Guaranty Bancorp 10-Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2007

OR

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

For the transition period from            to            

Commission File Number: 000-51556

CENTENNIAL BANK HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	41-2150446
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
1331 Seventeenth St., Suite 300 Denver, CO	80202
(Address of principal executive offices)	(Zip Code)

303-296-9600

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “Accelerated Filer and Large Accelerated Filer” in Rule 12B-2 of the Exchange Act. (check one):

    Large Accelerated Filer  ¨    Accelerated Filer  x    Non-accelerated Filer  ¨

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

As of May 2, 2007 there were 55,195,718 shares of the registrant’s common stock outstanding, including 1,729,925 shares of unvested stock grants.

Table of Contents

TABLE OF CONTENTS

		Page
	Forward-Looking Statements and Factors that Could Affect Future Results	3
PART I—FINANCIAL INFORMATION		5
ITEM 1.	Unaudited Condensed Consolidated Financial Statements	5
	Unaudited Consolidated Balance Sheets	5
	Unaudited Consolidated Statements of Income	6
	Unaudited Consolidated Statements of Comprehensive Income	7
	Consolidated Statement of Changes in Stockholders’ Equity	8
	Unaudited Consolidated Statements of Cash Flows	9
	Notes to Unaudited Condensed Consolidated Financial Statements	10
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	34
ITEM 4.	Controls and Procedures	35
PART II—OTHER INFORMATION		36
ITEM 1.	Legal Proceedings	36
ITEM 1A.	Risk Factors	37
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
ITEM 3.	Defaults Upon Senior Securities	37
ITEM 4.	Submission of Matters to a Vote of Security Holders	37
ITEM 5.	Other Information	37
ITEM 6.	Exhibits	38

2

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified. In addition, certain statements may be contained in our future filings with the SEC, in press releases, and in oral and written statements made by or with our approval that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or board of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

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

• Local, regional, national and international economic conditions and the impact they may have on us and our customers, and our assessment of that impact.

• Changes in the level of nonperforming assets and charge-offs.

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

• Inflation and interest rate, securities market and monetary fluctuations.

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

• The timely development and acceptance of new products and services and perceived overall value of these products and services by customers.

• Revenues are lower than expected.

• Changes in consumer spending, borrowings and savings habits.

• Changes in the financial performance and/or condition of our borrowers.

• Credit quality deterioration, which could cause an increase in the provision for credit losses.

• Technological changes.

• Acquisitions of acquired businesses and greater than expected costs or difficulties related to the integration of acquired businesses.

• The ability to increase market share and control expenses.

• Changes in the competitive environment among financial or bank holding companies and other financial service providers.

• The effect of changes in laws and regulations with which we and our subsidiaries must comply.

• The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

• Changes in our organization, compensation and benefit plans.

• The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews.

• Our success at managing the risks involved in the foregoing items.

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

4

PART I—FINANCIAL INFORMATION

ITEM 1. Unaudited Condensed Consolidated Financial Statements

CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

	March 31, 2007			December 31, 2006
	(In thousands, except share data)
Assets
Cash and due from banks	$	68,639		$	45,409
Federal funds sold		25,431			4,211
Cash and cash equivalents		94,070			49,620
Securities available for sale, at fair value		149,631			157,260
Securities held to maturity (fair value of $11,122 and $11,157 at March 31, 2007 and December 31, 2006)		11,179			11,217
Bank stocks, at cost		31,995			31,845
Total investments		192,805			200,322
Loans, net of unearned discount		1,886,613			1,947,487
Less allowance for loan losses		(27,492	)		(27,899	)
Net loans		1,859,121			1,919,588
Premises and equipment, net		73,599			74,166
Other real estate owned and foreclosed assets		861			1,207
Goodwill		392,958			392,958
Other intangible assets, net		39,404			41,599
Other assets		40,566			41,140
Total assets	$	2,693,384		$	2,720,600
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand	$	519,951		$	517,612
Interest-bearing demand		789,921			777,579
Savings		81,689			87,265
Time		580,308			577,649
Total deposits		1,971,869			1,960,105
Securities sold under agreements to repurchase and federal funds purchased		34,695			25,469
Borrowings		29,804			67,632
Subordinated debentures		41,239			41,239
Interest payable and other liabilities		34,680			36,696
Total liabilities		2,112,287			2,131,141
Stockholders’ equity:
Common stock—$.001 par value; 100,000,000 shares authorized, 64,233,450 shares issued, 55,475,018 shares outstanding at March 31, 2007; 64,154,950 shares issued, 57,236,795 shares outstanding at December 31, 2006		64			64
Additional paid-in capital		615,356			614,489
Shares to be issued for deferred compensation obligations		798			775
Retained earnings		48,305			42,896
Accumulated other comprehensive income		680			809
Treasury Stock, at cost, 8,168,756 and 6,450,418, respectively		(84,106	)		(69,574	)
Total stockholders’ equity		581,097			589,459
Total liabilities and stockholders’ equity	$	2,693,384		$	2,720,600

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

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CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

	Three Months Ended March 31,
	2007		2006
	(In thousands, except per share data)
Interest income:
Loans, including fees	$	39,738	$	40,521
Investment securities:
Taxable		621		776
Tax-exempt		1,412		911
Dividends		475		427
Federal funds sold and other		114		75
Total interest income		42,360		42,710
Interest expense:
Deposits		13,346		10,147
Federal funds purchased and repurchase agreements		301		261
Subordinated debentures		932		847
Borrowings		938		1,548
Total interest expense		15,517		12,803
Net interest income		26,843		29,907
Provision for credit losses		1,010		—
Net interest income, after provision for credit losses		25,833		29,907
Noninterest income:
Customer service and other fees		2,443		2,498
Gain (loss) on sale of securities		—		(5	)
Gain on sale of mortgages		—		314
Other		124		305
Total noninterest income		2,567		3,112
Noninterest expense:
Salaries and employee benefits		10,974		11,435
Occupancy expense		2,121		2,052
Furniture and equipment		1,240		1,165
Amortization of intangible assets		2,195		2,998
Merger, acquisition and transition expenses		—		88
Other general and administrative		3,991		4,002
Total noninterest expense		20,521		21,740
Income before income taxes		7,879		11,279
Income tax expense		2,470		3,990
Income from continuing operations		5,409		7,289
Income from discontinued operations, net of tax		—		140
Net income	$	5,409	$	7,429
Weighted average shares outstanding-basic		54,792,527		59,057,264
Effect of dilutive unvested stock awards		109,702		183,516
Weighted average shares outstanding-diluted		54,902,229		59,240,780
Earnings per share–basic:
Income from continuing operations	$	0.10	$	0.13
Income from discontinued operations, net of tax		—		—
Net income		0.10		0.13
Earnings per share–diluted:
Income from continuing operations	$	0.10	$	0.13
Income from discontinued operations, net of tax		—		—
Net income		0.10		0.13

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

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CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended March 31,
	2007			2006
	(In thousands)
Net income	$	5,409		$	7,429
Other comprehensive income, net of tax
Change in net unrealized gain on securities available for sale		(129	)		(146	)
Total comprehensive income	$	5,280		$	7,283

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

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CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

	Shares of Common Stock		Common Stock and Additional Paid-in Capital		Shares to be Issued			Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income			Totals
	(In thousands, except share data)
Balance, December 31, 2006	57,236,795		$	614,553	$	775		$	(69,574	)	$	42,896	$	809		$	589,459
Comprehensive income(loss):
Net income	–			–		–			–			5,409		–			5,409
Change in net unrealized gain on securities available for sale	–			–		–			–			–		(129	)		(129	)
Total comprehensive income	–			–		–			–			–		–			5,280
Stock compensation awards, net of forfeitures	34,100			–		–			–			–		–			–
Earned stock award compensation	–			867		–			–			–		–			867
Repurchase of common stock	(1,718,800	)		–		–			(14,537	)		–		–			(14,537	)
Deferred compensation obligations	3,305			–		28			–			–		–			28
Common shares issued	–			–		(5	)		5			–		–			–
Balance, March 31, 2007	55,555,400		$	615,420	$	798		$	(84,106	)	$	48,305	$	680		$	581,097

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

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CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended March 31,
	2007			2006
	(In thousands)
Cash flows from operating activities:
Net income	$	5,409		$	7,429
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,423			4,460
Provision for credit losses		1,010			8
Stock compensation		867			700
Loss on sale of securities		—			5
Loss on sale of other real estate owned and assets		96			122
Real estate valuation adjustments		158			—
Loss on discontinued operations		—			201
Other		(279	)		(377	)
Proceeds from sales of loans held for sale		—			21,991
Originations of loans held for sale		—			(20,586	)
Net change in:
Accrued interest receivable and other assets		1,530			1,906
Accrued interest payable and other liabilities		(2,519	)		2,213
Net cash provided by operating activities		9,695			18,072
Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, prepayments, and calls		8,970			9,956
Purchases		(1,527	)		(6,569	)
Activity in held-to-maturity securities:
Maturities, prepayments, and calls		39			—
Loan originations and principal collections, net		58,788			63,918
Proceeds from sales of other real estate owned and foreclosed assets		349			453
Proceeds from sales of premises and equipment		2			115
Additions to premises and equipment		(522	)		(4,730	)
Proceeds from sale of subsidiary		—			1,835
Net cash provided (used) by investing activities		66,099			64,978
Cash flows from financing activities:
Net change in deposits		11,764			20,791
Net change in short-term borrowings		(36,391	)		(72,985	)
Repayment of long-term debt		(1,405	)		—
Net change in federal funds purchased and repurchase agreements		9,225			(18,483	)
Repurchase of common stock		(14,537	)		(3,603	)
Net cash provided (used) by financing activities		(31,344	)		(74,280	)
Net change in cash and cash equivalents		44,450			8,770
Cash and cash equivalents, beginning of period		49,620			118,811
Cash and cash equivalents, end of period	$	94,070		$	127,581
Cash and cash equivalents–consolidated statements of cash flows	$	94,070		$	127,581
Cash and cash equivalents from discontinued operations recorded in assets held for sale on the consolidated balance sheets		—			(12,870	)
Cash and cash equivalents–consolidated balance sheets	$	94,070		$	114,711
Supplemental disclosure of cash flow activity:
Interest paid on deposits and borrowed funds	$	16,694		$	14,077
Income taxes paid		18,393			—
Supplemental disclosure of noncash activities:
Note receivable from sale of subsidiary		—			1,175
Loans transferred to other real estate owned		255			162

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

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CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(1) Organization, Operations and Basis of Presentation

Centennial Bank Holdings, Inc. is a financial holding company and a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as a holding company for our subsidiaries. As of March 31, 2007, those subsidiaries were Guaranty Bank and Trust Company and Centennial Bank of the West, referred to as Guaranty Bank, and CBW, respectively. At March 31, 2006, those subsidiaries were Guaranty Bank, CBW and Collegiate Peaks Bank, which was sold on November 1, 2006. Reference to “Banks” means Guaranty Bank and CBW, and “we” or “Company” means Centennial Bank Holdings, Inc. on a consolidated basis with the Banks and Collegiate Peaks, if applicable. References to “Centennial” or to the holding company are referring to the parent company on a stand alone basis.

The Banks are full-service community banks offering an array of banking products and services to the communities they serve, including accepting time and demand deposits and originating commercial loans (including energy loans), real estate loans (including construction loans and mortgage loans), Small Business Administration guaranteed loans and consumer loans. CBW also provides trust services, including personal trust administration, estate settlement, investment management accounts and self-directed IRAs.

(a) Basis of Presentation

The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles. All significant intercompany balances and transactions have been eliminated. Our financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The interim operating results are not necessarily indicative of operating results for the full year.

(b) Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheets and income and expense for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes include the assessment for impairment of certain investment securities, the allowance for credit losses, valuation of other real estate owned, deferred tax assets and liabilities, goodwill and other intangible assets, and stock compensation expense. Assumptions and factors used in the estimate of stock compensation costs are evaluated on an annual basis or whenever events or changes in circumstance indicate that the previous assumptions and factors have changed. The result of the analysis could result in adjustments to the estimates.

(c) Allowance for Credit Losses

The allowance for loan losses and the reserve for unfunded loan commitments when combined are referred to as the allowance for credit losses. The allowance for loan losses is reported as a reduction of outstanding loan balances and the reserve for unfunded loan commitments is included within interest payable and other liabilities.

An allowance for credit losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan portfolio and commitments for the extension of credit. The allowance for loan losses and reserve for unfunded commitments are evaluated on a regular basis by management and based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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(d) Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over the fair value of the net assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are tested for impairment and not amortized. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.

Goodwill is our only intangible asset with an indefinite life. The annual impairment analysis of goodwill includes identification of reporting units, the determination of the carrying value of each reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of each reporting unit. We have identified one significant reporting unit – banking operations. The Company tests for impairment of goodwill at October 31 each year or if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit. We determine the fair value of our reporting unit and compare it to its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, we are required to perform a second step to the impairment test to measure the extent of the impairment.

Core deposit intangible assets, referred to as CDI, and other definite-lived intangible assets are recognized apart from goodwill at the time of acquisition based on valuations prepared by independent third parties or other estimates of fair value. In preparing such valuations, the third parties consider variables such as deposit servicing costs, attrition rates, and market discount rates. CDI assets are amortized to expense over their useful lives, which we have estimated to range from 7 years to 15 years. The other definite-lived intangible assets are amortized over their useful lives, which range from 1 year to 7 years.

(e) Impairment of Long-Lived Assets

Long-lived assets, such as premises and equipment, and definite-lived intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstance indicate that the carrying value of an asset may not be recoverable. 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 separately presented in the balance sheet and reported at the lower of the carrying value or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale are presented separately in the appropriate asset and liability sections of the consolidated balance sheet. The gain or loss and income from a disposal group are recorded as discontinued operations on the consolidated statement of income.

(f) Stock Incentive Plan

The Company’s Amended and Restated 2005 Stock Incentive Plan (“Plan”) provides for up to 2,500,000 grants of stock options, stock awards, stock units awards, performance stock awards, stock appreciation rights, and other equity-based awards to key employees, nonemployee directors, consultants and prospective employees. As of December 31, 2006, the Company has only granted stock awards. The Company accounts for the equity-based compensation using the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R,Share-Based Payment. The Company recognizes expense for services received in a share-based payment transaction as services are received. That cost is recognized on a straight-line basis over the period during which an employee or director provides service in exchange for the award. The Company has issued stock awards that vest based on service periods from one to four years, performance conditions, and awards with both service periods and performance conditions. The performance-based share awards expire December 31, 2012. The compensation cost of employee and director services received in exchange for stock awards is based on the grant-date fair value of the award (as determined by quoted market prices). The stock compensation expense recognized reflects estimated forfeitures, adjusted as necessary based on actual forfeitures.

(g) Deferred Compensation Plans

The Company has Deferred Compensation Plans (the “Plans”) that allow directors and certain key employees to voluntarily defer compensation. Compensation expense is recorded for the deferred compensation and a related liability is recognized. Participants may elect designated investment options for the notional investment of their deferred compensation. The recorded obligations are adjusted for deemed income or loss related to the investments selected. Participants in certain Plans are given

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the opportunity to elect to have all or a portion of their deferred compensation earn a rate of return equal to the total return on the Company’s common stock. The Plans do not provide for diversification of a participant’s assets allocated to Company common stock and assets allocated to Company common stock can only be settled with a fixed number of shares of stock. In accordance with Emerging Issues Task Force Issue 97-14,Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested, the deferred compensation obligation associated with Company common stock is classified as a component of stockholders’ equity. Subsequent changes in the fair value of the common stock are not reflected in earnings or stockholders’ equity of the Company. Company common stock held by the Company for the satisfaction of obligations of the Plans is classified as treasury stock. The Company held 76,904 and 77,366 shares of Company common stock for deferred compensation plan obligations at March 31, 2007 and December 31, 2006, respectively, which are recorded as treasury stock.

(h) Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company adopted the provisions of FIN 48 on January 1, 2007. This Interpretation clarifies the accounting and reporting for uncertainties in income tax law. It prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions. Differences between a tax position taken or expected to be taken in the Company’s tax returns and the amount of benefit recognized and measured in the financial statements result in unrecognized tax benefits, which are recorded in the balance sheet as either a liability for unrecognized tax benefits or reductions to recorded tax assets, as applicable.

The adoption of FIN 48 did not have any impact on the Company’s consolidated financial statements. At January 1, 2007, the Company had no unrecognized tax benefits that, if recognized, would effect the effective tax rate. The Company does not expect any significant increase in the amount of unrecognized tax benefits over the next 12 months.

The Company recognizes interest and penalties related to unrecognized tax benefits in other interest expense and other noninterest expense, respectively. There have been no significant interest or penalties recognized in the financial statements of the Company.

The Company files income tax returns in the U.S. federal jurisdiction and the state of Colorado. The Company is currently not under examination by any federal or state tax authority, but remains subject to income tax examinations for each of its open tax years (2003 through 2006) in the jurisdictions in which it files.

(i) Impact of Recently Issued Accounting Standards

Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements: In September 2006, the FASB issued EITF Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”). Under EITF 06-4, an employer that enters into an endorsement split-dollar life insurance arrangement that provides an employee with a postretirement benefit should recognize a liability for the future benefits promised based on the substantive agreement with the employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. Management has not yet determined the impact of EITF 06-4 on the Company’s consolidated financial statements.

Accounting for Certain Hybrid Financial Instruments: In February 2006, the FASB issued SFAS No. 155,Accounting for Certain Hybrid Financial Instruments,which amends SFAS 133, Accounting forDerivative Instruments and Hedging Activities,and SFAS No. 140,Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities.In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”). SFAS 155 amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 addresses issues from SFAS 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” Under the original guidance, SFAS 155 removed the exemption for securitized financial instruments and included scenarios where certain discount mortgage-backed securities (“MBS’s”) and discount collateralized mortgage obligations (“CMO’s”) with embedded derivative components could be subject to the bifurcation rules of SFAS 133, and therefore be marked to market through earnings. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. In October 2006, the FASB met to discuss implementation issues and industry concerns surrounding SFAS 155. In January 2007, the FASB issued SFAS 133 Implementation Issue No. B40. Implementation Issue No. B40 includes a narrow scope exception from paragraph 13(b) of SFAS 133 for securitized interests that contain only an embedded derivative that is tied to the prepayment risk of the underlying prepayable financial assets, thereby excluding certain discount MBS’s and CMO’s from the bifurcation test. The guidance in Implementation Issue No. B40 generally applies to securitized interests in prepayable financial assets acquired after the adoption of SFAS 155. The mortgage-backed securities held by the Company generally exempt from bifurcation under the Implementation Issue No. B40 scope exception. Management does not expect the adoption of SFAS 155 to have a material impact on the Company’s consolidated financial statements.

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Fair Value Measurements: In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, which upon adoption will replace various definitions of fair value in existing accounting literature with a single definition, will establish a framework for measuring fair value, and will require additional disclosures about fair value measurements. The Statement clarifies that fair value is the price that would be received to sell an asset or the price paid to transfer a liability in the most advantageous market available to the entity and emphasizes that fair value is a market-based measurement and should be based on the assumptions market participants would use. The Statement also creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation. This hierarchy is the basis for the disclosure requirements, with fair value estimates based on the least reliable inputs requiring more extensive disclosures about the valuation method used and the gains and losses associated with those estimates. SFAS No. 157 is required to be applied whenever another financial accounting standard requires or permits an asset or liability to be measured at fair value. The statement does not expand the use of fair value to any new circumstances. The Company will be required to apply the new guidance beginning January 1, 2008, and does not expect it to have a material impact on its financial position or results of operations.

The Fair Value Option for Financial Assets and Financial Liabilities: The FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, in February 2007. This Statement permits companies to choose to measure many financial instruments and certain other items at fair value. Once a company chooses to report an item at fair value, changes in fair value would be reported in earnings at each reporting date. SFAS No. 159 is effective for us on January 1, 2008. Management is presently evaluating this Statement and has not yet decided whether we will adopt it with respect to specific financial assets and liabilities on the balance sheet as of the effective date of this statement.

(j) Reclassifications

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

(2) Securities

The amortized cost and estimated fair value of debt securities are as follows:

	March 31, 2007
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In thousands)
Securities available for sale:
U.S. government agencies	$	3,414	$	—	$	(15	)	$	3,399
State and municipal		107,876		1,769		(185	)		109,460
Mortgage-backed		36,339		38		(511	)		35,866
Marketable equity securities		904		2		—			906
Securities available for sale	$	148,533	$	1,809	$	(711	)	$	149,631
Securities held to maturity:
Mortgage-backed	$	11,179	$	42	$	(99	)	$	11,122
	December 31, 2006
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In thousands)
Securities available for sale:
U.S. government agencies	$	2,426	$	—	$	(18	)	$	2,408
State and municipal		113,649		1,998		(76	)		115,571
Mortgage-backed		39,039		38		(637	)		38,440
Marketable equity securities		841		—		—			841
Securities available for sale	$	155,955	$	2,036	$	(731	)	$	157,260
Securities held to maturity:
Mortgage-backed	$	11,217	$	38	$	(98	)	$	11,157

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All individual securities that have been in a continuous unrealized loss position for 12 months or longer at March 31, 2007, were securities that have been issued by U.S. government agencies and government-sponsored entities and have a AAA credit rating as determined by various rating agencies. These securities have fluctuated in value since their purchase dates as a result of changes in market interest rates. We concluded that the continuous unrealized loss positions on these securities is a result of the level of market interest rates and not a result of the underlying issuers’ ability to repay. In addition, we have the ability and intent to hold these securities until their fair value recovers to their cost. Accordingly, we have not recognized the temporary impairment in our consolidated statements of income.

(3) Loans

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

	March 31, 2007			December 31, 2006
	(In thousands)
Loans on real estate:
Residential and commercial mortgage	$	708,416		$	686,056
Construction		353,323			427,465
Equity lines of credit		54,904			56,468
Commercial loans		651,796			647,915
Agricultural loans		46,958			51,338
Lease financing		6,503			6,704
Installment loans to individuals		43,891			50,222
Overdrafts		4,499			4,319
SBA and other		20,211			21,121
		1,890,501			1,951,608
Less:
Allowance for loan losses		(27,492	)		(27,899	)
Unearned discount		(3,888	)		(4,121	)
Net Loans	$	1,859,121		$	1,919,588

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

	Quarter Ended
	March 31, 2007
	(In thousands)
Balance, beginning of period	$	27,899
Provision for credit losses–loan losses		849
Loans charged off		(1,692	)
Recoveries on loans previously charged-off		436
Balance, end of period	$	27,492

A summary of transactions in the reserve for unfunded commitments for the periods indicated is as follows:

	Quarter Ended
	March 31, 2007
	(In thousands)
Balance, beginning of period	$	411
Provision for credit losses–unfunded commitments		161
Balance, end of period	$	572

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The following table details key information regarding the Company’s impaired loans at the dates indicated:

	March 31, 2007		December 31, 2006
	(In thousands)
Impaired loans with a valuation allowance	$	24,782	$	23,616
Impaired loans without a valuation allowance		15,560		15,217
Total impaired loans	$	40,342	$	38,833
Valuation allowance related to impaired loans	$	7,673	$	8,028
	Quarter Ended March 31, 2007		Year Ended December 31, 2006
	(In thousands)
Average investment in impaired loans	$	39,588	$	42,660

There was no interest income recognized on nonaccrual loans during the period ended March 31, 2007. The gross interest income that would have been recorded in the period ended March 31, 2007, if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, was $870,000. At March 31, 2007 and December 31, 2006, nonaccrual loans were $31,940,000 and $32,852,000, respectively. At March 31, 2007, $323,000 in loans past due ninety days or more was still accruing interest.

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(4) Other Intangible Assets

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

		March 31,			December 31,
	Useful life	2007			2006
		(In thousands)
Noncompete employment agreements	2 years	$	–		$	3,606
Core deposit intangible assets	7 -15 years		62,975			62,975
		$	62,975		$	66,581
Accumulated amortization			(23,571	)		(24,982	)
		$	39,404		$	41,599

Amortization expense for intangible assets for the three months ended March 31, 2007 and 2006 was $2,195,000 and $2,998,000, respectively.

(5) Borrowings

Borrowings include Treasury Tax and Loan notes, Federal Home Loan Bank (“FHLB”) borrowings, and a revolving credit agreement with U.S. Bank National Association. The Company had $29,804,000 and $67,632,000 outstanding under these obligations at March 31, 2007 and December 31, 2006, respectively, with a total commitment, including balances outstanding, of $382,307,000 at March 31, 2007.

At March 31, 2007, borrowings consisted of term notes at the Federal Home Loan Bank, of $7,704,000, $21,905,000 under the U.S. Bank revolving credit agreement and a $195,000 Treasury Tax and Loan note balance.

The total commitment, including balances outstanding, for borrowings at the Federal Home Loan Bank for the term notes and line of credit at March 31, 2007 was $311.3 million. The interest rate on the line of credit varies with the federal funds rate, which was 5.3% at March 31, 2007. The term notes have fixed interest rates that range from 3.25% to 6.22%. A blanket pledge and security agreement with the Federal Home Loan Bank, which encompasses certain loans and securities, serves as collateral for these borrowings.

The $70 million revolving credit agreement with U.S. Bank National Association contains financial covenants, including maintaining a minimum return on average assets, a maximum nonperforming assets to total loans ratio and regulatory capital ratios that qualify the Company as well-capitalized. As of March 31, 2007, the Company had $21.9 million drawn on this line and was in compliance with all debt covenants. The interest rate varies based on a spread over the federal funds rate, with a rate of 6.8% at March 31, 2007. The credit agreement is secured by Guaranty Bank stock.

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(6) Subordinated Debentures and Trust Preferred Securities

The Company had $41,239,000 in aggregate principal balances of subordinated debentures outstanding with a weighted average cost of 9.0% and 9.1% at March 31, 2007 and December 31, 2006, respectively. The subordinated debentures were issued in four separate series. Each issuance has a maturity of thirty years from its date of issue. The subordinated debentures were issued to trusts established by the Company, which in turn issued $40 million of trust preferred securities. Generally and with certain limitations, the Company is permitted to call the debentures subsequent to the first five or ten years, as applicable, after issue if certain conditions are met, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment of the trusts, the debentures or the preferred securities.

These securities are currently included in Tier I capital for purposes of determining the Company’s Tier I and total risk-based capital ratios. The Board of Governors of the Federal Reserve System, which is the holding company’s banking regulator, has promulgated a modification of the capital regulations affecting trust preferred securities. Under this modification, beginning March 31, 2009, the Company will be required to use a more restrictive formula to determine the amount of trust preferred securities that can be included in regulatory Tier I capital. At that time, the Company will be allowed to include in Tier I capital an amount of trust preferred securities equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders’ equity less certain intangibles, including goodwill, core deposit intangibles and customer relationship intangibles, net of any related deferred income tax liability. The regulations currently in effect through December 31, 2008, limit the amount of trust preferred securities that can be included in Tier I capital to 25% of the sum of core capital elements without a deduction for permitted intangibles. The Company expects that its Tier I capital ratios will be at or above the existing well-capitalized levels on March 31, 2009, the first date on which the modified capital regulations must be applied.

The following table summarizes the terms of each subordinated debenture issuance at March 31, 2007 (dollars in thousands):

Series	Date Issued	Principal Amount		Maturity Date	Call Date*	Fixed or Variable Rate	Rate Adjuster		Rate at March 31, 2007		Next Rate Reset Date
CenBank Trust I	9/7/2000	$	10,310	9/7/2030	9/7/2010	Fixed	N/A		10.60	%	N/A
CenBank Trust II	2/22/2001		5,155	2/22/2031	2/22/2011	Fixed	N/A		10.20	%	N/A
CenBank Trust III	4/15/2004		15,464	4/15/2034	4/15/2009	Variable	LIBOR+2.65	%	8.01	%	4/16/2007
Guaranty Capital Trust III	7/7/2003		10,310	7/7/2033	7/7/2008	Variable	LIBOR+3.10	%	8.46	%	4/7/2007

* Call date represents the earliest date the Company can call the debentures without penalty.

(7) Commitments

The Company is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, stand-by 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 Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

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At the dates indicated, the following commitments were outstanding:

	March 31, 2007		December 31, 2006
	(In thousands)
Commitments to extend credit	$	611,486	$	555,757
Standby letters of credit		33,794		32,382
Commercial letters of credit		328		274
Totals	$	645,608	$	588,413

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Several of the commitments may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Commitments to extend credit under overdraft protection agreements are commitments for possible future extensions of credit to existing deposit customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and might not be drawn upon to the total extent to which the Company is committed.

Stand-by letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Substantially all 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 Company generally holds collateral supporting those commitments if deemed necessary.

The Company enters into commercial letters of credit on behalf of its customers, which authorize a third party to draw drafts on the Company up to a stipulated amount and with specific terms and conditions. A commercial letter of credit is a conditional commitment on the part of the Company to provide payment on drafts drawn in accordance with the terms of the commercial letter of credit.

(8) Stock-Based Compensation

Under the Company’s 2005 Amended and Restated Stock Incentive Plan (the “Incentive Plan”), the Company may grant stock-based compensation awards to nonemployee directors, key employees, consultants and prospective employees under the terms described in the Incentive Plan. The allowable stock-based compensation awards include the grant of Options, Restricted Stock Awards, Restricted Stock Unit Awards, Performance Stock Awards, Stock Appreciation Rights and other Equity-Based Awards. The Incentive Plan provides that eligible participants may be granted shares of Company common stock that are subject to forfeiture until the grantee vests in the stock award based on the established conditions, which include service conditions and established performance measures.

Prior to vesting of the stock awards with a service vesting condition, each grantee shall have the rights of a stockholder with respect to voting of the granted stock. The recipient is not entitled to dividend rights with respect to the shares of granted stock until vesting occurs. Prior to vesting of the stock awards with performance vesting conditions, each grantee shall have the rights of a stockholder with respect to voting of the granted stock. The recipient is not entitled to dividend rights with respect to the shares of granted stock until initial vesting occurs, at which time, the dividend rights will exist on vested and unvested shares of granted stock, subject to termination of such rights under the terms of the Incentive Plan.

Other than the stock awards with service and performance-based vesting conditions, no grants have been made under the Incentive Plan. The Incentive Plan authorizes grants of stock-based compensation awards of up to 2,500,000 shares of Company common stock, subject to adjustments provided by the Incentive Plan. As of March 31, 2007 and December 31, 2006, there were 1,759,925 and 1,725,825 shares of unvested stock granted (net of forfeitures), with 707,277 and 741,377 shares available for grant under the Incentive Plan, respectively.

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

	Shares		Weighted Average Fair Value on Award Date
Outstanding at December 31, 2006	1,725,825		$	10.67
Awarded	78,500			8.55
Forfeited	(44,400	)		10.98
Outstanding at March 31, 2007	1,759,925		$	10.57

The Company recognized $867,000 and $700,000 in compensation expense for services rendered for the three months ended March 31, 2007 and 2006, respectively. The total income tax benefit recognized in the consolidated income statement for share-based compensation arrangements was $329,000 and $266,000 for the three months ended March 31, 2007 and 2006, respectively. At March 31, 2007, compensation cost of $9,896,000 related to nonvested awards not yet recognized is expected to be recognized over a weighted-average period of 3.0 years. No awards vested during the three months ended March 31, 2007 or 2006.

(9) Capital Ratios

At March 31, 2007 and December 31, 2006, the Company had leverage ratios of 9.00% and 8.93%, Tier 1 risk-weighted capital ratios of 9.67% and 9.92%, and total risk-weighted capital ratios of 10.92% and 11.17%, respectively. The Company actively monitors its regulatory capital ratios to ensure that the Company and its bank subsidiaries are well capitalized under the applicable regulatory framework.

(10) Discontinued Operations

Business Disposition

On March 1, 2006, the Company sold substantially all of the assets of its First MainStreet Insurance, Ltd. subsidiary for $3,215,000, of which $1,835,000 was paid in cash at closing, and the release of the Company from certain contractual obligations. The sale of the subsidiary did not result in a gain or loss due to a reallocation of the initial goodwill allocated to First MainStreet Insurance, Ltd. First MainStreet Insurance, Ltd. net income for the period from January 1, 2006 to March 1, 2006 of $17,000 is included in income from discontinued operations for the three months ended March 31, 2006.

Discontinued Operations

The Company’s results of operations for the three months ended March 31, 2006 included the activity from First MainStreet Insurance, which was sold on March 1, 2006, and Collegiate Peaks Bank, which was held for sale as of March 31, 2006 and sold on October 1, 2006. The following tables present the summary results of operations presented in discontinued operations for the period ended March 31, 2006.

	Three Months Ended March 31, 2006
	(In thousands)
Interest income	$	1,295
Noninterest income	$	591
Net income from discontinued operations, net of tax	$	342
Impairment of assets, net of $123 tax benefit		(202	)
Income from discontinued operations	$	140

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(11) Contingencies

On December 31, 2004, an adversary proceeding was filed against Guaranty Bank and Trust Company in the United States Bankruptcy Court for the District of Colorado, by the trustees of the Will Hoover Company, or the Hoover Company, and William Gordon Hoover, Jr., or Hoover, seeking to avoid certain transfers that occurred over a four-year period commencing in 1999 under the United States Bankruptcy Code. The trustees alleged that certain transfers were made by the Hoover Company and Hoover with actual fraudulent intent, that the transfers were made for less than reasonably equivalent value and occurred at a time when the Hoover Company and Hoover were insolvent, or were rendered insolvent by the transfers, and that certain other transfers were preferential as to other creditors, were made for less than reasonably equivalent value or were made by the Hoover Company or Hoover with actual fraudulent intent. On September 7, 2005, the Bankruptcy Court granted, in part, Guaranty Bank’s initial response and dismissed $8.5 million of the claims relating to alleged transfers for payment of items credited in the check collection process. On August 29, 2006, Guaranty Bank filed a motion for partial summary judgment on the trustees’ claims to recover payments on alleged overdrafts in the amount of approximately $1.7 million, which the court denied. The remaining claims amount to approximately $2.9 million. In April 2007, the Company and the trustees participated in mediation. As a result of the mediation, the parties are currently in final settlement discussions. Any settlement will be subject to the approval of the Bankruptcy Court. The Company does not expect the settlement amount to materially exceed the amount the Company had reserved as of March 31, 2007 for this litigation.

On July 22, 2005 and August 18, 2005, two separate but similar actions (i.e., the Barnes action and Teper action, respectively) were filed against Guaranty Bank and a former officer in the Denver District Court, Denver, Colorado by investors who provided funds to Hoover, the Hoover Company or related entities. The investors allege that certain activities of Guaranty Bank and its former officer with respect to the customer relationship with Hoover, the Hoover Company and related entities aided and abetted Hoover and the Hoover Company in securities violations and violations of the Colorado Organized Crime Control Act and amounted to a civil conspiracy, causing the investors to incur damages. The court has subsequently dismissed the entire Teper action. The investors in the Barnes action are seeking actual and statutory treble damages, as well as interest and attorneys’ fees, against Guaranty Bank and its former officer. The currently outstanding alleged actual losses claimed in connection with the Barnes action are approximately $10.5 million. We will continue to vigorously defend the Barnes action. At this time, we cannot determine whether the outcome of the Barnes action will have a material adverse impact on our consolidated financial position or results of operations. To the extent the Barnes action is not settled or dismissed, the Company will incur ongoing legal defense costs and be exposed to a possible adverse judgment. If such legal defense costs and any adverse judgment are not covered by insurance, the legal defense costs and judgment incurred could have an adverse impact on our results of operations.

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

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

This MD&A should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report and Items 1, 1A, 6, 7, 7A and 8 of our 2006 Annual Report on Form 10-K. Also, please see the disclosure in the “Forward-Looking Statements and Factors that Could Affect Future Results” section in this report for certain other factors that could cause actual results or future events to differ materially from those anticipated in the forward-looking statements included in this report or from historical performance.

Overview

We are a financial holding company and a bank holding company providing banking and other financial services throughout our targeted Colorado markets to consumers and to small and medium-sized businesses, including the owners and employees of those businesses, through our bank subsidiaries. At March 31, 2007, those subsidiaries included Guaranty Bank and Trust Company and Centennial Bank of the West. Unless the context requires otherwise, the terms “Company,” “us,” “we,” and “our” refers to Centennial Bank Holdings, Inc. on a consolidated basis. Collegiate Peaks Bank was a subsidiary prior to November 1, 2006, the time at which its sale was completed. Collegiate Peaks Bank was classified as held for sale from December 31, 2004 through its sale on November 1, 2006, with the results of operations reported as discontinued operations in the Company’s financial statements. We refer to Guaranty Bank and Trust Company as Guaranty Bank, Centennial Bank of the West as CBW, and Collegiate Peaks Bank as Collegiate Peaks. We refer to Guaranty Bank and CBW as the Banks.

We offer an array of banking products and services to the communities we serve, including accepting time and demand deposits, originating commercial loans including energy loans, real estate loans, including construction and mortgage loans, Small Business Administration guaranteed loans and consumer loans. We derive our income primarily from interest received on real estate-related loans, commercial loans and leases and consumer loans and, to a lesser extent, from fees on the referral of loans, interest on investment securities and fees received in connection with servicing loan and deposit accounts. Our major operating expenses are the interest we pay on deposits and borrowings and general operating expenses. We rely primarily on locally generated deposits to provide us with funds for making loans.

We are subject to competition from other financial institutions and our operating results, like those of other financial institutions operating exclusively or primarily in Colorado, are significantly influenced by economic conditions in Colorado, including the strength of the real estate market. In addition, both the fiscal and regulatory policies of the federal government and regulatory authorities that govern financial institutions and market interest rates also impact our financial condition, results of operations and cash flows.

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RESULTS OF OPERATIONS

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

	Three Months Ended March 31,
							Change - Increase
	2007			2006			(Decrease)
	(In thousands, except share data)
Results of Operations:
Interest income	$	42,360		$	42,710		$	(350	)
Interest expense		15,517			12,803			2,714
Net interest income		26,843			29,907			(3,064	)
Provision for credit losses		1,010			—			1,010
Net interest income after provision for credit losses		25,833			29,907			(4,074	)
Noninterest income		2,567			3,112			(545	)
Noninterest expense		20,521			21,740			(1,219	)
Income before income taxes		7,879			11,279			(3,400	)
Income tax expense		2,470			3,990			(1,520	)
Income from continuing operations		5,409			7,289			(1,880	)
Income from discontinued operations (net of tax)		—			140			(140	)
Net income	$	5,409		$	7,429		$	(2,020	)
Share Data:
Basic earnings per share	$	0.10		$	0.13		$	(0.03	)
Diluted earnings per share	$	0.10		$	0.13		$	(0.03	)
Average shares outstanding		54,792,527			59,057,264			(4,264,737	)
Diluted average shares outstanding		54,902,229			59,240,780			(4,338,551	)
Selected Ratios:
Return on assets		0.82	%		1.03	%		(0.21	)
Return on equity		3.73	%		5.01	%		(1.28	)
Average equity to average total assets		21.90	%		20.53	%		1.37

The $5.4 million first quarter 2007 net income reflected a decrease of $2.0 million from first quarter 2006. First quarter 2007 interest income was consistent with the prior year quarter, while increases in interest expense and provision for credit losses were the primary factors leading to the decrease in net income. Our first quarter 2007 noninterest expense decreased from first quarter 2006 by $1.2 million, which was primarily the result of a reduction in salaries and benefits of $0.5 million and a reduction in amortization of intangible assets of $0.8 million.

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Net Interest Income and Net Interest Margin

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

	Quarter Ended
	March 31, 2007			December 31, 2006			September 30, 2006			June 30, 2006			March 31, 2006
	(Dollars in thousands)
Net interest income	$	26,843		$	27,906		$	28,996		$	29,388		$	29,907
Interest rate spread		4.16	%		4.14	%		4.45	%		4.66	%		4.67	%
Net interest margin		5.16	%		5.12	%		5.34	%		5.51	%		5.44	%

First quarter 2007 net interest income of $26.8 million decreased by $3.1 million from the first quarter 2006. The reduction in net interest income was the result of a $0.4 million decrease in interest income and a $2.7 million increase in interest expense.

The decline in our loan portfolio, primarily driven by a strategy to reduce residential construction, land and land development loans, was the cause of the decrease in interest income. Our yield on interest-earning assets was 8.14% for the first quarter 2007, an increase of 37 basis points from the first quarter 2006. First quarter 2007 interest expense increased by $2.7 million from the first quarter 2006, which was caused by rising interest rates in the first half of 2006 combined with increased costs caused by robust competition for deposits. Our cost of interest-bearing liabilities increased to 3.98% from a first quarter 2006 cost of 3.10%. Our first quarter 2007 net interest margin of 5.16% decreased by 28 basis points from the net interest margin for the first quarter 2006, while the interest rate spread decreased by 51 basis points.

Our net interest margin of 5.16% for the first quarter 2007 reflected an improvement of 4 basis points from the fourth quarter 2006, while our interest rate spread improved by 2 basis points over the fourth quarter 2006. Our yield on interest-earning assets increased by 9 basis points from the fourth quarter 2006, while our cost of interest-bearing liabilities increased by 7 basis points from the fourth quarter 2006.

The following tables present, for the periods indicated, average assets, liabilities and stockholders’ equity, as well as the net interest income from average interest-earning assets and the resultant annualized yields expressed in percentages. Nonaccrual loans are included in the calculation of average loans while accrued interest thereon is excluded from the computation of yields earned.

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	Quarter Ended March 31,
	2007						2006
	Average Balance		Interest Income or Expense		Average Yield or Cost		Average Balance		Interest Income or Expense		Average Yield or Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets:
Gross loans, net of unearned fees (1)(2)(3)	$	1,909,713	$	39,738	8.44	%	$	2,048,380	$	40,521	8.02	%
Investment securities(1)
Taxable		51,173		621	4.93	%		72,893		776	4.32	%
Tax-exempt		113,152		1,412	5.06	%		72,933		911	5.07	%
Equity Securities (4)		31,849		485	6.18	%		28,733		427	6.03	%
Other earning assets		4,327		104	9.72	%		6,044		75	5.03	%
Total interest-earning assets		2,110,214		42,360	8.14	%		2,228,983		42,710	7.77	%
Non-earning assets:
Cash and due from banks		56,891						78,425
Other assets		520,445						622,304
Total assets	$	2,687,550					$	2,929,712
LIABILITIES AND STOCKHOLDER’S EQUITY:
Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	160,075	$	250	0.63	%	$	173,758	$	152	0.35	%
Money Market		631,760		5,856	3.76	%		587,737		4,215	2.91	%
Savings		84,575		164	0.79	%		99,187		184	0.75	%
Time certificates of deposit		571,931		7,076	5.02	%		612,721		5,603	3.71	%
Total interest-bearing deposits		1,448,341		13,346	3.74	%		1,473,403		10,154	2.79	%
Borrowings:
Repurchase agreements		24,887		299	4.87	%		23,359		239	4.15	%
Federal funds purchased		154		2	5.83	%		1,436		22	6.21	%
Subordinated debentures		41,239		932	9.17	%		41,256		847	8.33	%
Borrowings		66,508		938	5.72	%		136,059		1,541	4.59	%
Total interest-bearing liabilities		1,581,129		15,517	3.98	%		1,675,513		12,803	3.10	%
Noninterest bearing liabilities:
Demand deposits		483,293						540,189
Other liabilities		34,661						112,620
Total liabilities		2,099,083						2,328,322
Stockholder’s Equity		588,467						601,390
Total liabilities and stockholder’s equity	$	2,687,550					$	2,929,712
Net interest income			$	26,843					$	29,907
Net interest margin					5.16	%					5.44	%

(1) Yields on loans and securities have not been adjusted to a tax-equivalent basis.

(2) Average gross loans include nonaccrual loans, which were $31.9 million and $28.7 million at March 31, 2007 and 2006, respectively.

(3) Net loan fees of $1.4 million and $2.0 million for the three months ended March 31, 2007 and 2006, respectively, are included in the yield computation.

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

24

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

	Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
	Net Change			Rate			Volume
	(In thousands)
Interest income:
Loans held for investment	$	(783	)	$	2,569		$	(3,352	)
Investment securities
Taxable		(155	)		137			(292	)
Tax-exempt		501			(1	)		502
Equity Securities		58			11			47
Other earning assets		29			42			(13	)
Total interest income		(350	)		2,758			(3,108	)
Interest expense:
Deposits:
Interest-bearing demand		98			109			(11	)
Money Market		1,641			1,306			335
Savings		(20	)		9			(29	)
Time certificates of deposit		1,473			1,815			(342	)
Repurchase agreements		60			44			16
Federal funds purchased		(20	)		(3	)		(17	)
Subordinated debentures		85			85			0
Borrowings		(603	)		556			(1,159	)
Total interest expense		2,714			3,921			(1,207	)
Net interest income	$	(3,064	)	$	(1,163	)	$	(1,901	)

Provision for Credit Losses

The provision for credit losses represents a charge against earnings. The provision is the amount required to maintain the allowance for loan losses and the reserve for unfunded commitments at a level that, in our judgment, is adequate to absorb losses inherent in the loan portfolio. In periods when an existing allowance or reserve is determined to exceed the amount required, the allowance or reserve is reduced, which decreases the charge to earnings through the provision for credit losses. When an existing allowance or reserve is deemed to be understated, an additional provision is recorded, resulting in an additional charge to earnings through the provision for credit losses.

In the first quarter 2007, the company recorded a $1.0 million provision for credit losses, including $0.2 million for the reserve on unfunded commitments, and net charge-offs of $1.3 million compared to a $2.7 million provision for credit losses, including $0.1 million for the reserve on unfunded commitments, and $0.7 million net charge-offs in the fourth quarter 2006. No provision was recorded during the three month period ended March 31, 2006.

Please see the nonperforming assets and allowance for loan loss analysis in the Financial Condition section of this document for additional information on our asset quality.

25

Noninterest Income

The following table presents the major categories of noninterest income:

	Quarter Ended
	March 31, 2007			December 31, 2006			September 30, 2006		June 30, 2006		March 31, 2006
	(In thousands)
Noninterest income:
Customer service and other fees	$	2,443		$	2,137		$	2,892	$	2,858	$	2,498
Gain (loss) on sale of securities		—			(5	)		6		—		(5	)
Gain on sale of loans		—			(55	)		229		231		314
Gain (loss) on sale of assets		(96	)		133			108		179		(91	)
Other		220			316			239		337		396
Total noninterest income	$	2,567		$	2,526		$	3,474	$	3,605	$	3,112

Noninterest income for first quarter 2007 decreased by $0.5 million from the first quarter 2006. The $0.5 million decrease in noninterest income between the first quarter 2007 and first quarter 2006 was primarily caused by the discontinuation of our residential mortgage group at the end of the third quarter 2006 and a reduction in first quarter 2007 loan placement and other fees as compared to the first quarter 2006. Noninterest income for first quarter 2007 increased $41,000 from the fourth quarter 2006, primarily due to a $0.3 million increase in customer service and other fees.

Noninterest Expense

The following table presents, for the periods indicated, the major categories of noninterest expense:

	Quarter Ended
	March 31, 2007		December 31, 2006		September 30, 2006		June 30, 2006		March 31, 2006
	(In thousands)
Noninterest expense:
Salaries and employee benefits	$	10,974	$	10,662	$	12,006	$	12,082	$	11,435
Occupancy expense		2,121		2,040		1,891		1,994		2,052
Furniture and equipment		1,240		1,176		1,289		1,229		1,165
Amortization of intangible assets		2,195		2,960		2,858		2,999		2,998
Merger, acquisition and transition expenses		—		—		239		1,539		88
Other general and administrative		3,991		4,384		4,659		5,162		4,002
Total noninterest expense	$	20,521	$	21,222	$	22,942	$	25,005	$	21,740

First quarter 2007 noninterest expense decreased from the first quarter 2006 by $1.2 million. The change between the first quarter 2007 and first quarter 2006 was driven primarily by a decrease in incentive payments to employees and a reduction in amortization of intangible assets due to the expiration of noncompete agreements and changes in the amortization of core deposit intangible assets.

Noninterest expense for the first quarter 2007 of $20.5 million decreased $0.7 million from the fourth quarter 2006. First quarter 2007 salaries and employee benefits increased by $0.3 million from the fourth quarter 2006. The first quarter 2007 increase in salaries and employee benefits included a $0.6 million decrease in salaries, incentive payments and bonus expenses, offset by increases in payroll taxes, employee benefits and equity-based compensation. Payroll taxes and employee benefits increased by $0.5 million, primarily driven by lower fourth quarter 2006 payroll taxes due to employees that had exceeded the FICA and other employer tax match limits. Equity-based compensation increased by $0.3 million, attributable to a reduction in the fourth quarter 2006 expense due to a revision of estimated forfeitures. First quarter 2007 intangible amortization expense decreased by $0.8 million from the fourth quarter 2006.

26

FINANCIAL CONDITION

The following sets forth certain key consolidated balance sheet data:

	March 31, 2007		December 31, 2006		September 30, 2006		June 30, 2006		March 30, 2006
	(In thousands)
Net loans (including loans held for sale)	$	1,859,121	$	1,919,588	$	1,955,529	$	1,906,513	$	1,983,882
Total assets		2,693,384		2,720,600		2,886,647		2,850,281		2,916,510
Deposits		1,971,869		1,960,105		1,968,264		1,998,055		2,077,076

Loans

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

	March 31, 2007			December 31, 2006			September 30, 2006			June 30, 2006			March 31, 2006
	(In thousands)
Real estate
Mortgage	$	708,416		$	686,056		$	663,170		$	583,020		$	595,860
Construction		353,323			427,465			463,468			486,060			504,426
Equity lines of credit		54,904			56,468			60,817			64,355			67,284
Commercial		651,796			647,915			654,829			664,202			702,556
Agricultural		46,958			51,338			54,805			52,897			57,054
Consumer		43,891			50,222			53,714			54,955			56,986
Leases receivable and other		31,213			32,144			32,931			26,470			25,714
Total gross loans		1,890,501			1,951,608			1,983,734			1,931,959			2,009,880
Less: allowance for loan losses		(27,492	)		(27,899	)		(25,977	)		(25,297	)		(26,999	)
Unearned discount		(3,888	)		(4,121	)		(4,328	)		(4,737	)		(4,729	)
Net Loans	$	1,859,121		$	1,919,588		$	1,953,429		$	1,901,925		$	1,978,152
Loans held for sale at lower of cost or market	$	—		$	—		$	2,119		$	4,588		$	5,730

March 31, 2007 total loans, net of unearned discount, decreased by $118.5 million from the balance at March 31, 2006 to $1.9 billion. The decline is due in part to our continued strategy to reduce our concentration in residential construction, land and land development loans and increase commercial and industrial, consumer and energy loans. The March 31, 2007 real estate portfolio balances, net of unearned discount, decreased by $53.1 million from December 31, 2006, primarily driven by decreases in the residential construction, land and land development loans, while commercial and industrial loans had a modest increase.

Nonperforming Assets

Credit risk related to nonperforming assets arises as a result of lending activities. To manage this risk, we employ frequent monitoring procedures and take prompt corrective action when necessary. We employ a risk rating system that identifies the potential risk associated with loans in our loan portfolio. This monitoring and rating system is designed to help management determine current and potential problems so that corrective actions can be taken promptly.

Generally, loans are placed on nonaccrual status when they become 90 days or more past due or at such earlier time as management determines timely recognition of interest to be in doubt. Accrual of interest is discontinued on a loan when we believe, after considering economic and business conditions and analysis of the borrower’s financial condition, that the collection of interest is doubtful.

27

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

	Quarter Ended
	March 31, 2007			December 31, 2006			September 30, 2006			June 30, 2006			March 31, 2006
	(Dollars in thousands)
Nonaccrual loans	$	31,940		$	32,852		$	26,812		$	30,684		$	28,746
Accruing loans past due 90 days or more		323			3			396			84			1
Other real estate owned		861			1,207			5,090			1,041			1,267
Total nonperforming assets	$	33,124		$	34,062		$	32,298		$	31,809		$	30,014
Nonperforming loans	$	32,263		$	32,855		$	27,208		$	30,768		$	28,747
Other impaired loans		8,079			5,978			17,076			16,166			11,841
Total impaired loans		40,342			38,833			44,284			46,934			40,588
Allocated allowance for loan losses		(7,673	)		(8,028	)		(6,468	)		(5,685	)		(9,296	)
Net investment in impaired loans	$	32,669		$	30,805		$	37,816		$	41,249		$	31,292
Charged-off loans	$	(1,692	)	$	(1,088	)	$	(1,736	)	$	(2,012	)	$	(1,091	)
Recoveries		436			366			177			593			615
Net recoveries (charge-offs)	$	(1,256	)	$	(722	)	$	(1,559	)	$	(1,419	)	$	(476	)
Provision for credit loss	$	1,010		$	2,724		$	1,566		$	—		$	—
Allowance for loan losses	$	27,492		$	27,899		$	25,977		$	25,297		$	26,999
Reserve on unfunded commitments	$	572		$	411		$	328		$	1,001		$	718
Allowance for loan losses to loans, net of unearned discount		1.46	%		1.43	%		1.31	%		1.31	%		1.35	%
Allowance for loan losses to nonaccrual loans		86.07	%		84.92	%		96.89	%		82.44	%		93.92	%
Allowance for loan losses to nonperforming assets		83.00	%		81.91	%		80.43	%		79.32	%		89.96	%
Allowance for loan losses to impaired loans		68.15	%		71.84	%		58.66	%		53.90	%		66.52	%
Nonperforming assets to loans, net of unearned discount, and other real estate owned		1.75	%		1.75	%		1.63	%		1.65	%		1.50	%
Annualized net charge-offs (recoveries) to average loans		0.45	%		0.15	%		0.32	%		0.29	%		0.09	%
Nonaccrual loans to loans, net of unearned discount		1.69	%		1.69	%		1.35	%		1.59	%		1.43	%

First quarter 2007 nonperforming assets increased by $3.1 million from the first quarter 2006, while total impaired loans decreased by $0.2 million. The change in nonperforming assets was primarily impacted by a $3.2 million increase in nonaccrual loans and a $0.4 million decrease in other real estate owned. Our coverage of allowance for loan losses to loans of 1.46% increased by 11 basis points at March 31, 2007 from March 31, 2006, while the 83.0% allowance for loan losses to nonperforming assets reflected a decrease of 7 percentage points.

When compared to the fourth quarter 2006, the first quarter 2007 nonperforming assets decreased by $0.9 million, with nonaccrual loans and OREO decreasing by $1.2 million and accruing loans past due 90 days or more increasing $0.3 million. The first quarter 2007 allowance for loan losses to loans increased by 3 basis points from the fourth quarter 2006, while the allowance for loan losses to nonperforming assets increased by 1.1 percentage points.

28

Allowance for Credit Losses

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

Our methodology for evaluating the adequacy of the allowance for loan losses has two basic elements: first, the identification of impaired loans and the measurement of an estimated loss for each individual loan identified; and second, estimating an allowance for probable losses on other loans. The specific allowance for impaired loans and the remaining allowance are combined to determine the required allowance for loan losses. The amount calculated is compared to the actual allowance for loan losses and adjustments are recorded through the provision for loan losses.

	Three Months Ended March 31,
	2007		2006
	(In thousands)
Balance, beginning of period	$	27,899	$	27,475
Loan charge-offs:
Real estate—mortgage		963		523
Real estate—construction		535		10
Commercial		43		442
Agricultural		—		21
Consumer		130		23
Lease receivable and other		21		72
Total loan charge-offs		1,692		1,091
Recoveries:
Real estate—mortgage		195		44
Real estate—construction		55		34
Commercial		120		483
Agricultural		—		—
Consumer		46		53
Lease receivable and other		20		1
Total loan recoveries		436		615
Net loan charge-offs		1,256		476
Provision for loan losses		849		—
Balance, end of period	$	27,492	$	26,999

29

Investment Securities

We manage our investment portfolio principally to provide liquidity and balance our overall interest rate risk. To a lesser extent, we manage our investment portfolio to provide earnings with a view to minimizing credit risk.

The carrying value of our portfolio of investment securities at March 31, 2007 and December 31, 2006 was as follows:

	March 31, 2007		December 31, 2006		Increase Decrease			% Change
	(In thousands)
Securities available-for-sale:
U.S. Government agencies	$	3,399	$	2,408	$	991		41.2	%
Obligations of states and political subdivisions		109,460		115,571		(6,111	)	(5.3	)%
Mortgage backed securities		35,866		38,440		(2,574	)	(6.7	)%
Marketable equity securities		906		841		65		7.7	%
Total securities available-for-sale	$	149,631	$	157,260	$	(7,629	)	-4.9	%
Securities held-to-maturity:
Mortgage-backed	$	11,179	$	11,217	$	(38	)	-0.3	%

The carrying value of our investment securities at March 31, 2007 was $160.8 million, compared to December 31, 2006 of $168.5 million. We decreased the level of our investments as we required less collateral for our deposits.

Deposits

At the end of the first quarter 2007, deposits were $2.0 billion, reflecting an increase of $11.8 million from December 31, 2006. The increase in deposits from December 31, 2006 was driven primarily by a $16.1 million increase in money market deposits, and included increases of $2.3 million and $2.7 million in noninterest-bearing deposits and certificates of deposits, respectively, while savings deposits and interest-bearing demand deposits declined by $9.3 million. Our noninterest-bearing deposits as a percentage of total deposits decreased 4 basis points to 26.4%, with certificates of deposits comprising 29.4% of total deposits, reflecting a decrease of 4 basis points from December 31, 2006.

	At March 31, 2007				At December 31, 2006
	Balance		% of Total		Balance		% of Total
	(Dollars in thousands)
Noninterest bearing deposits	$	519,951	26.37	%	$	517,612	26.41	%
Interest bearing demand		165,555	8.40	%		169,289	8.64	%
Money market		624,366	31.66	%		608,290	31.03	%
Savings		81,689	4.14	%		87,265	4.45	%
Time		580,308	29.43	%		577,649	29.47	%
Total deposits	$	1,971,869	100.00	%	$	1,960,105	100.00	%

Borrowings and Subordinated Debentures

At March 31, 2007, our outstanding borrowings were $29.8 million. These borrowings consisted of $7.7 million of term notes at the Federal Home Loan Bank (“FHLB”), $21.9 million on a U.S. Bank revolving credit agreement, and a $0.2 million Treasury Tax and Loan balance.

Our total available credit from the FHLB, including outstanding balances, was $311.3 million at March 31, 2007. The interest rate on the FHLB line of credit varies with the federal funds rate, which was 5.3% at March 31, 2007. The term notes have fixed interest rates that range from 3.25% to 6.22%. We have a blanket pledge and security agreement with the FHLB, which encompasses certain loans and securities as collateral for these borrowings.

30

We have a $70 million revolving credit agreement with U.S. Bank National Association that contains financial covenants, including maintaining a minimum return on average assets, a maximum nonperforming assets to total loans ratio, and regulatory capital ratios that qualify the Company as well capitalized. As of March 31, 2007, we had an outstanding balance of $21.9 million and were in compliance with all debt covenants. The line of credit has a variable rate based on the federal funds rate, which was 6.7% at March 31, 2007. The line of credit is secured by the stock of Guaranty Bank. U.S. Bank performs various commercial banking services for the Company for which they receive usual and customary fees.

At March 31, 2007, we had a $41,239,000 aggregate principal balance of subordinated debentures outstanding with a weighted average cost of 9.04%. The subordinated debentures were issued in four separate series. Each issuance has a maturity of thirty years from its date of issue. The subordinated debentures were issued to trusts established by us, which in turn issued $40 million of trust preferred securities. Generally and with certain limitations, the Company is permitted to call the debentures subsequent to the first five or ten years, as applicable, after issue if certain conditions are met, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment of the trusts, the debentures or the preferred securities.

Capital Resources

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

At March 31, 2007, the Company had a total risk-weighted capital ratio of 10.92%, a Tier 1 risk-weighted capital ratio of 9.67% and a leverage ratio of 9.00%. The Company actively monitors its regulatory capital ratios to ensure that the Company and its bank subsidiaries are well capitalized under the applicable regulatory framework.

Contractual Obligations and Off-Balance Sheet Arrangements

The Company is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, stand-by 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 Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

At March 31, 2007, the following financial instruments were outstanding whose contract amounts represented credit risk:

	March 31, 2007		December 31, 2006
	(In thousands)
Commitments to extend credit	$	611,486	$	555,757
Standby letters of credit		33,794		32,382
Commercial letters of credit		328		274
Totals	$	645,608	$	588,413

31

Liquidity

Based on our existing business plan, we believe that our level of liquid assets is sufficient to meet our current and presently anticipated funding needs.

We rely on dividends from our Banks as a primary source of liquidity for the holding company. We plan to continue to utilize the available dividends from the Banks for holding company operations, subject to regulatory and other restrictions. In general, the Banks are able to dividend earnings to the holding company, subject to the Banks maintaining a well-capitalized ratio. We require liquidity for the payment of interest on the subordinated debentures, for operating expenses, principally salaries and benefits, for repurchases of our common stock, and, if declared by our board of directors, for the payment of dividends to our stockholders.

The Banks rely on deposits as their principal source of funds and, therefore, must be in a position to service depositors’ needs as they arise. Fluctuations in the balances of a few large depositors may cause temporary increases and decreases in liquidity from time to time. We have dealt with such fluctuations from existing liquidity sources.

We believe that if the level of liquid assets (our primary liquidity) does not meet our liquidity needs, other available sources of liquid assets (our secondary liquidity), including the purchase of federal funds, sales of securities under agreements to repurchase, sales of loans, discount window borrowings from the Federal Reserve Bank and our lines of credit with the Federal Home Loan Bank of Topeka and U.S. Bank could be employed to meet those current and presently anticipated funding needs.

Application of Critical Accounting Policies and Accounting Estimates

Our accounting policies are integral to understanding the financial results reported. Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and consistently applied from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies that we believe are critical and involve significant management judgment.

Allowance for Loan Losses —The loan portfolio is the largest category of assets on our balance sheet. We determine probable losses inherent in our loan portfolio and establish an allowance for those losses by considering factors including historical loss rates, expected cash flows and estimated collateral values. In assessing these factors, we use organizational history and experience with credit decisions and related outcomes. The allowance for loan losses represents our best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. We evaluate our allowance for loan losses quarterly. If our underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for loan losses is adjusted.

We estimate the appropriate level of allowance for loan losses by separately evaluating impaired and nonimpaired loans. A specific allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used to assign an allowance to a nonimpaired loan is much more subjective. Generally, the allowance assigned to nonimpaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics and by exercising judgment to assess the impact of factors such as changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets. Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is continually assessed and adjusted when appropriate. Notwithstanding these procedures, there still exists the possibility that our assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for loan losses would be required.

We estimate the appropriate level of loan loss allowance by conducting a detailed review of a significant number of much smaller portfolio segments that comprise the consumer and commercial loan portfolios. We segment the loan portfolio into as many components as practical. Each component would normally have similar characteristics, such as risk classification, past due status, type of loan, industry or collateral. The risk profile of certain segments of the loan portfolio may be improving, while the risk profile of others may be deteriorating. As a result, changes in the appropriate level of the allowance for different segments may offset one another. Adjustments to the allowance represent the impact from the analysis of all loan segments.

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Investment in Debt and Equity Securities —We classify our investments in debt and equity securities as either held-to-maturity or available-for-sale. Securities classified as held-to-maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position and results of operations. If the estimated value of investments is less than the cost or amortized cost, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and we determine that the impairment is other-than-temporary, we expense the impairment of the investment in the period in which the event or change occurred.

Impairment of Goodwill— Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is evaluated for impairment annually, unless there are factors present that may be indicative of a potential impairment, in which case, a goodwill impairment test is performed more frequently than annually. The first step in testing for impairment is to determine the fair value of each reporting unit. If the carrying amount of any reporting unit exceeds its fair value, an impairment to goodwill is recorded. The evaluation of goodwill involves estimations of discount rates, the timing of projected future cash flows, and utilization of market based valuation techniques. The assumptions used in the evaluation of goodwill are subject to change with changes in economic conditions and other factors. Changes in assumptions used to evaluate this intangible asset affect its value and could have a material adverse impact on our results of operations.

Accounting for Uncertainty in Income Taxes —Under FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”, the Company records the financial statement effects of an income tax position when it is more likely than not, based on the technical merits, that it will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is measured and recorded as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority. Previously recognized tax positions are derecognized in the first period in which it is no longer more likely than not that the tax position will be sustained. The benefit associated with previously unrecognized tax positions are generally recognized in the first period in which the more-likely-than-not threshold is met at the reporting date, the tax matter is ultimately settled through negotiation or litigation or when the related statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. The recognition, derecognition and measurement of tax positions are based on management’s best judgment given the facts, circumstance and information available at the reporting date. The Company records penalties and interest associated with uncertain deductible temporary differences as a component of other noninterest expense. See the discussion of “Income Taxes” under Note 2(h) in the Notes to the Consolidated Financial Statements.

This discussion has highlighted those accounting policies that we consider to be critical to our financial reporting process. However, all the accounting policies are important, and therefore you are encouraged to review each of the policies included in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2006 to gain a better understanding of how our financial performance is measured and reported.

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ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

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

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

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

We monitor and evaluate our interest rate risk position on a quarterly basis using traditional gap analysis, earnings at risk analysis and economic value at risk analysis under 100 and 200 basis point change scenarios. Each of these analyses measures different interest rate risk factors inherent in the balance sheet. Traditional gap analysis, although not a complete view of these risks, provides a fair representation of our current interest rate risk exposure.

Gap Analysis— A traditional measure of a financial institution’s interest rate risk is the static gap analysis. Traditional gap analysis calculates the dollar amount of mismatches between assets and liabilities, at certain time periods, whose interest rates are subject to repricing at their contractual maturity date or repricing period. A static gap is the difference between the amount of assets and liabilities that are expected to mature or re-price within a specific period. Generally, a positive gap benefits an institution during periods of rising interest rates, and a negative gap benefits an institution during periods of declining interest rates.

At March 31, 2007, we had a negative gap of $149.0 million, or negative 5.5% of our total assets, that would be subject to re-pricing within one year, with a total positive gap of $500.4 million, or 18.6% of our total assets that would reprice within 5 years. The following table sets forth information concerning re-pricing opportunities for our interest-earning assets and interest bearing liabilities as of March 31, 2007. The amount of assets and liabilities shown within a particular period were determined in accordance with their contractual maturities, except that adjustable rate products are included in the period in which they are first scheduled to adjust and not in the period in which they mature. Such assets and liabilities are classified by the earlier of their maturity or re-pricing date.

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	Less Than 3 Months			3 Months to 1 Year			1 to 5 Years			Over 5 Years			Not Interest Rate Sensitive		Total
	(Dollars in thousands)
Interest-bearing cash and cash equivalents	$	31,266		$	—		$	—		$	—		$	—	$	31,266
Investment securities		29,254			10,862			28,841			91,852			31,995		192,804
Loans, gross		1,038,889			176,715			483,720			166,655			29,658		1,895,637
All other assets		—			—			—			—			573,677		573,677
Totals	$	1,099,409		$	187,577		$	512,561		$	258,507		$	635,330	$	2,693,384
Deposits	$	995,225		$	383,991		$	72,702		$	—		$	519,951	$	1,971,869
Assets under repurchase agreements and federal funds purchases		34,695			—			—			—			—		34,695
Borrowings		201			21,922			7,324			357			—		29,804
Subordinated debentures		—			—			—			41,239			—		41,239
All other liabilities		—			—			—			—			34,680		34,680
Stockholder’s equity		—			—			—			—			581,097		581,097
Totals	$	1,030,121		$	405,913		$	80,026		$	41,596		$	1,135,728	$	2,693,384
Period gap (assets minus liabilities)	$	69,288		$	(218,336	)	$	432,535		$	216,911
Cumulative gap	$	69,288		$	(149,048	)	$	283,487		$	500,398
Cumulative rate sensitive gap %		2.6	%		(5.5	)%		10.5	%		18.6	%

ITEM 4. Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by the Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934). The Company’s disclosure controls were designed to provide a reasonable assurance that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer, have concluded that the Company’s disclosure controls and procedures are effective at March 31, 2007 to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 was (i) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

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

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PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

On December 31, 2004, an adversary proceeding was filed against Guaranty Bank and Trust Company in the United States Bankruptcy Court for the District of Colorado, by the trustees of the Will Hoover Company, or the Hoover Company, and William Gordon Hoover, Jr., or Hoover, seeking to avoid certain transfers that occurred over a four-year period commencing in 1999 under the United States Bankruptcy Code. The trustees alleged that certain transfers were made by the Hoover Company and Hoover with actual fraudulent intent, that the transfers were made for less than reasonably equivalent value and occurred at a time when the Hoover Company and Hoover were insolvent, or were rendered insolvent by the transfers, and that certain other transfers were preferential as to other creditors, were made for less than reasonably equivalent value or were made by the Hoover Company or Hoover with actual fraudulent intent. On September 7, 2005, the Bankruptcy Court granted, in part, Guaranty Bank’s initial response and dismissed $8.5 million of the claims relating to alleged transfers for payment of items credited in the check collection process. On August 29, 2006, Guaranty Bank filed a motion for partial summary judgment on the trustees’ claims to recover payments on alleged overdrafts in the amount of approximately $1.7 million, which the court denied. The remaining claims amount to approximately $2.9 million. In April 2007, the Company and the trustees participated in mediation. As a result of the mediation, the parties are currently in final settlement discussions. Any settlement will be subject to the approval of the Bankruptcy Court. The Company does not expect the settlement amount to materially exceed the amount the Company had reserved as of March 31, 2007 for this litigation.

On July 22, 2005 and August 18, 2005, two separate but similar actions (i.e., the Barnes action and Teper action, respectively) were filed against Guaranty Bank and a former officer in the Denver District Court, Denver, Colorado by investors who provided funds to Hoover, the Hoover Company or related entities. The investors allege that certain activities of Guaranty Bank and its former officer with respect to the customer relationship with Hoover, the Hoover Company and related entities aided and abetted Hoover and the Hoover Company in securities violations and violations of the Colorado Organized Crime Control Act and amounted to a civil conspiracy, causing the investors to incur damages. The court has subsequently dismissed the entire Teper action. The investors in the Barnes action are seeking actual and statutory treble damages, as well as interest and attorneys’ fees, against Guaranty Bank and its former officer. The currently outstanding alleged actual losses claimed in connection with the Barnes action are approximately $10.5 million. We will continue to vigorously defend the Barnes action. At this time, we cannot determine whether the outcome of the Barnes action will have a material adverse impact on our consolidated financial position or results of operations. To the extent the Barnes action is not settled or dismissed, the Company will incur ongoing legal defense costs and be exposed to a possible adverse judgment. If such legal defense costs and any adverse judgment are not covered by insurance, the legal defense costs and judgment incurred could have an adverse impact on our results of operations.

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

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ITEM 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

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

(a) None.

(b) None.

(c) The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the first quarter 2007.

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans(1)	Maximum Number of Shares that May Yet Be Purchased Under the Plans at the End of the Period
January 1 to January 31	—	$	—	—	1,825,510
February 1 to February 28	1,496,600		8.44	1,496,600	1,253,400
March 1 to March 31	222,200		8.55	222,200	1,031,200
Total	1,718,800	$	8.46	1,718,800	1,031,200

⁽¹⁾ On February 13, 2007, we announced the authorization of an additional 924,490 shares to our existing stock repurchase program authorized in October 2006, to be purchased from time to time over a one-year period in the open market or through private transactions in accordance with applicable regulations of the Securities and Exchange Commission. Under the increased program, we are authorized to repurchase up to 2,750,000 shares.

On May 8, 2007, we announced the authorization of a new stock repurchase program to repurchase up to 2,000,000 shares of our common stock from time to time over a one-year period in the open market or through private transactions. This new program is not reflected in the above table.

ITEM 3. Defaults Upon Senior Securities

None.

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

None.

ITEM 5. Other Information

None.

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ITEM 6. Exhibits

Exhibit Number	Description
3.1	Amended and Restated Certification of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Registrant’s Form S-1 Registration Statement (No. 333-124855)).
3.2	Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Registrant’s Form S-1 Registration Statement (No. 333-124855)).
10.1†	Centennial Bank Holdings, Inc. Change in Control Severance Plan, adopted as of December 11, 2006 and amended and restated as of May 7, 2007.
31.1	Section 302 Certification of Chief Executive Officer.
31.2	Section 302 Certification of Chief Financial Officer.
32.1	Section 906 Certification of Chief Executive Officer.
32.2	Section 906 Certification of Chief Financial Officer.

† Indicates a management contract or compensatory plan or arrangement

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 8, 2007	CENTENNIAL BANK HOLDINGS, INC.
	/s/ PAUL W. TAYLOR
	Paul W. Taylor
	Executive Vice President and Chief Financial Officer

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