** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**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 31,2008**

 

**OR**

 
| **o** | ** ** | **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**

** **

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**CENTENNIAL BANK HOLDINGS, INC.**

(Exact name ofregistrant 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)                              |

 

**303-293-5563**

(Registrant’stelephone number, including area code)

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934, as amended during the preceding 12 months (orfor 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 o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company..  See thedefinitions of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12B-2 of the Exchange Act.

 
| Large Accelerated  Filer  o                                     |   | Accelerated  Filer x         |
|---------------------------------------------------------------------------|--------|------------------------------|
| Non-accelerated Filer   o(Do not check if smaller reporting company) |   | Smaller  reporting Company o |

 

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

 

As of May 1, 2008, there were 52,656,497shares of the registrant’s common stock outstanding, including 1,724,941 sharesof unvested stock grants and excluding 63,123 shares to be issued under itsdeferred compensation plan.

 

 

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**TABLE OFCONTENTS**

 
| ** **                                 | ** **    |                                                                                                | **Page** |
|--------------------------------------------|---------------|-----------------------------------------------------------------------------------------------------|----------|
|                                       |          | Forward-Looking  Statements and Factors that Could Affect Future Results                            | 3        |
|                                       |          |                                                                                                |     |
| **PART I—FINANCIAL INFORMATION** | 4             |
|                                       |          |                                                                                                |     |
|                                       | ITEM 1.  | Unaudited Condensed  Consolidated Financial Statements                                              | 4        |
|                                       |          |                                                                                                |     |
|                                       |          | Unaudited Consolidated  Balance Sheets                                                              | 4        |
|                                       |          |                                                                                                |     |
|                                       |          | Unaudited Consolidated Statements of Income                                                         | 5        |
|                                       |          |                                                                                                |     |
|                                       |          | Unaudited  Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive  Income | 6        |
|                                       |          |                                                                                                |     |
|                                       |          | Unaudited  Consolidated Statements of Cash Flows                                                    | 7        |
|                                       |          |                                                                                                |     |
|                                       |          | Notes to Unaudited Condensed Consolidated Financial  Statements                                     | 8        |
|                                       |          |                                                                                                |     |
|                                       | ITEM 2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations         | 20       |
|                                       |          |                                                                                                |     |
|                                       | ITEM 3.  | Quantitative  and Qualitative Disclosures About Market Risk                                         | 34       |
|                                       |          |                                                                                                |     |
|                                       | ITEM 4.  | Controls and  Procedures                                                                            | 36       |
|                                       |          |                                                                                                |     |
| **PART II—OTHER INFORMATION**    | 37            |
|                                       |          |                                                                                                |     |
|                                       | ITEM 1.  | Legal Proceedings                                                                                   | 37       |
|                                       |          |                                                                                                |     |
|                                       | ITEM 1A. | Risk Factors                                                                                        | 38       |
|                                       |          |                                                                                                |     |
|                                       | ITEM 2.  | Unregistered  Sales of Equity Securities and Use of Proceeds                                        | 38       |
|                                       |          |                                                                                                |     |
|                                       | ITEM 3.  | Defaults Upon  Senior Securities                                                                    | 38       |
|                                       |          |                                                                                                |     |
|                                       | ITEM 4.  | Submission of  Matters to a Vote of Security Holders                                                | 38       |
|                                       |          |                                                                                                |     |
|                                       | ITEM 5.  | Other Information                                                                                   | 38       |
|                                       |          |                                                                                                |     |
|                                       | ITEM 6.  | Exhibits                                                                                            | 39       |

 

2

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### ** **

### **Forward-Looking Statements and Factors that CouldAffect Future Results**

### ** **

Certain statementscontained in this Quarterly Report on Form 10-Q that are not statements ofhistorical fact constitute forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 (the “Act”), notwithstandingthat such statements are not specifically identified. In addition, certainstatements may be contained in our future filings with the SEC, in pressreleases, and in oral and written statements made by or with our approval thatare not statements of historical fact and constitute forward-looking statementswithin the meaning of the Act.  Examplesof forward-looking statements include, but are not limited to: (i) projectionsof revenues, expenses, income or loss, earnings or loss per share, the paymentor nonpayment of dividends, capital structure and other financial items; (ii) statementsof plans, objectives and expectations of the Company or its management or boardof directors, including those relating to products or services; (iii) statementsof future economic performance; and (iv) statements of assumptionsunderlying such statements. Words such as “believes”, “anticipates”, “expects”,“intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and othersimilar expressions are intended to identify forward-looking statements but arenot the exclusive means of identifying such statements.

 

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

 

·      Local,regional, national and international economic conditions and the impact theymay have on us and our customers, and our assessment of that impact.

 

·      Changesin the level of nonperforming assets and charge-offs.

 

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

 

·      Inflationand interest rate, securities market and monetary fluctuations.

 

·      Politicalinstability, acts of war or terrorism and natural disasters.

 

·      Thetimely development and acceptance of new products and services and perceivedoverall value of these products and services by customers.

 

·      Revenuesare lower than expected.

 

·      Changesin consumer spending, borrowings and savings habits.

 

·      Changesin the financial performance and/or condition of our borrowers.

 

·      Creditquality deterioration, which could cause an increase in the provision for loanlosses.

 

·      Technologicalchanges.

 

·      Acquisitionsof acquired businesses and greater than expected costs or difficulties relatedto the integration of acquired businesses.

 

·      The ability to increasemarket share and control expenses.

 

·      Changes in the competitiveenvironment among financial or bank holding companies and other financialservice providers.

 

·      The effect of changes inlaws and regulations with which we and our subsidiaries must comply.

 

·      Changes in the securitiesmarkets.

 

·      The effect of changes inaccounting policies and practices, as may be adopted by the regulatoryagencies, as well as the Public Company Accounting Oversight Board, theFinancial Accounting Standards Board and other accounting standard setters.

 

·      Changes in our organization,compensation and benefit plans.

 

·      The costs and effects oflegal and regulatory developments including the resolution of legal proceedingsor regulatory or other governmental inquiries and the results of regulatoryexaminations or reviews.

 

·      Our success at managing therisks involved in the foregoing items.

 

Forward-looking statements speak only as of the date on which such statementsare made.  We do not intend to update anyforward-looking statement to reflect events or circumstances after the date onwhich such statement is made, or to reflect the occurrence of unanticipatedevents.

 

3

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1. Unaudited Consolidated FinancialStatements**

 

**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Unaudited Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **March 31, 2008**                                           | ** **      | **December 31, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|-----------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **(Dollars in thousands, except share data)** | ** **      |
| **Assets**                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                   |            |                            |       |
| Cash and due from banks                                                                                                                                                                                                                                                                                                                                                                                                       |       | $                                                                      |  51,770    |                            | $          | 51,611 |   |
| Federal funds sold                                                                                                                                                                                                                                                                                                                                                                                                            |       | 9,788                                                                  |            | 745                             |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                     |       | 61,558                                                                 |            | 52,356                          |       |
| Securities available for sale, at fair value                                                                                                                                                                                                                                                                                                                                                                                  |       | 116,742                                                                |            | 118,964                         |       |
| Securities held to maturity (fair value of $14,361 and $14,916 at  March 31, 2008 and December 31, 2007, respectively)                                                                                                                                                                                                                                                                                              |       | 14,106                                                                 |            | 14,889                          |       |
| Bank stocks, at cost                                                                                                                                                                                                                                                                                                                                                                                                          |       | 32,588                                                                 |            | 32,464                          |       |
| Total investments                                                                                                                                                                                                                                                                                                                                                                                                             |       | 163,436                                                                |            | 166,317                         |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                                   |            |                            |       |
| Loans, net of unearned discount                                                                                                                                                                                                                                                                                                                                                                                               |       | 1,759,297                                                              |            | 1,781,647                       |       |
| Less allowance for loan losses                                                                                                                                                                                                                                                                                                                                                                                                |       | (26,048                                                                | )               | (25,711                         | )          |
| Net loans                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 1,733,249                                                              |            | 1,755,936                       |       |
| Loans, held for sale                                                                                                                                                                                                                                                                                                                                                                                                          |       | —                                                                 |            | 492                             |       |
| Premises and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                   |       | 69,519                                                                 |            | 69,981                          |       |
| Other real estate owned and foreclosed assets                                                                                                                                                                                                                                                                                                                                                                                 |       | 1,715                                                                  |            | 3,517                           |       |
| Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 250,748                                                                |            | 250,748                         |       |
| Other intangible assets, net                                                                                                                                                                                                                                                                                                                                                                                                  |       | 31,056                                                                 |            | 32,933                          |       |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 33,798                                                                 |            | 39,384                          |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                                                                                  |       | $                                                                      |  2,345,079 |                            | $          | 2,371,664 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                                   |            |                            |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                   |            |                            |       |
| Liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                                                   |            |                            |       |
| Deposits:                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                                                   |            |                            |       |
| Noninterest-bearing demand                                                                                                                                                                                                                                                                                                                                                                                                    |       | $                                                                      |  473,247   |                            | $          | 515,299 |   |
| Interest-bearing demand                                                                                                                                                                                                                                                                                                                                                                                                       |       | 738,429                                                                |            | 732,156                         |       |
| Savings                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 71,617                                                                 |            | 71,944                          |       |
| Time                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 426,789                                                                |            | 480,108                         |       |
| Total deposits                                                                                                                                                                                                                                                                                                                                                                                                                |       | 1,710,082                                                              |            | 1,799,507                       |       |
| Securities sold under agreements to repurchase and federal funds  purchased                                                                                                                                                                                                                                                                                                                                                   |       | 36,400                                                                 |            | 23,617                          |       |
| Borrowings                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 117,227                                                                |            | 63,715                          |       |
| Subordinated debentures                                                                                                                                                                                                                                                                                                                                                                                                       |       | 41,239                                                                 |            | 41,239                          |       |
| Interest payable and other liabilities                                                                                                                                                                                                                                                                                                                                                                                        |       | 18,670                                                                 |            | 24,932                          |       |
| Total liabilities                                                                                                                                                                                                                                                                                                                                                                                                             |       | 1,923,618                                                              |            | 1,953,010                       |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                                   |            |                            |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                   |            |                            |       |
| Common  stock—$.001 par value; 100,000,000 shares authorized, 64,514,450 shares  issued, 52,726,120 shares outstanding at March 31, 2008 (includes  1,732,011 shares of unvested restricted stock and 63,123 shares to be  issued); 64,378,450 shares issued, 52,616,991 shares outstanding at December 31,  2007 (includes 1,651,345 shares of unvested restricted stock and 60,507 of  shares to be issued). |       | 65                                                                     |            | 64                              |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                                                    |       | 618,382                                                                |            | 617,611                         |       |
| Shares to be issued for deferred compensation obligations                                                                                                                                                                                                                                                                                                                                                                     |       | 585                                                                    |            | 573                             |       |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                                                           |       | (92,022                                                                | )               | (95,196                         | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                                                                                                          |       | (2,572                                                                 | )               | (1,472                          | )          |
| Treasury Stock, at cost, 10,985,892 and 10,983,653, respectively                                                                                                                                                                                                                                                                                                                                                              |       | (102,977                                                               | )               | (102,926                        | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                               |       | 421,461                                                                |            | 418,654                         |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                               |       | $                                                                      | 2,345,079       |                            | $          | 2,371,664 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                               |            |                                                                        |                 |                                 |            |  |  |  |

 

See “Notes to UnauditedConsolidated Financial Statements.”

 

4

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**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Income**

 
| ** **                                           | ** ** | **Three Months Ended March 31,**                                            | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                                                                        | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands, except share and per  share data)** | ** ** |
| Interest income:                                     |       |                                                                                            |       |   |   |
| Loans, including fees                                |       | $                                                                                               | 31,040     |   | $ | 39,738 |   |
| Investment securities:                               |       |                                                                                            |       |   |   |
| Taxable                                              |       | 615                                                                                             |       | 621 |   |
| Tax-exempt                                           |       | 893                                                                                             |       | 1,412 |   |
| Dividends                                            |       | 470                                                                                             |       | 475 |   |
| Federal funds sold and other                         |       | 385                                                                                             |       | 114 |   |
| Total interest income                                |       | 33,403                                                                                          |       | 42,360 |   |
| Interest expense:                                    |       |                                                                                            |       |   |   |
| Deposits                                             |       | 9,795                                                                                           |       | 13,346 |   |
| Federal funds purchased and repurchase agreements    |       | 137                                                                                             |       | 301 |   |
| Borrowings                                           |       | 1,029                                                                                           |       | 932 |   |
| Subordinated debentures                              |       | 792                                                                                             |       | 938 |   |
| Total interest expense                               |       | 11,753                                                                                          |       | 15,517 |   |
| Net interest income                                  |       | 21,650                                                                                          |       | 26,843 |   |
| Provision for loan losses                            |       | 875                                                                                             |       | 849 |   |
| Net interest income, after provision for loan losses |       | 20,775                                                                                          |       | 25,994 |   |
| Noninterest income:                                  |       |                                                                                            |       |   |   |
| Customer service and other fees                      |       | 2,276                                                                                           |       | 2,443 |   |
| Gain on sale of securities                           |       | 138                                                                                             |       | — |   |
| Other                                                |       | 101                                                                                             |       | 124 |   |
| Total noninterest income                             |       | 2,515                                                                                           |       | 2,567 |   |
| Noninterest expense:                                 |       |                                                                                            |       |   |   |
| Salaries and employee benefits                       |       | 9,720                                                                                           |       | 10,974 |   |
| Occupancy expense                                    |       | 2,001                                                                                           |       | 2,121 |   |
| Furniture and equipment                              |       | 1,314                                                                                           |       | 1,240 |   |
| Amortization of intangible assets                    |       | 1,877                                                                                           |       | 2,195 |   |
| Other general and administrative                     |       | 3,798                                                                                           |       | 4,152 |   |
| Total noninterest expense                            |       | 18,710                                                                                          |       | 20,682 |   |
| Income before income taxes                           |       | 4,580                                                                                           |       | 7,879 |   |
| Income tax expense                                   |       | 1,335                                                                                           |       | 2,470 |   |
| Net income                                           |       | $                                                                                               | 3,245      |   | $ | 5,409 |   |
|                                                 |       |                                                                                            |       |   |   |
| Earnings per share–basic:                       |       | $                                                                                               | 0.06       |   | $ | 0.10 |   |
| Earnings per share–diluted:                     |       | $                                                                                               | 0.06       |   | $ | 0.10 |   |
|                                                 |       |                                                                                            |       |   |   |
| Weighted average shares outstanding-basic            |       | 50,988,229                                                                                      |       | 54,792,527 |   |
| Weighted average shares outstanding-diluted          |       | 51,049,525                                                                                      |       | 54,902,229 |   |

 

See “Notes toUnaudited Consolidated Financial Statements.”

 

5

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**CENTENNIAL BANK HOLDINGS, INC. ANDSUBSIDIARIES**

**UnauditedConsolidated Statements of Changes in Stockholders’ Equity and ComprehensiveIncome**

 
| ** **                                     | ** ** | **Common  Stock  Shares  Outstanding   and to be  Issued** | ** ** | **Common  Stock and  Additional  Paid-in  Capital** | ** ** | **Shares to  be Issued** | ** ** | **Treasury  Stock** | ** ** | **Retained  Earnings  (Accumulated  Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **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:                         |       |                                                                      |       |                                                     |       |                               |       |                |       |                                           |       |                                                      |       |       |       |
| Net income                                     |       | —                                                                    |       | —                                                   |       | —                             |       | —              |       | 5,409                                          |       | —                                                    |       | 5,409      |       |
| Other  comprehensive loss                      |       | —                                                                    |       | —                                                   |       | —                             |       | —              |       | —                                         |       | (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                         |       | 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 |   |
|                                           |       |                                                                      |       |                                                     |       |                               |       |                |       |                                           |       |                                                      |       |       |       |
| Balance,  December 31, 2007               |       | 52,616,991                                                                |       | $                                                        | 617,675    |                               | $          | 573                 |       | $                                              | (102,926   | )                                                         | $          | (95,196    | )          | $ | (1,472 | ) | $ | 418,654 |   |
| Adjustment to  apply EITF 06-04                |       |                                                                      |       |                                                     |       |                               |       |                |       | (71                                            | )          |                                                      |       | (71        | )          |
| Comprehensive  income:                         |       |                                                                      |       |                                                     |       |                               |       |                |       |                                           |       |                                                      |       |       |       |
| Net income                                     |       | —                                                                    |       | —                                                   |       | —                             |       | —              |       | 3,245                                          |       | —                                                    |       | 3,245      |       |
| Other  comprehensive loss                      |       | —                                                                    |       | —                                                   |       | —                             |       | —              |       | —                                         |       | (1,100                                                    | )          | (1,100     | )          |
| Total  comprehensive income                    |       |                                                                      |       |                                                     |       |                               |       |                |       |                                           |       |                                                      |       | 2,145      |       |
| Stock compensation  awards, net of forfeitures |       | 115,600                                                                   |       | —                                                   |       | —                             |       | —              |       | —                                         |       | —                                                    |       | —     |       |
| Earned stock  award compensation               |       |                                                                      |       | 772                                                      |       | —                             |       | —              |       | —                                         |       | —                                                    |       | 772        |       |
| Repurchase of  common stock                    |       | (9,087                                                                    | )          | —                                                   |       | —                             |       | (51                 | )          | —                                         |       | —                                                    |       | (51        | )          |
| Deferred  compensation                         |       | 2,616                                                                     |       | —                                                   |       | 12                                 |       | —              |       | —                                         |       | —                                                    |       | 12         |       |
|                                           |       |                                                                      |       |                                                     |       |                               |       |                |       |                                           |       |                                                      |       |       |       |
| Balance,  March 31, 2008                  |       | 52,726,120                                                                |       | $                                                        | 618,447    |                               | $          | 585                 |       | $                                              | (102,977   | )                                                         | $          | (92,022    | )          | $ | (2,572 | ) | $ | 421,461 |   |

 

See “Notes to Unaudited Condensed ConsolidatedFinancial Statements.”

 

6

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**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Unaudited Consolidated Statements of Cash Flows**

** **
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | **(In thousands)**                              | ** ** |
| Cash flows from operating activities:                                              |       |                                                 |       |   |   |
| Net income                                                                         |       | $                                                    | 3,245      |   | $ | 5,409 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                      |       | 2,904                                                |       | 3,423 |   |
| Provision for loan losses                                                          |       | 875                                                  |       | 849 |   |
| Stock compensation                                                                 |       | 772                                                  |       | 867 |   |
| Gain on sale of securities                                                         |       | (138                                                 | )          | — |   |
| Loss on sale of real estate owned and assets                                       |       | 5                                                    |       | 96 |   |
| Real estate valuation adjustments                                                  |       | 633                                                  |       | 158 |   |
| Other                                                                              |       | (173                                                 | )          | (118 | ) |
| Net change in:                                                                     |       |                                                 |       |   |   |
| Accrued interest receivable and other assets                                       |       | 5,515                                                |       | 1,530 |   |
| Accrued interest payable and other liabilities                                     |       | (4,973                                               | )          | (2,519 | ) |
| Net cash provided by operating activities                                          |       | 8,665                                                |       | 9,695 |   |
| Cash flows from investing activities:                                              |       |                                                 |       |   |   |
| Activity in available-for-sale securities:                                         |       |                                                 |       |   |   |
| Maturities, prepayments, and calls                                                 |       | 25,826                                               |       | 8,970 |   |
| Purchases                                                                          |       | (25,204                                              | )          | (1,527 | ) |
| Activity in held-to-maturity securities and bank stocks:                           |       |                                                 |       |   |   |
| Maturities, prepayments, and calls                                                 |       | 784                                                  |       | 39 |   |
| Loan originations and principal collections, net                                   |       | 21,808                                               |       | 58,788 |   |
| Proceeds from sale of loans held for sale                                          |       | 492                                                  |       | — |   |
| Proceeds from sales of foreclosed assets                                           |       | 582                                                  |       | 349 |   |
| Proceeds from sales of premises and equipment                                      |       | —                                               |       | 2 |   |
| Additions to premises and equipment                                                |       | (568                                                 | )          | (522 | ) |
| Net cash provided by investing activities                                          |       | 23,720                                               |       | 66,099 |   |
| Cash flows from financing activities:                                              |       |                                                 |       |   |   |
| Net increase (decrease) in deposits                                                |       | (89,425                                              | )          | 11,764 |   |
| Net change in short-term borrowings                                                |       | (16,359                                              | )          | (36,391 | ) |
| Proceeds from issuance of debt                                                     |       | 69,875                                               |       | — |   |
| Repayment of long-term debt                                                        |       | (6                                                   | )          | (1,405 | ) |
| Net change in federal funds purchased and repurchase agreements                    |       | 12,783                                               |       | 9,225 |   |
| Repurchase of common stock                                                         |       | (51                                                  | )          | (14,537 | ) |
| Net cash used by financing activities                                              |       | (23,183                                              | )          | (31,344 | ) |
| Net change in cash and cash equivalents                                            |       | 9,202                                                |       | 44,450 |   |
| Cash and cash equivalents, beginning of period                                     |       | 52,356                                               |       | 49,620 |   |
| Cash and cash equivalents, end of period                                           |       | $                                                    | 61,558     |   | $ | 94,070 |   |

 

See “Notes toUnaudited Consolidated Financial Statements.”

 

7

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**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Unaudited Condensed ConsolidatedFinancial Statements**

 

**(1)****     ****Organization, Operations and Basis of Presentation**

 

CentennialBank Holdings, Inc. is a financial holding company and a bank holdingcompany registered under the Bank Holding Company Act of 1956, as amended. Ourprincipal business is to serve as a holding company for our subsidiaries. As ofMarch 31, 2008, Centennial has a single bank subsidiary, Guaranty Bank andTrust Company, referred to as Guaranty Bank or the Bank. At December 312007, Centennial’s subsidiaries were Guaranty Bank and Centennial Bank of theWest, referred to as CBW.  CBW was mergedinto Guaranty Bank on January 1, 2008.

 

Referenceto “Banks” means Guaranty Bank and CBW, and “we” or “Company” means CentennialBank Holdings, Inc. on a consolidated basis with the Banks, ifapplicable.  References to “Centennial”or to the holding company refer to the parent company on a stand-alone basis.

 

The Bank is a full-service community bank offering an arrayof banking products and services to the communities it serves along the FrontRange of Colorado, including accepting time and demand deposits and originatingcommercial loans (including energy loans), real estate loans, Small BusinessAdministration guaranteed loans and consumer loans.  The Bank also provides trust services,including personal trust administration, estate settlement, investmentmanagement accounts and self-directed IRAs. Substantially all loans are secured by specific items of collateralincluding business assets, consumer assets and commercial and residential realestate.  Commercial loans are expected tobe repaid from cash flow from operations of business.  There are no significant concentrations ofloans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on thereal estate and general economic conditions of the area, among other factors.

 

On May 6, 2008, the stockholders of Centennial BankHoldings, Inc. approved the proxy proposal to change the name of theholding company to Guaranty Bancorp.  This name change will be effective on May 12, 2008.

 

***(a)******     ******Basis ofPresentation***

 

Theaccounting and reporting policies of the Company conform to generally acceptedaccounting principles in the United States of America. All significantintercompany balances and transactions have been eliminated. Our financialstatements reflect all adjustments that are, in the opinion of management,necessary for a fair presentation of the financial position and results ofoperations for the periods presented. Certain information and note disclosuresnormally included in consolidated financial statements prepared in accordancewith generally accepted accounting principles in the United States of Americahave been condensed or omitted pursuant to the rules and regulations ofthe Securities and Exchange Commission. The interim operating results are notnecessarily indicative of operating results for the full year.

 

***(b)******     ******Use ofEstimates***

 

Thepreparation of the consolidated financial statements in conformity withgenerally accepted accounting principles in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities as of the dates of the consolidated balancesheets and income and expense for the periods presented. Actual results coulddiffer significantly from those estimates. Material estimates that areparticularly susceptible to significant changes include the assessment forimpairment of certain investment securities, the allowance for loan losses,valuation of other real estate owned, deferred tax assets and liabilities,goodwill and other intangible assets and stock compensation expense.  Assumptions and factors are evaluated on anannual basis or whenever events or changes in circumstance indicate that theprevious assumptions and factors have changed. The result of the analysis could result in adjustments to the estimates.

 

***(c)******     ******Allowancefor Loan Losses***

 

Theallowance for loan losses is reported as a reduction of outstanding loanbalances.  The allowance for loan lossesis a valuation allowance for probable incurred loan losses.

 

Theallowance for loan losses is evaluated on a regular basis by management andbased upon management’s periodic review of the collectibility of the loans inlight of historical experience, the nature and volume of the loan portfolio,adverse situations that may affect borrowers’ ability to repay, estimated valueof any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective asit requires estimates that are susceptible to significant revision as moreinformation becomes available.

 

8

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**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

Inaddition to the allowance for loan losses, the Company records a reserve forunfunded commitments.  Similar to theallowance for loan losses, the reserve for unfunded commitments is evaluated ona regular basis by management.  Thisreserve is recorded in other liabilities.

 

***(d)******       ******Goodwilland Other Intangible Assets***

 

Goodwillrepresents the excess of cost over the fair value of the net assets of businessesacquired.  Goodwill and intangible assetsacquired in a purchase business combination and determined to have anindefinite useful life are tested for impairment and not amortized. Intangibleassets with definite useful lives are amortized over their estimated usefullives to their estimated residual values.

 

Goodwillis our only intangible asset with an indefinite life.  The annual impairment analysis of goodwillincludes identification of reporting units, the determination of the carryingvalue of each reporting unit, including the existing goodwill and intangibleassets, and estimating the fair value of each reporting unit.  We have identified one significant reportingunit — banking operations. The Company tests for impairment of goodwillannually as of October 31, or if an event occurs or circumstances changethat would more likely than not reduce the fair value of the reportingunit.  We determine the fair value of ourreporting unit and compare it to its carrying amount.  If the carrying amount of a reporting unitexceeds its fair value, we are required to perform a second step to theimpairment test to measure the extent of the impairment.

 

Duringthe first quarter 2008, no events occurred nor circumstances changed that wouldmore likely than not reduce the fair value of the reporting unit.  Therefore, no goodwill impairment testing wasdeemed necessary prior to the annual goodwill impairment testing date of October 31.

 

Coredeposit intangible assets, referred to as CDI, are recognized apart fromgoodwill at the time of acquisition based on valuations prepared by independentthird parties or other estimates of fair value. In preparing such valuations,variables such as deposit servicing costs, attrition rates, and market discountrates are considered. CDI assets are amortized to expense over their usefullives, which we have estimated to range from 7 years to 15 years.

 

***(e)******      ******StockIncentive Plan***

 

TheCompany’s Amended and Restated 2005 Stock Incentive Plan (“Plan”) provides forup to 2,500,000 grants of stock options, stock awards, stock units awards,performance stock awards, stock appreciation rights, and other equity-basedawards to key employees, nonemployee directors, consultants and prospectiveemployees. Through March 31, 2008, the Company has only granted stockawards. The Company accounts for the equity-based compensation using theprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R,*Share-Based Payment*. The Companyrecognizes expense for services received in a share-based payment transactionas services are received. That cost is recognized on a straight-line basis overthe period during which an employee or director provides service in exchangefor the award. The Company has issued stock awards that vest based on serviceperiods from one to four years, performance conditions, and awards with bothservice periods and performance conditions. The performance-based share awardsexpire December 31, 2012. The compensation cost of employee and directorservices received in exchange for stock awards is based on the grant-date fairvalue of the award (as determined by quoted market prices). The stockcompensation expense recognized reflects estimated forfeitures, adjusted asnecessary based on actual forfeitures.

 

***(f)******      ******Deferred CompensationPlans***

 

TheCompany has Deferred Compensation Plans (the “Plans”) that allow directors andcertain key employees to voluntarily defer compensation. Compensation expenseis recorded for the deferred compensation and a related liability is recognized.Participants may elect designated investment options for the notionalinvestment of their deferred compensation. The recorded obligations areadjusted for deemed income or loss related to the investments selected.Participants in certain Plans are given the opportunity to elect to have all ora portion of their deferred compensation earn a rate of return equal to thetotal return on the Company’s common stock. The Plans do not provide fordiversification of a participant’s assets allocated to Company common stock andassets allocated to Company common stock can only be settled with a fixednumber of shares of stock. In accordance with Emerging Issues Task Force Issue97-14, *Accounting for*

 

9

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**CENTENNIAL BANKHOLDINGS, INC. AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

*Deferred CompensationArrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested*, the deferred compensation obligationassociated with Company common stock is classified as a component ofstockholders’ equity and the related shares are treated as shares to be issuedand are included in total shares outstanding for earnings per share and balancesheet purposes only.  At March 31,2008 and December 31, 2007, the total shares outstanding included 63,123and 60,507 shares, respectively, to be issued. Subsequent changes in the fair value of the common stock are notreflected in earnings or stockholders’ equity of the Company.  Actual Company stock held by the Company forthe satisfaction of obligations of the Plans is classified as treasury stock.

 

***(g)******     ******Incometaxes***

 

Effective January 1, 2007, theCompany adopted FASB Interpretation 48, *Accountingfor Uncertainty in Income Taxes* (“FIN 48”).   A tax position isrecognized as a benefit only if it is “more likely than not” that the taxposition would be sustained in a tax examination, with a tax examination beingpresumed to occur. The amount recognized is the largest amount of tax benefitthat is greater than 50% likely to be realized on examination.  For taxpositions not meeting the “more likely than not” test, no tax benefit isrecorded.  The adoption of FIN 48 on January 1, 2007, had no effecton the Company’s financial statements.

 

The Company and its subsidiaries aresubject to U.S. federal income tax and State of Colorado tax. The Company is nolonger subject to examination by Federal or state taxing authorities for yearsbefore 2004. At March 31, 2008 and December 31, 2007, the Company didnot have any unrecognized tax benefits. The Company does not expect the totalamount of unrecognized tax benefits to significantly increase in the nexttwelve months. The Company recognizes interest related to income tax matters inother interest expense and penalties related to income tax matters in othernoninterest expense.  At March 31,2008 and December 31, 2007, the Company does not have any amounts accruedfor interest and penalties.

 

***(h)******     ******Earningsper Common Share***

 

Basic earnings per share representsincome available to common stockholders divided by the weighted average numberof common shares outstanding during the period. Diluted earnings per share reflect additional common shares that wouldhave been outstanding if potential dilutive common shares had been issued.  In accordance with SFAS No. 128 (AsAmended), *Earnings per Share*, the Company’sobligation to issue shares of stock to participants in its deferredcompensation plan has been treated as outstanding shares of stock in the basicearnings per share calculation.  Dilutivecommon shares that may be issued by the Company relate to unvested common sharegrants subject to a service condition for the three-month periods ended March 31,2008 and 2007.   Outstanding restrictedshares with an anti-dilutive impact, which are excluded from the earnings percommon share computation, include performance-based shares and service-basedshares that are not considered dilutive. For the three-months ended March 31, 2008 and 2007, theanti-dilutive restricted shares excluded from the earnings per common sharecomputation are 1,670,715 and 1,650,223, respectively.

 

Earnings per common share have beencomputed based on the following:

 
| ** **                                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                                                          |       |                                                 |       |   |   |
| Average common shares outstanding                                             |       | 50,988,229                                           |       | 54,792,527 |   |
| Effect of dilutive unvested stock grants                                      |       | 61,296                                               |       | 109,702 |   |
| Average shares outstanding for calculating diluted earnings per  common share |       | 51,049,525                                           |       | 54,902,229 |   |

 

***(i)******      ******Recently Issued AccountingStandards***

 

***Adoption of New Accounting Standards:***In September 2006, the FASB issuedStatement No. 157, *Fair Value Measurements*.  This Statement defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements.  This Statementestablishes a fair value hierarchy about the 

 

10

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** **

**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

assumptions used tomeasure fair value and clarifies assumptions about risk and the effect of arestriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15,2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, *Effective Date of FASB Statement No. 157*.  This FSP delays the effective date of FAS 157for all nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value on a recurring basis (at least annually) tofiscal years beginning after November 15, 2008, and interim periods withinthose fiscal years. The adoption of FAS 157 on January 1, 2008 did nothave a material impact on the Company’s consolidated financial position,results of operations or cash flows.  See Note 8 for further disclosure regarding the implementation of thisaccounting pronouncement.

 

In February 2007,the FASB issued Statement No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities*.  The standard provides companies with anoption to report selected financial assets and liabilities at fair value andestablishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities. The new standard became effective for the Company on January 1,2008.  Upon adoption of this accountingpronouncement on January 1, 2008, the Company did not elect the fair valueoption for any financial assets or financial liabilities.

 

In September 2006, the FASB Emerging Issues TaskForce finalized Issue No. 06-4, *Accounting for DeferredCompensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements*. This issue requires that a liability be recorded during the serviceperiod when a split-dollar life insurance agreement continues afterparticipants’ employment or retirement. The required accrued liability will be based on either thepost-employment benefit cost for the continuing life insurance or based on thefuture death benefit, depending on the contractual terms of the underlyingagreement.  This issue is effective forfiscal years beginning after December 15, 2007.  Upon adoption of this issue on January 1, 2008,the Company recorded a cumulative effect adjustment to reduce beginningretained earnings as of January 1, 2008 by $71,000.

 

On November 5, 2007, the SECissued Staff Accounting Bulletin No. 109, *Written LoanCommitments Recorded at Fair Value through Earnings*(“SAB 109”). Previously,SAB 105, *Application of**AccountingPrinciples to Loan Commitments*, stated that in measuring the fairvalue of a derivative loan commitment, a company should not incorporate theexpected net future cash flows related to the associated servicing of the loan.SAB 109 supersedes SAB 105 and indicates that the expected net future cashflows related to the associated servicing of the loan should be included inmeasuring fair value for all written loan commitments that are accounted for atfair value through earnings.  SAB 105also indicated that internally-developed intangible assets should not berecorded as part of the fair value of a derivative loan commitment, and SAB 109retains that view.  SAB 109 is effectivefor derivative loan commitments issued or modified in fiscal quarters beginningafter December 15, 2007.  The adoption of this SAB on January 1,2008 did not have a material impact on the Company’s consolidated financialposition, results of operations or cash flows.

 

***Newly Issued But Not Yet Effective Accounting Standards:*** In December 2007, the FASB issued Statement No. 141R, *Business Combinations (Revised)* (“SFAS 141R”). SFAS 141Rreplaces the current standard on business combinations and will significantlychange the accounting for and reporting of business combinations inconsolidated financial statements. This statement requires an entity to measurethe business acquired at fair value and to recognize goodwill attributable toany noncontrolling interests (previously referred to as minority interests)rather than just the portion attributable to the acquirer.  The statementwill also result in fewer exceptions to the principle of measuring assetsacquired and liabilities assumed in a business combination at fair value. In addition, the statement will result in payments to third parties forconsulting, legal, audit, and similar services associated with an acquisitionto be recognized as expenses when incurred rather than capitalized as part ofthe business combination.  SFAS 141R is effective for fiscal yearsbeginning on or after December 15, 2008.

 

In March 2008,the FASB issued Statement No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities an Amendment of FASB Statement No. 133*(“SFAS 161”).  SFAS 161 amends Statement133 by requiring expanded disclosures about an entity’s derivative instrumentsand hedging activities, but does not change Statement 133’s scope oraccounting.  This statement requiresincreased qualitative, quantitative, and credit-risk disclosures.  SFAS 161 also amends Statement No. 107to clarify that derivative instruments are subject to Statement 107’sconcentration-of-credit-risk disclosures. SFAS 161 is effective for fiscal years beginning on or after November 15,2008.

 

11

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** **

**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

***(j******)******      ******Reclassifications***

 

Certain amounts inprior year financial statements have been reclassified to conform to thecurrent year presentation.  Thesereclassifications had no impact on the Company’s consolidated financialposition, results of operations or net change in cash and cash equivalents.

 

**(2)****     ****Securities**

 

*The amortized cost and estimated fair value of debt securities are asfollows:*

* *
| ** **                                                 | ** ** | **Amortized  cost**          | ** ** | **Gross   unrealized   gains** | ** ** | **Gross   unrealized   losses** | ** ** | **Fair value** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|---------------------|------------|
| ** **                                                 | ** ** | **(In thousands)**      | ** ** |
| ** **                                                 | ** ** | **March 31, 2008** | ** ** |
| Securities available for sale:                             | ** ** | ** **                   | ** ** | ** **                               | ** ** | ** **                                | ** ** | ** **          | ** ** |
| U.S. government agencies and government-sponsored entities |       | $                            | 2,493      |                                     | $          | 16                                        |       | $                   | —     |   | $ | 2,509 |   |
| State and municipal                                        |       | 78,004                       |       | 1,070                                    |       | (5,564                                    | )          | 73,510              |       |
| Mortgage-backed                                            |       | 38,752                       |       | 341                                      |       | (16                                       | )          | 39,077              |       |
| Marketable equity                                          |       | 1,099                        |       | —                                   |       | —                                    |       | 1,099               |       |
| Other securities                                           |       | 547                          |       | —                                   |       | —                                    |       | 547                 |       |
| Securities available-for-sale                              |       | $                            | 120,895    |                                     | $          | 1,427                                     |       | $                   | (5,580     | ) | $ | 116,742 |   |
|                                                       |       |                         |       |                                     |       |                                      |       |                |       |
| Securities held to maturity:                               |       |                         |       |                                     |       |                                      |       |                |       |
| Mortgage-backed                                            |       | $                            | 14,106     |                                     | $          | 259                                       |       | $                   | (4         | ) | $ | 14,361 |   |

 
| ** **                                                 | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|
| Securities available for sale:                             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. government agencies and government-sponsored entities |       | $                               | 10,453     |   | $ | 13 |   | $ | (10 | ) | $ | 10,456 |   |
| State and municipal                                        |       | 79,164                          |       | 607 |   | (2,895 | ) | 76,876 |   |
| Mortgage-backed                                            |       | 30,132                          |       | 108 |   | (202 | ) | 30,038 |   |
| Marketable equity                                          |       | 1,047                           |       | — |   | — |   | 1,047 |   |
| Other securities                                           |       | 547                             |       | — |   | — |   | 547 |   |
| Securities available-for-sale                              |       | $                               | 121,343    |   | $ | 728 |   | $ | (3,107 | ) | $ | 118,964 |   |
|                                                       |       |                            |       |   |   |   |   |   |   |
| Securities held to maturity:                               |       |                            |       |   |   |   |   |   |   |
| Mortgage-backed                                            |       | $                               | 14,889     |   | $ | 93 |   | $ | (66 | ) | $ | 14,916 |   |

 

All individual securities that have been in acontinuous unrealized loss position for 12 months or longer at March 31,2008, have fluctuated in value since their purchase dates as a result ofchanges in market interest rates.  Thesesecurities include securities issued by U.S. government agencies andgovernment-sponsored entities that have an AAA credit rating as determined byvarious rating agencies or state and municipal bonds that have either beenrated as investment grade or higher by various rating agencies or have beensubject to an annual internal review process by management.  This annual review process was updated in thefirst quarter 2008 for the largest non-rated municipal security in ourportfolio.  This particular bond had anincrease in the unrealized loss at March 31, 2008, as the rates onunsecured non-bank qualified securities increased during the period.  The unrealized loss on this securitycomprises nearly 100% of the overall unrealized loss on state and municipalbonds.  We updated our annual creditanalysis of this particular bond in the first quarter 2008 and concluded thatthe continuous unrealized loss position on this security was a result of thelevel of market interest rates and not a result of the underlying issuer’sability to repay.   Similarly, managementconcluded that the continuous unrealized loss position on all other securitieswas also a result of the level of market interest rates and not a result of theunderlying issuers’ ability to repay.  Inaddition, we have the ability and intent to hold these securities until theirfair value recovers to their cost, which may be maturity.  Accordingly, we have not recognized anyother-than-temporary impairment in our consolidated statements of income.

 

12

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**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Unaudited Condensed ConsolidatedFinancial Statements (Continued)**

 

**(3)****     ****Loans**

 

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

 
|                                | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                | ** ** | **(In thousands)**  | ** ** |
| Loans on real estate:               | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Residential and commercial mortgage |       | $                        | 723,246    |                        | $          | 713,478 |   |
| Construction                        |       | 238,926                  |       | 235,236                     |       |
| Equity lines of credit              |       | 47,659                   |       | 48,624                      |       |
| Commercial loans                    |       | 657,423                  |       | 679,717                     |       |
| Agricultural loans                  |       | 35,003                   |       | 39,506                      |       |
| Lease financing                     |       | 472                      |       | 4,732                       |       |
| Installment loans to individuals    |       | 38,151                   |       | 40,835                      |       |
| Overdrafts                          |       | 2,520                    |       | 1,329                       |       |
| SBA and other                       |       | 19,213                   |       | 21,592                      |       |
|                                |       | 1,762,613                |       | 1,785,049                   |       |
| Less:                               |       |                     |       |                        |       |
| Allowance for loan losses           |       | (26,048                  | )          | (25,711                     | )          |
| Unearned discount                   |       | (3,316                   | )          | (3,402                      | )          |
| Net Loans                           |       | $                        | 1,733,249  |                        | $          | 1,755,936 |   |

 

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

 
|                                       |   | **Quarter Ended**   |   |
|--------------------------------------------|--------|--------------------------|--------|
|                                       |   | **March 31,  2008** |   | **March 31,  2007** |   |
|                                       |   | **(In thousands)**  |   |
| Balance, beginning of period               |   | $                        | 25,711 |   | $ | 27,899 |   |
| Provision for loan losses                  |   | 875                      |   | 849 |   |
| Loans charged off                          |   | (743                     | )      | (1,692 | ) |
| Recoveries on loans previously charged-off |   | 205                      |   | 436 |   |
| Balance, end of period                     |   | $                        | 26,048 |   | $ | 27,492 |   |

 

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

 
|                                                  |   | **Quarter Ended**   |   |
|-------------------------------------------------------|--------|--------------------------|--------|
|                                                  |   | **March 31,  2008** |   | **March 31,  2007** |   |
|                                                  |   | **(In thousands)**  |   |
| Balance, beginning of period                          |   | $                        | 522    |   | $ | 411 |   |
| Provision (credit) for losses on unfunded commitments |   | (122                     | )      | 161 |   |
| Balance, end of period                                |   | $                        | 400    |   | $ | 572 |   |

 

13

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**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

*The following table details key information regarding the Company’s impairedloans at the dates indicated:*

 
|                                          |   | **March 31,  2008** |   | **December 31,  2007** |   |
|-----------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                          |   | **(In thousands)**  |   |
| Impaired loans with a valuation allowance     |   | $                        | 14,757 |                        | $      | 16,663 |   |
| Impaired loans without a valuation allowance  |   | 6,042                    |   | 6,665                       |   |
| Total impaired loans                          |   | $                        | 20,799 |                        | $      | 23,328 |   |
| Valuation allowance related to impaired loans |   | $                        | 5,368  |                        | $      | 4,283 |   |

 
|                                                  |   | **Three Months Ended** |   |
|-------------------------------------------------------|--------|----------------------------------|--------|
|                                                  |   | **March 31,  2008**         |   | **March 31,  2007** |   |
|                                                  |   | **(In thousands)**          |   |
| Average of individually impaired loans during quarter |   | $                                | 22,114 |   | $ | 39,588 |   |
| Interest income recognized during impairment          |   | $                                | 17     |   | $ | 366 |   |
| Cash-basis interest income recognized                 |   | $                                | 17     |   | $ | 297 |   |

 

The gross interest income that would have beenrecorded in the year-to-date period ended March 31, 2008 and March 31,2007, if the loans had been current in accordance with their original terms andhad been outstanding throughout the period or since origination, if held forpart of the period, was $633,000 and $870,000, respectively.  At March 31, 2008 and December 31,2007, nonaccrual loans were $20,798,000 and $19,309,000, respectively.

 

**(4)****          ****Goodwill and OtherIntangible Assets**

 

Goodwill and other intangible assets arise frombusiness combinations.  Goodwill andother intangible assets deemed to have indefinite lives generated from purchasecombinations are tested for impairment no less than annually.

 

Other intangible assets with definite lives areamortized over their respective estimated useful lives to their estimatedresidual values.  The amortizationexpense represents the estimated decline in the value of the underlyingdeposits or loan customers acquired.

 

The carrying amount of goodwill was $250,748,000 forthe periods ended March 31, 2008 and December 31, 2007.

 

*The following table presents the gross amounts of core deposit andcustomer relationship intangibles and the related accumulated amortization atthe dates indicated:*

 
| ** **                     | ** ** | ** **           | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|----------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **Useful life** | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **                     | ** ** | ** **           | ** ** | **(In thousands)** | ** ** |
| Core deposit intangible assets |       | 7  - 15 years        |       | $                       | 62,975     |                  | $          | 62,975 |   |
| Accumulated amortization       |       |                 |       | (31,919                 | )          | (30,042               | )          |
| Net other intangible assets    |       |                 |       | $                       | 31,056     |                  | $          | 32,933 |   |

 

*Following is the aggregate amortization expense recognized in eachperiod:*

 
| ** **           | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------|------------|------------------------------------------------------|------------|
| ** **           | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **           | ** ** | **(In thousands)**                              | ** ** |
| Amortization expense |       | $                                                    | 1,877      |   | $ | 2,195 |   |
|                      |            |                                                      |            |  |  |  |  |

 

**(5)****     ****Borrowings**

 

At March 31,2008, our outstanding borrowings were $117,227,000 as compared to $63,715,000at December 31, 2007. These borrowings at March 31, 2008, consistedof term notes at the Federal Home Loan Bank (“FHLB”).  There was also a line of credit at the FHLBat March 31, 2008, but there was no balance outstanding on this line of 

 

14

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**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

credit on such date. At December 31,2007, borrowings consisted of a line of credit and term notes at the FederalHome Loan Bank of $15,160,000 and $47,356,000 respectively,and a $1,199,00 Treasury Tax and Loan note balance.

 

The total commitment,including balances outstanding, for borrowings at the Federal Home Loan Bankfor the term notes and line of credit at March 31, 2008 and December 31,2007 was $398.9 and $316.2 million, respectively. The interest rate on the lineof credit varies with the federal funds rate, and was 3.17% and 5.51% at March 31,2008 and December 31, 2007, respectively. The term notes have fixed interest rates that range from 2.52% to 6.22%. A blanket pledge and security agreement withthe Federal Home Loan Bank, which encompasses certain loans and securities,serves as collateral for these borrowings.

 

We have a$70 million revolving credit agreement with U.S. Bank National Associationwhich contains financial covenants, including maintaining a minimum return on averageassets, a maximum nonperforming assets to total loans ratio and regulatorycapital ratios that qualify the Company as well-capitalized.   As of March 31, 2008, the Company didnot have any amount drawn on this line. The Company is in compliance with all outstanding debt covenants, asamended. The interest rate varies based on a spread over the federal fundsrate, with a rate of 3.59% at March 31, 2008.The credit agreement is secured by Guaranty Bank stock.

 

**(6)****     ****Subordinated Debentures and Trust Preferred Securities**

 

The Company had $41,239,000 in aggregate principalbalances of subordinated debentures outstanding with a weighted average cost of8.35% and 8.97% at March 31,2008 and December 31,2007, respectively. The subordinated debentures were issued in four separateseries. 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 withcertain limitations, the Company is permitted to call the debentures subsequentto the first five or ten years, as applicable, after issue if certainconditions are met, or at any time upon the occurrence and continuation ofcertain changes in either the tax treatment or the capital treatment of thetrusts, the debentures or the preferred securities.   As of March 31, 2008, theCompany was in compliance with all covenants of these subordinated debentures.

 

These securities are currently included in Tier Icapital for purposes of determining the Company’s Tier I and total risk-basedcapital ratios. The Board of Governors of the Federal Reserve System, which isthe holding company’s banking regulator, has promulgated a modification of thecapital regulations affecting trust preferred securities. Under thismodification, beginning March 31, 2009, the Company will be required touse a more restrictive formula to determine the amount of trust preferredsecurities that can be included in regulatory Tier I capital. At that time, theCompany will be allowed to include in Tier I capital an amount of trustpreferred securities equal to no more than 25% of the sum of all core capitalelements, which is generally defined as stockholders’ equity less certainintangibles, including goodwill, core deposit intangibles and customerrelationship intangibles, net of any related deferred income tax liability. Theregulations currently in effect limit the amount of trust preferred securitiesthat can be included in Tier I capital to 25% of the sum of core capitalelements without a deduction for permitted intangibles.

 

*The following table summarizesthe terms of each subordinated debenture issuance at March 31, 2008**(dollars in thousands):*

 
| ** **                 | ** ** | **Date  Issued** | ** ** | **Amount** | ** ** | **Maturity  Date** | ** ** | **Call  Date*** | ** ** | **Fixed or  Variable** | ** ** | **Rate Adjuster**       | ** ** | **Current  Rate** | ** ** | **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          |       | 4/8/2004         |       | 15,464     |       | 4/15/2034          |       | 4/15/2009       |       | Variable               |       | LIBOR + 2.65% |       | 6.91              | %          | 4/15/2008                           |       |
| Guaranty Capital Trust III |       | 6/30/2003        |       | 10,310     |       | 7/7/2033           |       | 7/7/2008        |       | Variable               |       | LIBOR + 3.10% |       | 7.36              | %          | 4/07/2008                           |       |
|                            |            |                  |            |            |            |                    |            |                 |            |                        |            |                         |            |                   |            |                                     |            |  |

 

----

*   Call daterepresents the earliest date the Company can call the debentures.

 

**(7)****          ****Commitments**

 

The Company is a party to credit-related financialinstruments with off-balance sheet risk in the normal course of business tomeet the financing needs of its customers. These financial instruments includecommitments to extend credit, stand-by letters of credit and commercial lettersof credit. Such commitments involve, to varying degrees, elements of credit andinterest rate risk in excess of the amount recognized in the consolidatedbalance sheets.

 

15

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** **

**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

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

 

*At the dates indicated, the following commitments were outstanding:*

 
| ** **                   | ** ** | **March 31,  2008** | ** ** | **December 31,   2007** | ** ** |
|------------------------------|------------|--------------------------|------------|-----------------------------------|------------|
| ** **                   | ** ** | **(In thousands)**  | ** ** |
| ** **                   | ** ** | ** **               | ** ** | ** **                        | ** ** |
| Commitments to extend credit |       | $                        | 597,765    |                              | $          | 582,988 |   |
| Standby letters of credit    |       | 28,917                   |       | 33,573                            |       |
|                         |       |                     |       |                              |       |
| Totals                       |       | $                        | 626,682    |                              | $          | 616,561 |   |

 

Commitments to extend credit are agreements to lendto a customer as long as there is no violation of any condition established inthe contract. Commitments generally have fixed expiration dates or othertermination clauses and may require payment of a fee. Several of thecommitments may expire without being drawn upon. Therefore, the totalcommitment amounts do not necessarily represent future cash requirements. Theamount of collateral obtained, if it is deemed necessary by the Company, isbased on management’s credit evaluation of the customer.

 

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

 

Stand-by letters of credit are conditionalcommitments issued by the Company to guarantee the performance of a customer toa third party. Those letters of credit are primarily issued to support publicand private borrowing arrangements. Substantially all letters of credit issuedhave expiration dates within one year. The credit risk involved in issuingletters of credit is essentially the same as that involved in extending loanfacilities to customers. The Company generally holds collateral supportingthose commitments if deemed necessary.

 

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

 

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

 

Effective January 1, 2008, the Companyadopted FASB Statement No. 157, *Fair Value Measurements*(“SFAS No. 157”).  SFAS No. 157 clarifies that fair valueis an exit price, representing the amount that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants. Under SFAS No. 157, fair value measurements are not adjustedfor transaction costs. SFAS No. 157 establishes a fair value hierarchythat prioritizes the inputs to valuation techniques used to measure fair value.The hierarchy gives the highest priority to unadjusted quoted prices in activemarkets for identical assets or liabilities (level 1measurements) and thelowest priority to unobservable inputs (level 3 measurements). The three levelsof the fair value hierarchy under SFAS No. 157 are described below:

 

Basis of Fair Value Measurement:

 

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

 

Level 2-  Significant other observable inputs other than Level 1 prices suchas quoted prices in markets that are not active, quoted prices for similarassets, or other inputs that are observable, either directly or indirectly, forsubstantially the full term of the asset.

 

Level 3 -Prices or valuation techniques that require inputs that are both significant tothe fair value measurement and are unobservable (i.e., supported by little orno market activity).

 

16

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**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

A financial instrument’s level within thefair value hierarchy is based on the lowest level of input that is significantto the fair value measurement.

 

The fair values of securities available forsale are generally determined by matrix pricing, which is a mathematicaltechnique widely used in the industry to value debt securities without relyingexclusively on quoted prices for the specific securities but rather by relyingon the securities’ relationship to other benchmark quoted securities (Level 2inputs).

 

Level 3 is for positions that are not tradedin active markets or are subject to transfer restrictions, and/or wherevaluations are adjusted to reflect illiquidity and/or non-transferability.  Such adjustments are generally based onavailable market evidence. In the absence of such evidence, management’s bestestimate is used. Management’s best estimate consists of both internal andexternal support on certain Level 3 investments. Internal cash flow modelsusing a present value formula along with indicative exit pricing obtained frombroker/dealers were used to fair value support certain Level 3investments.  Subsequent to inception, management only changes level3 inputs and assumptions when corroborated by evidence such as transactions insimilar instruments, completed or pending third-party transactions in theunderlying investment or comparable entities, subsequent rounds of financing,recapitalizations and other transactions across the capital structure,offerings in the equity or debt markets, and changes in financial ratios orcash flows.

 

Impaired loans are evaluated and valued atthe time the loan is identified as impaired, at the lower of cost or fairvalue.  Fair value is measured based on the value of the collateralsecuring these loans and is classified at a level 3 in the fair valuehierarchy.  Collateral may be real estate and/or business assetsincluding equipment, inventory and/or accounts receivable and is determined basedon appraisals by qualified licensed appraisers hired by theCompany.   Appraised and reported values may be discounted basedon management’s historical knowledge, changes in market conditions from thetime of valuation, and/or management’s expertise and knowledge of the clientand client’s business.  Impaired loans are reviewed and evaluated onat least a quarterly basis for additional impairment and adjusted accordingly,based on the same factors identified above.

 

The following table sets forth the Company’sfinancial assets that were accounted for at fair value and are classified intheir entirety based on the lowest level of input that is significant to thefair value measurement.

 
| ** **                                                              | ** ** | **Quoted Prices  in Active   Markets for   Identical Assets  (Level 1)** | ** ** | **Significant   Other  Observable  Inputs   (Level 2)** | ** ** | **Significant  Unobservable  Inputs   (Level 3)** | ** ** | **Balance as of  March 31, 2008** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                              | ** ** | **(In thousands)**                                                       | ** ** |
| Assets at March 31, 2008 Investment  securities,available for sale |       | $                                                                        | —     |                                                    | $          | 116,742                                           |       | $                                      | —     |   | $ | 116,742 |   |
|                                                                    |

 

Thefollowing represent assets and liabilities were measured at fair value on anon-recurring basis:

 
| ** **                                   | ** ** | **Significant  Unobservable  Inputs   (Level 3)** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                   | ** ** | **(In  thousands)**                               | ** ** |
| Assets at March 31, 2008 Impaired loans |       | $                                                 | 14,757     |   |
|                                              |            |                                                   |            |  |

 

Impaired loans with a valuation allowance based uponfair value of the underlying collateral had a carrying amount of $14,757,000 atMarch 31, 2008 as compared to $16,663,000 at December 31, 2007. Thevaluation allowance on impaired loans was $5,368,000 at March 31, 2008 ascompared to $4,283,000 at December 31, 2007. During the three-month periodended March 31, 2008, an additional provision for loan losses ofapproximately $1.1 million was made for impaired loans.

 

17

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** **

**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

**(9)           Stock-BasedCompensation**

 

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

 

Prior to vesting of the stock awards with a servicevesting condition, each grantee shall have the rights of a stockholder withrespect to voting of the granted stock. The recipient is not entitled todividend rights with respect to the shares of granted stock until vestingoccurs. Prior to vesting of the stock awards with performance vestingconditions, each grantee shall have the rights of a stockholder with respect tovoting of the granted stock. The recipient is not entitled to dividend rightswith respect to the shares of granted stock until initial vesting occurs, atwhich time the dividend rights will exist on vested and unvested shares ofgranted stock, subject to termination of such rights under the terms of theIncentive Plan.

 

Other than the stock awards with service andperformance-based vesting conditions, no grants have been made under theIncentive Plan. The Incentive Plan authorizes grants of stock-basedcompensation awards of up to 2,500,000 shares of Company common stock, subjectto adjustments provided by the Incentive Plan. As of March 31, 2008 and December 31, 2007, there were1,732,011 and 1,651,345 shares of unvested stock granted (net of forfeituresand vestings), with 639,044 and 754,644 shares available for grant under theIncentive Plan, respectively.

 

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

 
| ** **                             | ** ** | **Shares** | ** ** | **Weighted   Average Fair   Value on   Award Date** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| Outstanding  at December 31, 2007 |       | 1,651,345  |       | $                                                   | 10.21      |   |
| Awarded                                |       | 136,000    |       | 6.19                                                |       |
| Forfeited                              |       | (20,400    | )          | 9.67                                                |       |
| Vested                                 |       | (34,934    | )          | 12.01                                               |       |
| Outstanding  at March 31, 2008    |       | 1,732,011  |       | $                                                   | 9.86       |   |

 

The Company recognized $772,000 and $867,000 instock-based compensation expense for services rendered for the three monthsended March 31, 2008 and 2007, respectively. The total income tax benefitrecognized in the consolidated income statement for share-based compensationarrangements was $208,000 and $329,000 for the three months ended March 31,2008 and 2007, respectively. At March 31, 2008, compensation cost of$6,799,000 related to nonvested awards not yet recognized is expected to berecognized over a weighted-average period of 2.0 years.   During the first three months of 2008, thevalue of the vested awards was approximately $197,000.  Of the 1,732,011 shares outstanding at March 31,2008, approximately 1,267,000 shares are expected to vest.

 

**(10)****          ****Capital Ratios**

 

At March 31, 2008 and December 31, 2007,the Company had leverage ratios of 9.21% and 8.55%, Tier 1 risk-weightedcapital ratios of 9.93% and 9.62%, and total risk-weighted capital ratios of11.18% and 10.87%, respectively. The Company actively monitors its regulatorycapital ratios to ensure that the Company and its bank subsidiaries are wellcapitalized under the applicable regulatory framework.

 

18

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**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

**(11)****          ****Total Comprehensive Income**

 

*The followingtable presents the components of other comprehensive loss and totalcomprehensive income (loss) for the periods presented:*

 
| ** **                                                       | ** ** | **Three Months Ended   March 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                | ** ** | **2007** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**                      | ** ** |
| Net  income                                                      |       | $                                       | 3,245      |   | $ | 5,409 |   |
| Other  comprehensive loss:                                       |       |                                    |       |   |   |
| Change in net unrealized gains (losses), net                     |       | (1,912                                  | )          | (207 | ) |
| Less: Reclassification adjustments for gains  included in income |       | (138                                    | )          | — |   |
| Net unrealized holding losses                                    |       | (1,774                                  | )          | (207 | ) |
| Income tax benefit                                               |       | (674                                    | )          | (78 | ) |
| Other comprehensive loss                                         |       | (1,100                                  | )          | (129 | ) |
| Total  comprehensive income                                      |       | $                                       | 2,145      |   | $ | 5,280 |   |

 

**(12)****          ****Contingencies**

 

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

 

19

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

 

ThisMD&A should be read together with our unaudited Condensed ConsolidatedFinancial Statements and unaudited Statistical Information included elsewherein this Report and Items 1, 1A, 6, 7, 7A and 8 of our 2007 Annual Report on Form 10-K.  Also, please see the disclosure in the “Forward-LookingStatements and Factors that Could Affect Future Results” section in this reportfor certain other factors that could cause actual results or future events todiffer materially from those anticipated in the forward-looking statementsincluded in this report or from historical performance.

 

**Overview**

 

Centennial Bank Holdings, Inc. is a financialholding company and a bank holding company with the principal business to serveas a holding company to its subsidiaries. Unless the context requires otherwise, the terms “Company,” “us,” “we,”and “our” refers to Centennial Bank Holdings, Inc. on a consolidatedbasis.

 

Through our banking subsidiary, we provide bankingand other financial services throughout our targeted Colorado markets toconsumers and to small and medium-sized businesses, including the owners andemployees of those businesses.  Thesebanking products and services include accepting time and demand deposits,originating commercial loans including energy loans, real estate loans,including construction and mortgage loans, Small Business Administrationguaranteed loans and consumer loans. We derive our income primarily frominterest received on real estate-related loans, commercial loans and leases andconsumer loans and, to a lesser extent, from fees on the referral of loans,interest on investment securities and fees received in connection withservicing loan and deposit accounts. Our major operating expenses are theinterest we pay on deposits and borrowings and general operating expenses. Werely primarily on locally generated deposits to provide us with funds formaking loans.

 

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

 

As of December 31, 2007, we had two bankingsubsidiaries.  Those subsidiaries wereGuaranty Bank and Trust Company and Centennial Bank of the West, which wesometimes refer to as Guaranty Bank and CBW, respectively.  On January 1, 2008, CBW was merged intoGuaranty Bank.

 

On May 6, 2008, the stockholders of Centennial BankHoldings, Inc. approved the proxy proposal to change the name of theholding company to Guaranty Bancorp.  This name change will be effective on May 12, 2008.

 

20

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**Earnings Summary**

 

*Table 1 summarizes certain key financial results for the periodsindicated:*

 

**Table 1**

 
| ** **                                                    | ** ** | **Three Months Ended March 31,**            | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | **Change -** | ** ** |
| ** **                                                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | **Favorable** | ** ** |
| ** **                                                    | ** ** | **2008**                                         | ** ** | **2007** | ** ** | **(Unfavorable)** | ** ** |
| ** **                                                    | ** ** | **(In thousands, except share data and ratios)** | ** ** |
| **Results  of Operations:**                                   | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  income                                              |       | $                                                | 33,403     |   | $ | 42,360 |   | $ | (8,957 | ) |
| Interest  expense                                             |       | 11,753                                           |       | 15,517 |   | 3,764 |   |
| Net interest income                                           |       | 21,650                                           |       | 26,843 |   | (5,193 | ) |
| Provision  for loan losses                                    |       | 875                                              |       | 849 |   | (26 | ) |
| Net  interest income after provision for loan losses          |       | 20,775                                           |       | 25,994 |   | (5,219 | ) |
| Noninterest  income                                           |       | 2,515                                            |       | 2,567 |   | (52 | ) |
| Noninterest  expense                                          |       | 18,710                                           |       | 20,682 |   | 1,972 |   |
| Income  before income taxes                                   |       | 4,580                                            |       | 7,879 |   | (3,299 | ) |
| Income  tax expense                                           |       | 1,335                                            |       | 2,470 |   | 1,135 |   |
| Net  income                                                   |       | $                                                | 3,245      |   | $ | 5,409 |   | $ | (2,164 | ) |
| ** **                                                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Share  Data:**                                              | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic  earnings per share                                     |       | $                                                | 0.06       |   | $ | 0.10 |   | $ | (0.04 | ) |
| Diluted  earnings per share                                   |       | $                                                | 0.06       |   | $ | 0.10 |   | $ | (0.04 | ) |
| Average  shares outstanding                                   |       | 50,988,229                                       |       | 54,792,527 |   | 3,804,298 |   |
| Diluted  average shares outstanding                           |       | 51,049,525                                       |       | 54,902,229 |   | 3,852,704 |   |
|                                                          |       |                                             |       |   |   |   |   |
| **Selected  Ratios:**                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total  risk based capital                                     |       | 11.2                                             | %          | 10.9 | % | 0.30 | % |
| Nonperforming  assets to total assets                         |       | 0.96                                             | %          | 1.23 | % | 0.27 | % |
| Allowance  for loan losses to nonperforming loans             |       | 125.24                                           | %          | 85.21 | % | 40.03 | % |
| Allowance  for loan losses to loans, net of unearned discount |       | 1.48                                             | %          | 1.46 | % | 0.02 | % |

 

The $3.2 million first quarter 2008 netincome is $2.2 million lower than first quarter 2007 due mostly to a $5.2million decrease in net interest income, primarily the result of lower interestrates.  This decrease in net interestincome was partially offset by lower noninterest expense and tax expense.

 

The decrease in noninterest expense is mostlydue to lower salaries and employee benefit expenses primarily attributable to a9.9% reduction in full-time equivalent employees in the first quarter 2008 ascompared to the first quarter 2007. Total full-time equivalent employees decreased by 51 to 465 at March 31,2008 as compared to 516 at March 31, 2007.

 

The above table reflects the improvement inthe ratio of nonperforming loans to total assets, as well as the coverage ofthe allowance to nonperforming loans. These improvements are mostly due to the modification of the Company’scredit management philosophy in the second quarter 2007, which included anadoption of an accelerated disposition strategy regarding problem credits.   Consequently, in October 2007,approximately $48 million of certain nonperforming and classified assets weresold.

 

**Net Interest Income and NetInterest Margin**

 

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

 

21

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*The following table summarizes the Company’s net interest income andrelated spread and margin for the current quarter and prior four quarters:*

 

**Table 2**

 
| ** **                                 | ** ** | **Quarter Ended**          | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **March 31,   2008**  | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,   2007** | ** ** | **March 31,  2007** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands)** | ** ** |
|                                       |       |                       |       |   |   |   |   |   |   |   |   |
| Net  interest income                       |       | $                          | 21,650     |   | $ | 24,184 |   | $ | 25,236 |   | $ | 25,987 |   | $ | 26,843 |   |
| Interest  rate spread                      |       | 3.58                       | %          | 3.77 | % | 3.84 | % | 3.98 | % | 4.16 | % |
| Net  interest margin                       |       | 4.42                       | %          | 4.75 | % | 4.82 | % | 5.00 | % | 5.16 | % |
| Net  interest margin, fully tax equivalent |       | 4.53                       | %          | 4.88 | % | 4.97 | % | 5.15 | % | 5.32 | % |
|                                            |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Firstquarter 2008 net interest income of $21.7 million declined by $5.2 million fromthe first quarter 2007.  This decrease isa result of a $3.9 million unfavorable rate variance and a $1.3 millionunfavorable volume variance (see Table 4).

 

Theunfavorable rate variance from the prior year first quarter is attributable tolower yields on loans and a higher cost of funds, causing an overall decline innet interest margin of 74 basis points to 4.42% at March 31, 2008 ascompared to March 31, 2007.  Duringthat same period, the Federal Open Markets Committee (FOMC) of the FederalReserve Board decreased the target federal funds rate six times by a total of300 basis points.  Similarly, the primerate decreased by 300 basis points during this same period.  Approximately 69% of the Company’soutstanding loan balances are variable rate loans and are tied to indices suchas prime, LIBOR or federal funds.  As aresult of these rate declines, the average yield on loans for the Companydecreased by 138 basis points from 8.44% for the quarter ended March 31,2007 to 7.06% for the same period in 2008.  Although rates paid on deposits also declined during this same period by66 basis points, the 138 basis point decline in the yield on loans was morerapid due to competitive pressures on the deposit side and the fact thatdeposits, and particularly time deposits, reprice more slowly than variablerate loans.

 

Theunfavorable volume variance is mostly attributable to loans, but is partiallyoffset by a decrease in time deposits.  The average balance of loans declined from the prior year by $142.1million.  Most of this decline isattributable to management’s decision to reduce the number of constructionloans.  The construction loan balancedecreased by $114.4 million to $238.9 million from March 31, 2007 to March 31,2008.   Additionally, approximately $48million of certain nonperforming and classified loans were sold in October 2007.  The $102.9 million decline in average timedeposits from the quarter ended March 31, 2007 is mostly due to astrategic decision to reduce non-core certificates of deposit accounts.

 

22

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The following table presents, for the periodsindicated, average assets, liabilities and stockholders’ equity, as well as thenet interest income from average interest-earning assets and the resultantannualized yields expressed in percentages. Nonaccrual loans are included in the calculation of average loans whileaccrued interest thereon is excluded from the computation of yields earned.

 

**Table 3**

** **
| ** **                                           | ** ** | **Quarter  Ended March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **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)             |       | $                                 | 1,767,583  |   | $ | 31,040 |   | 7.06 | % | $ | 1,909,713 |   | $ | 39,738 |   | 8.44 | % |
| Investment securities(1)                             |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                              |       | 50,810                            |       | 615 |   | 4.87 | % | 51,173 |   | 621 |   | 4.93 | % |
| Tax-exempt                                           |       | 76,501                            |       | 893 |   | 4.69 | % | 113,152 |   | 1,412 |   | 5.06 | % |
| Bank Stocks (3)                                      |       | 32,466                            |       | 470 |   | 5.82 | % | 31,849 |   | 475 |   | 6.04 | % |
| Other earning assets                                 |       | 41,796                            |       | 385 |   | 3.71 | % | 4,327 |   | 114 |   | 10.65 | % |
| Total interest-earning assets                        |       | 1,969,155                         |       | 33,403 |   | 6.82 | % | 2,110,214 |   | 42,360 |   | 8.14 | % |
| **Non-earning  assets:**                             | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and due from banks                              |       | 40,858                            |       |   |   |   |   | 56,891 |   |   |   |   |   |
| Other assets                                         |       | 366,526                           |       |   |   |   |   | 520,445 |   |   |   |   |   |
|                                                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| **Total  assets**                                    |       | $                                 | 2,376,539  |   |   |   |   |   | $ | 2,687,550 |   |   |   |   |   |
|                                                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY:**      | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing  liabilities:                       |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                            |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand                              |       | $                                 | 155,900    |   | $ | 282 |   | 0.73 | % | $ | 160,075 |   | $ | 250 |   | 0.63 | % |
| Money Market                                         |       | 581,538                           |       | 3,781 |   | 2.62 | % | 631,760 |   | 5,856 |   | 3.76 | % |
| Savings                                              |       | 71,178                            |       | 114 |   | 0.65 | % | 84,575 |   | 164 |   | 0.79 | % |
| Time certificates of deposit                         |       | 468,990                           |       | 5,618 |   | 4.82 | % | 571,931 |   | 7,076 |   | 5.02 | % |
| Total interest-bearing deposits                      |       | 1,277,606                         |       | 9,795 |   | 3.08 | % | 1,448,341 |   | 13,346 |   | 3.74 | % |
| Borrowings:                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase agreements                                |       | 16,813                            |       | 120 |   | 2.87 | % | 24,887 |   | 299 |   | 4.87 | % |
| Federal funds purchased                              |       | 2,098                             |       | 17 |   | 3.20 | % | 154 |   | 2 |   | 5.83 | % |
| Subordinated debentures                              |       | 41,239                            |       | 792 |   | 7.72 | % | 41,239 |   | 932 |   | 9.17 | % |
| Borrowings                                           |       | 120,483                           |       | 1,029 |   | 3.43 | % | 66,508 |   | 938 |   | 5.72 | % |
| Total interest-bearing liabilities                   |       | 1,458,239                         |       | 11,753 |   | 3.24 | % | 1,581,129 |   | 15,517 |   | 3.98 | % |
| Noninterest  bearing liabilities:                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                      |       | 472,802                           |       |   |   |   |   | 483,293 |   |   |   |   |   |
| Other liabilities                                    |       | 22,958                            |       |   |   |   |   | 34,661 |   |   |   |   |   |
| Total liabilities                                    |       | 1,953,999                         |       |   |   |   |   | 2,099,083 |   |   |   |   |   |
| Stockholder’s  Equity                           |       | 422,540                           |       |   |   |   |   | 588,467 |   |   |   |   |   |
| **Total  liabilities and stockholders’ equity** |       | $                                 | 2,376,539  |   |   |   |   |   | $ | 2,687,550 |   |   |   |   |   |
|                                                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Net  interest income                                 |       |                              |       | $ | 21,650 |   |   |   |   |   | $ | 26,843 |   |   |   |
| Net  interest margin                                 |       |                              |       |   |   | 4.42 | % |   |   |   |   | 5.16 | % |

 

----

(1) Yields on loans and securitieshave not been adjusted to a tax-equivalent basis.  Net interest margin on a fully tax-equivalentbasis would have been 4.53% and 5.32% for the three months ended March 31,2008 and March 31, 2007, respectively.

(2) Net loan fees of $0.7million and $1.4 million for the three months ended March 31, 2008 and2007, respectively, are included in the yield computation.

(3) Includes Bankers Bank ofthe West stock, Federal Agricultural Mortgage Corporation (Farmer Mac) stock,Federal Reserve Bank stock and Federal Home Loan Bank stock.

 

23

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The following table presents the dollar amount ofchanges in interest income and interest expense for the major categories of ourinterest-earning assets and interest-bearing liabilities. Information isprovided for each category of interest-earning assets and interest-bearingliabilities 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 ratemultiplied by prior-period average balances). For purposes of this table,changes attributable to both rate and volume, which cannot be segregated, havebeen allocated proportionately to the change due to volume and the change dueto rate.

 

**Table 4**

 
| ** **                        | ** ** | **Three Months Ended March 31, 2008  Compared to Three Months Ended  March 31, 2007** | ** ** |
|-----------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **Net Change**                                                                                  | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| ** **                        | ** ** | **(In thousands)**                                                                              | ** ** |
| **Interest  income:**             | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross Loans, net of unearned fees |       | $                                                                                               | (8,698     | ) | $ | (5,890 | ) | $ | (2,808 | ) |
| Investment Securities             |       |                                                                                            |       |   |   |   |   |
| Taxable                           |       | (6                                                                                              | )          | (2 | ) | (4 | ) |
| Tax-exempt                        |       | (519                                                                                            | )          | (86 | ) | (433 | ) |
| Bank Stocks                       |       | (15                                                                                             | )          | (25 | ) | 10 |   |
| Other earning assets              |       | 281                                                                                             |       | (22 | ) | 303 |   |
| Total interest income             |       | (8,957                                                                                          | )          | (6,025 | ) | (2,932 | ) |
|                              |       |                                                                                            |       |   |   |   |   |
| **Interest  expense:**            | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits:                         |       |                                                                                            |       |   |   |   |   |
| Interest-bearing demand           |       | 32                                                                                              |       | 38 |   | (6 | ) |
| Money market                      |       | (2,075                                                                                          | )          | (1,639 | ) | (436 | ) |
| Savings                           |       | (50                                                                                             | )          | (26 | ) | (24 | ) |
| Time certificates of deposit      |       | (1,458                                                                                          | )          | (219 | ) | (1,239 | ) |
| Repurchase agreements             |       | (179                                                                                            | )          | (99 | ) | (80 | ) |
| Federal funds purchased           |       | 15                                                                                              |       | (1 | ) | 16 |   |
| Subordinated debentures           |       | (140                                                                                            | )          | (140 | ) | 0 |   |
| Borrowings                        |       | 91                                                                                              |       | (86 | ) | 177 |   |
| Total interest expense            |       | (3,764                                                                                          | )          | (2,172 | ) | (1,592 | ) |
|                              |       |                                                                                            |       |   |   |   |   |
| **Net  interest income**          |       | $                                                                                               | (5,193     | ) | $ | (3,853 | ) | $ | (1,340 | ) |

 

24

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**Provision for Loan Losses**

 

The provision for loan losses in each yearrepresents a charge against earnings. The provision is the amount required tomaintain the allowance for loan losses at a level that, in our judgment, isadequate to absorb probable incurred loan losses in the loan portfolio. Theprovision for loan losses is based on our reserve methodology and reflects ourjudgments about the adequacy of the allowance for loan losses.  In determining the amount of the provision,we consider certain quantitative and qualitative factors including ourhistorical loan loss experience, the volume and type of lending we conduct, theresults of our credit review process, the amounts and severity of classified,criticized and nonperforming assets, regulatory policies, general economicconditions, underlying collateral values and other factors regardingcollectibility and impairment.  Theamount of expected loss on our loan portfolio is influenced by the collateralvalue associated with our loans. Loans with greater collateral value lessen ourexposure to loan loss provision.

 

In the first quarter 2008, the Company recorded aprovision for loan loss of $0.9 million, which is relatively flat as comparedto the same quarter in 2007.  For furtherdiscussion of the methodology and factorsimpacting management’s estimate of the allowance for loan losses, see “BalanceSheet Analysis – Allowance for Loan Losses” below.

 

Fora discussion of impaired loans and associated collateral values, see “BalanceSheet Analysis—Nonperforming Assets” below.

 

**Noninterest Income**

 

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

 

**Table 5**

 
| ** **                      | ** ** | **Quarter Ended**        | ** ** |
|---------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** |
| ** **                      | ** ** | **(In thousands)**       | ** ** |
| Noninterest  income:            |       |                     |       |   |   |   |   |   |   |   |   |
| Customer service and other fees |       | $                        | 2,276      |   | $ | 2,267 |   | $ | 2,390 |   | $ | 2,409 |   | $ | 2,443 |   |
| Gain on sale of securities      |       | 138                      |       | — |   | — |   | — |   | — |   |
| Other                           |       | 101                      |       | 665 |   | 230 |   | 168 |   | 124 |   |
| Total noninterest income        |       | $                        | 2,515      |   | $ | 2,932 |   | $ | 2,620 |   | $ | 2,577 |   | $ | 2,567 |   |

 

Noninterestincome in the first quarter 2008 decreased by $0.1 million from the firstquarter 2007 and by $0.4 million from the fourth quarter 2007.   During the first quarter 2008, a $0.1million gain on sale of securities was realized as management soldapproximately $15 million of available-for-sale securities and purchasedapproximately $15 million of new available-for-sale securities in order toimprove the overall yield on securities.  The decrease in other noninterest income from the fourth quarter 2007 ismostly due to a recovery recorded in the fourth quarter 2007 associated with amiscellaneous item from 2003.

 

25

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**Noninterest Expense**

 

*The following table presents, for the quarters indicated, the majorcategories of noninterest expense:*

 

**Table 6**

 
| ** **                        | ** ** | **Quarter Ended**        | ** ** |
|-----------------------------------|------------|--------------------------|------------|
| ** **                        | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,   2007** | ** ** | **March 31,  2007** | ** ** |
| ** **                        | ** ** | **(In thousands)**       | ** ** |
| Noninterest  expense:             |       |                     |       |   |   |   |   |   |   |   |   |
| Salaries and employee benefits    |       | $                        | 9,720      |   | $ | 8,442 |   | $ | 9,039 |   | $ | 10,724 |   | $ | 10,974 |   |
| Occupancy expense                 |       | 2,001                    |       | 1,781 |   | 1,855 |   | 2,056 |   | 2,121 |   |
| Furniture and equipment           |       | 1,314                    |       | 1,205 |   | 1,188 |   | 1,231 |   | 1,240 |   |
| Impairment of goodwill            |       | —                   |       | 142,210 |   | — |   | — |   | — |   |
| Amortization of intangible assets |       | 1,877                    |       | 2,132 |   | 2,143 |   | 2,195 |   | 2,195 |   |
| Other general and administrative  |       | 3,798                    |       | 4,278 |   | 3,980 |   | 11,416 |   | 4,152 |   |
| Total noninterest expense         |       | $                        | 18,710     |   | $ | 160,048 |   | $ | 18,205 |   | $ | 27,622 |   | $ | 20,682 |   |

 

The $2.0 million decrease in noninterest expense forthe first quarter 2008 ascompared to the same period in 2007 is due to a decline in salary and employeebenefit expense, amortization of intangible assets and other general andadministrative expense.  These categoriesdecreased for the reasons discussed below.

 

Salary andemployee benefits expense decreased by $1.3 million, or 11.4%, in the firstquarter 2008 as compared to the same period in 2007.  This decrease is primarily attributable to a9.9% reduction in full-time equivalent employees at March 31, 2008, ascompared to March 31, 2007. Salaries and employee benefits expense increased by $1.3 million in thefirst quarter 2008 as compared to the fourth quarter 2007 mostly due to a loweraccrual rate for bonuses and incentives in the fourth quarter 2007, as well asa $0.5 million reversal of executive bonus expense in the fourth quarter 2007and a $0.3 million increase in payroll taxes in the first quarter 2008.

 

Occupancyexpense for the first quarter 2008 is approximately $0.1 million lower than thefirst quarter 2007, but is $0.2 million more than the fourth quarter 2007.  The increase in occupancy expense from thefourth quarter 2007 is mostly due to seasonal increases in utilities andmaintenance, as well as small increases in property tax accruals and parkingexpenses.

 

Amortizationof intangible assets expense is $1.9 million in the first quarter 2008, ascompared to $2.2 million in the first quarter 2007, a decrease of $0.3 million,or 14%.  This decrease is mostlyattributable to the use of accelerated methods to amortize the core depositintangible asset.

 

Othergeneral and administrative expense decreased by $0.4 million, or 8.5%, in thefirst quarter 2008 as compared to the same period in 2007.  Overall professional fees decreased by $0.5million and provision for unfunded commitments declined by $0.3 million in thefirst quarter 2008 as compared to the same period in 2007.  These expense decreases were partially offsetby a $0.5 million increase in expenses associated with other real estate,primarily attributable to a write-down of a single property.  Similarly, other general and administrativeexpenses decreased by $0.5 million in the first quarter 2008, as compared tothe fourth quarter 2007 due mostly to a continued focus on expense managementwith decreases in most miscellaneous expense categories, including professionalfees, office and supplies, advertising and data processing.

 

**Income Tax Expense (Benefit)**

 

The effective tax rate onincome from continuing operations was 29.1% and 31.4% for the three-monthperiods ending March 31,2008 and 2007, respectively.  Theprimary difference between the expected tax rate and the effective tax rateswas tax-exempt income.  The effective taxrate is lower in 2008 as compared to 2007 primarily due to an increase in theratio of tax-exempt income to net income before tax.

 

26

----

 

**BALANCE SHEET ANALYSIS**

 

*The following sets forth certain key consolidated balance sheet data:*

 

**Table 7**

 
| ** **      | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **      | ** ** | **(In thousands)**       | ** ** |
| Total  assets   |       | 2,345,079                |       | 2,371,664                   |       | 2,617,153                    |       | 2,640,732               |       | 2,693,384                |       |
| Earning  assets |       | 1,932,526                |       | 1,949,211                   |       | 2,077,791                    |       | 2,084,941               |       | 2,110,214                |       |
| Deposits        |       | 1,710,082                |       | 1,799,507                   |       | 1,915,932                    |       | 1,938,412               |       | 1,971,869                |       |

 

At March 31, 2008, the Company had total assetsof $2.3 billion, or $26.6 million less than total assets at December 31,2007, and $348.3 million less than total assets at March 31, 2007.  The $26.6 million decline in assets from December 31,2007 is mostly due to a $22.4 million decrease in loans, net of unearneddiscount.  The $348.3 million decrease inassets from March 31, 2007, is partly due to a $150.6 million decrease inintangible assets due to a goodwill impairment recorded in the fourth quarter2007 and the amortization of core deposit intangible assets.  The remainder of the decrease in assets from March 31,2007, is primarily due to a $127.3 million decline in loans, net of unearneddiscount.

 

Approximately $48 million of this $127.3 milliondecline in loans from March 31, 2007 to March 31, 2008 isattributable to the sale of certain impaired and classified loans in October 2007.  A significant portion of the remainingdecrease in loans is due to the Company’s strategy of reducing itsconcentration of construction loans.  Construction loans declined by $114.4 millionfrom March 31, 2007 to March 31, 2008.

 

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

 

**Table 8**

 
| ** **                                     | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                     | ** ** | **(In thousands)**       | ** ** |
| Real  estate - Mortgage                        |       | $                        | 723,246    |                        | $          | 713,478                      |       | $                       | 724,528    |                     | $          | 742,802 |   | $ | 708,416 |   |
| Real  estate - Construction                    |       | 238,926                  |       | 235,236                     |       | 290,591                      |       | 321,982                 |       | 353,323                  |       |
| Equity  lines of credit                        |       | 47,659                   |       | 48,624                      |       | 49,747                       |       | 53,676                  |       | 54,904                   |       |
| Commercial                                     |       | 657,423                  |       | 679,717                     |       | 643,702                      |       | 652,911                 |       | 651,796                  |       |
| Agricultural                                   |       | 35,003                   |       | 39,506                      |       | 43,142                       |       | 47,891                  |       | 46,958                   |       |
| Consumer                                       |       | 38,151                   |       | 40,835                      |       | 40,868                       |       | 45,214                  |       | 43,891                   |       |
| Leases  receivable and other                   |       | 22,205                   |       | 27,653                      |       | 30,340                       |       | 32,829                  |       | 31,213                   |       |
| Total  gross loans                             |       | 1,762,613                |       | 1,785,049                   |       | 1,822,918                    |       | 1,897,305               |       | 1,890,501                |       |
| Less:  allowance for loan losses               |       | (26,048                  | )          | (25,711                     | )          | (23,979                      | )          | (35,594                 | )          | (27,492                  | )          |
| Unearned  discount                             |       | (3,316                   | )          | (3,402                      | )          | (3,730                       | )          | (3,865                  | )          | (3,888                   | )          |
| Loans,  net of unearned discount               |       | $                        | 1,733,249  |                        | $          | 1,755,936                    |       | $                       | 1,795,209  |                     | $          | 1,857,846 |   | $ | 1,859,121 |   |
|                                           |       |                     |       |                        |       |                         |       |                    |       |                     |       |
| Loans held for sale at lower of cost or market |       | $                        | —     |                        | $          | 492                          |       | $                       | 31,459     |                     | $          | — |   | $ | — |   |

 

**Nonperforming Assets**

 

Credit risk related to nonperforming assets arisesas a result of lending activities. To manage this risk, we employ frequentmonitoring procedures and take prompt corrective action when necessary. Weemploy a risk rating system that identifies the potential risk associated withloans in our loan portfolio. This monitoring and rating system is designed tohelp management determine current and potential problems so that correctiveactions can be taken promptly.

 

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

 

27

----

 

The following table summarizes the loans for whichthe accrual of interest has been discontinued, loans with payments more than 90days past due and still accruing interest, loans that have been restructured,and other real estate owned. For reporting purposes, other real estate ownedconsists of all real estate, other than bank premises, actually owned orcontrolled by us, including real estate acquired through foreclosure.

 

**Table 9**

 
| ** **                                                                            | ** ** | **Quarter Ended**        | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                            | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** |
| ** **                                                                            | ** ** | **(In thousands)**       | ** ** |
|                                                                                  |       |                     |       |   |   |   |   |   |   |   |   |
| Nonaccrual loans and leases, not restructured                                         |       | $                        | 20,798     |   | $ | 19,309 |   | $ | 16,831 |   | $ | 35,515 |   | $ | 31,940 |   |
| Accruing  loans past due 90 days or more                                              |       | 1                        |       | 527 |   | 9 |   | 122 |   | 323 |   |
| Other  real estate owned                                                              |       | 1,715                    |       | 3,517 |   | 3,401 |   | 1,385 |   | 861 |   |
| Total nonperforming assets                                                            |       | $                        | 22,514     |   | $ | 23,353 |   | $ | 20,241 |   | $ | 37,022 |   | $ | 33,124 |   |
| Nonperforming  loans                                                                  |       | $                        | 20,799     |   | $ | 19,836 |   | $ | 16,840 |   | $ | 35,637 |   | $ | 32,263 |   |
| Other  impaired loans                                                                 |       | —                   |       | 3,492 |   | 510 |   | 20,208 |   | 8,079 |   |
| Total  impaired loans                                                                 |       | $                        | 20,799     |   | $ | 23,328 |   | $ | 17,350 |   | $ | 55,845 |   | $ | 40,342 |   |
| Allocated  allowance for loan losses                                                  |       | (5,368                   | )          | (4,283 | ) | (4,028 | ) | (14,113 | ) | (7,673 | ) |
| Net investment in impaired loans                                                      |       | $                        | 15,431     |   | $ | 19,045 |   | $ | 13,322 |   | $ | 41,732 |   | $ | 32,669 |   |
| Loans  charged off                                                                    |       | $                        | 743        |   | $ | 1,729 |   | $ | 20,079 |   | $ | 5,473 |   | $ | 1,692 |   |
| Recoveries                                                                            |       | (205                     | )          | (436 | ) | (438 | ) | (809 | ) | (436 | ) |
| Net charge-offs                                                                       |       | $                        | 538        |   | $ | 1,293 |   | $ | 19,641 |   | $ | 4,664 |   | $ | 1,256 |   |
|                                                                                  |       |                     |       |   |   |   |   |   |   |   |   |
| Provision  for loan losses                                                            |       | $                        | 875        |   | $ | 3,025 |   | $ | 8,026 |   | $ | 12,766 |   | $ | 849 |   |
|                                                                                  |       |                     |       |   |   |   |   |   |   |   |   |
| Allowance  for loan losses                                                            |       | $                        | 26,048     |   | $ | 25,711 |   | $ | 23,979 |   | $ | 35,594 |   | $ | 27,492 |   |
|                                                                                  |       |                     |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to loans, net of unearned  discount                         |       | 1.48                     | %          | 1.44 | % | 1.32 | % | 1.88 | % | 1.46 | % |
| Allowance for loan losses to nonaccrual loans                                         |       | 125.24                   | %          | 133.16 | % | 142.47 | % | 100.22 | % | 86.07 | % |
| Allowance for loan losses to nonperforming assets                                     |       | 115.70                   | %          | 110.10 | % | 118.47 | % | 96.14 | % | 83.00 | % |
| Allowance for loan losses to nonperforming loans                                      |       | 125.24                   | %          | 129.62 | % | 142.39 | % | 99.88 | % | 85.21 | % |
| Nonperforming assets to loans, net of unearned  discount, and other real estate owned |       | 1.28                     | %          | 1.31 | % | 1.11 | % | 1.96 | % | 1.76 | % |
| Annualized net charge-offs to average loans                                           |       | 0.12                     | %          | 0.28 | % | 4.16 | % | 0.99 | % | 0.27 | % |
| Nonaccrual loans to loans, net of unearned discount                                   |       | 1.18                     | %          | 1.08 | % | 0.93 | % | 1.88 | % | 1.69 | % |

 

Nonperforming assets at March 31, 2008,decreased by $10.6 million, or 32.0%, from March 31, 2007, and by $0.8million, or 3.6%, from December 31, 2007. The decrease from March 31, 2007 is mostly due to the sale ofcertain nonperforming and classified loans on October 31, 2007.   Similarly, impaired loans at March 31,2008, decreased by $19.5 million, or 48.4% from March 31, 2007, and by$2.5 million, or 10.8%, from December 31, 2007.

 

Although the nonperformingloans at March 31, 2008 have declined from March 31, 2007, thedeterioration of the local and national real estate economy has resulted in thecontinued decline in the values of the underlying collateral on thenonperforming loans and thus the overall allowance for loan losses remains at alevel similar to March 31, 2007.

 

As of March 31,2008, the five largest nonperforming loan relationships amounted to$12.5 million, or 60.0%, of the total nonperforming loans.

 

28

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**Allowance for Loan Losses**

 

The allowance for loan losses is maintained at alevel that, in our judgment, is adequate to absorb probable incurred losses inthe loan portfolio. The amount of the allowance is based on management’sevaluation of the collectibility of the loan portfolio, historical lossexperience, and other significant factors affecting loan portfoliocollectibility, including the volume and severity of delinquent and classifiedloans, trends in volume and terms of loans, levels and trends in creditconcentrations, 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, andother external factors including industry conditions, competition andregulatory requirements.

 

The ratio of allowance for loan losses tototal loans was 1.48% at March 31,2008, as compared to 1.46% at March 31,2007 and 1.44% at December 31, 2007.

 

Our methodology for evaluating the adequacy of theallowance for loan losses has two basic elements: first, the identification ofimpaired loans and the measurement of an estimated loss for each individualloan identified; second, estimating an allowance for probable incurred losseson other loans. The specific allowance for impaired loans and the remainingallowance are combined to determine the required allowance for loan losses.

 

In estimating the allowance for probable incurredlosses on other loans, we group the balance of the loan portfolio into segmentsthat have common characteristics, such as loan type or risk weighting.  For each nonspecific allowance portfoliosegment, we apply loss factors to calculate the required allowance based uponactual historical loss rates adjusted for qualitative factors affecting loanportfolio collectibility as described above. Loans typically segregated by risk rating are those that have beenassigned risk ratings using regulatory definitions of “watch”, “substandard”,  “doubtful” and “loss”.  Loans graded as either doubtful or loss aregenerally partially or fully charged-off. Other loans segregated by risk weighting are evaluated for trends involume and severity.

 

The specific allowance for impaired loans and theallowance calculated for probable incurred losses on other loans are combinedto determine the required allowance for loan losses.  The amount calculated is compared to theactual allowance for loan losses balance at each quarter end and any shortfallis charged to income as an additional provision for loan losses.

 

The following table provides a summary of theactivity within the allowance for loan losses account for the periodspresented:

 

**Table 10**

 
| ** **                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                    | ** ** | **(In thousands)**                    | ** ** |
| Balance,  beginning of period |       | $                                     | 25,711     |   | $ | 27,899 |   |
| Loan  charge-offs:            |       |                                  |       |   |   |
| Real estate - mortgage        |       | 370                                   |       | 963 |   |
| Real estate - construction    |       | 87                                    |       | 535 |   |
| Commercial                    |       | 179                                   |       | 43 |   |
| Agricultural                  |       | 9                                     |       | — |   |
| Consumer                      |       | 98                                    |       | 130 |   |
| Lease receivable and other    |       | —                                |       | 21 |   |
| Total loan charge-offs        |       | 743                                   |       | 1,692 |   |
| Recoveries:                   |       |                                  |       |   |   |
| Real estate - mortgage        |       | 135                                   |       | 195 |   |
| Real estate - construction    |       | 3                                     |       | 55 |   |
| Commercial                    |       | 34                                    |       | 120 |   |
| Agricultural                  |       | 6                                     |       | — |   |
| Consumer                      |       | 27                                    |       | 46 |   |
| Lease receivable and other    |       | —                                |       | 20 |   |
| Total loan recoveries         |       | 205                                   |       | 436 |   |
| Net  loan charge-offs         |       | 538                                   |       | 1,256 |   |
| Provision  for loan losses    |       | 875                                   |       | 849 |   |
| Balance,  end of period       |       | $                                     | 26,048     |   | $ | 27,492 |   |

 

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Management continues tomonitor the allowance for loan losses closely and will adjust the allowancewhen necessary, based on its analysis, which includes an ongoing evaluation ofsubstandard loans and their collateral positions.

 

**Securities**

 

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

 

The carrying value of our portfolio of investmentsecurities at March 31,2008 and December 31,2007 was as follows:

 

**Table 11**

 
| ** **                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                                  | ** ** | **2008**           | ** ** | **2007**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                                                  | ** ** | **(In thousands)** | ** ** |
| Securities available-for-sale:                              |       |               |       |                  |       |           |       |       |       |
| U.S. Government agencies and  government-sponsored entities |       | $                  | 2,509      |                  | $          | 10,456         |       | $          | (7,947     | ) | (76.0 | )% |
| Obligations of states and political subdivisions            |       | 73,510             |       | 76,876                |       | (3,366         | )          | (4.4       | )%         |
| Mortgage-backed                                             |       | 39,077             |       | 30,038                |       | 9,039          |       | 30.1       | %          |
| Marketable equity                                           |       | 1,099              |       | 1,047                 |       | 52             |       | 5.0        | %          |
| Other                                                       |       | 547                |       | 547                   |       | 0              |       | 0.0        | %          |
| Total securities available-for-sale                         |       | $                  | 116,742    |                  | $          | 118,964        |       | $          | (2,222     | ) | (1.9 | )% |
|                                                        |       |               |       |                  |       |           |       |       |       |
| Securities held-to-maturity:                                |       |               |       |                  |       |           |       |       |       |
| Mortgage-backed                                             |       | $                  | 14,106     |                  | $          | 14,889         |       | $          | (783       | ) | (5.3 | )% |

 

The carrying value of our investmentsecurities at March 31, 2008was $116.7 million, compared to the December 31, 2007 carrying value of$119.0 million. The decrease in the level of our investments from December 31,2007, is primarily due to a decrease in the fair value of certain municipalbonds.    The change in U.S. Governmentagencies and government-sponsored entities and mortgage-backed securities from December 31,2007 to March 31, 2008 is a result of a decision to sell certainsecurities at a $0.1 million gain and replace them with higher yieldingsecurities.

 

**Deposits**

 

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

 

**Table 12**

 
| ** **                   | ** ** | **At March 31, 2008** | ** ** | **At December 31, 2007** | ** ** |
|------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                   | ** ** | ** **                 | ** ** | **% of**                      | ** ** | ** ** | ** ** | **%** | ** ** |
| ** **                   | ** ** | **Balance**                | ** ** | **Total**                     | ** ** | **Balance** | ** ** | **of Total** | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Noninterest bearing deposits |       | $                          | 473,247    |                          | 27.67      | % | $ | 515,299 |   | 28.64 | % |
| Interest bearing demand      |       | 156,416                    |       | 9.15                          | %          | 160,100 |   | 8.90 | % |
| Money market                 |       | 582,013                    |       | 34.03                         | %          | 572,056 |   | 31.79 | % |
| Savings                      |       | 71,617                     |       | 4.19                          | %          | 71,944 |   | 4.00 | % |
| Time                         |       | 426,789                    |       | 24.96                         | %          | 480,108 |   | 26.67 | % |
|                         |       |                       |       |                          |       |   |   |   |   |
| Total deposits               |       | $                          | 1,710,082  |                          | 100.00     | % | $ | 1,799,507 |   | 100.00 | % |

 

At the endof the first quarter 2008, deposits were $1.7 billion as compared to $1.8billion at December 31, 2007, reflecting a decrease of $89.4 million.  Approximately $53.3 million, or 60% of thisdecline, from December 31, 2007, is from a decrease in time deposits dueto a strategic decision to mitigate the impact of margin compression.  Most of the remainder of the decline isattributable to non-interest bearing deposits. Even with the decline, noninterest bearing deposits still comprisedapproximately 27.7% of total deposits at March 31, 2008, as compared to28.6% at December 31, 2007, which helped to keep our overall cost of fundslower.

 

**Borrowings and SubordinatedDebentures**

 

At March 31,2008, our outstanding borrowings were $117,227,000 as compared to $63,715,000at December 31, 2007. These borrowings at March 31, 2008, consistedof term notes at the Federal Home Loan Bank (“FHLB”). 

 

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There was also a line of credit at the FHLBat March 31, 2008, but there was no balance outstanding on this line ofcredit on such date. At December 31, 2007, borrowings consisted of a lineof credit and term notes at the Federal Home Loan Bank of $15,160,000 and $47,356,000 respectively , and a $1,199,00 Treasury Tax and Loan note balance.

 

The totalcommitment, including balances outstanding, for borrowings at the Federal HomeLoan Bank for the term notes and line of credit at March 31, 2008 and December 31,2007 was $398.9 million and $316.2 million, respectively. The interest rate onthe line of credit varies with the federal funds rate, and was 3.17% and 5.51%at March 31, 2008 and December 31, 2007, respectively.  The term notes have fixed interest rates thatrange from 2.52% to 6.22%. A blanket pledge andsecurity agreement with the Federal Home Loan Bank, which encompasses certainloans and securities, serves as collateral for these borrowings.

 

We have a$70 million revolving credit agreement with U.S. Bank National Association whichcontains financial covenants, including maintaining a minimum return on averageassets, a maximum nonperforming assets to total loans ratio and regulatorycapital ratios that qualify the Company as well-capitalized.   As of March 31, 2008, the Company didnot have any amount drawn on this line. The Company is in compliance with all outstanding debt covenants, asamended. The interest rate varies based on a spread over the federal fundsrate, with a rate of 3.59% at March 31, 2008.The credit agreement is secured by Guaranty Bank stock.  U.S. Bank performs various commercial bankingservices for the Company for which they receive usual and customary fees.

 

At March 31,2008, we had a$41,239,000 aggregate principal balance of subordinated debentures outstandingwith a weighted average cost of 8.35%. The subordinated debentures were issued in four separate series. Eachissuance has a maturity of thirty years from its date of issue. Thesubordinated debentures were issued to trusts established by us, which in turnissued $40 million of trust preferred securities. Generally and with certainlimitations, the Company is permitted to call the debentures subsequent to thefirst five or ten years, as applicable, after issue if certain conditions aremet, or at any time upon the occurrence and continuation of certain changes ineither the tax treatment or the capital treatment of the trusts, the debenturesor the preferred securities.   TheGuaranty Capital Trust III issuance of $10.0 million has a variable rate ofLIBOR plus 3.10% and is callable without penalty on July 7, 2008, andevery quarter thereafter.   Managementdoes not expect to call these debentures on July 7, 2008, but willcontinue to evaluate whether to call these debentures each quarter.

 

These securities are currently included in Tier Icapital for purposes of determining the Company’s Tier I and total risk-basedcapital ratios. The Board of Governors of the Federal Reserve System, which isthe holding company’s banking regulator, has promulgated a modification of thecapital regulations affecting trust preferred securities. Under thismodification, beginning March 31, 2009, the Company will be required touse a more restrictive formula to determine the amount of trust preferredsecurities that can be included in regulatory Tier I capital. At that time, theCompany will be allowed to include in Tier I capital an amount of trustpreferred securities equal to no more than 25% of the sum of all core capitalelements, which is generally defined as stockholders’ equity less certainintangibles, including goodwill, core deposit intangibles and customerrelationship intangibles, net of any related deferred income tax liability. Theregulations currently in effect limit the amount of trust preferred securitiesthat can be included in Tier I capital to 25% of the sum of core capitalelements without a deduction for permitted intangibles.  The Company expects that its Tier I capitalratios 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.

 

**Capital Resources**

 

Current risk-based regulatory capital standardsgenerally require banks and bank holding companies to maintain a ratio of “core”or “Tier 1” capital (consisting principally of common equity) to risk-weightedassets 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 includesTier 1 capital plus certain forms of subordinated debt, a portion of theallowance for loan losses, and preferred stock) to risk-weighted assets of atleast 8%. Risk-weighted assets are calculated by multiplying the balance ineach category of assets by a risk factor, which ranges from zero for cashassets and certain government obligations to 100% for high-risk loans, andadding the products together.

 

For regulatory and debt-covenant purposes,the Company maintains capital above the minimum core standards.  The Company maintains capital at awell-capitalized level. Under the regulations adopted by the federal regulatoryauthorities, a bank is well-capitalized if the institution has a totalrisk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratioof 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subjectto any order or written directive by any such regulatory authority to meet andmaintain a specific capital level for

 

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any capital measure. Our subsidiary bank is required to maintainsimilar capital levels under capital adequacy guidelines.  At March 31,2008, our subsidiary bank was “well-capitalized”.

 

The following table provides the currentcapital ratios as of the dates presented, along with the regulatory capital requirements:

 

**Table 13**

 
| ** **                        | ** ** | ** **         | ** ** | ** **            | ** ** | ** **      | ** ** | **Minimum**           | ** ** |
|-----------------------------------|------------|--------------------|------------|-----------------------|------------|-----------------|------------|-----------------------|------------|
| ** **                        | ** ** | ** **         | ** ** | ** **            | ** ** | ** **      | ** ** | **Requirement**       | ** ** |
| ** **                        | ** ** | ** **         | ** ** | ** **            | ** ** | **Minimum**     | ** ** | **For “Well**    | ** ** |
| ** **                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Capital**     | ** ** | **Capitalized”** | ** ** |
| ** **                        | ** ** | **2008**           | ** ** | **2007**              | ** ** | **Requirement** | ** ** | **Institution**       | ** ** |
|                              |       |               |       |                  |       |            |       |                  |       |
| Leverage ratio                    |       | 9.21               | %          | 8.55                  | %          | 4.00            | %          | 5.00                  | %          |
| Tier 1 risk weighted ratio        |       | 9.93               | %          | 9.62                  | %          | 4.00            | %          | 6.00                  | %          |
| Total risk weighted capital ratio |       | 11.18              | %          | 10.87                 | %          | 8.00            | %          | 10.00                 | %          |

 

**Contractual Obligations and Off-Balance SheetArrangements**

 

The Company is a party to credit-related financialinstruments with off-balance sheet risk in the normal course of business tomeet the financing needs of its customers. These financial instruments includecommitments to extend credit, stand-by letters of credit, and commercialletters of credit. Such commitments involve, to varying degrees, elements ofcredit and interest rate risk in excess of the amount recognized in theconsolidated balance sheets.

 

The Company’s exposure to credit loss is representedby the contractual amount of these commitments. The Company follows the samecredit policies in making commitments as it does for on-balance sheetinstruments.

 

At March 31, 2008, the following financialinstruments were outstanding whose contract amounts represented credit risk:

 

**Table 14**

 
| ** **                   | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **(In thousands)**       | ** ** |
| Commitments to extend credit |       | $                        | 597,765    |                        | $          | 582,988 |   |
| Standby letters of credit    |       | 28,917                   |       | 33,573                      |       |
|                         |       |                     |       |                        |       |
| Totals                       |       | $                        | 626,682    |                        | $          | 616,561 |   |

 

**Liquidity**

 

We believe that our level of liquid assets issufficient to meet our current and presently anticipated funding needs.

 

We rely on dividends from our Bank as a primarysource of liquidity for the holding company. We plan to continue to utilize theavailable dividends from the Bank for holding company operations, subject toregulatory and other restrictions.  Theability of the Bank to pay dividends or make other capital distributions to usis subject to the regulatory authority of the Federal Reserve Board and theColorado Division of Banking.  Because ofthe net loss in 2007 as a result of the goodwill impairment charge, the Bankwill be required to obtain permission from the Federal Reserve Board and theColorado Division of Banking prior to making any dividend to the holdingcompany.   As the net loss in 2007 didnot have any impact on the Bank’s liquidity, cash flows or regulatory capital,it is expected that permission will be granted if the bank remains more thanwell-capitalized and if the payment of dividends is not deemed to be an unsafeor unsound practice.  We requireliquidity for the payment of interest on the subordinated debentures, foroperating expenses, principally salaries and benefits, for repurchases of ourcommon stock, and, if declared by our board of directors, for the payment ofdividends to our stockholders.

 

The Bank relies on deposits as their principalsource 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 maycause temporary increases and decreases in liquidity from time to time. We dealwith such fluctuations by using existing liquidity sources.

 

32

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

 

**Application of Critical Accounting Policiesand Accounting Estimates**

 

Management’sDiscussion and Analysis of financial condition and results of operationsdiscusses the Company’s condensed consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of these condensed consolidatedfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent liabilities at the date of the condensed consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. On an on-going basis, management evaluates its estimates andjudgments, including those related to customers and suppliers, allowance forloan losses, bad debts, investments, financing operations, long-lived assets,contingencies and litigation. Management bases its estimates and judgments onhistorical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which have formed the basisfor making such judgments about the carrying value of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom the recorded estimates under different assumptions or conditions.  A summary of critical accounting policies andestimates are listed in the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” section of the Company’s 2007 AnnualReport Form 10-K for the fiscal year ended December 31, 2007.  There have been no changes to these criticalaccounting policies in 2008.

 

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** **

**ITEM 3.**  **Quantitative and QualitativeDisclosure about Market Risk**

 

Market risk is the risk of loss in a financialinstrument arising from adverse changes in market prices and rates, foreigncurrency exchange rates, commodity prices and equity prices. Our market riskarises primarily from interest rate risk inherent in our lending and deposittaking activities. To that end, management actively monitors and manages ourinterest rate risk exposure. We do not have any market risk sensitiveinstruments entered into for trading purposes. We manage our interest ratesensitivity by matching the re-pricing opportunities on our earning assets tothose on our funding liabilities. We use various asset/liability strategies tomanage the re-pricing characteristics of our assets and liabilities designed toensure that exposure to interest rate fluctuations is limited to our guidelinesof acceptable levels of risk-taking. Hedging strategies, including the termsand pricing of loans and deposits and managing the deployment of oursecurities, are used to reduce mismatches in interest rate re-pricingopportunities 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 oursenior management. The ALCO monitors interest rate risk by analyzing thepotential impact on net interest income and the net portfolio of equity valuefrom potential changes in interest rates, and considers the impact ofalternative strategies or changes in balance sheet structure. The ALCO managesour balance sheet in part to maintain the potential impact on net portfoliovalue and net interest income within acceptable ranges despite changes ininterest rates.

 

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

 

We monitor and evaluate our interest rate riskposition on a quarterly basis using economic value at risk analysis under 100and 200 basis point change scenarios. Each of these analyses measures differentinterest rate risk factors inherent in the balance sheet.

 

This disclosure alternative has been changed fromprior annual and quarterly reports filed by the Company, which used the Gapanalysis disclosure method.   The staticgap analysis looked at the dollar amount of mismatches between assets andliabilities, at certain time periods, whose interest rates are subject to pricingat their contractual maturity date or repricing period.   As this Gap analysis looked at contractualdates that assets and liabilities are subject to repricing, it caused theentire balance of interest-bearing NOW accounts, money market accounts and savingsaccounts to be treated as immediately repriceable.  As our actual experience with repricing ofthese liabilities differed from the contractual maturities, Management haschosen to disclose the sensitivity analysis alternative which measures the impacton net interest income of hypothetical changes in interest rates.    As discussed above, this tool is usedinternally by ALCO in monitoring interest rate risk of the Company and thus,the Company has chosen to change this disclosure alternative regarding marketrisk.  Summarized comparable information,under the new disclosure method, for the preceding year is provided.

 

**Net Interest Income Modeling**

 

The Company’s primary interest rate risk tool, theNet Interest Income Simulation Analysis, measures interest rate risk and theeffect of interest rate changes on net interest income. This analysisincorporates all of the Company’s assets and liabilities together withforecasted changes in the balance sheet and assumptions that reflect thecurrent interest rate environment. Through these simulations, managementestimates the impact on net interest income of a 100 and 200 basis point upwardor downward change of market interest rates over a one year period.  Assumptions are made to project rates for newloans and deposits based on historical analysis, management outlook andrepricing strategies. Asset prepayments and other market risks are developedfrom industry estimates of prepayment speeds and other market changes. Sincethe results of these simulations can be significantly influenced by assumptionsutilized, management evaluates the sensitivity of the simulation results tochanges in assumptions.

 

34

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The following table shows the net interest incomeincrease or decrease over the next twelve months as of March 31, 2008 and2007:

 

**Table 15**

 

**   MARKETRISK:**

 
| ** **                | ** ** | **Annualized Net Interest Income** | ** ** |
|---------------------------|------------|------------------------------------|------------|
| ** **                | ** ** | **March 31, 2008**            | ** ** | **March 31, 2007** | ** ** |
| ** **                | ** ** | **Amount of Change**               | ** ** | **Amount of Change** | ** ** |
| ** **                | ** ** | **(In thousands)**                 | ** ** |
| **Rates in Basis Points** | ** ** | ** **                         | ** ** | ** ** | ** ** |
| 200                       |       | $                                  | 6,905      |   | $ | 9,599 |   |
| 100                       |       | 3,543                              |       | 4,840 |   |
| Static                    |       | —                             |       | — |   |
| (100)                     |       | (3,488                             | )          | (4,878 | ) |
| (200)                     |       | (6,350                             | )          | (9,639 | ) |
|                           |            |                                    |            |  |  |  |  |

 

Overall, the company ispositioned to have a short-term favorable interest income impact in a risingrate environment and have an adverse interest income impact in the short-termin a falling rate environment.

 

If rates increase, netinterest income is anticipated to increase and similarly, if rates decrease,net interest income is expected to decrease, meaning the bank is assetsensitive.  At March 31, 2008, a 200basis point increase in rates would be anticipated to increase net interestincome by $6.9 million as compared to $9.6 million at March 31, 2007.  The Company is now less asset sensitive to anincrease or decrease in rates than a year ago.

 

35

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**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 theparticipation of the Chief Executive Officer and the Chief Financial Officer,of the effectiveness of the Company’s disclosure controls and procedures (asdefined in Rule 15d-15(e) under the Securities Exchange Act of 1934).The Company’s disclosure controls were designed to provide a reasonableassurance that information required to be disclosed in reports that we file orsubmit under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission. It should be noted that thedesign of any system of controls is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions, regardless of how remote. However, the controls have been designedto provide reasonable assurance of achieving the controls’ stated goals. Basedon that evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer, have concluded that the Company’s disclosure controls and proceduresare effective at March 31, 2008 to ensure that information required to bedisclosed in the reports that we file or submit under the Securities ExchangeAct of 1934 was (i) accumulated and communicated to management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, to allowtimely decisions regarding required disclosure and (ii) recorded,processed, summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission.

 

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

 

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**PART II—OTHERINFORMATION**

 

**ITEM 1.**       **Legal Proceedings**

 

Inthe ordinary course of our business, we are party to various legal actions,which we believe are incidental to the operation of our business. Although theultimate outcome and amount of liability, if any, with respect to these otherlegal actions to which we are currently a party cannot presently be ascertainedwith certainty, in the opinion of management, based upon information currentlyavailable to us, any resulting liability is not likely to have a materialadverse effect on the Company’s consolidated financial position, results ofoperations or cash flows.

 

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**ITEM 1A.    Risk Factors**

 

In addition to the other information setforth 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 yearended December 31, 2007, 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 theonly risks facing the Company. Additional risks and uncertainties not currentlyknown to us or that we currently deem to be immaterial also may materiallyaffect 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 withrespect to purchases made by or on behalf of the Company or any “affiliatedpurchaser” (as defined in Rule 10b-18(a)(3) under the SecuritiesExchange Act of 1934), of our common stock during the first quarter 2008.

 
| ** **                          | ** ** | **Total  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   |       | 8,701                        |       | $                                            | 5.61       |                                                                                                                    | —     |                                                                                                                                                                     | 1,349,858  |   |
| February 1 to February 29 |       | 386                          |       | 6.04                                         |       | —                                                                                                                  |       | 1,349,858                                                                                                                                                                |       |
| March 1 to March 31       |       | —                       |       | —                                       |       | —                                                                                                                  |       | 1,349,858                                                                                                                                                                |       |
|                                |       |                         |       |                                         |       |                                                                                                                    |       |                                                                                                                                                                     |       |
|                                |       | 9,087                        |       | $                                            | 5.63       |                                                                                                                    | —     | (2)                                                                                                                                                                      | 1,349,858  |   |

 

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(1)          In May 2007, we announced theauthorization of a stock repurchase program to repurchase up to 2,000,000shares of our common stock from time to time over a one-year period in the openmarket or through private transactions in accordance with the applicableregulations of the Securities and Exchange Commission. In October 2007, weannounced the authorization of a new stock repurchase program to repurchase upto 1,200,000 shares of our common stock from time to time over a one-yearperiod in the open market or through private transactions in accordance withapplicable regulations of the Securities and Exchange Commission. The companyhas 1,349,858 shares remaining under these two repurchase programs.

 

(2)        The difference of 9,087 shares between “TotalShares Purchased” and “Total Number of Shares Purchased as Part ofPublicly Announced Plans” relates to the net settlement of vested, restrictedstock awards.

 

**ITEM 3.**       **Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**ITEM 5.**       **Other Information**

 

None

 

38

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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 10-K filed on March 3, 2008).                                          |
|                      |       |                                                                                                                                                                                                      |
| 31.1                      |       | Section 302  Certification of Chief Executive Officer.                                                                                                                                               |
|                      |       |                                                                                                                                                                                                      |
| 31.2                      |       | Section 302  Certification of Chief Financial Officer.                                                                                                                                               |
|                      |       |                                                                                                                                                                                                      |
| 32.1                      |       | Section 906  Certification of Chief Executive Officer.                                                                                                                                               |
|                      |       |                                                                                                                                                                                                      |
| 32.2                      |       | Section 906  Certification of Chief Financial Officer.                                                                                                                                               |

 

39

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                    |                                                    |
|-------------------------|---------------------------------------------------------|
| Date:  May 7, 2008 | CENTENNIAL BANK HOLDINGS, INC.                          |
|                    |                                                    |
|                    |                                                    |
|                    | /s/    PAUL W. TAYLOR               |
|                    |                                                    |
|                    | Paul W. Taylor                                          |
|                    | *Executive Vice President and Chief Financial  Officer* |

 

40

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