Guaranty Bancorp 10-Q 2015 Q1 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 March 31, 2015

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 April 29, 2015, there were 21,738,501 shares of the registrant’s common stock outstanding, consisting of 20,719,501 shares of voting common stock, of which 676,017 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 Statements 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	35
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	55
ITEM 4.	Controls and Procedures	57
PART II—OTHER INFORMATION		58
ITEM 1.	Legal Proceedings	58
ITEM 1A.	Risk Factors	58
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
ITEM 3.	Defaults Upon Senior Securities	58
ITEM 4	Mine Safety Disclosure	58
ITEM 5.	Other Information	58
ITEM 6.	Exhibits	59

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PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

		March 31,		December 31,
		2015		2014
		(In thousands, except share and per share data)
Assets
Cash and due from banks	$	31,649	$	32,441
Securities available for sale, at fair value		295,700		346,146
Securities held to maturity (fair value of $145,274 and $90,809 at
March 31, 2015 and December 31, 2014)		141,969		88,514
Bank stocks, at cost		14,602		14,822
Total investments		452,271		449,482
Loans held for sale		700		-
Loans, held for investment, net of unearned loan fees		1,554,454		1,541,434
Less allowance for loan losses		(22,500)		(22,490)
Net loans, held for investment		1,531,954		1,518,944
Premises and equipment, net		48,400		45,937
Other real estate owned and foreclosed assets		2,175		2,175
Other intangible assets, net		6,659		7,154
Bank-owned life insurance		47,795		42,456
Other assets		23,849		26,189
Total assets	$	2,145,452	$	2,124,778
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand	$	659,765	$	654,051
Interest-bearing demand and NOW		356,573		326,748
Money market		370,705		374,063
Savings		141,948		138,588
Time		192,890		191,874
Total deposits		1,721,881		1,685,324
Securities sold under agreement to repurchase and federal funds purchased		23,922		33,508
Federal Home Loan Bank term notes		20,000		20,000
Federal Home Loan Bank line of credit borrowing		128,600		140,300
Subordinated debentures		25,774		25,774
Securities purchased, not yet settled		2,284		-
Interest payable and other liabilities		11,854		12,933
Total liabilities		1,934,315		1,917,839
Stockholders’ equity:
Common stock (1)		24		24
Additional paid-in capital - common stock		710,217		709,341
Accumulated deficit		(393,193)		(396,172)
Accumulated other comprehensive loss		(2,466)		(3,127)
Treasury stock, at cost, 2,269,778 and 2,248,033 shares, respectively		(103,445)		(103,127)
Total stockholders’ equity		211,137		206,939
Total liabilities and stockholders’ equity	$	2,145,452	$	2,124,778
____________________

⁽¹⁾ Common stock—$0.001 par value; 30,000,000 shares authorized; 24,008,279 shares issued and 21,738,501 shares outstanding at March 31, 2015 (includes 676,017 shares of unvested restricted stock); 23,876,906 shares issued and 21,628,873 shares outstanding at December 31, 2014 (includes 620,075 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 March 31,
		2015		2014
		(In thousands, except share and per share data)
Interest income:
Loans, including fees	$	16,806	$	14,734
Investment securities:
Taxable		2,123		2,332
Tax-exempt		702		645
Dividends		222		169
Federal funds sold and other		1		1
Total interest income		19,854		17,881
Interest expense:
Deposits		668		580
Securities sold under agreement to repurchase and
federal funds purchased		11		8
Borrowings		199		836
Subordinated debentures		199		198
Total interest expense		1,077		1,622
Net interest income		18,777		16,259
Provision (credit) for loan losses		(23)		(6)
Net interest income, after provision for loan losses		18,800		16,265
Noninterest income:
Deposit service and other fees		2,035		2,066
Investment management and trust		1,334		908
Increase in cash surrender value of life insurance		408		293
Gain on sale of securities		-		25
Gain on sale of SBA loans		280		137
Other		58		229
Total noninterest income		4,115		3,658
Noninterest expense:
Salaries and employee benefits		8,604		8,075
Occupancy expense		1,697		1,548
Furniture and equipment		730		695
Amortization of intangible assets		495		591
Other real estate owned, net		41		56
Insurance and assessments		565		580
Professional fees		829		892
Other general and administrative		2,309		2,201
Total noninterest expense		15,270		14,638
Income before income taxes		7,645		5,285
Income tax expense		2,561		1,743
Net income	$	5,084	$	3,542
Earnings per common share–basic:	$	0.24	$	0.17
Earnings per common share–diluted:		0.24		0.17
Dividends declared per common share:		0.10		0.05
Weighted average common shares outstanding-basic:		21,037,325		20,936,295
Weighted average common shares outstanding-diluted:		21,165,433		21,028,722

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 March 31,
		2015		2014
		(In thousands)
Net income	$	5,084	$	3,542
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		1,909		4,893
Income tax effect		(726)		(1,860)
Change in unamortized loss on available for sale securities
reclassified into held to maturity securities		84		-
Income tax effect		(32)		-
Reclassification adjustment for net (gains) included
in net income during the period		-		(25)
Income tax effect		-		10
Change in market value of derivatives during the period		(926)		(282)
Income tax effect		352		107
Other comprehensive income		661		2,843
Total comprehensive income	$	5,745	$	6,385

See "Notes to Unaudited Condensed Consolidated Financial Statements”

5

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		Common Stock and Additional Paid-in Capital		Treasury Stock		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Totals
Balance, January 1, 2014	21,303,707	$	706,514	$	(102,672)	$	(405,494)	$	(8,954)	$	189,394
Net income	-		-		-		3,542		-		3,542
Other comprehensive income	-		-		-		-		2,843		2,843
Stock compensation awards, net of forfeitures	404,761		-		-		-		-		-
Stock based compensation, net	-		459		-		-		-		459
Repurchase of common stock	(12,361)		-		(163)		-		-		(163)
Dividends paid	-		-		-		(1,046)		-		(1,046)
Balance, March 31, 2014	21,696,107	$	706,973	$	(102,835)	$	(402,998)	$	(6,111)	$	195,029
Balance, January 1, 2015	21,628,873	$	709,365	$	(103,127)	$	(396,172)	$	(3,127)	$	206,939
Net income	-		-		-		5,084		-		5,084
Other comprehensive income	-		-		-		-		661		661
Stock compensation awards, net of forfeitures	131,373		-		-		-		-		-
Stock based compensation, net	-		746		-		-		-		746
Tax effect of restricted stock vestings	-		130		-		-		-		130
Repurchase of common stock	(21,745)		-		(318)		-		-		(318)
Dividends paid	-		-		-		(2,105)		-		(2,105)
Balance, March 31, 2015	21,738,501	$	710,241	$	(103,445)	$	(393,193)	$	(2,466)	$	211,137

See "Notes to Unaudited Condensed Consolidated Financial Statements."

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GUARANTY BANCORP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

		Three Months Ended March 31,
		2015		2014
		(In thousands)
Cash flows from operating activities:
Net income	$	5,084	$	3,542
Reconciliation of net income to net cash from operating activities:
Depreciation and amortization		1,144		1,172
Provision (credit) for loan losses		(23)		(6)
Stock compensation, net		746		459
Gain on sale of securities		-		(25)
Gain on sale of SBA loans		(280)		(137)
Origination of SBA loans with intent to sell		(2,718)		(1,683)
Proceeds from the sale of SBA loans originated with intent to sell		2,642		1,872
Gain, net and valuation adjustments on real estate owned		-		(8)
Other		144		569
Net change in:
Other assets		2,065		1,095
Interest payable and other liabilities		(2,294)		(1,775)
Net cash from operating activities		6,510		5,075
Cash flows from investing activities:
Activity in available for sale securities:
Sales, maturities, prepayments and calls		11,409		37,615
Purchases		(8,561)		(26,133)
Activity in held to maturity securities and bank stocks:
Maturities, prepayments and calls		3,270		686
Purchases		(5,057)		(18,318)
Loan originations net of principal collections		(13,306)		(40,856)
Purchase of bank-owned life insurance contracts		(5,000)		-
Proceeds from sales of other real estate owned and foreclosed assets		-		82
Proceeds from sale of SBA loans transferred to held for sale		207		-
Additions to premises and equipment		(3,112)		(39)
Net cash from investing activities		(20,150)		(46,963)
Cash flows from financing activities:
Net change in deposits		36,557		4,553
Net change in borrowings on Federal Home Loan Bank line of credit		(11,700)		43,017
Cash dividends on common stock		(2,105)		(1,046)
Net change in repurchase agreements and federal funds purchased		(9,586)		2,761
Repurchase of common stock		(318)		(163)
Net cash from financing activities		12,848		49,122
Net change in cash and cash equivalents		(792)		7,234
Cash and cash equivalents, beginning of period		32,441		28,077
Cash and cash equivalents, end of period	$	31,649	$	35,311
Supplemental disclosure of noncash activities:
Reclassification of available for sale securities into held to maturity	$	49,084	$	-
Securities purchased, not yet settled		2,284		-

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.

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, originating commercial 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. 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 generally 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 strongly correlated to general economic conditions prevailing in Colorado, including the strength of the local real estate market, 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. 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 statement 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, 2014.

(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.

(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 made to borrowers located 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

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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, prevailing economic conditions and current organizational 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 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 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

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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 calculated based on 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 asset’s 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 intangible assets are amortized to expense over their estimated useful life, which has been estimated to be ten years. As of March 31, 2015 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

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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 March 31, 2015, one of these properties remained held for sale and is included in “other assets” in the consolidated balance sheet. The Company recognized an additional $186,000 in impairment charges on this property during 2014 in response to changing market conditions. No additional impairment was recognized on this property during the first quarter 2015.    

(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”) provided 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. The Incentive Plan expired by its terms on April 4, 2015. On March 4, 2015 the Company’s Board of Directors approved the Guaranty Bancorp 2015 Long-Term Incentive Plan, subject to stockholder approval at the annual meeting of stockholders, scheduled for May 5, 2015.

As of March 31, 2015, the Company had only granted stock awards, which will remain outstanding in accordance with their terms despite the expiration of the Incentive Plan. 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 is recognized using an estimated forfeiture rate, adjusted as necessary to reflect actual forfeitures. The Company has issued stock awards that vest based 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 March 31, 2015,  certain performance stock awards were expected to vest prior to their expiration, while certain performance awards were not expected to

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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 February 3, 2015, the Company’s Board of Directors authorized the extension of the expiration date of the Company’s share repurchase program originally announced in April 2014. The repurchase program had been scheduled to expire 12 months from the date of its announcement, and as extended, the program is scheduled to expire on April 2, 2016. Pursuant to the program, the Company may repurchase up to 1,000,000 shares of its voting common stock, par value $0.001 per share. As of the date of this filing, the Company had not repurchased any shares under the 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 March 31, 2015 and December 31, 2014, the Company had a net deferred tax asset of $9,723,000 and $10,988,000, respectively, which includes the deferred tax asset associated with the unrealized gain (loss) on securities and the fluctuation of fair value on the Company’s interest rate swaps designated as cash flow hedges. 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 management determined that as of March 31, 2015 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 March 31, 2015 or December 31, 2014.

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. The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other noninterest expense. At March 31, 2015 and December 31, 2014, the Company did not have any amounts accrued for interest or penalties.

As of March 31, 2015 and December 31, 2014 the Company maintained an immaterial unrecognized tax benefit. If this benefit were to be recognized in a future period both our tax expense and effective tax rate would be reduced. The Company does not expect the total amount of unrecognized tax benefits to materially increase or decrease in the next 12 months.

(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.

12

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

	Three Months Ended March 31,
	2015	2014
Average common shares outstanding	21,037,325	20,936,295
Effect of dilutive unvested stock grants (1)	128,108	92,427
Average shares outstanding for calculated
diluted earnings per common share	21,165,433	21,028,722
_____________

(1)Unvested stock grants representing 676,017 shares at March 31, 2015 had a dilutive impact of 128,108 shares in the diluted earnings per share calculation for the three months ended March 31, 2015.  Unvested stock grants representing 745,406 shares at March 31, 2014 had a dilutive impact of 92,427 shares in the diluted earnings per share calculation for the three months ended March 31, 2014.

 (m)    Recently Issued Accounting Standards

Recently Issued but not yet Effective Accounting Standards:

In May 2014 in an effort to foster additional consistency in recognizing revenue the FASB issued accounting standards update 2014-09 Revenue from Contracts with Customers. The main provisions of the update require the identification of performance obligations within a contract and require 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: (i) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs, or (ii) the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (iii) 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. Initially the amendments of the update were to be effective for public entities beginning with interim and annual reporting periods beginning after December 15, 2016, however the FASB recently voted to defer the implementation for one year, although that change has not yet been finalized. 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.

13

(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:

	March 31, 2015
		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses		Amortized Cost
		(In thousands)
Securities available for sale:
State and municipal	$	34,723	$	6	$	(11)	$	34,728
Mortgage-backed - agency / residential		165,374		2,098		(1,184)		164,460
Mortgage-backed - private / residential		411		4		-		407
Trust preferred		18,615		363		(1,748)		20,000
Corporate		68,053		1,526		-		66,527
Collateralized loan obligations		8,524		49		-		8,475
Total securities available for sale	$	295,700	$	4,046	$	(2,943)	$	294,597

	December 31, 2014
		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses		Amortized Cost
		(In thousands)
Securities available for sale:
State and municipal	$	49,399	$	71	$	(293)	$	49,621
Mortgage-backed - agency / residential		201,902		2,027		(2,063)		201,938
Mortgage-backed - private / residential		412		-		-		412
Asset-backed		8,708		-		(280)		8,988
Trust preferred		18,075		175		(2,100)		20,000
Corporate		64,717		956		(49)		63,810
Collateralized loan obligations		2,933		-		-		2,933
Total securities available for sale	$	346,146	$	3,229	$	(4,785)	$	347,702

During the first quarter of 2015, the Company reclassified, at fair value, approximately $49,084,000 in available for sale mortgage-backed,  asset-backed and municipal securities to the held to maturity category. The related unrealized pre-tax losses of approximately $750,000 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. 

14

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)
March 31, 2015:
State and municipal	$	56,244	$	1,064	$	(113)	$	55,293
Mortgage-backed - agency / residential		67,460		1,956		-		65,504
Asset-backed		21,570		409		(11)		21,172
	$	145,274	$	3,429	$	(124)	$	141,969
December 31, 2014:
State and municipal	$	36,051	$	923	$	(95)	$	35,223
Mortgage-backed - agency / residential		41,734		1,203		-		40,531
Asset-backed		13,024		264		-		12,760
	$	90,809	$	2,390	$	(95)	$	88,514

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

		Three Months Ended March 31,
		2015		2014
		(In thousands)
Proceeds	$	2,868	$	8,367
Gross gains		16		42
Gross losses		(16)		(17)
Net tax expense related to gains
(losses) on sale		-		10

The amortized cost and estimated fair value of available for sale and held to maturity debt securities by contractual maturity at March 31, 2015 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
		Fair Value		Amortized Cost
		(In thousands)
Securities available for sale:
Due in one year or less	$	2,939	$	2,885
Due after one year through five years		46,819		45,934
Due after five years through ten years		18,583		17,996
Due after ten years		53,050		54,440
Total AFS, excluding mortgage-backed (MBS)
and collateralized loan obligations		121,391		121,255
Mortgage-backed and collateralized
loan obligations		174,309		173,342
Total securities available for sale	$	295,700	$	294,597

15

		Held to Maturity
		Fair Value		Amortized Cost
		(In thousands)
Securities held to maturity:
Due in one year or less	$	1,608	$	1,607
Due after one year through five years		2,584		2,557
Due after five years through ten years		17,000		16,736
Due after ten years		35,052		34,393
Total HTM, excluding MBS and asset-backed		56,244		55,293
Mortgage-backed and asset-backed		89,030		86,676
Total securities held to maturity	$	145,274	$	141,969

The following tables present the fair value and the unrealized loss on securities that were temporarily impaired as of March 31, 2015 and December 31, 2014, aggregated by major security type and length of time in a continuous unrealized loss position:

March 31, 2015		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	$	1,455	$	(11)	$	-	$	-	$	1,455	$	(11)
Mortgage-backed - agency /
residential		46,464		(767)		29,352		(417)		75,816		(1,184)
Trust preferred		-		-		8,253		(1,748)		8,253		(1,748)
Held to maturity:
State and municipal		5,935		(46)		12,505		(303)		18,440		(349)
Mortgage-backed - agency /
residential		-		-		45,307		(289)		45,307		(289)
Asset-backed		-		-		21,568		(438)		21,568		(438)
Total temporarily impaired	$	53,854	$	(824)	$	116,985	$	(3,195)	$	170,839	$	(4,019)

December 31, 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	$	-	$	-	$	12,515	$	(293)	$	12,515	$	(293)
Mortgage-backed - agency /
residential		23,407		(92)		103,429		(1,971)		126,836		(2,063)
Asset-backed		-		-		8,708		(280)		8,708		(280)
Trust preferred		-		-		7,900		(2,100)		7,900		(2,100)
Corporate		11,505		(49)		-		-		11,505		(49)
Collateralized loan obligations		2,933		-		-		-		2,933		-
Held to maturity:
State and municipal		-		-		10,426		(95)		10,426		(95)
Total temporarily impaired	$	37,845	$	(141)	$	142,978	$	(4,739)	$	180,823	$	(4,880)

16

In determining whether or not there is an other-than-temporary-impairment (“OTTI”) for a security, management considers many factors, including: (i) the length of time for which and the extent to which the security’s fair value has been less than cost, (ii) the financial condition and near-term prospects of the security’s issuer, (iii) whether the decline in the security’s value was affected by macroeconomic conditions, and (iv) 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 a  recovery in 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. There were no accumulated credit losses on any of the Company’s securities as of March 31, 2015 or December 31, 2014.

At March 31, 2015, there were 70 individual securities in an unrealized loss position, including 51 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 19 securities in an unrealized loss position and has determined that the decline in value since their purchase dates was primarily attributable to fluctuations in market interest rates and does not reflect a decline in the underlying issuers’ ability to repay.  The decrease in the number of securities in an unrealized loss position in excess of 12 months from 75 securities at December 31, 2014 to the 51 securities at March 31, 2015 was primarily attributable to the timing of interest rate fluctuations. Likewise, the total number of securities in an unrealized loss position declined from 84 individual securities at December 31, 2014 to 70  securities at March 31, 2015 also as a result of the timing of interest rate fluctuations. At March 31, 2015, 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 March 31, 2015 and December 31, 2014, the Company’s unrated municipal bonds comprised approximately 13.8% and 14.7%, respectively, of the carrying value of the Company’s entire municipal bond portfolio.

At March 31, 2015, a revenue bond issued by the Colorado Health Facilities Authority with a book value of $24,115,000 accounted for 11.4% of total stockholders’ equity. This amortizing tax-exempt bond is secured by a pledge of revenues and a deed of trust from a local hospital and carries an interest rate of 4.75% and a maturity date of 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 March 31, 2015 and December 31, 2014 approximated its par value. In addition to conducting its annual review of unrated municipal bonds, the most recent of which was completed in the fourth quarter 2014, management conducts a quarterly review of the hospital’s financial statements. In addition to a partial redemption in 2013 in advance of the contractual repayment schedule, the bond has paid principal and interest in accordance with its contractual terms.

Certain mortgage backed securities with an aggregate market value of approximately $40,495,000 as of March 31, 2015 were pledged to secure overnight repurchase agreement borrowings. Fluctuations in the fair value of these securities and or the fluctuation in customer repurchase agreement balances may result in the need to pledge additional securities against these borrowings. Management monitors the Bank’s collateral position with respect to repurchase agreement borrowings on a daily basis.

17

(3)Loans

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

		March 31,		December 31,
		2015		2014
		(In thousands)
Commercial and residential real estate	$	1,055,219	$	1,049,315
Construction		72,505		66,634
Commercial		326,679		324,057
Agricultural		10,625		10,625
Consumer		60,008		60,155
SBA		27,419		30,025
Other		2,133		1,002
Total gross loans		1,554,588		1,541,813
Unearned loan fees		(134)		(379)
Loans, held for investment, net of unearned loan fees		1,554,454		1,541,434
Less allowance for loan losses		(22,500)		(22,490)
Net loans, held for investment	$	1,531,954	$	1,518,944

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

		Three Months Ended March 31,
		2015		2014
		(In thousands)
Balance, beginning of period	$	22,490	$	21,005
Provision (credit) for loan losses		(23)		(6)
Loans charged-off		(49)		(407)
Recoveries on loans previously
charged-off		82		958
Balance, end of period	$	22,500	$	21,550

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.

18

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 months ended March 31, 2015 and March 31, 2014. The detail provided for the amount of the allowance for loan losses and loans individually versus collectively evaluated for impairment (i.e., the specific component versus the general 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, 2014	$	19,607	$	39	$	2,844	$	22,490
Charge-offs		(7)		(1)		(41)		(49)
Recoveries		33		6		43		82
Provision (credit)		(11)		(8)		(4)		(23)
Balance as of March 31, 2015	$	19,622	$	36	$	2,842	$	22,500

Balances at March 31, 2015:
Allowance for Loan Losses
Individually evaluated	$	296	$	1	$	1	$	298
Collectively evaluated		19,326		35		2,841		22,202
Total	$	19,622	$	36	$	2,842	$	22,500
Loans
Individually evaluated	$	27,276	$	1	$	45	$	27,322
Collectively evaluated		1,241,143		2,611		283,378		1,527,132
Total	$	1,268,419	$	2,612	$	283,423	$	1,554,454

		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		(8)		(11)		(388)		(407)
Recoveries		890		5		63		958
Provision (credit)		(615)		4		605		(6)
Balance as of March 31, 2014	$	18,742	$	50	$	2,758	$	21,550

Balances at December 31, 2014:
Allowance for Loan Losses
Individually evaluated	$	224	$	1	$	2	$	227
Collectively evaluated		19,383		38		2,842		22,263
Total	$	19,607	$	39	$	2,844	$	22,490
Loans
Individually evaluated	$	26,751	$	25	$	68	$	26,844
Collectively evaluated		1,230,289		2,799		281,502		1,514,590
Total	$	1,257,040	$	2,824	$	281,570	$	1,541,434

19

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.

March 31, 2015		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	$	15,019	$	16,530	$	-	$	15,174	$	53
Construction		986		986		-		493		-
Commercial		-		-		-		47		-
Consumer		310		338		-		342		2
Other		152		472		-		160		-
Total	$	16,467	$	18,326	$	-	$	16,216	$	55
Impaired loans with a related allowance:
Commercial and residential real estate	$	10,289	$	10,536	$	276	$	10,282	$	95
Construction		-		-		-		-		-
Commercial		45		48		1		56		1
Consumer		521		584		21		530		3
Other		-		-		-		-		-
Total	$	10,855	$	11,168	$	298	$	10,868	$	99
Total impaired loans:
Commercial and residential real estate	$	25,308	$	27,066	$	276	$	25,456	$	148
Construction		986		986		-		493		-
Commercial		45		48		1		103		1
Consumer		831		922		21		872		5
Other		152		472		-		160		-
Total impaired loans	$	27,322	$	29,494	$	298	$	27,084	$	154

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December 31, 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	$	15,329	$	16,874	$	-	$	18,792	$	220
Construction		-		-		-		-		-
Commercial		93		103		-		265		10
Consumer		374		391		-		297		10
Other		168		615		-		236		-
Total	$	15,964	$	17,983	$	-	$	19,590	$	240
Impaired loans with a related allowance:
Commercial and residential real estate	$	10,274	$	10,507	$	201	$	3,818	$	425
Construction		-		-		-		-		-
Commercial		67		330		2		248		5
Consumer		539		595		24		673		14
Other		-		-		-		68		-
Total	$	10,880	$	11,432	$	227	$	4,807	$	444
Total impaired loans:
Commercial and residential real estate	$	25,603	$	27,381	$	201	$	22,610	$	645
Construction		-		-		-		-		-
Commercial		160		433		2		513		15
Consumer		913		986		24		970		24
Other		168		615		-		304		-
Total impaired loans	$	26,844	$	29,415	$	227	$	24,397	$	684

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 $164,000 for the three months ended March 31, 2015 and $199,000 for the three months ended March 31, 2014.

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:

March 31, 2015		30-89 Days Past Due		90 Days + Past Due and Still Accruing		Nonaccrual		Total Nonaccrual and Past Due		Total Loans, Held for Investment
		(In thousands)
Commercial and residential
real estate	$	7,154	$	-	$	11,592	$	18,746	$	1,055,127
Construction		-		-		986		986		72,499
Commercial		882		-		-		882		326,651
Consumer		91		-		536		627		60,003
Other		241		-		152		393		40,174
Total	$	8,368	$	-	$	13,266	$	21,634	$	1,554,454

21

December 31, 2014		30-89 Days Past Due		90 Days + Past Due and Still Accruing		Nonaccrual		Total Nonaccrual and Past Due		Total Loans, Held for Investment
		(In thousands)
Commercial and residential
real estate	$	92	$	-	$	11,872	$	11,964	$	1,049,057
Construction		-		-		-		-		66,618
Commercial		1,080		-		18		1,098		323,977
Consumer		66		-		559		625		60,140
Other		143		-		168		311		41,642
Total	$	1,381	$	-	$	12,617	$	13,998	$	1,541,434

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: 

March 31, 2015		Commercial & Residential Real Estate		Construction		Commercial		Consumer		Other		Total
		(In thousands)
Non-classified	$	1,033,297	$	71,519	$	325,455	$	58,875	$	38,980	$	1,528,126
Substandard		21,922		986		1,224		1,133		1,197		26,462
Doubtful		-		-		-		-		-		-
Subtotal		1,055,219		72,505		326,679		60,008		40,177		1,554,588
Less: Unearned loan fees		(92)		(6)		(28)		(5)		(3)		(134)
Loans, held for investment, net
of unearned loan fees	$	1,055,127	$	72,499	$	326,651	$	60,003	$	40,174	$	1,554,454

December 31, 2014		Commercial & Residential Real Estate		Construction		Commercial		Consumer		Other		Total
		(In thousands)
Non-classified	$	1,027,792	$	66,634	$	322,920	$	58,941	$	40,430	$	1,516,717
Substandard		21,523		-		1,137		1,214		1,222		25,096
Doubtful		-		-		-		-		-		-
Subtotal		1,049,315		66,634		324,057		60,155		41,652		1,541,813
Less: Unearned loan fees		(258)		(16)		(80)		(15)		(10)		(379)
Loans, held for investment, net
of unearned loan fees	$	1,049,057	$	66,618	$	323,977	$	60,140	$	41,642	$	1,541,434

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The book balance of troubled debt restructurings (“TDRs”) at March 31, 2015 and December 31, 2014 was $25,446,000 and  $25,903,000, respectively. TDRs are included in impaired loans. Management established approximately $281,000 and $208,000 in specific reserves with respect to these loans as of March 31, 2015 and December 31, 2014, respectively. At March 31, 2015 and December 31, 2014, the Company had an additional $953,000 and $1,038,000, respectively, committed on loans classified as TDRs. 

During the first quarter 2015, management made no loan modifications qualifying as TDRs. 

The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2014:

Three Months Ended March 31, 2014:
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(In thousands)
Commercial and residential
real estate	4	$	211	$	211
Construction	-		-		-
Commercial	-		-		-
Consumer	1		35		35
Other	1		86		86
Total	6	$	332	$	332

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 three months ended March 31, 2015 or March 31, 2014.

(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 March 31, 2015, 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: 

			March 31,		December 31,
	Useful Life		2015		2014
			(In thousands)
Core deposit intangible assets	10 - 15 years	$	62,975	$	62,975
Core deposit intangible assets accumulated amortization			(61,062)		(60,708)
Core deposit intangible assets, net		$	1,913	$	2,267
Customer relationship intangible assets	10 years		5,654		5,654
Customer relationship intangible assets accumulated amortization			(908)		(767)
Customer relationship intangible assets, net		$	4,746	$	4,887
Total other intangible assets, net		$	6,659	$	7,154

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Following is the aggregate amortization expense recognized in each period:

		Three Months Ended March 31,
		2015		2014
		(In thousands)
Amortization expense	$	495	$	591

(5)Borrowings

At March 31, 2015, the Company’s outstanding borrowings were $148,600,000 as compared to $160,300,000 at December 31, 2014.  These borrowings at March 31, 2015 consisted of a  $20,000,000 term note and $128,600,000 of advances on our line of credit, both with the Federal Home Loan Bank (the “FHLB”). At December 31, 2014, outstanding borrowings consisted of the same $20,000,000 term note and $140,300,000 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 $364,385,000 at March 31, 2015 and $385,584,000 at December 31, 2014. The maximum credit allowance for future borrowings, including term notes and advances on the line of credit, was $215,785,000 at March 31, 2015 and $225,284,000 at December 31, 2014.  

The interest rate on the line of credit varies with the federal funds rate, and was 0.25% at March 31, 2015. The Company has one term note with the FHLB with a fixed interest rate of 2.52% and matures on January 23, 2018.

(6) Subordinated Debentures and Trust Preferred Securities

At both March 31, 2015 and December 31, 2014, the balance of the Company’s outstanding subordinated debentures was $25,774,000. As of March 31, 2015 the Company's subordinated debentures bore a weighted average cost of funds of 3.08%.  

The Company’s 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 March 31, 2015, the Company was in compliance with all financial covenants of the subordinated debentures.

At March 31, 2015 and December 31, 2014 the Company had accrued, unpaid interest on its subordinated debentures of approximately $199,000 and $202,000, respectively. 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 25% of capital on an aggregate basis. Any amount that exceeds 25% qualifies as Tier 2 capital. At March 31, 2015, the full $25,000,000 of the TruPS qualified as Tier 1 capital.

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Under the Dodd-Frank Act and a recent joint rule from the Federal Reserve Board, the Office of the Comptroller of the 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 March 31, 2015 (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	7/15/2015	Variable	LIBOR + 2.65	%	2.90	%	7/15/2015
Guaranty Capital Trust III	6/30/2003	10,310	7/7/2033	7/7/2015	Variable	LIBOR + 3.10	%	3.35	%	7/7/2015

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

** On April 7, 2015, the rate on the Guaranty Capital Trust III subordinated debentures reset to 3.35%. On April 15, 2015, the rate on the CenBank Trust III subordinated debentures reset to 2.90%.

(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:

		March 31, 2015		December 31, 2014
		(In thousands)
Commitments to extend credit:
Variable	$	337,174	$	342,496
Fixed		51,753		41,742
Total commitments to extend credit	$	388,927	$	384,238
Standby letters of credit	$	10,286	$	11,474

At March 31, 2015, the rates on the fixed rate commitments to extend credit ranged from 2.25% to 7.00%.

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.

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 

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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.

Fair values of our securities are determined though the utilization of evaluated pricing models that vary by asset class and incorporate available market information (Level 2). The evaluated pricing models apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to prepare evaluations. These models assess interest rate impact, develop prepayment scenarios and take into account market conventions. For securities where routine valuation techniques are not used 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 values 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 inputs). The Company considers the value of the swap to be highly sensitive to fluctuations in interest rates.

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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 March 31, 2015
State and municipal securities	$	-	$	2,686	$	32,037	$	34,723
Mortgage-backed securities – agency /
residential		-		165,374		-		165,374
Mortgage-backed securities – private /
residential		-		411		-		411
Trust preferred securities		-		18,615		-		18,615
Corporate securities		-		68,053		-		68,053
Collateralized loan obligations		-		8,524				8,524
Interest rate swaps - cash flow hedge		-		(2,452)		-		(2,452)
Assets/(Liabilities) at December 31, 2014
State and municipal securities	$	-	$	17,082	$	32,317	$	49,399
Mortgage-backed securities – agency /
residential		-		201,902		-		201,902
Mortgage-backed securities – private /
residential		-		412		-		412
Asset-backed securities		-		8,708		-		8,708
Trust preferred securities		-		18,075		-		18,075
Corporate securities		-		64,717		-		64,717
Collateralized loan obligations		-		2,933				2,933
Interest rate swaps - cash flow hedge		-		(1,526)		-		(1,526)

There were no transfers of financial assets and liabilities among Level 1, Level 2 and Level 3 during the three months ended March 31, 2015.

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 months ended March 31, 2015 and March 31, 2014:  

		State and Municipal Securities
		Three Months Ended March 31, 2015
		(In thousands)
Beginning balance December 31, 2014	$	32,317
Total unrealized gains (losses) included in:
Net income		5
Other comprehensive income		(5)
Sales, calls and prepayments		-
Transfer to held to maturity		(280)
Transfers in and (out) of Level 3		-
Balance end of period	$	32,037

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		State and Municipal Securities
		Three Months Ended March 31, 2014
		(In thousands)
Beginning balance December 31, 2013	$	24,167
Total unrealized gains (losses) included in:
Net income (loss)		-
Other comprehensive income (loss)		479
Sales, calls and prepayments		-
Transfers in and (out) of Level 3		-
Balance end of period	$	24,646

For the three months ended March 31, 2015 and March 31, 2014, 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. For the three months ended March 31, 2015, the amount included in net income in the above table consisted of the accretion of any discount on the Level 3 securities.

The following tables present quantitative information about Level 3 fair value measurements on the Company’s state and municipal securities at March 31, 2015 and December 31, 2014:

March 31, 2015		Fair Value	Valuation Technique	Unobservable Inputs	Range
		(In thousands)
State and municipal securities	$	32,037	discounted cash flow	discount rate	1.83%-4.75%
Total	$	32,037

December 31, 2014		Fair Value	Valuation Technique	Unobservable Inputs	Range
		(In thousands)
State and municipal securities	$	32,037	discounted cash flow	discount rate	1.75%-4.75%
State and municipal securities		280	matrix pricing	discount rate or yield	N/A*
Total	$	32,317

* 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.

Financial Assets and Liabilities Measured on a Nonrecurring Basis

Financial assets and liabilities measured at fair value on a nonrecurring basis were not significant as of March 31, 2015 and December 31, 2014.  

Nonfinancial Assets and Liabilities Measured on a Nonrecurring Basis

Nonfinancial assets and liabilities measured at fair value on a nonrecurring basis were not significant as of March 31, 2015 and December 31, 2014.

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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 March 31, 2015:
		Carrying Amount		Level 1		Level 2		Level 3		Total
		(In thousands)
Financial assets:
Cash and cash equivalents	$	31,649	$	31,649	$	-	$	-	$	31,649
Securities available for sale		295,700		-		263,663		32,037		295,700
Securities held to maturity		141,969		-		140,734		4,540		145,274
Bank stocks		14,602		n/a		n/a		n/a		n/a
Loans held for sale		700		770		-		-		770
Loans held for investment, net		1,531,954		-		-		1,523,099		1,523,099
Accrued interest receivable		6,430		-		6,430		-		6,430
Financial liabilities:
Deposits	$	1,721,881	$	-	$	1,721,200	$	-	$	1,721,200
Federal funds purchased and sold under
agreements to repurchase		23,922		-		23,922		-		23,922
Short-term borrowings		128,600		-		128,600		-		128,600
Subordinated debentures		25,774		-		-		18,424		18,424
Long-term borrowings		20,000		-		20,759		-		20,759
Accrued interest payable		399		-		399		-		399
Interest rate swap - cash flow hedge		2,452		-		2,452		-		2,452

				Fair Value Measurements at December 31, 2014:
		Carrying Amount		Level 1		Level 2		Level 3		Total
		(In thousands)
Financial assets:
Cash and cash equivalents	$	32,441	$	32,441	$	-	$	-	$	32,441
Securities available for sale		346,146		-		313,829		32,317		346,146
Securities held to maturity		88,514		-		86,551		4,258		90,809
Bank stocks		14,822		n/a		n/a		n/a		n/a
Loans held for investment, net		1,518,944		-		-		1,511,289		1,511,289
Accrued interest receivable		5,934		-		5,934		-		5,934
Financial liabilities:
Deposits	$	1,685,324	$	-	$	1,684,011	$	-	$	1,684,011
Federal funds purchased and sold under
agreements to repurchase		33,508		-		33,508		-		33,508
Short-term borrowings		140,300		-		140,300		-		140,300
Subordinated debentures		25,774		-		-		18,351		18,351
Long-term borrowings		20,000		-		20,735		-		20,735
Accrued interest payable		375		-		375		-		375
Interest rate swap - cash flow hedge		1,526		-		1,526		-		1,526

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

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 though the utilization of evaluated pricing models that vary by asset class and incorporate available market information (Level 2). The evaluated pricing models apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to prepare evaluations. These models assess interest rate impact, develop prepayment scenarios and take into account market conventions. 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 when specific reserves are attributed to these loans because the present value of expected cash flows or the net realizable value of collateral is less than the impaired loan’s recorded investment. 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, passbook 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 flow 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 90 days approximate their fair values (Level 2).

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(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).

(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 or receipts 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 March 31, 2015 and December 31, 2014.

	Balance		Fair Value
	Sheet		March 31,		December 31,
	Location		2015		2014
			(In thousands)
Derivatives designated as hedging instruments
Assets:
Interest rate swaps	Other assets	$	-	$	-
Liabilities:
Interest rate swaps	Other liabilities	$	2,452	$	1,526

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 these objectives, 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

31

variable amounts from a counterparty in exchange for the Company making fixed payments. As of March 31, 2015, 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.

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 months ended March 31, 2015, 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, if LIBOR remains near current levels, approximately $411,000 will be reclassified from AOCI into interest expense as one of our $25,000,000 cash flow hedges is expected 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 months ended March 31, 2015 and March 31, 2014:

	Income		Three Months Ended
Interest Rate Swaps with	Statement		March 31,
Hedge Designation	Location		2015		2014
Gain or (loss) recognized in OCI on
derivative	Not applicable	$	(574)	$	(175)
Gain or (loss) reclassified from
accumulated OCI into income
(ineffective portion)	Interest expense		-		-

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 as of March 31, 2015 had posted $5,742,000 against its obligations under these agreements. If the Company had breached any of these provisions at March 31, 2015, 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, which expired by its terms on April 4, 2015, the Company’s Board of Directors granted stock-based compensation awards to nonemployee directors, key employees, consultants and prospective employees under the terms described in the Incentive Plan. On March 4, 2015 the Company’s Board of Directors approved the Guaranty Bancorp 2015 Long-Term Incentive Plan, subject to stockholder approval at the annual meeting of stockholders, scheduled for May 5, 2015. The 2015 Long Term Incentive Plan, if approved, will

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also provide for the grant of stock-based awards to nonemployee directors, key employees, consultants and prospective employees.  

The Incentive Plan allowed and the 2015 Long-Term Incentive Plan, if approved in its current form will allow, for the grant of stock-based compensation awards in the form of options, restricted stock awards, restricted stock unit awards, performance stock awards, stock appreciation rights and other equity based awards. Likewise, the Incentive Plan provided, and the 2015 Long-Term 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 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 authorized 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 March 31, 2015 and December 31, 2014, there were outstanding awards representing 676,017 and 620,075 shares of unvested stock, with 442,272 and 573,645 shares remaining available for grant under the Incentive Plan, respectively. When the Incentive Plan expired by its terms, 442,272 shares remained available for grant under the plan. Whether or not the 2015 Long-Term Incentive Plan is approved by the Company’s stockholders, those remaining shares will not be available for issuance under the new plan. Although the Incentive Plan expired by its terms on April 4, 2015, awards previously granted under the Incentive Plan will remain outstanding in accordance with their terms.

Of the 676,017 shares of unvested awards at March 31, 2015, approximately 636,000 shares are expected to vest. At March 31, 2015, there were 326,723 shares of restricted stock outstanding that were subject to a performance condition. Management expects that approximately 304,000 of these shares will vest and that the remaining shares will expire unvested. The performance shares that are expected to vest relate to awards granted to various key employees from February 2013 through February 2015. The vesting of these performance shares is contingent upon the meeting of certain return on asset performance measures. The performance-based shares awarded in 2013, 2014  and 2015 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.  As of March 31, 2015, management expected that approximately 91% of the 2013 performance awards will vest and that all of the performance awards made in 2014 and 2015 will vest (not including expected forfeitures), 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 three months ended March 31, 2015 is presented in the table below:

	Shares		Weighted Average Fair Value on Award Date
Unearned at January 1, 2015	620,075	$	12.05
Awarded	144,241		14.38
Forfeited	(12,868)		12.18
Vested	(75,431)		10.11
Unearned at March 31, 2015	676,017	$	12.76

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The Company recognized $746,000 and  $459,000 in stock-based compensation expense for services rendered for the three months ended March 31, 2015 and March 31, 2014, respectively. The total income tax benefit recognized for share-based compensation arrangements was $284,000 and $174,000  for the three months ended March 31, 2015 and March 31, 2014, respectively. At March 31, 2015, compensation cost of $5,999,000 related to unvested awards not yet recognized is expected to be recognized over a weighted-average period of 2.3 years. The fair value of awards that vested in the three months ended March 31, 2015 was approximately $1,104,000.

(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, the ratios as of March 31, 2015 were calculated in accordance with the requirements of Basel III, which became effective January 1, 2015:

	Ratio at March 31, 2015		Ratio at December 31, 2014		Minimum Capital Requirement at March 31, 2015		Minimum Requirement for "Well-Capitalized" Institution at March 31, 2015
Common Equity Tier 1 Risk-Based Capital Ratio
Consolidated	11.32	%	N/A		4.50	%	N/A
Guaranty Bank and Trust Company	12.45	%	N/A		4.50	%	6.50	%
Tier 1 Risk-Based Capital Ratio
Consolidated	12.54	%	12.60	%	6.00	%	N/A
Guaranty Bank and Trust Company	12.45	%	12.33	%	6.00	%	8.00	%
Total Risk-Based Capital Ratio
Consolidated	13.75	%	13.85	%	8.00	%	N/A
Guaranty Bank and Trust Company	13.67	%	13.58	%	8.00	%	10.00	%
Leverage Ratio
Consolidated	11.09	%	11.10	%	4.00	%	N/A
Guaranty Bank and Trust Company	11.02	%	10.86	%	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, 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, 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 to maintain unsecured federal funds lines and secured lines of credit with correspondent banks.

· The effects of inflation and interest rate, securities market, commodity 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 the 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 acquisitions, including our ability to identify suitable future acquisition candidates, success or failure in the integration of their operations and the ability to enter new markets successfully and capitalize on growth opportunities. 35  

· 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 (the “FASB”) 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 2014 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 banking and other financial services throughout our targeted Colorado markets to consumers and small to medium-sized businesses, including the owners and employees of those businesses. Our line of banking products and services includes accepting demand and time deposits and originating commercial loans, real estate loans (including jumbo mortgages), SBA loans and consumer loans. The Bank, PCM and CHIA also provide wealth management solutions, including trust and investment management 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, 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 building growth 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 our existing footprint, 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

36

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 March 31,
								Change
								Favorable
		2015			2014			(Unfavorable)
		(In thousands, except for share data and ratios)
Results of Operations:
Interest income	$	19,854		$	17,881		$	1,973
Interest expense		1,077			1,622			545
Net interest income		18,777			16,259			2,518
Provision (credit) for
loan losses		(23)			(6)			17
Net interest income after
provision for loan losses		18,800			16,265			2,535
Noninterest income		4,115			3,658			457
Noninterest expense		15,270			14,638			(632)
Income before income taxes		7,645			5,285			2,360
Income tax expense		2,561			1,743			(818)
Net income	$	5,084		$	3,542		$	1,542
Common Share Data:
Basic earnings per common share	$	0.24		$	0.17		$	0.07
Diluted earnings per common share	$	0.24		$	0.17		$	0.07
Average common shares outstanding		21,037,325			20,936,295			101,030
Diluted average common shares outstanding		21,165,433			21,028,722			136,711
Average equity to average assets		9.96	%		10.14	%		(1.8)	%
Return on average equity		9.81	%		7.43	%		32.0	%
Return on average assets		0.98	%		0.75	%		30.7	%
Dividend payout ratio		41.40	%		29.54	%		40.1	%

	March 31,		March 31,		Percent
	2015		2014		Change
Selected Balance Sheet Ratios:
Total risk-based capital to
risk-weighted assets	13.75	%	14.75	%	(6.7)	%
Leverage ratio	11.09	%	11.65	%	(4.8)	%
Loans(1), net of unearned loan fees
to deposits	90.28	%	88.87	%	1.6	%
Allowance for loan losses to
loans(1), net of unearned loan fees	1.45	%	1.58	%	(8.2)	%
Allowance for loan losses to
nonperforming loans	169.61	%	147.55	%	15.0	%
Classified assets to allowance
and Tier 1 capital (2)	11.26	%	11.59	%	(2.8)	%
Noninterest bearing deposits to
total deposits	38.32	%	37.42	%	2.4	%
Time deposits to total deposits	11.20	%	11.72	%	(4.4)	%
(1)Loans held for investment
(2) Based on Bank only Tier 1 capital

First quarter 2015 net income increased $1.5 million to $5.1 million as compared to $3.5 million for the same quarter in 2014. The $1.5 million increase in net income was primarily the result of a $2.0 million increase in interest income, a $0.5 million decrease in interest expense and a $0.5 million increase in noninterest income, partially offset by a $0.6 million increase in noninterest expense and a $0.8 million increase in income taxes. The

37

$2.0 million increase in interest income was driven by a $198.5 million increase in average loans for the quarter ended March 31, 2015 combined with a $0.7 million increase in loan fees as compared to the first quarter 2014. The $0.5 million decrease in interest expense during the first quarter 2015, as compared to the same quarter in 2014, was mostly due to the prepayment of $90.0 million of high-cost Federal Home Loan Bank (FHLB) term advances during the fourth quarter 2014. The $0.5 million increase in noninterest income was primarily due to an increase in investment management and trust income. The $0.6 million increase in noninterest expense in the first quarter 2015, as compared to the first quarter 2014, included a $0.5 million increase in salaries and employee benefits driven by a 6.2 increase in average full-time equivalent employees and an increase in equity compensation expense primarily due to an increase in average shares outstanding. The $0.8 million increase in income tax expense in the first quarter 2015, as compared to the same quarter in 2014, was primarily a result of growth in pre-tax income over the same period.

Net Interest Income and Net Interest Margin

Net interest 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 March 31, 2015 and the prior four quarters:

Table 2

		Three Months Ended
		March 31,			December 31,			September 30,			June 30,			March 31,
		2015			2014			2014			2014			2014
		(Dollars in thousands)
Net interest income	$	18,777		$	17,680		$	17,809		$	17,065		$	16,259
Interest rate spread		3.72	%		3.40	%		3.47	%		3.47	%		3.49	%
Net interest margin		3.84	%		3.61	%		3.67	%		3.66	%		3.69	%
Net interest margin, fully tax
equivalent		3.93	%		3.69	%		3.75	%		3.75	%		3.78	%
Average cost of interest-bearing
liabilities		0.35	%		0.56	%		0.55	%		0.55	%		0.57	%
Average cost of deposits
(including noninterest-bearing
deposits)		0.16	%		0.16	%		0.16	%		0.16	%		0.15	%

During the first quarter 2015, net interest margin increased 23 basis points to 3.84%, as compared to the fourth quarter 2014 and increased 15 basis points, as compared to the first quarter 2014. The increase in the net interest margin during the first quarter 2015, as compared to the fourth quarter 2014, was primarily the result of an eight basis point increase in loan yields combined with a 21 basis point decrease in the average cost of interest-bearing liabilities. The increase in loan yields during the first quarter 2015, as compared to the fourth quarter 2014 was largely due to net fees recognized on the early payoff of loans during the same period. The decline in the cost of interest-bearing liabilities during the first quarter 2015, as compared to the fourth quarter 2014, was mostly due to the prepayment of $90.0 million in FHLB term advances with a weighted average cost of 3.07% in the fourth quarter 2014. As compared to the first quarter 2014, the increase in net interest margin during the first quarter 2015 was primarily due to a 22 basis point decline in the cost of interest-bearing liabilities mostly due to the prepayment of FHLB term advances during the fourth quarter 2014.

Net interest income increased by $1.1 million to $18.8 million in the first quarter 2015, as compared to the fourth quarter 2014, and increased $2.5 million as compared to the first quarter 2014. The $1.1 million increase in net interest income in the first quarter 2015, as compared to the fourth quarter 2014, was due to a $0.5 million increase in interest income, primarily due to an increase in loan fees and a $0.6 million decrease in interest expense, mostly due to the prepayment of FHLB term advances during the fourth quarter 2014. The $2.5 million increase in net interest income in the first quarter 2015, as compared to the first quarter 2014, was due to a $2.0 million increase in interest income, driven by a 14.9% increase in average loan balances and a $0.5 million decrease in interest expense, mostly due to the prepayment of FHLB term advances during the fourth quarter 2014.

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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 3

		Three Months Ended March 31,
		2015						2014
		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)	$	1,529,619	$	16,806	4.46	%	$	1,331,154	$	14,734	4.49	%
Investment securities (1)
Taxable		348,453		2,123	2.47	%		365,422		2,332	2.59	%
Tax-exempt		85,511		702	3.33	%		73,172		645	3.57	%
Bank Stocks (4)		14,800		222	6.08	%		15,848		169	4.32	%
Other earning assets		2,334		1	0.17	%		2,182		1	0.19	%
Total interest-earning assets		1,980,717		19,854	4.07	%		1,787,778		17,881	4.06	%
Non-earning assets:
Cash and due from banks		26,145						24,415
Other assets		101,904						95,586
Total assets	$	2,108,766					$	1,907,779
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Interest-bearing demand and NOW	$	336,658	$	79	0.10	%	$	332,905	$	83	0.10	%
Money market		376,805		213	0.23	%		331,316		212	0.26	%
Savings		140,330		38	0.11	%		116,026		31	0.11	%
Time certificates of deposit		191,537		338	0.72	%		180,195		254	0.57	%
Total interest-bearing deposits		1,045,330		668	0.26	%		960,442		580	0.24	%
Borrowings:
Repurchase agreements		25,938		11	0.17	%		21,852		8	0.15	%
Federal funds purchased (5)		40		-	0.82	%		3		-	0.81	%
Subordinated debentures		25,774		199	3.13	%		25,774		198	3.12	%
Borrowings		140,866		199	0.57	%		148,553		836	2.28	%
Total interest-bearing liabilities		1,237,948		1,077	0.35	%		1,156,624		1,622	0.57	%
Noninterest bearing liabilities:
Demand deposits		647,184						548,272
Other liabilities		13,524						9,434
Total liabilities		1,898,656						1,714,330
Stockholders' Equity		210,110						193,449
Total liabilities and stockholders' equity	$	2,108,766					$	1,907,779
Net interest income			$	18,777					$	16,259
Net interest margin					3.84	%					3.69	%

(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 3.93% and 3.78% for the three months ended March 31, 2015 and March 31, 2014, 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 $0.2 million for the three months ended March 31, 2015 and March 31, 2014, 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 first quarter 2015 and the first quarter 2014 rounded to zero. 

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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 4

		Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014
		Net Change		Rate		Volume
		(In thousands)
Interest income:
Gross Loans, net of unearned
loan fees	$	2,072	$	(108)	$	2,180
Investment Securities
Taxable		(209)		(103)		(106)
Tax-exempt		57		(39)		96
Bank Stocks		53		63		(10)
Total interest income		1,973		(187)		2,160
Interest expense:
Deposits:
Interest-bearing demand
and NOW		(4)		(5)		1
Money market		1		(6)		7
Savings		7		-		7
Time certificates of deposit		84		67		17
Repurchase agreements		3		1		2
Subordinated debentures		1		1		-
Borrowings		(637)		(594)		(43)
Total interest expense		(545)		(536)		(9)
Net interest income	$	2,518	$	349	$	2,169

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 first quarter 2015, the fourth quarter 2014 and the first quarter 2014, we recorded a credit provision for loan losses which was less than $0.1 million.  Management considered several factors 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 March 31, 2015.

Net recoveries in the first quarter 2015 were less than $0.1 million, as compared to net recoveries of $0.1 million in the fourth quarter 2014 and net recoveries of $0.6 million in the first quarter 2014. 

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

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Noninterest Income

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

Table 5

		Three Months Ended
		March 31, 2015		December 31, 2014		September 30, 2014		June 30, 2014		March 31, 2014
		(In thousands)
Noninterest income:
Deposit service and other fees	$	2,035	$	2,358	$	2,290	$	2,352	$	2,066
Investment management and trust		1,334		1,231		1,279		962		908
Increase in cash surrender value of
life insurance		408		418		291		293		293
Gain (loss) on sale of securities		-		-		3		-		25
Gain on sale of SBA loans		280		447		186		28		137
Other		58		408		289		202		229
Total noninterest income	$	4,115	$	4,862	$	4,338	$	3,837	$	3,658

Noninterest income increased $0.5 million to $4.1 million in the first quarter 2015, as compared to the first quarter 2014 and decreased $0.7 million, as compared to the fourth quarter 2014. The $0.5 million increase in noninterest income in the first quarter 2015, as compared to the first quarter 2014, was mostly due to a $0.4 million increase in investment management and trust fees, primarily attributable to the July 16, 2014 acquisition of CHIA. In addition, income from bank-owned life insurance (BOLI) and gains on sales of SBA loans both increased $0.1 million each during the first quarter 2015 as compared to the same quarter in 2014.

At March 31, 2015, assets under management (AUM) were $706.8 million, a 42.7% increase as compared to March 31, 2014 and a 14.1% annualized increase as compared to December 31, 2014.

The $0.7 million decrease in noninterest income in the first quarter 2015, as compared to the fourth quarter 2014, was primarily due to a $0.3 million decrease in deposit service and other fees, a $0.4 million decrease in other noninterest income and a $0.2 million decrease in gains on sales of SBA loans. The decline in deposit service and other fees was mostly related to lower debt card interchange income and lower nonsufficient funds income received during the first quarter 2015, as compared to the fourth quarter 2014. The decrease in other noninterest income in the first quarter 2015, as compared to the fourth quarter 2014, was primarily related to incentives related to a contract renewal recorded during the fourth quarter 2014.

Noninterest Expense

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

Table 6

		Three Months Ended
		March 31, 2015		December 31, 2014		September 30, 2014		June 30, 2014		March 31, 2014
		(In thousands)
Noninterest expense:
Salaries and employee benefits	$	8,604	$	8,434	$	8,135	$	8,122	$	8,075
Occupancy expense		1,697		1,544		1,583		1,633		1,548
Furniture and equipment		730		698		693		673		695
Amortization of intangible assets		495		654		670		591		591
Other real estate owned		41		142		147		22		56
Insurance and assessment		565		576		594		605		580
Professional fees		829		927		890		811		892
Prepayment penalty on debt
extinguishment		-		5,459		-		-		-
Impairment of long-lived assets		-		76		-		110		-
Other general and administrative		2,309		2,524		2,447		2,348		2,201
Total noninterest expense	$	15,270	$	21,034	$	15,159	$	14,915	$	14,638

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Noninterest expense decreased $5.8 million to $15.3 million in the first quarter 2015, as compared to $21.0 million in the fourth quarter 2014 and increased $0.6 million, as compared to the first quarter 2014.

First quarter 2015 noninterest expense decreased, as compared to the fourth quarter 2014 primarily due to the prepayment penalty of $5.5 million incurred in connection with the prepayment of FHLB term advances in the fourth quarter 2014. In addition, amortization of intangible assets decreased $0.2 million due to scheduled declines in the accelerated amortization of the core deposit intangible assets and other general and administrative expense decreased $0.2 million, mostly due to a decrease in debit card interchange expense during the first quarter 2015 as compared to the fourth quarter 2014. Partially offsetting these declines in noninterest expense was a $0.2 million increase in salaries and employee benefits during the first quarter 2015, as compared to the fourth quarter 2014, mostly due to increased payroll taxes as a result of the timing of the payroll cycle.

First quarter 2015 noninterest expense increased $0.6 million, as compared to the first quarter 2014 primarily due to a $0.3 million increase in salaries and a $0.3 million increase in equity compensation expense. The primary driver for the increase in salaries was an increase of 6.2 average full-time equivalent employees in the first quarter 2015 as compared to the first quarter 2014. The increase in equity compensation expense was mostly due to an increase in average unvested shares outstanding during the first quarter 2015 as compared to the first quarter 2014.

Income Taxes

Income tax expense was $2.6 million for the first three months of 2015 as compared to $1.7 million for the first three months of 2014, primarily as a result of the increase in pre-tax income as well as an increase in our effective tax rate to 33.5%. Our effective tax rate was approximately 33.0% for the same period in 2014. 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 7

		March 31,		December 31,		September 30,		June 30,		March 31,
		2015		2014		2014		2014		2014
		(In thousands)
Cash and cash equivalents	$	31,649	$	32,441	$	46,617	$	44,124	$	35,311
Total investments		452,271		449,482		456,118		465,717		470,847
Total loans		1,555,154		1,541,434		1,482,268		1,438,089		1,362,312
Total assets		2,145,452		2,124,778		2,077,939		2,038,890		1,961,392
Earning assets		2,010,489		1,992,199		1,960,404		1,908,840		1,836,049
Deposits		1,721,881		1,685,324		1,662,598		1,552,676		1,533,010

At March 31, 2015, total assets were $2.1 billion, reflecting a $20.7 million increase as compared to December 31, 2014 and a $184.1 million increase as compared to March 31, 2014. The increase in total assets during the first quarter 2015 includes a $13.7 million increase in loans, a $5.3 million increase in BOLI and a $2.8 million increase in investments. During the first quarter 2015, we transferred approximately $49.1 million in investments classified as available-for-sale to held-to-maturity. The increase in assets during the first quarter 2015 was funded by a $36.6 million increase in deposits.

As compared to March 31, 2014, the increase in total assets of $184.1 million was primarily due to a $192.8 million increase in loans, partially offset by an $18.6 million decrease in investments. The increase in assets at March 31, 2015 as compared to March 31, 2014 was mostly funded by a $188.9 million increase in deposits.  

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

Table 8

		March 31,		December 31,		September 30,		June 30,		March 31,
		2015		2014		2014		2014		2014
		(In thousands)
Commercial and residential real estate	$	1,055,219	$	1,049,315	$	1,001,174	$	949,148	$	904,124
Construction		72,505		66,634		89,787		78,394		67,862
Commercial		326,679		324,057		286,545		307,629		288,865
Consumer		60,008		60,155		60,492		59,610		60,010
Other		40,177		41,652		44,866		43,865		42,326
Total gross loans		1,554,588		1,541,813		1,482,864		1,438,646		1,363,187
Unearned loan fees		(134)		(379)		(596)		(812)		(875)
Loans, held for investment, net of
unearned loan fees		1,554,454		1,541,434		1,482,268		1,437,834		1,362,312
Less allowance for loan losses		(22,500)		(22,490)		(22,350)		(22,155)		(21,550)
Net loans, held for investment	$	1,531,954	$	1,518,944	$	1,459,918	$	1,415,679	$	1,340,762

The following table presents the changes in our loan balances (including loans held for sale) at the dates indicated:

Table 9

		March 31,		December 31,		September 30,		June 30,		March 31,
		2015		2014		2014		2014		2014
		(In thousands)
Beginning balance	$	1,541,434	$	1,482,268	$	1,438,089	$	1,362,312	$	1,320,424
New credit extended		95,738		106,718		93,215		107,484		96,999
Net existing credit advanced		57,900		71,815		78,829		54,169		36,492
Net paydowns and maturities		(141,983)		(119,854)		(127,633)		(87,095)		(89,611)
Charge-offs and other		2,065		487		(232)		1,219		(1,992)
Loans, net of unearned loan fees	$	1,555,154	$	1,541,434	$	1,482,268	$	1,438,089	$	1,362,312
Net change - loans outstanding	$	13,720	$	59,166	$	44,179	$	75,777	$	41,888

During the first quarter 2015, loans held for investment, net of unearned fees grew $13.7 million, comprised of a $5.9 million increase in commercial and residential real estate, a $5.9 million increase in construction loans and a $2.6 million increase in commercial loans, partially offset by a $2.6 million decrease in SBA loans. First quarter 2015 net loan growth consisted of $153.6 million in new loans and net advances on existing loans, partially offset by $142.0 million in net loan paydowns and maturities. The net loan paydowns and maturities during the first quarter 2015 exceeded every quarter in the prior five years, primary as a result of economic conditions in Colorado. In addition to contractual loan principal payments and maturities, the first quarter 2015 included $41.5 million in early payoffs related to the sale of the borrower’s assets, $18.8 million in paydowns related to revolving line of credit fluctuations, $9.8 million related to paydowns of energy-related loans, $6.6 million in early payoffs of jumbo mortgages and $2.4 million in paydowns on classified or watch loans.

As compared to March 31, 2014, loans held for investment, net of unearned fees increased by $192.8 million, or 14.2 %. The net loan growth was primarily comprised of a $151.1 million increase in commercial and residential real estate loans, including a $33.0 million increase in 1-4 family residential loans and a $37.8 million increase in commercial loans. At March 31, 2015, our commercial and residential real estate portfolio included $262.0 million of 1-4 family residential loans. The utilization rate on commercial lines of credit was 37.8% at March 31, 2015, as compared to 41.0% at December 31, 2014 and 40.7% at March 31, 2014. At March 31, 2015 our commercial loan portfolio included $45.3 million in energy-related loans, less than 3% of our total loan portfolio, and was comprised primarily of exploration and production loans, with relatively equal exposure to oil and gas.

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 multifamily 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,

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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 50% of capital at March 31, 2015, as compared to 49% at December 31, 2014 and 50% at March 31, 2014. For the Bank, total commercial real estate loans represented 317% of capital at March 31, 2015, as compared to 324% at December 31, 2014 and 300% at March 31, 2014. Further, the Bank’s commercial real estate loan portfolio increased 41.8% during the preceding 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 March 31, 2015, we did not have any significant concentrations in any particular industry.

Nonperforming Assets and Other Impaired Loans

Credit risk related to nonperforming assets is inherent in lending activities. To manage this risk, we utilize routine monitoring procedures and take prompt corrective action when necessary. We employ a risk rating system that identifies the potential risk 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 when they become 90 days or more past due or at such earlier time as management determines timely recognition of interest to be in doubt. Accrual of interest is discontinued on a loan when we believe, 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 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 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 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 10

		Quarter Ended
		March 31,			December 31,			September 30,			June 30,			March 31,
		2015			2014			2014			2014			2014
		(Dollars in thousands)
Nonaccrual loans and leases	$	1,876		$	941		$	1,137		$	1,501		$	11,832
Nonperforming troubled debt
restructurings		11,390			11,676			12,100			12,383			2,773
Accruing loans past due 90 days or more (1)		-			-			-			-			-
Total nonperforming loans	$	13,266		$	12,617		$	13,237		$	13,884		$	14,605
Other real estate owned and foreclosed
assets		2,175			2,175			3,526			4,373			4,419
Total nonperforming assets	$	15,441		$	14,792		$	16,763		$	18,257		$	19,024
Total classified assets	$	28,637		$	27,271		$	32,578		$	35,010		$	27,176
Nonperforming loans	$	13,266		$	12,617		$	13,237		$	13,884		$	14,605
Performing troubled debt restructurings		14,056			14,227			17,634			8,318			5,757
Allocated allowance for loan losses		(298)			(227)			(70)			(124)			(104)
Net carrying amount of impaired loans	$	27,024		$	26,617		$	30,801		$	22,078		$	20,258
Accruing loans past due 30-89 days (1)	$	8,368		$	1,381		$	458		$	1,236		$	432
Allowance for loan losses	$	22,500		$	22,490		$	22,350		$	22,155		$	21,550
For the Three Months Ended:
Loans charged-off	$	49		$	73		$	80		$	63		$	407
Recoveries		(82)			(214)			(278)			(644)			(958)
Net charge-offs	$	(33)		$	(141)		$	(198)		$	(581)		$	(551)
Provision (credit) for loan losses	$	(23)		$	(1)		$	(3)		$	24		$	(6)
Loan Portfolio Ratios:
Allowance for loan losses to loans, net
of unearned loan fees (2)		1.45	%		1.46	%		1.51	%		1.54	%		1.58	%
Allowance for loan losses to
nonperforming loans		169.61	%		178.25	%		168.84	%		159.57	%		147.55	%
Annualized net charge-offs to average
loans		(0.01)	%		(0.04)	%		(0.05)	%		(0.17)	%		(0.17)	%
Nonperforming assets to total assets		0.72	%		0.70	%		0.81	%		0.90	%		0.97	%
Nonperforming loans to loans, net
of unearned loan fees (2)		0.85	%		0.82	%		0.89	%		0.97	%		1.07	%
Loans 30-89 days past due to loans, net
of unearned loan fees (2)		0.54	%		0.09	%		0.03	%		0.09	%		0.03	%
Texas ratio (3)		6.07	%		6.01	%		6.89	%		7.60	%		8.11	%
Classified asset ratio (4)		11.26	%		11.08	%		13.39	%		14.58	%		11.59	%
(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 continues to be current with respect to payments.
(2) Loans, net of unearned loan fees, exclude loans held for sale.
(3) Texas ratio defined as total NPAs divided by subsidiary bank only Tier 1 Capital plus allowance for loan losses.
(4) 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 March 31, 2015 classified assets comprised 11.3% of bank level capital and allowance for loan losses; compared to 11.1% at December 31, 2014 and 11.6% at March 31, 2014. The increase in this ratio during the first quarter 2015, as compared to the fourth quarter 2014 was mostly the result of the downgrade of a $1.0 million construction loan. The decrease in the ratio as compared to March 31, 2014 was primarily the result of an increase in bank-level capital, primarily due to net income recorded over the preceding 12 months, partially offset by a $1.5 million increase in classified assets.

During the first quarter 2015, nonperforming loans increased $0.6 million as compared to December 31, 2014 and decreased $1.3 million as compared to March 31, 2014. Nonperforming loans at March 31, 2015 include one out-of-state loan participation with a balance of $9.8 million. As of March 31, 2015, no additional funds were committed to be advanced in connection with non-performing loans.

The increase in loans past due 30-89 days during the first quarter 2015, as compared to the fourth quarter 2014, was mostly due to a $6.2 million accruing loan that matured during the first quarter 2015 and which has been subsequently renewed in April 2015.

Net recoveries in the first quarter 2014 were immaterial as compared to $0.1 million in net recoveries in the fourth quarter 2014 and $0.6 million in net recoveries in the first quarter 2014.

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 $13.2 million at March 31, 2015, as compared to $12.5 million at December 31, 2014 and $8.2 million at March 31, 2014. The primary cause of the increase in accruing classified loans between March 31, 2014 and March 31, 2015 was a single $8.9 million loan secured by a commercial shopping center that was downgraded to substandard during the second quarter 2014.

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 $2.2 million at March 31, 2015 and at December 31, 2014 as compared to $4.4 million at March 31, 2014. The balance of OREO at March 31, 2015 was comprised of six separate properties, of which $1.8 million was attributable to land and $0.4 million was attributable to commercial real estate. The balance of OREO at March 31, 2014, was comprised of 11 separate properties, of which $2.9 million was land and $1.5 million was commercial real estate.

As of March 31, 2015 we had $25.4 million of loans with terms that were modified in troubled debt restructurings (“TDRs”), with a total allocated allowance for loan loss of $0.3 million. As of December 31, 2014, we had $25.9 million of loans with terms that were modified in TDRs, with a total allocated allowance for loan loss of $0.2 million. At March 31, 2015 we had $1.0 million 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 11 

		March 31,		December 31,		September 30,		June 30,		March 31,
		2015		2014		2014		2014		2014
		(In thousands)
Troubled Debt Restructurings (TDRs):
Performing TDRs	$	14,056	$	14,227	$	17,634	$	8,318	$	5,757
Allocated allowance for loan losses
on performing TDRs		(266)		(186)		(24)		(29)		(37)
Net investment in performing TDRs	$	13,790	$	14,041	$	17,610	$	8,289	$	5,720
Nonperforming TDRs	$	11,390	$	11,676	$	12,100	$	12,383	$	2,773
Allocated allowance for loan losses
on nonperforming TDRs		(15)		(22)		(24)		(41)		(37)
Net investment in nonperforming TDRs	$	11,375	$	11,654	$	12,076	$	12,342	$	2,736

The following provides a rollforward of TDRs for the three month periods ended March 31, 2015 and March 31, 2014:  

Table 12

Troubled Debt Restructuring Rollforward:		Performing TDRs		Nonperforming TDRs		Total
		(In thousands)
Balance at January 1, 2014	$	6,227	$	3,105	$	9,332
Principal repayments / advances		(575)		(217)		(792)
Charge-offs, net		-		(342)		(342)
New modifications		136		196		332
Transfers		(31)		31		-
Balance at March 31, 2014	$	5,757	$	2,773	$	8,530
Balance at January 1, 2015	$	14,227	$	11,676	$	25,903
Principal repayments / advances		(171)		(286)		(457)
Charge-offs, net		-		-		-
New modifications		-		-		-
loans removed from TDR Status		-		-		-
Transfers		-		-		-
Balance at March 31, 2015	$	14,056	$	11,390	$	25,446

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 1.45% at March 31, 2015 as compared to 1.46% at December 31, 2014  and 1.58% at March 31, 2014.

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 shortfall is charged against income as an additional

47

provision for loan losses. For further discussion of the provision for loan losses, see “Provision for Loan Losses” above.

In estimating the allowance for probable incurred losses on other loans, we group the balance of the loan portfolio into portfolio 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 in consideration of credit quality during the historical loss period. We also consider other qualitative factors that may warrant adjustment of the computed historical loss rate, including, loan growth, loan concentrations, economic considerations and organizational factors.

During the first quarter 2015, the fourth quarter 2014 and the first quarter 2014 we recorded immaterial credit provisions for loan losses. Management considered net recoveries, improvement in nonperforming loans, loan portfolio composition and loan growth 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 March 31, 2015. For further discussion of the provision for loan losses, see “Provision for Loan Losses” above.

Approximately $0.3 million of the $22.5 million allowance for loan losses at March 31, 2015 relates to loans with specific reserves. At December 31, 2014, approximately $0.2 million of the $22.5 million allowance for loan losses relates to loans with specific reserves.

The general component of the allowance as a percentage of overall loans, net of unearned loan fees, was 1.43% at March 31, 2015 as compared to 1.44% at December 31, 2014 and 1.57% at March 31, 2014. The decrease in the general reserve as a percentage of loans between March 31, 2014 and March 31, 2015 was primarily a result of reductions in our historical loss rate over that time period.

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 13  

		Three Months Ended March 31,
		2015		2014
		(In thousands)
Balance, beginning of period	$	22,490	$	21,005
Loan charge-offs:
Commercial and residential real estate		-		8
Construction		7		-
Commercial		1		343
Consumer		1		11
Other		40		45
Total loan charge-offs		49		407
Recoveries:
Commercial and residential real estate		28		883
Construction		5		7
Commercial		15		41
Consumer		6		5
Other		28		22
Total loan recoveries		82		958
Net loan charge-offs		(33)		(551)
Provision (credit) for loan losses		(23)		(6)
Balance, end of period	$	22,500	$	21,550

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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 14

		March 31,		December 31,		Increase	Percent
		2015		2014		(Decrease)	Change
		(In thousands)
Securities available for sale:
State and municipal	$	34,723	$	49,399	$	(14,676)	(29.7)	%
Mortgage-backed - agency / residential		165,374		201,902		(36,528)	(18.1)	%
Mortgage-backed - private / residential		411		412		(1)	(0.2)	%
Asset-backed		-		8,708		(8,708)	(100.0)	%
Trust preferred		18,615		18,075		540	3.0	%
Corporate		68,053		64,717		3,336	5.2	%
Collateralized loan obligations		8,524		2,933		5,591	190.6	%
Total securities available for sale	$	295,700	$	346,146	$	(50,446)	(14.6)	%
Securities held to maturity:
State and municipal		55,293		35,223		20,070	57.0	%
Mortgage-backed - agency / residential		65,504		40,531		24,973	61.6	%
Asset-backed		21,172		12,760		8,412	65.9	%
Total securities held to maturity	$	141,969	$	88,514	$	53,455	60.4	%

The carrying value of our available for sale investment securities at March 31, 2015 was $295.7 million, compared to the December 31, 2014 carrying value of $346.1 million. The decrease in available for sale securities between December 31, 2014 and March 31, 2015 was primarily a result of the reclassification of approximately $49.1 million in available for sale mortgage-backed securities, asset-backed securities and municipal bonds to the held to maturity category in the first quarter 2015. 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 $0.5 million in after tax unrealized losses remained in accumulated other comprehensive income as of March 31, 2015 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 value of our held to maturity securities at March 31, 2015 was $142.0 million compared to $88.5 million at December 31, 2014. The increase in held to maturity securities during the first quarter 2015 as compared to December 31, 2014 was primarily a result of the reclassification in the first quarter 2015, as outlined above.

At March 31, 2015 and December 31, 2014, our investment securities portfolio had an average effective duration of approximately 5.2 years and 5.1 years, respectively.

The fair values of our securities are determined through the utilization of evaluated pricing models that vary by asset class and incorporate available market information. The evaluated pricing models apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to prepare evaluations. These models assess interest rate impact, develop prepayment scenarios and take into account market conventions. Standard inputs into these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.

Five municipal bond issuances were priced using significant unobservable inputs as of March 31, 2015. The largest of these is a revenue bond issued by the Colorado Health Facilities Authority 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 March 31, 2015 was approximately equal to its par value.

49

At March 31, 2015, there were 70 individual securities in an unrealized loss position, consisting of 51 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 19 securities in an unrealized loss position and determined that the decline in value since their purchase date was primarily attributable to fluctuations in market interest rates. The decrease in the number of securities in an unrealized loss position in excess of 12 months, from 75 securities at December 31, 2014 to the 51 securities at March 31, 2015, was primarily attributable to the timing of interest rate fluctuations. At March 31, 2015, 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 March 31, 2015 and December 31, 2014, we held $14.6 million and $14.8 million, respectively, of other equity securities consisting primarily of bank stocks with no maturity date, which are not reflected in Table 13 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 15

		March 31, 2015				At December 31, 2014
		Balance	% of Total			Balance	% of Total
		(Dollars in thousands)
Noninterest-bearing demand	$	659,765	38.32	%	$	654,051	38.81	%
Interest-bearing demand and NOW		356,573	20.71	%		326,748	19.39	%
Money market		370,705	21.53	%		374,063	22.20	%
Savings		141,948	8.24	%		138,588	8.22	%
Time		192,890	11.20	%		191,874	11.38	%
Total deposits	$	1,721,881	100.00	%	$	1,685,324	100.00	%

Total deposits increased $36.6 million at March 31, 2015 as compared to December 31, 2014, and increased by $188.9 million as compared to March 31, 2014. The increase in deposits, primarily non-maturing deposits, over the last 12 months was mostly attributable to increases in the deposit balances of our largest customers as well as 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 uncertain what impact, if any, that rising interest rates would have on our deposit base.

Noninterest bearing deposits as a percentage of total deposits decreased to approximately 38.3% at March 31, 2015 as compared to 38.8% at December 31, 2014. 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.

Time deposit balances increased $1.0 million as of March 31, 2015 as compared to December 31, 2014 and comprised 11.2% of total deposits at March 31, 2015. The majority of the time deposit balance represented deposits of local customers, with only $38.2 million representing brokered deposits, as compared to $38.2 million at December 31, 2014 and $20.4 million at March 31, 2014. 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 March 31, 2015, securities sold under agreement to repurchase decreased by $9.6 million to $23.9 million from December 31, 2014 and decreased by $3.1 million from March 31, 2014. 

Borrowings and Subordinated Debentures

At March 31, 2015, our FHLB borrowings were $148.6 million as compared to $160.3 million at December 31, 2014 and $173.0 million at March 31, 2014. At March 31, 2015, borrowings consisted of $20.0 million in a term

50

note and $128.6 million in line of credit advances. At December 31, 2014, our FHLB borrowings consisted of $20.0 million in a  term note and $140.3 million in line of credit advances. The total FHLB commitment, including balances outstanding, at March 31, 2015 and December 31, 2014 was $364.4 million and $385.6 million, respectively. 

Under an advance, pledge and security agreement with the FHLB, the Bank had additional borrowing capacity of approximately $215.8 million at March 31, 2015, which can be utilized for term and or line of credit advances.

The FHLB term borrowings at March 31, 2015 consisted of one fixed-rate term note at the Bank, that matures on January 23, 2018 with an interest rate of 2.52%  and is convertible on a quarterly basis by the FHLB to a variable rate borrowing. If the note is 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 0.25% at March 31, 2015. During the fourth quarter 2014, we prepaid $90.0 million in FHLB term advances, replacing it with FHLB overnight borrowings.

At March 31, 2015, we had a $25.8 million aggregate principal balance of junior subordinated debentures outstanding with a weighted average cost of 3.08%. 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 March 31, 2015, 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 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 our TruPS will continue to be eligible to be treated as Tier 1 capital, subject to other rules and limitations.

Capital Resources

Under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III, risk-based regulatory capital standards generally require banks and bank holding companies to, in order to be considered “adequately capitalized” maintain a ratio of “Common Equity Tier 1” capital to risk-weighted assets of at least 4.5%, a ratio of  “Tier 1” capital to risk-weighted assets of at least 6.0%, 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 8.0% and a ratio of Tier 1 capital to average total assets (leverage ratio) of at least 4.0%. 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 150% for certain 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 Common Equity Tier 1 risk-based capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a total risk-based capital ratio of 10.0% 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 March 31, 2015, each of the Bank’s capital ratios was above the regulatory capital threshold of “well capitalized”.

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The following table provides the capital ratios of the Company and Bank as of the dates presented, along with the applicable regulatory capital requirements, the ratios as of March 31, 2015 were calculated in accordance with the requirements of Basel III, which became effective January 1, 2015:

Table 16

	Ratio at March 31, 2015		Ratio at December 31, 2014		Ratio at March 31, 2014		Minimum Capital Requirement at March 31, 2015		Minimum Requirement for "Well-Capitalized" Institution at March 31, 2015
Common Equity Tier 1 Risk-Based Capital Ratio
Consolidated	11.32	%	N/A		N/A		4.50	%	N/A
Guaranty Bank and Trust Company	12.45	%	N/A		N/A		4.50	%	6.50	%
Tier 1 Risk-Based Capital Ratio
Consolidated	12.54	%	12.60	%	13.50	%	6.00	%	N/A
Guaranty Bank and Trust Company	12.45	%	12.33	%	12.99	%	6.00	%	8.00	%
Total Risk-Based Capital Ratio
Consolidated	13.75	%	13.85	%	14.75	%	8.00	%	N/A
Guaranty Bank and Trust Company	13.67	%	13.58	%	14.24	%	8.00	%	10.00	%
Leverage Ratio
Consolidated	11.09	%	11.10	%	11.65	%	4.00	%	N/A
Guaranty Bank and Trust Company	11.02	%	10.86	%	11.22	%	4.00	%	5.00	%

As of March 31, 2015 our consolidated total risk-based capital ratio declined by ten basis points and our Tier 1 risk-based capital ratio declined by six basis points as compared to December 31, 2014, primarily due to a combination of first quarter 2015 net income and loan growth as well as the impact of the new Basel III requirements. The decreases in consolidated total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios as of March 31, 2015 as compared to March 31, 2014 were also primarily the result of loan growth over the past 12 months. 

Under Basel III a capital conservation buffer of 2.5%, comprised of Common Equity Tier 1, is established above the regulatory minimum capital requirement. The capital conservation buffer will be phased in between January 1, 2016 and year end 2018 becoming fully effective on January 1, 2019.

The Bank made the one-time AOCI opt-out election on its March 31, 2015 Call Report, which allows community banks under $250 billion who make the one-time opt-out election to remove the impact of certain unrealized capital gains and losses from the calculation of regulatory capital. There is no opportunity to change methodology in future periods.

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 universal S-3.

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 two and one-half cents per share to stockholders on a quarterly basis through November of 2013. Beginning in February 2014, we increased the cash dividend to five cents per share on a quarterly basis through November of 2014. In February 2015 we increased the quarterly cash dividend to ten cents per share to stockholders.

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

52

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 (i) an event of default under any of the subordinated debenture agreements has occurred and is continuing, or (ii) we defer payment of interest on the TruPS for a period of up to 60 consecutive months. At March 31, 2015, 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 17

		March 31, 2015		December 31, 2014
		(In thousands)
Commitments to extend credit:
Variable	$	337,174	$	342,496
Fixed		51,753		41,742
Total commitments to extend credit	$	388,927	$	384,238
Standby letters of credit	$	10,286	$	11,474

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 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 March 31, 2015, the Company had $31.6 million of cash and cash equivalents. Further, the Bank had $24.2 million in excess pledging related to customer accounts that required collateral at March 31, 2015 and $72.3 million of unencumbered securities that were available for pledging to our FHLB line.

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 anticipated funding needs. At March 31, 2015, the Bank had approximately $215.8 million of availability on its FHLB line, $50.8 million of availability on its secured

53

and unsecured federal funds lines with correspondent banks, and $7.4 million of availability with the Federal Reserve discount window.

At March 31, 2015, the Bank had $38.2 million of brokered deposits of which  $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. As of December 31, 2014 the Bank maintained the same $38.2 million in brokered deposits. 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 March 31, 2015, the holding company had approximately $1.5 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. 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, 2014.  There have been no changes during 2015 to the critical accounting policies listed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.  

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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 repricing between our portfolio of 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 composed 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 evaluate fluctuations in 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. Through these simulations, we estimate the impact on net interest income of an immediate change in market rates of 100, 200 and 300 basis points upward or downward, over a one year period. 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 March 31, 2015 and March 31, 2014:

Table 18

Market Risk:
		Annualized Net Interest Income
		March 31, 2015		March 31, 2014
		Amount of Change		Amount of Change
		(In thousands)
Rates in Basis Points
300	$	2,271	$	927
200		1,740		522
100		827		180
Static		-		-
(100)		(1,834)		(1,470)
(200)		(1,828)		(1,790)
(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 March 31, 2015, we are 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, the loan rate 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 increase in value of our low cost deposits. As of March 31, 2015 our asset sensitivity had increased relative to March 31, 2014, primarily due to the increase in our variable rate loans over the last 12 months.

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 March 31, 2015, it is 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. At March 31, 2015, the loss of gross interest income in a falling interest rate environment is expected to exceed the corresponding reduction in interest expense in a falling rate environment. We believe that this scenario is 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 to 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 March 31, 2015. 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 March 31, 2015.  

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 March 31, 2015 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 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, 2014.

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 first quarter 2015.

				Shares Purchased	Remaining
				under	Repurchase
	Total Shares		Average Price	Publicly Announced	Authority
	Purchased (1)		Paid per Share	Repurchase Plan	in Shares
January 1 to January 31	-	$	-	-	1,000,000
February 1 to February 28	19,787		14.39	-	1,000,000
March 1 to March 31	1,958		16.81	-	1,000,000
	21,745	$	14.61	-	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 initially authorized on April 3, 2014 and scheduled to expire on April 2, 2016. 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.

59

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: April 30, 2015	GUARANTY BANCORP
	/s/  CHRISTOPHER G. TREECE
	Christopher G. Treece
	Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer)

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