Guaranty Bancorp 10-Q 2014 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

◻ 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

 

GUARANTY BANCORP

(Exact name 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 200 Denver, CO	80202
(Address of principal executive offices)	(Zip Code)

303-675-1194

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for 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 ☒ No ◻ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☒No ◻ 

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

Large Accelerated Filer  ◻  Accelerated Filer  ��☒ 

Non-accelerated Filer  ◻  (Do not check if smaller reporting company) Smaller Reporting Company ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ◻ No ☒ 

As of October 30, 2014, there were 21,713,867 shares of the registrant’s common stock outstanding, consisting of 20,694,867 shares of voting common stock, of which 746,116 shares were in the form of unvested stock awards, and  1,019,000 shares of the registrant’s non-voting common stock.

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Table of Contents

		Page
PART I—FINANCIAL INFORMATION		3
ITEM 1.	Unaudited Condensed Consolidated Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets	3
	Unaudited Condensed Consolidated Statements of Income	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income	5
	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity	6
	Unaudited Condensed Consolidated Statements of Cash Flows	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	61
ITEM 4.	Controls and Procedures	63
PART II—OTHER INFORMATION		64
ITEM 1.	Legal Proceedings	64
ITEM 1A.	Risk Factors	64
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
ITEM 3.	Defaults Upon Senior Securities	64
ITEM 4	Mine Safety Disclosure	64
ITEM 5.	Other Information	64
ITEM 6.	Exhibits	65

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PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

		September 30,		December 31,
		2014		2013
		(In thousands, except share and per share data)
Assets
Cash and due from banks	$	46,617	$	28,077
Securities available for sale, at fair value		349,993		384,957
Securities held to maturity (fair value of $92,244 and $40,217 at
September 30, 2014 and December 31, 2013)		91,042		41,738
Bank stocks, at cost		15,083		15,605
Total investments		456,118		442,300
Loans held for sale		-		507
Loans, held for investment, net of unearned loan fees		1,482,268		1,319,917
Less allowance for loan losses		(22,350)		(21,005)
Net loans, held for investment		1,459,918		1,298,912
Premises and equipment, net		46,492		48,080
Other real estate owned and foreclosed assets		3,526		4,493
Other intangible assets, net		7,808		6,530
Securities sold or called, not yet settled		-		21,917
Bank-owned life insurance		32,135		31,410
Other assets		25,325		28,806
Total assets	$	2,077,939	$	1,911,032
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand	$	617,704	$	564,326
Interest-bearing demand and NOW		365,538		346,449
Money market		357,368		326,008
Savings		128,931		111,568
Time		193,057		180,106
Total deposits		1,662,598		1,528,457
Securities sold under agreement to repurchase and federal funds purchased		23,674		24,284
Federal Home Loan Bank term notes		110,000		110,000
Federal Home Loan Bank line of credit borrowing		40,400		20,000
Subordinated debentures		25,774		25,774
Securities purchased, not yet settled		-		3,839
Interest payable and other liabilities		10,132		9,284
Total liabilities		1,872,578		1,721,638
Stockholders’ equity:
Common stock (1)		24		24
Additional paid-in capital - common stock		708,573		706,490
Accumulated deficit		(396,339)		(405,494)
Accumulated other comprehensive loss		(4,052)		(8,954)
Treasury stock, at cost, 2,228,562 and 2,215,457 shares, respectively		(102,845)		(102,672)
Total stockholders’ equity		205,361		189,394
Total liabilities and stockholders’ equity	$	2,077,939	$	1,911,032
____________________

⁽¹⁾ Common stock—$0.001 par value; 30,000,000 shares authorized;  23,942,677 shares issued and 21,714,115 shares outstanding at September 30, 2014 (includes 746,782 shares of unvested restricted stock); 23,519,164 shares issued and 21,303,707 shares outstanding at December 31, 2013 (includes 386,525 shares of unvested restricted stock).

See "Notes to Unaudited Condensed Consolidated Financial Statements."

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GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Income

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2014		2013		2014		2013
		(In thousands, except share and per share data)
Interest income:
Loans, including fees	$	16,336	$	14,487	$	46,508	$	42,673
Investment securities:
Taxable		2,287		2,408		6,995		6,995
Tax-exempt		691		719		2,007		2,298
Dividends		214		169		622		495
Federal funds sold and other		1		6		4		107
Total interest income		19,529		17,789		56,136		52,568
Interest expense:
Deposits		647		630		1,797		1,880
Securities sold under agreement to repurchase and
federal funds purchased		9		10		27		39
Borrowings		862		883		2,580		2,550
Subordinated debentures		202		204		599		920
Total interest expense		1,720		1,727		5,003		5,389
Net interest income		17,809		16,062		51,133		47,179
Provision (credit) for loan losses		(3)		142		15		142
Net interest income, after provision for loan losses		17,812		15,920		51,118		47,037
Noninterest income:
Deposit service and other fees		2,290		2,302		6,708		6,603
Investment management and trust		1,279		736		3,149		2,073
Increase in cash surrender value of life insurance		291		305		877		714
Gain on sale of securities		3		20		28		74
Gain on sale of SBA loans		186		207		351		630
Other		253		94		634		231
Total noninterest income		4,302		3,664		11,747		10,325
Noninterest expense:
Salaries and employee benefits		8,112		7,242		24,286		21,896
Occupancy expense		1,583		1,572		4,764		4,782
Furniture and equipment		693		709		2,061		2,215
Amortization of intangible assets		670		703		1,852		2,116
Other real estate owned, net		147		(200)		225		(123)
Insurance and assessments		594		629		1,779		1,878
Professional fees		890		886		2,593		2,650
Prepayment penalty on long term debt		-		-		-		629
Impairment of long-lived assets		-		-		110		-
Other general and administrative		2,434		2,395		6,956		6,964
Total noninterest expense		15,123		13,936		44,626		43,007
Income before income taxes		6,991		5,648		18,239		14,355
Income tax expense		2,320		1,797		5,942		4,414
Net income	$	4,671	$	3,851	$	12,297	$	9,941
Earnings per common share–basic:	$	0.22	$	0.18	$	0.59	$	0.48
Earnings per common share–diluted:		0.22		0.18		0.58		0.47
Dividends declared per common share:		0.05		0.03		0.15		0.05
Weighted average common shares outstanding-basic:		20,966,179		20,873,601		20,954,046		20,861,175
Weighted average common shares outstanding-diluted:		21,089,221		20,981,555		21,070,895		20,954,687

See "Notes to Unaudited Condensed Consolidated Financial Statements."

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GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2014		2013		2014		2013
		(In thousands)
Net income	$	4,671	$	3,851	$	12,297	$	9,941
Change in net unrealized gains (losses) on available for sale
securities during the period excluding the change attributable to
available for sale securities reclassified to held to maturity		(1,074)		(1,060)		8,845		(16,081)
Income tax effect		408		404		(3,362)		6,113
Change in unamortized loss on available for sale securities
reclassified into held to maturity securities		74		-		110		-
Income tax effect		(28)		-		(42)		-
Reclassification adjustment for net losses (gains) included
in net income during the period		(3)		(20)		(28)		(74)
Income tax effect		1		7		11		28
Change in net unrealized gains (losses) on derivatives during
the period		148		(140)		(1,020)		297
Income tax effect		(56)		53		388		(113)
Reclassification adjustment for hedge ineffectiveness
included in net income during the period		-		1		-		-
Income tax effect		-		-		-		-
Other comprehensive income (loss)		(530)		(755)		4,902		(9,830)
Total comprehensive income	$	4,141	$	3,096	$	17,199	$	111

See "Notes to Unaudited Condensed Consolidated Financial Statements”

GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share and per share data)

	Common Stock Shares Outstanding and to be Issued		Common Stock and Additional Paid-in Capital		Treasury Stock		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Totals
Balance, January 1, 2013	21,169,521	$	705,389	$	(102,397)	$	(417,957)	$	3,165	$	188,200
Net income	-		-		-		9,941		-		9,941
Other comprehensive loss	-		-		-		-		(9,830)		(9,830)
Stock compensation awards, net of forfeitures	227,659		-		-		-		-		-
Stock based compensation, net	-		1,070		-		-		-		1,070
Repurchase of common stock	(6,768)		-		(69)		-		-		(69)
Dividends paid	-		-		-		(1,044)		-		(1,044)
Balance, September 30, 2013	21,390,412	$	706,459	$	(102,466)	$	(409,060)	$	(6,665)	$	188,268
Balance, January 1, 2014	21,303,707	$	706,514	$	(102,672)	$	(405,494)	$	(8,954)	$	189,394
Net income	-		-		-		12,297		-		12,297
Other comprehensive income	-		-		-		-		4,902		4,902
Stock compensation awards, net of forfeitures	423,513		-		-		-		-		-
Stock based compensation, net	-		1,767		-		-		-		1,767
Tax effect of restricted stock vestings			316								316
Repurchase of common stock	(13,105)		-		(173)		-		-		(173)
Dividends paid	-		-		-		(3,142)		-		(3,142)
Balance, September 30, 2014	21,714,115	$	708,597	$	(102,845)	$	(396,339)	$	(4,052)	$	205,361

See "Notes to Unaudited Condensed Consolidated Financial Statements."

GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

		Nine Months Ended September 30,
		2014		2013
		(In thousands)
Cash flows from operating activities:
Net income	$	12,297	$	9,941
Reconciliation of net income to net cash from operating activities:
Depreciation and amortization		3,793		3,688
Provision for loan losses		15		142
Impairment of long-lived assets		110		-
Stock compensation, net		1,767		1,070
Gain on sale of securities		(28)		(74)
Gain on sale of SBA loans		(351)		(630)
Prepayment penalty on debt		-		629
Origination of SBA loans with intent to sell		(3,690)		(3,068)
Proceeds from the sale of SBA loans originated with intent to sell		4,119		3,614
Loss (gain), net and valuation adjustments on real estate owned		134		(461)
Other		1,127		(392)
Net change in:
Other assets		(1,356)		3,847
Interest payable and other liabilities		(146)		(814)
Net cash from operating activities		17,791		17,492
Cash flows from investing activities:
Activity in available for sale securities:
Sales, maturities, prepayments and calls		58,920		64,318
Purchases		(34,052)		(102,211)
Activity in held to maturity securities and bank stocks:
Maturities, prepayments and calls		12,211		7,556
Purchases		(25,261)		(10,735)
Loan originations net of principal collections		(159,779)		(135,701)
Redemption of time deposits with banks		-		8,000
Cash outlays related to acquisition		(2,386)		-
Purchase of bank-owned life insurance contracts		-		(15,000)
Proceeds from sales of other real estate owned and foreclosed assets		833		8,454
Proceeds from sale of SBA loans transferred to held for sale		-		3,386
Additions to premises and equipment		(353)		(500)
Net cash from investing activities		(149,867)		(172,433)
Cash flows from financing activities:
Net change in deposits		134,141		27,759
Net change in borrowings on Federal Home Loan Bank line of credit		20,400		52,550
Repayment of Federal Home Loan Bank term notes		-		(12)
Redemption of subordinated debentures		-		(16,094)
Cash dividends on common stock		(3,142)		(1,044)
Net change in repurchase agreements and federal funds purchased		(610)		(37,901)
Repurchase of common stock		(173)		(69)
Net cash from financing activities		150,616		25,189
Net change in cash and cash equivalents		18,540		(129,752)
Cash and cash equivalents, beginning of period		28,077		163,217
Cash and cash equivalents, end of period	$	46,617	$	33,465
Supplemental disclosure of noncash activities:
Reclassification of available for sale securities into held to maturity	$	39,365	$	-
Financing of the sale of other real estate owned		-		8,576

See "Notes to Unaudited Condensed Consolidated Financial Statements."

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(1) Organization, Operations and Basis of Presentation

Guaranty Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and headquartered in Colorado.

The Company’s principal business is to serve as a holding company for its bank subsidiary, Guaranty Bank and Trust Company, referred to as the “Bank”.

References to “Company,” “us,” “we,” and “our” refer to Guaranty Bancorp on a consolidated basis. References to “Guaranty Bancorp” or to the “holding company” refer to the parent company on a stand-alone basis. References to the “Bank” refer to Guaranty Bank and Trust Company, the Company’s wholly owned bank subsidiary.

The Bank is a full-service community bank offering an array of banking products and services to the communities it serves along the Front Range of Colorado, including accepting time and demand deposits and originating commercial loans (including energy loans), real estate loans (including jumbo mortgages), Small Business Administration (“SBA”) guaranteed loans and consumer loans. The Bank together with its wholly owned subsidiaries, Private Capital Management, LLC (“PCM”) and Cherry Hills Investment Advisors, Inc. (“CHIA”), provide wealth management services, including private banking, investment management and trust services. The Company acquired CHIA and its’ assets under management of approximately $178,500,000 on July 16, 2014.  Substantially all of the Bank’s loans are secured by specific items of collateral, including business assets, commercial and residential real estate, which include land or improved land and consumer assets. Commercial loans are expected to be repaid from cash flow from the operations of businesses that have taken out the loans. There are no significant concentrations of loans to any one industry or customer. The ability of customers to repay their loans is generally dependent on the real estate market and general economic conditions prevailing in Colorado, among other factors. 

(a)Basis of Presentation

The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America and prevailing practices within the financial services industry. All material intercompany balances and transactions have been eliminated in consolidation. The Company’s financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of its financial position and results of operations for the periods presented. All such adjustments are of a normal and recurring nature. Subsequent events have been evaluated through the date of financial statements issuance.

Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The interim operating results presented in these financial statements are not necessarily indicative of operating results for the full year. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2013.

(b)Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheets and income and expense for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes include the assessment for impairment of certain investment securities and the allowance for loan losses. Assumptions and factors used in these estimates are evaluated on an annual basis and whenever events or changes in circumstances indicate that the previous assumptions and factors have changed. The results of such an evaluation could result in material adjustments to the Company’s estimates.

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(c)Loans and Loan Commitments

The Company extends commercial, real estate, agricultural and consumer loans to customers. A substantial portion of the loan portfolio consists of commercial and real estate loans throughout the Front Range of Colorado. The ability of the Company’s borrowers to honor their contracts is generally dependent upon the real estate and general economic conditions prevailing in Colorado, among other factors.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances, adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs. Accounting for loans is performed consistently across all portfolio segments and classes.

A portfolio segment is defined in accounting guidance as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses. A class is defined in accounting guidance as a group of loans having similar initial measurement attributes, risk characteristics and methods for monitoring and assessing risk.

Interest income is accrued on the unpaid principal balance of the Company’s loans. Loan origination fees, net of direct origination costs, are deferred and recognized as an adjustment to the related loan yield using the effective interest method without anticipating prepayments.

The accrual of interest on loans is discontinued (and the loan is put on nonaccrual status) at the time the loan is 90 days past due unless the loan is well secured and in process of collection. The time at which a loan enters past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off prior to the date on which they would otherwise enter past due status if collection of principal or interest is considered doubtful. The interest on a nonaccrual loan is accounted for using the cash-basis method until the loan qualifies for a return to the accrual basis method, and any payments received on a nonaccrual loan are applied first to the principal balance of the loan. A loan is returned to accrual status after the delinquent borrower’s financial condition has improved, when all the principal and interest amounts contractually due are brought current and when the likelihood of the borrower making future timely payments are reasonably assured.

Financial instruments include off‑balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The face amount of each item represents our total exposure to loss with respect to the item, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

(d)Allowance for Loan Losses and Allowance for Unfunded Commitments

The allowance for loan losses or “the allowance” is a valuation allowance for probable incurred loan losses and is reported as a reduction of outstanding loan balances.

Management evaluates the amount of the allowance on a regular basis based upon its periodic review of the collectability of the Company’s loans. Factors affecting the collectability of the loans include historical loss experience, the nature and volume of the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Management maintains the allowance at a level that it deems appropriate to adequately provide for known and inherent risks in the loan portfolio and other extensions of credit. The Company’s methodology for estimating the allowance is consistent across all portfolio segments and classes of loans.

Loans deemed to be uncollectible are charged off and deducted from the allowance. The Company’s loan portfolio primarily consists of non-homogeneous commercial and real estate loans where charge-offs are considered on a loan-by-loan basis based on the facts and circumstances, including management’s evaluation of collateral values in comparison to book values on collateral-dependent loans. Charge-offs on smaller balance unsecured homogenous type loans such as overdrafts and ready reserves are recognized by the time

7

the loan in question is 90 days past due. The provision for loan losses and recoveries on loans previously charged-off are added to the allowance.

The allowance consists of both specific and general components. The specific component relates to loans that are individually classified as impaired. All loans are subject to individual impairment evaluation should the pertinent facts and circumstances suggest that such an evaluation is necessary. Factors considered by management in determining impairment include the loan’s payment status and the probability of collecting scheduled principal and interest payments when they become due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the original underlying loan agreement. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is impaired, a portion, if any, of the allowance is allocated so that the loan is reported at the present value of estimated future cash flows using the loan’s original contractual rate or at the fair value of collateral, less estimated selling costs, if repayment is expected solely from collateral.

The general component of the allowance covers all other loans not specifically identified as impaired and is determined by calculating losses recognized by portfolio segment during the current credit cycle and adjusted based on management’s evaluation of various qualitative factors. In performing this calculation, loans are aggregated into one of three portfolio segments: Real Estate, Consumer and Commercial & Other. An assessment of risks impacting loans in each of these portfolio segments is performed and qualitative adjustment factors, which adjust the historical loss rate are estimated. These qualitative adjustment factors consider current conditions relative to conditions present throughout the current credit cycle in the following areas: credit quality, loan class concentration levels, economic conditions, loan growth dynamics and organizational conditions. The historical loss experience is adjusted for management’s estimate of the impact of these factors based on the risks present for each portfolio segment.

The Company recognizes a liability in relation to unfunded commitments that is intended to represent the estimated future losses on the commitments. In calculating the amount of this liability, management considers the amount of the Company’s off-balance sheet commitments, estimated utilization factors and loan specific risk factors. The Company’s liability for unfunded commitments is calculated quarterly and is included under “other liabilities” in the consolidated balance sheet.

(e)Other Real Estate Owned and Foreclosed Assets

Assets acquired through or in lieu of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If the asset’s fair value declines subsequent to the assets’ acquisition, a valuation allowance is recorded through expense. Operating revenues and expenses of these assets and reductions in the fair value of the assets are included in noninterest expense. Gains and losses on their disposition are also included in noninterest expense.

(f)Other Intangible Assets

Intangible assets acquired in a business combination are amortized over their estimated useful lives to their estimated residual values and evaluated for impairment whenever changes in circumstances indicate that such an evaluation is necessary.

Core deposit intangible assets (“CDI assets”) are recognized at the time of their acquisition based on valuations prepared by independent third parties or other estimates of fair value. In preparing such valuations, management considers variables such as deposit servicing costs, attrition rates, and market discount rates. CDI assets are amortized to expense over their useful lives, ranging from 10 years to 15 years.

Customer relationship intangible assets are recognized at the time of their acquisition based upon management’s estimate of their fair value. In preparing their valuation, management considers variables such as growth in existing customer base, attrition rates and market discount rates. The customer relationship

8

intangible assets are amortized to expense over their estimated useful life, which has been estimated to be ten years. As of September 30, 2014 the Company had recognized two customer relationship intangible assets as a result of the acquisitions of PCM on July 31, 2012 and CHIA on July 16, 2014.  

(g) Impairment of Long-Lived Assets

Long-lived assets, such as premises and equipment, and finite-lived intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carrying value of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset, less costs to sell.

Assets to be disposed of are reported at the lower of their carrying value or fair value less costs to sell, and are no longer depreciated. In 2012, the Company recorded an impairment related to two bank buildings that were later transferred to assets held for sale. At September 30, 2014, one of these properties remained held for sale and is included in “other assets” in the consolidated balance sheet. Market conditions during the second quarter 2014 indicated that the net realizable fair value of this property had declined and as a result the Company recognized an impairment of $110,000 related to this property as of June 30, 2014. No additional impairment was recognized on this property during the third quarter 2014. 

(h) Derivative Instruments

The Company records all derivatives on its consolidated balance sheets at fair value. At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to the derivative’s likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). To date, the Company has entered into cash flow hedges and stand-alone derivative agreements but has not entered into any fair value hedges. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. Any portion of the cash flow hedge not deemed highly effective in hedging the changes in expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest income.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions, at the inception of the derivative contract. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the hedge is highly effective in offsetting changes in cash flows of the hedged items.

(i)Stock Incentive Plan

The Company’s Amended and Restated 2005 Stock Incentive Plan (the “Incentive Plan”) provides for the grant of stock options, stock awards, stock unit awards, performance stock awards, stock appreciation rights, and other equity-based awards representing up to a total of 1,700,000 shares of voting common stock to key employees, nonemployee directors, consultants and prospective employees. As of September 30, 2014, the Company had only granted stock awards. The Company recognizes stock compensation expense for services received in a share-based payment transaction over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The compensation cost of employee and director services received in exchange for stock awards is based on the grant date fair value of the award, as determined by quoted market prices. Stock compensation expense recognized considers estimated forfeitures and is adjusted as necessary to reflect actual forfeitures. The Company has issued stock awards that vest based

9

on the passage of time over service periods of one to five years (in some cases vesting in annual installments, in other cases cliff vesting at the end of the service period), and other stock awards that vest contingent upon the satisfaction of certain performance conditions. The last date on which outstanding performance stock awards may vest is December 31, 2018. At September 30, 2014, certain performance stock awards were expected to vest prior to their expiration, while approximately 90,000 performance awards were not expected to vest prior to their expiration, based on current projections in comparison to performance conditions. Should these expectations change, additional expense could be recorded or reversed in future periods.

(j)    Stock Repurchase Plan

On April 3, 2014, the Company announced that its Board of Directors had authorized the repurchase of up to 1,000,000 shares of its voting common stock, par value $0.001 per share. Repurchases under the program were authorized to commence immediately and continue through April 2, 2015. As of the date of this filing, no stock has been repurchased under the current program.

(k)    Income Taxes

Income tax expense is the total of the current year’s income tax payable or refundable and the increase or decrease in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of 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 the Company will not realize some portion of, or the entire deferred tax asset. In assessing the Company’s likelihood of realizing deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, forecasts of future income, taking into account applicable tax planning strategies, and assessments of current and future economic and business conditions. Management performs this analysis quarterly and adjusts as necessary. At September 30,  2014 and December 31, 2013, the Company had a net deferred tax asset of $11,727,000 and $16,681,000, respectively, which includes the deferred tax asset associated with the unrealized loss on securities. After analyzing the composition of and changes in the deferred tax assets and liabilities and considering the Company’s forecasted future taxable income and various tax planning strategies, including the intent to hold the securities available for sale that were in a loss position until maturity, management determined that as of September 30, 2014 it was “more likely than not” that the net deferred tax asset would be fully realized. As a result, there was no valuation allowance with respect to the Company’s deferred tax asset as of September 30, 2014 or December 31, 2013.

At September 30, 2014 and December 31, 2013, the Company did not have any uncertain tax positions for which a tax benefit was disallowed under current accounting guidance. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company and the Bank are subject to U.S. federal income tax and State of Colorado income tax. The Company is no longer subject to examination by Federal or State taxing authorities for years before 2010 except to the extent of the amount of the 2010 carryback claim for a refund filed in 2011 with respect to 2008. At September 30, 2014 and December 31, 2013, the Company did not have any unrecognized tax benefits. The Company does not expect the amount of any unrecognized tax benefits to materially change in the next 12 months. The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other noninterest expense. At September 30, 2014 and December 31, 2013, the Company did not have any amounts accrued for interest or penalties.

10

(l)Earnings per Common Share

Basic earnings per common share represents the earnings allocable to common stockholders divided by the weighted average number of common shares outstanding during the period. Dilutive common shares that may be issued by the Company represent unvested stock awards subject to a service or performance condition.

Earnings per common share have been computed based on the following calculation of weighted average shares outstanding:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2014	2013	2014	2013
Average common shares outstanding	20,966,179	20,873,601	20,954,046	20,861,175
Effect of dilutive unvested stock grants (1)	123,042	107,954	116,849	93,512
Average shares outstanding for calculated
diluted earnings per common share	21,089,221	20,981,555	21,070,895	20,954,687
_____________

 (1)Unvested stock grants representing 746,782 shares at September 30, 2014 had a dilutive impact of 123,042 and 116,849 shares in the diluted earnings per share calculation for the three and nine months ended September 30, 2014, respectively. Unvested stock grants representing 515,816 shares at September 30, 2013 had a dilutive impact of 107,954 and 93,512 shares in the diluted earnings per share calculation for the three and nine months ended September 30, 2013, respectively.

(m)    Recently Issued Accounting Standards

Adoption of New Accounting Standards:

In July of 2013 the FASB issued an accounting standards update to reduce the diversity in the accounting practice with respect to the presentation of unrecognized tax benefits when net operating loss or credit carryforwards are present. The provisions of this update require the separate presentation of unrecognized tax benefits related to net operating loss carryforwards and credit carryforwards apart from other deferred tax assets. For the Company, the amendments of the update became effective for fiscal years, and interim periods within those years, beginning subsequent to December 15, 2013. At September 30, 2014, the impact of this update on the Company’s disclosures was not material.

Recently Issued but not yet Effective Accounting Standards:

In July 2014 in an effort to foster additional consistency in recognizing revenue the FASB issued accounting standards update 2014-09Revenue from Contracts with Customers. The main provisions of the update require the identification of performance obligations within a contract andrequire the recognition of revenue based on a stand-alone allocation of contract revenue to each performance obligation. Performance obligations may be satisfied and revenue recognized over a period of time if: 1) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs, or 2) the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or 3)the entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. For public entities the amendments of the update are effective for interim and annual reporting periods beginning after December 15, 2016. Management does not expect the impacts of this update to have a material impact on the Company’s financial position, results of operations or cash flows.

(n) Reclassifications

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

11

(2)Securities

The fair value of available for sale debt securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) (“AOCI”) were as follows at the dates presented:

	September 30, 2014
		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses		Amortized Cost
		(In thousands)
Securities available for sale:
State and municipal	$	50,395	$	52	$	(551)	$	50,894
Mortgage-backed - agency / residential		207,069		1,713		(4,105)		209,461
Mortgage-backed - private / residential		463		9		-		454
Asset-backed		8,561		-		(435)		8,996
Trust preferred		18,675		275		(1,600)		20,000
Corporate		64,830		874		(156)		64,112
Total securities available for sale	$	349,993	$	2,923	$	(6,847)	$	353,917

	December 31, 2013
		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses		Amortized Cost
		(In thousands)
Securities available for sale:
State and municipal	$	41,085	$	59	$	(2,395)	$	43,421
Mortgage-backed - agency / residential		254,103		1,289		(10,114)		262,928
Mortgage-backed - private / residential		561		-		-		561
Asset-backed		22,503		-		(1,902)		24,405
Marketable equity		1,535		-		-		1,535
Trust preferred		26,096		88		(2,330)		28,338
Corporate		39,074		510		(211)		38,775
Total securities available for sale	$	384,957	$	1,946	$	(16,952)	$	399,963

During the second quarter of 2014, the Company reclassified, at fair value, approximately $39,365,000 in available for sale mortgage-backed and asset-backed securities to the held to maturity category.  The related unrealized after-tax losses of approximately $1,404,000 remained in accumulated other comprehensive income (loss) and will be amortized over the remaining life of the securities, offsetting the related amortization of discount on the transferred securities. No gains or losses were recognized at the time of reclassification.

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

		Fair Value		Gross Unrecognized Gains		Gross Unrecognized Losses		Amortized Cost
		(In thousands)
September 30, 2014:
State and municipal	$	35,733	$	734	$	(272)	$	35,271
Mortgage-backed - agency / residential		43,089		803		(124)		42,410
Asset-backed		13,422		61		-		13,361
	$	92,244	$	1,598	$	(396)	$	91,042
December 31, 2013:
State and municipal	$	26,351	$	-	$	(1,664)	$	28,015
Mortgage-backed - agency / residential		13,866		343		(200)		13,723
	$	40,217	$	343	$	(1,864)	$	41,738

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The proceeds from sales and calls of securities and the associated gains are listed below:

		Three Months Ended September 30,				Nine Months Ended September 30,
		2014		2013		2014		2013
		(In thousands)
Proceeds	$	3,203	$	2,900	$	11,570	$	10,400
Gross gains		3		20		45		74
Gross losses		-		-		(17)		-
Net tax expense related to gains
on sale		1		8		11		28

The amortized cost and estimated fair value of available for sale debt securities by contractual maturity at September 30, 2014 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. Securities not due at a single maturity date are presented separately.

		Available for Sale (AFS)
		Fair Value		Amortized Cost
		(In thousands)
Securities available for sale:
Due in one year or less	$	1,403	$	1,393
Due after one year through five years		40,734		40,336
Due after five years through ten years		27,024		26,740
Due after ten years		64,739		66,537
Total AFS, excluding mortgage-backed (MBS),
asset-backed and marketable equity securities		133,900		135,006
Mortgage-backed, asset-backed and marketable
equity securities		216,093		218,911
Total securities available for sale	$	349,993	$	353,917

		Held to Maturity (HTM)
		Fair Value		Amortized Cost
		(In thousands)
Securities held to maturity:
Due after one year through five years	$	3,046	$	3,041
Due after five years through ten years		8,386		8,278
Due after ten years		24,301		23,952
Total HTM, excluding MBS and asset-backed		35,733		35,271
Mortgage-backed and asset-backed		56,511		55,771
Total securities held to maturity	$	92,244	$	91,042

13

The following tables present the fair value and the unrealized loss on securities that were temporarily impaired as of September 30, 2014 and December 31, 2013, aggregated by major security type and length of time in a continuous unrealized loss position:

September 30, 2014		Less than 12 Months				12 Months or More				Total
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
		(In thousands)
Description of securities:
Available for sale:
State and municipal	$	-	$	-	$	14,691	$	(551)	$	14,691	$	(551)
Mortgage-backed - agency /
residential		24,276		(269)		107,482		(3,836)		131,758		(4,105)
Asset-backed		-		-		8,561		(435)		8,561		(435)
Trust preferred		-		-		8,400		(1,600)		8,400		(1,600)
Corporate		18,470		(156)		-		-		18,470		(156)
Held to maturity:
State and municipal		1,412		(2)		12,408		(270)		13,820		(272)
Mortgage-backed - agency /
residential		13,167		(91)		3,521		(33)		16,688		(124)
Total temporarily impaired	$	57,325	$	(518)	$	155,063	$	(6,725)	$	212,388	$	(7,243)

December 31, 2013		Less than 12 Months				12 Months or More				Total
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
		(In thousands)
Description of securities:
Available for sale:
State and municipal	$	35,012	$	(1,946)	$	3,517	$	(449)	$	38,529	$	(2,395)
Mortgage-backed - agency /
residential		186,193		(9,943)		9,668		(171)		195,861		(10,114)
Asset-backed		17,953		(1,526)		4,549		(376)		22,502		(1,902)
Trust preferred		13,215		(227)		7,897		(2,103)		21,112		(2,330)
Corporate		15,484		(211)		-		-		15,484		(211)
Held to maturity:
State and municipal		20,012		(1,296)		2,510		(368)		22,522		(1,664)
Mortgage-backed - agency /
residential		6,621		(200)		-		-		6,621		(200)
Total temporarily impaired	$	294,490	$	(15,349)	$	28,141	$	(3,467)	$	322,631	$	(18,816)

In determining whether or not there is an other-than-temporary-impairment (“OTTI”) for a security, management considers many factors, including: (1) the length of time for which and the extent to which the security’s fair value has been less than cost, (2) the financial condition and near-term prospects of the security’s issuer, (3) whether the decline in the security’s value was affected by macroeconomic conditions, and (4) whether the Company intends to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovering its fair value. The assessment of whether an OTTI exists involves a high degree of subjectivity and judgment and is based on the information available to management at a particular point in time.

The Company did not recognize any OTTI during the quarter ended September 30, 2014 or September 30, 2013. There were no accumulated credit losses on any of the Company’s securities as of September 30, 2014 or December 31, 2013.

At September 30, 2014, there were 98 individual securities in an unrealized loss position, including 82 individual securities that had been in a continuous unrealized loss position for 12 months or longer. Management has evaluated these securities in addition to the remaining 16 securities in an unrealized loss position and has determined that the decline in value since their purchase dates was primarily attributable to changes in market interest rates.  

14

Management determined that the increase in the number of securities in an unrealized loss position in excess of 12 months from 22 securities at December 31, 2013 to the 82 securities at September 30, 2014 was primarily attributable to the timing of interest rate fluctuations. The total number of securities in an unrealized loss position declined from 134 individual securities at December 31, 2013 to 98 securities at September 30, 2014. At September 30, 2014, the Company did not intend to sell, and did not consider it likely that it would be required to sell, any of these securities prior to recovery in their fair value.

The Company’s unrated and rated municipal bond securities, along with the Company’s other rated investment securities, are subject to an annual internal review process that management has historically performed in the fourth quarter. The review process includes a review of the securities’ issuers’ most recent financial statements, including an evaluation of the expected sufficiency of the issuers’ cash flows relative to their debt service requirements. In addition, management considers any interim information reasonably made available to it that would prompt the need for more frequent review. At September 30, 2014 and December 31, 2013, the Company’s unrated municipal bonds comprised approximately 14.6% and 6.3%, respectively, of the carrying value of the Company’s entire municipal bond portfolio. The increase in unrated municipal securities at September 30, 2014 compared to December 31, 2013 was the result of the Company’s purchase of a $8.0 million tax-exempt, private placement revenue bond issued by a local non-profit during the third quarter 2014.

At September 30, 2014, a hospital revenue bond with a book value of $24,115,000 accounted for 11.7% of total stockholders’ equity. This amortizing tax-exempt bond was issued by a hospital in the Company’s footprint and is secured by a pledge of revenues and a deed of trust from the hospital, carries an interest rate of 4.75% and matures December 1, 2031. Utilizing the discounted cash flow method and an estimate of current market rates for similar bonds, management determined the estimated fair value of this bond as of September 30, 2014 approximated its par value. Management determined that the estimated fair value of this bond as of December 31, 2013 reflected an unrealized loss of $478,000. In addition to conducting its annual review of unrated municipal bonds, the most recent of which was completed in the fourth quarter 2013, management conducts a quarterly review of the hospital’s financial statements. To date, the bond has paid principal and interest in accordance with its contractual terms. During the fourth quarter 2013 the issuer redeemed $10,810,000 in advance of the contractual repayment schedule.

(3)Loans

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

		September 30,		December 31,
		2014		2013
		(In thousands)
Commercial and residential real estate	$	1,001,174	$	866,507
Construction		89,787		77,657
Commercial		286,545		271,843
Agricultural		11,986		10,772
Consumer		60,492		60,932
SBA		32,107		31,010
Other		773		2,039
Total gross loans		1,482,864		1,320,760
Unearned loan fees		(596)		(843)
Loans, held for investment, net of unearned loan fees		1,482,268		1,319,917
Less allowance for loan losses		(22,350)		(21,005)
Net loans, held for investment	$	1,459,918	$	1,298,912

Activity in the allowance for loan losses for the period indicated is as follows:

		Three Months Ended September 30,				Nine Months Ended September 30,
		2014		2013		2014		2013
		(In thousands)
Balance, beginning of period	$	22,155	$	20,218	$	21,005	$	25,142
Provision (credit) for loan losses		(3)		142		15		142
Loans charged-off		(80)		(110)		(550)		(6,629)
Recoveries on loans previously
charged-off		278		200		1,880		1,795
Balance, end of period	$	22,350	$	20,450	$	22,350	$	20,450

15

The Company’s additional disclosures relating to loans and the allowance for loan losses are broken out into two subsets: portfolio segment and class. The portfolio segment level is defined as the level where financing receivables are aggregated in developing the Company’s systematic method for calculating its allowance for loan losses. The class level is the second level at which credit information is presented and represents the categorization of financing related receivables at a slightly less aggregated level than the portfolio segment level. Because data presented according to class is dependent upon the underlying purpose of the loan, whereas loan data organized by portfolio segment is determined by the loan’s underlying collateral, disclosures broken out by portfolio segment versus class may not be in agreement.

The following tables provide detail for the ending balances in the Company’s allowance for loan losses and loans held for investment, broken down by portfolio segment as of the dates indicated. In addition, the tables also provide a rollforward by portfolio segment of the allowance for loan losses for the three and nine months ended September 30, 2014 and September 30, 2013. The detail provided for the amount of the allowance for loan losses and loans individually versus collectively evaluated for impairment (i.e., the general component versus the specific component of the allowance for loan losses) corresponds to the Company’s systematic methodology for estimating its allowance for loan losses.

		Real Estate		Consumer and  Installment		Commercial and Other		Total
		(In thousands)
Allowance for Loan Losses
Balance as of December 31, 2013	$	18,475	$	52	$	2,478	$	21,005
Charge-offs		(20)		(26)		(504)		(550)
Recoveries		1,620		24		236		1,880
Provision (credit)		(404)		(7)		426		15
Balance as of September 30, 2014	$	19,671	$	43	$	2,636	$	22,350
Balance as of June 30, 2014	$	19,191	$	48	$	2,916	$	22,155
Charge-offs		(11)		(11)		(58)		(80)
Recoveries		152		6		120		278
Provision (credit)		339		-		(342)		(3)
Balance as of September 30, 2014	$	19,671	$	43	$	2,636	$	22,350

Balances at September 30, 2014:
Allowance for Loan Losses
Individually evaluated	$	68	$	-	$	2	$	70
Collectively evaluated		19,603		43		2,634		22,280
Total	$	19,671	$	43	$	2,636	$	22,350
Loans
Individually evaluated	$	30,477	$	26	$	368	$	30,871
Collectively evaluated		1,195,570		3,172		252,655		1,451,397
Total	$	1,226,047	$	3,198	$	253,023	$	1,482,268

16

		Real Estate		Consumer and  Installment		Commercial and Other		Total
		(In thousands)
Allowance for Loan Losses
Balance as of December 31, 2012	$	19,550	$	76	$	5,516	$	25,142
Charge-offs		(5,670)		(27)		(932)		(6,629)
Recoveries		1,647		24		124		1,795
Provision (credit)		1,404		(69)		(1,193)		142
Balance as of September 30, 2013	$	16,931	$	4	$	3,515	$	20,450
Balance as of June 30, 2013	$	17,095	$	136	$	2,987	$	20,218
Charge-offs		(92)		(12)		(6)		(110)
Recoveries		182		6		12		200
Provision (credit)		(254)		(126)		522		142
Balance as of September 30, 2013	$	16,931	$	4	$	3,515	$	20,450

Balances at December 31, 2013:
Allowance for Loan Losses
Individually evaluated	$	352	$	1	$	212	$	565
Collectively evaluated		18,123		51		2,266		20,440
Total	$	18,475	$	52	$	2,478	$	21,005
Loans
Individually evaluated	$	21,045	$	27	$	631	$	21,703
Collectively evaluated		1,075,051		3,929		219,234		1,298,214
Total	$	1,096,096	$	3,956	$	219,865	$	1,319,917

17

The following tables provide additional detail with respect to impaired loans broken out according to class as of the dates indicated. The recorded investment included in the following table represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs.  The unpaid balance represents the recorded balance prior to any partial charge-offs. Interest income recognized year-to-date may exclude an immaterial amount of interest income on matured loans that are 90 days or more past due, but that are in the process of being renewed and thus are still accruing.

September 30, 2014		Recorded Investment		Unpaid  Balance		Related Allowance		Average Recorded Investment YTD		Interest Income Recognized  YTD
		(In thousands)
Impaired loans with no related allowance:
Commercial and residential real estate	$	27,693	$	29,286	$	-	$	19,658	$	597
Construction		-		-		-		-		-
Commercial		322		335		-		309		21
Consumer		404		417		-		278		8
Other		300		605		-		253		-
Total	$	28,719	$	30,643	$	-	$	20,498	$	626
Impaired loans with a related allowance:
Commercial and residential real estate	$	1,489	$	1,745	$	45	$	2,204	$	39
Construction		-		-		-		-		-
Commercial		143		413		2		293		8
Consumer		520		570		23		707		8
Other		-		-		-		85		-
Total	$	2,152	$	2,728	$	70	$	3,289	$	55
Total impaired loans:
Commercial and residential real estate	$	29,182	$	31,031	$	45	$	21,862	$	636
Construction		-		-		-		-		-
Commercial		465		748		2		602		29
Consumer		924		987		23		985		16
Other		300		605		-		338		-
Total impaired loans	$	30,871	$	33,371	$	70	$	23,787	$	681

18

December 31, 2013		Recorded Investment		Unpaid  Balance		Related Allowance		Average Recorded Investment YTD		Interest Income Recognized  YTD
		(In thousands)
Impaired loans with no related allowance:
Commercial and residential real estate	$	16,467	$	17,497	$	-	$	12,516	$	244
Construction		-		-		-		2,703		-
Commercial		294		294		-		362		15
Consumer		378		379		-		515		11
Other		202		472		-		774		-
Total	$	17,341	$	18,642	$	-	$	16,870	$	270
Impaired loans with a related allowance:
Commercial and residential real estate	$	2,714	$	3,699	$	182	$	6,677	$	73
Construction		-		-		-		2,735		-
Commercial		666		1,236		220		1,453		9
Consumer		816		862		93		738		7
Other		166		359		70		286		-
Total	$	4,362	$	6,156	$	565	$	11,889	$	89
Total impaired loans:
Commercial and residential real estate	$	19,181	$	21,196	$	182	$	19,193	$	317
Construction		-		-		-		5,438		-
Commercial		960		1,530		220		1,815		24
Consumer		1,194		1,241		93		1,253		18
Other		368		831		70		1,060		-
Total impaired loans	$	21,703	$	24,798	$	565	$	28,759	$	359

The gross year-to-date interest income that would have been recorded had the nonaccrual loans been current in accordance with their original terms was $520,000 for the nine months ended September 30, 2014 and $998,000 for the nine months ended September 30, 2013.

The following tables summarize by class loans classified as past due in excess of 30 days or more in addition to those loans classified as nonaccrual:

September 30, 2014		30-89 Days Past Due		90 Days + Past Due and Still Accruing		Nonaccrual Loans		Total Past Due		Total Loans, Held for Investment
		(In thousands)
Commercial and residential
real estate	$	50	$	-	$	12,319	$	12,369	$	1,000,771
Construction		-		-		-		-		89,751
Commercial		51		-		31		82		286,430
Consumer		123		-		587		710		60,468
Other		234		-		300		534		44,848
Total	$	458	$	-	$	13,237	$	13,695	$	1,482,268

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December 31, 2013		30-89 Days Past Due		90 Days + Past Due and Still Accruing		Nonaccrual Loans		Total Past Due		Total Loans, Held for Investment
		(In thousands)
Commercial and residential
real estate	$	590	$	-	$	13,560	$	14,150	$	865,960
Construction		277		-		-		277		77,601
Commercial		616		-		624		1,240		271,670
Consumer		146		-		924		1,070		60,893
Other		494		-		368		862		43,793
Total	$	2,123	$	-	$	15,476	$	17,599	$	1,319,917

The Company categorizes loans into risk categories based on relevant information about the ability of a particular borrower to service its debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory guidance:

Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral, if any, pledged to secure the loan. Loans so classified have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above are considered to be non-classified loans.

The following tables provide detail for the risk categories of loans by class of loans based on the most recent credit analysis performed as of the dates indicated: 

September 30, 2014		Commercial & Residential Real Estate		Construction		Commercial Loans		Consumer		Other		Total
		(In thousands)
Non-classified	$	976,352	$	89,787	$	285,341	$	59,094	$	43,238	$	1,453,812
Substandard		24,822		-		1,204		1,398		1,628		29,052
Doubtful		-		-		-		-		-		-
Subtotal		1,001,174		89,787		286,545		60,492		44,866		1,482,864
Less: Unearned loan fees		(403)		(36)		(115)		(24)		(18)		(596)
Loans, held for investment, net
of unearned loan fees	$	1,000,771	$	89,751	$	286,430	$	60,468	$	44,848	$	1,482,268

December 31, 2013		Commercial & Residential Real Estate		Construction		Commercial Loans		Consumer		Other		Total
		(In thousands)
Non-classified	$	847,231	$	77,657	$	270,511	$	58,868	$	41,771	$	1,296,038
Substandard		19,276		-		1,332		2,064		2,050		24,722
Doubtful		-		-		-		-		-		-
Subtotal		866,507		77,657		271,843		60,932		43,821		1,320,760
Less: Unearned loan fees		(547)		(56)		(173)		(39)		(28)		(843)
Loans, held for investment, net
of unearned loan fees	$	865,960	$	77,601	$	271,670	$	60,893	$	43,793	$	1,319,917

The balance of substandard graded loans increased from $24,722,000 at December 31, 2013 to $29,052,000 as of September 30, 2014. The $4,330,000 increase in substandard graded loans during the first nine months of 2014

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was primarily the result of the downgrade of a single substandard credit with a book balance of $8,734,000 as a result of the deterioration in cash flow from the commercial shopping center securing the subject loan. The commercial shopping center securing the downgraded loan is located within the Bank’s operating footprint.

The book balance of troubled debt restructurings (“TDRs”) at September 30, 2014 and December 31, 2013 was $29,734,000 and $9,332,000, respectively. The primary cause of the increase in troubled debt restructurings as of September 30, 2014 compared to December 31, 2013 was the restructuring of the Company’s largest nonaccrual loan of $10,085,000 during the second quarter 2014, in addition to the third quarter 2014 restructuring of the company’s largest accruing, substandard loan of $8,734,000. Management has established approximately $48,000 and $335,000 in specific reserves with respect to these loans as of September 30, 2014 and December 31, 2013. As of both September 30, 2014 and December 31, 2013, the Company had no material additional amounts committed on loans classified as TDRs. Of the $22,778,000 in new TDR’s added in the first nine months of 2014, $10,281,000 were designated as nonaccrual loans as of December 31,2013, the largest of which being the $10,085,000 loan outlined above. 

During the third quarter 2014, management made five loan modifications qualifying as TDRs. The modifications involved the extension of maturity on four substandard-graded loans and the restructuring of the payment amount on one loan. 

During the nine months ended September 30, 2014, management made 16 loan modifications qualifying as TDRs. Of the 16 modifications, four involved the restructuring of payment amounts whereas the remaining 12 restructurings were classified as TDRs because the subject loans were substandard graded loans. 

The following tables present loans by class modified as TDRs that occurred during the three and nine months ended September 30, 2014 and September 30, 2013:

Three Months Ended September 30, 2014:
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(In thousands)
Commercial and residential
real estate	3	$	9,573	$	9,573
Construction	-		-		-
Commercial	1		32		32
Consumer	1		23		23
Other	-		-		-
Total	5	$	9,628	$	9,628

Nine Months Ended September 30, 2014:
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(In thousands)
Commercial and residential
real estate	10	$	22,240	$	22,240
Construction	-		-		-
Commercial	2		372		372
Consumer	3		80		80
Other	1		86		86
Total	16	$	22,778	$	22,778

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Three Months Ended September 30, 2013:
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(In thousands)
Commercial and residential
real estate	6	$	2,239	$	2,147
Construction	-		-		-
Commercial	2		299		299
Consumer	1		21		21
Other	-		-		-
Total	9	$	2,559	$	2,467

Nine Months Ended September 30, 2013:
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(In thousands)
Commercial and residential
real estate	8	$	4,711	$	4,445
Construction	-		-		-
Commercial	3		483		483
Consumer	1		21		21
Other	-		-		-
Total	12	$	5,215	$	4,949

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no defaults on TDRs during the nine months ended September 30, 2014. A single default occurred on a TDR during the nine months ended September 30, 2013, and as a result, a $133,000 charge-off was taken on the loan.

(4)Other Intangible Assets

Other intangible assets with finite lives are amortized over their respective estimated useful lives to their estimated residual values. As of September 30, 2014, the Company had intangible assets comprised of its core deposit intangible assets and two customer relationship intangible assets.

The following table presents the gross amounts of core deposit intangible assets and customer relationship intangible assets and the related accumulated amortization at the dates indicated: 

			September 30,		December 31,
	Useful Life		2014		2013
			(In thousands)
Core deposit intangible assets	10 - 15 years	$	62,975	$	62,975
Core deposit intangible assets accumulated amortization			(60,195)		(58,611)
Core deposit intangible assets, net		$	2,780	$	4,364
Customer relationship intangible assets	10 years		5,654		2,524
Customer relationship intangible assets accumulated amortization			(626)		(358)
Customer relationship intangible assets, net		$	5,028	$	2,166
Total other intangible assets, net		$	7,808	$	6,530

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Following is the aggregate amortization expense recognized in each period:

		Three Months Ended September 30,				Nine Months Ended September 30,
		2014		2013		2014		2013
		(In thousands)
Amortization expense	$	670	$	703	$	1,852	$	2,116

(5)Borrowings

At September 30, 2014, the Company’s outstanding borrowings were $150,400,000 as compared to $130,000,000 at December 31, 2013. Borrowings at September 30, 2014 consisted of $110,000,000 of term notes and $40,400,000 of advances on our line of credit, both with the Federal Home Loan Bank (the “FHLB”). At December 31, 2013, outstanding borrowings consisted of $110,000,000 of term notes and $20,000,000 of advances on our line of credit, both with the FHLB.

The Company has an advance, pledge and security agreement with the FHLB and had pledged qualifying loans and securities in the amount of $410,583,000 at September 30, 2014 and $339,727,000 at December 31, 2013. The maximum credit allowance for future borrowings, including term notes and advances on the line of credit, was $260,183,000 at September 30, 2014 and $209,727,000 at December 31, 2013.

The interest rate on the line of credit varies with the federal funds rate, and was 0.24% at September 30, 2014. The term notes have fixed interest rates that range from 2.52% to 3.17%, with a weighted average rate of 2.97%, and remaining maturities as of September 30, 2014 ranging from 38 to 40 months.

(6)  Subordinated Debentures and Trust Preferred Securities

At both September 30, 2014 and December 31, 2013, the balance of the Company’s outstanding subordinated debentures was $25,774,000. As of September 30, 2014 the Company's subordinated debentures bore a weighted average cost of funds of 3.06%. During the first quarter 2013, the Company redeemed the subordinated debentures issued by CenBank Trusts I and II. As a result of the early redemption of these instruments, the Company recognized an aggregate prepayment penalty of $629,000. Prior to their early redemption on March 7, 2013 and February 22, 2013, the CenBank Trusts I and II accrued interest at 10.60% and 10.20%, respectively.

The Company’s remaining subordinated debentures were issued in two separate series. Each issuance has a maturity of 30 years from its date of issuance. The subordinated debentures were issued to trusts established by the Company, which in turn issued $25,000,000 of trust preferred securities (“TruPS”). Generally, and with certain limitations, the Company is permitted to call the debentures subsequent to the first five or ten years, as applicable, after issuance, if certain conditions are met, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment of the trusts, the debentures or the preferred securities. The Guaranty Capital Trust III TruPS became callable at each quarterly interest payment date starting on July 7, 2008. The CenBank Trust III TruPS became callable at each quarterly interest payment date starting on April 15, 2009.

As of September 30, 2014, the Company was in compliance with all financial covenants of these remaining subordinated debentures.

At both September 30, 2014 and December 31, 2013 the Company had accrued, unpaid interest on its subordinated debentures of approximately $202,000. Interest payable on subordinated debentures is included in interest payable and other liabilities on the consolidated balance sheets.

The Company is not considered the primary beneficiary of the trusts that issued the TruPS (variable interest entities); therefore, the trusts are not consolidated in the Company’s financial statements and the subordinated debentures are shown as liabilities.  The Company’s investment in the common stock of each trust is included in other assets in the Company’s consolidated balance sheets.

Although the securities issued by each of the trusts are not included as a component of stockholders’ equity in the consolidated balance sheets, they are treated as capital for regulatory purposes. Specifically, under applicable regulatory guidelines, the $25,000,000 of TruPS issued by the trusts qualify as Tier 1 capital, up to a maximum of

23

25% of capital on an aggregate basis. Any amount that exceeds 25% qualifies as Tier 2 capital. At September 30, 2014, the full $25,000,000 of the TruPS qualified as Tier 1 capital.

Under the Dodd-Frank Act and a recent joint rule from the Federal Reserve Board, the Office of the Comptroller of Currency, and the FDIC, certain TruPS are no longer eligible to be included as Tier 1 capital for regulatory purposes. However, an exception to this statutory prohibition applies to securities issued prior to May 19, 2010 by bank holding companies with less than $15 billion of total assets. As we have less than $15 billion in total assets and issued all of our TruPS prior to May 19, 2010, we expect that our TruPS will continue to be eligible to be treated as Tier 1 capital, subject to other rules and limitations.

The following table summarizes the terms of each outstanding subordinated debenture issuance at September 30, 2014 (dollars in thousands):

	Date Issued	Amount	Maturity Date	Call Date *	Fixed or Variable	Rate Adjuster		Current Rate		Next Rate Reset Date**
CenBank Trust III	4/8/2004	15,464	4/15/2034	10/15/2014	Variable	LIBOR + 2.65	%	2.88	%	10/15/2014
Guaranty Capital Trust III	6/30/2003	10,310	7/7/2033	10/7/2014	Variable	LIBOR + 3.10	%	3.33	%	10/7/2014

*  Call date represents the earliest or next date the Company can call the debentures

** On October 7, 2014, the rate on the Guaranty Capital Trust III subordinated debentures reset to 3.33%. On October 15, 2014, the rate on the CenBank Trust III subordinated debentures reset to 2.88%.

(7)Commitments

The Bank enters into credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

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

At the dates indicated, the following financial instruments were outstanding whose contract amounts represented credit risk:

		September 30, 2014		December 31, 2013
		(In thousands)
Commitments to extend credit:
Variable	$	346,543	$	290,564
Fixed		41,579		30,343
Total commitments to extend credit	$	388,122	$	320,907
Standby letters of credit	$	11,256	$	10,217

At September 30, 2014, the rates on the fixed rate commitments to extend credit ranged from 2.35% to 6.75%.

A commitment to extend credit is an agreement to lend to a customer as long as there is no violation of any condition established in the underlying contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Several of the commitments may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies used for loans are used to make such commitments, including obtaining collateral, if necessary, at exercise of the commitment.

A commitment to extend credit under an overdraft protection agreement is a commitment for a possible future extension of credit to an existing deposit customer. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Bank is committed.

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Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. A majority of letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments if deemed necessary.

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

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

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

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

Level 3 - Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the instrument’s fair value measurement. Transfers of financial instruments between levels within the fair value hierarchy are recognized on the date management determines that the underlying circumstances or assumptions have changed.

The fair values of securities available for sale are generally determined by matrix pricing, which is a mathematical technique widely used in the financial industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where market values of similar securities are not available management utilizes a discounted cash flow model with market-adjusted discount rates or other unobservable inputs to estimate fair value. Due to the lack of ratings available on these securities, management determined that a relationship to other benchmark quoted securities was unobservable and as a result these securities should be classified as Level 3 (Level 3 inputs). The valuation of the Company’s Level 3 bonds is highly sensitive to changes in unobservable inputs.

Currently, the Company uses interest rate swapsto manage interest rate risk. The fair value of each interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2 inputs). The Company considers the value of the swap to be highly sensitive to fluctuations in interest rates.

Upon being designated impaired, impaired loans are evaluated to determine whether or not they are collateral-dependent. Collateral-dependent impaired loans are generally carried at the lower of cost or fair value of the collateral, less estimated selling costs. Collateral values are determined based on appraisals performed by qualified licensed appraisers hired by the Company and then further adjusted if warranted based on relevant facts and circumstances. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between fair value and general economic conditions, management considers the fair value of impaired loans to be highly sensitive to changes in market conditions.

25

OREO is valued at the time the related loan is foreclosed upon and the asset is transferred to OREO. The value is based primarily on third party appraisals, less estimated selling costs. The appraised value may be adjusted if warranted based on relevant facts and circumstances. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. OREO is reviewed and evaluated on at least an annual basis for additional impairment and adjusted accordingly, based on the same factors identified above. Because of the high degree of judgment required in estimating the fair value of OREO properties and because of the relationship between fair value and general economic conditions management considers the fair value of OREO to be highly sensitive to changes in market conditions.

Assets held for sale are valued at the time the determination is made to designate the asset as held for sale.  The value is based primarily on third party appraisals, less estimated selling costs. The appraised value may be adjusted if warranted based on relevant facts and circumstances. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Assets held for sale are regularly reviewed for additional impairment in order that these assets may be marketed at market value and thereby maintained in the held for sale designation. Assets held for sale may also be written down to fair value in anticipation of sale, based on a letter-of-intent or purchase-contract. Since these adjustments in value are based upon the perceived value of the assets in question by an independent third-party, such adjustments generally result in Level 2 classification. Because of the high degree of judgment required in estimating the fair value of assets held for sale and because of the relationship between fair value and general economic conditions management considers the fair value of these assets to be highly sensitive to changes in market conditions.

Financial Assets and Liabilities Measured on a Recurring Basis

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

		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
		(In thousands)
Assets/(Liabilities) at September 30, 2014
State and municipal securities	$	-	$	18,019	$	32,376	$	50,395
Mortgage-backed securities – agency /
residential		-		207,069		-		207,069
Mortgage-backed securities – private /
residential		-		463		-		463
Asset-backed securities		-		8,561		-		8,561
Trust preferred securities		-		18,675		-		18,675
Corporate securities		-		64,830		-		64,830
Interest rate swaps - cash flow hedge		-		(555)		-		(555)
Assets/(Liabilities) at December 31, 2013
State and municipal securities	$	-	$	16,918	$	24,167	$	41,085
Mortgage-backed securities – agency /
residential		-		254,103		-		254,103
Mortgage-backed securities – private /
residential		-		561		-		561
Asset-backed securities		-		22,503		-		22,503
Marketable equity securities		-		1,535		-		1,535
Trust preferred securities		-		26,096		-		26,096
Corporate securities		-		39,074		-		39,074
Interest rate swaps - cash flow hedge		-		465		-		465

There were no transfers of financial assets and liabilities among Level 1, Level 2 and Level 3 during the nine months ended September 30, 2014.

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The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2014 and September 30, 2013:  

		State and Municipal Securities
		Three Months Ended September 30, 2014		Nine Months Ended September 30, 2014
		(In thousands)
Beginning balance	$	24,456	$	24,167
Total unrealized gains (losses) included in:
Net income (loss)		-		1
Other comprehensive income (loss)		-		478
Sales, calls and prepayments		-		(190)
Purchase of Level 3 investment		7,920		7,920
Balance end of period	$	32,376	$	32,376

		State and Municipal Securities
		Three Months Ended September 30, 2013		Nine Months Ended September 30, 2013
		(In thousands)
Beginning balance	$	40,829	$	49,889
Total unrealized gains (losses) included in:
Net income		21		84
Other comprehensive income (loss)		195		(614)
Purchases, sales, issuances and settlements, net		(2,900)		(11,214)
Balance end of period	$	38,145	$	38,145

For the three and nine months ended September 30, 2014 and September 30, 2013, the entire amount of other comprehensive income for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) consisted of changes in unrealized gains and losses on the mark-to-market of securities designated as available for sale.

The following tables present quantitative information about Level 3 fair value measurements on the Company’s state and municipal securities at September 30, 2014 and December 31, 2013:

September 30, 2014		Fair Value	Valuation Technique	Unobservable Inputs	Range
		(In thousands)
State and municipal securities	$	32,035	discounted cash flow	discount rate	1.75%-4.75%
State and municipal securities		341	matrix pricing	discount rate or yield	N/A*
Total	$	32,376

December 31, 2013		Fair Value	Valuation Technique	Unobservable Inputs	Range
		(In thousands)
State and municipal securities	$	23,636	discounted cash flow	discount rate	5.10%
State and municipal securities		531	matrix pricing	discount rate or yield	N/A*
Total	$	24,167

* The Company relies on a third-party pricing service to value non-rated municipal securities. Because of the lack of credit ratings, management considers the relationship between rates on these securities and benchmarks rates to be unobservable. The unobservable adjustments used by the third-party pricing service were not readily available.

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Financial Assets and Liabilities Measured on a Nonrecurring Basis

The following table present impaired loans measured at fair value on a non-recurring basis as of December 31, 2013. The valuation methodology used to measure the fair value of these loans is described earlier in this Note. In the absence of recent valuation adjustments, there were no impaired loans carried at fair value as of September 30, 2014.    

		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
		(In thousands)
December 31, 2013
Impaired loans:
Commercial and residential real estate	$	-	$	-	$	115	$	115
Other		-		-		231		231
Total impaired loans	$	-	$	-	$	346	$	346

Impaired loans, which are measured for impairment using either the fair value of collateral or the present value of expected future cash flows, had a carrying amount of $30,871,000 at September 30, 2014, after partial charge-offs of $751,000. In addition, these loans have a specific valuation allowance of $70,000 at September 30, 2014.  None of our impaired loans were carried at fair value as of September 30, 2014 because none of the specific reserves on impaired loans were calculated using the fair value of collateral method using recent valuations.

Impaired loans had a carrying amount of $21,703,000 at December 31, 2013, after a partial charge-off of $1,507,000. In addition, these loans had a specific valuation allowance of $565,000 at December 31, 2013.  Of the $21,703,000 impaired loan portfolio at December 31, 2013,  $425,000 were carried at fair value as a result of the aforementioned charge-offs and specific valuation allowances. The remaining $21,278,000 of impaired loans were not carried at fair value at December 31, 2013,  because these loans did not require a specific reserve calculated based on the fair value of collateral or have amounts previously charged-off.

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

The following table presents quantitative information about Level 3 fair value measurements for impaired loans measured at fair value on a non-recurring basis as of December 31, 2013.

December 31, 2013		Fair Value	Valuation Technique	Unobservable Inputs	Range
		(In thousands)
Impaired loans:
Commercial and residential	$	115	sales comparison	adjustment to comparable sales	6%-8%
real estate
Other		231	sales comparison	adjustment to comparable sales	6%-8%
Total impaired loans	$	346

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Nonfinancial Assets and Liabilities Measured on a Nonrecurring Basis

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

		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
		(In thousands)
December 31, 2013
Other real estate owned and foreclosed assets:
Commercial real estate	$	-	$	-	$	1,636	$	1,636
Land		-		-		2,857		2,857
Total other real estate owned and foreclosed assets	$	-	$	-	$	4,493	$	4,493

OREO had a carrying amount of $3,526,000 at September 30, 2014, which is made up of an outstanding balance of $4,594,000, with a valuation allowance of $1,068,000. Write-downs accounted for a $46,000 increase in the OREO valuation allowance during the first nine months of 2014. In the absence of any write-downs on OREO properties during the third-quarter 2014 no OREO properties were carried at fair value as of September 30, 2014.

OREO had a carrying amount of $4,493,000 at December 31, 2013, which was made up of an outstanding balance of $5,515,000, with a valuation allowance of $1,022,000. 

The following table presents quantitative information about Level 3 fair value measurements for OREO measured at fair value on a non-recurring basis as of December 31, 2013:

December 31, 2013		Fair Value	Valuation Technique	Unobservable Inputs	Range
		(In thousands)
Other real estate owned and
foreclosed assets:
Commercial real estate	$	1,636	broker opinion	discount to broker opinion	10% - 20%
Land		2,857	sales comparison	adjustment to comparable sales	10% - 55%
			broker opinion	discount to broker opinion	10% - 20%
Total other real estate owned
and foreclosed assets	$	4,493

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Fair Value of Financial Instruments

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:

				Fair Value Measurements at September 30, 2014:
		Carrying Amount		Level 1		Level 2		Level 3		Total
		(In thousands)
Financial assets:
Cash and cash equivalents	$	46,617	$	46,617	$	-	$	-	$	46,617
Securities available for sale		349,993		-		317,617		32,376		349,993
Securities held to maturity		91,042		-		88,000		4,244		92,244
Bank stocks		15,083		n/a		n/a		n/a		n/a
Loans held for investment, net		1,459,918		-		-		1,450,219		1,450,219
Accrued interest receivable		6,300		-		6,300		-		6,300
Financial liabilities:
Deposits	$	1,662,598	$	-	$	1,660,957	$	-	$	1,660,957
Federal funds purchased and sold under
agreements to repurchase		23,674		-		23,674		-		23,674
Short-term borrowings		40,400		-		40,400		-		40,400
Subordinated debentures		25,774		-		-		18,349		18,349
Long-term borrowings		110,000		-		115,331		-		115,331
Accrued interest payable		600		-		600		-		600
Interest rate swap - cash flow hedge		555		-		555		-		555

				Fair Value Measurements at December 31, 2013:
		Carrying Amount		Level 1		Level 2		Level 3		Total
		(In thousands)
Financial assets:
Cash and cash equivalents	$	28,077	$	28,077	$	-	$	-	$	28,077
Securities available for sale		384,957		-		360,790		24,167		384,957
Securities held to maturity		41,738		-		36,463		3,754		40,217
Bank stocks		15,605		n/a		n/a		n/a		n/a
Loans held for sale		507		558		-		-		558
Loans held for investment, net		1,298,912		-		-		1,291,439		1,291,439
Accrued interest receivable		5,156		-		5,156		-		5,156
Interest rate swap - cash flow hedge		465		-		465		-		465
Financial liabilities:
Deposits	$	1,528,457	$	-	$	1,527,034	$	-	$	1,527,034
Federal funds purchased and sold under
agreements to repurchase		24,284		-		24,284		-		24,284
Short-term borrowings		20,000		-		20,000		-		20,000
Subordinated debentures		25,774		-		-		18,351		18,351
Long-term borrowings		110,000		-		117,316		-		117,316
Accrued interest payable		600		-		600		-		600

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

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Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Therefore, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions are used by the Company in estimating fair value disclosures for financial instruments:

(a) Cash and Cash Equivalents and Time Deposits with Banks

The carrying amounts of cash and short-term instruments approximate fair values (Level 1).

(b) Securities and Bank Stocks

Fair values for securities available for sale and held to maturity are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). For positions that are not traded in active markets or are subject to transfer restrictions (i.e., bonds valued with Level 3 inputs), management uses a combination of reviews of the underlying financial statements, appraisals and management’s judgment regarding credit quality and intent to sell in order to determine the value of the bond.

It is not practical to determine the fair value of bank stocks due to restrictions placed on the transferability of FHLB stock, Federal Reserve Bank stock and Bankers’ Bank of the West stock. These three stocks comprise the majority of the balance of the Company’s bank stocks.

(c) Loans Held for Investment

For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values (Level 3). Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality (Level 3). Impaired loans are valued at the lower of cost or fair value as described above in this note. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

(d) Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value, with fair value determined by the sales price agreed upon in negotiation with the purchaser (Level 1).

(e) Deposits

The fair values of demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) (Level 2). The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date (Level 2). Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits (Level 2).

(f) Short-term Borrowings

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values (Level 2).

(g) Long-term Borrowings

The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 2).

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(h) Subordinated Debentures

The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 3).

(i) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value (Level 2).

(j) Interest Rate Swaps, net

The fair value of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2).

(k) Off-balance Sheet Instruments

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

(9) Derivatives and Hedging Activities

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company utilizes derivative financial instruments to assist in the management of interest rate risk, primarily helping to secure long term borrowing rates. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment or receipt of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash payments principally related to certain variable-rate borrowings. The Company does not use derivatives for trading or speculative purposes.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheet as of September 30, 2014 and December 31, 2013.

	Balance		Fair Value
	Sheet		September 30,		December 31,
	Location		2014		2013
			(In thousands)
Derivatives designated as hedging instruments
Assets:
Interest rate swaps	Other assets	$	-	$	465
Liabilities:
Interest rate swaps	Other liabilities	$	555	$	-

The Company’s objectives in using interest rate derivatives are to add stability and predictability to interest expense and to manage the Company’s exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. For hedges of the Company’s variable-rate borrowings, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments. As of September 30, 2014, the Company had two interest rate swaps with an aggregate notional amount of $50,000,000 that were designated as a cash flow hedge associated with the Company’s forecasted variable-rate borrowings.  The swaps are forward-starting with the first $25,000,000 swap becoming effective in June 2015 and the second swap becoming effective in March 2016.

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The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in AOCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company’s cash flow hedges are used to hedge the forecasted variable cash outflows associated with forecasted issuances of FHLB advances. During the three and nine months ended September 30, 2014, the income statement effect of hedge ineffectiveness was not material.

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. Management expects that, during the next 12 months, an immaterial amount will be reclassified as an adjustment to interest expense related to interest rate swaps as the related borrowings which correspond to the hedge are anticipated to commence in June of 2015.

The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with another third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The impact of these customer interest rate swaps on the Company’s financial statements was not material for any periods covered by this report.

The table below presents the effect of the Company’s derivative financial instruments on both comprehensive income and net income for the three and nine months ended September 30, 2014 and September 30, 2013:

	Income		Three Months Ended				Nine Months Ended
Interest Rate Swaps with	Statement		September 30,				September 30,
Hedge Designation	Location		2014		2013		2014		2013
			(In thousands)
Gain or (loss) recognized in OCI on
derivative	Not applicable	$	92	$	(87)	$	(632)	$	184
Gain or (loss) reclassified from
accumulated OCI into income
(ineffective portion)	Interest expense		-		1		-		-

The Company has agreements with its derivative counterparties that contain a cross-default provision whereby if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted $1,095,000 against its obligations under these agreements. If the Company had breached any of these provisions at September 30, 2014, it could have been required to settle its obligations under the agreements at the termination value.  

(10) Stock-Based Compensation

Under the Company’s Incentive Plan, the Company’s Board of Directors may grant stock-based compensation awards to nonemployee directors, key employees, consultants and prospective employees under the terms described in the Incentive Plan. Stock-based compensation awards issuable under the Incentive Plan include the grant of options, restricted stock awards, restricted stock unit awards, performance stock awards, stock appreciation rights and other equity based awards. The Incentive Plan provides that eligible participants may be granted shares of Company common stock that are subject to forfeiture until the grantee vests in the stock award based on the established conditions, which may include service conditions, established performance measures or both.

Prior to the vesting of stock awards that are subject to a service vesting condition, each grantee has the rights of a stockholder with respect to voting the shares of stock represented by the award. The grantee is not entitled to dividend rights with respect to the shares of stock until vesting occurs. Prior to vesting of the stock awards with

33

performance vesting conditions, each grantee has the rights of a stockholder with respect to voting of the shares of stock represented by the award. The recipient is generally not entitled to dividend rights with respect to unvested shares. Other than the stock awards with service and performance based vesting conditions, no other grants have been made under the Incentive Plan.

The Incentive Plan authorizes grants of stock-based compensation awards of up to a total of 1,700,000 shares of Company voting common stock, subject to adjustments upon the occurrence of certain events. As of September 30, 2014 and December 31, 2013, there were outstanding awards representing 746,782 and 386,525 shares of unvested stock (net of forfeitures), with 507,874 and 931,384 shares remaining available for grant under the Incentive Plan, respectively.

Of the 746,782 shares represented by unvested awards at September 30, 2014, approximately 630,000 shares are expected to vest. At September 30, 2014, there were 329,709 shares of restricted stock outstanding that were subject to a performance condition. Management expects that approximately 240,000 of these 329,709 shares will vest and that the remaining shares will expire unvested. The shares subject to a performance condition that are expected to vest relate to awards granted to various key employees from February 2013 through August 2014. The vesting of these performance shares is contingent upon the meeting of certain return on asset performance measures. The performance-based shares awarded in 2012, 2013 and 2014 each include a “threshold” and “target” performance level, with vesting determined based on where actual performance falls in relation to the numeric range represented by these performance criteria. Management expects that the targeted performance goals will be met with respect to the performance-based shares awarded in 2013 and 2014 and does not expect to reach the threshold performance criteria for the performance awards granted in 2012, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed.

A summary of the status of unearned stock awards and the change during the nine months ended September 30, 2014 is presented in the table below:

	Shares		Weighted Average Fair Value on Award Date
Unearned at January 1, 2014	386,525	$	9.18
Awarded	426,204		13.34
Forfeited	(2,691)		11.00
Vested	(63,256)		8.76
Unearned at September 30, 2014	746,782	$	11.59

The Company recognized $1,767,000 and $1,070,000 in stock-based compensation expense for services rendered for the nine months ended September 30, 2014 and September 30, 2013, respectively. The total income tax benefit recognized for share-based compensation arrangements was $672,000 and $407,000  for the nine months ended September 30, 2014 and September 30, 2013, respectively. At September 30, 2014, compensation cost of $5,343,000 related to unvested awards not yet recognized is expected to be recognized over a weighted-average period of 2.2 years. The fair value of awards that vested in the nine months ended September 30, 2014 was approximately $822,000.

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(11)Capital Ratios

The following table provides the capital ratios of the Company and Bank as of the dates presented, along with the applicable regulatory capital requirements:

	Ratio at September 30, 2014		Ratio at December 31, 2013		Minimum Capital Requirement		Minimum Requirement for "Well-Capitalized" Institution
Total Risk-Based Capital Ratio
Consolidated	14.25	%	14.96	%	8.00	%	N/A
Guaranty Bank and Trust Company	13.87	%	14.37	%	8.00	%	10.00	%
Tier 1 Risk-Based Capital Ratio
Consolidated	12.99	%	13.71	%	4.00	%	N/A
Guaranty Bank and Trust Company	12.62	%	13.12	%	4.00	%	6.00	%
Leverage Ratio
Consolidated	11.18	%	11.49	%	4.00	%	N/A
Guaranty Bank and Trust Company	10.86	%	11.00	%	4.00	%	5.00	%

(

(12)  Legal Contingencies  

The Company and the Bank are defendants, from time to time, in legal actions at various points of the legal process, including appeals, arising from transactions conducted in the ordinary course of business. Management believes, after consultations with legal counsel that it is not probable that the outcome of current legal actions will result in a liability that has a material adverse effect on the Company’s consolidated financial position, results of operations, comprehensive income or cash flows. In the event that such legal action results in an unfavorable outcome, the resulting liability could have a material adverse effect on the Company’s consolidated financial position, results of operations, comprehensive income or cash flows.

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

Forward-Looking Statements and Factors That Could Affect Future Results

Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified as such. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, 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 of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “projected”, “continue”, “remain”, “will”, “should”, “could”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements and the lack of such an identifying word does not necessarily indicate the absence of a forward-looking statement.

Forward-looking statements are based on assumptions and involve risks and uncertainties, many of which are beyond our control, which may cause actual results to differ materially from those discussed in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

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

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

· Changes imposed by regulatory agencies to increase our capital to a level greater than the current level required for well-capitalized financial institutions (including the impact of the recent joint rule by the Federal Reserve Board, the Office of the Comptroller of the Currency (the “OCC”), and the FDIC to revise the regulatory capital rules, including the implementation of the Basel III standards), the failure to maintain capital above the level required to be well-capitalized under the regulatory capital adequacy guidelines, the availability of capital from private or government sources, or the failure to raise additional capital as needed.

· Changes in the level of nonperforming assets and charge-offs and the deterioration of other credit quality measures, and their impact on the adequacy of the Bank’s allowance for loan losses and provision for loan losses.

· Changes in sources and uses of funds, including loans, deposits and borrowings, including the ability of the Bank to retain and grow core deposits, to purchase brokered deposits and maintain unsecured federal funds lines and secured lines of credit with correspondent banks.

· The effects of inflation and interest rate, securities market and monetary supply fluctuations.

· Political instability, acts of war or terrorism and natural disasters.

· Our ability to develop and promote customer acceptance of new products and services in a timely manner and customers’ perceived overall value of these products and services.

· Changes in consumer spending, borrowings and savings habits.

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

· Changes in the financial performance or condition of the Bank’s borrowers and the ability of the Bank’s borrowers to perform under the terms of their loans and terms of other credit agreements.

· Our ability to receive regulatory approval for the Bank to declare and pay dividends to the holding company.

· Our ability to acquire, operate and maintain cost-effective and efficient systems.

· The timing, impact and other uncertainties of any future acquisition, including our ability to identify suitable acquisition candidates, success or failure in the integration of our acquisition’s operations and the ability to enter new markets successfully and capitalize on growth opportunities. 36  

· Our ability to successfully implement changes in accounting policies and practices, adopted by regulatory agencies, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

· The loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels.

· The costs and other effects resulting from changes in laws and regulations and of other legal and regulatory developments, including, but not limited to, increases in FDIC insurance premiums, the commencement of legal proceedings or regulatory or other governmental inquiries, and our ability to successfully undergo regulatory examinations, reviews and other inquiries.

· Other risks and uncertainties listed from time to time in the Company’s reports and documents filed with the Securities and Exchange Commission (the “SEC”).

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

This Management Discussion and Analysis of Financial Condition and Results of Operations should be read together with our unaudited condensed consolidated financial statements and unaudited statistical information included elsewhere in this Report, Part II, Item 1A of this Report, and Items 1, 1A, 7, 7A and 8 of our 2013 Annual Report on Form 10-K. Also, please see the disclosure in the “Forward-Looking Statements and Factors That Could Affect Future Results” section in this Report for certain other factors that could cause actual results or future events to differ materially from those anticipated in the forward-looking statements included in this Report or from historical performance. 

Overview

Guaranty Bancorp is a bank holding company with its principal business to serve as the holding company for its Colorado-based bank subsidiary, Guaranty Bank and Trust Company (the “Bank”). The Bank is the sole member of several limited liability companies that hold real estate as well as the sole owner of two investment management firms Private Capital Management LLC (“PCM”) and Cherry Hills Investment Advisors, Inc. (“CHIA”).  References to “Company”, “us”, “we”, and “our” refer to Guaranty Bancorp on a consolidated basis. References to “Guaranty Bancorp” or to the “holding company” refer to the parent company on a stand-alone basis. References to the “Bank” refer to Guaranty Bank and Trust Company, our bank subsidiary.

Through the Bank, we provide financial services throughout our targeted Colorado markets to consumers and small and medium-sized businesses, including the owners and employees of those businesses. Our banking products and services include accepting time and demand deposits and originating commercial real estate loans (including construction loans), commercial loans (including energy loans), SBA guaranteed loans and consumer loans. The Bank, PCM and CHIA also provide wealth management services, including private banking, investment management, jumbo mortgage loans and trust services. We derive our income primarily from interest (including loan origination fees) received on loans and, to a lesser extent, interest on investment securities and other fees received in connection with servicing loan and deposit accounts, personal trust and investment management services. Our major operating expenses include the interest we pay on deposits and borrowings and general operating expenses. We rely primarily on locally generated deposits to provide us with funds for making loans.

In addition to growing organically through our existing branches, we seek opportunities to acquire small to medium-sized banks or specialty finance companies that will allow us to expand our franchise in a manner consistent with our community-banking focus. Ideally, the financial institutions we seek to acquire will be in or contiguous to the existing footprint of the current branch network of our Bank, which would allow us to use the acquisition to consolidate duplicative costs and administrative functions and to rationalize operating expenses. We believe that by streamlining the administrative and operational functions of an acquired financial institution, we are able to substantially lower operating costs, operate more efficiently and integrate the acquired financial institution while maintaining the stability of our existing business. In certain circumstances we may seek to acquire financial institutions that may be located outside of our existing footprint. We also seek opportunities which will allow us to further diversify our noninterest income base, including adding to our wealth management platform.

We are subject to competition from other financial institutions and our operating results, like those of other financial institutions operating exclusively or primarily in Colorado, are significantly influenced by economic conditions in Colorado, including the strength of the Colorado real estate market. In addition, the fiscal, monetary

37

and regulatory policies of the federal government and regulatory authorities that govern financial institutions and market interest rates impact our financial condition, results of operations and cash flows.

Earnings Summary

The following table summarizes certain key financial results for the periods indicated:

Table 1

	Three Months Ended September 30,									Nine Months Ended September 30,
								Change									Change
								Favorable									Favorable
		2014			2013			(Unfavorable)			2014			2013			(Unfavorable)
		(In thousands, except for share data and ratios)
Results of Operations:
Interest income	$	19,529		$	17,789		$	1,740		$	56,136		$	52,568		$	3,568
Interest expense		1,720			1,727			7			5,003			5,389			386
Net interest income		17,809			16,062			1,747			51,133			47,179			3,954
Provision (credit) for
loan losses		(3)			142			145			15			142			127
Net interest income after
provision for loan losses		17,812			15,920			1,892			51,118			47,037			4,081
Noninterest income		4,302			3,664			638			11,747			10,325			1,422
Noninterest expense		15,123			13,936			(1,187)			44,626			43,007			(1,619)
Income before income taxes		6,991			5,648			1,343			18,239			14,355			3,884
Income tax expense		2,320			1,797			(523)			5,942			4,414			(1,528)
Net income	$	4,671		$	3,851		$	820		$	12,297		$	9,941		$	2,356
Common Share Data:
Basic earnings per common
share	$	0.22		$	0.18		$	0.04		$	0.59		$	0.48		$	0.11
Diluted earnings per common
share	$	0.22		$	0.18		$	0.04		$	0.58		$	0.47		$	0.11
Average common shares
outstanding		20,966,179			20,873,601			92,578			20,954,046			20,861,175			92,871
Diluted average common
shares outstanding		21,089,221			20,981,555			107,666			21,070,895			20,954,687			116,208
Average equity to average
assets		9.98	%		9.98	%		-	%		10.04	%		10.22	%		(1.8)	%
Return on average equity		9.09	%		8.15	%		11.5	%		8.27	%		7.03	%		17.6	%
Return on average assets		0.91	%		0.81	%		12.3	%		0.83	%		0.72	%		15.3	%
Dividend payout ratio		22.44	%		13.55	%		65.6	%		25.56	%		5.25	%		386.9	%

	September 30,		September 30,		Percent
	2014		2013		Change
Selected Balance Sheet Ratios:
Total risk-based capital to
risk-weighted assets	14.25	%	14.94	%	(4.6)	%
Leverage ratio	11.18	%	11.50	%	(2.8)	%
Loans(1), net of unearned loan fees
to deposits	89.15	%	87.23	%	2.2	%
Allowance for loan losses to
loans(1), net of unearned loan fees	1.51	%	1.58	%	(4.4)	%
Allowance for loan losses to
nonperforming loans	168.84	%	113.01	%	49.4	%
Classified assets to allowance
and Tier 1 capital (2)	13.39	%	14.99	%	(10.7)	%
Noninterest bearing deposits to
total deposits	37.15	%	35.44	%	4.8	%
Time deposits to total deposits	11.61	%	12.41	%	(6.4)	%
(1)  Loans held for investment
(2) Based on Bank only Tier 1 capital

38

Third quarter 2014 net income increased approximately $0.8 million to $4.7 million as compared to $3.9 million for the same quarter in 2013. The $0.8 million increase in net income was primarily the result of a $1.7 million increase in interest income, attributable to growth in average loan balances and a $0.6 million increase in noninterest income, resulting from growth in our investment management fees, partially offset by a $1.2 million increase in noninterest expense, driven by increases in salary and employee benefit expense.

For the nine months ended September 30, 2014, net income was $12.3 million as compared to $9.9 million for the same period in 2013. The $2.4 million increase in net income during the nine months ended September 30, 2014 was primarily the result of a $3.6 million increase in interest income, which was attributable to growth in average loan balances, a $0.4 million decrease in interest expense, and a $1.4 million increase in noninterest income. These improvements to net income were partially offset by a $1.6 million increase in noninterest expense and a $1.5 million increase in income tax expense. The $0.4 million decrease in interest expense during the nine months ended September 30, 2014 compared to the same period in 2013 was primarily the result of the first quarter 2013 redemption of certain high-cost TruPS and related subordinated debentures. The $1.4 million increase in noninterest income in the nine months ended September 30, 2014 compared to the same period in 2013 was primarily the result of a $1.1 million increase in investment management and trust fees driven by growth in assets under management (“AUM”), in addition to a $0.2 million increase in income related to bank owned life insurance. The $1.6 million increase in noninterest expense in the first nine months of 2014 compared to the same period in 2013 was primarily comprised of a $2.4 million increase in salaries and employee benefit expense offset by decrease in most other categories of noninterest expense. The increase in salaries was primarily due to the achievement of specific performance targets. The $1.5 million increase in income tax expense in the nine months ended September 30, 2014 compared to the same period in 2013 was primarily a result of growth in pre-tax income over the same period.

Net Interest Income and Net Interest Margin

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

The following table summarizes the Company’s net interest income and related spread and margin for the quarter ended September 30, 2014 and the prior four quarters:

Table 2

		Three Months Ended
		September 30,			June 30,			March 31,			December 31,			September 30,
		2014			2014			2014			2013			2013
		(Dollars in thousands)
Net interest income	$	17,809		$	17,065		$	16,259		$	16,391		$	16,062
Interest rate spread		3.47	%		3.47	%		3.49	%		3.45	%		3.43	%
Net interest margin		3.67	%		3.66	%		3.69	%		3.65	%		3.63	%
Net interest margin, fully tax
equivalent		3.75	%		3.75	%		3.78	%		3.75	%		3.73	%

Net interest income increased by $1.7 million to $17.8 million in the third quarter 2014 as compared to the third quarter 2013, primarily as a result of a $1.7 million increase in interest income derived from increased average loan balances. Interest expense for the third quarter 2014 was essentially flat compared to the third quarter 2013, despite a $71.0 million increase in average interest-bearing deposit balances. The $1.7 million increase in interest income in the third quarter 2014 compared to the third quarter 2013 was primarily the result of a $2.1 million favorable volume variance, which primarily resulted from the $195.4 million increase in average loan balances between the third quarter 2013 and the third quarter 2014. This increase was partially offset by an unfavorable rate variance of $0.4 million, which was primarily caused by a 10 basis point decline in loan yields over the same period. The decline in loan yields between the third quarter 2013 and the third quarter 2014 reflected a reduction in market yields on loans resulting from the competitive interest rate environment.

 Net interest margin increased from 3.66% in the second quarter 2014 to 3.67% in the third quarter 2014. This increase is partially attributable to our sustained loan growth which continues to reallocate the overall mix of our earning assets in favor of higher-yielding loans and a one basis point improvement, quarter-over-quarter in the yield

39

on our loan portfolio. The one basis point increase in our loan yield during the third quarter 2014 represents the first quarterly increase in loan yield since the second quarter of 2011.

On a linked quarter basis, net interest income improved by $0.7 million, primarily as a result of a $0.8 million increase in interest income, while interest expense remained relatively flat. The $0.8 million increase in interest income in the third quarter 2014 compared to the second quarter 2014 was primarily caused by a $63.2 million increase in average loan balances in the third quarter 2014 compared to the second quarter 2014 in conjunction with the one basis point increase in yield outlined above.

The following table summarizes the Company’s net interest income and related spread and margin for the nine months ended September 30, 2014 and September 30, 2013:

Table 3

		Nine Months Ended
		September 30,			September 30,
		2014			2013
		(Dollars in thousands)
Net interest income	$	51,133		$	47,179
Interest rate spread		3.47	%		3.40	%
Net interest margin		3.67	%		3.62	%
Net interest margin, fully tax
equivalent		3.76	%		3.72	%

For the nine month period ended September 30, 2014, net interest income increased by $4.0 million, or 8.4%, as compared to the same period in 2013. This increase was comprised of a $3.6 million increase in interest income and a $0.4 million decrease in interest expense. 

The increase in interest income for the nine months ended September 30, 2014 compared to the same period in 2013 was due to a $5.3 million favorable volume variance, partially offset by a $1.7 million unfavorable rate variance. The favorable volume variance was primarily the result of a $182.4 million increase in average loans, partially offset by a $30.6 million decrease in investment securities and a $32.7 million decrease in low-yielding overnight cash balances. The unfavorable rate variance was primarily the result of a 24 basis point decline in average yields on loans due to the competitive interest rate environment. The $0.4 million decrease in interest expense was primarily the result of a $0.3 million decline in interest expense on subordinated debentures, mostly related to the redemption of $15.0 million of fixed, high-cost TruPS and related subordinated debentures during the first quarter 2013, combined with reduced interest expense attributable to favorable rate variances on our deposit funding.

40

The following table presents, for the periods indicated, average assets, liabilities and stockholders’ equity, as well as interest income from average interest-earning assets, interest expense from average interest-bearing liabilities and the resultant annualized yields and costs expressed in percentages. Nonaccrual loans are included in the calculation of average loans and leases while nonaccrued interest thereon is excluded from the computation of yield earned.

Table 4

		Three Months Ended September 30,
		2014						2013
		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)	$	1,463,042	$	16,336	4.43	%	$	1,267,647	$	14,487	4.53	%
Investment securities (1)
Taxable		363,607		2,287	2.50	%		383,270		2,408	2.49	%
Tax-exempt		82,895		691	3.31	%		75,228		719	3.79	%
Bank Stocks (4)		16,101		214	5.27	%		17,771		169	3.77	%
Other earning assets		1,829		1	0.22	%		9,830		6	0.24	%
Total interest-earning assets		1,927,474		19,529	4.02	%		1,753,746		17,789	4.02	%
Non-earning assets:
Cash and due from banks		25,689						24,392
Other assets		90,593						99,943
Total assets	$	2,043,756					$	1,878,081
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Interest-bearing demand and NOW	$	362,196	$	93	0.10	%	$	351,450	$	101	0.11	%
Money market		354,265		200	0.22	%		318,683		244	0.30	%
Savings		124,885		34	0.11	%		106,578		29	0.11	%
Time certificates of deposit		191,748		320	0.66	%		185,423		256	0.55	%
Total interest-bearing deposits		1,033,094		647	0.25	%		962,134		630	0.26	%
Borrowings:
Repurchase agreements		22,017		9	0.16	%		28,307		10	0.14	%
Federal funds purchased (5)		2		-	0.81	%		6		-	0.00	%
Subordinated debentures		25,774		202	3.11	%		25,774		204	3.14	%
Borrowings		153,786		862	2.22	%		155,384		883	2.25	%
Total interest-bearing liabilities		1,234,673		1,720	0.55	%		1,171,605		1,727	0.58	%
Noninterest bearing liabilities:
Demand deposits		595,041						510,367
Other liabilities		10,131						8,723
Total liabilities		1,839,845						1,690,695
Stockholders' Equity		203,911						187,386
Total liabilities and stockholders' equity	$	2,043,756					$	1,878,081
Net interest income			$	17,809					$	16,062
Net interest margin					3.67	%					3.63	%

(1) Yields on loans and securities have not been adjusted to a tax-equivalent basis. Net interest margin on a fully tax-equivalent basis would have been 3.75% and 3.73% for the three months ended September 30, 2014 and September 30, 2013, respectively. The tax-equivalent basis was computed by calculating the deemed interest on municipal bonds and tax-exempt loans that would have been earned on a fully taxable basis to yield the same after-tax income, net of the interest expense disallowance under Internal Revenue Code Sections 265 and 291, using a combined federal and state marginal tax rate of 38%.

(2) The loan average balances and rates include nonaccrual loans.

(3) Net loan fees of $0.4 million and $0.2 million for the three months ended September 30, 2014 and September 30, 2013, respectively, are included in the yield computation.

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

(5) The interest expense related to federal funds purchased for the third quarter 2014 and the third quarter 2013 rounded to zero. 

41

Table 4 (Continued)

		Nine Months Ended September 30,
		2014						2013
		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)	$	1,398,501	$	46,508	4.45	%	$	1,216,089	$	42,673	4.69	%
Investment securities (1)
Taxable		367,356		6,995	2.55	%		396,453		6,995	2.36	%
Tax-exempt		77,948		2,007	3.44	%		79,650		2,298	3.86	%
Bank Stocks (4)		16,591		622	5.01	%		16,420		495	4.03	%
Other earning assets		1,973		4	0.27	%		34,686		107	0.41	%
Total interest-earning assets		1,862,369		56,136	4.03	%		1,743,298		52,568	4.03	%
Non-earning assets:
Cash and due from banks		24,801						13,369
Other assets		92,212						92,815
Total assets	$	1,979,382					$	1,849,482
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Interest-bearing demand and NOW	$	341,096	$	253	0.10	%	$	313,569	$	261	0.11	%
Money market		337,956		592	0.23	%		321,262		751	0.31	%
Savings		120,355		99	0.11	%		106,032		106	0.13	%
Time certificates of deposit		185,233		853	0.62	%		186,949		762	0.54	%
Total interest-bearing deposits		984,640		1,797	0.24	%		927,812		1,880	0.27	%
Borrowings:
Repurchase agreements		23,029		27	0.16	%		40,459		39	0.13	%
Federal funds purchased (5)		2		-	0.76	%		11		-	0.87	%
Subordinated debentures		25,774		599	3.11	%		29,211		920	4.21	%
Borrowings		169,931		2,580	2.03	%		141,161		2,550	2.42	%
Total interest-bearing liabilities		1,203,376		5,003	0.56	%		1,138,654		5,389	0.63	%
Noninterest bearing liabilities:
Demand deposits		568,188						513,163
Other liabilities		9,075						8,647
Total liabilities		1,780,639						1,660,464
Stockholders' Equity		198,743						189,018
Total liabilities and stockholders' equity	$	1,979,382					$	1,849,482
Net interest income			$	51,133					$	47,179
Net interest margin					3.67	%					3.62	%

(1) Yields on loans and securities have not been adjusted to a tax-equivalent basis. Net interest margin on a fully tax-equivalent basis would have been 3.76% and 3.72% for the nine months ended September 30, 2014 and September 30, 2013, respectively. The tax-equivalent basis was computed by calculating the deemed interest on municipal bonds and tax-exempt loans that would have been earned on a fully taxable basis to yield the same after-tax income, net of the interest expense disallowance under Internal Revenue Code Sections 265 and 291, using a combined federal and state marginal tax rate of 38%.

(2) The loan average balances and rates include nonaccrual loans.

(3) Net loan fees of $0.9 million and $0.8 million for the nine months ended September 30, 2014 and September 30, 201, respectively, are included in the yield computation.

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

(5) The interest expense related to federal funds purchased for the nine months ended September 30, 2014 and September 30, 2013 rounded to zero.

42

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

Table 5

		Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013						Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
		Net Change		Rate		Volume		Net Change		Rate		Volume
		(In thousands)
Interest income:
Gross Loans, net of unearned
loan fees	$	1,849	$	(324)	$	2,173	$	3,835	$	(2,052)	$	5,887
Investment Securities
Taxable		(121)		3		(124)		-		513		(513)
Tax-exempt		(28)		(138)		110		(291)		(243)		(48)
Bank Stocks		45		59		(14)		127		122		5
Other earning assets		(5)		(1)		(4)		(103)		(27)		(76)
Total interest income		1,740		(401)		2,141		3,568		(1,687)		5,255
Interest expense:
Deposits:
Interest-bearing demand
and NOW		(8)		(11)		3		(8)		(41)		33
Money market		(44)		(77)		33		(159)		(201)		42
Savings		5		-		5		(7)		(29)		22
Time certificates of deposit		64		55		9		91		98		(7)
Repurchase agreements		(1)		2		(3)		(12)		12		(24)
Subordinated debentures		(2)		(2)		-		(321)		(222)		(99)
Borrowings		(21)		(12)		(9)		30		(108)		138
Total interest expense		(7)		(45)		38		(386)		(491)		105
Net interest income	$	1,747	$	(356)	$	2,103	$	3,954	$	(1,196)	$	5,150

Provision for Loan Losses

The provision for loan losses is a charge against earnings and represents management’s estimate of the amount required to maintain the allowance for loan losses at a level that, in our judgment, is adequate to absorb probable incurred loan losses in the loan portfolio. The provision for loan losses is based on our allowance methodology and reflects our judgments about the adequacy of the allowance for loan losses. In determining the amount of the provision, we consider certain quantitative and qualitative factors, including our historical loan loss experience, the volume and type of lending we conduct, the results of our credit review process, the amounts and severity of classified, criticized and nonperforming assets, regulatory policies, general economic conditions, underlying collateral values and other factors regarding collectability and impairment. The estimated amount of expected loss in our loan portfolio is influenced by the collateral value associated with our loans. Loans with greater collateral values, as a percentage of the outstanding loan balance, reduce our exposure to loan loss.

In the third quarter 2014, we recorded an immaterial credit provision for loan losses, compared to an immaterial provision in the second quarter 2014 and a provision of $0.1 million in the third quarter 2013. Management considered the $0.2 million in net recoveries received during the third quarter 2014 in its calculation of the adequacy of the allowance for loan losses and resulting provision required to absorb the probable incurred losses inherent in the loan portfolio as of September 30, 2014.

Net recoveries in the third quarter 2014 were $0.2 million, as compared to net recoveries of $0.1 million in the third quarter 2013.

For a discussion of impaired loans and associated collateral values, see “Balance Sheet Analysis Nonperforming Assets and Other Impaired Loans” below.—

43

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

Noninterest Income

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

Table 6

		Three Months Ended
		September 30, 2014		June 30, 2014		March 31, 2014		December 31, 2013		September 30, 2013
		(In thousands)
Noninterest income:
Deposit service and other fees	$	2,290	$	2,352	$	2,066	$	2,222	$	2,302
Investment management and trust		1,279		962		908		831		736
Increase in cash surrender value of
life insurance		291		293		293		304		305
Gain (loss) on sale of securities		3		-		25		(85)		20
Gain on sale of SBA loans		186		28		137		95		207
Other		253		160		221		107		94
Total noninterest income	$	4,302	$	3,795	$	3,650	$	3,474	$	3,664

Noninterest income increased by $0.5 million to $4.3 million in the third quarter 2014 as compared to the second quarter 2014 and increased $0.6 million as compared to the third quarter 2013. The $0.5 million increase in noninterest income in the third quarter 2014 compared to the second quarter 2014 was mostly due to a $0.3 million increase in investment management and trust fees, primarily attributable to the July 16, 2014 acquisition of CHIA and a $0.2 million increase in gains from SBA loan sales executed during the quarter.

The $0.6 million increase in noninterest income in the third quarter 2014 as compared to the third quarter 2013 was primarily driven by increased investment management and trust fees. The growth in third quarter 2014 investment management and trust fees is the result of a $244.3 million or 56.7% increase in AUM between September 30, 2013 and September 30, 2014. The growth in AUM over this period was bolstered by the July 16, 2014 acquisition of CHIA, which added $178.5 million to the Company’s AUM, but also reflects successful efforts in procuring new customer relationships as well as growth in existing relationships. 

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

Table 7

		Nine Months Ended
		September 30, 2014		September 30, 2013
		(In thousands)
Noninterest income:
Deposit service and other fees	$	6,708	$	6,603
Investment management and trust		3,149		2,073
Increase in cash surrender value of life insurance		877		714
Gain on sale of securities		28		74
Gain on sale of SBA loans		351		630
Other		634		231
Total noninterest income	$	11,747	$	10,325

For the nine month period ended September 30, 2014, noninterest income increased by $1.4 million compared to the same period in 2013. The increase in noninterest income was primarily due to a $1.1 million increase in investment management and trust fees generated by the growth in AUM discussed above, in addition to a $0.3 million increase in customer interest rate swap income, contained in other noninterest income.  

44

Noninterest Expense

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

Table 8

		Three Months Ended
		September 30, 2014		June 30, 2014		March 31, 2014		December 31, 2013		September 30, 2013
		(In thousands)
Noninterest expense:
Salaries and employee benefits	$	8,112	$	8,096	$	8,078	$	7,685	$	7,242
Occupancy expense		1,583		1,633		1,548		1,507		1,572
Furniture and equipment		693		673		695		728		709
Amortization of intangible assets		670		591		591		702		703
Other real estate owned		147		22		56		(1,037)		(200)
Insurance and assessment		594		605		580		641		629
Professional fees		890		811		892		968		886
Impairment of long-lived assets		-		110		-		-		-
Other general and administrative		2,434		2,332		2,190		2,487		2,395
Total noninterest expense	$	15,123	$	14,873	$	14,630	$	13,681	$	13,936

Noninterest expense was $15.1 million in the third quarter 2014 as compared to $14.9 million during the second quarter 2014 and $13.9 million for the third quarter 2013.

Third quarter 2014 noninterest expense reflected a $0.2 million increase as compared to the second quarter 2014, primarily due to a $0.1 million loss associated with the disposal of a single OREO property during the quarter, a $0.1 million increase in intangible asset amortization as a result of the July 16, 2014 acquisition of CHIA, a $0.1 million increase in professional fees and a $0.1 million increase in other general and administrative expense, driven by data processing charges. These increases were partially offset by a $0.1 million reduction in occupancy expense related to branch closures and a $0.1 million decrease in impairments on long-lived assets due to the second quarter 2014 impairment of a former branch facility, designated as held-for-sale. 

The $1.2 million increase in noninterest expense in the third quarter 2014 compared to the third quarter 2013 was primarily comprised of a $0.9 million increase in salaries and employee benefits resulting from increased salary, incentive compensation and equity compensation primarily related to the achievement of specific performance targets. In addition, OREO related expense increased by $0.3 million as a result of fluctuations in gains and losses recognized on sales in the third quarter 2013 compared to the third quarter 2014.

Table 9

		Nine Months Ended
		September 30, 2014		September 30, 2013
		(In thousands)
Noninterest expense:
Salaries and employee benefits	$	24,286	$	21,896
Occupancy expense		4,764		4,782
Furniture and equipment		2,061		2,215
Amortization of intangible assets		1,852		2,116
Other real estate owned		225		(123)
Insurance and assessment		1,779		1,878
Professional fees		2,593		2,650
Prepayment penalty on long term debt		-		629
Impairment of long-lived assets		110		-
Other general and administrative		6,956		6,964
Total noninterest expense	$	44,626	$	43,007

Noninterest expense for the nine months ended September 30, 2014 increased by $1.6 million to $44.6 million as compared to $43.0 million in the same period in 2013. The increase in noninterest expense was comprised

45

of a $2.4 million increase in salaries and employee benefits, partially offset by decreases in other categories of noninterest expense with the exception of the $0.1 million impairment on our former branch facility recognized in the second quarter 2014 and a $0.3 million increase in other real estate owned (“OREO”) related expense.  The increase in salaries and employee benefits was comprised of a $1.1 million increase in salaries, a $0.7 million increase in equity compensation and a $0.3 million increase in expense related to the administration of our self-funded medical insurance plan. The increase in salaries and equity compensation during the first nine months of 2014 as compared to the same period in 2013 reflects our strategy to grow the Company using a team of highly skilled bankers and to competitively compensate our bankers in order to align performance with the interests of our stockholders. The increase in OREO related expense was attributable to fluctuations in gains and losses recognized on sales in 2013 compared to 2014. During the third quarter 2014 we renegotiated the lease for our corporate headquarters. The renegotiated terms provide for a reduction in our leased square footage of approximately 50% by February 2016. Once effectuated, we expect the reduction in square footage to reduce occupancy expense by approximately $0.2 million per quarter.

Income Taxes

Income tax expense was $5.9 million for the first nine months of 2014 as compared to $4.4 million for the first nine months of 2013, primarily as a result of the increase in income before tax as well as an increase in our effective tax rate to 32.6%. Our effective tax rate was 30.7% for the same period in 2013. The increase in the effective tax rate was mostly due to a decrease in tax-exempt income as a percentage of taxable and tax-exempt income.

BALANCE SHEET ANALYSIS

The following sets forth certain key consolidated balance sheet data:

Table 10

		September 30,		June 30,		March 31,		December 31,		September 30,
		2014		2014		2014		2013		2013
		(In thousands)
Cash and cash equivalents	$	46,617	$	44,124	$	35,311	$	28,077	$	33,465
Total investments		456,118		465,717		470,847		442,300		471,257
Total loans		1,482,268		1,438,089		1,362,312		1,320,424		1,293,252
Total assets		2,077,939		2,038,890		1,961,392		1,911,032		1,896,191
Earning assets		1,960,404		1,908,840		1,836,049		1,763,608		1,766,123
Deposits		1,662,598		1,552,676		1,533,010		1,528,457		1,482,515

At September 30, 2014, total assets were $2.1 billion, reflecting a $166.9 million increase as compared to December 31, 2013 and a $181.7 million increase as compared to September 30, 2013. The increase in total assets during the nine month period ended September 30, 2014 includes a $161.8 million increase in loans, a $13.8 million increase in investments and an $18.5 million increase in cash and cash equivalents. These increases were partially offset by a $21.9 million decrease in securities sold or called, not yet settled and a $3.5 million decrease in other assets. 

As compared to September 30, 2013, the increase in total assets of $181.7 million was primarily due to a $189.0 million increase in loans, partially offset by a $15.1 million decrease in investments. 

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The following table sets forth the amount of our loans held for investment outstanding at the dates indicated:

Table 11

		September 30,		June 30,		March 31,		December 31,		September 30,
		2014		2014		2014		2013		2013
		(In thousands)
Commercial and residential real estate	$	1,001,174	$	949,148	$	904,124	$	866,507	$	834,128
Construction		89,787		78,394		67,862		77,657		72,025
Commercial		286,545		307,629		288,865		271,843		280,577
Consumer		60,492		59,610		60,010		60,932		60,876
Other		44,866		43,865		42,326		43,821		46,378
Total gross loans		1,482,864		1,438,646		1,363,187		1,320,760		1,293,984
Unearned loan fees		(596)		(812)		(875)		(843)		(732)
Loans, held for investment, net of
unearned loan fees		1,482,268		1,437,834		1,362,312		1,319,917		1,293,252
Less allowance for loan losses		(22,350)		(22,155)		(21,550)		(21,005)		(20,450)
Net loans, held for investment	$	1,459,918	$	1,415,679	$	1,340,762	$	1,298,912	$	1,272,802

For the quarter ended September 30, 2014, loans held for investment, net of unearned fees grew $44.4 million, or 12.3% on an annualized basis as compared to June 30, 2014 and grew $189.0 million, or 14.6% as compared to September 30, 2013. The increase in loans during the third quarter included a $52.0 million increase in commercial and residential real estate loans and an $11.4 million increase in construction loans, partially offset by a $21.1 million net decrease in commercial loans. Commercial and residential real estate loan growth during the third quarter 2014 was driven by loans to finance the acquisition and improvement of single and multi-tenant commercial properties as well as a $10.4 million increase in jumbo mortgage loans. The decrease in commercial loans during the third quarter 2014 was primarily caused by $28.3 million in early payoffs on four loans resulting from clients successfully selling theirbusinesses. With respect to the portfolio as a whole we advanced $172.0 million in new originations during the third quarter 2014, compared to $161.7 million in the second quarter 2014. 

As compared to September 30, 2013, loans held for investment net of unearned fees increased by $189.0 million, or 14.6%. The net loan growth was primarily comprised of a $167.0 million increase in commercial and residential real estate loans, including a $42.8 million increase in jumbo mortgage loans, and a $6.0 million increase in commercial loans. The growth in loans was primarily the result of new customer relationships.  The utilization rate on commercial lines of credit was 41.0% at September 30, 2014 as compared to 39.5% at December 31, 2013 and 42.8% at September 30, 2013.

Under joint guidance from the FDIC, the Federal Reserve and the OCC on sound risk management practices for financial institutions with concentrations in commercial real estate lending, a financial institution may have elevated concentration risk if it has, among other factors, (i) total reported loans for construction, land development, and other land representing 100% or more of capital (CRE 1), or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land development and other land and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, representing 300% or more of total capital (CRE 2) and an increase in its commercial  real estate loan portfolio of 50% or more during the preceding 36 months. For the Bank, total loans for construction, land development and land represented 57% of capital at September 30, 2014, as compared to 55% at December 31, 2013, and 61% at September 30, 2013. For the Bank, total commercial real estate loans represented 322% of capital at September 30, 2014, as compared to 296% at December 31, 2013, and 292% at September 30, 2013. Further, the Bank’s commercial real estate loan portfolio increased 49.8% during the previous 36 months. Management employs heightened risk management practices with respect to commercial real estate lending, including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. Loans secured by commercial real estate are recorded on the balance sheet as either a commercial real estate loan or commercial loan depending on the purpose of the loan, regardless of the underlying collateral.

With respect to group concentrations, most of our business activity is with customers in the state of Colorado. At September 30, 2014, we did not have any significant concentrations in any particular industry.

Nonperforming Assets and Other Impaired Loans

Credit risk is inherent in lending activities. To manage this risk, we utilize frequent monitoring procedures and take prompt corrective action when necessary. We employ a risk rating system that identifies the potential risk

47

associated with loans in our loan portfolio. This monitoring and rating system is designed to help management identify current and potential problems so that corrective actions can be taken promptly.

Generally, loans are placed on nonaccrual status and accrual of interest is discontinued when the loan in question becomes 90 days or more past due or at such earlier time as management determines, after considering economic and business conditions and analysis of the borrower’s financial condition and the underlying collateral value, that the collection of interest is doubtful.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments when due according to the contractual terms of the underlying loan agreement. Impaired loans consist of our nonaccrual loans, loans that are 90 days or more past due, and other loans for which we determine that noncompliance with contractual terms of the loan agreement is probable. Losses on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For impaired loans that are collateral dependent, impairment is generally measured based on the fair value of the collateral less estimated selling costs.

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

Table 12

		Quarter Ended
		September 30,			June 30,			March 31,			December 31,			September 30,
		2014			2014			2014			2013			2013
		(Dollars in thousands)
Nonaccrual loans and leases	$	1,137		$	1,501		$	11,832		$	12,371		$	13,536
Nonperforming troubled debt
restructurings		12,100			12,383			2,773			3,105			4,559
Accruing loans past due 90 days or more (1)		-			-			-			-			-
Total nonperforming loans	$	13,237		$	13,884		$	14,605		$	15,476		$	18,095
Other real estate owned and foreclosed
assets		3,526			4,373			4,419			4,493			6,211
Total nonperforming assets	$	16,763		$	18,257		$	19,024		$	19,969		$	24,306
Total classified assets	$	32,578		$	35,010		$	27,176		$	29,215		$	33,993
Nonperforming loans	$	13,237		$	13,884		$	14,605		$	15,476		$	18,095
Performing troubled debt restructurings		17,634			8,318			5,757			6,227			2,500
Allocated allowance for loan losses		(70)			(124)			(104)			(565)			(1,450)
Net carrying amount of impaired loans	$	30,801		$	22,078		$	20,258		$	21,138		$	19,145
Accruing loans past due 30-89 days (1)	$	458		$	1,236		$	432		$	2,123		$	1,026
Allowance for loan losses	$	22,350		$	22,155		$	21,550		$	21,005		$	20,450
For the Three Months Ended:
Loans charged-off	$	80		$	63		$	407		$	644		$	110
Recoveries		(278)			(644)			(958)			(1,045)			(200)
Net charge-offs	$	(198)		$	(581)		$	(551)		$	(401)		$	(90)
Provision (credit) for loan losses	$	(3)		$	24		$	(6)		$	154		$	142
Loan Portfolio Ratios:
Allowance for loan losses to loans, net
of unearned loan fees (2)		1.51	%		1.54	%		1.58	%		1.59	%		1.58	%
Allowance for loan losses to
nonperforming loans		168.84	%		159.57	%		147.55	%		135.73	%		113.01	%
Annualized net charge-offs to average
loans		(0.05)	%		(0.17)	%		(0.17)	%		(0.12)	%		(0.03)	%
Nonperforming assets to total assets		0.81	%		0.90	%		0.97	%		1.04	%		1.28	%
Nonperforming loans to loans, net
of unearned loan fees (2)		0.89	%		0.97	%		1.07	%		1.17	%		1.40	%
Loans 30-89 days past due to loans, net
of unearned loan fees (2)		0.03	%		0.09	%		0.03	%		0.16	%		0.08	%
Classified asset ratio (3)		13.39	%		14.58	%		11.59	%		12.74	%		14.99	%
(1) Past due loans include both loans that are past due with respect to payments and loans that are past due because the loan has matured and is in the process of renewal, but that continues to be current with respect to payments.
(2) Loans, net of unearned loan fees, exclude loans held for sale.
(3) Classified asset ratio defined as total classified assets to subsidiary bank only Tier 1 Capital plus allowance for loan losses.

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At September 30, 2014, classified assets comprised 13.4% of bank level capital and allowance for loan losses; compared to 14.6% at June 30, 2014 and 12.7% at December 31, 2013. The decrease in this ratio during the third quarter 2014 was the result of a $2.4 million decrease in classified assets combined with the increase to regulatory capital effected by net bank level earnings generated during the third quarter 2014. The increase in the ratio as compared to December 31, 2013 was primarily the result of a second quarter 2014 downgrade of a $8.7 commercial real estate loan, partially offset by other reductions in classified assets through ongoing workout efforts and the generation of additional bank level capital from earnings (net of dividends paid to the holding company) over the preceding nine months.  

During the third quarter 2014, nonperforming loans decreased $0.6 million as compared to June 30, 2014 and decreased $4.9 million as compared to September 30, 2013. Nonperforming loans at September 30, 2014 includes one out-of-state loan participation with a balance of $10.0 million. As of September 30, 2014, no additional funds were committed to be advanced in connection with non-performing loans.

Net recoveries in the third quarter 2014 were $0.2 million as compared to $0.6 million in net recoveries in the second quarter 2014 and $0.1 million in net recoveries in the third quarter 2013.

We categorize loans into risk categories of “pass”, “pass-watch”, “special mention”, “substandard”, “doubtful” and “loss”. These internal categories are based on the definitions in the Uniform Agreement on the Classification of Assets and Appraisal of Securities Held by Banks and Thrifts issued by the OCC, the Federal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve System. In particular, we consider loans that we have internally rated as substandard, doubtful or loss as adversely classified loans. The amount of accruing loans that we have internally considered to be adversely classified was $15.8 million at September 30, 2014, as compared to $9.2 million at December 31, 2013 and $9.7 million at September 30, 2013. The $6.6 million increase in adversely classified, accruing loans during the first nine months of 2014 was primarily the result of the downgrade of a single substandard credit with a book balance of $8.7 million as a result of the deterioration in cash flow on the commercial shopping center securing the subject loan.

In addition to adversely classified loans, we have loans that are considered to be “special mention” and “pass-watch” loans. Each internal risk rating is ultimately subjective, but is based on both objective and subjective factors and criteria. The internal risk ratings focus on an evaluation of the borrowers’ ability to meet future debt service and performance to plan and consider potential adverse market or economic conditions. As described below under “Allowance for Loan Losses”, we adjust the general component of our allowance for loan losses for trends in the volume and severity of adversely classified and “pass-watch” list loans, which encompasses any loans with a classification of “pass-watch” or worse.

OREO was $3.5 million at September 30, 2014 compared to $4.5 million at December 31, 2013 and $6.2 million at September 30, 2013. The balance of OREO at September 30, 2014 was comprised of 10 separate properties, of which $2.7 million was attributable to land and $0.8 million was attributable to commercial real estate, including multi-family units. The balance of OREO at September 30, 2013, was comprised of 17 separate properties, of which $3.6 million was land and $2.6 million was commercial real estate, including multi-family units.

As of September 30, 2014 we had $29.7 million of loans with terms that were modified in troubled debt restructurings (“TDRs”), with a total allocated allowance for loan loss of $0.0 million. As of December 31, 2013, we had $9.3 million of loans with terms that were modified in TDRs, with a total allocated allowance for loan loss of $0.3 million. The primary cause of the increase in TDRs as of September 30, 2014 compared to December 31, 2013 was the result of two individual restructurings. In the second quarter 2014 we restructured our single largest nonaccrual loan of $10.1 million as part of our workout strategy on the loan. During the third quarter 2014, as part of our workout efforts, we restructured the $8.7 million substandard loan which had been downgraded in the second quarter, as outlined above. TDRs are included in impaired loans above. At September 30, 2014 there were no material additional amounts of unfunded commitments to borrowers whose loans were classified as TDRs. 

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The following table provides the allowance for loan losses allocated to TDRs for the current quarter and the prior four quarters:

Table 13 

		September 30,		June 30,		March 31,		December 31,		September 30,
		2014		2014		2014		2013		2013
		(In thousands)
Troubled Debt Restructurings (TDRs):
Performing TDRs	$	17,634	$	8,318	$	5,757	$	6,227	$	2,500
Allocated allowance for loan losses
on performing TDRs		(24)		(29)		(37)		(64)		(74)
Net investment in performing TDRs	$	17,610	$	8,289	$	5,720	$	6,163	$	2,426
Nonperforming TDRs	$	12,100	$	12,383	$	2,773	$	3,105	$	4,559
Allocated allowance for loan losses
on nonperforming TDRs		(24)		(41)		(37)		(271)		(911)
Net investment in nonperforming TDRs	$	12,076	$	12,342	$	2,736	$	2,834	$	3,648

The following provides a rollforward of TDRs for the nine month periods ended September 30, 2014 and September 30, 2013:

Table 14

Troubled Debt Restructuring Rollforward:		Performing TDRs		Nonperforming TDRs		Total
		(In thousands)
Balance at January 1, 2013	$	3,838	$	4,659	$	8,497
Principal repayments / advances		(294)		(1,744)		(2,038)
Charge-offs, net		(174)		(998)		(1,172)
New modifications		2,573		2,642		5,215
Transfers		(2,567)		(876)		(3,443)
Balance at September 30, 2013	$	3,376	$	3,683	$	7,059
Balance at January 1, 2014	$	6,227	$	3,105	$	9,332
Principal repayments / advances		(1,030)		(1,280)		(2,310)
Charge-offs, net		-		(66)		(66)
New modifications		12,497		10,281		22,778
Transfers		(60)		60		-
Balance at September 30, 2014	$	17,634	$	12,100	$	29,734

Allowance for Loan Losses

The allowance for loan losses is maintained at a level that, in our judgment, is adequate to absorb probable incurred loan losses in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, historical loss experience, and other significant factors affecting loan portfolio collectability, including the level and trends in delinquent, nonaccrual and adversely classified loans, trends in volume and terms of loans, levels and trends in credit concentrations, effects of changes in underwriting standards, policies, procedures and practices, national and local economic trends and conditions, changes in capabilities and experience of lending management and staff, and other external factors including industry conditions, competition and regulatory requirements.

The ratio of allowance for loan losses to total loans was 1.51% at September 30, 2014 as compared to 1.59% at December 31, 2013 and 1.58% at September 30, 2013.

Our methodology for evaluating the adequacy of the allowance for loan losses has two basic elements: first, the specific identification of impaired loans and the measurement of an estimated loss for each individual loan identified; and second, estimating a nonspecific allowance for probable losses on all other loans.

The specific allowance for impaired loans and the allowance calculated for probable incurred losses on other loans are combined to determine the required allowance for loan losses. The amount calculated is compared to the recorded allowance balance at each quarter end and any difference is recorded as an adjustment to income through the provision for loan losses. For further discussion of the provision for loan losses, see “Provision for Loan Losses” above.

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In estimating the allowance for probable incurred losses on other loans, we group the balance of the loan portfolio into segments that have common characteristics, such as loan type or risk rating. For each nonspecific allowance portfolio segment, we apply loss factors to calculate the required allowance based upon actual historical loss rates over a time period that we have determined represents the current credit cycle, adjusted for qualitative factors affecting loan portfolio collectability as described above. We also look at risk ratings of loans and compute a qualitative adjustment based on our credit quality in consideration of credit quality during the historical loss period.  We also consider other qualitative factors that may warrant adjustment of the computed historical rate, including, loan growth, loan concentrations, economic considerations and organizational factors.

During the third quarter 2014 we recorded an immaterial credit provision for loans losses compared to an immaterial provision for the second quarter 2014 and a $0.1 million provision in the third quarter of 2013. Management considered the $0.2 million in net recoveries received during the third quarter 2014 in its calculation of the adequacy of the allowance for loan losses and resulting provision required to absorb the probable incurred losses inherent in the loan portfolio as of September 30, 2014. For further discussion of the provision for loan losses, see “Provision for Loan Losses” above.

Approximately $0.1 million of the $22.4 million allowance for loan losses at September 30, 2014 relates to loans with specific reserves. At December 31, 2013, approximately $0.6 million of the $21.0 million allowance for loan losses relates to loans with specific reserves. The decrease in the specific reserves as of September 30, 2014 compared to December 31, 2013 was primarily the result of a $0.2 million charge-off of a loan with a specific reserve in the same amount at December 31, 2013 during the first quarter 2014.  

The general component of the allowance as a percentage of overall loans, net of unearned loan fees, was 1.50% at September 30, 2014 as compared to 1.55% at December 31, 2013 and 1.47% at September 30, 2013. The decrease in the general component of the allowance as a percentage of loans as of September 30, 2014 compared to December 31, 2013 was primarily attributable to the impact that the net recoveries had on the calculation of the Company’s historical charge-off rate during the first nine months of 2014.

We monitor the allowance for loan losses closely and adjust the allowance when necessary, based on our analysis, which includes an ongoing evaluation of substandard loans and their collateral positions.

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

Table 15 

		Nine Months Ended September 30,
		2014		2013
		(In thousands)
Balance, beginning of period	$	21,005	$	25,142
Loan charge-offs:
Commercial and residential
real estate		20		5,345
Construction		-		325
Commercial		351		777
Consumer		26		27
Other		153		155
Total loan charge-offs		550		6,629
Recoveries:
Commercial and residential
real estate		1,286		1,087
Construction		334		560
Commercial		52		27
Consumer		24		24
Other		184		97
Total loan recoveries		1,880		1,795
Net loan charge-offs		(1,330)		4,834
Provision for loan losses		15		142
Balance, end of period	$	22,350	$	20,450

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Securities

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

The carrying value of our portfolio of investment securities at the dates indicated were as follows: 

Table 16

		September 30,		December 31,		Increase	Percent
		2014		2013		(Decrease)	Change
		(In thousands)
Securities available for sale:
State and municipal	$	50,395	$	41,085	$	9,310	22.7	%
Mortgage-backed - agency / residential		207,069		254,103		(47,034)	(18.5)	%
Mortgage-backed - private / residential		463		561		(98)	(17.5)	%
Asset-backed		8,561		22,503		(13,942)	(62.0)	%
Marketable equity		-		1,535		(1,535)	(100.0)	%
Trust preferred		18,675		26,096		(7,421)	(28.4)	%
Corporate		64,830		39,074		25,756	65.9	%
Total securities available for sale	$	349,993	$	384,957	$	(34,964)	(9.1)	%
Securities held to maturity:
State and municipal		35,271		28,015		7,256	25.9	%
Mortgage-backed - agency / residential		42,410		13,723		28,687	209.0	%
Asset-backed		13,361		-		13,361	100.0	%
Total securities held to maturity	$	91,042	$	41,738	$	49,304	118.1	%

The carrying value of our available for sale investment securities at September 30, 2014 was $350.0 million, compared to the December 31, 2013 carrying value of $385.0 million. The decrease in available for sale securities between December 31, 2013 and September 30, 2014 was primarily a result of the reclassification of approximately $39.4 million in available for sale mortgage-backed and asset-backed securities to the held to maturity category in the second quarter 2014.The bonds were selected based on a combination of factors, such as current market price and average life, in an effort to mitigate mark-to-market risk and its impact on tangible common equity. As a result of the reclassification, approximately $1.3 million in after tax unrealized losses remained in accumulated other comprehensive income as of September 30, 2014 and is being amortized over the remaining life of the securities, offsetting the related amortization of discount on the transferred securities. No gains or losses were recognized at the time of reclassification.

The carrying value of our held to maturity securities at September 30, 2014 was $91.0 million compared to $41.7 million at December 31, 2013. The increase in held to maturity securities during the first nine months of 2014 was primarily a result of the reclassification in the second quarter 2014, as outlined above.

At September 30, 2014 and December 31, 2013, our investment securities portfolio had an average effective duration of approximately 5.7 years and 6.0 years, respectively.

Fair values for municipal securities are generally determined by matrix pricing, which is a mathematical technique widely used in the banking industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Characteristics utilized by matrix pricing include insurer, credit support, state of issuance, and bond rating. These factors are used to incorporate additional spreads and municipal curves. A separate curve structure is used for bank-qualified municipal bonds versus general market municipals. For the bank-qualified municipal bonds, active quotes are obtained when available.

Fair values for U.S. Treasury securities, securities issued by U.S. government agencies and government-sponsored entities and mortgage-backed securities are determined using a combination of daily closing prices, evaluations, income data, security master (descriptive) data, and terms and conditions data. Additional data used to compute the fair value of U.S. mortgage-backed pass-through issues (FHLMC, FNMA, GNMA, and SBA pools) includes daily composite seasoned, pool-specific, and generic coupon evaluations, and factors and descriptive data for individual pass-through pools. Additional data used to compute the fair value of U.S. collateralized mortgage

53

obligations include daily evaluations and descriptive data. Independent bond ratings were also used to compute the fair value of mortgage-backed securities.

During the third quarter 2014 our commercial loan group assisted a local non-profit organization with its analysis of an $8.0 financing for expansion purposes. The non-profit elected to structure the financing as a tax-exempt bond through one of Colorado’s public authorities and we purchased their entire $8.0 million tax-exempt, private placement bond and recorded it as an investment security during the third quarter 2014.

Including the non-profit security discussed above, five municipal bond issuances were priced using significant unobservable inputs as of September 30, 2014. The largest of these is a revenue bond with a par value of $24.1 million and repayment supported by cash flows from a local hospital. We reviewed the financials of the hospital, had discussions with hospital management and reviewed the underlying collateral of the municipal bond to determine an appropriate benchmark risk-adjusted interest rate based on bonds with similar risks. Utilizing the discounted cash flow method and an estimate of current market rates for similar bonds, management determined that the estimated fair value of this bond as of September 30, 2014 was approximately equal to its par value.

At September 30, 2014, there were 98 individual securities in an unrealized loss position, consisting of 82 individual securities that had been in a continuous unrealized loss position for 12 months or longer. We evaluated these securities in addition to the remaining 16 securities in an unrealized loss position and determined that the decline in value since their purchase dates is primarily attributable to fluctuations in market interest rates. Likewise, management determined that the increase in securities in an unrealized loss position in excess of 12 months between December 31, 2013 and September 30, 2014 was primarily attributable to the timing of interest rate fluctuations. At September 30, 2014, we did not intend to sell and did not consider it likely that we would be required to sell, any of these securities prior to recovery in their fair value, which may be upon maturity.

At September 30, 2014 and December 31, 2013, we held $15.1 million and $15.6 million, respectively, of other equity securities consisting primarily of bank stocks with no maturity date, which are not reflected in Table 16 above. Bank stocks are comprised of stock of the Federal Reserve Bank of Kansas City, the Federal Home Loan Bank of Topeka and Bankers’ Bank of the West. These stocks have restrictions placed on their transferability as only members of the entities can own the stock. We review the equity securities quarterly for potential impairment. No impairment has been recognized on these equity securities.

Deposits

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

Table 17

		At September 30, 2014				At December 31, 2013
		Balance	% of Total			Balance	% of Total
		(Dollars in thousands)
Noninterest-bearing demand	$	617,704	37.15	%	$	564,326	36.92	%
Interest-bearing demand and NOW		365,538	22.00	%		346,449	22.67	%
Money market		357,368	21.49	%		326,008	21.33	%
Savings		128,931	7.75	%		111,568	7.30	%
Time		193,057	11.61	%		180,106	11.78	%
Total deposits	$	1,662,598	100.00	%	$	1,528,457	100.00	%

Total deposits increased $134.1 million at September 30, 2014 as compared to December 31, 2013, and increased by $180.1 million as compared to September 30, 2013. The increase in deposits, primarily non-maturing deposits, over the last 12 months was in part attributable to increases in the deposit balances of our largest customers and in part attributable to the continued success of our business and retail strategic deposit gathering campaign. Because of the current low interest-rate environment and because of the span of time since the last period of increasing interest rates we are not certain what impact, if any, that rising interest rates will have on our deposit base.

Noninterest bearing deposits as a percentage of total deposits increased to approximately 37.2% at September 30, 2014 as compared to 36.9% at December 31, 2013. Noninterest bearing deposits help reduce overall deposit funding costs; however, due to the extremely low rate environment, the impact of noninterest bearing deposits on the overall cost of funds is currently less significant than in a higher rate environment.

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Time deposit balances increased $13.0 million as of September 30, 2014 compared to December 31, 2013 and comprised 11.6% of total deposits at September 30, 2014. The majority of the time deposit balance represented deposits of local customers, with only $38.2 million representing brokered deposits, as compared to $20.6 million at both December 31, 2013 and September 30, 2013. We monitor time deposit maturities and renewals on a daily basis and will raise rates on local time deposits if necessary to grow such deposits.

Securities Sold under Agreement to Repurchase

As of September 30, 2014, securities sold under agreement to repurchase decreased by $0.6 million to $23.7 million from December 31, 2013 and decreased by $5.5 million from September 30, 2013. 

Borrowings and Subordinated Debentures

At September 30, 2014, our FHLB borrowings were $150.4 million as compared to $130.0 million at December 31, 2013. At September 30, 2014, borrowings consisted of $110.0 million in term notes and $40.4 million in line of credit advances. At December 31, 2013, our FHLB borrowings consisted of $110.0 million in term notes and $20.0 million in line of credit advances. The increase of $20.4 million on our FHLB line of credit borrowings as compared to December 31, 2013 was primarily the result of growth in loan balances during the first nine months of 2014. The total FHLB commitment, including balances outstanding, at September 30, 2014 and December 31, 2013 was $410.6 million and $339.7 million, respectively. The total FHLB commitment of $410.6 million at September 30, 2014 represents a $40.0 million decrease from the $450.6 million commitment at June 30, 2014. The decrease in the overall FHLB commitment during the third quarter 2014 reflected our efforts to reallocate liquidity from borrowing availability to unencumbered securities.

Under an advance, pledge and security agreement with the FHLB, the Bank has additional borrowing capacity of approximately $260.2 million at September 30, 2014, which can be utilized for term or line of credit advances, or a combination of both.

The FHLB term borrowings at September 30, 2014 consisted of four separate fixed-rate term notes at the Bank, with remaining maturities ranging from 38 to 40 months and interest rates that range from 2.52% to 3.17%. The weighted-average rate on the term notes was 2.97% at September 30, 2014.  The four notes have Bermudan conversion options to a variable rate. Each of these notes is convertible on a quarterly basis by the FHLB. If the notes are converted by the FHLB, we have the option to prepay the advance without penalty. The interest rate on the line of credit is variable, and was 0.24% at September 30, 2014.

During the first quarter 2013, we redeemed the CenBank Trust I issuance of $10.3 million with a fixed rate of 10.6% and the CenBank Trust II issuance of $5.2 million with a fixed rate of 10.2% with an aggregate pre-payment penalty of approximately $0.6 million.

At September 30, 2014, we had a $25.8 million aggregate principal balance of junior subordinated debentures outstanding with a weighted average cost of 3.06%. The subordinated debentures are issued in two separate series. Each issuance has a maturity of 30 years from its date of issuance. The subordinated debentures were issued to trusts established by us, which in turn issued $25.0 million of trust preferred securities. Generally and with certain limitations, we are permitted to call the debentures subsequent to the first five or ten years after issuance, as applicable, if certain conditions are met, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment 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 has been callable without penalty each quarter since July 7, 2008. The CenBank Trust III issuance of $15.5 million has a variable rate of LIBOR plus 2.65% and has been callable without penalty each quarter since April 15, 2009. We did not call any of these debentures on the latest call date, but will continue to evaluate whether to call these debentures each quarter.

Under the terms of each indenture, we have the ability to defer interest on the debentures for a period of up to 60 months as long as we are in compliance with all covenants of the agreement. At September 30, 2014, the interest payments with respect to our two subordinated debentures were current.

Under the Dodd-Frank Act and the recent joint rule from the Federal Reserve Board, the OCC and the FDIC, certain TruPS will no longer be eligible to be included as Tier 1 capital for regulatory purposes. However, an exception to this statutory prohibition applies to securities issued prior to May 19, 2010 by bank holding companies with less than $15 billion of total assets. As we have less than $15 billion in total assets and issued all of our TruPS prior to May 19, 2010, our TruPS will continue to be eligible to be treated as Tier 1 capital, subject to other rules and limitations.

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Capital Resources

Current risk-based regulatory capital standards generally require banks and bank holding companies to maintain a ratio of “core” or “Tier 1” capital (consisting principally of common equity) to risk-weighted assets 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 includes Tier 1 capital plus certain forms of subordinated debt, a portion of the allowance for loan and lease losses, and preferred stock) to risk-weighted assets of at least 8%. Risk-weighted assets are calculated by multiplying the balance in each category of assets by a risk factor, which ranges from zero for cash assets and certain government obligations to 100% for most loans, and adding the products together.

For regulatory purposes, we maintain capital above the minimum core standards. We actively monitor our regulatory capital ratios to ensure that the Company and the Bank are more than well-capitalized under the applicable regulatory framework. Under these regulations, a bank is considered well-capitalized if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure. The Bank is required to maintain similar capital levels under capital adequacy guidelines. At September 30, 2014, each of the Bank’s capital ratios were above the regulatory capital threshold of “well-capitalized”.

We have computed our projected regulatory capital ratios on a pro forma basis under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III. At September 30, 2014, the Company and the Bank exceeded the capital requirements set forth in the new rule, which becomes effective in the first quarter 2015 by a minimum of approximately 300 basis points. 

The following table provides the capital ratios of the Company and Bank as of the dates presented, along with the applicable regulatory capital requirements:

Table 18

	Ratio at September 30, 2014		Ratio at December 31, 2013		Ratio at September 30, 2013		Minimum Capital Requirement		Minimum Requirement for "Well-Capitalized" Institution
Total Risk-Based Capital Ratio
Consolidated	14.25	%	14.96	%	14.94	%	8.00	%	N/A
Guaranty Bank and Trust Company	13.87	%	14.37	%	14.40	%	8.00	%	10.00	%
Tier 1 Risk-Based Capital Ratio
Consolidated	12.99	%	13.71	%	13.69	%	4.00	%	N/A
Guaranty Bank and Trust Company	12.62	%	13.12	%	13.15	%	4.00	%	6.00	%
Leverage Ratio
Consolidated	11.18	%	11.49	%	11.50	%	4.00	%	N/A
Guaranty Bank and Trust Company	10.86	%	11.00	%	11.05	%	4.00	%	5.00	%

As of September 30, 2014 our consolidated total risk-based capital ratio declined by 71 basis points and our Tier 1 risk-based capital ratio declined by 72 basis points as compared to December 31, 2013, primarily due to loan growth during the first nine months of 2014. Over the same period our consolidated leverage ratio decreased by 31 basis points for the same reason. The decreases in consolidated total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios as of September 30, 2014 as compared to September 30, 2013 were also primarily the result of loan growth over the past 12 months. 

In December 2012, we filed a universal shelf registration statement on Form S−3 with the SEC to register up to $100 million in securities. The SEC declared the registration statement effective on April 4, 2013. We do not have any current plans to raise additional capital; however, due to the amended filing of our Annual Report on form 10-K for the year ended December 31, 2012, we are not currently eligible to utilize the registration statement until we file an amended S-3.

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Dividends

Holders of voting common stock are entitled to dividends out of funds legally available for such dividends, when, and if, declared by the Board of Directors. Beginning in May, 2013, we paid cash dividends of 2.5 cents per share to stockholders on a quarterly basis through November of 2013. Beginning February 25, 2014, we increased the quarterly cash dividend to 5 cents per share and have paid quarterly stockholder dividends at this level through the third quarter 2014. 

Our ability to pay dividends is subject to the restrictions of the Delaware General Corporation Law. Because we are a bank holding company with no significant assets other than our bank subsidiary, we currently depend upon dividends from our bank subsidiary for the majority of our revenues. Various banking laws applicable to the Bank limit the payment of dividends, management fees and other distributions by the Bank to the holding company, and may therefore limit our ability to pay dividends on our common stock. Under these laws, the Bank is currently required to request permission from the Federal Reserve prior to payment of a dividend to the holding company.

Under the terms of each of our two outstanding trust preferred financings, including our related subordinated debentures, which occurred on June 30, 2003 and April 8, 2004, respectively, we cannot declare or pay any dividends or distributions (other than stock dividends) on, or redeem, purchase, acquire or make a liquidation payment with respect to, any shares of our capital stock if (1) an event of default under any of the subordinated debenture agreements has occurred and is continuing, or (2) we defer payment of interest on the TruPS for a period of up to 60 consecutive months. As of September 30, 2014, there is no event of default and interest payments on our two trust preferred financings were current.

Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including general business conditions, our financial results, our future business prospects, capital requirements, contractual, legal, and regulatory restrictions on the payment of dividends by us to our stockholders or by the Bank to the holding company, and such other factors as our Board of Directors may deem relevant.

Contractual Obligations and Off-Balance Sheet Arrangements

The Bank is a party to credit-related financial instruments with off-balance sheet risk entered into in the normal course of business to meet the financing needs of the Bank’s customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

Our exposure to credit loss is represented by the contractual amount of these commitments. We follow the same credit policies in making commitments as we do for on-balance sheet instruments. 

At the dates indicated, the following commitments were outstanding:

Table 19

		September 30, 2014		December 31, 2013
		(In thousands)
Commitments to extend credit:
Variable	$	346,543	$	290,564
Fixed		41,579		30,343
Total commitments to extend credit	$	388,122	$	320,907
Standby letters of credit	$	11,256	$	10,217

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 account balances of a few large depositors may cause temporary

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increases and decreases in liquidity from time to time. We deal with such fluctuations by using other sources of liquidity, as discussed below.

The Bank’s initial sources of liquidity are its liquid assets. At September 30, 2014, the Company had $46.6 million of cash and cash equivalents. Additionally,  we had $195.9 million in unencumbered securities available for pledging as of September 30, 2014. When the level of our liquid assets does not meet our liquidity needs, other available sources of liquidity, including the purchase of federal funds, sales of loans, including jumbo mortgage loans, brokered and internet certificates of deposit, one-way purchases of certificates of deposit through the Certificates of Deposit Account Registry Service, discount window borrowings from the Federal Reserve, and our lines of credit with the FHLB and other correspondent banks are employed to meet current and presently anticipated funding needs. At September 30, 2014, the Bank had approximately $260.2 million of availability on its FHLB line, $50.8 million of availability on its unsecured federal funds lines with correspondent banks and $8.1 million of availability with the Federal Reserve discount window.

At September 30, 2014, the Bank had $38.2 million of brokered deposits, reflecting an increase of $7.0 million from the $31.2 million maintained as of June 30, 2014 and a $17.6 million increase from the $20.6 million maintained at December 31, 2013. Management selectively grew brokered deposits during the first nine months of 2014 in order to secure a portion of long term fixed rate funding, partially offsetting the highly sensitive overnight borrowings utilized in part, to fund the Bank’s 2014 loan growth. Of the Bank’s $38.2 million in brokered CDs, $7.0 million will mature in the second quarter 2017, $15.8 million will mature in the third quarter 2017 and $15.4 million will mature in the second quarter 2018. We continue to evaluate new brokered deposits as a source of low-cost, longer-term funding.

The holding company relies primarily on cash flow from the Bank as its source of liquidity. The holding company requires liquidity for the payment of interest on the subordinated debentures, for operating expenses, principally salaries and benefits, for repurchases of our common stock, and, if declared by our Board of Directors, for the payment of dividends to our stockholders. The Bank pays a management fee for its share of expenses paid by the holding company, as well as for services provided by the holding company. As discussed in the “Capital Resources” section above, various banking laws applicable to the Bank limit the payment of dividends by the Bank to the holding company, and may therefore limit our ability to pay dividends on our common stock. Under these laws, the Bank is currently required to request permission from the Federal Reserve prior to payment of a dividend to the Company. Under the terms of our TruPS financings, we may defer payment of interest on the subordinated debentures and related TruPS for a period of up to 60 consecutive months as long as we are in compliance with all covenants of the agreement.

As of September 30, 2014, the holding company had approximately $5.5 million of cash on hand. Based on current cash flow projections for the holding company, we estimate that cash balances maintained by the holding company are sufficient to meet the operating needs of the holding company through 2017.

Application of Critical Accounting Policies and Accounting Estimates

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the rules and regulations of the SEC. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates on an ongoing basis its estimates and judgments, including those related to the impairment of investment securities,  the allowance for loan losses, and OREO. Management bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which have formed the basis for making such judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from the recorded estimates under different assumptions or conditions. A summary of critical accounting policies and estimates are listed in the "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section of the Company’s Annual Report on Form 10-K for the    

fiscal year ended December 31, 2013. There have been no changes during 2014 to the critical accounting policies listed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

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ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. To that end, management actively monitors and manages our interest rate risk exposure. We have not entered into any market risk sensitive instruments for trading purposes. We manage our interest rate sensitivity by matching the repricing opportunities on our earning assets to those on our funding liabilities. In order to manage the repricing characteristics of our assets and liabilities, we use various strategies designed to ensure that our exposure to interest rate fluctuations is limited in accordance with our guidelines of acceptable levels of risk-taking. Balance sheet hedging strategies, including monitoring the terms and pricing of loans and deposits and managing the deployment of our securities, are used to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources.

Net Interest Income Modeling

Our Asset Liability Management Committee, or ALCO, oversees our exposure to and mitigation of interest rate risk and, along with our Board of Directors, reviews our exposure to interest rate risk at least quarterly. The committee is comprised of members of our senior management. The ALCO monitors interest rate risk by analyzing the potential impact on the net portfolio value and net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. The ALCO manages our balance sheet in part to minimize the potential impact on net portfolio value and net interest income despite changes in interest rates.

Interest rate risk exposure is measured using interest rate sensitivity analysis to project the change in our net portfolio value and net interest income in the event of hypothetical changes in interest rates. If potential changes to net portfolio value and net interest income from hypothetical interest rate changes are not within the limits approved by the Board of Directors, the Board may direct management to adjust the Bank’s mix of assets and liabilities to bring interest rate risk within these limits.

We monitor and evaluate our interest rate risk position on at least a quarterly basis using net interest income simulation analysis under 100, 200 and 300 basis point change scenarios (see below). Each of these analyses measures different interest rate risk factors inherent in the financial statements.  

Our primary interest rate risk measurement tool, the “Net Interest Income Simulation Analysis”, measures interest rate risk and the effect of hypothetical interest rate changes on net interest income. This analysis incorporates all of our assets and liabilities together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. We establish these assumptions based on anticipated changes in balances, pricing, prepayments and sensitivity of our assets and liabilities. Through these simulations, we estimate the impact on net interest income over a one-year period from immediate upward and downward changes in market rates of 100, 200 and 300 basis points. Assumptions are made to project rates for new loans and deposits based on historical analysis, our outlook and repricing strategies. Asset prepayments and other market risks are developed from industry estimates of prepayment speeds and other market changes. Since the results of these simulations can be significantly influenced by the assumptions on which the simulations rely, we also evaluate the sensitivity of simulation results to changes in underlying assumptions.

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The following table shows the projected net interest income increase or decrease over the 12 months following September 30, 2014 and September 30, 2013:

Table 20

Market Risk:
		Annualized Net Interest Income
		September 30, 2014		September 30, 2013
		Amount of Change		Amount of Change
		(In thousands)
Rates in Basis Points
300	$	3,593	$	2,645
200		2,294		1,500
100		1,082		501
Static		-		-
(100)		(2,059)		(1,748)
(200)		(2,382)		(2,292)
(300)		N/M		N/M
N/M = not meaningful

Overall, we believe our balance sheet is asset sensitive; i.e. that a change in interest rates would have a greater impact on our assets than on our liabilities. At September 30, 2014, we were positioned to have a short-term favorable interest income impact in the event of an immediate 300, 200, or 100 basis point increase in market interest rates. Our asset sensitivity is mostly due to the amount of variable rate loans on the books and is partially mitigated by interest rate floors, or minimum rates. As rates rise, individual loan rates may continue to be at the minimum rate. We also anticipate that deposit rates, other than time deposit rates, would increase immediately in a rising rate environment, but at a reduced magnitude. Additionally, the interest rates paid on our FHLB line of credit advances would increase immediately as well. In addition to performing net interest income modeling, we also monitor the impact an instantaneous change in interest rates would have on our economic value of equity. We anticipate a reduction in the economic value of equity in a rising rate environment as the reduction in the value of our fixed rate earning assets would outweigh the corresponding improvement in value of our low cost deposits. Our asset sensitivity at September 30, 2014 increased relative to our asset sensitivity at September 30, 2013, primarily due to the increase in loans financed in part by sources of funding which are projected to be less sensitive to fluctuations in interest rates.   

We estimate that our net interest income would decline in a 100, 200 or 300 basis point falling rate environment. This is consistent with our belief that our balance sheet is asset sensitive. At September 30, 2014, it was not possible for the majority of our deposit rates to fall 100 to 300 basis points since most deposit rates were already below 100 basis points. As a result of this limitation on our ability to reduce deposit rates, the loss of gross interest income would likely exceed the corresponding reduction in interest expense in a falling rate environment. We believe that this scenario is very unlikely. The target federal funds rate is currently set by the Federal Open Market Committee of the Federal Reserve Board at a rate of between 0 and 25 basis points and the prime rate has historically been set at a rate of 300 basis points over the target federal funds rate. Our interest rate risk modeling assumes that the prime rate would continue to be set at a rate of 300 basis points over the target federal funds rate; therefore, a 200 basis point decline in overall rates would only result in a 0 and 25 basis point decline in both target federal funds rate and the prime rate. Further, other rates that are currently below 1% or 2% (e.g. short-term U.S. Treasuries and LIBOR) are modeled to not fall below 0% with an overall 100 or 200 basis point decrease in rates. Many of our variable rate loans are set to an index tied to the prime rate, the target federal funds rate or LIBOR, therefore, a further decrease in rates would likely not have a substantial impact on loan yields.

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ITEM 4.  Controls and Procedures

The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended [the “Exchange Act”] ) as of September 30, 2014. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at September 30, 2014.  

The Company’s disclosure controls and procedures were designed to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company and the Bank are defendants, from time to time, in legal actions at various points of the legal process, including appeals, arising from transactions conducted in the ordinary course of business. Management believes that, after consultations with legal counsel it is not probable that the outcome of current legal actions will result in a liability that would have a material adverse effect on the Company’s consolidated financial position, results of operations, comprehensive income or cash flows. In the event that such a legal action results in an unfavorable outcome, the resulting liability could have a material adverse effect on the Company’s consolidated financial position, results of operations, comprehensive income or cash flows.

ITEM 1A.  Risk Factors 

There have been no material changes from risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable.

(b) Not applicable.

(c) The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our voting common stock during the third quarter 2014.

				Shares Purchased	Remaining
				under	Repurchase
	Total Shares		Average Price	Publicly Announced	Authority
	Purchased (1)		Paid per Share	Repurchase Plan	in Shares
July 1 to July 31	155	$	14.24	-	1,000,000
August 1 to August 31	455		13.75	-	1,000,000
September 1 to September 30	134		13.44	-	1,000,000
	744	$	13.80	-	1,000,000

(1) These shares relate to the net settlement by employees related to vested, restricted stock awards and do not impact the 1,000,000 shares available for repurchase under the repurchase plan authorized on April 3, 2014. Net settlements represent instances where employees elect to satisfy their income tax liability related to the vesting of restricted stock through the surrender of a proportionate number of the vested shares to the Company.

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Mine Safety Disclosure

Not applicable.

5
ITEM 5.	Other Information

Not applicable.

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ITEM 6.		Exhibits
Exhibit Number			Description
3.1			Second Amended and Restated Certification of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on August 12, 2009).
3.2			Certificate of Amendment to the Registrant’s Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on October 3, 2011).
3.3			Certificate of Amendment to the Registrant’s Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on July 31, 2013).
3.4			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).
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.
101.INS	XBRL Interactive Data File**
101.SCH	XBRL Interactive Data File**
101.CAL	XBRL Interactive Data File**
101.LAB	XBRL Interactive Data File**
101.PRE	XBRL Interactive Data File**
101.DEF	XBRL Interactive Data File**

* Filed with this Quarterly Report on Form 10-Q.

** This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

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SIGNATURES

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

i
Dated: October 31, 2014	GUARANTY BANCORP
	/s/    CHRISTOPHER G. TREECE
	Christopher G. Treece
	Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer)

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