                       | 13,451     |   | $ | 18,904 |   |
| Occupancy  expense                 |       | 3,847                   |       | 4,132 |   |
| Furniture  and equipment           |       | 2,278                   |       | 2,697 |   |
| Amortization  of intangible assets |       | 3,163                   |       | 3,754 |   |
| Other  general and administrative  |       | 10,456                  |       | 8,920 |   |
| Total  noninterest expense         |       | $                       | 33,195     |   | $ | 38,407 |   |

 

Noninterest expense for the six months ended June 30, 2009decreased by $5.2 million, or 13.6%, as compared to the same period in2008.  The decrease in the year-to-datenoninterest expense is mostly due to a $5.5 million decrease in salaries andemployee benefits.

 

The $5.5 million year-to-date decline in salaries and employee benefitsexpense is due to a $2.7 million reduction in base salary and employee benefitexpense primarily as aresult of a reduction of sixty-one full-time equivalent employees from thesecond quarter 2008.   Additionally, restricted stock expensedecreased by $1.1 million primarily due to the discontinuation of expenseassociated with the performance-based awards in 2008 as well as increasedforfeitures in 2008.     The remainder ofthe decrease is due to a decrease to accruals for bonus and incentives.

 

Occupancy expense and furniture and equipment expense decreased on ayear-to-date basis from the prior year by $0.3 million and $0.4 million,respectively, primarily asa result of a decision to close two branches in 2008, as well as theoutsourcing of a portion of our data processing.

 

Amortizationof intangible asset expense decreased by $0.6 million, or 15.7%, on ayear-to-date basis in 2009 as compared to 2008 due to the use of acceleratedmethods to amortize the core deposit intangible asset.

 

37

----

Tableof Contents

 

Other general and administrative expense increased by $1.5 million forthe year-to-date period ended June 30, 2009 as compared to the same periodin 2008.   This increase is primarily dueto a $1.9 million increase to FDIC insurance premiums and assessments and a$0.6 million increase in professional services due mostly to higher legal andother professional fees related to the work-out of problem credits.    These increases to other noninterestexpense on a year-to-date basis were partially offset by a decrease resultingfrom a $1.3 million charge in the second quarter 2008 related to the decisionto close two branches.

 

**Income Tax Expense**

 

The effective tax benefitwas 39.1% for the three months ending June 30, 2009 as compared to aneffective tax rate of 30.8% for the same period in 2008. The effective taxbenefit was 39.4% for the six months ending June 30, 2009 as compared toan effective tax rate of 29.8% for the same period in 2008.   The primary difference between the expectedrate and the effective tax rate for the three and six months ended June 30,2008 was tax-exempt income.   In 2009,because we are in a net loss position for the three and six months ended June 30,2009, the tax-exempt income increased our tax benefit and thereby increased oureffective tax benefit.

 

As of June 30,2009, the Company had a deferred tax asset primarily due to the allowance forloan losses.   The realizability of ourdeferred tax asset depends upon our ability to derive benefits from the taxdeductions inherent in the deferred tax asset by refunds of prior taxes paid orby reducing future tax obligations. We believe, based on our internal earningsprojections, that we will realize the benefit of this deferred tax asset as weachieve profitability in the future. Although there has been a cumulativepre-tax loss for book purposes when combined with our results in the prior twoyears, the Company believes that the positive evidence supports that itsdeferred tax asset is realizable.   Theprimary driver of the cumulative pre-tax loss for book purposes is goodwillimpairment which has no impact on income taxes.   The remainder of the pre-tax loss isavailable for carryback due to taxable income reported for the prior two years,as well as carried forward to offset future income coupled with tax planningstrategies available to be employed.   Future volatility in earnings may create a presumption that is notrebuttable that would require the Company to establish of a valuation allowanceagainst the Company’s deferred tax assets.  The establishment of a valuation allowance would increase the amount ofincome tax expense or reduce the amount of income tax benefit recognized in ourconsolidated financial statements in future periods.

 

**BALANCE SHEET ANALYSIS**

 

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

 

**Table 10**

 
| ** **      | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** |
|-----------------|------------|-------------------------|------------|-------------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **      | ** ** | **(In thousands)**      | ** ** |
| Total assets    |       | $                       | 1,944,867  |                          | $          | 2,036,395                   |       | $                            | 2,102,741  |                    | $          | 2,052,944 |   | $ | 2,358,559 |   |
| Earning  assets |       | 1,800,472               |       | 1,902,670                     |       | 1,989,884                   |       | 1,927,128                    |       | 1,959,434               |       |
| Deposits        |       | 1,560,730               |       | 1,639,797                     |       | 1,698,651                   |       | 1,635,101                    |       | 1,707,031               |       |
|                 |            |                         |            |                               |            |                             |            |                              |            |                         |            |  |  |  |  |  |

 

At June 30, 2009, the Company had total assetsof $1.9 billion, or $160 million less than total assets at December 31,2008.  The decline in assets from December 31,2008 is primarily a result of a $175 million decrease in total loansoutstanding, consisting mostly of a $70 million decrease in real estate loansand a $107 million decrease in commercial loans.   The decline in loans is mostly a result ofmanagement’s efforts to reduce the risk profile on the balance sheet byreducing residential real-estate and residential land and land developmentloans, as well as lower yielding syndicated and participated loans.

 

38

----

Tableof Contents

 

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

 

**Table 11**

 
| ** **                                      | ** ** | **June 30,  2009** | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **(In  thousands)**     | ** ** |
| Real  estate - Residential and Commercial       |       | $                       | 682,923    |                     | $          | 658,982                     |       | $                            | 680,030    |                    | $          | 693,800 |   | $ | 717,533 |   |
| Real  estate - Construction                     |       | 190,197                 |       | 250,665                  |       | 268,306                     |       | 248,883                      |       | 232,522                 |       |
| Equity  lines of credit                         |       | 55,812                  |       | 52,679                   |       | 50,270                      |       | 49,205                       |       | 46,778                  |       |
| Commercial                                      |       | 639,462                 |       | 714,218                  |       | 746,241                     |       | 706,678                      |       | 705,309                 |       |
| Agricultural                                    |       | 22,764                  |       | 22,686                   |       | 22,738                      |       | 23,989                       |       | 29,442                  |       |
| Consumer                                        |       | 37,878                  |       | 38,220                   |       | 38,352                      |       | 38,777                       |       | 39,611                  |       |
| Leases  receivable and other                    |       | 25,506                  |       | 22,828                   |       | 23,996                      |       | 22,099                       |       | 21,628                  |       |
| Total  gross loans                              |       | 1,654,542               |       | 1,760,278                |       | 1,829,933                   |       | 1,783,431                    |       | 1,792,823               |       |
| Less:  allowance for loan losses                |       | (43,041                 | )          | (37,598                  | )          | (44,988                     | )          | (44,765                      | )          | (26,506                 | )          |
| Unearned  discount                              |       | (2,970                  | )          | (3,175                   | )          | (3,600                      | )          | (3,758                       | )          | (3,668                  | )          |
| Loans,  net of unearned discount                |       | $                       | 1,608,531  |                     | $          | 1,719,505                   |       | $                            | 1,781,345  |                    | $          | 1,734,908 |   | $ | 1,762,649 |   |
|                                            |       |                    |       |                     |       |                        |       |                         |       |                    |       |
| Loans  held for sale at lower of cost or market |       | $                       | 5,250      |                     | $          | 5,175                       |       | $                            | 5,760      |                    | $          | — |   | $ | — |   |

 

There were $928.9 million ofreal estate loans at June 30, 2009, compared to $998.6 million at December 31,2008 and $996.8 million at June 30, 2008. Management continues its efforts to decrease its exposure to residentialreal-estate and residential land and land development loans.   The Company does not have any AlternativeA-paper (Alt-A) or subprime residential loans in its portfolio.   Commercial loans decreased primarily as aresult of paydowns and non-renewals, and in particular, a concentrated effortby management to reduce the volume of lower yielding syndicated andparticipated loans.

 

**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.

 

39

----

Table of Contents

 

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

 

**Table 12**

 
| ** **                                                                            | ** ** | **Quarter Ended**          | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                            | ** ** | **June 30,  2009**         | ** ** | **March 31,   2009** | ** ** | **December 31,   2008** | ** ** | **September 30,   2008** | ** ** | **June 30,  2008** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                  |       |                       |       |   |   |   |   |   |   |   |   |
| Nonaccrual loans and leases, not restructured                                         |       | $                          | 52,483     |   | $ | 57,299 |   | $ | 54,594 |   | $ | 54,654 |   | $ | 29,742 |   |
| Accruing loans past due 90 days or more                                               |       | 2,671                      |       | 911 |   | 228 |   | 324 |   | 98 |   |
| Total nonperforming loans                                                             |       | $                          | 55,154     |   | $ | 58,210 |   | $ | 54,822 |   | $ | 54,978 |   | $ | 29,840 |   |
| Other real estate owned and foreclosed assets                                         |       | 34,746                     |       | 14,524 |   | 484 |   | 1,199 |   | 1,910 |   |
| Total nonperforming assets                                                            |       | $                          | 89,900     |   | $ | 72,734 |   | $ | 55,306 |   | $ | 56,177 |   | $ | 31,750 |   |
|                                                                                  |       |                       |       |   |   |   |   |   |   |   |   |
| Impaired loans                                                                        |       | $                          | 55,154     |   | $ | 58,210 |   | $ | 54,822 |   | $ | 54,978 |   | $ | 29,840 |   |
| Allocated allowance for loan losses                                                   |       | (7,291                     | )          | (6,342 | ) | (11,064 | ) | (12,825 | ) | (6,295 | ) |
| Net investment in impaired loans                                                      |       | $                          | 47,863     |   | $ | 51,868 |   | $ | 43,758 |   | $ | 42,153 |   | $ | 23,545 |   |
| Loans past due 30-89 days                                                             |       | $                          | 39,836     |   | $ | 31,957 |   | $ | 35,169 |   | $ | 20,660 |   | $ | 20,169 |   |
| Loans charged-off                                                                     |       | $                          | 13,509     |   | $ | 10,262 |   | $ | 2,032 |   | $ | 12,779 |   | $ | 673 |   |
| Recoveries                                                                            |       | (347                       | )          | (367 | ) | (1,005 | ) | (288 | ) | (231 | ) |
| Net charge-offs                                                                       |       | $                          | 13,162     |   | $ | 9,895 |   | $ | 1,027 |   | $ | 12,491 |   | $ | 442 |   |
| Provision for loan losses                                                             |       | $                          | 18,605     |   | $ | 2,505 |   | $ | 1,250 |   | $ | 30,750 |   | $ | 900 |   |
| Allowance for loan losses                                                             |       | $                          | 43,041     |   | $ | 37,598 |   | $ | 44,988 |   | $ | 44,765 |   | $ | 26,506 |   |
|                                                                                  |       |                       |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to loans, net of unearned  discount                         |       | 2.61                       | %          | 2.14 | % | 2.46 | % | 2.52 | % | 1.48 | % |
| Allowance for loan losses to nonaccrual loans                                         |       | 82.01                      | %          | 65.62 | % | 82.41 | % | 81.91 | % | 89.12 | % |
| Allowance for loan losses to nonperforming assets                                     |       | 47.88                      | %          | 51.69 | % | 81.34 | % | 79.69 | % | 83.48 | % |
| Allowance for loan losses to nonperforming loans                                      |       | 78.04                      | %          | 64.59 | % | 82.06 | % | 81.42 | % | 88.83 | % |
| Nonperforming assets to loans, net of unearned discount,  and other real estate owned |       | 5.33                       | %          | 4.11 | % | 3.03 | % | 3.15 | % | 1.77 | % |
| Annualized net charge-offs to average loans                                           |       | 3.04                       | %          | 2.22 | % | 0.22 | % | 2.75 | % | 0.10 | % |
| Nonaccrual loans to loans, net of unearned discount                                   |       | 3.18                       | %          | 3.26 | % | 2.99 | % | 3.07 | % | 1.66 | % |
| Loans 30-89 days past due to loans, net of unearned  discount                         |       | 2.41                       | %          | 1.82 | % | 1.93 | % | 1.16 | % | 1.13 | % |

 

Nonperforming assets at June 30, 2009 increased by$34.6 million from December 31, 2008, primarily as a result of a $34.3 millionincrease in other real estate owned.   Additionally, accruing loans past due 90 days or more increased by $2.4million over the same period.   Includedin the $2.7 million of accruing loans over 90 days past due at June 30, 2009,was a single loan for $2.5 million which was renewed subsequent to quarter-endand is currently performing to its terms.

 

At June 30, 2009, approximately $28.8 million, or 52%,of all nonperforming loans outstanding were residential construction, land andland development.   At December 31, 2008,approximately $36.8 million, or 67.1%, of all nonperforming loans wereresidential construction, land and land development loans.

 

Net charge-offs in the second quarter 2009 were $13.2 million,as compared to $9.9 million in the first quarter 2009, and $0.4 million in thesecond quarter 2008.   Impaired loans asof June 30, 2009 totaled $55.2 million, as compared to $54.8 million at December31, 2008.

 

40

----

Table of Contents

 

**Allowance for Loan Losses**

 

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

 

The ratio of allowance for loan losses tototal loans was 2.61% at June 30, 2009,as compared to 2.46% at December 31,2008 and 1.48% at June 30, 2008.

 

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

 

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. Management also looks at risk weightings of loans and computes a factorfor the volume and severity of classified loans using assigned risk ratingsunder regulatory definitions of “watch”, “substandard”‘, “doubtful” and “loss”.  Loans graded as either doubtful or loss aretreated as impaired and are included as part of the specific reserve computedabove.  Loans segregated by riskweighting categories watch or substandard are evaluated for trends in volumeand severity.

 

The provision for loan losses recorded in2009 was required in order for the Company to maintain the allowance for loanlosses (2.61% of total loans as of June 30, 2009) at a level necessary for theprobable incurred losses inherent in the loan portfolio as of June 30,2009.  Forfurther discussion of the provision for loan losses, see “Provision for LoanLosses” above.

 

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

 

41

----

Table of Contents

 

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

 

**Table 13**

 
| ** **                               | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **2009**                      | ** ** | **2008** | ** ** |
|                                     |       | **(In thousands)**            |       |
| Balance, beginning of period             |       | $                             | 44,988     |   | $ | 25,711 |   |
| Loan charge-offs:                        |       |                          |       |   |   |
| Real estate - Residential and Commercial |       | 2,491                         |       | 767 |   |
| Real estate - Construction               |       | 17,836                        |       | 258 |   |
| Commercial                               |       | 1,939                         |       | 243 |   |
| Agricultural                             |       | —                        |       | 18 |   |
| Consumer                                 |       | 178                           |       | 130 |   |
| Lease receivable and other               |       | 1,327                         |       | — |   |
| Total loan charge-offs                   |       | 23,771                        |       | 1,416 |   |
| Recoveries:                              |       |                          |       |   |   |
| Real estate - Residential and Commercial |       | 306                           |       | 195 |   |
| Real estate - Construction               |       | 52                            |       | 59 |   |
| Commercial                               |       | 312                           |       | 116 |   |
| Agricultural                             |       | 3                             |       | 7 |   |
| Consumer                                 |       | 41                            |       | 59 |   |
| Total loan recoveries                    |       | 714                           |       | 436 |   |
| Net loan charge-offs                     |       | 23,057                        |       | 980 |   |
| Provision for loan losses                |       | 21,110                        |       | 1,775 |   |
| Balance, end of period                   |       | $                             | 43,041     |   | $ | 26,506 |   |

 

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

 

**Securities**

 

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

 

*The carrying value of our portfolio of investment securities at June 30,2009 and December 31, 2008 was as follows:*

 

**Table 14**

 
| ** **                                                  | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|------------------|------------|----------------|------------|------------|------------|
| ** **                                                  | ** ** | **2009**           | ** ** | **2008**         | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
|                                                        |       | **(In thousands)** |       |
| Securities  available-for-sale:                             |       |               |       |             |       |           |       |       |       |
| U.S.  Treasury securities                                   |       | $                  | —     |             | $          | 3,495          |       | $          | (3,495     | ) | (100.0 | )% |
| U.S.  Government agencies and government-sponsored entities |       | 2,453              |       | 2,510            |       | (57            | )          | (2.3       | )%         |
| State and  municipal                                        |       | 64,822             |       | 63,015           |       | 1,807          |       | 2.9        | %          |
| Mortgage  backed                                            |       | 28,123             |       | 31,965           |       | (3,842         | )          | (12.0      | )%         |
| Marketable  equity                                          |       | 1,519              |       | 1,345            |       | 174            |       | 12.9       | %          |
| Other  securities                                           |       | 544                |       | 544              |       | 0              |       | 0.0        | %          |
| Total  securities available-for-sale                        |       | $                  | 97,461     |             | $          | 102,874        |       | $          | (5,413     | ) | (5.3 | )% |
|                                                        |       |               |       |             |       |           |       |       |       |
| Securities  held-to-maturity:                               |       |               |       |             |       |           |       |       |       |
| Mortgage-backed                                             |       | $                  | 10,929     |             | $          | 13,114         |       | $          | (2,185     | ) | (16.7 | )% |

 

All mortgage-backed securities are sponsoredby either U.S. government agencies or government-sponsored entities, and noneare private issuances.

 

42

----

Tableof Contents

 

The carrying value of our available-for-saleinvestment securities at June 30, 2009 was $97.5 million, compared to the December31, 2008 carrying value of $102.9 million. The decrease in the level of ourinvestments from December 31, 2008, is primarily due to a decision not toreplace maturities of U.S. Treasury, U.S. government agencies andgovernment-sponsored entities, as well as municipal bonds because these bondswere in excess of our requirements for collateral on public deposits andcustomer repurchase agreements.

 

Included in the obligations of state and politicalsubdivisions is an individual non-rated municipal bond with a fair value of$38.5 million and an unrealized loss of $0.2 million.  This unrealized loss comprises 0.4% of theoriginal cost of this security and comprises nearly 76% of the gross unrealizedloss of all investment securities at June 30, 2009.  Management performs an annual review processfor all non-rated municipal securities in our portfolio, but updated itsanalysis for this particular security during the second quarter 2009 due to therelative size of this security.  Thissecond quarter 2009 analysis of this particular bond included a review of theissuer’s current financial statements and the related cash flows and interestpayments.  Management concluded that thecontinuous unrealized loss position on this security was a result of the levelof market interest rates and lack of marketability and not a result of theunderlying 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 do not have theintention to sell the securities with an unrealized loss and do not believethat it is more likely than not that we will be required to sell the securitiesprior to a recovery in their value.  Accordingly, we have not recognized any other-than-temporary impairmentin our consolidated statements of income.

 

**Deposits**

 

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

 

**Table 15**

 
| ** **                    | ** ** | **At June 30,  2009**       | ** ** | **At December  31, 2008** | ** ** |
|-------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                    | ** ** | **Balance**                 | ** ** | **% of Total**            | ** ** | **Balance** | ** ** | **% of Total** | ** ** |
| ** **                    | ** ** | **(Dollars in  thousands)** | ** ** |
| Noninterest  bearing deposits |       | $                           | 352,185    |                      | 22.57      | % | $ | 433,761 |   | 25.52 | % |
| Interest  bearing demand      |       | 142,013                     |       | 9.10                      | %          | 145,492 |   | 8.57 | % |
| Money  market                 |       | 306,243                     |       | 19.62                     | %          | 315,364 |   | 18.57 | % |
| Savings                       |       | 72,143                      |       | 4.62                      | %          | 68,064 |   | 4.01 | % |
| Time                          |       | 688,146                     |       | 44.09                     | %          | 735,970 |   | 43.33 | % |
|                          |       |                        |       |                      |       |   |   |   |   |
| Total  deposits               |       | $                           | 1,560,730  |                      | 100.00     | % | $ | 1,698,651 |   | 100.00 | % |

 

At the end of the second quarter 2009, deposits were $1.6 billion ascompared to $1.7 billion at December 31, 2008, reflecting a decrease of $138million.  Approximately $82 million ofthis decline is attributable to noninterest bearing deposits.  A portion of the decrease in noninterestbearing deposits is due to a $67 million movement of funds from a noninterestbearing account to a money market account by a single account holder whoadministers an omnibus account on behalf of bank cash sweep account customers.   The decline in deposit balances reflectsboth a decline in our customers’ available balances and increased competitionfor such deposits.   Noninterest bearingdeposits still comprised approximately 23% of total deposits at June 30, 2009,which helps mitigate overall deposit funding costs.  The $138 million decrease in overall depositsfrom December 31, 2008 correlates to our $175 million decrease in overall loansduring the same period with $39 million of the decrease being from brokereddeposits other than reciprocal deposits with other banks through theCertificate of Deposit Account Registry Service (CDARS).   Approximately $60 million of the remaining$177 million in brokered time deposits, excluding reciprocal balances withother banks through CDARS, will mature during the remainder of 2009.  These maturing brokered time deposits have anaverage rate of 3.84%.

 

**Borrowings and Subordinated Debentures**

 

At June 30,2009, our outstanding borrowings were $164,459,000 as compared to $166,404,000at December 31, 2008.

 

Theborrowings at June 30, 2009 consisted of 16 separate fixed-rate term notes withthe FHLB at our Bank subsidiary level, with maturities ranging from 17 to 114months.  Approximately $140 million ofthe FHLB term advances at June 30, 2009 have Bermudan conversion options to avariable rate.  The initial fixed rateperiods range 

 

43

----

Tableof Contents

 

from one to five years and can be prepaidwithout penalty at or after conversion. Our bank subsidiary also had a line of credit with the FHLB at June 30,2009, but there was no balance outstanding on this line of credit as of thatdate.

 

The totalcommitment, including balances outstanding, for borrowings at the Federal HomeLoan Bank for the term notes and line of credit at June 30, 2009 and December 31,2008 was $404.0 million and $428.3 million, respectively. The interest rate onthe line of credit varies with the federal funds rate, and was 0.25% and 0.65%at June 30, 2009 and December 31, 2008, respectively.  The term notes have fixed interest rates thatrange from 2.52% to 6.22%. A blanket pledge andsecurity agreement with the Federal Home Loan Bank, which encompasses certainloans and securities, serves as collateral for these borrowings.  However, as of June 30, 2009 and December 31,2008, there were no investment securities pledged as collateral under theblanket pledge and security agreement.

 

As of December31, 2008, the Company had a revolving credit agreement, as amended, with U.S.Bank National Association, which contained financial covenants, includingmaintaining a minimum adjusted return (excluding goodwill impairment andintangible asset amortization) on average assets, a maximum nonperformingassets to total loans ratio, regulatory capital ratios that qualify the Companyas well-capitalized and a minimum total risk-based capital amount.   At December 31, 2008, the Company was incompliance with all covenants except the minimum total risk-based capitalamount.  The minimum total risk-basedcapital amount was set by U.S. Bank and was based on the Company receivingadditional capital from Treasury’s Capital Purchase Program prior to December 31,2008.  As the Company’s application toreceive capital under Treasury’s Capital Purchase Program was still pending asof December 31, 2008, the Company did not meet this financial covenant andvoluntarily decided to terminate its line of credit on February 9, 2009 with U.S.Bank. The revolving credit agreement would have otherwise expired on March 31,2009.

 

At June 30, 2009, we had a $41,239,000 aggregateprincipal balance of junior subordinated debentures outstanding with a weightedaverage cost of 6.40%.  The subordinateddebentures were issued in four separate series. Each issuance has a maturity ofthirty years from its date of issue. The subordinated debentures were issued totrusts established by us, which in turn issued $40 million of trust preferredsecurities. Generally and with certain limitations, the Company is permitted tocall the debentures subsequent to the first five or ten years, as applicable,after issue if certain conditions are met, or at any time upon the occurrenceand continuation of certain changes in either the tax treatment or the capitaltreatment of the trusts, the debentures or the preferred securities.  The Guaranty Capital Trust III issuance of$10.3 million has a variable rate of LIBOR plus 3.10% and was callable withoutpenalty on July 7, 2008, and every quarter thereafter.  The CenBank Trust III issuance of $15.5million has a variable rate of LIBOR plus 2.65% and was callable withoutpenalty on April 15, 2009, and every quarter thereafter.   Management did not call either of thesesecurities on the latest call date, but will continue to evaluate whether tocall these debentures each quarter.

 

Under theterms of each subordinated debentures agreement, the Company has the ability todefer interest on the debentures for a period of up to sixty months as long asit is in compliance with all covenants of the agreement.  On July 31, 2009, the Company temporarilydeferred regularly scheduled interest payments on each series of its juniorsubordinated debentures.  Sucha deferral is not an event of default and the interest continues toaccrue.  The Company is prohibited frompaying any dividends on its other stock for so long as interest is deferred,with the exception of stock dividends.

 

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

 

44

----

Tableof Contents

 

**Capital Resources**

 

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

 

For regulatory purposes, the Companymaintains capital above the minimum core standards.  The Company actively monitors itsregulatory capital ratios to ensure that the Company and its bank subsidiaryare more than well capitalized under the applicable regulatory framework.  Under the regulations adopted by the federalregulatory authorities, a bank is well-capitalized if the institution has atotal risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capitalratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is notsubject to any order or written directive by any such regulatory authority tomeet and maintain a specific capital level for any capital measure.  Our subsidiary bank is required to maintainsimilar capital levels under capital adequacy guidelines.  At June 30, 2009, 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**

 
| ** **                      | ** ** | **Ratio at   June 30,  2009** | ** ** | **Ratio at   December 31,   2008** | ** ** | **Minimum   Capital   Requirement** | ** ** | **Minimum   Requirement   for “Well   Capitalized”   Institution** | ** ** |
|---------------------------------|------------|-------------------------------|------------|------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------------------------------|------------|
|                            |       |                          |       |                               |       |                                | ** ** | ** **                                                                   | ** ** |
| Total Risk-Based Capital Ratio  |       |                          |       |                               |       |                                | ** ** | ** **                                                                   | ** ** |
| Consolidated                    |       | 10.73                         | %          | 10.61                              | %          | 8.00                                | %          | N/A                                                                          |       |
| Guaranty Bank and Trust Company |       | 10.71                         | %          | 10.52                              | %          | 8.00                                | %          | 10.00                                                                        | %          |
| Tier 1 Risk-Based Capital Ratio |       |                          |       |                               |       |                                |       |                                                                         |       |
| Consolidated                    |       | 9.46                          | %          | 9.35                               | %          | 4.00                                | %          | N/A                                                                          |       |
| Guaranty Bank and Trust Company |       | 9.44                          | %          | 9.26                               | %          | 4.00                                | %          | 6.00                                                                         | %          |
| Leverage Ratio                  |       |                          |       |                               |       |                                |       |                                                                         |       |
| Consolidated                    |       | 8.96                          | %          | 8.98                               | %          | 4.00                                | %          | N/A                                                                          |       |
| Guaranty Bank and Trust Company |       | 8.95                          | %          | 8.90                               | %          | 4.00                                | %          | 5.00                                                                         | %          |

 

On May 6, 2009, theCompany announced that it had entered into definitive agreements to sell up to$60 million of mandatorily convertible preferred stock.   The transaction was subject to stockholderand regulatory approvals, as well as customary closing conditions.   At the Company’s Special Meeting ofStockholders held on June 29, 2009, each of the proposals in connection withthe proposed capital raise was approved. On July 27, 2009, each of the principal investors obtained the necessaryregulatory approvals or non-objections.  The closing is expected to occur on or about the week of August 10,2009, subject to the remaining customary closing conditions.

 

**Contractual Obligations and Off-Balance SheetArrangements**

 

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

 

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

 

45

----

Tableof Contents

 

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

 

**Table 17**

 
| ** **                    | ** ** | **June 30,  2009** | ** ** | **December 31,    2008** | ** ** |
|-------------------------------|------------|--------------------|------------|--------------------------|------------|
|                          | ** ** | **(In thousands)** | ** ** |
|                          | ** ** | ** **         | ** ** | ** **               | ** ** |
| Commitments  to extend credit |       | $                  | 365,609    |                     | $          | 390,277 |   |
| Standby  letters of credit    |       | 17,482             |       | 24,792                   |       |
| Commercial  letters of credit |       | 11,000             |       | 11,000                   |       |
|                          |       |               |       |                     |       |
| Totals                        |       | $                  | 394,091    |                     | $          | 426,069 |   |

 

**Liquidity**

 

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

 

Concerns over deposit fluctuations with respect to the overall bankingindustry were addressed by the FDIC in September and October 2008. The FDICtemporarily increased the individual account deposit insurance from $100,000per account to $250,000 per account through December 31, 2009, which has beensubsequently extended through December 31, 2013.  The FDIC also implemented a TemporaryLiquidity Guarantee Program (TLGP), which provides for full FDIC coverage fortransaction accounts, regardless of dollar amounts. The Bank elected to opt-into this program, thus, our customers receive full coverage for transactionaccounts under the program. The TLGP is currently set to expire December 31,2009, but the FDIC has proposed a potential extension of the program through June30, 2010.

 

Additionally, the Bank has become a member of theCertificate of Deposit Account Registry Service (CDARS®) program. ThroughCDARS®, the Bank’s customers can increase their FDIC insurance by up to $50million through reciprocal certificate of deposit accounts. This isaccomplished by the Bank entering into reciprocal depository relationships withother member banks. The individual customer’s large deposit is broken intoamounts below the $100,000 amount (or $250,000 if the time deposit maturesprior to December 31, 2013) and placed with other banks that are members of thenetwork. The reciprocal member bank issues certificate of deposits in amountsthat ensure that the entire deposit is eligible for FDIC insurance.

 

When the level of liquid assets (our primaryliquidity) does not meet our liquidity needs, other available sources of liquidassets (our secondary liquidity), including the purchase of federal funds,sales of securities under agreements to repurchase, purchase of brokeredcertificates of deposit, sales of loans, discount window borrowings from theFederal Reserve Bank, and our lines of credit with the Federal Home Loan Bankof Topeka (FHLB) are employed to meet current and presently anticipated fundingneeds. At June 30, 2009, the Bank had approximately $225.5 million ofavailability on its FHLB line, $65 million of availability on its federal fundslines with correspondent banks, and $1.1 million of availability with theFederal Reserve discount window. The Bank can also increase its amount ofbrokered deposits. However, if we would become less than well-capitalized underthe capital adequacy guidelines, regulatory approval would have to be obtainedin order to continue purchasing brokered deposits. Additionally, as describedabove, the Bank joined the CDARS® program and can purchase certificates ofdeposit through this program. At June 30, 2009 the Bank is eligible to purchasecertificates of deposit of up to three percent of its total assets throughCDARS®. These sources provide significant secondary liquidity to the Bank toservice its depositors’ needs.

 

The holding company relies on dividends from itsBank as a primary source of liquidity. The ability of the Bank to pay dividendsor make other capital distributions to the holding company is subject to theregulatory authority of the Federal Reserve Bank of Kansas City and theColorado Division of Banking. Because of the accumulated deficit at December 31,2008 as a result of goodwill impairment charges in 2008 and 2007, the Bank isrequired to obtain permission from the Federal Reserve Bank of Kansas City andthe Colorado Division of Banking prior to making any dividend to the holdingcompany.  The Company does not believethat such permission would be granted until additional capital is obtained atthe bank level.   The holding companyrequires liquidity for the payment of interest on its junior subordinateddebentures, for operating expenses, principally salaries and benefits, 

 

46

----

Tableof Contents

 

forrepurchases of our common stock, and, if declared by our board of directors,for the payment of dividends to our stockholders.   The Holding Company temporarily deferredinterest on its junior subordinated debentures related to its trust preferredsecurities.  Theterms of debentures permit the Company to defer interest payments for up to 5years. Such a deferral is not an event of default, but the interest continuesto accrue and the Company is prohibited from paying any dividends on its otherstock for so long as interest is deferred, with the exception of stockdividends.

 

**Application of Critical Accounting Policiesand Accounting Estimates**

 

Management’sDiscussion and Analysis of financial condition and results of operationsdiscusses the Company’s condensed consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of these condensed consolidatedfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent liabilities at the date of the condensed consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. On an on-going basis, management evaluates its estimates andjudgments, including those related to customers and suppliers, allowance forloan losses, bad debts, investments, financing operations, long-lived assets,contingencies and litigation. Management bases its estimates and judgments onhistorical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which have formed the basisfor making such judgments about the carrying value of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom the recorded estimates under different assumptions or conditions.  A summary of critical accounting policies andestimates are listed in the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” section of the Company’s 2008 AnnualReport Form 10-K for the fiscal year ended December 31, 2008.  There have been no changes to the criticalaccounting policies listed in the Company’s 2008 Annual Report Form 10-K during2009.  During the first quarter 2009, theCompany began offering customers interest rate swaps, and adopted the followingaccounting policy:

 

*Accounting Policy for Derivative Instrumentsand Hedging Activities*

 

Statement of Financial Accounting Standards No.161, *Disclosures about Derivative Instruments andHedging Activities, an amendment of FASB Statement No. 133 (SFAS 161*found at ASC 815-10 in the FASB’s GAAP Codification*)*amends and expands the disclosure requirements of FASB Statement No. 133  (SFAS 133) with the intent to provide usersof financial statements with an enhanced understanding of: (a) how and why anentity uses derivative instruments, (b) how derivative instruments and relatedhedged items are accounted for under SFAS 133 and its related interpretations,and (c) how derivative instruments and related hedged items affect an entity’sfinancial position, financial performance, and cash flows. SFAS 161 requiresqualitative disclosures about objectives and strategies for using derivatives,quantitative disclosures about the fair value of and gains and losses onderivative instruments, and disclosures about credit-risk-related contingentfeatures in derivative instruments.

 

As required by SFAS 133 (found at ASC 815-10in the FASB’s GAAP Codification), the Company records all derivatives on thebalance sheet at fair value.  Theaccounting for changes in the fair value of derivatives depends on the intendeduse of the derivative, whether the Company has elected to designate aderivative in a hedging relationship and apply hedge accounting and whether thehedging relationship has satisfied the criteria necessary to apply hedgeaccounting. Currently, none of the Company’s derivatives are designated inqualifying SFAS 133 hedging relationships, as the derivatives are not used tomanage risks within the Company’s assets or liabilities. As such, all changesin fair value of the Company’s derivatives are recognized directly in earnings.

 

47

----

Tableof Contents

 

**ITEM3.****Quantitative and Qualitative Disclosure about Market Risk**

 

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

 

**Credit Risk-related ContingentFeatures**

 

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

 

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

 

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

 

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

 

As of June 30, 2009, the fair value of derivatives ina net liability position, which includes accrued interest but excludes anyadjustment for nonperformance risk related to these agreements, was $110,000.The Company has minimum collateral posting thresholds with certain of itsderivative counterparties, but has not been required to post collateral againstits obligations under these agreements. If the Company had breached any ofthese provisions at June 30, 2009, it would have been required to settle itsobligations under the agreements at the termination value.

 

**Net Interest Income Modeling**

 

Our Asset Liability Management Committee, or ALCO,comprised of members of our senior management addresses interest rate risk. TheALCO monitors interest rate risk by analyzing the potential impact on netinterest income and the net portfolio of equity value from potential changes ininterest rates, and considers the impact of alternative strategies or changesin balance sheet structure. The ALCO manages our balance sheet in part tomaintain the potential impact on net portfolio value and net interest incomewithin acceptable ranges despite changes in interest rates.

 

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

 

48

----

Tableof Contents

 

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

 

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

 

*The following table shows the net interest income increase or decreaseover the next twelve months as of June 30, 2009 and 2008:*

 

**Table 18**

 

**MARKET RISK:**

 
| ** **                | ** ** | **Annualized  Net Interest Income** | ** ** |
|---------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **June 30,  2009**                  | ** ** | **June 30,  2008** | ** ** |
| ** **                | ** ** | **Amount of  Change**               | ** ** | **Amount of  Change** | ** ** |
| ** **                | ** ** | **(In  thousands)**                 | ** ** |
| **Rates in Basis Points** |       |                                |       |   |   |
| 200                       |       | $                                   | 95         |   | $ | 7,024 |   |
| 100                       |       | 1,645                               |       | 3,279 |   |
| Static                    |       | —                              |       | — |   |
| (100)                     |       | 4,860                               |       | (3,518 | ) |
| (200)                     |       | 7,705                               |       | (6,893 | ) |
|                           |            |                                     |            |  |  |  |  |

 

Overall, the Company believes it is asset-sensitive,which is consistent with the decline in net interest income during 2009 as aresult of lower rates.   At June 30,2009, the Company is positioned to have a short-term favorable interest incomeimpact in a rising rate environment as well as a falling rate environment. Thisis because of the extremely low rate environment at June 30, 2009.   The Company is less asset sensitive at June 30,2009 as compared to June 30, 2008, due to the fact that the low rateenvironment has triggered a minimum pricing on loans.  This minimum pricing will cause interestrates on variable rate loans to reprice less rapidly in a 100 basis point orsmaller rising rate environment than was projected in the prior year.  The prime rate has historically been set at arate of 300 basis points over the target federal funds rate. The target federalfunds rate is currently set by the FOMC at a rate between 0 and 25 basispoints. The Company’s interest rate risk modeling has an assumption that primewould continue to be set at a rate of 300 basis points over the target federalfunds rate, therefore, a 200 basis point decline in overall rates would onlyhave between a 0 and 25 basis point decline in both federal funds and the primerate.  Further, other rates that arecurrently below 1% or 2% (e.g. U.S. Treasuries, LIBOR, etc.) are modeled to notfall below 0% with an overall 100 or 200 basis point decrease in rates. Many ofour variable rate loans are set to an index tied to prime, federal funds orLIBOR, therefore, a further decrease in rates would not have a substantialimpact on loan yields. Additionally, current deposit rates, especially timedeposit rates, would continue to decrease in a falling rate environment. As afalling rate environment would potentially impact the cost of liabilities to agreater degree than earning assets for the above reasons, a falling rateenvironment would be expected to have a favorable impact on net interestmargin. However, if the actual prime rate falls below a 300 basis point spreadto target federal funds rate, the Company could experience a continued decreasein net interest income as a result of falling yields on earning assets tied toprime.

 

49

----

Table of Contents

 

**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 June 30, 2009 to ensure that information required to bedisclosed in the reports that we file or submit under the Securities ExchangeAct of 1934 was (i) accumulated and communicated to management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, to allowtimely decisions regarding required disclosure and (ii) recorded,processed, summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission.

 

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

 

50

----

Table of Contents

 

**PART II—OTHER INFORMATION**

 

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

 

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

 

**ITEM 1A. Risk Factors**

 

The following risk factors inherent to our business supplement the riskfactors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Reporton Form 10-K for the year ended December 31, 2008, which couldmaterially affect our business, financial condition and/or operatingresults.  You should also carefullyconsider the risks and uncertainties described below and in the Form 10-Kfor the year ended December 31, 2008. 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.

 

*The level of ourcommercial real estate loan portfolio may subject us to additional regulatoryscrutiny.*

 

The FDIC, theFederal Reserve and the Office of the Comptroller of the Currency, have promulgatedjoint guidance on sound risk management practices for financial institutionswith concentrations in commercial real estate lending. Under the guidance, afinancial institution that, like us, is actively involved in commercial realestate lending should perform a risk assessment to identify concentrations. Afinancial institution may have a concentration in commercial real estatelending if, among other factors, (i) total reported loans forconstruction, land development, and other land represent 100% or more of totalcapital or (ii) total reported loans secured by multifamily and non-farmresidential properties, loans for construction, land development and other landand loans otherwise sensitive to the general commercial real estate market,including loans to commercial real estate related entities, represent 300% ormore of total capital. Management should also employ heightened risk managementpractices including board and management oversight and strategic planning,development of underwriting standards, risk assessment and monitoring throughmarket analysis and stress testing. We have concluded that we have aconcentration in commercial real estate lending under the foregoing standards.While we believe we have currently implemented policies and procedures withrespect to our commercial real estate loan portfolio consistent with thisguidance, bank regulators could require us to implement additional policies andprocedures or obtain additional capital consistent with their interpretation ofthe guidance, which could result in additional regulatory burdens and costs tous.

 

*Our small to medium-sized business target markets may havefewer financial resources to weather a downturn in the economy.*

 

We target the banking and financial services needs ofsmall and medium-sized businesses.  Thesebusinesses generally have fewer financial resources in terms of capitalborrowing capacity than larger entities. If general economic conditions negatively impact these businesses in themarkets in which we operate, our business, financial condition, and results ofoperation could be adversely affected.

 

*Ourdeposit insurance premiums have increased and could increase further in thefuture, which could have a material adverse effect on our future earnings.*

 

The FDIC insures deposits at FDIC insured financial institutions,including the Bank. The FDIC charges the insured financial institutionspremiums to maintain the Deposit Insurance Fund at a certain level. Currenteconomic conditions have increased bank failures and expectations for furtherfailures, in which case the FDIC ensures payments of deposits up to insuredlimits from the Deposit Insurance Fund.

 

On October 16, 2008,the FDIC published a restoration plan designed to replenish the DepositInsurance Fund over a period of five years and to increase the depositinsurance reserve ratio, which decreased to 1.01% of insured deposits on June 30,2008, to the statutory minimum of 1.15% of insured deposits by December 31,2013. In order to implement the restoration plan, the FDIC changed both itsrisk-based assessment system and its base assessment rates.  For the first quarter of 2009 only, the FDICincreased all FDIC deposit assessment rates by 7 basis points.  These rates ranged from 12-14 basis pointsfor Risk Category I institutions to 50 basis points for Risk 

 

51

----

Table of Contents

 

Category IVinstitutions.  Beginning with the secondquarter of 2009, the base assessment rates now range from 12-16 basis pointsfor Risk Category I institutions to 45 basis points for Risk Category IVinstitutions, subject to adjustment as described below.  Changes to the risk-based assessment systeminclude increasing premiums for institutions that rely on excessive amounts ofbrokered deposits, including CDARS, increasing premiums for excessive use ofsecured liabilities, including Federal Home Loan Bank advances, loweringpremiums for smaller institutions with very high capital levels, and addingfinancial ratios and debt issuer ratings to the premium calculations for bankswith over $10 billion in assets, while providing a reduction for theirunsecured debt.

 

In addition, on May 22,2009, the FDIC adopted a final rule imposing a special assessment on allinstitutions of 5 basis points for the second quarter of 2009, which is due on September 30,2009.  The Bank accrued $0.9 million forthis special assessment as a liability and expense for the second quarter of2009.  In its final rule, the FDICindicated that the FDIC may impose an additional special assessment in 2009 ofup to 5 basis points if the FDIC believes that the reserve ratio of the DIF isestimated to fall to a level that would adversely affect public confidence orto a level which shall be close to or below zero. Any such additional specialassessment will not exceed 10 basis points times the institution’s assessmentbase for the corresponding quarter. The latest possible date for imposing anadditional special assessment under the final rule would be December 31,2009, with collection on March 30, 2010. The FDIC indicated that such an additional assessment is probable.

 

Either an increase in the Risk Category of the Bank, furtheradjustments to the base assessment rates or additional special assessmentscould have a material adverse effect on our earnings.

 

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

 

(a)                                  None.

 

(b)                                 None.

 

(c)   The following table provides information with respect to purchasesmade by or on behalf of the Company or any “affiliated purchaser” (as definedin Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), ofour common stock during the second quarter 2009.  These purchases relate to the net settlementof vested, restricted stock awards.  TheCompany does not have any existing publicly announced repurchase plans orprograms.

 
| ** **                     | ** ** | **Total  Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** |
|--------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| April 1  to April 30 |       | 1,864                        |       | $                                 | 2.63       |   |
| May 1  to May 31     |       | —                       |       | —                            |       |
| June 1  to June 30   |       | 8,761                        |       | 2.07                              |       |
|                           |       |                         |       |                              |       |
|                           |       | 10,625                       |       | $                                 | 2.16       |   |

 

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

 

None.

 

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

 

On May 6, 2009, the Company held its Annual Meeting ofStockholders for which the Board of Directors solicited proxies. At the AnnualMeeting, the stockholders voted on the following proposals stated in the ProxyStatement dated March 23, 2009.

 

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

 

52

----

Table of Contents

 
| **Election of Directors:**   | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-  Votes** | ** ** |
|------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-----------------|------------|
| G.  Hank Brown               |       | 35,694,454 |       | 11,895,978  |       | 331,272     |       |            |       |
| Edward  B. Cordes            |       | 46,348,334 |       | 976,999     |       | 596,371     |       | —          |       |
| John  M. Eggemeyer, III |       | 46,189,687 |       | 1,329,841   |       | 402,176     |       | —          |       |
| Stephen  D. Joyce            |       | 40,241,772 |       | 7,083,289   |       | 596,643     |       | —          |       |
| Gail  H. Klapper             |       | 33,445,321 |       | 13,725,363  |       | 751,020     |       | —          |       |
| Daniel  M. Quinn             |       | 46,258,340 |       | 1,065,847   |       | 597,517     |       | —          |       |
| Kathleen  Smythe             |       | 46,001,703 |       | 1,323,530   |       | 596,471     |       | —          |       |
| Matthew  P. Wagner           |       | 45,998,182 |       | 1,324,933   |       | 598,589     |       | —          |       |
| Albert  C. Yates             |       | 40,260,321 |       | 7,330,011   |       | 331,372     |       | —          |       |

 

2)              Ratification of the appointment of CroweHorwath LLP as the Company’s independent registered public accounting firm forthe year ending December 31, 2009.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------|------------|
| 47,767,797 |       | 93,286      |       | 61,621      |       | —        |       |

 

On June 29, 2009, the Company held a Special Meeting ofStockholders for which the Board of Directors solicited proxies. At the SpecialMeeting, the stockholders voted on the following proposals stated in the ProxyStatement dated June 1, 2009.

 

1)              Approval of the issuance of up to 60,000shares of our 9.0% mandatorily convertible non-cumulative preferred stock(including the issuance of the preferred stock to Castle Creek Capital PartnersIII, L.P., an affiliate of John M. Eggemeyer, Chairman of the Board) and theissuance of our common stock upon conversion of such preferred stock, and therelated issuance of additional shares of preferred stock in connection withpayments of dividends on the preferred stock and the issuance of our common stockupon conversion of such additional preferred shares.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------|------------|
| 39,780,808 |       | 1,526,079   |       | 156,300     |       | 7,142,840     |       |

 

2)              Approval of our Second Amended andRestated Certificate of Incorporation, which will, among other things, increaseour total authorized number of shares of common stock from 100,000,000 to150,000,000 shares and establish and authorize 143,750,000 shares of a class ofvoting common stock and 6,250,000 shares of a class of non-voting common stock.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------|------------|
| 47,226,232 |       | 1,318,928   |       | 60,867      |       | —        |       |

 

3)              To approve the adjournment orpostponement of the special meeting to a later date or dates, if necessary, tosolicit additional proxies if there are insufficient proxies given prior to thetime of the special meeting to constitute a quorum for purposes of the meetingor to solicit additional proxies in favor of the approval of the aboveproposals.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------|------------|
| 45,615,627 |       | 2,924,666   |       | 65,734      |       | 3,600         |       |

 

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

 

None

 

53

----

Table ofContents

 

**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                      |       | Investment Agreement,  dated as of May 6, 2009, by and among Guaranty Bancorp and the Investors  named therein (incorporated by reference to Exhibit 10.1 to Registrant’s  Form 8-K filed on May 12, 2009). |
|                      |       |                                                                                                                                                                                                                                 |
| 10.2                      |       | Severance Agreement and  Release, dated as of April 15, 2009, between Registrant and Zsolt K.  Bessko.                                                                                                                          |
|                      |       |                                                                                                                                                                                                                                 |
| 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.                                                                                                                                                                          |

 

54

----

Table of Contents

 

**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: July 31,  2009 |   | GUARANTY BANCORP                                                                 |
|---------------------------|--------|----------------------------------------------------------------------------------|
|                      |   |                                                                             |
|                      |   |                                                                             |
|                      |   | /s/   PAUL W. TAYLOR                                              |
|                      |   | Paul W. Taylor                                                                   |
|                      |   | *Executive  Vice President, Chief Financial and Operating Officer and Secretary* |

 

55

----