Independent Bank (IBTX) 8-K Audited Consolidated Financial Statements of

Exhibit 99.1

GUARANTY BANCORP

AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF

GUARANTY BANCORP AS OF AND FOR THE

YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

Guaranty Bancorp and Subsidiaries
Report of Independent Registered Public Accounting Firm	1
Consolidated Balance Sheets at December 31, 2018 and 2017	2
Consolidated Statements of Income, Years Ended December 31, 2018, 2017 and 2016	3
Consolidated Statements of Comprehensive Income, Years Ended December 31, 2018, 2017 and 2016	4
Consolidated Statements of Changes in Stockholders’ Equity, Years Ended December 31, 2018, 2017 and 2016	5
Consolidated Statements of Cash Flows, Years Ended December 31, 2018, 2017 and 2016	6
Notes to Consolidated Financial Statements	7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and the Board of Directors

Independent Bank Group, Inc. as successor by merger to Guaranty Bancorp

McKinney, Texas

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Guaranty Bancorp and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/Crowe LLP

We have served as the Company’s auditor since 2007.

Oak Brook, Illinois

October 2, 2019

1

GUARANTY BANCORP AND SUBSIDIARIES

Consolidated Balance Sheets

	December 31,			December 31,
	2018			2017
	(In thousands, except share and per share data)
Assets
Cash and due from banks	$	39,913		$	51,553
Time deposits with banks		262			254
Securities available for sale, at fair value		330,789			329,977
Securities held to maturity (fair value of $235,062 and $257,665 at December 31, 2018 and December 31, 2017)		240,322			259,916
Bank stocks, at cost		27,688			24,419
Total investments		598,799			614,312
Loans held for sale		—			1,725
Loans, held for investment, net of deferred costs and fees		2,907,132			2,805,663
Less allowance for loan losses		(23,750	)		(23,250	)
Net loans, held for investment		2,883,382			2,782,413
Premises and equipment, net		62,348			65,874
Other real estate owned and foreclosed assets		540			761
Goodwill		67,917			65,106
Other intangible assets, net		14,950			14,441
Bank-owned life insurance		80,839			78,573
Other assets		31,418			23,878
Total assets	$	3,780,368		$	3,698,890
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand	$	980,436		$	939,550
Interest-bearing demand and NOW		887,816			813,882
Money market		559,940			527,621
Savings		208,210			201,687
Time		472,477			458,887
Total deposits		3,108,879			2,941,627
Securities sold under agreement to repurchase		8,475			44,746
Federal Home Loan Bank line of credit borrowing		92,600			157,444
Federal Home Loan Bank term notes		50,000			70,000
Subordinated debentures, net		65,148			65,065
Interest payable and other liabilities		14,184			15,109
Total liabilities		3,339,286			3,293,991
Stockholders’ equity:
Common stock (1)		32			32
Additionalpaid-in capital - common stock		862,908			859,509
Accumulated deficit		(304,971	)		(343,383	)
Accumulated other comprehensive loss		(8,919	)		(4,694	)
Treasury stock, at cost, 2,475,092 and 2,421,208 shares, respectively		(107,968	)		(106,565	)
Total stockholders’ equity		441,082			404,899
Total liabilities and stockholders’ equity	$	3,780,368		$	3,698,890

⁽¹⁾ Common stock—$0.001 par value; 40,000,000 shares authorized; 31,763,489 shares issued and 29,288,397 shares outstanding at December 31, 2018 (including 398,114 shares of unvested restricted stock); 40,000,000 shares authorized; 31,643,472 shares issued and 29,222,264 shares outstanding at December 31, 2017 (including 434,149 shares of unvested restricted stock).

See “Notes to Consolidated Financial Statements.”

2

GUARANTY BANCORP AND SUBSIDIARIES

Consolidated Statements of Income

	Year Ended December 31,
	2018		2017			2016
	(In thousands, except share and per share data)
Interest income:
Loans, including costs and fees	$	134,531	$	118,674		$	87,249
Investment securities:
Taxable		10,331		9,264			7,625
Tax-exempt		4,848		4,933			3,683
Dividends		1,633		1,290			1,063
Federal funds sold and other		115		141			233
Total interest income		151,458		134,302			99,853
Interest expense:
Deposits		11,948		7,344			4,859
Securities sold under agreement to repurchase		76		71			52
Federal funds purchased		56		—			—
Borrowings		4,718		2,648			2,549
Subordinated debentures		3,701		3,440			2,005
Total interest expense		20,499		13,503			9,465
Net interest income		130,959		120,799			90,388
Provision for loan losses		1,137		992			143
Net interest income, after provision for loan losses		129,822		119,807			90,245
Noninterest income:
Deposit service and other fees		14,050		13,951			10,447
Investment management and trust		10,167		6,005			5,452
Increase in cash surrender value of life insurance		2,663		2,559			2,005
Gain (loss) on sale of securities		14		(6	)		(73	)
Gain on sale of SBA loans		1,098		1,256			873
Other		1,767		1,679			553
Total noninterest income		29,759		25,444			19,257
Noninterest expense:
Salaries and employee benefits		51,612		46,762			40,946
Occupancy expense		6,576		6,664			5,887
Furniture and equipment		4,029		3,898			3,070
Amortization of intangible assets		3,652		2,745			1,557
Other real estate owned, net		52		174			31
Insurance and assessments		2,750		2,666			2,314
Professional fees		4,048		4,129			3,639
Impairment of long-lived assets		—		394			185
Other general and administrative		15,570		19,363			15,158
Total noninterest expense		88,289		86,795			72,787
Income before income taxes		71,292		58,456			36,715
Income tax expense		15,129		19,832			11,988
Net income	$	56,163	$	38,624		$	24,727
Earnings per common share–basic:	$	1.95	$	1.38		$	1.06
Earnings per common share–diluted:		1.93		1.36			1.05
Weighted average common shares outstanding-basic:		28,857,324		28,056,588			23,267,108
Weighted average common shares outstanding-diluted:		29,130,647		28,343,687			23,559,947

See “Notes to Consolidated Financial Statements.”

3

GUARANTY BANCORP AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Net income	$	56,163		$	38,624		$	24,727
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		(5,478	)		1,868			(4,304	)
Income tax effect		1,351			(710	)		1,636
Change in unamortized loss on available for sale securities reclassified into held to maturity securities		447			486			504
Income tax effect		(110	)		(185	)		(192	)
Reclassification adjustment for net losses (gains) included in net income during the period		(14	)		6			73
Income tax effect		4			(2	)		(28	)
Change in fair value of derivatives during the period		478			136			(296	)
Income tax effect		(118	)		(52	)		113
Reclassification adjustment for losses on derivatives during the period		300			783			925
Income tax effect		(74	)		(298	)		(352	)
Other comprehensive income (loss)		(3,214	)		2,032			(1,921	)
Total comprehensive income	$	52,949		$	40,656		$	22,806

See “Notes to Consolidated Financial Statements”

4

GUARANTY BANCORP AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share data)

	Common Stock Shares Outstanding			Common Stock and Additional Paid-in Capital		Treasury Stock			Accumulated Deficit			Accumulated Other Comprehensive Loss			Totals
Balance, January 1, 2016		21,704,852		$	712,334	$	(103,743	)	$	(382,147	)	$	(4,805	)	$	221,639
Net income		—			—		—			24,727			—			24,727
Other comprehensive loss		—			—		—			—			(1,921	)		(1,921	)
Issuance of common stock for acquisition of Home State Bancorp net of issuance costs		6,533,756			116,643		—			—			—			116,643
Stock compensation awards, net of forfeitures		169,534			—		—			—			—			—
Stock based compensation, net		—			3,121		—			—			—			3,121
Repurchase of common stock		(74,138	)		—		(1,307	)		—			—			(1,307	)
Dividends paid ($0.46 per share)		—			—		—			(10,524	)		—			(10,524	)
Balance, December 31, 2016		28,334,004			832,098		(105,050	)		(367,944	)		(6,726	)		352,378
Net income		—			—		—			38,624			—			38,624
Other comprehensive income		—			—		—			—			2,032			2,032
Issuance of common stock for acquisition of Castle Rock Bank Holding Company		840,629			24,420											24,420
Stock compensation awards, net of forfeitures		106,957			—		—			—			—			—
Stock based compensation, net		—			3,023		—			—			—			3,023
Repurchase of common stock		(59,326	)		—		(1,515	)		—			—			(1,515	)
Dividends paid ($0.50 per share)		—			—		—			(14,063	)		—			(14,063	)
Balance, December 31, 2017		29,222,264			859,541		(106,565	)		(343,383	)		(4,694	)		404,899
Net income		—			—		—			56,163			—			56,163
Other comprehensive loss		—			—		—			—			(3,214	)		(3,214	)
Stock compensation awards, net of forfeitures		120,017			—		—			—			—			—
Stock based compensation, net		—			3,399		—			—			—			3,399
Repurchase of common stock		(53,884	)		—		(1,403	)		—			—			(1,403	)
Reclassification of stranded tax effect		—			—		—			1,011			(1,011	)		—
Dividends paid ($0.65 per share)		—			—		—			(18,762	)		—			(18,762	)
Balance, December 31, 2018		29,288,397		$	862,940	$	(107,968	)	$	(304,971	)	$	(8,919	)	$	441,082

See “Notes to Consolidated Financial Statements.”

5

GUARANTY BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Cash flows from operating activities:
Net income	$	56,163		$	38,624		$	24,727
Reconciliation of net income to net cash from operating activities:
Depreciation and amortization		6,599			5,716			4,270
Net amortization (accretion) on investment and loan portfolios		(1,152	)		(953	)		872
Provision for loan losses		1,137			992			143
Impairment of long-lived assets		—			394			185
Stock compensation, net		3,399			3,023			3,121
Dividends on bank stocks		(696	)		(434	)		(521	)
Increase in cash surrender value of life insurance		(2,266	)		(2,164	)		(1,629	)
Net gain on sale of securities and SBA loans		(1,112	)		(1,250	)		(800	)
Loss (gain) on the sale of other assets		(954	)		(271	)		345
Origination of SBA loans with intent to sell		(14,001	)		(8,455	)		(12,990	)
Proceeds from the sale of SBA loans originated with intent to sell		14,523			13,795			10,587
Loss, net, and valuation adjustments on real estate owned		36			160			105
Net change in:
Interest receivable and other assets		(8,733	)		1,035			(282	)
Net deferred income tax assets		(336	)		1,723			(360	)
Interest payable and other liabilities		(2,339	)		(91	)		977
Net cash from operating activities		50,268			51,844			28,750
Cash flows from investing activities:
Activity in available for sale securities:
Sales, maturities, prepayments and calls		36,037			125,234			411,461
Purchases		(44,352	)		(91,934	)		(152,650	)
Activity in held to maturity securities and bank stocks:
Maturities, prepayments and calls		33,366			25,443			29,599
Purchases		(17,445	)		(43,052	)		(60,639	)
Loan originations, net of principal collections		(88,976	)		(122,461	)		(142,268	)
Loan purchases		(6,465	)		(98,940	)		(109,519	)
Redemption (purchase) of time deposits with banks		(8	)		—			250
Purchase of bank-owned life insurance contracts		—			(7,500	)		(15,000	)
Proceeds from sale of other assets		5,687			1,463			2,204
Proceeds from sales of other real estate owned and foreclosed assets		271			514			45
Proceeds from sale of SBA and other loans transferred to held for sale		—			3,939			229
Additions to premises and equipment		(847	)		(1,549	)		(1,464	)
Cash paid in acquisition, net of cash received		(5,223	)		21,717			(23,915	)
Net cash from investing activities		(87,955	)		(187,126	)		(61,667	)
Cash flows from financing activities:
Net change in deposits		167,327			114,160			127,561
Repayment of Federal Home Loan Bank term notes		(20,000	)		(2,409	)		(50,026	)
Net change in borrowings on Federal Home Loan Bank line of credit		(64,844	)		32,753			(63,208	)
Proceeds from Federal Home Loan Bank term advances		—			—			25,000
Proceeds from issuance of subordinated debt, net of issuance costs		—			—			39,170
Cash dividends on common stock		(18,762	)		(14,063	)		(10,524	)
Net change in repurchase agreements and federal funds purchased		(36,271	)		7,798			(9,515	)
Repurchase of common stock		(1,403	)		(1,515	)		(1,307	)
Payment of stock issuance costs related to acquisition		—			—			(834	)
Net cash from financing activities		26,047			136,724			56,317
Net change in cash and cash equivalents		(11,640	)		1,442			23,400
Cash and cash equivalents, beginning of year		51,553			50,111			26,711
Cash and cash equivalents, end of year	$	39,913		$	51,553		$	50,111
Supplemental disclosure of cash flow activity:
Interest paid on deposits and borrowed funds	$	19,920		$	13,731		$	8,312
Income taxes paid		14,910			15,983			12,653
Supplemental disclosure of noncash activities:
Common stock issued in acquisition		—			24,420			117,477
Loans transferred to other real estate owned and foreclosed assets		91			113			—
Real Estate transferred to held for sale		1,112			4,278			—
Reclassification of available for sale securities into held to maturity		—			—			63,432
See Footnote 3 for breakout of acquisition purchase price

See “Notes to Consolidated Financial Statements.”

6

(1) Organization

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 wholly owned bank subsidiary, Guaranty Bank and Trust Company, referred to as the “Bank”.

References to the “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.

(2) Summary of Significant Accounting Policies

(a) Nature of Operations and Principles of Consolidation

The Bank is a full-service community bank offering an array of banking products and services to the communities it serves along the Front Range of Colorado including accepting time and demand deposits and originating commercial loans, commercial and residential real estate loans, Small Business Administration (“SBA”) guaranteed loans and consumer loans. The Bank, together with its wholly owned subsidiary Private Capital Management, LLC (“PCM”), provides 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. There are no significant concentrations of loans to any one industry or customer.

On September 8, 2016, the Company completed the acquisition of Home State Bancorp (“Home State”), based in Loveland, Colorado, in exchange for a combination of Company stock and cash. The transaction enhanced the Company’s balance sheet liquidity and supports the Company’s objective of serving the banking needs of northern Colorado business and consumer customers. On April 3, 2017, Cherry Hills Investment Advisors, Inc. (“CHIA”), a previously wholly owned subsidiary of the Bank, was consolidated into PCM. On October 27, 2017, the Company completed the acquisition of Castle Rock Bank Holding Company (“Castle Rock”), based in Castle Rock, Colorado in exchange for Company stock. Similar to the Home State acquisition, the Castle Rock acquisition enhanced the Company’s liquidity and grew market share in Douglas County, Colorado. On January 16, 2018, the Company, through PCM, acquired the assets of Wagner Wealth Management, LLC (“Wagner”). The Wagner acquisition increased the Company’s market share in the Denver wealth management marketplace and added additional investment advisory expertise.

On May 22, 2018 the Company jointly announced with Independent Bank Group, Inc. (“Independent”), the execution of an Agreement and Plan of Reorganization (the “Reorganization Agreement”), under which the Company would merge (the “Merger”) with and into Independent in anall-stock transaction. On January 1, 2019, under the terms previously announced in the Reorganization Agreement, the Company merged with and into Independent.

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.

(b) Business Combinations

The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair value upon the date of acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to determine the fair values of assets acquired and liabilities assumed. Any excess of purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.

7

(c) 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.

(d) Cash Flows

Cash and cash equivalents on the Company’s consolidated balance sheets includecash-on-hand, balances due from banks and interest-bearing deposits in other financial institutions that have an original maturity of three months or less and are carried at cost. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other financial institutions, short-term borrowings, federal funds purchased and repurchase agreements.

(e) Time Deposits with Banks

The Company may invest in short term, fully insured time deposits with other banks.

(f) Securities

Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities not classified as held to maturity are classified as available for sale. Securities available for sale are carried at fair value, with unrealized gains and losses reported in other comprehensive income, net of tax.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized according to the effective interest method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or more likely than not will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as an impairment to earnings.

The investments in bank stocks are reviewed by management quarterly for potential OTTI. This quarterly review considers the credit quality of the institution, the institution’s ability to repurchase shares and the Company’s carrying value in the shares relative to book value. Based on these reviews, management concluded that there was no impairment during 2018, 2017 and 2016.

(g) Loans and Loan Commitments

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

8

Loans acquired in a business combination, that on the date of acquisition reflected evidence of credit deterioration since origination and for which collection of all contractually required payments was not probable, were designated as purchased credit impaired or “PCI” loans. In the September 8, 2016 Home State transaction, the Company designated $2,108,000 of loans as PCI. In the October 27, 2017 Castle Rock transaction, the Company designated $1,283,000 of loans as PCI. As of December 31, 2018, $978,000 in PCI loans remained in the Company’s loan portfolio. Loans not designated as PCI(“Non-PCI” loans) comprise the significant majority of the Company’s loan portfolio and consist of internally originated loans in addition to acquired loans. AcquiredNon-PCI loans were designated as such as of the date of acquisition for one or both of the following reasons: (1) management considered the collection of all contractually required payments probable, and (2) the loan demonstrated no evidence of credit deterioration since origination.

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances, adjusted for charge-offs, the allowance for loan losses, acquisition-related discounts and any deferred fees or costs. Acquired loans are recorded upon acquisition at fair value, with no associated allowance for loan loss. However, if subsequent to acquisition the credit quality of an acquired loan deteriorates, an allowance may be required. 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. Purchase discount or premium on acquired,Non-PCI loans is recognized as an adjustment to interest income over the contractual life of such loans using the effective interest method, or taken into income when the related loans are paid off or sold. With respect to PCI loans, the “accretable yield”, calculated as the excess of undiscounted expected cash flows over the present value of expected cash flows, is accreted into income over the term of the loan assuming the amount and timing of cash flows are reasonably estimable.

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 orcharged-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 cost-recovery or cash-basis method, until the loan qualifies for a return to the accrual-basis method. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero, with payments received being applied first to the principal balance of the loan. Under the cash-basis method, interest income is recognized when the payment is received in cash. 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 is reasonably assured.

Financial instruments includeoff-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 the Company’s 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.

(h) 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 the nature and volume of the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Management maintains the allowance at a level that it deems appropriate to adequately provide for probable incurred losses 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.

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Loans deemed to be uncollectable arecharged-off and deducted from the allowance. The Company’s loan portfolio primarily consists ofnon-homogeneous commercial and real estate loans where charge-offs are considered on aloan-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 previouslycharged-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 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 acase-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. Troubled debt restructurings (“TDRs”) are separately identified for impairment disclosures. If a TDR is considered to be a collateral-dependent loan, impairment of the loan is measured using the fair value of the collateral, less estimated selling costs. Likewise, if a TDR is not collateral-dependent, impairment is measured by the present value of estimated future cash flows using the loan’s effective rate at inception. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with its accounting policy for the allowance.

The general component of the allowance covers all other loans not specifically identified as impaired and is determined by calculating losses recognized by portfolio segment during the current credit cycle and adjusted based on management’s evaluation of various qualitative factors. In performing this calculation, loans are aggregated into one of three portfolio segments: Real Estate, Consumer and Commercial & Other. An assessment of risks impacting loans in each of these portfolio segments is performed, and qualitative adjustment factors, which will 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 commitments. In calculating the amount of this liability, management considers the amount of the Company’soff-balance sheet commitments, estimated utilization factors and loan specific risk factors. The Company’s liability for unfunded commitments is calculated quarterly and the liability is included under “other liabilities” in the consolidated balance sheet.

(i) Loans Held for Sale

Particular loans may be considered “held for sale” as of the Company’s balance sheet date. The Company routinely sells SBA guaranteed loans, and historically has designated select classified or nonaccrual loans asheld-for-sale as part of its strategy to dispose of thesenon-earning assets. Once the decision is made to sell a loan, the loan is designated as held for sale and carried at the lower of cost or fair value, with any required write-down being taken at the time of the reclassification.

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(j) Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

(k) 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.

(l) Premises and Equipment

Land is carried at cost. Buildings, equipment and software are carried at cost, less accumulated depreciation and amortization computed on the straight-line method over the useful life of the asset. Leasehold improvements are depreciated over the shorter of their estimated useful life or the lease term. Buildings and leasehold improvements carry an estimated useful life of five to 40 years and equipment and software carry an estimated useful life of one to 15 years. Repairs and maintenance are charged to noninterest expense as incurred.

(m) Bank Stocks

The Bank is a member of the Federal Home Loan Bank (FHLB) system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. The Bank also owns Federal Reserve Bank (FRB) stock, Bankers’ Bank of the West (BBW) stock and Pacific Coast Bankers’ Bank (PCBB) stock. FHLB, FRB, BBW and PCBB stock is carried at cost, classified as a restricted security, and periodically reviewed for impairment based on the likelihood of ultimate recovery of par value. Both cash and stock dividends are reported as income.

(n) Goodwill and Other Intangible Assets

Goodwill was recorded in the Home State, Castle Rock and Wagner transactions and represents the excess of the purchase price over the fair value of acquired tangible assets and identifiable intangible assets less liabilities. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified.

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 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, ranging from 10 to 13 years. The Company has added to its aggregated customer relationship intangible asset in its acquisitions of PCM, CHIA, Home State and Wagner.

Non-compete intangible assets are recognized at estimated fair value in the event thatnon-compete or similar agreements are entered into in an acquisition between the Company and the sellers of the acquired business. In preparing their valuation, management considers the ability and likelihood of a seller to compete in the absence of the agreement in addition to the terms of the agreement in consideration of the specific market in which the seller would be likely to compete.Non-compete intangible assets are amortized to expense over their estimated useful life. The Company acquired anon-compete intangible asset acquired in the Wagner acquisition which it is amortizing to expense over a period of three years.

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(o) Impairment of Long-Lived Assets

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

Assets to be disposed of are reported at the lower of their carrying value or fair value less costs to sell, classified as held for sale and moved into other assets. At the time of the transfer into held for sale depreciation is suspended. During 2018, the Company did not have any impairment charges. During 2017, the Company recognized $394,000 in impairment charges on three properties acquired in the Home State transaction and designated as held for sale during the year. During 2016, the Company recognized an impairment charge of $185,000 on a long-lived asset.

(p) Derivative Instruments

The Company records all derivatives on its consolidated balance sheet 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 impacts earnings. Any portion of the cash flow hedge not deemed highly effective in hedging the changes in expected cash flows of the hedged item is 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.

(q) Stock Incentive Plan

The Company’s Amended and Restated 2005 Stock Incentive Plan (the “Incentive Plan”) provided for the grant of 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. At the Company’s annual meeting of stockholders on May 5, 2015, the Company’s stockholders approved the Guaranty Bancorp 2015 Long-Term Incentive Plan (the “2015 Plan”), which had been previously approved by the Company’s Board of Directors. The 2015 Plan provides for the grant of stock options, stock awards, stock unit awards, performance stock awards, stock appreciation rights, and other equity-based awards representing up to a total of 935,000 shares of voting common stock to key employees, nonemployee directors, consultants and prospective employees. All awards issued under the Incentive Plan will remain outstanding in accordance with their terms despite the expiration of the Incentive Plan; however, any awards granted subsequent to the expiration of the Incentive Plan have been, and will continue to be, issued under the 2015 Plan. As of December 31, 2018 there were 499,802 shares remaining available for grant under the 2015 Plan.

As of December 31, 2018, the Company had granted stock awards under both the Incentive Plan and the 2015 plan. The Company recognizes stock compensation expense for services received in a share-based payment transaction over the requisite 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

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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. Compensation cost related to the performance stock awards is recognized based on an evaluation of expected financial performance in comparison to established criteria.

(r) Stock Repurchase Plan

On February 12, 2018, 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. Due to previous extensions the program was scheduled to expire on April 2, 2018, however, this most recent extension extended the expiration date of the repurchase program through April 2, 2019. 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 report, the Company had not repurchased any shares under the program.

(s) Bank-Owned Life Insurance

The Bank has life insurance policies on certain key executives and former key executives. Bank-owned life insurance (“BOLI”) is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts likely due at settlement.

(t) 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 carry forwards. 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. During 2017 the President of the United States signed the 2017 Tax Cuts and Jobs Act (“the Tax Act”) which reduced the statutory Federal corporate income tax rate from 35% to 21% beginning in 2018. As a result, the Company’s existing deferred tax assets and liabilities (net deferred tax asset) which were expected to be reversed beginning in 2018 werere-measured in 2017 using the updated statutory rates applicable in 2018. There-measurement of the Company’s net deferred tax asset resulted in a $976,000 charge being recognized in income tax expense in the fourth quarter 2017.

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, 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 December 31, 2018 and December 31, 2017, the Company had a net deferred tax asset of $3,190,000 and $1,802,000, respectively, primarily comprised of the deferred tax asset associated with the net unrealized loss on securities and interest rate swaps. The portion of the total deferred tax asset related to the net unrealized losses on securities and interest rate swaps was $2,920,000 as of December 31, 2018 and $1,867,000 as of December 31, 2017. After analyzing the composition of and changes in the deferred tax assets and liabilities and considering the Company’s forecasted future taxable income and various tax planning strategies, including the intent to hold the securities available for sale that were in a loss position until maturity, management determined that as of December 31, 2018, 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 December 31, 2018 or December 31, 2017.

The Company and the Bank are subject to U.S. federal income tax, State of Colorado income tax and income tax in other states. Generally, the Company is no longer subject to examination by Federal taxing authorities for years before 2015 and is no longer subject to examination by the State of Colorado for years before 2014. The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other noninterest expense. At December 31, 2018 and December 31, 2017, the Company did not have any amounts accrued for interest or penalties.

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(u) Segments of an Enterprise and Related Information

The Company operates as a single segment. The operating information used by the Company’s executive officers and its Chief Executive Officer for purposes of assessing performance and making operating decisions impacting the Company is the consolidated financial data presented in this report. For the years ended 2018, 2017, and 2016 the Company had one active operating subsidiary, the Bank. The Company has determined that banking is its one reportable business segment.

(v) Earnings per Common Share

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

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

	Year Ended December 31,
	2018		2017		2016
Average common shares outstanding		28,857,324		28,056,588		23,267,108
Effect of dilutive unvested stock grants (1)		273,323		287,099		292,839
Average shares outstanding for calculated diluted earnings per common share		29,130,647		28,343,687		23,559,947

⁽¹⁾ Unvested stock grants representing 398,114 shares at December 31, 2018 had a dilutive impact of 273,323 shares in the diluted earnings per share calculation. Unvested stock grants representing 434,149 shares at December 31, 2017 had a dilutive impact of 287,099 shares in the diluted earnings per share calculation. Unvested stock grants representing 513,187 shares at December 31, 2016 had a dilutive impact of 292,839 shares in the diluted earnings per share calculation.

(w) Dividend Restrictions

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.

Various banking laws applicable to the Bank limit the payment of dividends, management fees and other distributions by the Bank to the 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 and the Colorado Division of Banking prior to payment of a dividend to the Company.

(x) Fair Values of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 18 “Fair Value Measurements and Fair Value of Financial Instruments”. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

(y) Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of a loss is probable and an amount or range of loss can be reasonably estimated. Loss contingencies are more fully disclosed in Note 15 “Legal Contingencies”.

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(z) Recently Issued Accounting Standards

Adoption of New Accounting Standards:

In May 2014, the FASB issued accounting standards update2014-09 Revenue from Contracts with Customers, codified at ASC 606. 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. For public business entities, the amendments of this update became effective beginning with interim and annual reporting periods beginning after December 15, 2017. Interest income earned on financial instruments is outside of the scope of the update, and as a result the impact of the update to the Company is limited to certain components of noninterest income. The Company adopted ASC 606 utilizing the modified retrospective method on January 1, 2018. Because the Company’s noninterest income is primarily generated by customer transactions or attributable to the passage of time (wealth management fees), ASC 606 has not had a material impact on the timing of revenue recognition. The Company had no material uncompleted customer contract liabilities as of December 31, 2017 and as a result there was no cumulative transition adjustment recorded in the Company’s accumulated deficit upon adoption in the first quarter 2018. The most significant impact of ASC 606 to the Company was the additional disclosure requirements added to Note 22 “Revenue”.

In January 2016, the FASB released accounting standards update2016-01 Recognition and Measurement of Financial Assets and Liabilities. The provisions of this update became effective for interim and annual periods beginning after December 15, 2017. The main provisions of the update eliminated the available for sale classification of accounting for equity securities and adjusted fair value disclosures for financial instruments carried at amortized costs to reflect an exit price as opposed to an entry price. The provisions of this update also required that equity securities be carried at fair market value on the balance sheet and any periodic changes in value to be reflected in the income statement. A practical expedient was provided for equity securities without a readily determinable fair value, such that these securities can be carried at cost less any impairment. The Company adopted the provisions of the update beginning in the first quarter 2018 and considered these requirements in calculating the December 31, 2018 estimate of loan portfolio fair value included in Note 18 “Fair Value Measurements and Fair Value of Financial Instruments”.

In August 2016, the FASB issued accounting standards update2016-15, Statement of Cash Flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update became effective for fiscal years and interim periods beginning after December 15, 2017. The provisions of the update outlined the appropriate classification of debt extinguishment costs, repayment of debt instruments with insignificant coupons, contingent consideration payments made subsequent to a business combination, insurance proceeds, premiums and settlements on bank-owned life insurance policies, distributions from equity method investees, beneficial interest in securitizations and the appropriate classification of payments and receipts that contain aspects of multiple classes of cash flows. The provisions of the update did not affect the presentation of our 2018 statement of cash flows.

In January 2017, the FASB issued ASUNo. 2017-01, Business Combinations—Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, feedback received by FASB indicated that analyzing transactions can be inefficient and costly and that the current definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The requirements of this update did not have a material impact on the Company’s financial position, results of operations or cash flows.

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In February 2018, the FASB issued accounting standards update2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). The amendments of the update allowed an optional reclassification to retained earnings for stranded tax effects included in accumulated other comprehensive income, resulting from the reduction in the U.S. Statutory Corporate Income Tax Rate as provided for in the Tax Act. The provisions of the update are effective for all entities beginning with fiscal years commencing after December 15, 2018, with early adoption allowed in any interim period. The Company adopted the update in the first quarter 2018 and reclassified the $1,011,000 in stranded tax effects from AOCI into retained earnings, as reflected on the Statement of Changes in Stockholder’s Equity.

(aa) 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 cash flows.

(3) Business Combinations

On December 1, 2017, PCM, a wholly owned subsidiary of the Bank, entered into an Asset Purchase Agreement with Wagner. The transaction, structured as an asset purchase, closed on January 16, 2018, with the Company paying $5,223,000 of cash, in addition to agreeing to make a contingent payment on approximately theone-year anniversary of the acquisition valued at $1,846,000 on January 16, 2018.

On July 18, 2017, the Company entered into an Agreement and Plan of Reorganization (the “Castle Rock Merger Agreement”) with Castle Rock Bank Holding Company (“Castle Rock”), parent company of Castle Rock Bank, a Colorado state chartered bank headquartered in Castle Rock, Colorado whereby Castle Rock would merge into the Company. The transaction closed on October 27, 2017 with an aggregate transaction value of $24,421,000. The Castle Rock Merger Agreement provided that, subject to certain conditions, Castle Rock shareholders would receive 840,629 shares of Company voting common stock valued at $24,420,000 based on the Company’s closing stock price on October 27, 2017 of $29.05, in addition to approximately $1,000 in cash paid in lieu of the issuance of fractional shares of Company stock.

On March 16, 2016, the Company entered into an Agreement and Plan of Reorganization (the “Home State Merger Agreement”) with Home State, parent company of Home State Bank, a Colorado state chartered bank headquartered in Loveland, Colorado whereby Home State would merge into the Company. The transaction closed on September 8, 2016 with an aggregate transaction value of $152,478,000. The Home State Merger Agreement provided that, subject to certain conditions, Home State shareholders would receive 6,533,756 shares of Company voting common stock valued at $117,477,000 based on the Company’s closing stock price on September 8, 2016 of $17.98, in addition to $35,001,000 in cash.

The Wagner acquisition increased the Company’s market share in the Denver wealth management marketplace and added additional investment advisory expertise. The Castle Rock and Home State transactions enhanced the Company’s balance sheet liquidity and supported the Company’s objective of serving the banking needs of business and consumer customers in Colorado’s Front Range markets.

Wagner’s and Castle Rock’s results of operations subsequent to the respective merger dates have been included in the Company’s results of operations; however, it is impractical to provide separate information on Wagner or Castle Rock’s revenues and income subsequent to acquisition due to changes in the consolidated balance sheet.Pre-tax merger-related expenses of $75,000, incurred in connection with the Wagner transaction were included in the Company’s results of operations in the first quarter 2018. An additional $2,070,000, in merger-related expenses were incurred by the Company in 2018, related to the Independent transaction. Comparatively, $3,587,000 in merger-related expenses, related to the Castle Rock transaction, were incurred in 2017 and $6,259,000 in merger-related expenses, related to the Home State transaction, were incurred in 2016. The Company did not incur debt-issuance or stock-issuance costs in association with the Wagner or Castle Rock transactions.

Goodwill of $2,811,000 and $8,702,000, respectively, was recognized in the Wagner and Castle Rock transactions. The recognized goodwill represents expected synergies and cost savings resulting from combining the operations of the acquired institutions with those of the Company. Since the Wagner acquisition was a taxable transaction,tax-deductible goodwill of $2,811,000 will be amortized over a period of 15 years for income tax purposes. Thetax-free structure of the Castle Rock transaction preclude the amortization oftax-deductible goodwill for tax purposes.

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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the January 16, 2018 transaction with Wagner:

Assets acquired:

	(In thousands)
Goodwill	$	2,811
Other intangible assets, net		4,161
Premises and equipment, net		24
Other assets		188
Total assets acquired		7,184
Liabilities assumed:
Other liabilities		115
Anniversary payment liability		1,846
Total liabilities assumed		1,961
Net assets acquired	$	5,223

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the October 27, 2017 transaction with Castle Rock,:

Assets acquired:

	(In thousands)
Cash and cash equivalents	$	21,717
Securities available for sale		39,670
Bank stocks		705
Net Loans		71,052
Premises and equipment, net		4,184
Other real estate owned		761
Goodwill		8,702
Other intangible assets, net		1,870
Bank owned life insurance		3,371
Other assets		1,048
Total assets acquired		153,080
Liabilities assumed:
Deposits		128,450
Other liabilities		209
Total liabilities assumed		128,659
Net assets acquired	$	24,421

The fair value of net assets acquired includes fair value adjustments to certain loans that were considered impaired as of the acquisition date. The fair value adjustments were determined using discounted expected cash flows. Acquired loans that evidence credit deterioration since origination, for which the acquirer does not expect to collect all contractual cash flows, are designated as PCI upon acquisition. The gross contractual amount of loans identified as PCI as of the acquisition date totaled $1,644,000 in the Castle Rock transaction. Contractual cash flows not expected to be collected as of acquisition date on these PCI loans totaled $320,000 in the Castle Rock transaction. Additionally, Castle Rock PCI loans had an interest rate fair value adjustment of $41,000 bringing the net fair value of acquired PCI loans to $1,283,000 in the Castle Rock transaction. The cash flows on the Company’s PCI loans cannot be reliably estimated and as a result these loans have been designated as nonaccrual. Loans that were not designated PCI in the Castle Rock transaction had a fair value and contractual balance of $69,769,000 and $72,220,000 as of October 27, 2017. The credit component of the fair value adjustment onnon-PCI loans as of acquisition totaled $1,494,000 in the Castle Rock transaction representing 2.1% of contractual balances. No allowance for loan losses related to acquired loans was brought over as a result of the Castle Rock transaction.

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The composition of Castle Rock’s portfolio as of October 27, 2017 is detailed in the table below:

	October 27,
	2017
	(In thousands)
Commercial and residential real estate	$	51,531
Construction		6,337
Commercial		5,666
Agricultural		3,735
Consumer		3,783
Total gross loans		71,052

The following tables present unauditedpro-forma financial information as if the Wagner transaction occurred as of January 1, 2017. The unauditedpro-forma information includes adjustments for noninterest income on investment management fees generated, amortization of intangibles arising from the transaction and the related tax effects. The unaudited pro forma financial information has been adjusted to exclude nonrecurring expenses related to the Wagner transaction. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction occurred on January 1, 2017.

	Year Ended December 31,
	2018		2017
UNAUDITED	(Dollars in thousands, except per share data)
Net interest income	$	130,959	$	120,799
Noninterest income		29,914		28,564
Net income		56,236		38,578
Earnings per common share-basic:	$	1.95	$	1.38
Earnings per common share-diluted:	$	1.93	$	1.36

Unaudited pro forma net income for 2018 excludes $75,000 in merger-related expenses incurred by the Company during the first quarter 2018. These expenses were excluded since they were nonrecurring in nature and directly attributable to the transaction. For 2017, no merger-related expense adjustments were made to pro forma income.

(4) 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 as of the dates presented:

	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost
	(In thousands)
December 31, 2018:
Securities available for sale:
State and municipal	$	78,845	$	139	$	(1,980	)	$	80,686
Mortgage-backed - agency / residential		154,136		90		(4,825	)		158,871
Corporate		92,609		202		(3,471	)		95,878
Collateralized loan obligations		5,199		—		(85	)		5,284
Total securities available for sale	$	330,789	$	431	$	(10,361	)	$	340,719
December 31, 2017:
Securities available for sale:
State and municipal	$	82,486	$	530	$	(1,224	)	$	83,180
Mortgage-backed - agency / residential		131,180		133		(3,069	)		134,116
Corporate		103,512		546		(1,320	)		104,286
Collateralized loan obligations		12,799		17		(51	)		12,833
Total securities available for sale	$	329,977	$	1,226	$	(5,664	)	$	334,415

18

During the fourth quarter 2016, the Company reclassified, at fair value, approximately $63,432,000 in available for sale municipal bonds, asset-backed securities and mortgage backed securities to the held to maturity category, primarily to limit future volatility in equity due to potential increases in interest rates. The related unrealizedpre-tax losses of approximately $828,000 remained in accumulated other comprehensive income (loss) and will be amortized over the remaining life of the securities, offsetting the related accretion of discount on the transferred securities. No gains or losses were recognized at the time of reclassification. No transfers of securities occurred in 2018 or 2017.

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

	Fair Value		Gross Unrecognized Gains		Gross Unrecognized Losses			Amortized Cost
	(In thousands)
December 31, 2018:
Securities held to maturity:
State and municipal	$	130,165	$	536	$	(2,982	)	$	132,611
Mortgage-backed - agency / residential		90,138		119		(2,786	)		92,805
Asset-backed		13,559		—		(147	)		13,706
Other		1,200		—		—			1,200
Total securities held to maturity	$	235,062	$	655	$	(5,915	)	$	240,322
December 31, 2017:
Securities held to maturity:
State and municipal	$	136,490	$	1,121	$	(1,530	)	$	136,899
Mortgage-backed - agency / residential		103,925		315		(2,088	)		105,698
Asset-backed		16,050		7		(76	)		16,119
Other		1,200		—		—			1,200
Total securities held to maturity	$	257,665	$	1,443	$	(3,694	)	$	259,916

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

	Year Ended December 31,
	2018			2017			2016
Proceeds	$	4,036		$	80,027		$	370,111
Gross gains		16			334			2,486
Gross losses		(2	)		(340	)		(2,608	)
Net tax (benefit) expense related to gains (losses) on sale		3			(2	)		(46	)

19

The amortized cost and estimated fair value of available for sale and held to maturity debt securities by contractual maturity at December 31, 2018 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
December 31, 2018	Fair Value		Amortized Cost
	(In thousands)
Securities available for sale:
Due in one year or less	$	2,274	$	2,278
Due after one year through five years		21,423		21,856
Due after five years through ten years		97,395		101,272
Due after ten years		50,362		51,158
Total AFS, excluding mortgage-backed (MBS) and collateralized loan obligations		171,454		176,564
Mortgage-backed and collateralized loan obligations		159,335		164,155
Total securities available for sale	$	330,789	$	340,719

	Held to Maturity
December 31, 2018	Fair Value		Amortized Cost
	(In thousands)
Securities held to maturity:
Due in one year or less	$	2,861	$	2,861
Due after one year through five years		25,118		25,492
Due after five years through ten years		70,174		71,133
Due after ten years		33,212		34,325
Total HTM, excluding MBS and asset-backed		131,365		133,811
Mortgage-backed and asset-backed		103,697		106,511
Total securities held to maturity	$	235,062	$	240,322

Securities with carrying values of $200,342,000 and $219,621,000 were pledged at December 31, 2018 and December 31, 2017, respectively, as collateral for various lines of credit, public deposits and for other purposes as required or permitted by law. Certain mortgage backed securities with an aggregate market value of approximately $12,149,000 and $56,383,000 were pledged to secure overnight repurchase agreement borrowings as of December 31, 2018 and December 31, 2017, respectively. Fluctuations in the fair value of these securities, and/or the fluctuation in public deposits or 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 public deposits and repurchase agreement borrowings on a daily basis. At December 31, 2018, approximately $367,186,000 of securities were unpledged. At December 31, 2017, approximately $367,587,000 of securities were unpledged.

20

The following table presents the fair value and the unrealized loss on securities that were temporarily impaired as of December 31, 2018, aggregated by major security type and length of time in a continuous unrealized loss position:

December 31, 2018	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	$	19,810	$	(304	)	$	43,307	$	(1,676	)	$	63,117	$	(1,980	)
Mortgage-backed - agency / residential		15,835		(29	)		102,962		(4,796	)		118,797		(4,825	)
Corporate		22,104		(548	)		57,093		(2,923	)		79,197		(3,471	)
Collateralized loan obligations		2,244		(5	)		2,955		(80	)		5,199		(85	)
Held to maturity:
State and municipal		14,195		(251	)		88,693		(3,360	)		102,888		(3,611	)
Mortgage-backed - agency / residential		3,967		(60	)		85,182		(3,399	)		89,149		(3,459	)
Asset-backed		—		—			13,559		(417	)		13,559		(417	)
Total temporarily impaired	$	78,155	$	(1,197	)	$	393,751	$	(16,651	)	$	471,906	$	(17,848	)

The table above presents unrealized losses on held to maturity securities since the date of the securities purchase, independent of the impact associated with changes in cost basis upon transfer from available for sale to held to maturity.

In determining whether or not there is an 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 December 31, 2018.

At December 31, 2018, there were 311 individual securities in an unrealized loss position, including 254 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 57 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. Management determined that the increase in the number of securities in an unrealized loss position in excess of 12 months from 194 securities at December 31, 2017 to 254 securities at December 31, 2018 was primarily as a result of fluctuation in market interest rates. The total number of securities in an unrealized loss position increased from 255 individual securities at December 31, 2017 to 311 securities at December 31, 2018. At December 31, 2018, 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 made available to it that would prompt the need for more frequent review. At both December 31, 2018 and December 31, 2017, the Company’s unrated municipal bonds comprised approximately 4.4% of the carrying value of the Company’s entire municipal bond portfolio.

21

The following table presents the fair value and the unrealized loss on securities that were temporarily impaired as of December 31, 2017, aggregated by major security type and length of time in a continuous unrealized loss position:

December 31, 2017	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	$	8,710	$	(82	)	$	36,894	$	(1,142	)	$	45,604	$	(1,224	)
Mortgage-backed - agency / residential		43,494		(315	)		77,909		(2,754	)		121,403		(3,069	)
Corporate		38,267		(567	)		23,731		(753	)		61,998		(1,320	)
Collateralized loan obligations		4,532		(13	)		3,011		(38	)		7,543		(51	)
Held to maturity:
State and municipal		18,521		(167	)		69,314		(2,057	)		87,835		(2,224	)
Mortgage-backed - agency / residential		19,721		(162	)		78,472		(2,685	)		98,193		(2,847	)
Asset-backed		—		—			16,051		(448	)		16,051		(448	)
Total temporarily impaired	$	133,245	$	(1,306	)	$	305,382	$	(9,877	)	$	438,627	$	(11,183	)

At December 31, 2017, there were 255 individual securities in an unrealized loss position, including 194 individual securities that had been in a continuous unrealized loss position for 12 months or longer. Management evaluated these securities in addition to the remaining 61 securities in an unrealized loss position and determined that the decline in value since their purchase dates was primarily attributable to fluctuations in market interest rates and did not reflect a decline in the underlying issuers’ ability to repay. At December 31, 2017, 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.

(5) Bank Stocks

The Bank is a member of both the FRB of Kansas City and the FHLB of Topeka and is required to maintain an investment in the capital stock of each. The FRB, FHLB and other bank stocks are restricted in that they can only be redeemed by the issuer at par value. The Company’s investments in these instruments at December 31, 2018 and December 31, 2017 were as follows:

	2018		2017
	(In thousands)
Federal Reserve Bank of Kansas City	$	14,290	$	12,495
Federal Home Loan Bank of Topeka		11,710		10,235
Other bank stocks securities		1,688		1,689
Totals	$	27,688	$	24,419

22

(6) Loans

A summary of loans held for investment by loan type is included in the following table:

	December 31, 2018			December 31, 2017
	(In thousands)
Commercial and residential real estate	$	2,105,165		$	1,977,431
Construction		116,978			99,965
Commercial		517,366			523,355
Agricultural		13,497			16,995
Consumer		110,821			143,066
SBA		42,109			44,121
Other		225			866
Total gross loans		2,906,161			2,805,799
Deferred costs and (fees)		971			(136	)
Loans, held for investment, net		2,907,132			2,805,663
Less allowance for loan losses		(23,750	)		(23,250	)
Net loans, held for investment	$	2,883,382		$	2,782,413

During 2018, the Company purchased $6,465,000 of performing loans included in commercial and residential real estate and commercial loan portfolio segments. In comparison, during 2017, excluding the Castle Rock transaction, the Company purchased $98,940,000 in performing loans included in commercial and residential real estate, commercial and consumer loan portfolio segments. The Company recognized a $271,000 gain on the sale of its $2.0 million credit card loan portfolio during the first quarter 2017.

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

	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Balance, beginning of period	$	23,250		$	23,250		$	23,000
Provision for loan losses		1,137			992			143
Loanscharged-off		(1,167	)		(1,550	)		(721	)
Recoveries on loans previouslycharged-off		530			558			828
Balance, end of period	$	23,750		$	23,250		$	23,250

The Company’s additional disclosures relating to loans and the allowance for loan losses are broken out into two subsets, portfolio segment and class. The portfolio segment level is defined as the level where financing receivables are aggregated in developing the Company’s systematic method for calculating its allowance for loan losses. The class level is the second level at which credit information is presented and represents the categorization of financing related receivables at a slightly less aggregated level than the portfolio segment level. Because data presented according to class is dependent upon the underlying purpose of the loan, whereas loan data organized by portfolio segment is determined by the loan’s underlying collateral, disclosures broken out by portfolio segment versus class may not be in agreement. The disclosures in this footnote include bothnon-PCI and PCI loans. As of December 31, 2018, PCI loans acquired in the Castle Rock and Home State transactions are not considered material and as a result separate PCI disclosures are not included.

23

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 December 31, 2018 and December 31, 2017. In addition, the table also provides a rollforward by portfolio segment of the allowance for loan losses for the years ended December 31, 2018, December 31, 2017 and December 31, 2016. 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 January 1, 2016	$	20,306		$	71		$	2,623		$	23,000
Charge-offs		(217	)		(51	)		(453	)		(721	)
Recoveries		340			14			474			828
Provision (credit)		(347	)		71			419			143
Balance as of December 31, 2016	$	20,082		$	105		$	3,063		$	23,250
Balance as of January 1, 2017	$	20,082		$	105		$	3,063		$	23,250
Charge-offs		(386	)		(106	)		(1,058	)		(1,550	)
Recoveries		132			91			335			558
Provision (credit)		(1,283	)		220			2,055			992
Balance as of December 31, 2017	$	18,545		$	310		$	4,395		$	23,250
Balance as of January 1, 2018	$	18,545		$	310		$	4,395		$	23,250
Charge-offs		(9	)		(538	)		(620	)		(1,167	)
Recoveries		403			24			103			530
Provision (credit)		(1,523	)		419			2,241			1,137
Balance as of December 31, 2018	$	17,416		$	215		$	6,119		$	23,750
Balances at December 31, 2018:
Allowance for Loan Losses
Individually evaluated	$	—		$	—		$	3,165		$	3,165
Collectively evaluated		17,416			215			2,954			20,585
Total	$	17,416		$	215		$	6,119		$	23,750
Loans
Individually evaluated	$	8,948		$	—		$	13,229		$	22,177
Collectively evaluated		2,355,542			52,386			477,027			2,884,955
Total	$	2,364,490		$	52,386		$	490,256		$	2,907,132
Balances at December 31, 2017:
Allowance for Loan Losses
Individually evaluated	$	1		$	—		$	1,121		$	1,122
Collectively evaluated		18,544			310			3,274			22,128
Total	$	18,545		$	310		$	4,395		$	23,250
Loans
Individually evaluated	$	11,256		$	1		$	12,363		$	23,620
Collectively evaluated		2,225,944			74,675			481,424			2,782,043
Total	$	2,237,200		$	74,676		$	493,787		$	2,805,663

24

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 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.

December 31, 2018	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	$	7,998	$	8,527	$	—	$	8,696	$	358
Construction		—		—		—		—		—
Commercial		125		842		—		3,214		41
Consumer		148		160		—		201		7
Other		1,258		1,842		—		1,974		55
Total	$	9,529	$	11,371	$	—	$	14,085	$	461
Impaired loans with a related allowance:
Commercial and residential real estate	$	—	$	—	$	—	$	28	$	—
Construction		—		—		—		—		—
Commercial		11,224		11,276		2,832		7,912		414
Consumer		93		105		—		128		2
Other		1,331		1,331		333		266		—
Total	$	12,648	$	12,712	$	3,165	$	8,334	$	416
Total impaired loans:
Commercial and residential real estate	$	7,998	$	8,527	$	—	$	8,724	$	358
Construction		—		—		—		—		—
Commercial		11,349		12,118		2,832		11,126		455
Consumer		241		265		—		329		9
Other		2,589		3,173		333		2,240		55
Total impaired loans	$	22,177	$	24,083	$	3,165	$	22,419	$	877

25

December 31, 2017	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	$	9,981	$	10,705	$	—	$	16,166	$	2,052
Construction		—		—		—		—		—
Commercial		1,006		1,553		—		886		195
Consumer		367		425		—		88		—
Other		2,233		2,838		—		1,066		62
Total	$	13,587	$	15,521	$	—	$	18,206	$	2,309
Impaired loans with a related allowance:
Commercial and residential real estate	$	46	$	157	$	1	$	779	$	—
Construction		—		—		—		—		—
Commercial		9,807		9,899		1,120		5,262		447
Consumer		180		214		1		329		18
Other		—		—		—		635		6
Total	$	10,033	$	10,270	$	1,122	$	7,005	$	471
Total impaired loans:
Commercial and residential real estate	$	10,027	$	10,862	$	1	$	16,945	$	2,052
Construction		—		—		—		—		—
Commercial		10,813		11,452		1,120		6,148		642
Consumer		547		639		1		417		18
Other		2,233		2,838		—		1,701		68
Total impaired loans	$	23,620	$	25,791	$	1,122	$	25,211	$	2,780

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:

December 31, 2018	30-89 Days Past Due		90 Days + Past Due and Still Accruing		90 Days + Past Due and Nonaccrual		Total Nonaccrual and Past Due		Total Loans, Held for Investment
	(In thousands)
Commercial and residential real estate	$	332	$	234	$	233	$	799	$	2,105,868
Construction		—		—		—		—		117,017
Commercial		1,149		5		3,866		5,020		517,539
Consumer		341		78		77		496		110,858
Other		—		—		2,264		2,264		55,850
Total	$	1,822	$	317	$	6,440	$	8,579	$	2,907,132

December 31, 2017	30-89 Days Past Due		90 Days + Past Due and Still Accruing		90 Days + Past Due and Nonaccrual		Total Nonaccrual and Past Due		Total Loans, Held for Investment
	(In thousands)
Commercial and residential real estate	$	410	$	—	$	1,750	$	2,160	$	1,977,335
Construction		—		—		—		—		99,960
Commercial		1,663		—		2,079		3,742		523,330
Consumer		469		—		444		913		143,059
Other		327		—		1,281		1,608		61,979
Total	$	2,869	$	—	$	5,554	$	8,423	$	2,805,663

If nonaccrual loans outstanding during 2018, 2017 and 2016 had been current in accordance with their original terms, $321,000, $252,000 and $257,000 would have been recorded in incremental gross interest income during 2018, 2017 and 2016, respectively. The income recognized on nonaccrual loans prior to impairment during 2018, 2017 and 2016 was $165,000, $93,000 and $163,000 respectively. During 2016 $332,000 of cash basis interest

26

income was recognized on a nonaccrual loan that was moved to accruing status in the third quarter of 2016; no cash basis interest income was recognized on nonaccrual loans in 2018 or 2017. The $877,000 and $2,780,000 in interest income recognized on impaired loans during 2018 and 2017, respectively, is primarily comprised of interest income recognized on performing TDRs.

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 benon-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:

December 31, 2018	Commercial & Residential Real Estate		Construction		Commercial		Consumer		Other		Total
	(In thousands)
Non-classified	$	2,096,456	$	116,978	$	506,881	$	110,596	$	51,874	$	2,882,785
Substandard		8,709		—		10,485		225		3,957		23,376
Doubtful		—		—		—		—		—		—
Subtotal		2,105,165		116,978		517,366		110,821		55,831		2,906,161
Deferred costs and (fees)		703		39		173		37		19		971
Loans, held for investment, net	$	2,105,868	$	117,017	$	517,539	$	110,858	$	55,850	$	2,907,132

December 31, 2017	Commercial & Residential Real Estate			Construction			Commercial			Consumer			Other			Total
	(In thousands)
Non-classified	$	1,964,934		$	99,965		$	513,563		$	142,512		$	57,256		$	2,778,230
Substandard		12,497			—			9,792			554			4,726			27,569
Doubtful		—			—			—			—			—			—
Subtotal		1,977,431			99,965			523,355			143,066			61,982			2,805,799
Deferred (fees) and costs		(96	)		(5	)		(25	)		(7	)		(3	)		(136	)
Loans, held for investment, net	$	1,977,335		$	99,960		$	523,330		$	143,059		$	61,979		$	2,805,663

The book balance of TDRs at December 31, 2018 and December 31, 2017 was $15,578,000 and $19,256,000, respectively. Management established approximately $18,000 and $53,000 in specific reserves for these loans as of December 31, 2018 and December 31, 2017, respectively. The Company had an additional $3,195,000 and $4,181,000 committed on loans classified as TDRs at December 31, 2018 and December 31, 2017, respectively.

During the year ended December 31, 2018, the terms of five loans totaling $1,064,000 were modified in troubled debt restructurings. The modifications of the five loans included four restructurings of payment terms and one renewal of a loan with a term more favorable to the borrower than would otherwise be available based on the borrower’s financial strength. As a result of these modifications, the Company did not recognize any additional charge-offs during 2018 and the impact on the provision for loan losses was not material.

During the year ended December 31, 2017, the terms of 33 loans totaling $12,062,000 were modified in troubled debt restructurings. The modification of the terms of such loans included 19 restructurings of payment terms and 14 loan renewals with terms more favorable to the borrowers than would otherwise be available based on the borrower’s financial strength. As a result of these modifications, the Company did not recognize any additional charge-offs during 2017 and the impact on the provision for loan losses was not material.

27

The following tables present loans by class modified as troubled debt restructurings that occurred during the years indicated:

Year Ended December 31, 2018:

Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(In thousands)
Commercial and residential real estate		2	$	305	$	305
Construction		—		—		—
Commercial		—		—		—
Consumer		2		109		109
Other		1		650		650
Total		5	$	1,064	$	1,064

Year Ended December 31, 2017:

Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(In thousands)
Commercial and residential real estate		12	$	2,935	$	2,935
Construction		—		—		—
Commercial		15		7,991		7,991
Consumer		1		51		51
Other		5		1,085		1,085
Total		33	$	12,062	$	12,062

For reporting purposes, a loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There was a single default on a TDR in the fourth quarter 2018 with a balance of $19,000. In the second quarter 2018, there was a single default on a TDR with a balance of $22,000 which wascharged-off in the third quarter 2018. No TDRs defaulted during the year ended December 31, 2017.

(7) Premises and Equipment

A summary of the cost and accumulated depreciation and amortization of premises and equipment at December 31 is as follows:

	2018			2017
	(In thousands)
Land	$	14,782		$	15,354
Buildings		58,327			59,060
Leasehold improvements		3,236			3,790
Equipment and software		17,686			17,506
Leasehold interest in land		684			684
Subtotal	$	94,715		$	96,394
Accumulated depreciation and amortization		(32,367	)		(30,520	)
Total premises and equipment	$	62,348		$	65,874

Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was approximately $2,946,000, $2,971,000 and $2,713,000, respectively. Such amounts are classified in occupancy and furniture and equipment expense.

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Operating Leases: Pursuant to the terms ofnon-cancelable lease agreements in effect at December 31, 2018 pertaining to banking premises, future minimum rent commitments under various operating leases are as follows (in thousands):

2019	$	1,980
2020		2,069
2021		2,016
2022		1,675
2023		1,509
Thereafter		2,680
	$11,929

Certain leases contain options to extend the lease terms for five totwenty-one years. The cost of such extensions is not included in the above rental commitments. Rent expense for the years ended December 31, 2018, 2017 and 2016 was $1,907,000, $1,704,000 and $1,849,000, respectively.

(8) Goodwill and Other Intangible Assets

The Company recognized $2,811,000 in goodwill as a result of the January 16, 2018 Wagner acquisition and $8,702,000 in goodwill as a result of the Castle Rock transaction on October 27, 2017.

Other intangible assets with finite lives are amortized over their respective estimated useful lives to their estimated residual values. As of December 31, 2018, the Company’s intangible assets were comprised of its core deposit intangible assets, its customer relationship intangible assets and anon-compete intangible asset.

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:

			December 31,
	Useful Life		2018			2017
			(In thousands)
Core deposit intangible assets		10 - 15 years	$	75,956		$	75,956
Core deposit intangible assets accumulated amortization				(67,364	)		(65,272	)
Core deposit intangible assets, net				8,592			10,684
Customer relationship intangible assets		10 - 13 years	$	9,764		$	6,243
Customer relationship intangible assets accumulated amortization				(3,839	)		(2,486	)
Customer relationship intangible assets, net				5,925			3,757
Non-compete agreements intangible asset		3 years	$	640		$	—
Non-compete agreements intangible asset accumulated amortization				(207	)		—
Non-compete agreements intangible asset, net				433			—
Total other intangible assets, net			$	14,950		$	14,441

Amortization expense for the years ended December 31, 2018, 2017 and 2016 was $3,652,000, $2,745,000 and $1,557,000, respectively. Estimated amortization expense for the next five years, and thereafter, is as follows (in thousands):

	Total
Fiscal year ending:
2019	$	3,072
2020		2,698
2021		2,181
2022		1,861
2023		1,579
Thereafter		3,559
	$	14,950

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(9) Deposits

The aggregate amount of time deposits in denominations of $250,000 or more at December 31, 2018 and December 31, 2017 was $93,873,000 and $88,449,000, respectively.

At December 31, 2018 and December 31, 2017, the Bank had $108,205,000 and $95,299,000, respectively, in brokered time deposits. At December 31, 2018 and December 31, 2017, the Bank had $25,075,000 and $25,035,000, respectively, in brokered money market accounts. There were no reciprocal time deposits at December 31, 2018 or December 31, 2017.

At December 31, 2018, the scheduled maturities of time deposits are as follows (amounts in thousands):

2019	$	309,195
2020		120,525
2021		33,328
2022		6,831
2023		2,598
	$	472,477

(10) Securities Sold Under Agreements to Repurchase

The following is a summary of information pertaining to securities sold under agreement to repurchase at December 31:

	2018			2017
	(Dollars in thousands)
Ending Balance	$	8,475		$	44,746
Weighted-average interest rate atyear-end		0.20	%		0.20	%

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying security. The securities sold under agreements to repurchase are collateralized by government agency and mortgage-backed securities held by the Company, which had carrying values of $12,232,000 and $57,183,000 at December 31, 2018 and December 31, 2017, respectively.

Information concerning securities sold under agreements to repurchase is summarized below:

	Year Ended December 31,
	2018			2017			2016
	(Dollars in thousands)
Average daily balance during the year	$	40,791		$	37,332		$	25,221
Average interest rate during the year		0.19	%		0.19	%		0.21	%
Maximummonth-end balance during the year	$	61,866		$	48,391		$	38,089

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(11) Borrowings

A summary of borrowings is as follows:

	Principal		Interest Rate			Maturity Date	Total Committed
	(Dollars in thousands)
December 31, 2018
Short-term borrowings:
American Financial Exchange	$	—		2.55	%	overnight	$	64,000
Bankers’ Bank of the West		—		2.90	%	overnight		10,000
Federal Reserve Bank		—		3.00	%	overnight		10,655
U.S. Bank		—		3.00	%	overnight		5,750
Wells Fargo		—		2.87	%	overnight		10,000
FHLB line of credit		92,600		2.65	%	overnight		716,802
Total short-term borrowings	$	92,600
Long-term borrowings:
FHLB term notes (variable rate)	$	25,000		2.73	%	March 7, 2019		716,802
FHLB term notes (variable rate)		25,000		2.57	%	August 2, 2019		716,802
Total long-term borrowings	$	50,000
Total borrowings	$	142,600
December 31, 2017
Short-term borrowings:
Bankers’ Bank of the West	$	—		2.00	%	overnight	$	10,000
Federal Reserve Bank		—		2.00	%	overnight		1,650
U.S. Bank		—		2.00	%	overnight		5,750
Wells Fargo		—		1.85	%	overnight		10,000
Wells Fargo - Holding Company LOC		—		4.75	%	overnight		10,000
Zions		—		1.64	%	overnight		25,000
FHLB line of credit		157,444		1.47	%	overnight		706,251
Total short-term borrowings	$	157,444
Long-term borrowings:
FHLB term notes (fixed rate)	$	20,000		2.52	%	January 23, 2018		706,251
FHLB term notes (variable rate)		25,000		1.48	%	March 7, 2018		706,251
FHLB term notes (variable rate)		25,000		1.45	%	August 3, 2018		706,251
Total long-term borrowings	$	70,000
Total borrowings	$	227,444

At December 31, 2018, the Company’s outstanding borrowings were $142,600,000 compared to $227,444,000 at December 31, 2017. These borrowings at December 31, 2018 consisted of $50,000,000 of term notes and $92,600,000 of advances on our line of credit, both with the FHLB. At December 31, 2017, outstanding borrowings consisted of $70,000,000 of term notes and $157,444,000 of advances on our line of credit, both with the FHLB.

The interest rate on the line of credit varies with the federal funds rate, and was 2.65% at December 31, 2018. The Company has two variable rate term notes with the FHLB. The term notes are each $25,000,000 that mature on March 7, 2019 and August 2, 2019 and carry an interest rate that resets quarterly. As of December 31, 2018, the rates on our variable rate term notes were set at 2.73% and 2.57%, respectively.

The Company has an advance, pledge and security agreement with the FHLB and had pledged qualifying loans and securities in the amount of $716,802,000 at December 31, 2018 and $706,251,000 at December 31, 2017. The maximum credit allowance for future borrowings, including term notes and advances on the line of credit, was $574,202,000 at December 31, 2018 and $477,474,000 at December 31, 2017.

The Company had additional availability with correspondent banks of $100,405,000 and $62,400,000 at December 31, 2018 and December 31, 2017, respectively, as outlined in the table above.

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Information concerning borrowings on the FHLB line of credit is summarized below:

	Year Ended December 31,
	2018			2017			2016
	(Dollars in thousands)
Average daily balance during the year	$	161,492		$	73,042		$	81,539
Average interest rate during the year		2.04	%		0.99	%		0.55	%
Maximummonth-end balance during the year	$	220,700		$	157,444		$	185,700

(12) Income Taxes

The components of the income tax expense (benefit) are as follows:

	Year Ended December 31,
	2018			2017		2016
	(In thousands)
Current tax expense:
Federal	$	12,413		$	15,894	$	11,921
State		3,051			2,215		427
Total current tax expense		15,464			18,109		12,348
Deferred tax expense
Federal		(280	)		626		(1,026	)
Re-measurement of net deferred tax asset		—			976		—
State		(55	)		121		666
Total deferred tax expense (benefit)		(335	)		1,723		(360	)
Total tax expense	$	15,129		$	19,832	$	11,988

Income tax expense attributable to income from continuing operations differed from the amounts computed by applying the U.S. federal statutory tax rate to pretax income from operations as a result of the following:

	Year Ended December 31,
	2018			2017			2016
Tax expense at statutory federal rate		21.0	%		35.0	%		35.0	%
State tax, net of federal benefit		3.3	%		2.7	%		2.7	%
Tax exempt income		(2.8	)%		(4.8	)%		(5.1	)%
Re-measurement of net deferred tax asset related to 2017 Tax Cuts and Jobs Act		—	%		1.7	%		—	%
Other		(0.3	)%		(0.7	)%		0.1	%
Effective tax rate		21.2	%		33.9	%		32.7	%

As of December 31, 2018, the Company maintained a current tax payable of approximately $463,000 compared to current taxes receivable at December 31, 2017 of approximately $100,000. The Company’s net deferred tax asset is included in other assets at December 31, 2018 and December 31, 2017.

On December 22, 2017 President Donald Trump signed into law H.R. 1, commonly referred to as the 2017 Tax Cuts and Jobs Act. Under GAAP, the Company was required to account for the effects of this change in the period of enactment, or 2017. The direct impact to the 2017 financial statements was there-measurement of the Company’s net deferred tax asset, which resulted in $976,000 in additional income tax expense being recognized in 2017. The impact of thisre-measurement is included in the statutory rate reconciliation included above.

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Deferred tax assets and liabilities result from the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes at December 31, 2018 and December 31, 2017 are as follows:

	2018		2017
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	5,857	$	5,733
Other real estate owned		61		61
Other assets and accruals		887		1,061
Unrealized loss on available for sale securities		2,449		1,094
Unrealized loss on securities transferred to held to maturity		436		548
Unrealized loss on cash flow hedges		35		225
Intangible assets		679		515
Fair value adjustments on loans and other assets		2,445		3,313
Stock compensation and other		1,112		910
Total deferred tax assets:		13,961		13,460
Deferred tax liabilities:
Premises and equipment		4,849		5,211
Unrealized gain on acquired securities		1,071		1,141
Core deposit intangibles		2,247		2,774
Deferred loan costs		1,466		1,301
FHLB stock, prepaid assets, equity investments and other liabilities		1,138		1,231
Total deferred tax liabilities		10,771		11,658
Deferred tax asset, net	$	3,190	$	1,802

Realization of deferred tax assets is dependent upon the generation of sufficient future taxable income during the periods in which existing deferred tax assets are expected to become deductible for income tax purposes. Based on historical income levels, management determined that the Company’s deferred tax asset was fully realizable at December 31, 2018. As a result, the Company did not recognize a valuation allowance on its net deferred tax asset as of December 31, 2018 or December 31, 2017.

As of December 31, 2018, the Company had no Federal NOL loss carryforward, Alternative Minimum Tax (“AMT”) Credit carryforward or State of Colorado net operating loss carryforward.

As of December 31, 2018 the Company does not have any known unrecognized tax benefits and does not expect the total amount of unrecognized tax benefits to change significantly in the next twelve months.

(13) Subordinated Debentures and Trust Preferred Securities

At December 31, 2018, the Company’s outstanding subordinated debentures and notes (collectively, the “Debentures”) consisted of $65,774,000 in debt, partially offset by $626,000 in debt issuance costs. At December 31, 2017, the Company’s outstanding Debentures consisted of $65,774,000 in debt, partially offset by $709,000 in debt issuance costs. As of December 31, 2018, the Debentures carried a weighted average cost of funds of 5.56% compared to 5.14% at December 31, 2017.

The Company’s Debentures were issued in three separate series. The first two issuances have a maturity of 30 years from their date of issuance. These two issuances of 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 TruPS. The Guaranty Capital Trust III TruPS became callable at each quarterly interest payment date starting on July 7, 2008. The CenBank Statutory Trust III TruPS became callable at each quarterly interest payment date starting on April 15, 2009.

In April 2004, a predecessor to the Company formed CenBank Statutory Trust III and the trust completed an offering of $15,000,000, LIBOR plus 2.65% Cumulative TruPS, which are guaranteed by the Company. The trust also issued common securities to the predecessor of the Company and used the net proceeds from the offering to purchase $15,464,000 in principal amount of floating rate Debentures issued by the predecessor. The Company assumed the predecessor’s obligations relating to such securities upon the acquisition of the predecessor. Interest is

33

paid quarterly and is distributed to the holders of the TruPS. These Debentures are unsecured, ranked junior and were subordinate in right of payment to all senior debt of the Company. The TruPS are subject to mandatory redemption upon repayment of the Debentures. The Company has the right, subject to events of default, to defer payments of interest on the Debentures at any time by extending the interest payment period for a period not exceeding 60 consecutive months with respect to each deferral period, provided that no extension period could extend beyond the redemption or maturity date of the Debentures. The Debentures mature on April 15, 2034 and are callable on each quarterly payment date.

In June 2003, a predecessor to the Company formed Guaranty Capital Trust III and the trust completed an offering of $10,000,000, LIBOR plus 3.10% Cumulative TruPS, which are guaranteed by the Company. The trust also issued common securities to the predecessor of the Company and used the net proceeds from the offering to purchase $10,310,000 in principal amount of Debentures issued by the predecessor. The Company assumed the predecessor’s obligations relating to such securities upon the acquisition of the predecessor. Interest is paid quarterly and is distributed to the holders of the TruPS. The other terms and condition of these Debentures are substantially similar to those described under the CenBank Statutory Trust III. The Debentures mature on July 7, 2033 and are callable on each quarterly interest payment date.

Under the terms of each indenture pursuant to which the two respective Debentures were issued, the Company has the ability to defer interest on the Debentures for a period not exceeding 60 consecutive months as long as it is in compliance with all covenants of the respective indenture. Such a deferral is not an event of default under each indenture and interest on the Debentures continues to accrue during the deferral period. No interest was being deferred as of December 31, 2018.

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 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.

In July 2016, the Company issued its third set of Debentures in anticipation of closing on the Home State transaction. This third issuance of $40,000,000Fixed-to-Floating rate Subordinated Notes (“the Notes”) initially bear a fixed interest rate of 5.75% per annum, payable semi-annually in arrears and mature July 20, 2026. The carrying balance of the Notes at December 31, 2018 was comprised of the $40,000,000 face amount net of unamortized debt-issuance costs of $626,000. The terms of the Notes provide that on July 20, 2021, and, thereafter, the interest on the Notes will be payable quarterly in arrears, at an annual floating rate equal to three-month LIBOR as determined by the applicable quarterly period, plus 4.73%.

As of December 31, 2018, the Company was in compliance with all financial covenants of all three Debentures.

At December 31, 2018, the Company had accrued, unpaid interest on all three series of Debentures of approximately $1,375,000 compared to $1,305,000 at December 31, 2017. Interest payable on Debentures is included in interest payable and other liabilities, on the 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 both December 31, 2018 and December 31, 2017, the full $25,000,000 of the TruPS qualified as Tier 1 capital. The $40,000,000 from July 2016 issuance qualifies for inclusion in Tier 2 capital.

Under the Dodd-Frank Act and a 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 in total assets. As we have less than $15 billion in total assets and issued all of our TruPS prior to May 19, 2010, our TruPS continue to be eligible to be treated as Tier 1 capital, subject to other rules and limitations.

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The following table summarizes the terms of each outstanding subordinated debenture issuance at December 31, 2018 (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

4/15/2019

Variable

LIBOR + 2.65

%

5.09

%

4/15/2019

Guaranty Capital Trust III

6/30/2003

10,310

7/7/2033

4/7/2019

Variable

LIBOR + 3.10

%

5.54

%

4/7/2019

Subordinated Note

7/18/2016

40,000

7/20/2026

N/A

Fixed

LIBOR + 4.73

%

5.75

%

7/20/2021

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

** On January 7, 2019, the rate on the Guaranty Capital Trust III subordinated debentures reset to 5.89%. On January 15, 2019, the rate on the CenBank Trust III subordinated debentures reset to 5.44%. The subordinated notes issued July 18, 2016 are fixed at 5.75% until July 20, 2021 at which point the notes turn to floating rate at three-month LIBOR plus 4.73%.

(14) Commitments

The Bank enters into credit-related financial instruments withoff-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, including obtaining collateral, if necessary, as it does foron-balance sheet instruments.

At December 31 of the year indicated, the following financial instruments were outstanding whose contract amounts represented credit risk:

	2018		2017
	(In thousands)
Commitments to extend credit:
Variable	$	493,010	$	508,186
Fixed		98,911		116,026
Total commitments to extend credit	$	591,921	$	624,212
Standby letters of credit	$	10,513	$	12,398

At December 31, 2018, the rates on the fixed rate commitments to extend credit ranged from 2.90% 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. Commitments may expire without being fully 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.

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 issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral supporting these commitments if deemed necessary.

(15) Legal Contingencies

The Company and the Bank are defendants, from time to time, in legal actions at various points of the legal process, including appeals, arising from transactions conducted in the ordinary course of business. Management believes, after consultations with legal counsel that it is not probable that current legal actions will result in an unfavorable outcome 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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In the third quarter 2017, the Company incurred a $1,600,000 charge for a litigation settlement. The settlement related to a commercial borrower who filed counterclaims immediately after the Bank began collection efforts on its defaulted loan. The Company successfully defended all initial counterclaims, but at the onset of the initial trial, one new claim was raised and resulted in a hung jury. After a successful appeals process, the final claim was scheduled for a retrial in the third quarter of 2017. Prior to this retrial, the former borrower requested a conference to settle this remaining issue and after negotiation, the Company agreed to settle with the borrower to eliminate the expected significant costs of continued litigation.

(16) Employee Benefit Plans

Substantially all employees are eligible to participate in the Company’s 401(k) plan. Employees may contribute up to 100% of their compensation subject to certain limits based on federal tax laws. The Company makes matching contributions equal to a specified percentage of the employee’s compensation as defined by the plan. For years ended December 31, 2018, 2017 and 2016, matching contributions to the 401(k) plan were $1,136,000, $764,000 and $615,000, respectively.

Stock-Based Compensation

Under the Company’s Incentive Plan, which expired by its terms on April 4, 2015, the Company’s Board of Directors had the authority to grant stock-based compensation awards prior to the plan’s expiration. Under the 2015 Plan, which was approved by the Company’s stockholders at the May 5, 2015 annual meeting, the Company’s Board of Directors maintains the authority to grant stock-based compensation awards to nonemployee directors, key employees, consultants and prospective employees.

Stock-based compensation awards issuable under the 2015 Plan include, and that were issuable under the Incentive Plan, included, 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 for, and the 2015 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 or the 2015 Plan.

Under the provisions of the 2015 Plan and the Incentive Plan grants of stock-based compensation awards of 935,000 and 1,700,000 shares, respectively, were authorized, subject to adjustments upon the occurrence of certain events. As of December 31, 2018, there were 291,910 and 106,204 outstanding awards under the 2015 Plan and the Incentive Plan, respectively. As of December 31, 2018, there were 499,802 shares remaining available for grant under the 2015 Plan. As of December 31, 2017, there were 234,204 and 199,945 outstanding awards under the 2015 Plan and the Incentive Plan, respectively and 619,819 shares remaining available for grant under the 2015 Plan.

At December 31, 2018, there were 398,114 shares represented by unvested awards, of which 268,975 shares of restricted stock outstandings were subject to a performance condition. The performance shares relate to awards granted to key employees from March 2014 through May 2018. The vesting of these performance shares is contingent upon meeting certain return on average asset performance measures. As of December 31, 2018, management expected that approximately all of the unvested awards will vest, which is consistent with the level of expense being recognized over the vesting period.

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

	Shares			Weighted Average Fair Value on Award Date
Unearned at January 1, 2018		434,149		$	17.05
Awarded		135,038			27.95
Forfeited		(15,021	)		23.92
Vested		(156,052	)		16.53
Unearned at December 31, 2018		398,114		$	20.69

The Company recognized $3,399,000, $3,023,000 and $3,121,000 in stock-based compensation expense for services rendered for the years ended December 31, 2018, 2017 and 2016, respectively. The total income tax benefit recognized for share-based compensation arrangements was $838,000, $1,149,000 and $1,186,000 for the years ending December 31, 2018, 2017 and 2016, respectively. The grant date fair value of restricted stock awards granted in 2018, 2017 and 2016 was $3,774,000, $2,894,000 and $2,998,000, respectively. The fair value of vested shares as of the date of vesting were $4,142,000, $4,711,000 and $4,334,000 in 2018, 2017 and 2016 respectively. At December 31, 2018, compensation cost of $3,453,000 related to unvested awards not yet recognized is expected to be recognized over a weighted-average period of 0.9 years.

(17) Related-Party Transactions

Related parties include directors, executive officers and their affiliates. Deposits from related parties held by the Company at December 31, 2018 and 2017 amounted to $2,161,000 and $3,135,000, respectively. At December 31, 2018, the Company had one loan to one related party with an outstanding balance of $0. At December 31, 2017, the Company had two loans to one related party with a total balance of $568,000.

(18) 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 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 through 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. The valuation of the Company’s Level 3 bonds is highly sensitive to changes in unobservable inputs.

37

Currently, the Company uses interest rate swapsto help manage interest rate risk. 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 inputs). The Company considers the value of the swaps to be sensitive to fluctuations in interest rates.

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 December 31, 2018
State and municipal securities	$	—	$	71,834		$	7,011	$	78,845
Mortgage-backed securities – agency / residential		—		154,136			—		154,136
Corporate securities		—		92,609			—		92,609
Collateralized loan obligations		—		5,199			—		5,199
Interest rate swap - cash flow hedge		—		74			—		74
Interest rate swap - cash flow hedge		—		(306	)		—		(306	)
Assets/(Liabilities) at December 31, 2017
State and municipal securities	$	—	$	75,162		$	7,324	$	82,486
Mortgage-backed securities – agency / residential		—		131,180			—		131,180
Corporate securities		—		103,512			—		103,512
Collateralized loan obligations		—		12,799			—		12,799
Interest rate swaps - cash flow hedge		—		(1,010	)		—		(1,010	)

There were no transfers of financial assets and liabilities among Level 1, Level 2 and Level 3 during 2018 or 2017.

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 year ended December 31, 2018:

	State and Municipal Securities
	(In thousands)
Beginning balance December 31, 2017	$	7,324
Total unrealized gains (losses) included in:
Net income		8
Other comprehensive income (loss)		—
Sales, calls and prepayments		(321	)
Transfers in and (out) of Level 3		—
Balance December 31, 2018	$	7,011

For the year ended December 31, 2018, there was no other comprehensive income or loss for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as a result of consistentmark-to-market valuations at December 31, 2018 and December 31, 2017. For the year ended December 31, 2018, the amounts included in net income include accretion of any discount on these Level 3 bonds.

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The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2017:

	State and Municipal Securities
	(In thousands)
Beginning balance December 31, 2016	$	31,752
Total unrealized gains (losses) included in:
Net income		(233	)
Other comprehensive income (loss)		—
Sales, calls and prepayments		(24,195	)
Transfers in and (out) of Level 3		—
Balance December 31, 2017	$	7,324

For the year ended December 31, 2017, there was no other comprehensive income or loss for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as a result of consistentmark-to-market valuations at December 31, 2017 and December 31, 2016. For the year ended December 31, 2017 the amount included in net income included a $241,000 loss on the sale of the Company’s largest Level 3 municipal bond, partially offset by $8,000 in accretion on Level 3 bonds.

The following tables present quantitative information about Level 3 fair value measurements on the Company’s state and municipal securities at December 31, 2018 and December 31, 2017:

December 31, 2018	Fair Value		Valuation Technique	Unobservable Inputs	Range
	(In thousands)
State and municipal securities	$	7,011	discounted cash flow	discount rate		3.25%-3.75	%
Total	$	7,011

December 31, 2017	Fair Value		Valuation Technique	Unobservable Inputs	Range
	(In thousands)
State and municipal securities	$	7,324	discounted cash flow	discount rate		2.50%-3.00	%
Total	$	7,324

Financial Assets and Liabilities Measured on a Nonrecurring Basis

Financial assets and liabilities measured at fair value on a nonrecurring basis were not material as of December 31, 2018 and December 31, 2017.

Nonfinancial Assets and Liabilities Measured on a Nonrecurring Basis

Nonfinancial assets and liabilities measured at fair value on a nonrecurring basis were not material as of December 31, 2018 and December 31, 2017.

39

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 December 31, 2018:
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets:
Cash and cash equivalents	$	39,913	$	39,913	$	—	$	—	$	39,913
Time deposits with banks		262		262		—		—		262
Securities available for sale		330,789		—		323,778		7,011		330,789
Securities held to maturity		240,322		—		232,731		2,331		235,062
Bank stocks		27,688		n/a		n/a		n/a		n/a
Loans held for sale		—		—		—		—		—
Loans held for investment, net		2,883,382		—		—		2,789,764		2,789,764
Accrued interest receivable		11,700		—		11,700		—		11,700
Interest rate swap - cash flow hedge		74		—		74		—		74
Financial liabilities:
Deposits	$	3,108,879	$	—	$	3,104,421	$	—	$	3,104,421
Federal funds purchased and sold under agreements to repurchase		8,475		—		8,475		—		8,475
Short-term borrowings		92,600		—		92,600		—		92,600
Subordinated debentures		65,148		—		—		63,173		63,173
Long-term borrowings		50,000		—		49,900		—		49,900
Accrued interest payable		2,509		—		2,509		—		2,509
Interest rate swap - cash flow hedge		306		—		306		—		306

			Fair Value Measurements at December 31, 2017:
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets:
Cash and cash equivalents	$	51,553	$	51,553	$	—	$	—	$	51,553
Time deposits with banks		254		254		—		—		254
Securities available for sale		329,977		—		322,653		7,324		329,977
Securities held to maturity		259,916		—		255,189		2,476		257,665
Bank stocks		24,419		n/a		n/a		n/a		n/a
Loans held for sale		1,725		1,898		—		—		1,898
Loans held for investment, net		2,782,413		—		—		2,771,262		2,771,262
Accrued interest receivable		11,441		—		11,441		—		11,441
Financial liabilities:
Deposits	$	2,941,627	$	—	$	2,937,584	$	—	$	2,937,584
Federal funds purchased and sold under agreements to repurchase		44,746		—		44,746		—		44,746
Short-term borrowings		157,444		—		157,444		—		157,444
Subordinated debentures		65,065		—		—		61,129		61,129
Long-term borrowings		70,000		—		70,141		—		70,141
Accrued interest payable		1,930		—		1,930		—		1,930
Interest rate swap - cash flow hedge		1,010		—		1,010		—		1,010

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 through 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, FRB stock and BBW stock. These three stocks comprise the majority of the balance of the Company’s bank stocks.

(c) Loans Held for Investment

The fair value of loans was determined using an exit price methodology as prescribed by ASU2016-01, which became effective in the first quarter 2018. The exit price estimation of fair value is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital (Level 3). In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark. In comparison, loan fair values as of December 31, 2017 were estimated based on an entrance price methodology. As a result, the fair value adjustments as of December 31, 2018 and December 31, 2017 are not comparable.

(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 negotiations with the purchaser (Level 1).

(e) Deposits

The fair values of demand deposits (e.g., interest andnon-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).

41

(f) Short-term Borrowings

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

(g) Long-term Borrowings

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

(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

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 foroff-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.

(19) 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 December 31, 2018 and December 31, 2017:

	Balance
	Sheet		Fair Value at December 31,
	Location		2018		2017
			(In thousands)
Derivatives designated as hedging instruments
Assets:
Interest rate swaps		Other assets	$	74	$	—
Liabilities:
Interest rate swaps		Other liabilities	$	306	$	1,010

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The Company’s objectives in using interest rate derivatives are to add stability and predictability to interest expense and to manage the Company’s exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. For hedges of the Company’s variable-rate borrowings, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments. As of December 31, 2018 and December 31, 2017, the Company had twoforward-starting interest rate swaps with an aggregate notional amount of $50,000,000 that were each designated as cash flow hedges associated with the Company’s forecasted variable-rate borrowings. The first $25,000,000 swap became effective in June 2015 at a fixed rate of 2.46% and matures in June 2020. The second $25,000,000 swap became effective in March 2016 at a fixed rate of 3.00% and matures in March 2021.

Summary information about the interest-rate swaps designated as cash flow hedges as of December 31, 2018 and December 31, 2017 is included in the table below:

	2018			2017
	(Dollars in thousands)
Notional amounts	$	50,000		$	50,000
Weighted average pay rates		2.73	%		2.73	%
Weighted average receive rates		3 month LIBOR			3 month LIBOR
Weighted average maturity		1.9 years			2.9 years
Unrealized gains (losses), net	$	(232	)	$	(1,010)

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 2018, 2017, and 2016, the income statement effect of hedge ineffectiveness was not material.

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 immaterial for the 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 years ended December 31, 2018 and December 31, 2017:

	Income
Interest Rate Swaps with	Statement	December 31,
Hedge Designation	Location	2018		2017
		(In thousands)
Gain or (loss) recognized in OCI on derivative - net of tax	Not applicable	$	360	$	84
(Gain) or loss reclassified from accumulated OCI into income (effective portion) - net of tax	Interest expense		226		485

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 December 31, 2018 had posted $2,620,000 against its obligations under these agreements. If the Company had breached any of these provisions at December 31, 2018, it could have been required to settle its obligations under the agreements at the termination value.

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(20) Accumulated Other Comprehensive Income

The following table summarizes the changes within each classification of accumulated other comprehensive income (loss) (“AOCI”) net of tax for the years ended December 31, 2018, 2017 and 2016:

	Unrealized Gains and Losses on Available for Sale Securities			Unrealized Gains and Losses on Held to Maturity Securities			Unrealized Gains and Losses on Cash Flow Hedges			Total
	(In thousands)
Balance, January 1, 2016	$	(1,803	)	$	(1,477	)	$	(1,525	)	$	(4,805	)
Other comprehensive income (loss) before reclassifications, net of tax		(2,668	)		—			(183	)		(2,851	)
Net unrealized losses on securities transferred from available for sale, to held to maturity net of tax		513			(513	)		—			—
Amounts reclassified from accumulated other comprehensive income (loss), net of tax		45			312			573			930
Net other comprehensive income (loss)		(2,110	)		(201	)		390			(1,921	)
Balance, December 31, 2016	$	(3,913	)	$	(1,678	)	$	(1,135	)	$	(6,726	)
Other comprehensive income (loss) before reclassifications, net of tax		1,158			—			84			1,242
Net unrealized losses on securities transferred from available for sale, to held to maturity net of tax		—			—			—			—
Amounts reclassified from accumulated other comprehensive income (loss), net of tax		4			301			485			790
Net other comprehensive income (loss)		1,162			301			569			2,032
Balance, December 31, 2017	$	(2,751	)	$	(1,377	)	$	(566	)	$	(4,694	)
Other comprehensive income (loss) before reclassifications, net of tax		(4,127	)		—			360			(3,767	)
Net unrealized losses on securities transferred from available for sale, to held to maturity net of tax		—			—			—			—
Amounts reclassified from accumulated other comprehensive income (loss), net of tax		(10	)		337			226			553
Net other comprehensive income (loss)		(4,137	)		337			586			(3,214	)
Reclassification of stranded tax effect		(593	)		(298	)		(120	)		(1,011	)
Balance, December 31, 2018	$	(7,481	)	$	(1,338	)	$	(100	)	$	(8,919	)

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The following table summarizes the significant amounts reclassified out of each component of AOCI for the years ended December 31, 2018, 2017 and 2016:

Details about AOCI Components	Amount Reclassified from AOCI									Affected Income Statement Line Item
	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Unrealized gains and losses on available for sale securities	$	(14	)	$	6		$	73		(Gain) loss on the sale of securities
		4			(2	)		(28	)	Income tax effect
	$	(10	)	$	4		$	45		Net income
Unrealized gains and losses on held to maturity securities	$	447		$	486		$	504		Interest income
		(110	)		(185	)		(192	)	Income tax effect
	$	337		$	301		$	312		Net income
Unrealized gains and losses on cash flow hedges	$	300		$	783		$	925		Interest expense
		(74	)		(298	)		(352	)	Income tax effect
	$	226		$	485		$	573		Net income
Total reclassifications for the period	$	553		$	790		$	930		Net income

(21) Regulatory Capital Matters

The Holding Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certainoff-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. At December 31, 2018 and 2017, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since that notification that management believes have changed the Bank’s category.

Current risk-based regulatory capital standards generally require banks and bank holding companies to maintain a ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.50%, a ratio of Tier 1 capital to risk-weighted assets of at least 6.00%, a ratio of Tier 1 capital to average total assets (leverage ratio) of at least 4.00% and a ratio of total capital (which includes Tier 1 capital plus certain forms of subordinated debt, a portion of the allowance for loan and lease losses, and preferred stock) to risk-weighted assets of at least 8.00%. However, under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III, which became effective in the first quarter 2015, a capital conservation buffer of 2.5%, comprised of Common Equity Tier 1 was established above the regulatory minimum capital requirement. The capital conservation bufferphase-in period began January 1, 2016 and will become fully effective on January 1, 2019. A fullyphased-in capital conservation buffer is included in the table below. Management believes that the Holding Company and the Bank met all capital adequacy requirements to which they are subject.

45

The Company’s and the Bank’s actual capital amounts and ratios as of both December 31, 2018 and December 31, 2017 are presented in the table below:

	Actual					Minimum Requirement for “Adequately Capitalized” Institution plus fully phased in Capital Conservation Buffer					Minimum Requirement for “Well-Capitalized” Institution
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	Dollars in thousands
As of December 31, 2018:
Common Equity Tier 1 Risk-Based Capital Ratio
Consolidated	$	369,380		11.38	%	$	227,256		7.00	%	$	N/A		N/A
Guaranty Bank and Trust Company		423,647		13.10	%		226,458		7.00	%		210,283		6.50	%
Tier 1 Risk-Based Capital Ratio
Consolidated		394,380		12.15	%		275,954		8.50	%		N/A		N/A
Guaranty Bank and Trust Company		423,647		13.10	%		274,985		8.50	%		258,809		8.00	%
Total Risk-Based Capital Ratio
Consolidated		458,317		14.12	%		340,884		10.50	%		N/A		N/A
Guaranty Bank and Trust Company		447,585		13.84	%		339,687		10.50	%		323,512		10.00	%
Leverage Ratio
Consolidated		394,380		10.58	%		149,096		4.00	%		N/A		N/A
Guaranty Bank and Trust Company		423,647		11.37	%		149,016		4.00	%		186,270		5.00	%
As of December 31, 2017:
Common Equity Tier 1 Risk-Based Capital Ratio
Consolidated	$	335,153		10.57	%	$	221,969		7.00	%	$	N/A		N/A
Guaranty Bank and Trust Company		389,698		12.29	%		221,923		7.00	%		206,071		6.50	%
Tier 1 Risk-Based Capital Ratio
Consolidated		360,153		11.36	%		269,534		8.50	%		N/A		N/A
Guaranty Bank and Trust Company		389,698		12.29	%		269,477		8.50	%		253,626		8.00	%
Total Risk-Based Capital Ratio
Consolidated		423,583		13.36	%		332,954		10.50	%		N/A		N/A
Guaranty Bank and Trust Company		413,128		13.03	%		332,884		10.50	%		317,032		10.00	%
Leverage Ratio
Consolidated		360,153		10.21	%		141,164		4.00	%		N/A		N/A
Guaranty Bank and Trust Company		389,698		11.05	%		141,075		4.00	%		176,344		5.00	%

(22) Revenue

On January 1, 2018, the Company implemented accounting standards update2014-09 Revenue from Contracts with Customers, codified at ASC 606. The majority of the Company’s revenues are generated through interest earned on loans, securities and other sources which fall outside the scope of ASC 606. Revenue earned by the Company subject to ASC 606 was primarily comprised of deposit service charges, investment management fees and other noninterest income.

The Company adopted ASC 606 using the modified retrospective transition method. As of December 31, 2017, the Company had no uncompleted customer contracts and as a result no cumulative transition adjustment was posted to the Company’s accumulated deficit during 2018. Results for reporting periods beginning January 1, 2018 are presented under ASC 606 while prior period amounts continue to be reported under legacy GAAP.

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All of the Company’s revenue that is subject to ASC 606 is included in noninterest income, however not all noninterest income is subject to ASC 606. The following table presents the Company’s sources of noninterest income for the year ended December 31, 2018. Totals in the table may not agree to the amounts included in the Company’s consolidated statements of income as certain sources of revenue not subject to ASC 606 are excluded from the table.

	Income Statement Location	Year Ended December 31, 2018
Overdraft related income	Deposit service and other fees	$	3,288
Deposit service income	Deposit service and other fees		708
Analysis income	Deposit service and other fees		1,945
Wire fee income	Deposit service and other fees		342
Interchange income	Deposit service and other fees		6,968
Safe deposit box rental income	Deposit service and other fees		237
Other fee income	Deposit service and other fees		213
Subtotal		$	13,701
Trust fee income	Investment management and trust	$	2,660
Investment advisory income	Investment management and trust		7,507
Subtotal		$	10,167
Gain (loss) on sale of assets	Other noninterest income	$	954
Other	Other noninterest income		510
Subtotal		$	1,464

A description of the Company’s revenue streams accounted for under ASC 606 follows.

Overdraft-related income:The Company earns fees from its deposit customers for overdrafts and for maintaining accounts in an overdraft position. Overdraft fees are recognized at the point in time that the overdraft occurs or each day that an account remains in an overdraft position, which is the same time the Company’s performance obligation is satisfied.

Deposit service income:The Company earns fees from its deposit customers for transaction-based and account maintenance services. Transaction-based fees, which include stop-payment fees, statement rendering and check printing are recognized at the time the transaction is executed, which is the same time the Company’s performance obligation is satisfied. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month as the monthly maintenance performance obligation to the customer is satisfied.

Analysis Income:For deposit customers on account analysis, a variety of services are provided by the Bank. Services are charged in aggregate to customers on analysis over an established period. Services include remote deposit capture, merchant services, lockbox, ACH transmission, positive pay and cash sweep services. Because the performance obligation of providing the agreed upon services is satisfied monthly, recognition of revenue occurs monthly.

Interchange Income:The Company earns interchange income from cardholder transactions conducted with merchants, through various interchange networks with which the Company participates. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, as transaction processing services are provided to the deposit customer.

Investment advisory and trust fee income:The Company earns investment advisory and trust fee income by providing investment management and trust services to customers under investment management and trust contracts. These fees are earned over time based on the assets under management by the Company as of eachquarter-end. As the direction of investment management and trust accounts is provided over time, the performance obligation to investment management and trust customers is satisfied over time and revenue is recognized over time.

Significant judgments made by the Company in recognizing revenue from contracts with customers include the estimation of variable consideration, primarily related to the refunding of deposit service fees and the recognition of investment management fees on a straight-line basis over time. The Company’s estimate for refund obligations is based on historical trends and was not material as of December 31, 2018 or December 31, 2017. Investment management fees are recognized over time on a straight-line basis because the provision of advisory services occurs evenly over time and the straight-line method depicts the satisfaction of the Company’s performance obligation to the customer.

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With respect to deposit service charges, the deposit service charge is generated and revenue is recognized as customer activity occurs, which is also at the time the performance obligation is satisfied. As a result, the Company typically does not have contract liabilities, or unsatisfied performance obligations with deposit customers as ofquarter-end. The majority of the Company’s investment management fee revenue is billed quarterly in advance after each quarter end resulting in a contract liability balance being recorded as of the date of the billing. A limited amount of investment management fee revenue is billed in arrears, resulting in a contract asset being recorded as ofquarter-end. The Company’s performance obligation for investment management contracts with customers is satisfied evenly over time on a straight-line basis as investment management services are provided to the customer. This pattern of revenue recognition reflects the underlying provision of investment management services to the customer throughout the quarter. Because investment management fees are billed quarterly and earned during the quarter, the Company typically does not have contract liabilities or unsatisfied performance obligations with investment management customers as ofquarter-end.

As of both December 31, 2018 and December 31, 2017, the Company had an immaterial amount of contract assets outstanding.

(23) Parent Company Only Condensed Financial Information

The following is condensed financial information of Guaranty Bancorp (parent company only):

Balance Sheets

(Parent Company Only)

December 31, 2018 and 2017

	2018			2017
	(In thousands)
Assets
Cash	$	339		$	11,762
Investments in subsidiaries		495,349			459,443
Other assets		12,172			1,443
Total assets	$	507,860		$	472,648
Liabilities and Stockholders’ Equity
Liabilities:
Subordinated debentures	$	65,148		$	65,065
Other liabilities		1,630			2,684
Total liabilities		66,778			67,749
Stockholders’ equity:
Common stock		32			32
Common stock - additionalpaid-in capital		862,908			859,509
Accumulated deficit		(304,971	)		(343,383	)
Accumulated other comprehensive loss		(8,919	)		(4,694	)
Treasury stock		(107,968	)		(106,565	)
Total stockholders’ equity		441,082			404,899
Total liabilities and stockholders’ equity	$	507,860		$	472,648

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Statements of Income and Comprehensive Income

(Parent Company Only)

Years Ended December 31, 2018, 2017 and 2016

	2018			2017		2016
	(In thousands)
Income:
Management fee - subsidiary bank	$	7,654		$	6,139	$	8,127
Dividends from subsidiary bank		23,800			18,700		9,800
Other		5			1		—
Total income		31,459			24,840		17,927
Expenses:
Interest expense		3,701			3,440		2,005
Salaries and benefits		4,225			3,736		3,838
Professional services		2,195			2,083		1,774
Other		3,219			1,633		3,759
Total expenses		13,340			10,892		11,376
Income before federal income taxes and equity in undistributed net income of subsidiaries		18,119			13,948		6,551
Income tax benefit		1,162			1,576		1,024
Income before equity in undistributed net income of subsidiaries		19,281			15,524		7,575
Equity in undistributed income of subsidiaries		36,882			23,100		17,152
Net income	$	56,163		$	38,624	$	24,727
Other Comprehensive Income (Loss)		(3,214	)		2,032		(1,921	)
Total Comprehensive Income	$	52,949		$	40,656	$	22,806

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Statements of Cash Flow

(Parent Company Only)

Years Ended December 31, 2018, 2017 and 2016

	2018			2017			2016
	(In thousands)
Cash flows from operating activities:
Net income	$	56,163		$	38,624		$	24,727
Reconciliation of net income to net cash from operating activities:
Equity based compensation		1,161			1,123			1,168
Net change in:
Other assets		(10,730	)		1,298			1,474
Other liabilities		(970	)		(122	)		1,454
Equity in undistributed income of consolidated subsidiaries		(36,882	)		(23,100	)		(17,152	)
Net cash from operating activities		8,742			17,823			11,671
Cash flows from investing activities:
Cash paid in acquisition, net of cash acquired		—			48			(32,446	)
Net cash from investing activities		—			48			(32,446	)
Cash flows from financing activities:
Repurchase of common stock		(1,403	)		(1,515	)		(1,307	)
Proceeds from issuance of subordinated debt, net of issuance costs		—			—			39,170
Dividends paid		(18,762	)		(14,063	)		(10,524	)
Payment of stock issuance costs related to acquisition		—			—			(834	)
Net cash from financing activities		(20,165	)		(15,578	)		26,505
Net change in cash and cash equivalents		(11,423	)		2,293			5,730
Cash and cash equivalents, beginning of year		11,762			9,469			3,739
Cash and cash equivalents, end of year	$	339		$	11,762		$	9,469

(24) Subsequent Events

As disclosed in Note 2, on January 1, 2019, the Company merged with and into Independent Bank Group, Inc. (IBTX). The Company has evaluated subsequent events for recognition and disclosure through October 2, 2019, which is the date the financial statements were available to be issued.

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