General

The primary function of the Company is to monitor and oversee its investment in Guaranty Bank (the "Bank"), a wholly-owned subsidiary of the Company. The Company engages in few other activities, and the Company has no significant assets other than its investment in the Bank. As a result, the results of operations of the Company are derived primarily from operations of the Bank. The Bank's results of operations are primarily dependent on net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Bank's income is also affected by the level of its noninterest expenses, such as employee salaries and benefits, occupancy expenses and other expenses. The following discussion reviews the Company's financial condition as of June 30, 2009, and the results of operations for the three and six months ended June 30, 2009 and 2008.

The discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management's perception thereof as of the date of this Form 10-Q. When used in this Form 10-Q, words such as "anticipates," "estimates," "believes," "expects," and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties. Actual results of the Company's operations could materially differ from those forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to: changes in demand for banking services; changes in portfolio composition; changes in management strategy; increased competition from both bank and non-bank companies; changes in the general level of interest rates, in general or local economic conditions, in the real estate market, and in federal or state regulations and legislation governing the operations of the Company or the Bank; and other factors set forth in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time, including the risk factors described under Item 1A. of the Company's Form 10-K for the fiscal year ended December 31, 2008.

Financial Condition

The Company's total assets increased $71,033,336 (11%) from $675,670,393 as of December 31, 2008, to $746,703,729 as of June 30, 2009.

Cash and cash equivalents increased $28,922,482 (192%) from $15,097,015 as of December 31, 2008, to $44,019,497 as of June 30, 2009. Interest-bearing deposits increased $21,404,000 from $0 as of December 31, 2008, to $21,404,000 as of June 30, 2009. These increases were due to the funding provided by the Bank's money market deposit campaign. See further explanation below.

Securities available-for-sale increased $42,999,322 (66%) from $65,505,339 as of December 31, 2008, to $108,504,661 as of June 30, 2009. The increase is primarily due to purchases of $61.6 million offset by sales and principal payments received of $18.6 million. The purchases were made with funding provided by the Bank's money market deposit campaign. See further explanation below.

Securities held-to-maturity decreased primarily due to principal repayments by $46,102 (8%) from $556,465 as of December 31, 2008, to $510,363 as of June 30, 2009.

Net loans receivable decreased by $29,176,587 (5%) from $556,393,243 as of December 31, 2008, to $527,216,656 as of June 30, 2009 primarily due to principal paydowns and unanticipated payoffs. Commercial real estate loans increased by $24,589,833 (12%) from $204,218,526 as of December 31, 2008, to $228,808,360 as of June 30, 2009. Commercial loans decreased $10,554,678 (9%) from $118,468,028 as of December 31, 2008, to $107,913,349 as of June 30, 2009. Permanent multi-family loans decreased by $985,625 (3%) from $31,757,153 as of December 31, 2008, to $30,771,527 as of June 30, 2009. Construction loans decreased by $42,147,777 (50%) to $42,924,801 as of June 30, 2009 compared to $85,072,577 as of December 31, 2008.

Allowance for loan losses decreased $2,464,030 (14%) from $16,728,492 as of December 31, 2008 to $14,264,462 as of June 30, 2009. The allowance decreased due to net loan charge-offs of $6,744,030 exceeding the provision for loan losses of $4,280,000 recorded during the period. Management charged-off specific loans that had been identified and classified as impaired at December 31, 2008. Due to the charge-offs noted and continuing concerns over the local and national economy and specific borrowers, management decided to record a provision for loan losses for the period in order to maintain the allowance at a level in accordance with management's internal review and methodology. See discussion under "Results of Operations - Comparison of Three and Six Month Periods Ended June 30, 2009 and 2008 - Provision for Loan Losses." The allowance for loan losses, as a percentage of gross loans outstanding, as of June 30, 2009 and December 31, 2008 was 2.63% and 2.92%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of June 30, 2009 and December 31, 2008 was 49.9% and 80.8%, respectively. Management believes the allowance for loan losses is at a level to be sufficient in providing for potential loans losses in the Bank's existing loan portfolio.

Deposits increased $78,346,433 (18%) from $447,079,469 as of December 31, 2008, to $525,425,902 as of June 30, 2009. For the six months ended June 30, 2009, checking and savings accounts increased by $124.7 million and certificates of deposit decreased by $46.4 million. The increase in checking and savings was due to the Bank's strong emphasis on increasing money market accounts through an aggressive deposit campaign. Management has implemented additional marketing efforts to obtain additional personal and commercial checking business from these money market customers. See also the discussion under "Quantitative and Qualitative Disclosure about Market Risk - Asset/Liability Management."

Federal Home Loan Bank of Des Moines ("FHLB") advances decreased by $21,000,000 from $132,436,000 as of December 31, 2008, to $111,436,000 as of June 30, 2009 due to principal repayments during the period.

Notes payable decreased $1,435,190 (100%) from $1,435,190 as of December 31, 2008, to $0 as of June 30, 2009, due to the full repayment of the existing note payable during the period.

Stockholders' equity (including unrealized appreciation on securities available-for-sale and interest rate swaps, net of tax) increased $14,116,613 from $37,312,902 as of December 31, 2008, to $51,429,515 as of June 30, 2009. As a result of our participation in the CPP, our stockholders' equity increased by $17,000,000 during the period (See Note 10 to the Condensed Consolidated Financial Statements for further discussion). In addition, in conjuction with the Series A Preferred Stock issued under the CPP, the Company has recognized $354,166 of dividends (5%) and recorded $114,818 of accretion associated with the discount on the preferred stock. The Company's net loss during this period was $2,224,202. On a per common share basis, stockholders' equity decreased from $14.28 as of December 31, 2008 to $13.61 as of June 30, 2009.

Average Balances, Interest and Average Yields

The Company's profitability is primarily dependent upon net interest income, which represents the difference between interest and fees earned on loans and debt and equity securities, and the cost of deposits and borrowings. Net interest income is dependent on the difference between the average balances and rates earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities. Non-interest income, non-interest expense, and income taxes also impact the Company's results of operations.

The following tables sets forth certain information relating to the Company's average consolidated statements of financial condition and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense annualized by the average balance of assets or liabilities, respectively, for the periods shown. Average balances were derived from average daily balances. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yields and costs include fees which are considered adjustments to yields. All dollar amounts are in thousands.

                                 Three months ended 6/30/2009                        Three months ended 6/30/2008
                          Average                                             Average
                          Balance          Interest       Yield / Cost        Balance          Interest       Yield / Cost
ASSETS
Interest-earning:
Loans                   $   554,783       $    7,412               5.34 %   $   552,631       $    8,045               5.82 %
Investment securities
and interest-bearing
deposits                    140,293            1,075               3.07 %        63,007              829               5.26 %
Other assets                 33,431               17               0.20 %         7,765               51               2.63 %
Total
interest-earning            728,507            8,504               4.67 %       623,403            8,925               5.73 %
Noninterest-earning          21,736                                              21,961
                        $   750,243                                         $   645,364
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts        $    12,873               29               0.90 %   $    13,347               31               0.93 %
Transaction accounts        210,892            1,492               2.83 %       102,899              392               1.52 %
Certificates of
deposit                     274,375            2,421               3.53 %       284,129            3,107               4.37 %
FHLB advances               111,436              786               2.82 %       116,738              762               2.61 %
Securities sold under
agreements to
repurchase                   39,750              220               2.21 %        39,750              250               2.52 %
Subordinated
debentures                   15,465              256               6.62 %        15,465              256               6.62 %
Other borrowed funds              -                -               0.00 %         1,462               14               3.83 %
Total
interest-bearing            664,791            5,204               3.13 %       573,790            4,812               3.35 %
Noninterest-bearing          30,934                                              28,730
Total liabilities           695,725                                             602,520
Stockholders' equity         54,518                                              42,844
                        $   750,243                                         $   645,364
Net earning balance     $    63,716                                         $    49,613
Earning yield less
costing rate                                                       1.54 %                                              2.37 %
Net interest income,
and net yield spread
on interest earning
assets                                    $    3,300               1.81 %                     $    4,113               2.64 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                      110 %                                               109 %

                                    Six months ended 6/30/2009                             Six months ended 6/30/2008
                        Average Balance       Interest       Yield / Cost      Average Balance       Interest       Yield / Cost
ASSETS
Interest-earning:
Loans                   $        558,854     $   14,857               5.32 %   $        536,597     $   16,648               6.21 %
Investment securities
and interest-bearing
deposits                         112,740          1,904               3.38 %             53,540          1,404               5.24 %
Other assets                      55,232             66               0.24 %              7,024            104               2.96 %
Total
interest-earning                 726,826         16,827               4.63 %            597,161         18,156               6.08 %
Noninterest-earning               21,371                                                 20,952
                        $        748,197                                       $        618,113
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts        $         12,423             56               0.90 %   $         12,994             82               1.26 %
Transaction accounts             192,548          2,636               2.74 %            101,003            954               1.89 %
Certificates of
deposit                          291,679          5,285               3.62 %            280,463          6,471               4.61 %
FHLB advances                    112,714          1,568               2.78 %            101,109          1,495               2.96 %
Securities sold under
agreements to
repurchase                        39,750            452               2.27 %             34,805            475               2.73 %
Subordinated
debentures                        15,465            512               6.62 %             15,465            512               6.62 %
Other borrowed funds                 230              3               2.61 %              1,191             24               4.03 %
Total
interest-bearing                 664,809         10,512               3.16 %            547,030         10,013               3.66 %
Noninterest-bearing               31,426                                                 28,056
Total liabilities                696,235                                                575,086
Stockholders' equity              51,962                                                 43,027
                        $        748,197                                       $        618,113
Net earning balance     $         62,017                                       $         50,131
Earning yield less
costing rate                                                          1.47 %                                                 2.42 %
Net interest income,
and net yield spread
on interest earning
assets                                       $    6,315               1.74 %                        $    8,143               2.73 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                         109 %                                                  109 %

Results of Operations - Comparison of Three and Six Month Periods Ended June 30, 2009 and 2008

Net loss for the three months and six months ended June 30, 2009 was ($1,632,082) and ($2,224,202) as compared to a net loss of ($2,496,280) and ($1,879,422) for the three months and six months ended June 30, 2008, which represents a decrease in the net loss of $864,198 (35%) for the three month period, and an increase in the net loss of $344,780 (18%) for the six month period.

Interest Income

Total interest income for the three months and six months ended June 30, 2009, decreased $421,092 (5%) and $1,328,824 (7%), respectively, as compared to the three months and six months ended June 30, 2008. For the three month and six month periods ended June 30, 2009 compared to the same periods in 2008, the average yield on interest earning assets decreased 106 basis points to 4.67% and decreased 145 basis points to 4.63%, respectively, while the average balance of interest earning assets increased approximately $105,104,000 and $129,665,000, respectively. The Company's decline in the average yield on interest earning assets is partially due to the Federal Reserve's significant interest rate cuts of 200 basis points since March 31, 2008. This affected the Company's yield on loans which are tied to the prime rate. Another factor that has impacted the Company's yield on loans is the level of nonaccrual loans which has increased to $28.6 million as of June 30, 2009, as compared to $7.2 million as of June 30, 2008. Also, the Company increased its investment securities and interest-bearing deposits during the period which, because of the low rate environment for investment yields, decreased the average yield on investment securities and interest-bearing deposits by 219 basis points for the three month period and 187 basis points for the six month period, respectively, as compared to the same periods in 2008.

Interest Expense

Total interest expense for the three months and six months ended June 30, 2009, increased $392,664 (8%) and $499,589 (5%), respectively, when compared to the three months and six months ended June 30, 2008. For the three month and six month periods ended June 30, 2009 compared to the same periods in 2008, the average cost of interest bearing liabilities decreased 22 basis points to 3.13% and 50 basis points to 3.16%, respectively, while the average balance of interest bearing liabilities increased approximately $91,001,000 and $117,779,000, respectively, when compared to the same periods in 2008. The significant increase in the average balance of transaction accounts was due to the Bank's strong emphasis on increasing money market accounts through an aggressive deposit campaign. This initiative to improve core deposit liquidity has increased the Bank's cost of funds in the near term and is expected to have a short term negative impact on earnings. Management has implemented additional marketing efforts to obtain additional personal and commercial checking business from these money market customers.

Net Interest Income

Net interest income for the three months and six months ended June 30, 2009, decreased $813,756 (20%) and $1,828,413 (22%), respectively, when compared to the same periods in 2008. For the three and six month periods ended June 30, 2009, the earning yield minus the costing rate spread decreased 83 and 95 basis points, respectively, when compared to the same periods in 2008.

Provision for Loan Losses

Based on its internal analysis and methodology, management recorded a provision for loan losses of $3,300,000 and $4,280,000 for the three months and six months ended June 30, 2009, respectively, compared to $5,684,079 and $6,504,079 for the same periods in 2008. These provisions are due to the Bank's increased charge-offs for the periods and continuing concerns over the local and national economy and certain specific borrowers. A significant portion of additional reserves were made on a few problem loans already identified by management in previous quarters. Due to the concerns discussed above, and as a result of continuing analysis, including new information obtained after the quarter, the reserves are warranted. The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions. Management of the Company anticipates the need to continue increasing the allowance for loan losses through charges to the provision for loan losses if growth in the Bank's loan portfolio is experienced or other circumstances warrant. Although the Bank maintains its allowance for loan losses at a level which it considers to be sufficient to provide for potential loan losses in its existing loan portfolio, there can be no assurance that future loan losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies which can order the establishment of additional loan loss provisions.

Noninterest Income

Noninterest income increased $702,053 (86%) and $629,174 (37%) for the three months and six months ended June 30, 2009, respectively, when compared to the three months and six months ended June 30, 2008.

Gains on sales of investment securities increased $413,227 (423%) for both the three months and six months ended June 30, 2009 when compared to the same periods in 2008. These increases were due to the Company recognizing certain gains in its available-for-sale securities portfolio to reduce potential credit and interest rate risk issues. Service charges on transaction accounts decreased by $30,434 (6%) and $64,645 (7%) for the three months and six months ended June 30, 2009 when compared to the same periods in 2008, primarily due to declines in overdraft charges. Gain on sale of loans increased $186,945 (73%) and $311,278 (64%) for the three months and six months ended June 30, 2009 when compared to the same period in 2008 due to increased volume associated with the Bank's selling fixed rate mortgage loans.

Noninterest Expense

Noninterest expense increased $822,222 (26%) and $1,465,379 (23%) for the three months and six months ended June 30, 2009 when compared to the same periods in 2008.

Salaries and employee benefits increased $58,872 (3%) and $199,870 (5%) for the three months and six months ended June 30, 2009 when compared to the same period in 2008. This increase was primarily due to additions in several staff positions in the areas of commercial lending, finance and risk management in the latter half of fiscal year 2008.

FDIC deposit insurance premiums increased $608,001 (973%) and $820,032 (656%) for the three months and six months ended June 30, 2009 when compared to the same periods in 2008 due to the increase in premium assessments beginning in the first quarter of 2009 and the special assessment incurred as of June 30, 2009, to be payable on September 30, 2009 (See Note 11 to the Condensed Consolidated Financial Statements).

Credit for Income Taxes

The credit for income taxes is a direct result of the Company's taxable loss for the three months and six months ended June 30, 2009, as well as the prior year periods.

Nonperforming Assets

The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Bank's existing loan portfolio. When making such evaluation, management considers such factors as the repayment status of its loans, the estimated net realizable value of the underlying collateral, borrowers' intent (to the extent known by the Bank) and ability to repay the loan, local economic conditions and the Bank's historical loss ratios. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of June 30, 2009 and December 31, 2008 was 49.9% and 80.8%, respectively. Total loans classified as substandard, doubtful or loss as of June 30, 2009, were $47.8 million or 6.41% of total assets as compared to $47.7 million, or 7.06% of total assets at December 31, 2008. Management considered nonperforming and total classified loans in evaluating the adequacy of the Bank's allowance for loan losses.

The ratio of nonperforming assets to total assets is another useful tool in evaluating exposure to credit risk. Nonperforming assets of the Bank include impaired loans and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. All dollar amounts are in thousands.

                                                      6/30/2009       12/31/2008       12/31/2007
Nonperforming loans                                  $    28,592     $     20,694     $      7,254
Real estate acquired in settlement of loans                5,366            5,655              727
Total nonperforming assets                           $    33,958     $     26,349     $      7,981

Total nonperforming assets as a percentage of
total assets                                                4.55 %           3.90 %           1.41 %
Allowance for loan losses                            $    14,264     $     16,728     $      5,963
Allowance for loan losses as a percentage of gross
loans                                                       2.63 %           2.92 %           1.15 %

Liquidity and Capital Resources

Liquidity refers to the ability to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The Company's primary sources of liquidity include cash and cash equivalents, customer deposits and FHLB borrowings. The Company also has established borrowing lines available from the Federal Reserve Bank which is considered a secondary source of funds.

The Company's most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Bank's operating, financing, and investment activities at any given time. The Company's cash and cash equivalents totaled $44,019,497 as of June 30, 2009 and $15,097,015 as of December 31, 2008, representing an increase of $28,922,482. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows, which are subject to, and influenced by, many factors.

The Bank's capital ratios are above the levels required to be considered a well-capitalized financial institution. As of June 30, 2009, the Bank's Tier 1 leverage ratio was 8.18%, its Tier 1 risk-based capital ratio was 10.97% and the Bank's total risk-based capital ratio was 12.23% - all exceeding the minimums of 5%, 6% and 10%, respectively.

With regards to the securities sold to the Treasury under CPP, if the Company is unable to redeem the Series A Preferred Stock within five years of its issuance, the cost of capital to the Company will increase significantly from 5% per annum ($850,000 annually) to 9% per annum ($1,530,000 annually). Depending on the Company's financial condition at the time, the increase in the annual dividend rate on the Series A Preferred Stock could have a material effect on the Company's liquidity and net income available to common stockholders.