** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM10-Q**

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

 

**For the quarterly period ended September 30, 2007**

** **

**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**

** **

----

 

**CENTENNIALBANK HOLDINGS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**                       | ** **                               |
|------------------------------------|------------------------------------------|
| (State or other  jurisdiction      | **41-2150446**                           |
| 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’s telephone number, including areacode)

 

----

 

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

 

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

 
| Large  Accelerated Filer  o | Accelerated Filer x | Non-accelerated Filer  o |
|---------------------------------------|---------------------|-------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act.): Yes o No x

 

Asof November 1, 2007 there were 53,845,812 shares of the registrant’s commonstock outstanding, including 1,687,345 shares of unvested stock grants.

 

----

 

**TABLE OF CONTENTS**

 
|                                  | Forward-Looking  Statements and Factors that Could Affect Future Results                    | 3          |
|---------------------------------------|---------------------------------------------------------------------------------------------|------------|
| ** **                            | ** **                                                                                  | ** ** |
| **PART I—FINANCIAL INFORMATION** |                                                                                        |
|                                  |                                                                                        |       |
| ITEM 1.                          | Unaudited Condensed  Consolidated Financial Statements                                      | 5          |
|                                  |                                                                                        |       |
|                                  | Unaudited  Consolidated Balance Sheets                                                      | 5          |
|                                  |                                                                                        |       |
|                                  | Unaudited  Consolidated Statements of Income                                                | 6          |
|                                  |                                                                                        |       |
|                                  | Unaudited  Consolidated Statement of Changes in Stockholders’ Equity                   | 7          |
|                                  |                                                                                        |       |
|                                  | Unaudited Consolidated  Statements of Cash Flows                                            | 8          |
|                                  |                                                                                        |       |
|                                  | Notes to  Unaudited Condensed Consolidated Financial Statements                             | 9          |
|                                  |                                                                                        |       |
| ITEM 2.                          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 19         |
|                                  |                                                                                        |       |
| ITEM 3.                          | Quantitative and  Qualitative Disclosures About Market Risk                                 | 33         |
|                                  |                                                                                        |       |
| ITEM 4.                          | Controls  and Procedures                                                                    | 34         |
|                                  |                                                                                        |       |
| **PART II—OTHER INFORMATION**    | ** **                                                                                  |
|                                  |                                                                                        |       |
| ITEM 1.                          | Legal  Proceedings                                                                          | 36         |
|                                  |                                                                                        |       |
| ITEM 1A.                         | Risk  Factors                                                                               | 37         |
|                                  |                                                                                        |       |
| ITEM 2.                          | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 37         |
|                                  |                                                                                        |       |
| ITEM 3.                          | Defaults  Upon Senior Securities                                                            | 37         |
|                                  |                                                                                        |       |
| ITEM 4.                          | Submission  of Matters to a Vote of Security Holders                                        | 37         |
|                                  |                                                                                        |       |
| ITEM 5.                          | Other  Information                                                                          | 37         |
|                                  |                                                                                        |       |
| ITEM 6.                          | Exhibits                                                                                    | 38         |

### ** **

2

----

 

### **Forward-LookingStatements and Factors that Could Affect Future Results**

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

 

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

 

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

•                  Changes in thelevel of nonperforming assets and charge-offs.

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

•                  Inflation andinterest rate, securities market and monetary fluctuations.

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

•                  The timelydevelopment and acceptance of new products and services and perceived overallvalue of these products and services by customers.

•                  Revenues arelower than expected.

•                  Changes inconsumer spending, borrowings and savings habits.

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

•                  Credit qualitydeterioration, which could cause an increase in the provision for loan losses.

•                  Technologicalchanges.

•                  Acquisitions ofacquired businesses and greater than expected costs or difficulties related tothe integration of acquired businesses, and the successful integration of themerger of the subsidiary banks.

•                  The ability to increase market shareand control expenses.

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

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

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

•                  Changes in our organization,compensation and benefit plans.

•                  The costs and effects of legal andregulatory developments including the resolution of legal proceedings orregulatory or other governmental inquiries and the results of regulatoryexaminations or reviews.

•                  Our success at managing the risksinvolved in the foregoing items.

 

3

----

 

Forward-lookingstatements speak only as of the date on which such statements are made. We donot intend to update any forward-looking statement to reflect events orcircumstances after the date on which such statement is made, or to reflect theoccurrence of unanticipated events.

 

4

----

 

**PART I—FINANCIAL INFORMATION**

 

**ITEM 1.**    **Unaudited CondensedConsolidated Financial Statements**

 

**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**UnauditedConsolidated Balance Sheets**
| ** **                                                                                                                                                                                                                                                                                                                                         | ** ** | **September 30,  2007**                           | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                         | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                                         | ** ** | ** **                                        | ** ** | ** **             | ** ** |
| Cash and due from banks                                                                                                                                                                                                                                                                                                                            |       | $                                                 | 51,083     |                   | $          | 45,409 |   |
| Federal funds sold                                                                                                                                                                                                                                                                                                                                 |       | 3,457                                             |       | 4,211                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                          |       | 54,540                                            |       | 49,620                 |       |
| Securities available for sale, at fair value                                                                                                                                                                                                                                                                                                       |       | 143,266                                           |       | 157,260                |       |
| Securities held to maturity (fair value of $11,352 and $11,157 at September  30, 2007 and December 31, 2006)                                                                                                                                                                                                                                       |       | 11,555                                            |       | 11,217                 |       |
| Bank stocks, at cost                                                                                                                                                                                                                                                                                                                               |       | 32,328                                            |       | 31,845                 |       |
| Total investments                                                                                                                                                                                                                                                                                                                                  |       | 187,149                                           |       | 200,322                |       |
| Loans, net of unearned discount                                                                                                                                                                                                                                                                                                                    |       | 1,819,188                                         |       | 1,947,487              |       |
| Less allowance for loan losses                                                                                                                                                                                                                                                                                                                     |       | (23,979                                           | )          | (27,899                | )          |
| Net loans                                                                                                                                                                                                                                                                                                                                          |       | 1,795,209                                         |       | 1,919,588              |       |
| Loans, held for sale                                                                                                                                                                                                                                                                                                                               |       | 31,459                                            |       | —                 |       |
| Premises and equipment, net                                                                                                                                                                                                                                                                                                                        |       | 71,240                                            |       | 74,166                 |       |
| Other real estate owned and foreclosed assets                                                                                                                                                                                                                                                                                                      |       | 3,401                                             |       | 1,207                  |       |
| Goodwill                                                                                                                                                                                                                                                                                                                                           |       | 392,958                                           |       | 392,958                |       |
| Other intangible assets, net                                                                                                                                                                                                                                                                                                                       |       | 35,066                                            |       | 41,599                 |       |
| Other assets                                                                                                                                                                                                                                                                                                                                       |       | 46,131                                            |       | 41,140                 |       |
| Total assets                                                                                                                                                                                                                                                                                                                                       |       | $                                                 | 2,617,153  |                   | $          | 2,720,600 |   |
|                                                                                                                                                                                                                                                                                                                                               |       |                                              |       |                   |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                        | ** ** | ** **             | ** ** |
| Liabilities:                                                                                                                                                                                                                                                                                                                                       |       |                                              |       |                   |       |
| Deposits:                                                                                                                                                                                                                                                                                                                                          |       |                                              |       |                   |       |
| Noninterest-bearing demand                                                                                                                                                                                                                                                                                                                         |       | $                                                 | 464,446    |                   | $          | 517,612 |   |
| Interest-bearing demand                                                                                                                                                                                                                                                                                                                            |       | 817,927                                           |       | 777,579                |       |
| Savings                                                                                                                                                                                                                                                                                                                                            |       | 73,054                                            |       | 87,265                 |       |
| Time                                                                                                                                                                                                                                                                                                                                               |       | 560,505                                           |       | 577,649                |       |
| Total deposits                                                                                                                                                                                                                                                                                                                                     |       | 1,915,932                                         |       | 1,960,105              |       |
| Securities sold under agreements to repurchase and federal fund purchases                                                                                                                                                                                                                                                                          |       | 17,910                                            |       | 25,469                 |       |
| Borrowings                                                                                                                                                                                                                                                                                                                                         |       | 51,062                                            |       | 67,632                 |       |
| Subordinated debentures                                                                                                                                                                                                                                                                                                                            |       | 41,239                                            |       | 41,239                 |       |
| Interest payable and other liabilities                                                                                                                                                                                                                                                                                                             |       | 28,354                                            |       | 36,696                 |       |
| Total liabilities                                                                                                                                                                                                                                                                                                                                  |       | 2,054,497                                         |       | 2,131,141              |       |
|                                                                                                                                                                                                                                                                                                                                               |       |                                              |       |                   |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                                                                         |       |                                              |       |                   |       |
| Common stock—$.001 par value; 100,000,000 shares  authorized,64,285,950 shares issued, 53,814,537 shares outstanding at September  30, 2007 (includes 1,651,344 shares of unvested restricted stock); 64,154,950  shares issued, 57,236,795 shares outstanding at December 31, 2006 (includes  1,725,825 shares of unvested restricted stock) |       | 64                                                |       | 64                     |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                         |       | 616,861                                           |       | 614,489                |       |
| Shares to be issued for deferred compensation obligations                                                                                                                                                                                                                                                                                          |       | 551                                               |       | 775                    |       |
| Retained earnings                                                                                                                                                                                                                                                                                                                                  |       | 43,014                                            |       | 42,896                 |       |
| Accumulated other comprehensive income (loss)                                                                                                                                                                                                                                                                                                      |       | (1,401                                            | )          | 809                    |       |
| Treasury Stock, at cost, 9,718,100 and 6,450,418, respectively                                                                                                                                                                                                                                                                                     |       | (96,433                                           | )          | (69,574                | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                                                                    |       | 562,656                                           |       | 589,459                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                                    |       | $                                                 | 2,617,153  |                   | $          | 2,720,600 |   |
|                                                                                                                                                                                                                                                                                                                                               |       |                                              |       |                   |       |
| See “Notes to Unaudited  Consolidated Financial Statements.”                                                                                                                                                                                                                                                                             |       |
|                                                                                                                                                                                                                                                                                                                                                    |            |                                                   |            |                        |            |  |  |  |

 

5

----

 

**CENTENNIAL BANK HOLDINGS, INC. ANDSUBSIDIARIES**

**UnauditedConsolidated Statements of Income**

** **
| ** **                                                             | ** ** | **Three Months Ended  September 30,**             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                          | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest income:                                                       |       |                                              |       |                                 |       |   |   |   |   |
| Loans, including fees                                                  |       | $                                                 | 38,369     |                                 | $          | 41,427 |   | $ | 117,194 |   | $ | 122,592 |   |
| Investment securities:                                                 |       |                                              |       |                                 |       |   |   |   |   |
| Taxable                                                                |       | 617                                               |       | 713                                  |       | 1,846 |   | 2,207 |   |
| Tax-exempt                                                             |       | 1,343                                             |       | 1,454                                |       | 4,091 |   | 3,420 |   |
| Dividends                                                              |       | 490                                               |       | 485                                  |       | 1,424 |   | 1,345 |   |
| Federal funds sold and other                                           |       | 265                                               |       | 145                                  |       | 592 |   | 336 |   |
| Total interest income                                                  |       | 41,084                                            |       | 44,224                               |       | 125,147 |   | 129,900 |   |
| Interest expense:                                                      |       |                                              |       |                                 |       |   |   |   |   |
| Deposits                                                               |       | 13,933                                            |       | 12,283                               |       | 41,017 |   | 33,963 |   |
| Federal funds purchased and repurchase agreements                      |       | 428                                               |       | 351                                  |       | 1,177 |   | 905 |   |
| Borrowings                                                             |       | 543                                               |       | 1,623                                |       | 2,073 |   | 4,022 |   |
| Subordinated debentures                                                |       | 944                                               |       | 972                                  |       | 2,814 |   | 2,720 |   |
| Total interest expense                                                 |       | 15,848                                            |       | 15,229                               |       | 47,081 |   | 41,610 |   |
| Net interest income                                                    |       | 25,236                                            |       | 28,995                               |       | 78,066 |   | 88,290 |   |
| Provision for loan losses                                              |       | 8,026                                             |       | 1,566                                |       | 21,641 |   | 1,566 |   |
| Net interest income, after provision for loan losses                   |       | 17,210                                            |       | 27,429                               |       | 56,425 |   | 86,724 |   |
| Noninterest income:                                                    |       |                                              |       |                                 |       |   |   |   |   |
| Customer service and other fees                                        |       | 2,390                                             |       | 3,015                                |       | 7,242 |   | 8,640 |   |
| Gain on sale of securities                                             |       | —                                            |       | 6                                    |       | — |   | 1 |   |
| Gain on sale of loans                                                  |       | —                                            |       | 229                                  |       | — |   | 774 |   |
| Other                                                                  |       | 230                                               |       | 224                                  |       | 522 |   | 776 |   |
| Total noninterest income                                               |       | 2,620                                             |       | 3,474                                |       | 7,764 |   | 10,191 |   |
| Noninterest expense:                                                   |       |                                              |       |                                 |       |   |   |   |   |
| Salaries and employee benefits                                         |       | 9,039                                             |       | 12,006                               |       | 30,737 |   | 35,523 |   |
| Occupancy expense                                                      |       | 1,855                                             |       | 1,891                                |       | 6,032 |   | 5,937 |   |
| Furniture and equipment                                                |       | 1,188                                             |       | 1,286                                |       | 3,659 |   | 3,682 |   |
| Amortization of intangible assets                                      |       | 2,143                                             |       | 2,858                                |       | 6,533 |   | 8,855 |   |
| Other general and administrative                                       |       | 3,980                                             |       | 4,901                                |       | 19,548 |   | 15,689 |   |
| Total noninterest expense                                              |       | 18,205                                            |       | 22,942                               |       | 66,509 |   | 69,686 |   |
| Income (loss) before income taxes                                      |       | 1,625                                             |       | 7,961                                |       | (2,320 | ) | 27,229 |   |
| Income tax expense (benefit)                                           |       | 122                                               |       | 2,521                                |       | (2,438 | ) | 9,123 |   |
| Income from continuing operations                                      |       | 1,503                                             |       | 5,440                                |       | 118 |   | 18,106 |   |
| Income from discontinued operations, net of tax                        |       | —                                            |       | 380                                  |       | — |   | 869 |   |
| Net income                                                             |       | $                                                 | 1,503      |                                 | $          | 5,820 |   | $ | 118 |   | $ | 18,975 |   |
|                                                                   |       |                                              |       |                                 |       |   |   |   |   |
| Earnings per share—basic:                                         |       |                                              |       |                                 |       |   |   |   |   |
| Income from continuing operations                                      |       | $                                                 | 0.03       |                                 | $          | 0.10 |   | $ | — |   | $ | 0.31 |   |
| Income from discontinued operations, net of tax                        |       | —                                            |       | —                               |       | — |   | 0.02 |   |
| Net income                                                             |       | 0.03                                              |       | 0.10                                 |       | — |   | 0.33 |   |
| Earnings per share—diluted:                                       |       |                                              |       |                                 |       |   |   |   |   |
| Income from continuing operations                                      |       | $                                                 | 0.03       |                                 | $          | 0.10 |   | $ | — |   | $ | 0.31 |   |
| Income from discontinued operations, net of tax                        |       | —                                            |       | —                               |       | — |   | 0.02 |   |
| Net income                                                             |       | 0.03                                              |       | 0.10                                 |       | — |   | 0.33 |   |
| Weighted average shares outstanding-basic                              |       | 52,699,409                                        |       | 57,093,056                           |       | 53,631,569 |   | 58,060,683 |   |
| Weighted average shares outstanding-diluted                            |       | 52,742,028                                        |       | 57,499,412                           |       | 53,771,405 |   | 58,394,354 |   |
|                                                                   |       |                                              |       |                                 |       |   |   |   |   |
| See “Notes to Unaudited  Consolidated Financial Statements.” |       |

 

6

----

 

**CENTENNIALBANK HOLDINGS, INC. AND SUBSIDIARIES**

**Unaudited Consolidated Statement of Changes in Stockholders’ Equity**

** **
| ** **                                                               | ** ** | **Common Stock and Additional Paid-in Capital** | ** ** | **Shares to  be Issued** | ** ** | **Treasury  Stock** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other Comprehensive Income (Loss)** | ** ** | **Totals** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------|------------|---------------------|------------|------------------------|------------|----------------------------------------------------|------------|------------|------------|
| ** **                                                               | ** ** | **(In  thousands)**                             | ** ** |
| Balance, December  31, 2005                                              |       | $                                               | 612,152    |                     | $          | —              |       | $                      | (31,975    | )                                                  | $          | 18,478     |       | $ | 93 |   | $ | 598,748 |   |
| Comprehensive  income (loss):                                            |       |                                            |       |                     |       |                |       |                   |       |                                               |       |       |       |
| Net income                                                               |       | —                                          |       | —                   |       | —              |       | 18,975                 |       | —                                             |       | 18,975     |       |
| Other  comprehensive loss                                                |       | —                                          |       | —                   |       | —              |       | —                 |       | (71                                                | )          | (71        | )          |
| Total  comprehensive income                                              |       |                                            |       |                     |       |                |       |                   |       |                                               |       | 18,904     |       |
| Earned stock  award compensation                                         |       | 2,382                                           |       | —                   |       | —              |       | —                 |       | —                                             |       | 2,382      |       |
| Repurchase of  common stock                                              |       | —                                          |       | —                   |       | (25,072             | )          | —                 |       | —                                             |       | (25,072    | )          |
| Shares to be  issued for settlement of deferred compensation obligations |       | (500                                            | )          | 751                      |       | —              |       | —                 |       | —                                             |       | 251        |       |
| Tax effect of  equity compensation                                       |       | 2                                               |       | —                   |       | —              |       | —                 |       | —                                             |       | 2          |       |
| Balance,  September 30, 2006                                             |       | $                                               | 614,036    |                     | $          | 751                 |       | $                      | (57,047    | )                                                  | $          | 37,453     |       | $ | 22 |   | $ | 595,215 |   |
|                                                                     |       |                                            |       |                     |       |                |       |                   |       |                                               |       |       |       |
| Balance, December  31, 2006                                              |       | $                                               | 614,553    |                     | $          | 775                 |       | $                      | (69,574    | )                                                  | $          | 42,896     |       | $ | 809 |   | $ | 589,459 |   |
| Comprehensive  income (loss):                                            |       |                                            |       |                     |       |                |       |                   |       |                                               |       |       |       |
| Net income                                                               |       | —                                          |       | —                   |       | —              |       | 118                    |       | —                                             |       | 118        |       |
| Other  comprehensive loss                                                |       | —                                          |       | —                   |       | —              |       | —                 |       | (2,210                                             | )          | (2,210     | )          |
| Total  comprehensive loss                                                |       |                                            |       |                     |       |                |       |                   |       |                                               |       | (2,092     | )     |
| Earned stock  award compensation                                         |       | 2,123                                           |       | —                   |       | —              |       | —                 |       | —                                             |       | 2,123      |       |
| Repurchase of  common stock                                              |       | —                                          |       | —                   |       | (26,893             | )          | —                 |       | —                                             |       | (26,893    | )          |
| Shares to be  issued for settlement of deferred compensation obligations |       | —                                          |       | 61                       |       | —              |       | —                 |       | —                                             |       | 61         |       |
| Common shares  issued                                                    |       | 251                                             |       | (285                     | )          | 34                  |       | —                 |       | —                                             |       | —     |       |
| Tax effect of  equity based shares                                       |       | (2                                              | )          |                     |       |                |       |                   |       |                                               |       | (2         | )     |
| Balance,  September 30, 2007                                             |       | $                                               | 616,925    |                     | $          | 551                 |       | $                      | (96,433    | )                                                  | $          | 43,014     |       | $ | (1,401 | ) | $ | 562,656 |   |

 

See “Notes to UnauditedCondensed Consolidated Financial Statements.”

 

7

----

 

**CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated Statements of CashFlows (Unaudited)**

** **
| ** **                                                                                                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| ** **                                                                                                                  | ** ** | **(In thousands)**                  | ** ** |
| Cash flows from operating activities:                                                                                       |       |                                |       |   |   |
| Net income                                                                                                                  |       | $                                   | 118        |   | $ | 18,975 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:                                          |       |                                |       |   |   |
| Depreciation and amortization                                                                                               |       | 9,744                               |       | 13,370 |   |
| Provision for loan losses                                                                                                   |       | 21,641                              |       | 1,588 |   |
| Stock compensation                                                                                                          |       | 2,123                               |       | 2,382 |   |
| Gain on sale of securities                                                                                                  |       | —                              |       | (1 | ) |
| Loss (gain) on sale of other real estate owned and assets                                                                   |       | 163                                 |       | (196 | ) |
| Real estate valuation adjustments                                                                                           |       | 158                                 |       | — |   |
| Impairment of assets from discontinued operations, net                                                                      |       | —                              |       | 201 |   |
| Other                                                                                                                       |       | (222                                | )          | (1,208 | ) |
| Proceeds from sales of loans held for sale                                                                                  |       | —                              |       | 55,390 |   |
| Originations of loans held for sale                                                                                         |       | —                              |       | (49,896 | ) |
| Net change in:                                                                                                              |       |                                |       |   |   |
| Accrued interest receivable and other assets                                                                                |       | (4,991                              | )          | (262 | ) |
| Accrued interest payable and other liabilities                                                                              |       | (6,989                              | )          | (8,355 | ) |
| Net cash provided by operating activities                                                                                   |       | 21,745                              |       | 31,988 |   |
| Cash flows from investing activities:                                                                                       |       |                                |       |   |   |
| Activity in available-for-sale securities:                                                                                  |       |                                |       |   |   |
| Maturities, prepayments, and calls                                                                                          |       | 16,121                              |       | 70,981 |   |
| Purchases                                                                                                                   |       | (5,625                              | )          | (96,679 | ) |
| Activity in held-to-maturity securities and bank stocks:                                                                    |       |                                |       |   |   |
| Maturities, prepayments, and calls                                                                                          |       | 1,043                               |       | 297 |   |
| Purchases                                                                                                                   |       | (1,373                              | )          | (4,395 | ) |
| Loan originations and principal collections, net                                                                            |       | 67,517                              |       | 76,324 |   |
| Proceeds from sales of foreclosed assets                                                                                    |       | 1,016                               |       | 1,784 |   |
| Proceeds from sales of premises and equipment                                                                               |       | 585                                 |       | 6,382 |   |
| Additions to premises and equipment                                                                                         |       | (912                                | )          | (13,318 | ) |
| Proceeds from sale of subsidiary                                                                                            |       | —                              |       | 1,835 |   |
| Net cash provided by investing activities                                                                                   |       | 78,372                              |       | 43,211 |   |
| Cash flows from financing activities:                                                                                       |       |                                |       |   |   |
| Net decrease in deposits                                                                                                    |       | (44,173                             | )          | (83,754 | ) |
| Net change in short-term borrowings                                                                                         |       | (14,941                             | )          | 7,170 |   |
| Repayment of long-term debt                                                                                                 |       | (1,629                              | )          | (388 | ) |
| Net change in federal funds purchased and repurchase agreements                                                             |       | (7,559                              | )          | (4,825 | ) |
| Repurchase of common stock                                                                                                  |       | (26,893                             | )          | (25,328 | ) |
| Tax benefit (reversal) from vesting of stock compensation                                                                   |       | (2                                  | )          | 2 |   |
| Net cash used by financing activities                                                                                       |       | (95,197                             | )          | (107,123 | ) |
| Net change in cash and cash equivalents                                                                                     |       | 4,920                               |       | (31,924 | ) |
| Cash and cash equivalents, beginning of period                                                                              |       | 49,620                              |       | 118,811 |   |
| Cash and cash equivalents, end of period                                                                                    |       | $                                   | 54,540     |   | $ | 86,887 |   |
|                                                                                                                        |       |                                |       |   |   |
| Cash and cash equivalents-consolidated statements of cash flows                                                             |       | 54,540                              |       | 86,887 |   |
| Cash and cash equivalents from discontinued operations recorded in  assets held for sale on the consolidated balance sheets |       | —                              |       | (15,305 | ) |
| Cash and cash equivalents-consolidated balance sheets                                                                       |       | $                                   | 54,540     |   | $ | 71,582 |   |
|                                                                                                                        |       |                                |       |   |   |
| Supplemental disclosure of noncash investing activities:                                                                    |       |                                |       |   |   |
| Additions to other real estate owned in settlement of loans                                                                 |       | 3,478                               |       | 5,094 |   |
| Transfer from loans to loans held for sale                                                                                  |       | 31,459                              |       | — |   |
|                                                                                                                        |       |                                |       |   |   |
| See “Notes to Unaudited  Consolidated Financial Statements.”                                                      |

 

8

----

 

 

**CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes toUnaudited Condensed Consolidated Financial Statements**

 

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

 

Centennial Bank Holdings, Inc. is a financial holdingcompany and a bank holding company registered under the Bank Holding CompanyAct of 1956, as amended. Our principal business is to serve as a holdingcompany for our subsidiaries. As of September 30, 2007, those subsidiaries wereGuaranty Bank and Trust Company and Centennial Bank of the West, referred to asGuaranty Bank, and CBW, respectively. At September 30, 2006, those subsidiarieswere Guaranty Bank, CBW and Collegiate Peaks Bank, which was sold on November1, 2006.  On July 24, 2007, the Companyannounced that it would merge CBW into Guaranty Bank.  Federal and state regulatory approval wasreceived in the third quarter and management intends to merge the two banks bythe end of the fourth quarter 2007. Reference to “Banks” means Guaranty Bankand CBW, and “we” or “Company” means Centennial Bank Holdings, Inc. on aconsolidated basis with the Banks and Collegiate Peaks, if applicable.  References to “Centennial” or to the holdingcompany refer to the parent company on a stand-alone basis.

 

The Banks are full-service community banks offering anarray of banking products and services to the communities they serve, includingaccepting time and demand deposits and originating commercial loans (includingenergy loans), real estate loans (including construction loans and mortgageloans), Small Business Administration guaranteed loans and consumer loans.  CBW also provides trust services, includingpersonal trust administration, estate settlement, investment managementaccounts and self-directed IRAs.

 

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

 

The accounting and reportingpolicies of the Company conform to U.S. generally accepted accountingprinciples. All significant intercompany balances and transactions have beeneliminated. Our financial statements reflect all adjustments that are, in theopinion of management, necessary for a fair presentation of the financialposition and results of operations for the periods presented. Certaininformation and note disclosures normally included in consolidated financialstatements prepared in accordance with U.S. generally accepted accountingprinciples have been condensed or omitted pursuant to the rules and regulationsof the Securities and Exchange Commission. The interim operating results arenot necessarily indicative of operating results for the full year.

 

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

 

The preparation of theconsolidated financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities as of the dates ofthe consolidated balance sheets and income and expense for the periodspresented. Actual results could differ significantly from those estimates.Material estimates that are particularly susceptible to significant changesinclude the assessment for impairment of certain investment securities, theallowance for loan losses, valuation of other real estate owned, deferred taxassets and liabilities, goodwill and other intangible assets, and stockcompensation expense.  Assumptions andfactors are evaluated on an annual basis or whenever events or changes incircumstance indicate that the previous assumptions and factors havechanged.  The result of the analysiscould result in adjustments to the estimates.

 

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

 

The allowance for loanlosses is reported as a reduction of outstanding loan balances.

 

An allowance for loan lossesis maintained at a level deemed appropriate by management to adequately providefor known and probable risks in the loan portfolio.  The allowance for loan losses is evaluated ona regular basis by management and based upon management’s periodic review ofthe collectibility of the loans in light of historical experience, the natureand volume of the loan portfolio, adverse situations that may affect borrowers’ability to repay, estimated value of any underlying collateral and prevailingeconomic conditions.  This evaluation isinherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available.

 

In addition to the allowancefor loan losses the Company records a reserve for unfunded commitments.  Similar to the allowance for loan losses, thereserve for unfunded commitments is evaluated on a regular basis by management.  This reserve is recorded in otherliabilities.

 

9

----

 

**CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements —(Continued)**

 

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

 

Goodwill represents theexcess 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.

 

Goodwill is our onlyintangible asset with an indefinite life. The annual impairment analysis of goodwill includes identification ofreporting units, the determination of the carrying value of each reportingunit, including the existing goodwill and intangible assets, and estimating thefair value of each reporting unit.  Wehave identified one significant reporting unit — banking operations. TheCompany tests for impairment of goodwill annually as of October 31, or if anevent occurs or circumstances change that would more likely than not reduce thefair value of the reporting unit.  Wedetermine the fair value of our reporting unit and compare it to its carryingamount.  If the carrying amount of areporting unit exceeds its fair value, we are required to perform a second stepto the impairment test to measure the extent of the impairment.

 

Core deposit intangibleassets, referred to as CDI, and other definite-lived intangible assets arerecognized apart from goodwill at the time of acquisition based on valuationsprepared by independent third parties or other estimates of fair value. Inpreparing such valuations, the third parties consider variables such as depositservicing costs, attrition rates, and market discount rates. CDI assets areamortized to expense over their useful lives, which we have estimated to rangefrom 7 years to 15 years.

 

***(e)******                 ******Impairmentof Long-Lived Assets***

 

Long-lived assets, such aspremises and equipment, and definite-lived intangible assets subject toamortization, are reviewed for impairment whenever events or changes incircumstance indicate that the carrying value of an asset may not be recoverable.Recoverability of assets to be held and used is measured by a comparison of thecarrying value of the asset to the estimated undiscounted future cash flowsexpected to be generated by the asset. If the carrying value of an assetexceeds its estimated undiscounted future cash flows, an impairment charge isrecognized by the amount by which the carrying value of the asset exceeds thefair value of the asset, less costs to sell. Assets to be disposed of areseparately presented in the balance sheet and reported at the lower of thecarrying value or fair value less costs to sell, and are no longer depreciated.The assets and liabilities of a disposal group classified as held for sale arepresented separately in the appropriate asset and liability sections of theconsolidated balance sheet. The gain or loss and income from a disposal groupare recorded as discontinued operations on the consolidated statement ofincome.

 

***(f)       Stock Incentive Plan***

 

The Company’s Amended andRestated 2005 Stock Incentive Plan (“Plan”) provides for up to 2,500,000 grantsof stock options, stock awards, stock units awards, performance stock awards,stock appreciation rights, and other equity-based awards to key employees,nonemployee directors, consultants and prospective employees. Through September30, 2007, the Company has only granted stock awards. The Company accounts forthe equity-based compensation using the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 123R, *Share-BasedPayment*. The Company recognizes expense for services received in ashare-based payment transaction as services are received. That cost isrecognized on a straight-line basis over the period during which an employee ordirector provides service in exchange for the award. The Company has issuedstock awards that vest based on service periods from one to four years,performance conditions, and awards with both service periods and performanceconditions. The performance-based share awards expire December 31, 2012. Thecompensation cost of employee and director services received in exchange forstock awards is based on the grant-date fair value of the award (as determinedby quoted market prices). The stock compensation expense recognized reflectsestimated forfeitures, adjusted as necessary based on actual forfeitures.

 

***(g)      DeferredCompensation Plans***

 

The Company has DeferredCompensation Plans (the “Plans”) that allow directors and certain key employeesto voluntarily defer compensation. Compensation expense is recorded for thedeferred compensation and a related liability is recognized. Participants mayelect designated investment options for the notional investment of theirdeferred compensation. The recorded obligations are adjusted for deemed

 

10

----

 

**CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements —(Continued)**

 

income or loss related tothe investments selected. Participants in certain Plans are given theopportunity to elect to have all or a portion of their deferred compensationearn a rate of return equal to the total return on the Company’s common stock.The Plans do not provide for diversification of a participant’s assetsallocated to Company common stock and assets allocated to Company common stockcan only be settled with a fixed number of shares of stock. In accordance withEmerging Issues Task Force Issue 97-14, *Accounting for DeferredCompensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust andInvested*, the deferred compensation obligation associated withCompany common stock is classified as a component of stockholders’ equity.  Subsequent changes in the fair value of thecommon stock are not reflected in earnings or stockholders’ equity of theCompany. Company common stock held by the Company for the satisfaction ofobligations of the Plans is classified as treasury stock. The Company held31,270 and 77,366 shares of Company common stock for deferred compensation planobligations at September 30, 2007 and December 31, 2006, respectively, whichare recorded as treasury stock.

 

***(h)      Incometaxes***

 

Effective, January 1, 2007, the Company adopted FASBInterpretation 48, *Accounting forUncertainty 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 had no affect on the Company’s financialstatements.

 

The Company and its subsidiaries are subject to U.S. federalincome tax and State of Colorado tax. The Company is no longer subject toexamination by Federal or state taxing authorities for years before 2004. AtSeptember 30, 2007, the Company did not have any unrecognized tax benefits. TheCompany does not expect the total amount of unrecognized tax benefits tosignificantly increase in the next twelve months. The Company recognizesinterest related to income tax matters in other interest expense and penaltiesrelated to income tax matters in other noninterest expense. The Company doesnot have any amounts accrued for interest and penalties.

 

***(i)       Earnings  per Common Share***

 

Basic earnings per share represents income available tocommon stockholders divided by the weighted average number of common sharesoutstanding during the period.  Dilutedearnings per share reflect additional common shares that would have beenoutstanding if potential dilutive common shares had been issued.  In accordance with SFAS No. 128 (As Amended),*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 nine-month period ended September30, 2007 and 2006.   Outstandingrestricted shares with an anti-dilutive impact, which are excluded from theearnings per common share computation, include performance-based shares and service-basedshares that are not considered dilutive. For the three-months and nine-months ended September 30, 2007, theanti-dilutive restricted shares excluded from the earnings per common sharecomputation are 1,608,725 and 1,511,508, respectively. Earnings per commonshare have been computed based on the following:
| ** **                                                                    | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                               | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                          |       |                                   |       |                                  |       |   |   |   |   |
| Average common  shares outstanding                                            |       | 52,699,409                             |       | 57,093,056                            |       | 53,631,569 |   | 58,060,683 |   |
| Effective of  dilutive unvested stock grants                                  |       | 42,619                                 |       | 406,356                               |       | 139,836 |   | 333,671 |   |
| Average shares  outstanding for calculating diluted earnings per common share |       | 52,742,028                             |       | 57,499,412                            |       | 53,771,405 |   | 58,394,354 |   |

 

11

----

 

**CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements —(Continued)**

 

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

 

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

 

 

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

 

*Theamortized cost and estimated fair value of debt securities are as follows:*
| ** **                                                  | ** ** | **September  30, 2007** | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                  | ** ** | **Amortized  cost**     | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair  value** | ** ** |
| ** **                                                  | ** ** | **(In  thousands)**     | ** ** |
| Securities  available for sale:                             |       |                    |       |   |   |   |   |   |   |
| U.S. government  agencies and government-sponsored entities |       | $                       | 5,414      |   | $ | 2 |   | $ | (3 | ) | $ | 5,413 |   |
| State and  municipal                                        |       | 106,610                 |       | 1,275 |   | (3,097 | ) | 104,788 |   |
| Mortgage-backed                                             |       | 31,956                  |       | 45 |   | (493 | ) | 31,508 |   |
| Corporate bonds                                             |       | 547                     |       | 13 |   | — |   | 560 |   |
| Marketable  equity securities                               |       | 997                     |       | — |   | — |   | 997 |   |
| Securities  available for sale                              |       | $                       | 145,524    |   | $ | 1,335 |   | $ | (3,593 | ) | $ | 143,266 |   |
|                                                        |       |                    |       |   |   |   |   |   |   |
| Securities held  to maturity:                               |       |                    |       |   |   |   |   |   |   |
| Mortgage-backed                                             |       | $                       | 11,555     |   | $ | 11 |   | $ | (214 | ) | $ | 11,352 |   |

 
| ** **                                                 | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **Amortized  cost**   | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair value** | ** ** |
| ** **                                                 | ** ** | **(In thousands)**    | ** ** |
| Securities available for sale:                             |       |                  |       |   |   |   |   |   |   |
| U.S. government agencies and government-sponsored entities |       | $                     | 2,426      |   | $ | — |   | $ | (18 | ) | $ | 2,408 |   |
| State and municipal                                        |       | 113,649               |       | 1,998 |   | (76 | ) | 115,571 |   |
| Mortgage-backed                                            |       | 39,039                |       | 38 |   | (637 | ) | 38,440 |   |
| Marketable equity securities                               |       | 841                   |       | — |   | — |   | 841 |   |
| Securities available for sale                              |       | $                     | 155,955    |   | $ | 2,036 |   | $ | (731 | ) | $ | 157,260 |   |
|                                                       |       |                  |       |   |   |   |   |   |   |
| Securities held to maturity:                               |       |                  |       |   |   |   |   |   |   |
| Mortgage-backed                                            |       | $                     | 11,217     |   | $ | 38 |   | $ | (98 | ) | $ | 11,157 |   |

 

Allindividual securities that have been in a continuous unrealized loss positionfor 12 months or longer at September 30, 2007, have fluctuated in value sincetheir purchase dates as a result of changes in market interest rates.  These securities include securities issued byU.S. government agencies and government-sponsored entities that have an AAAcredit rating as determined by various rating agencies or state and municipalbonds that have either been rated as investment grade or higher by variousrating agencies or have been subject to an annual internal review process bymanagement.  We concluded that thecontinuous unrealized loss positions on these securities is a result of thelevel of market interest rates and not a result of the underlying issuers’ability to repay. In addition, we have the ability and intent to hold thesesecurities until their fair value recovers to their cost. Accordingly, we havenot recognized any other-than-temporary impairment in our consolidatedstatements of income.

 

12

----

 

**CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements —(Continued)**

 

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

 

*Asummary of net loans held for investment by loan type at the dates indicated isas follows:*

* *
| ** **                          | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **(In thousands)**      | ** ** |
| Loans on real estate:               |       |                    |       |                   |       |
| Residential and commercial mortgage |       | $                       | 724,528    |                   | $          | 686,056 |   |
| Construction                        |       | 290,591                 |       | 427,465                |       |
| Equity lines of credit              |       | 49,747                  |       | 56,468                 |       |
| Commercial loans                    |       | 643,702                 |       | 647,915                |       |
| Agricultural loans                  |       | 43,142                  |       | 51,338                 |       |
| Lease financing                     |       | 5,677                   |       | 6,704                  |       |
| Installment loans to individuals    |       | 40,868                  |       | 50,222                 |       |
| Overdrafts                          |       | 4,261                   |       | 4,319                  |       |
| SBA and other                       |       | 20,402                  |       | 21,121                 |       |
|                                |       | 1,822,918               |       | 1,951,608              |       |
| Less:                               |       |                    |       |                   |       |
| Allowance for loan losses           |       | (23,979                 | )          | (27,899                | )          |
| Unearned discount                   |       | (3,730                  | )          | (4,121                 | )          |
| Net Loans                           |       | $                       | 1,795,209  |                   | $          | 1,919,588 |   |

 

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

* *
| ** **                                 | ** ** | **Quarter Ended**      | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **September 30, 2007** | ** ** | **September 30, 2007** | ** ** |
| ** **                                 | ** ** | **(In thousands)**     | ** ** |
| Balance, beginning of period               |       | $                      | 35,594     |                   | $          | 27,899 |   |
| Provision for loan losses                  |       | 8,026                  |       | 21,641                 |       |
| Loans charged off                          |       | (20,079                | )          | (27,244                | )          |
| Recoveries on loans previously charged-off |       | 438                    |       | 1,683                  |       |
| Balance, end of period                     |       | $                      | 23,979     |                   | $          | 23,979 |   |

 

*Asummary of transactions in the reserve for unfunded commitments for the periodsindicated is as follows:*

* *
| ** **                                            | ** ** | **Quarter Ended**      | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **September 30, 2007** | ** ** | **September 30, 2007** | ** ** |
| ** **                                            | ** ** | **(In thousands)**     | ** ** |
| Balance, beginning of period                          |       | $                      | 610        |                   | $          | 411 |   |
| Provision (credit) for losses on unfunded commitments |       | (24                    | )          | 175                    |       |
| Balance, end of period                                |       | $                      | 586        |                   | $          | 586 |   |

 

 

On October 26, 2007, the company entered into adefinitive agreement to sell a portfolio of nonperforming and classified loansfor approximately $31.5 million.  Becausethe loan sale agreement was signed on October 26, 2007, these loans have beenclassified as held for sale effective September 30, 2007.  Management took a charge off through theallowance for loan loss of approximately $16.4 million and recorded anadditional provision for loan losses prior to transferring the loans from theportfolio to loans held for sale.  The transactionclosed on October 31, 2007.

 

*The following table details key information regarding the Company’simpaired loans at the dates indicated:*

*** ***
| ** **                                    | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **(In thousands)**      | ** ** |
| Impaired loans with a valuation allowance     |       | $                       | 12,486     |                   | $          | 23,616 |   |
| Impaired loans without a valuation allowance  |       | 4,864                   |       | 15,217                 |       |
| Total impaired loans                          |       | $                       | 17,350     |                   | $          | 38,833 |   |
| Valuation allowance related to impaired loans |       | $                       | 4,028      |                   | $          | 8,028 |   |

 

13

----

 

**CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements —(Continued)**

 
| ** **                           | ** ** | **Nine Months  Ended September  30, 2007** | ** ** | **Year Ended  December 31,  2006** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **(In thousands)**                         | ** ** |
| Average investment in impaired loans |       | $                                          | 37,846     |                               | $          | 42,660 |   |
|                                      |            |                                            |            |                                    |            |  |  |

 

Interestincome of $566,000 was recognized on nonaccrual loans during the year-to-dateperiod ended September 30, 2007.  Thegross interest income that would have been recorded in the year-to-date periodended September 30, 2007, if the loans had been current in accordance with theiroriginal terms and had been outstanding throughout the period or sinceorigination, if held for part of the period, was $1,580,000.  At September 30, 2007 and December 31, 2006,nonaccrual loans were $16,831,000 and $32,852,000, respectively.

 

**(4)           Goodwilland Other Intangible Assets**

 

Goodwilland other intangible assets arise from business combinations.  Goodwill and other intangible assets deemedto have indefinite lives generated from purchase combinations are tested forimpairment no less than annually.

 

Otherintangible assets with definite lives are amortized over their respectiveestimated useful lives to their estimated residual values.  The amortization expense represents theestimated decline in the value of the underlying deposits or loan customersacquired.

 

Thecarrying amount of goodwill was $392,958,000 for the periods ended September30, 2007 and December 31, 2006.

 

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

* *
| ** **                        | ** ** | ** **      | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------|------------|--------------------|------------|------------------|------------|
| ** **                        | ** ** | **Useful life** | ** ** | **2007**           | ** ** | **2006**         | ** ** |
| ** **                        | ** ** | ** **      | ** ** | **(In thousands)** | ** ** |
| Non-compete employment agreements |       | 2  years        |       | $                  | —     |             | $          | 3,606 |   |
| Core deposit intangible assets    |       | 7  - 15 years   |       | 62,975             |       | 62,975           |       |
| Total other intangible assets     |       |            |       | $                  | 62,975     |             | $          | 66,581 |   |
| Accumulated amortization          |       |            |       | (27,909            | )          | (24,982          | )          |
| Net other intangible assets       |       |            |       | $                  | 35,066     |             | $          | 41,599 |   |

 

 

*Following is the aggregateamortization expense recognized in each period:*

 

 
| ** **           | ** ** | **Three Months Ended**  | ** ** | **Nine Months Ended**   | ** ** |
|----------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **           | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
| ** **           | ** ** | **(In thousands)**      | ** ** |
| Amortization expense |       | $                       | 2,143      |                    | $          | 2,858 |   | $ | 6,533 |   | $ | 8,855 |   |
|                      |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

 

14

----

 

**CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements —(Continued)**

 

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

 

Borrowingsinclude Treasury Tax and Loan notes, Federal Home Loan Bank (“FHLB”)borrowings, and a revolving credit agreement with U.S. Bank NationalAssociation. The Company had $51,062,000 and $67,632,000 outstanding underthese obligations at September 30, 2007 and December 31, 2006, respectively,with a total commitment, including balances outstanding, of $410,098,000 atSeptember 30, 2007.

 

At September 30, 2007, borrowings consistedof a line of credit and term notes at the Federal Home Loan Bank of $29,400,000and $7,485,000respectively, $13,085,000 under the U.S. Bank revolving credit agreement and a $1,092,000 Treasury Tax and Loan note balance.

 

The total commitment, including balancesoutstanding, for borrowings at the Federal Home Loan Bank for the term notesand line of credit at September 30, 2007 was $320.6 million. The interest rateon the line of credit varies with the federal funds rate, and was 5.42% atSeptember 30, 2007. The term notes have fixed interest rates that range from3.25% 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.

 

The $70 million revolving credit agreementwith U.S. Bank National Association contains financial covenants, includingmaintaining a minimum return on average assets, a maximum nonperforming assetsto total loans ratio and regulatory capital ratios that qualify the Company aswell-capitalized.  As of September 30,2007, the Company was not in compliance with the return on average assetscovenant because of the additional provision for loan losses recorded in thethird quarter 2007, which was mostly attributable to the Company’s decision tosell a portfolio of its nonperforming and classified loans in a bulk sale,rather than continuing to work out each credit individually.  As a result of the most recent amendment tothe credit agreement (see Part II, Item 5), however, the Company is now incompliance with all outstanding financial covenants as of September 30, 2007.  As of September 30, 2007, the Company had$13.1 million drawn on this line.  The Company is in compliance with alloutstanding debt covenants, as amended. The interest rate varies based on aspread over the federal funds rate, with a rate of 6.4% at September 30, 2007. The credit agreement is secured by Guaranty Bankstock.

 

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

 

TheCompany had $41,239,000 in aggregate principal balances of subordinateddebentures outstanding with a weighted average cost of 9.0% and 9.1% atSeptember 30, 2007 and December 31, 2006, respectively. The subordinated debentureswere issued in four separate series. Each issuance has a maturity of thirtyyears from its date of issue. The subordinated debentures were issued to trustsestablished by the Company, which in turn issued $40 million of trust preferredsecurities. Generally and with certain limitations, the Company is permitted tocall the debentures subsequent to the first five or ten years, as applicable,after issue if certain conditions are met, or at any time upon the occurrenceand continuation of certain changes in either the tax treatment or the capitaltreatment of the trusts, the debentures or the preferred securities.   As of September 30, 2007, the Company was incompliance with all covenants of these subordinated debentures.

 

Thesesecurities are currently included in Tier I capital for purposes of determiningthe Company’s Tier I and total risk-based capital ratios. The Board ofGovernors of the Federal Reserve System, which is the holding company’s bankingregulator, has promulgated a modification of the capital regulations affectingtrust preferred securities. Under this modification, beginning March 31,2009, the Company will be required to use a more restrictive formula todetermine the amount of trust preferred securities that can be included inregulatory Tier I capital. At that time, the Company will be allowed to includein Tier I capital an amount of trust preferred securities equal to no more than25% of the sum of all core capital elements, which is generally defined asstockholders’ equity less certain intangibles, including goodwill, core depositintangibles and customer relationship intangibles, net of any related deferredincome tax liability. The regulations currently in effect limit the amount oftrust preferred securities that can be included in Tier I capital to 25% of thesum of core capital elements without a deduction for permitted intangibles.

 

15

----

 

**CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements —(Continued)**

 

 

*The following table summarizes the terms of each subordinated debentureissuance at September 30, 2007 (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           |       | 4/15/2004        |       | 15,464     |       | 4/15/2034          |       | 4/15/2009       |       | Variable               |       | LIBOR + 2.65 | %          | 8.01              | %          | 10/15/2007                |       |
| Guaranty Capital Trust  III |       | 7/7/2003         |       | 10,310     |       | 7/7/2033           |       | 7/7/2008        |       | Variable               |       | LIBOR + 3.10 | %          | 8.46              | %          | 10/07/2007                |       |
|                             |            |                  |            |            |            |                    |            |                 |            |                        |            |                        |            |                   |            |                           |            |  |

----

*         Calldate represents the earliest date the Company can call the debentures.

 

 **(7)          Commitments**

 

TheCompany is a party to credit-related financial instruments with off-balancesheet risk in the normal course of business to meet the financing needs of itscustomers. These financial instruments include commitments to extend credit,stand-by letters of credit and commercial letters of credit. Such commitmentsinvolve, to varying degrees, elements of credit and interest rate risk inexcess of the amount recognized in the consolidated balance sheets.

 

TheCompany’s exposure to credit loss is represented by the contractual amount ofthese commitments. The Company follows the same credit policies in makingcommitments as it does for on-balance sheet instruments.

 

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

 
| ** **                   | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **(In thousands)**     | ** ** |
| Commitments to extend credit |       | $                      | 615,941    |                  | $          | 555,757 |   |
| Standby letters of credit    |       | 34,447                 |       | 32,382                |       |
| Commercial letters of credit |       | —                 |       | 274                   |       |
|                         |       |                   |       |                  |       |
| Totals                       |       | $                      | 650,388    |                  | $          | 588,413 |   |

 

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract. Commitments generallyhave fixed expiration dates or other termination clauses and may requirepayment of a fee. Several of the commitments may expire without being drawnupon. Therefore, the total commitment amounts do not necessarily representfuture cash requirements. The amount of collateral obtained, if it is deemednecessary by the Company, is based on management’s credit evaluation of thecustomer.

 

Commitmentsto extend credit under overdraft protection agreements are commitments forpossible future extensions of credit to existing deposit customers. These linesof credit are uncollateralized and usually do not contain a specified maturitydate and might not be drawn upon to the total extent to which the Company iscommitted.

 

Stand-byletters of credit are conditional commitments issued by the Company toguarantee the performance of a customer to a third party. Those letters ofcredit are primarily issued to support public and private borrowingarrangements. Substantially all letters of credit issued have expiration dateswithin one year. The credit risk involved in issuing letters of credit isessentially the same as that involved in extending loan facilities tocustomers. The Company generally holds collateral supporting those commitmentsif deemed necessary.

 

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

 

16

----

 

**CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES**

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

 

 **(8)          Stock-BasedCompensation**

 

Underthe Company’s Amended and Restated 2005 Stock Incentive Plan (the “IncentivePlan”), the Company may grant stock-based compensation awards to nonemployeedirectors, key employees, consultants and prospective employees under the termsdescribed in the Incentive Plan. The allowable stock-based compensation awardsinclude the grant of Options, Restricted Stock Awards, Restricted Stock UnitAwards, Performance Stock Awards, Stock Appreciation Rights and otherEquity-Based Awards. The Incentive Plan provides that eligible participants maybe granted shares of Company common stock that are subject to forfeiture untilthe grantee vests in the stock award based on the established conditions, whichinclude service conditions and established performance measures.

 

Priorto vesting of the stock awards with a service vesting condition, each granteeshall have the rights of a stockholder with respect to voting of the grantedstock. The recipient is not entitled to dividend rights with respect to theshares of granted stock until vesting occurs. Prior to vesting of the stockawards with performance vesting conditions, each grantee shall have the rightsof a stockholder with respect to voting of the granted stock. The recipient isnot entitled to dividend rights with respect to the shares of granted stockuntil initial vesting occurs, at which time the dividend rights will exist onvested and unvested shares of granted stock, subject to termination of suchrights under the terms of the Incentive Plan.

 

Otherthan the stock awards with service and performance-based vesting conditions, nogrants have been made under the Incentive Plan. The Incentive Plan authorizesgrants of stock-based compensation awards of up to 2,500,000 shares of Companycommon stock, subject to adjustments provided by the Incentive Plan. As ofSeptember 30, 2007 and December 31, 2006, there were 1,651,344 and 1,725,825shares of unvested stock granted (net of forfeitures and vestings), with762,144 and 741,377 shares available for grant under the Incentive Plan,respectively.

 

*Asummary of the status of our outstanding stock awards and the change during theperiod is presented in the table below:*

* *
| ** **                        | ** ** | **Shares** | ** ** | **Weighted  Average Fair  Value on  Award Date** | ** ** |
|-----------------------------------|------------|------------|------------|--------------------------------------------------|------------|
| Outstanding at December 31, 2006  |       | 1,725,825  |       | $                                                | 10.67      |   |
| Awarded                           |       | 131,000    |       | 8.60                                             |       |
| Forfeited                         |       | (151,767   | )          | 10.92                                            |       |
| Vested                            |       | (53,714    | )          | 10.64                                            |       |
| Outstanding at September 30, 2007 |       | 1,651,344  |       | $                                                | 10.48      |   |

 

TheCompany recognized $2,123,000 and $2,382,000 in stock-based compensationexpense for services rendered for the nine months ended September 30, 2007 and2006, respectively. The total income tax benefit recognized in the consolidatedincome statement for share-based compensation arrangements was $751,000 and$905,000 for the nine months ended September 30, 2007 and 2006, respectively.At September 30, 2007, compensation cost of $7,416,000 related to nonvestedawards not yet recognized is expected to be recognized over a weighted-averageperiod of 2.5 years.   During the firstnine months of 2007, the value of the vested awards was approximately$419,500.  Of the 1,651,344 sharesoutstanding at September 30, 2007, approximately 810,000 shares are expected tovest.

 

**(9)****                 ****Capital Ratios**

 

AtSeptember 30, 2007 and December 31, 2006, the Company had leverage ratios of8.56% and 8.93%, Tier 1 risk-weighted capital ratios of 9.16% and 9.92%,and total risk-weighted capital ratios of 10.35% and 11.17%, respectively. TheCompany actively monitors its regulatory capital ratios to ensure that theCompany and its bank subsidiaries are well capitalized under the applicableregulatory framework.

 

17

----

 

**CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated Financial Statements —(Continued)**

 

**(10)****          ****Total Comprehensive Income (Loss)**

 

*The followingtable presents the components of other comprehensive loss and totalcomprehensive income (loss) for the periods presented:*
| ** **                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                      | ** ** | **(In thousands)**                    | ** ** |
| Net income                                                      |       | $                                     | 1,503      |                                 | $          | 5,820 |   | $ | 118 |   | $ | 18,975 |   |
| Other comprehensive income (loss):                              |       |                                  |       |                                 |       |   |   |   |   |
| Change in net unrealized gains (losses), net                    |       | (1,416                                | )          | 845                                  |       | (3,563 | ) | (130 | ) |
| Less: Reclassification adjustments for gains included in income |       | —                                |       | (6                                   | )          | — |   | (1 | ) |
| Net unrealized holding gains (losses)                           |       | (1,416                                | )          | 839                                  |       | (3,563 | ) | (131 | ) |
| Income tax benefit (expense)                                    |       | 537                                   |       | (343                                 | )          | 1,353 |   | 60 |   |
| Other comprehensive income (loss)                               |       | (879                                  | )          | 496                                  |       | (2,210 | ) | (71 | ) |
| Total comprehensive income (loss)                               |       | $                                     | 624        |                                 | $          | 6,316 |   | $ | (2,092 | ) | $ | 18,904 |   |

 

 **(11)****       ****Discontinued Operations**

 

*Discontinued Operations*

 

TheCompany’s results of operations for the nine months ended September 30, 2006included the activity from First MainStreet Insurance, which was sold on March1, 2006, and Collegiate Peaks Bank, which was held for sale as of September 30,2006 and sold on November 1, 2006.

 

*Thefollowing tables present the summary results of discontinued operations for theperiod ended September 30, 2006.*
| ** **                                          | ** ** | **Nine Months Ended  September 30, 2006** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **(In thousands)**                        | ** ** |
| Net interest income                                 |       | $                                         | 3,297      |   |
| Noninterest income                                  |       | $                                         | 780        |   |
|                                                |       |                                      |       |
| Net income from discontinued operations, net of tax |       | 1,078                                     |       |
| Impairment of assets, net of $123 tax benefit       |       | (201                                      | )          |
| Intercompany elimination                            |       | (8                                        | )          |
| Income from discontinued operations                 |       | $                                         | 869        |   |

 

 

** (12) Contingencies**

 

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

 

18

----

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

 

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

 

**Overview**

 

We are a financialholding company and a bank holding company providing banking and otherfinancial services throughout our targeted Colorado markets to consumers and tosmall and medium-sized businesses, including the owners and employees of thosebusinesses, through our bank subsidiaries. At September 30, 2007, those subsidiaries included Guaranty Bank andTrust Company and Centennial Bank of the West. Unless the context requires otherwise, the terms “Company,” “us,” “we,”and “our” refers to Centennial Bank Holdings, Inc. on a consolidatedbasis.  Collegiate Peaks Bank was a subsidiaryprior to its sale on November 1, 2006. Collegiate Peaks Bank was classified as held for sale from December 31,2004 through November 1, 2006, with the results of operations reported asdiscontinued operations in the Company’s financial statements. We refer toGuaranty Bank and Trust Company as Guaranty Bank, Centennial Bank of the Westas CBW, and Collegiate Peaks Bank as Collegiate Peaks.  We refer to Guaranty Bank and CBW as theBanks. On July 24, 2007, the Company announced that it would merge CBW intoGuaranty Bank.  Federal and stateregulatory approval was received in the third quarter 2007. Management expectsto complete the merger by the end of the year.

 

We offer an array ofbanking products and services to the communities we serve, including acceptingtime and demand deposits, originating commercial loans including energy loans,real estate loans, including construction and mortgage loans, Small BusinessAdministration guaranteed loans and consumer loans. We derive our incomeprimarily from interest received on real estate-related loans, commercial loansand leases and consumer loans and, to a lesser extent, from fees on thereferral of loans, interest on investment securities and fees received inconnection with servicing loan and deposit accounts. Our major operatingexpenses are the interest we pay on deposits and borrowings and generaloperating expenses. We rely primarily on locally generated deposits to provideus with funds for making loans.

 

We are subject tocompetition from other financial institutions and our operating results, likethose of other financial institutions operating exclusively or primarily inColorado, are significantly influenced by economic conditions in Colorado,including the strength of the real estate market. In addition, both the fiscaland regulatory policies of the federal government and regulatory authoritiesthat govern financial institutions and market interest rates also impact ourfinancial condition, results of operations and cash flows.

 

 

 

19

----

 

**EarningsSummary**

 

*Table 1summarizes certain key financial results for the periods indicated:*

 

**Table 1**
| ** **                                                  | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended September 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | **Change -** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change -** | ** ** |
| ** **                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | **Favorable** | ** ** | ** ** | ** ** | ** ** | ** ** | **Favorable** | ** ** |
| ** **                                                  | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **(Unfavorable)** | ** ** | **2007** | ** ** | **2006** | ** ** | **(Unfavorable)** | ** ** |
| **(In thousands, except share data)**                       | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Results of Operations:**                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  income                                            |       | $                                     | 41,084     |                                 | $          | 44,224 |   | $ | (3,140 | ) | $ | 125,147 |   | $ | 129,900 |   | $ | (4,753 | ) |
| Interest  expense                                           |       | 15,848                                |       | 15,229                               |       | (619 | ) | 47,081 |   | 41,610 |   | (5,471 | ) |
| Net  interest income                                        |       | 25,236                                |       | 28,995                               |       | (3,759 | ) | 78,066 |   | 88,290 |   | (10,224 | ) |
| Provision  for loan losses                                  |       | 8,026                                 |       | 1,566                                |       | (6,460 | ) | 21,641 |   | 1,566 |   | (20,075 | ) |
| Net  interest income after provision  for  loan losses |       | 17,210                                |       | 27,429                               |       | (10,219 | ) | 56,425 |   | 86,724 |   | (30,299 | ) |
| Noninterest  income                                         |       | 2,620                                 |       | 3,474                                |       | (854 | ) | 7,764 |   | 10,191 |   | (2,427 | ) |
| Noninterest  expense                                        |       | 18,205                                |       | 22,942                               |       | 4,737 |   | 66,509 |   | 69,686 |   | 3,177 |   |
| Income  (loss) before income taxes                          |       | 1,625                                 |       | 7,961                                |       | (6,336 | ) | (2,320 | ) | 27,229 |   | (29,549 | ) |
| Income  tax expense (benefit)                               |       | 122                                   |       | 2,521                                |       | 2,399 |   | (2,438 | ) | 9,123 |   | 11,561 |   |
| Income  from continuing operations                          |       | 1,503                                 |       | 5,440                                |       | (3,937 | ) | 118 |   | 18,106 |   | (17,988 | ) |
| Income  from discontinued operations (net of tax)           |       | —                                |       | 380                                  |       | (380 | ) | — |   | 869 |   | (869 | ) |
| Net  income                                                 |       | $                                     | 1,503      |                                 | $          | 5,820 |   | $ | (4,317 | ) | $ | 118 |   | $ | 18,975 |   | $ | (18,857 | ) |
| **Share Data:**                                             | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic  earnings per share                                   |       | $                                     | 0.03       |                                 | $          | 0.10 |   | $ | (0.07 | ) | $ | 0.00 |   | $ | 0.33 |   | $ | (0.33 | ) |
| Diluted  earnings per share                                 |       | $                                     | 0.03       |                                 | $          | 0.10 |   | $ | (0.07 | ) | $ | 0.00 |   | $ | 0.33 |   | $ | (0.33 | ) |
| Average  shares outstanding                                 |       | 52,699,409                            |       | 57,093,056                           |       | (4,393,647 | ) | 53,631,569 |   | 58,060,683 |   | (4,429,114 | ) |
| Diluted  average shares outstanding                         |       | 52,742,028                            |       | 57,499,412                           |       | (4,757,384 | ) | 53,771,405 |   | 58,394,354 |   | (4,622,949 | ) |

 

 

The $1.5 million thirdquarter 2007 net income is $4.3 million lower than third quarter 2006 duemostly to a $6.5 million increase to the provision for loan losses and a $3.8million decrease to net interest income. These decreases to net income were partially offset by $4.7 million inlower noninterest expense.

 

The Company recorded an$8.0 million provision for loan losses in the third quarter 2007 as compared toa $1.6 million provision for loan losses in the third quarter 2006.   The increase was primarily driven by thedecision to sell a large portion of its nonperforming and classified credits ina bulk sale, rather than continuing to work each credit individually.  This was a part of an ongoing adoption of amore aggressive credit management philosophy, including an accelerated loandisposition strategy for problem credits, announced in the second quarter 2007.

 

The decrease to netinterest income is mostly due to lower rates on loans combined with higherrates on deposits as discussed in further detail under Net Interest Incomebelow.

 

The decrease tononinterest expense is mostly due to lower salaries and employee benefitexpenses primarily attributable to a continued focus on determining eachbusiness unit’s appropriate level of staffing and managing to that level.   Total full-time equivalent employeesdecreased by 73 to 482 at September 30, 2007 as compared to 555 at September30, 2006.

 

The Company recorded netincome of $0.1 million for the nine months ended September 30, 2007 as comparedto $19.0 million for the same period in 2006. This decrease of $18.9 million is mostly attributable to the after-taximpact of the $20.0 million increase to the provision for loan losses takenyear-to-date in 2007 as compared to 2006, and a $6.5 million charge for thesettlement of the Barnes action in the second quarter 2007.

 

**NetInterest Income and Net Interest Margin**

 

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

 

 

20

----

 

*Thefollowing table summarizes the Company’s net interest income and related spreadand margin for the current quarter and prior four quarters:*

 

**Table 2**
| ** **                                 | ** ** | **Quarter  Ended**          | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **September  30, 2007**     | ** ** | **June 30,    2007** | ** ** | **March  31,  2007** | ** ** | **December  31, 2006** | ** ** | **September  30, 2006** | ** ** |
|                                       |       | **(Dollars  in thousands)** |       |
|                                       |       | ** **                  |       |
| Net  interest income                       |       | $                           | 25,236     |   | $ | 25,987 |   | $ | 26,843 |   | $ | 27,906 |   | $ | 28,995 |   |
| Interest  rate spread                      |       | 3.84                        | %          | 3.98 | % | 4.16 | % | 4.14 | % | 4.45 | % |
| Net  interest margin                       |       | 4.82                        | %          | 5.00 | % | 5.16 | % | 5.12 | % | 5.34 | % |
| Net  interest margin, fully tax equivalent |       | 4.97                        | %          | 5.15 | % | 5.55 | % | 5.27 | % | 5.51 | % |
|                                            |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thirdquarter 2007 net interest income of $25.2 million decreased by $3.8 millionfrom the third quarter 2006.  Thisdecrease is a result of a $3.1 million unfavorable rate variance and a $0.7million unfavorable volume variance (see Table 5).   The reclassification of loans held for saleas of September 30, 2007 had a minimal impact on yield.

 

Theunfavorable rate variance from the prior year third quarter is attributable tolower yields on loans and a higher cost of funds causing an overall decline innet interest margin of 52 basis points to 4.82% at September 30, 2007 ascompared to September 30, 2006.  Duringthe same period, the interest rate spread decreased by 61 basis points.   The reason for the lower impact on netinterest margin as compared to interest rate spread is primarily attributableto a continued relatively high level of noninterest demand deposits.  The average level of noninterest bearingdemand deposits to total average deposits was 23.9% in the third quarter 2007as compared to 26.0% in the third quarter 2006. The increase in cost of funds is due mostly to a 19 basis point increasein rates on money market deposits and a 72 basis point increase in the cost oftime deposits.   This increase ininterest expense from the third quarter 2006 is due mostly to higher costsassociated with time deposits with higher rates as a result of competition, aswell as the renewals of certificates of deposits at prevailing interest rates.

 

Theunfavorable volume variance from the prior year third quarter is mostly due toa decrease in earning assets.  Averageearning assets in the third quarter 2007 declined by $77.2 million, or 3.6%,from the same period last year.  Thisdecrease was mostly in the loan category, which had a $75.2 million decline inaverage balances for the three months ended September 30, 2007 as compared tothe same period in 2006.   The declinewas mostly due to a decrease in construction and land development loans.  Part of the Company’s strategy is to reduceits exposure in residential construction and land development loans.  Total real estate construction loans were$290.6 million at September 30, 2007 as compared to $463.5 million at September30, 2006, a decrease of $172.9 million, or 37.3%.   All other loan categories increased by $12.1million from September 30, 2006 to September 30, 2007.

 

*Thefollowing table summarizes the Company’s net interest income and related spreadand margin for the year-to-date periods presented:*

 

**Table 3**
| ** **                                 | ** ** | **Nine  Months Ended**      | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **September  30,  2007**    | ** ** | **September  30,   2006** | ** ** |
| ** **                                 | ** ** | **(Dollars  in thousands)** | ** ** |
| Net  interest income                       |       | $                           | 78,066     |   | $ | 88,290 |   |
| Interest  rate spread                      |       | 4.00                        | %          | 4.59 | % |
| Net  interest margin                       |       | 4.99                        | %          | 5.43 | % |
| Net  interest margin, fully tax equivalent |       | 5.10                        | %          | 5.56 | % |
|                                            |            |                             |            |  |  |  |  |

 

Forthe nine-month period ended September 30, 2007, net interest income decreasedby $10.2 million, or 11.6%, as compared to the same period in 2006.  This decrease is due to a $7.1 millionunfavorable rate variance and a $3.1 million unfavorable volume variance (seeTable 5).

 

Theunfavorable rate variance for year-to-date 2007 is mostly due to higher cost offunds.  In particular, time deposits andmoney market accounts had significant increases over the prior year due tocontinued rate competition and repricing at prevailing higher rates.  These increases were partially offset by afavorable earning asset yield variance due to a 2 basis point increase in theyield on earning assets.

 

 

21

----

 

 

Theunfavorable volume variance is mostly a result of lower average earningassets.  As stated above, part of theCompany’s strategy is to decrease its concentration in residential constructionand land development loans.  Thisstrategy was the reason for most of the $84.1 million decrease in averageearning assets for the first nine months of 2007 as compared to the same periodin 2006.  At  September 30, 2007, total real estate constructionloans comprised 16% of the gross loan portfolio as compared to 23% at September30, 2006.

 

The following tablepresents, for the periods indicated, average assets, liabilities andstockholders’ equity, as well as the net interest income from averageinterest-earning assets and the resultant annualized yields expressed inpercentages.  Nonaccrual loans areincluded in the calculation of average loans while accrued interest thereon isexcluded from the computation of yields earned.

 

**Table 4**
| ** **                                          | ** ** | **Quarter  Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **Average  Balance**             | ** ** | **Interest  Income or Expense** | ** ** | **Average  Yield or   Cost** | ** ** | **Average  Balance** | ** ** | **Interest  Income or Expense** | ** ** | **Average  Yield or  Cost** | ** ** |
| ** **                                          | ** ** | **(Dollars  in thousands)**      | ** ** |
| **ASSETS:**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest-earning assets:**                        | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  loans, net of unearned fees (1)(2)           |       | $                                | 1,871,939  |   | $ | 38,369 |   | 8.13 | % | $ | 1,947,126 |   | $ | 41,427 |   | 8.44 | % |
| Investment  securities(1)                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 50,779                           |       | 617 |   | 4.82 | % | 61,554 |   | 713 |   | 4.59 | % |
| Tax-exempt                                          |       | 106,566                          |       | 1,343 |   | 5.00 | % | 112,292 |   | 1,542 |   | 5.45 | % |
| Bank  Stocks (3)                                    |       | 32,181                           |       | 490 |   | 6.05 | % | 30,731 |   | 485 |   | 6.27 | % |
| Other  earning assets                               |       | 16,326                           |       | 265 |   | 6.43 | % | 3,244 |   | 57 |   | 6.88 | % |
| Total  interest-earning assets                      |       | 2,077,791                        |       | 41,084 |   | 7.84 | % | 2,154,947 |   | 44,224 |   | 8.14 | % |
| **Non-earning assets:**                             | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash  and due from banks                            |       | 44,189                           |       |   |   |   |   | 73,837 |   |   |   |   |   |
| Other  assets                                       |       | 504,933                          |       |   |   |   |   | 621,997 |   |   |   |   |   |
|                                                |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **Total assets**                                    |       | $                                | 2,626,913  |   |   |   |   |   | $ | 2,850,781 |   |   |   |   |   |
|                                                |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDER’S EQUITY:**      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing  liabilities:                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                            |       | $                                | 151,656    |   | $ | 122 |   | 0.32 | % | $ | 159,634 |   | $ | 194 |   | 0.48 | % |
| Money  Market                                       |       | 653,997                          |       | 6,272 |   | 3.81 | % | 647,741 |   | 5,909 |   | 3.62 | % |
| Savings                                             |       | 75,374                           |       | 146 |   | 0.77 | % | 91,928 |   | 173 |   | 0.75 | % |
| Time  certificates of deposit                       |       | 579,339                          |       | 7,393 |   | 5.06 | % | 548,846 |   | 6,007 |   | 4.34 | % |
| Total  interest-bearing deposits                    |       | 1,460,366                        |       | 13,933 |   | 3.79 | % | 1,448,149 |   | 12,283 |   | 3.36 | % |
| Borrowings:                                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase  agreements                              |       | 35,475                           |       | 425 |   | 4.75 | % | 31,083 |   | 349 |   | 4.45 | % |
| Federal  funds purchased                            |       | 258                              |       | 3 |   | 5.39 | % | 122 |   | 2 |   | 4.94 | % |
| Borrowings                                          |       | 35,326                           |       | 543 |   | 6.09 | % | 115,591 |   | 1,623 |   | 5.57 | % |
| Subordinated  debentures                            |       | 41,239                           |       | 944 |   | 9.08 | % | 41,239 |   | 972 |   | 9.35 | % |
| Total  interest-bearing liabilities                 |       | 1,572,664                        |       | 15,848 |   | 4.00 | % | 1,636,184 |   | 15,229 |   | 3.69 | % |
| Noninterest  bearing liabilities:                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                    |       | 458,143                          |       |   |   |   |   | 508,993 |   |   |   |   |   |
| Other  liabilities                                  |       | 26,848                           |       |   |   |   |   | 110,275 |   |   |   |   |   |
| Total  liabilities                                  |       | 2,057,655                        |       |   |   |   |   | 2,255,452 |   |   |   |   |   |
| Stockholder’s  Equity                          |       | 569,258                          |       |   |   |   |   | 595,329 |   |   |   |   |   |
| **Total liabilities and stockholder’s equity** |       | $                                | 2,626,913  |   |   |   |   |   | $ | 2,850,781 |   |   |   |   |   |
|                                                |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net  interest income                                |       |                             |       | $ | 25,236 |   |   |   |   |   | $ | 28,995 |   |   |   |
| Net  interest margin                                |       |                             |       |   |   | 4.82 | % |   |   |   |   | 5.34 | %  |
|                                                     |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1) Yields on loans and securities have notbeen adjusted to a tax-equivalent basis. Net interest margin on a fullytax-equivalent basis would have been 4.97% and 5.51% (based on adjustments of$811,000 and $922,000) for the three months ended September 30, 2007 andSeptember 30, 2006, respectively, using a combined federal and state tax rateof 38.01%.

 

 

22

----

 

(2) Net loan fees of $1.2 million and $1.5million for the three months ended September 30, 2007 and 2006 are included inthe yield computation.

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

 

 

**Table 4 (Continued)**

** **
| ** **                                          | ** ** | **Nine  Months Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                          | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **Average  Balance**                 | ** ** | **Interest  Income or Expense** | ** ** | **Average  Yield or Cost** | ** ** | **Average  Balance** | ** ** | **Interest  Income or Expense** | ** ** | **Average  Yield or Cost** | ** ** |
| ** **                                          | ** ** | **(Dollars  in thousands)**          | ** ** |
| **ASSETS:**                                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest-earning assets:**                        | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  loans, net of unearned fees (1)(2)           |       | $                                    | 1,888,013  |   | $ | 117,194 |   | 8.30 | % | $ | 1,984,197 |   | $ | 122,592 |   | 8.26 | % |
| Investment  securities(1)                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 51,075                               |       | 1,846 |   | 4.83 | % | 69,112 |   | 2,207 |   | 4.27 | % |
| Tax-exempt                                          |       | 109,347                              |       | 4,091 |   | 5.00 | % | 87,066 |   | 3,420 |   | 5.25 | % |
| Bank  Stocks (3)                                    |       | 32,011                               |       | 1,424 |   | 5.95 | % | 29,874 |   | 1,345 |   | 6.02 | % |
| Other  earning assets                               |       | 10,769                               |       | 592 |   | 7.35 | % | 5,054 |   | 336 |   | 8.88 | % |
| Total  interest-earning assets                      |       | 2,091,215                            |       | 125,147 |   | 8.00 | % | 2,175,303 |   | 129,900 |   | 7.98 | % |
| **Non-earning assets:**                             | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash  and due from banks                            |       | 50,907                               |       |   |   |   |   | 76,109 |   |   |   |   |   |
| Other  assets                                       |       | 514,207                              |       |   |   |   |   | 622,119 |   |   |   |   |   |
|                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Total assets**                                    |       | $                                    | 2,656,329  |   |   |   |   |   | $ | 2,873,531 |   |   |   |   |   |
|                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDER’S EQUITY:**      | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing  liabilities:                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                            |       | $                                    | 156,837    |   | $ | 637 |   | 0.54 | % | $ | 169,415 |   | $ | 538 |   | 0.42 | % |
| Money  Market                                       |       | 636,547                              |       | 18,034 |   | 3.79 | % | 624,450 |   | 15,527 |   | 3.32 | % |
| Savings                                             |       | 79,299                               |       | 462 |   | 0.78 | % | 95,581 |   | 534 |   | 0.75 | % |
| Time  certificates of deposit                       |       | 578,170                              |       | 21,884 |   | 5.06 | % | 576,471 |   | 17,364 |   | 4.03 | % |
| Total  interest-bearing deposits                    |       | 1,450,853                            |       | 41,017 |   | 3.78 | % | 1,465,917 |   | 33,963 |   | 3.10 | % |
| Borrowings:                                         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Repurchase  agreements                              |       | 32,312                               |       | 1,157 |   | 4.79 | % | 26,982 |   | 872 |   | 4.32 | % |
| Federal  funds purchased                            |       | 716                                  |       | 20 |   | 3.74 | % | 563 |   | 20 |   | 4.75 | % |
| Borrowings                                          |       | 46,941                               |       | 2,073 |   | 5.90 | % | 105,850 |   | 4,035 |   | 5.10 | % |
| Subordinated  debentures                            |       | 41,239                               |       | 2,814 |   | 9.12 | % | 41,245 |   | 2,720 |   | 8.82 | % |
| Total  interest-bearing liabilities                 |       | 1,572,061                            |       | 47,081 |   | 4.00 | % | 1,640,557 |   | 41,610 |   | 3.39 | % |
| Noninterest  bearing liabilities:                   |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                    |       | 473,214                              |       |   |   |   |   | 522,537 |   |   |   |   |   |
| Other  liabilities                                  |       | 31,332                               |       |   |   |   |   | 110,580 |   |   |   |   |   |
| Total  liabilities                                  |       | 2,076,607                            |       |   |   |   |   | 2,273,674 |   |   |   |   |   |
| Stockholder’s  Equity                          |       | 579,722                              |       |   |   |   |   | 599,857 |   |   |   |   |   |
| **Total liabilities and stockholder’s equity** |       | $                                    | 2,656,329  |   |   |   |   |   | $ | 2,873,531 |   |   |   |   |   |
|                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net  interest income                                |       |                                 |       | $ | 78,066 |   |   |   |   |   | $ | 88,290 |   |   |   |
| Net  interest margin                                |       |                                 |       |   |   | 4.99 | % |   |   |   |   | 5.43 | % |
|                                                     |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

| (1) Yields on loans and securities have  not been adjusted to a tax-equivalent basis. Net interest margin on a fully  tax-equivalent basis would have been 5.10% and 5.56% (based on adjustments of  $1,648,000 and $2,180,000) for the nine months ended September 30, 2007 and  September 30, 2006, respectively, using a federal and state tax rate of  38.01%. |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) Net loan fees of $4.3 million and $5.3  million for the nine months ended September 30, 2007 and 2006 are included in  the yield computation.                                                                                                                                                                                                                  |
| (3) Includes Bankers Bank of the West  stock, Federal Agricultural Mortgage Corporation (Farmer Mac) stock, Federal  Reserve Bank stock and Federal Home Loan Bank stock.                                                                                                                                                                                          |

 

 

23

----

 

The following tablepresents the dollar amount of changes in interest income and interest expensefor the major categories of our interest-earning assets and interest-bearingliabilities. Information is provided for each category of interest-earningassets and interest-bearing liabilities with respect to (i) changesattributable to changes in volume (i.e., changes in average balances multipliedby the prior-period average rate) and (ii) changes attributable to rate (i.e.,changes in average rate multiplied by prior-period average balances). Forpurposes of this table, changes attributable to both rate and volume, whichcannot be segregated, have been allocated proportionately to the change due tovolume and the change due to rate.

 

**Table 5**
| ** **                    | ** ** | **Three  Months Ended September 30, 2007 Compared to Three Months Ended September 30,  2006** | ** ** | **Nine  Months Ended September 30, 2007 Compared to Nine Months Ended  September 30, 2006** | ** ** |
|-------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **Net  Change**                                                                               | ** ** | **Rate**                                                                                    | ** ** | **Volume** | ** ** | **Net  Change** | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| ** **                    | ** ** | **(In  thousands)**                                                                           | ** ** |
| **Interest income:**          | ** ** | ** **                                                                                    | ** ** | ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans  held for investment    |       | $                                                                                             | (3,058     | )                                                                                           | $          | (1,488 | ) | $ | (1,570 | ) | $ | (5,398 | ) | $ | 575 |   | $ | (5,973 | ) |
| Securities                    |       |                                                                                          |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Taxable                       |       | (96                                                                                           | )          | 37                                                                                          |       | (132 | ) | (361 | ) | 370 |   | (730 | ) |
| Tax-exempt                    |       | (199                                                                                          | )          | (123                                                                                        | )          | (76 | ) | 671 |   | (153 | ) | 824 |   |
| Equity  securities            |       | 5                                                                                             |       | (15                                                                                         | )          | 20 |   | 79 |   | (16 | ) | 95 |   |
| Other  earning assets         |       | 208                                                                                           |       | (4                                                                                          | )          | 212 |   | 256 |   | (46 | ) | 302 |   |
| Total  interest income        |       | (3,140                                                                                        | )          | (1,593                                                                                      | )          | (1,546 | ) | (4,753 | ) | 730 |   | (5,482 | ) |
|                          |       |                                                                                          |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| **Interest expense:**         | ** ** | ** **                                                                                    | ** ** | ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits:                     |       |                                                                                          |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand      |       | (72                                                                                           | )          | (63                                                                                         | )          | (9 | ) | 99 |   | 135 |   | (36 | ) |
| Money  market                 |       | 363                                                                                           |       | 305                                                                                         |       | 58 |   | 2,507 |   | 2,201 |   | 306 |   |
| Savings                       |       | (27                                                                                           | )          | 5                                                                                           |       | (32 | ) | (72 | ) | 24 |   | (96 | ) |
|                          |       |                                                                                          |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Time  certificates of deposit |       | 1,386                                                                                         |       | 1,038                                                                                       |       | 348 |   | 4,520 |   | 4,469 |   | 51 |   |
| Repurchase  agreements        |       | 76                                                                                            |       | 24                                                                                          |       | 52 |   | 285 |   | 101 |   | 184 |   |
| Federal  funds purchased      |       | 1                                                                                             |       | (1                                                                                          | )          | 1 |   | 0 |   | 2 |   | (2 | ) |
| Borrowings                    |       | (1,080                                                                                        | )          | 171                                                                                         |       | (1,250 | ) | (1,962 | ) | 783 |   | (2,744 | ) |
| Subordinated  debentures      |       | (28                                                                                           | )          | (28                                                                                         | )          | 0 |   | 94 |   | 94 |   | 0 |   |
| Total  interest expense       |       | 619                                                                                           |       | 1,451                                                                                       |       | (832 | ) | 5,471 |   | 7,809 |   | (2,337 | ) |
|                          |       |                                                                                          |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| **Net interest income**       |       | $                                                                                             | (3,759     | )                                                                                           | $          | (3,044 | ) | $ | (714 | ) | $ | (10,224 | ) | $ | (7,079 | ) | $ | (3,145 | ) |

 

**Provisionfor Loan Losses**

 

The provision for loanlosses represents a charge against earnings. The provision is the amountrequired to maintain the allowance for loan losses at a level that, in ourjudgment, is adequate to absorb probable incurred losses inherent in the loanportfolio as of the balance sheet date. In periods when an existing allowance is determined to exceed the amountrequired, the allowance is reduced, which decreases the charge to earningsthrough the provision for loan losses. When an existing allowance is deemed tobe less than the amount required, an additional provision is recorded,resulting in an additional charge to earnings through the provision for loanlosses.

 

In the third quarter 2007, the Company recorded an$8.0 million provision for loan losses as compared to $1.6 million in the sameperiod in 2006.  As announced in thesecond quarter 2007, the Company modified its credit management philosophyincluding more aggressive collection efforts and an accelerated dispositionstrategy regarding problem credits.  Theincrease in the provision for loan losses in the third quarter 2007 as comparedto the same period in 2006 is mostly attributable to the Company determining tosell a portfolio of its nonperforming and classified loans in a bulk sale, ratherthan continuing to work out each credit individually.  The Company was not actively marketing theseloans as a bulk sale, but did solicit a bid from a single third party on aportfolio of nonperforming and classified loans.  A final offer was received in October 2007,which the Company accepted.  Because theoffer was received and accepted in October 2007, the loans were classified asheld for sale as of September 30, 2007 and written down to their estimated marketvalue through the allowance for loan loss.

 

Please see thenonperforming assets and allowance for loan losses analysis in the FinancialCondition section of this document for additional information on our assetquality.

 

24

----

 

For the nine months endedSeptember 30, 2007, the Company recorded a provision for loan losses of $21.6million as compared to $1.6 million in the same period in 2006.  This significant increase is mostlyattributable to the $8.0 million of provision for loan losses taken in thethird quarter as discussed above, as well as a $12.8 million provision for loanlosses taken in the second quarter 2007. The $12.8 million provision for loan losses taken in the second quarter2007 is primarily a result of the modification of the Company’s creditmanagement philosophy during the second quarter 2007.  As a result, the Company enhanced its riskrating methodology, problem loan identification process and instituted moreaggressive collection efforts and an accelerated disposition strategy regardingproblem credits.

 

**NoninterestIncome**

 

*Thefollowing table presents the major categories of noninterest income for thecurrent quarter and prior four quarters:*

 

**Table 6**
| ** **                         | ** ** | **Quarter  Ended**      | ** ** |
|------------------------------------|------------|-------------------------|------------|
|                               | ** ** | **September  30, 2007** | ** ** | **June 30,    2007** | ** ** | **March  31,   2007** | ** ** | **December  31, 2006** | ** ** | **September  30, 2006** | ** ** |
|                               | ** ** | **(In  thousands )**    | ** ** |
| Noninterest  income:               |       |                    |       |   |   |   |   |   |   |   |   |
| Customer  service and other fees   |       | $                       | 2,390      |   | $ | 2,409 |   | $ | 2,443 |   | $ | 2,137 |   | $ | 3,015 |   |
| Gain  (loss) on sale of securities |       | —                  |       | — |   | — |   | (5 | ) | 6 |   |
| Gain  (loss) on sale of loans      |       | —                  |       | — |   | 3 |   | (55 | ) | 229 |   |
| Other                              |       | 230                     |       | 168 |   | 121 |   | 449 |   | 224 |   |
| Total  noninterest income          |       | $                       | 2,620      |   | $ | 2,577 |   | $ | 2,567 |   | $ | 2,526 |   | $ | 3,474 |   |

 

Noninterestincome remained relatively flat for the fourth consecutive quarter.  The decrease in noninterest income betweenthe third quarter 2007 and third quarter 2006 was partially caused by thediscontinuation of our residential mortgage group at the end of the thirdquarter 2006.

 

*Thefollowing table presents the major categories of noninterest income for theyear-to-date periods presented:*

 

**Table 7**
| ** **                       | ** ** | **Nine  Months Ended**  | ** ** |
|----------------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **September  30, 2007** | ** ** | **September  30, 2006** | ** ** |
|                             |       |                    |       |   |   |
| Noninterest  income:             |       |                    |       |   |   |
| Customer  service and other fees |       | $                       | 7,242      |   | $ | 8,640 |   |
| Gain  on sale of securities      |       | —                  |       | 1 |   |
| Gain  on sale of loans           |       | —                  |       | 774 |   |
| Other                            |       | 522                     |       | 776 |   |
| Total  noninterest income        |       | $                       | 7,764      |   | $ | 10,191 |   |

 

Noninterestincome for the first nine months of 2007 decreased by $2.4 million from thesame period in 2006.  The decrease innoninterest income between the year-to-date period in 2007 and the same periodin 2006 was partially caused by a reduction in loan placement and other fees in2007 as compared to 2006, as well as the discontinuation of our residentialmortgage group at the end of the third quarter 2006.

 

**NoninterestExpense**

 

*Thefollowing table presents, for the quarters indicated, the major categories ofnoninterest expense:*

* *

 

25

----

 

**Table 8**
| ** **                         | ** ** | **Quarter  Ended**      | ** ** |
|------------------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **September  30, 2007** | ** ** | **June 30,    2007** | ** ** | **March  31,   2007** | ** ** | **December  31, 2006** | ** ** | **September  30, 2006** | ** ** |
| ** **                         | ** ** | **(In  thousands)**     | ** ** |
| Noninterest  expense:              |       |                    |       |   |   |   |   |   |   |   |   |
| Salaries  and employee benefits    |       | $                       | 9,039      |   | $ | 10,724 |   | $ | 10,974 |   | $ | 10,662 |   | $ | 12,006 |   |
| Occupancy  expense                 |       | 1,855                   |       | 2,056 |   | 2,121 |   | 2,040 |   | 1,891 |   |
| Furniture  and equipment           |       | 1,188                   |       | 1,231 |   | 1,240 |   | 1,176 |   | 1,286 |   |
| Amortization  of intangible assets |       | 2,143                   |       | 2,195 |   | 2,195 |   | 2,960 |   | 2,858 |   |
| Other  general and administrative  |       | 3,980                   |       | 11,416 |   | 4,152 |   | 4,467 |   | 4,901 |   |
| Total  noninterest expense         |       | $                       | 18,205     |   | $ | 27,622 |   | $ | 20,682 |   | $ | 21,305 |   | $ | 22,942 |   |
|                               |       |                    |       |   |   |   |   |   |   |   |   |

 

     The $4.7 million decrease in noninterest expense for the third quarter 2007 as compared to the sameperiod in 2006 is due to a decline in salary and employee benefit expense,amortization of intangible assets and other general and administrativeexpense.  These categories decreased forthe reasons discussed below.

 

Salaryand employee benefits expense decreased by $3.0 million, or 24.7%, in the thirdquarter 2007 as compared to the same period in 2006.  This decrease is primarily attributable to a13.2% reduction in full-time equivalent employees at September 30, 2007, ascompared to September 30, 2006. Additional causes for the decrease in expense is a $0.4 million reductionin the third quarter 2007 expense for equity-based compensation, as well as adecline in the accrual for year-end executive bonuses.   The decrease in equity-based compensation isa result of a change in the estimate related to the performance criteria forperformance-based restricted stock awards.

 

Amortizationof intangible assets expense is $2.1 million in the third quarter 2007, ascompared to $2.9 million in the third quarter 2006, a decrease of $0.7 million,or 25%.  This decrease is mostlyattributable to the use of accelerated amortization periods on core depositintangibles and an expiration of non-compete agreements.

 

Othergeneral and administrative expense decreased by $0.9 million in the thirdquarter 2007 as compared to the same period in 2006.  This 18.8% decrease is primarily a result ofa $0.5 million reduction in professional fees, mostly due to lower internal andexternal audit costs, and a $0.3 million reduction in advertising and businessdevelopment costs.

 

*Thefollowing table presents, for the year-to-date periods indicated, the majorcategories of noninterest expense:*

 

**Table 9**
| ** **                         | ** ** | **Nine  Months Ended**   | ** ** |
|------------------------------------|------------|--------------------------|------------|
| ** **                         | ** ** | **September  30,  2007** | ** ** | **September  30,  2006** | ** ** |
|                               |       |                     |       |   |   |
| Noninterest  expense:              |       |                     |       |   |   |
| Salaries  and employee benefits    |       | $                        | 30,737     |   | $ | 35,523 |   |
| Occupancy  expense                 |       | 6,032                    |       | 5,937 |   |
| Furniture  and equipment           |       | 3,659                    |       | 3,682 |   |
| Amortization  of intangible assets |       | 6,533                    |       | 8,855 |   |
| Other  general and administrative  |       | 19,548                   |       | 15,689 |   |
| Total  noninterest expense         |       | $                        | 66,509     |   | $ | 69,686 |   |
|                               |       |                     |       |   |   |

 

 

26

----

 

Overallnoninterest expense decreased by $3.2 million, or 4.6%, for the nine monthsended September 30, 2007 as compared to the same period in 2006.  This decrease is mostly attributable toreductions in salaries and employee benefits, as well as amortization ofintangible assets.  These declines werepartially offset by a $3.9 million increase in other general and administrativeexpense.

 

Othergeneral and administrative expense increased year-to-date 2007 as compared tothe same period in 2006 due mostly to a $6.5 million second quarter 2007settlement charge for the Barnes action, as well as a $1.0 million secondquarter 2007 charge related to the merger of our subsidiary banks.  The company expects the total cost of themerger to be approximately $1.5 million. Partially offsetting these 2007charges were a $1.6 million charge in the second quarter 2006 related to amanagement transition, a $1.2 million reduction in professional fees and a $0.5million reduction in advertising and business development costs.  The $1.2 million decrease in professionalfees in 2007 is attributable to a $0.5 million reduction in internal andexternal audit fees mostly due to a change in auditors and lower compliancecosts for Sarbanes-Oxley, as well as a $0.5 million reduction in legal fees anda $0.2 million reduction in miscellaneous professional fees.

 

**IncomeTax Expense (Benefit)**

 

Theeffective tax rate on income from continuing operations was 7.5% and 31.7% forthe three-month periods ending September 30, 2007 and 2006, respectively.  The primary difference between the expectedtax rate and the effective tax rates was tax-exempt income.  The effective tax rate is significantly lowerin 2007 as compared to 2006 primarily due to the level of tax-exempt income ascompared to net income before tax.

 

TheCompany recorded a $2.4 million tax benefit for the year-to-date period endingSeptember 30, 2007 due partially to the $2.3 million net loss beforetaxes.  An additional tax benefit wasrecorded primarily due to tax-exempt income for the nine-months ended September30, 2007.   For the year-to-date periodended September 30, 2006, the Company had an effective tax rate on income fromcontinuing operations of 33.5%.  Theprimary difference between the expected tax rate of 35% and the effective taxrate for 2006 was tax-exempt income.

 

**BALANCESHEET ANALYSIS**

 

*Thefollowing sets forth certain key consolidated balance sheet data:*

 

**Table 10**
| ** **                                 | ** ** | **September  30, 2007** | ** ** | **June 30,    2007** | ** ** | **March 31  2007** | ** ** | **December  31, 2006** | ** ** | **September  30, 2006** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|----------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **(In thousands)**      | ** ** |
| Net  loans (including loans held for sale) |       | $                       | 1,826,668  |                 | $          | 1,857,846               |       | $                      | 1,859,121  |                    | $          | 1,919,588 |   | $ | 1,955,529 |   |
| Total  assets                              |       | 2,617,153               |       | 2,640,732            |       | 2,693,384               |       | 2,720,600              |       | 2,886,647               |       |
| Deposits                                   |       | 1,915,932               |       | 1,938,412            |       | 1,971,869               |       | 1,960,105              |       | 1,968,264               |       |
|                                            |            |                         |            |                      |            |                         |            |                        |            |                         |            |  |  |  |  |  |

 

**Loans**

 

*Thefollowing table sets forth the amount of our loans outstanding at the datesindicated:*

 

**Table 11**
| ** **                       | ** ** | **September  30, 2007** | ** ** | **June 30,    2007** | ** ** | **March  31,   2007** | ** ** | **December  31, 2006** | ** ** | **September  30, 2006** | ** ** |
|----------------------------------|------------|-------------------------|------------|----------------------|------------|-----------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **(In  thousands)**     | ** ** |
| Real  estate - Mortgage          |       | $                       | 724,528    |                 | $          | 742,802               |       | $                      | 708,416    |                    | $          | 686,056 |   | $ | 663,170 |   |
| Real  estate - Construction      |       | 290,591                 |       | 321,982              |       | 353,323               |       | 427,465                |       | 463,468                 |       |
| Equity  lines of credit          |       | 49,747                  |       | 53,676               |       | 54,904                |       | 56,468                 |       | 60,817                  |       |
| Commercial                       |       | 643,702                 |       | 652,911              |       | 651,796               |       | 647,915                |       | 654,829                 |       |
| Agricultural                     |       | 43,142                  |       | 47,891               |       | 46,958                |       | 51,338                 |       | 54,805                  |       |
| Consumer                         |       | 40,868                  |       | 45,214               |       | 43,891                |       | 50,222                 |       | 53,714                  |       |
| Leases  receivable and other     |       | 30,340                  |       | 32,829               |       | 31,213                |       | 32,144                 |       | 32,931                  |       |
| Total  gross loans               |       | 1,822,918               |       | 1,897,305            |       | 1,890,501             |       | 1,951,608              |       | 1,983,734               |       |
| Less:  allowance for loan losses |       | (23,979                 | )          | (35,594              | )          | (27,492               | )          | (27,899                | )          | (25,977                 | )          |
| Unearned  discount               |       | (3,730                  | )          | (3,865               | )          | (3,888                | )          | (4,121                 | )          | (4,328                  | )          |
| Loans,  net of unearned discount |       | $                       | 1,795,209  |                 | $          | 1,857,846             |       | $                      | 1,859,121  |                    | $          | 1,919,588 |   | $ | 1,953,429 |   |
|                             |       |                    |       |                 |       |                  |       |                   |       |                    |       |
| Loans  held for sale             |       | $                       | 31,459     |                 | $          | —                |       | $                      | —     |                    | $          | — |   | $ | 2,100 |   |

 

 

27

----

 

Loans, net of unearneddiscount, at September 30, 2007, were $128.3 million lower than at December 31,2006.  This decrease is due in part toour continued strategy to reduce our concentration in residential constructionand land development loans.  TheSeptember 30, 2007 real estate construction loan balances, which include bothresidential and commercial construction loans and land development loans,decreased by $136.9 million from December 31, 2006.

 

An additional cause forthe decrease in loan balances from December 31, 2006, was the reclassificationof certain nonperforming and classified loans from the portfolio, net of a$16.4 million charge off taken through the allowance for loan losses, to loansheld for sale effective September 30, 2007.  This sale was closed on October 31, 2007.

 

**NonperformingAssets**

 

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

 

Generally, loans areplaced on nonaccrual status when they become 90 days or more past due or atsuch earlier time as management determines timely recognition of interest to bein doubt. Accrual of interest is discontinued on a loan when we believe, afterconsidering economic and business conditions and analysis of the borrower’sfinancial condition, that the collection of interest is doubtful.

 

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

 

**Table 12**
| ** **                                                                            | ** ** | **Quarter  Ended**       | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                            | ** ** | **September  30,  2007** | ** ** | **June 30,  2007** | ** ** | **March 31  2007** | ** ** | **December  31,  2006** | ** ** | **September  30,  2006** | ** ** |
| ** **                                                                            | ** ** | **(In  thousands)**      | ** ** |
|                                                                                  |       |                     |       |   |   |   |   |   |   |   |   |
| Nonaccrual loans                                                                      |       | $                        | 16,831     |   | $ | 35,515 |   | $ | 31,940 |   | $ | 32,852 |   | $ | 26,812 |   |
| Accruing loans past due 90 days or more                                               |       | 9                        |       | 122 |   | 323 |   | 3 |   | 396 |   |
| Other real estate owned                                                               |       | 3,401                    |       | 1,385 |   | 861 |   | 1,207 |   | 5,090 |   |
| Total nonperforming assets                                                            |       | $                        | 20,241     |   | $ | 37,022 |   | $ | 33,124 |   | $ | 34,062 |   | $ | 32,298 |   |
|                                                                                  |       |                     |       |   |   |   |   |   |   |   |   |
| Nonperforming loans                                                                   |       | $                        | 16,840     |   | $ | 35,637 |   | $ | 32,263 |   | $ | 32,855 |   | $ | 27,208 |   |
| Other impaired loans                                                                  |       | 510                      |       | 20,208 |   | 8,079 |   | 5,978 |   | 17,076 |   |
| Total impaired loans                                                                  |       | $                        | 17,350     |   | $ | 55,845 |   | $ | 40,342 |   | $ | 38,833 |   | $ | 44,284 |   |
| Allocated allowance for loan losses                                                   |       | (4,028                   | )          | (14,113 | ) | (7,673 | ) | (8,028 | ) | (6,468 | ) |
| Net investment in impaired loans                                                      |       | $                        | 13,322     |   | $ | 41,732 |   | $ | 32,669 |   | $ | 30,805 |   | $ | 37,816 |   |
|                                                                                  |       |                     |       |   |   |   |   |   |   |   |   |
| Charged-off loans                                                                     |       | $                        | 20,079     |   | $ | 5,473 |   | $ | 1,692 |   | $ | 1,088 |   | $ | 1,736 |   |
| Recoveries                                                                            |       | (438                     | )          | (809 | ) | (436 | ) | (366 | ) | (177 | ) |
| Net charge-off loans                                                                  |       | $                        | 19,641     |   | $ | 4,664 |   | $ | 1,256 |   | $ | 722 |   | $ | 1,559 |   |
|                                                                                  |       |                     |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to loans, net of unearned discount                          |       | 1.32                     | %          | 1.88 | % | 1.46 | % | 1.43 | % | 1.31 | % |
| Allowance for loan losses to nonaccrual loans                                         |       | 142.47                   | %          | 100.22 | % | 86.07 | % | 84.92 | % | 96.89 | % |
| Allowance for loan losses to nonperforming assets                                     |       | 118.47                   | %          | 96.14 | % | 83.00 | % | 81.91 | % | 80.43 | % |
| Allowance for  loan losses to nonperforming loans                                     |       | 142.39                   | %          | 99.88 | % | 85.21 | % | 84.92 | % | 95.48 | % |
| Nonperforming  assets to loans, net of unearned discount, and other real estate owned |       | 1.11                     | %          | 1.96 | % | 1.76 | % | 1.75 | % | 1.63 | % |
| Annualized net  charge-offs to average loans                                          |       | 4.16                     | %          | 0.99 | % | 0.27 | % | 0.15 | % | 0.32 | % |
| Nonaccrual loans  to loans, net of unearned discount                                  |       | 0.93                     | %          | 1.88 | % | 1.69 | % | 1.69 | % | 1.35 | % |

 

 

28

----

 

 

Third quarter 2007nonperforming assets decreased by $12.1 million from the third quarter 2006,and by $16.8 million from the second quarter 2007.   One of the reasons for the decrease innonperforming assets is the reclassification of certain nonperforming loansfrom the portfolio to loans held for sale at the end of the third quarter 2007,resulting from the Company entering into a definitive agreement in October 2007for the sale of these loans.  Only thoseloans included in the loan sale were reclassified to loans held for sale.   The sale of these loans closed on October31, 2007.  Included with this sale, theCompany also sold certain internally classified loans.  As many of these loans were previously deemedto be impaired, other impaired loans also decreased significantly from theprior quarter and from the third quarter 2006.  Other impaired loans were $0.5 million at September 30, 2007 as comparedto $20.2 million at June 30, 2007 and $17.1 million at September 30, 2006.

 

As of  September 30, 2007, the three largestnonperforming loan relationships amounted to $9.0 million, or 53.4%, of thetotal nonperforming loans.

 

Although our ratio ofallowance for loan losses to loans of 1.32% at September 30, 2007 remainedrelatively flat as compared to 1.31% at September 30, 2006, there was asignificant decline as compared to the second quarter 2007.  The allowance for loan loss to loansdecreased from 1.88% at June 30, 2007 to 1.32% at September 30, 2007 primarilydue to lower nonperforming and impaired loans.  The allowance for loan loss to nonperforming loans increased to 142.4%at September 30, 2007, as compared to 95.5% at September 30, 2006 and 99.9% atJune 30, 2007.

 

**Allowancefor Loan Losses**

 

The allowance for loanlosses is maintained at a level that, in our judgment, is adequate to absorbprobable incurred losses in the loan portfolio. The amount of the allowance isbased on management’s evaluation of the collectibility of the loan portfolio,historical loss experience, and other significant factors affecting loanportfolio collectibility, including the level and trends in delinquent,nonaccrual and adversely classified loans, trends in volume and terms of loans,levels and trends in credit concentrations, effects of changes in underwriting standards,policies, procedures and practices, national and local economic trends andconditions, changes in capabilities and experience of lending management andstaff, and other external factors including industry conditions, competitionand regulatory requirements.

 

Our methodology forevaluating the adequacy of the allowance for loan losses has two basicelements: first, the identification of impaired loans and the measurement of anestimated loss for each individual loan identified; second, estimating anallowance for probable incurred losses on other loans. The specific allowancefor impaired loans and the remaining allowance are combined to determine therequired allowance for loan losses. The amount calculated is compared to theactual allowance for loan losses and adjustments are recorded through theprovision for loan losses.

 

The following tableprovides a summary of the activity within the allowance for loan losses accountfor the periods presented*:*

 

 

29

----

 

**Table 13**
| ** **                    | ** ** | **Nine  Months Ended September 30,** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|
| ** **                    | ** ** | **2007**                             | ** ** | **2006** | ** ** |
|                          |       | **(In  thousands )**                 |       |
| Balance,  beginning of period |       | $                                    | 27,899     |   | $ | 27,475 |   |
| Loan  charge-offs:            |       |                                 |       |   |   |
| Real  estate mortgage         |       | 11,574                               |       | 1,594 |   |
| Real  estate construction     |       | 12,338                               |       | 1,981 |   |
| Commercial                    |       | 2,182                                |       | 871 |   |
| Agricultural                  |       | 21                                   |       | 24 |   |
| Consumer                      |       | 347                                  |       | 348 |   |
| Lease  receivable and other   |       | 782                                  |       | 21 |   |
| Total  loan charge-offs       |       | 27,244                               |       | 4,839 |   |
| Recoveries:                   |       |                                 |       |   |   |
| Real  estate mortgage         |       | 816                                  |       | 211 |   |
| Real  estate construction     |       | 71                                   |       | 48 |   |
| Commercial                    |       | 272                                  |       | 919 |   |
| Agricultural                  |       | 394                                  |       | 29 |   |
| Consumer                      |       | 109                                  |       | 178 |   |
| Lease  receivable and other   |       | 21                                   |       | — |   |
| Total  loan recoveries        |       | 1,683                                |       | 1,385 |   |
| Net  loan charge-offs         |       | 25,561                               |       | 3,454 |   |
| Provision  for loan losses    |       | 21,641                               |       | 1,956 |   |
| Balance,  end of period       |       | $                                    | 23,979     |   | $ | 25,977 |   |

 

**Securities**

 

We manage our investmentportfolio principally to provide liquidity, balance our overall interest raterisk and to provide collateral for public deposits and customer repurchaseagreements.

 

The carrying value of ourportfolio of investment securities at September 30, 2007 and December 31, 2006was as follows:

 

**Table 14**
| ** **                                                  | ** ** | **September  30,**  | ** ** | **December  31,** | ** ** | **Increase** | ** ** | **%**      | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                                  | ** ** | **2007**            | ** ** | **2006**          | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                                                  | ** ** | **(In  thousands)** | ** ** |
| Securities  available-for-sale:                             |       |                |       |              |       |         |       |       |       |
| U.S.  Government agencies and government-sponsored entities |       | $                   | 5,413      |              | $          | 2,408        |       | $          | 3,005      |   | 124.8 | % |
| Obligations  of states and political subdivisions           |       | 104,788             |       | 115,571           |       | (10,783      | )          | (9.3       | )%         |
| Mortgage  backed securities                                 |       | 31,508              |       | 38,440            |       | (6,932       | )          | (18.0      | )%         |
| Corporate  bonds                                            |       | 560                 |       | —            |       | 560          |       | 100.0      | %          |
| Marketable  equity securities                               |       | 997                 |       | 841               |       | 156          |       | 18.5       | %          |
| Total  securities available-for-sale                        |       | $                   | 143,266    |              | $          | 157,260      |       | $          | (13,994    | ) | (8.9 | )% |
|                                                        |       |                |       |              |       |         |       |       |       |
| Securities  held-to-maturity:                               |       |                |       |              |       |         |       |       |       |
| Mortgage-backed                                             |       | $                   | 11,555     |              | $          | 11,217       |       | $          | 338        |   | 3.0 | % |

 

The carrying value of ourinvestment securities at September 30, 2007 was $154.8 million, compared to theDecember 31, 2006 carrying value of $168.5 million. The decrease in the levelof our investments from December 31, 2006, is primarily due to a decision notto maintain excess collateral for certain deposits and customer repurchaseagreements.

 

**Deposits**

 

Atthe end of the third quarter 2007, deposits were $1.9 billion as compared to$2.0 billion at December 31, 2006, reflecting a decrease of $44.2 million, or2.3%.  Even with the decline, noninterestbearing deposits still comprised over 24% of total deposits at September 30,2007, as compared to 26% at December 31, 2006 which helped to keep our overallcost of funds lower.  The $17.1 milliondecline in time deposits from December 31, 2006 to September 30, 2007 isprimarily a result of not renewing internet certificate of deposits.

 

 

30

----

 

**Table 15**
| ** **                    | ** ** | **At  September 30, 2007**  | ** ** | **At  December 31, 2006** | ** ** |
|-------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                    | ** ** | **Balance**                 | ** ** | **% of   Total**          | ** ** | **Balance** | ** ** | **% of   Total** | ** ** |
| ** **                    | ** ** | **(Dollars  in thousands)** | ** ** |
| Noninterest  bearing deposits |       | $                           | 464,446    |                      | 24.24      | % | $ | 517,612 |   | 26.41 | % |
| Interest  bearing demand      |       | 156,548                     |       | 8.17                      | %          | 169,289 |   | 8.64 | % |
| Money  market                 |       | 661,379                     |       | 34.52                     | %          | 608,290 |   | 31.03 | % |
| Savings                       |       | 73,054                      |       | 3.81                      | %          | 87,265 |   | 4.45 | % |
| Time                          |       | 560,505                     |       | 29.26                     | %          | 577,649 |   | 29.47 | % |
| Total  deposits               |       | $                           | 1,915,932  |                      | 100.00     | % | $ | 1,960,105 |   | 100.00 | % |

 

 

**Borrowingsand Subordinated Debentures**

 

AtSeptember 30, 2007, our outstanding borrowings were $51.1 million. Theseborrowings consisted of $29.4 million and $7.5 million of line of credit andterm notes, respectively, at the Federal Home Loan Bank (“FHLB”); $13.1 millionon a U.S. Bank revolving credit agreement; and a $1.1 million Treasury Tax andLoan balance.

 

Ourtotal available credit from the FHLB, including outstanding balances, was $320.6 million at September 30, 2007. The interest rate on the FHLB line ofcredit varies with the federal funds rate, and was 5.42% at September 30, 2007.The term notes have fixed interest rates that range from 3.25% to 6.22%. Wehave a blanket pledge and security agreement with the FHLB, which encompassescertain loans and securities as collateral for these borrowings.

 

We have a $70 millionrevolving credit agreement with U.S. Bank National Association that containsfinancial covenants, including maintaining a minimum return on average assets,a maximum nonperforming assets to total loans ratio, and regulatory capitalratios that qualify the Company as well capitalized. As of September 30, 2007,we had an outstanding balance of $13.1 million and were in compliance with alldebt covenants, as amended (see Part II, Item 5).  The line of credit has a variable rate basedon the federal funds rate, and was 6.4% at September 30, 2007. The line ofcredit is secured by the stock of Guaranty Bank. U.S. Bank performs variouscommercial banking services for the Company for which they receive usual andcustomary fees.

 

At September 30, 2007, wehad a $41,239,000 aggregate principal balance of subordinated debenturesoutstanding with a weighted average cost of 9.0%.  The subordinated debentures were issued infour separate series. Each issuance has a maturity of thirty years from itsdate of issue. The subordinated debentures were issued to trusts established byus, which in turn issued $40 million of trust preferred securities. Generallyand with certain limitations, the Company is permitted to call the debenturessubsequent to 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.

 

These securities arecurrently included in Tier I capital for purposes of determining the Company’sTier I and total risk-based capital ratios. The Board of Governors of theFederal Reserve System, which is the holding company’s banking regulator, haspromulgated a modification of the capital regulations affecting trust preferredsecurities. Under this modification, beginning March 31, 2009, the Companywill be required to use a more restrictive formula to determine the amount oftrust preferred securities that can be included in regulatory Tier I capital.At that time, the Company will be allowed to include in Tier I capital anamount of trust preferred securities equal to no more than 25% of the sum ofall core capital elements, which is generally defined as stockholders’ equityless certain intangibles, including goodwill, core deposit intangibles andcustomer relationship intangibles, net of any related deferred income taxliability. The regulations currently in effect limit the amount of trustpreferred securities that can be included in Tier I capital to 25% of the sumof core capital elements 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.

 

**CapitalResources**

 

Current risk-basedregulatory capital standards generally require banks and bank holding companiesto maintain a ratio of “core” or “Tier 1” capital (consisting principally ofcommon equity) to risk-weighted assets of at least 4%, a ratio of Tier 1capital to average total assets (leverage ratio) of at least 4% and a ratio oftotal capital (which includes Tier 1 capital plus certain forms of subordinateddebt, a portion of the allowance for loan losses, and preferred stock) torisk-weighted assets of at least 8%. Risk-weighted assets are calculated bymultiplying the balance in each category of assets by a risk factor, whichranges from zero for cash assets and certain government obligations to 100% forhigh-risk loans, and adding the products together.

 

 

31

----

For regulatory and debt-covenant purposes, the Company maintainscapital above the minimum core standards. The Company maintains capital at a well-capitalized level.   Under the regulations adopted by the federalregulatory authorities, a bank is well-capitalized if the institution has atotal risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capitalratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is notsubject to any order or written directive by any such regulatory authority tomeet and maintain a specific capital level for any capital measure.  Our subsidiary banks are required to maintainsimilar capital levels under capital adequacy guidelines.  At September 30, 2007, both of our subsidiarybanks were “well-capitalized”.

 

The following table provides the current capital ratios as of the datespresented, along with the regulatory capital requirements:

 

**Table 16**
| ** **                        | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** | **Minimum  Capital Requirement** | ** ** | **Minimum Requirement  For “Well Capitalized” Institution** | ** ** |
|-----------------------------------|------------|-------------------------|------------|------------------------|------------|----------------------------------|------------|-----------------------------------------------------------------------|------------|
|                              |       |                    |       |                   |       |                             |       |                                                                  |       |
| Leverage ratio                    |       | 8.56                    | %          | 8.93                   | %          | 4.00                             | %          | 5.00                                                                  | %          |
| Tier 1 risk weighted ratio        |       | 9.16                    | %          | 9.92                   | %          | 4.00                             | %          | 6.00                                                                  | %          |
| Total risk weighted capital ratio |       | 10.35                   | %          | 11.17                  | %          | 8.00                             | %          | 10.00                                                                 | %          |

 

**Contractual Obligations and Off-Balance Sheet Arrangements**

 

TheCompany is a party to credit-related financial instruments with off-balancesheet risk in the normal course of business to meet the financing needs of itscustomers. These financial instruments include commitments to extend credit,stand-by letters of credit, and commercial letters of credit. Such commitmentsinvolve, to varying degrees, elements of credit and interest rate risk inexcess of the amount recognized in the consolidated balance sheets.

 

TheCompany’s exposure to credit loss is represented by the contractual amount ofthese commitments. The Company follows the same credit policies in makingcommitments as it does for on-balance sheet instruments.

 

AtSeptember 30, 2007, the following financial instruments were outstanding whosecontract amounts represented credit risk:

 

**Table 17**
| ** **                   | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **(In thousands)**     | ** ** |
| Commitments to extend credit |       | $                      | 615,941    |                  | $          | 555,757 |   |
| Standby letters of credit    |       | 34,447                 |       | 32,382                |       |
| Commercial letters of credit |       | —                 |       | 274                   |       |
|                         |       |                   |       |                  |       |
| Totals                       |       | $                      | 650,388    |                  | $          | 588,413 |   |

 

**Liquidity**

 

Basedon our existing business plan, we believe that our level of liquid assets issufficient to meet our current and presently anticipated funding needs.

 

Werely on dividends from our Banks as a primary source of liquidity for theholding company. We plan to continue to utilize the available dividends fromthe Banks for holding company operations, subject to regulatory and otherrestrictions. In general, the Banks are able to dividend earnings to the holdingcompany, subject to the Banks maintaining a well-capitalized ratio. 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.

 

TheBanks rely on deposits as their principal source of funds and, therefore, mustbe in a position to service depositors’ needs as they arise. Fluctuations inthe balances of a few large depositors may cause temporary increases anddecreases in liquidity from time to time. We deal with such fluctuations byusing existing liquidity sources.

 

 

32

----

 

Webelieve that if the level of liquid assets (our primary liquidity) does notmeet our liquidity needs, other available sources of liquid assets (oursecondary liquidity), including the purchase of federal funds, sales ofsecurities under agreements to repurchase, sales of loans, discount windowborrowings from the Federal Reserve Bank, and our lines of credit with theFederal Home Loan Bank of Topeka and U.S. Bank could be employed to meet thosecurrent and presently anticipated funding needs.

 

**Application of Critical Accounting Policiesand Accounting Estimates**

 

                Management’s Discussion andAnalysis of financial condition and results of operations discusses theCompany’s condensed consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America. The preparation of these condensed consolidated financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentliabilities at the date of the condensed consolidated financial statements andthe reported amounts of revenues and expenses during the reporting period. Onan on-going basis, management evaluates its estimates and judgments, includingthose related to customers and suppliers, allowance for loan losses, bad debts,investments, financing operations, long-lived assets, contingencies andlitigation. Management bases its estimates and judgments on historicalexperience and on various other factors that are believed to be reasonableunder the circumstances, the results of which have formed the basis for makingsuch judgments about the carrying value of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from therecorded 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 2006 AnnualReport Form 10-K for the fiscal year ended December 31, 2006.  There have been no changes to these criticalaccounting policies in 2007.

 

**ITEM 3. Quantitative andQualitative Disclosure aboutMarket Risk**

 

Marketrisk is the risk of loss in a financial instrument arising from adverse changesin market prices and rates, foreign currency exchange rates, commodity pricesand equity prices. Our market risk arises primarily from interest rate riskinherent in our lending and deposit taking activities. To that end, managementactively monitors and manages our interest rate risk exposure. We do not haveany market risk sensitive instruments entered into for trading purposes. Wemanage our interest rate sensitivity by matching the re-pricing opportunitieson our earning assets to those on our funding liabilities. We use variousasset/liability strategies to manage the re-pricing characteristics of ourassets and liabilities designed to ensure that exposure to interest ratefluctuations is limited to our guidelines of acceptable levels of risk-taking. Hedgingstrategies, including the terms and pricing of loans and deposits and managingthe deployment of our securities, are used to reduce mismatches in interestrate re-pricing opportunities of portfolio assets and their funding sources.

 

OurAsset Liability Management Committee, or ALCO, addresses interest rate risk.The committee is comprised of members of our senior management. The ALCOmonitors interest rate risk by analyzing the potential impact on the netportfolio of equity value and net interest income from potential changes ininterest rates, and considers the impact of alternative strategies or changesin balance sheet structure. The ALCO manages our balance sheet in part tomaintain the potential impact on net portfolio value and net interest incomewithin acceptable ranges despite changes in interest rates.

 

Ourexposure to interest rate risk is reviewed on at least a quarterly basis by theALCO and our board of directors. Interest rate risk exposure is measured usinginterest rate sensitivity analysis to determine our change in net portfoliovalue and net interest income in the event of hypothetical changes in interestrates. If potential changes to net portfolio value and net interest incomeresulting from hypothetical interest rate changes are not within board-approvedlimits, the board may direct management to adjust the asset and liability mixto bring interest rate risk within board-approved limits.

 

Wemonitor and evaluate our interest rate risk position on a quarterly basis usingtraditional gap analysis, earnings at risk analysis, and economic value at riskanalysis under 100 and 200 basis point change scenarios. Each of these analysesmeasures different interest rate risk factors inherent in the balance sheet.Traditional gap analysis, although not a complete view of these risks, providesa fair representation of our current interest rate risk exposure.

 

*Gap Analysis*— A traditional measure of a financial institution’s interest rate riskis the static gap analysis. Traditional gap analysis calculates the dollaramount of mismatches between assets and liabilities, at certain time periods,whose interest rates are subject to repricing at their contractual maturitydate or repricing period. A static gap is the difference between the amount of assetsand liabilities that are expected to mature or re-price within a

 

 

33

----

 

specific period. Generally,a positive gap benefits an institution during periods of rising interest rates,and a negative gap benefits an institution during periods of declining interestrates.

 

AtSeptember 30, 2007, we had a negative gap of $167.2 million, or 6.4% of ourtotal assets, that would be subject to re-pricing within one year, with a totalpositive gap of $231.3 million, or 8.8% of our total assets that would repricewithin 5 years.  The liability sensitivegap position for less than one year is largely the result of classifyinginterest-bearing NOW accounts, money market accounts, and savings accounts asimmediately repriceable and therefore maturing in the less than one yearcolumns.

 

Thefollowing table sets forth information concerning re-pricing opportunities forour interest-earning assets and interest bearing liabilities as of September30, 2007. The amount of assets and liabilities shown within a particular periodwere determined in accordance with their contractual maturities, except thatadjustable rate products are included in the period in which they are firstscheduled to adjust and not in the period in which they mature. Such assets andliabilities are classified by the earlier of their maturity or re-pricing date.

 

**Table18**
| ** **                                                     | ** ** | **Less Than 3 Months**     | ** ** | **3 Months to  1 Year** | ** ** | **1 to 5 Years** | ** ** | **Over 5  Years** | ** ** | **Not Interest Rate  Sensitive** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|------------------|------------|-------------------|------------|----------------------------------|------------|-----------|------------|
| ** **                                                     | ** ** | **(Dollars in thousands)** | ** ** |
| Interest-bearing cash and cash equivalents                     |       | $                          | 3,467      |                    | $          | —           |       | $                 | —     |                             | $          | —    |       | $ | — |   | $ | 3,467 |   |
| Investment securities                                          |       | 30,456                     |       | 8,652                   |       | 30,364           |       | 85,349            |       | 32,328                           |       | 187,149   |       |
| Loans, gross                                                   |       | 1,049,598                  |       | 194,566                 |       | 432,227          |       | 166,825           |       | 15,213                           |       | 1,858,429 |       |
| All other assets                                               |       | —                     |       | —                  |       | —           |       | —            |       | 568,108                          |       | 568,108   |       |
|                                                           |       |                       |       |                    |       |             |       |              |       |                             |       |      |       |
| Totals                                                         |       | $                          | 1,083,521  |                    | $          | 203,218          |       | $                 | 462,591    |                             | $          | 252,174   |       | $ | 615,649 |   | $ | 2,617,153 |   |
|                                                           |       |                       |       |                    |       |             |       |              |       |                             |       |      |       |
| Deposits                                                       |       | $                          | 1,073,062  |                    | $          | 319,358          |       | $                 | 56,842     |                             | $          | 2,224     |       | $ | 464,446 |   | $ | 1,915,932 |   |
| Assets under repurchase agreements and federal funds purchases |       | 17,910                     |       | —                  |       | —           |       | —            |       | —                           |       | 17,910    |       |
| Borrowings                                                     |       | 43,583                     |       | 17                      |       | 7,221            |       | 241               |       | —                           |       | 51,062    |       |
| Subordinated debentures                                        |       | —                     |       | —                  |       | —           |       | 41,239            |       | —                           |       | 41,239    |       |
| All other liabilities                                          |       | —                     |       | —                  |       | —           |       | —            |       | 28,354                           |       | 28,354    |       |
| Stockholder’s equity                                      |       | —                     |       | —                  |       | —           |       | —            |       | 562,656                          |       | 562,656   |       |
|                                                           |       |                       |       |                    |       |             |       |              |       |                             |       |      |       |
| Totals                                                         |       | $                          | 1,134,555  |                    | $          | 319,375          |       | $                 | 64,063     |                             | $          | 43,704    |       | $ | 1,055,456 |   | $ | 2,617,153 |   |
|                                                           |       |                       |       |                    |       |             |       |              |       |                             |       |      |       |
| Period gap (assets minus liabilities)                          |       | (51,034                    | )          | (116,157                | )          | 398,528          |       | 208,470           |       | (439,807                         | )          |      |       |
| Cumulative gap                                                 |       | (51,034                    | )          | (167,191                | )          | 231,337          |       | 439,807           |       |                             |       |      |       |
| Cumulative rate sensitive gap %                                |       | (1.9                       | )%         | (6.4                    | )%         | 8.8              | %          | 16.8              | %          |                             |       |      |       |
|                                                                |            |                            |            |                         |            |                  |            |                   |            |                                  |            |           |            |  |  |  |  |  |  |  |  |

 

 

**ITEM 4.****Controls and Procedures**

 

Asof the end of the period covered by this report, an evaluation was carried outby the Company’s management, with the participation of the Chief ExecutiveOfficer and the Chief Financial Officer, of the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rule 15d-15(e) under theSecurities Exchange Act of 1934). The Company’s disclosure controls weredesigned to provide a reasonable assurance that information required to bedisclosed in reports that we file or submit under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the Securities and Exchange Commission. Itshould be noted that the design of any system of controls is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote. However, the controlshave been designed to provide reasonable assurance of achieving the controls’stated goals. Based on that evaluation, the Company’s Chief Executive Officerand Chief Financial Officer, have concluded that the Company’s disclosurecontrols and procedures are effective at September 30, 2007 to ensure thatinformation required to be disclosed in the reports that we file or submitunder the Securities Exchange Act of 1934 was 

 

 

34

----

 

(i) accumulated andcommunicated to management, including the Company’s Chief Executive Officer andChief Financial Officer, to allow timely decisions regarding requireddisclosure and (ii) recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the Securities andExchange Commission.

 

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

 

** **

 

35

----

 

** **

**PART II—OTHER INFORMATION**

 

**ITEM 1.Legal Proceedings**

 

In the ordinary course of our business, we are partyto various legal actions, which we believe are incidental to the operation ofour business. Although the ultimate outcome and amount of liability, if any,with respect to these other legal actions to which we are currently a partycannot presently be ascertained with certainty, in the opinion of management,based upon information currently available to us, any resulting liability isnot likely to have a material adverse effect on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

 

 

36

----

 

 

**ITEM 1A.  RiskFactors**

 

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

 

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

 

(a)                                  None.

 

(b)                                 None.

 

(c)   Thefollowing table provides information with respect to purchases made by or onbehalf of the Company or any “affiliated purchaser” (as defined in Rule10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stockduring the third quarter 2007.

 
| ** **                  | ** ** | **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** | ** ** |
|-----------------------------|------------|----------------------------|------------|----------------------------------|------------|----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| July 1 to July 31           |       | 881                        |       | $                                | 6.12       |                                                                                   | —     |                                                                                             | 2,327,453  |   |
| August 1 to August 31       |       | 929,457                    |       | 6.54                             |       | 912,353                                                                                |       | 1,415,100                                                                                        |       |
| September 1 to September 30 |       | —                     |       | —                           |       | —                                                                                 |       | 1,415,100                                                                                        |       |
|                        |       |                       |       |                             |       |                                                                                   |       |                                                                                             |       |
|                        |       | 930,338                    |       | $                                | 6.54       |                                                                                   | 912,353(2  | )                                                                                                | 1,415,100  |   |

 

----

(1) The Companyhas 1,415,100 shares remaining under its stock repurchase program announced onMay 8, 2007.  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 with applicable regulations ofthe Securities and Exchange Commission.

(2) The differenceof 17,985 shares between total shares purchased and total number of sharespurchased as part of publicly announced plans relates to the net settlement ofvested restricted stock awards and the net settlement of Company stockdistributed under the deferred compensation plan.

 

**ITEM 3. Defaults Upon Senior Securities**

 

None.

  

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

 

None.

 

 

**ITEM 5. Other Information**

 

OnNovember 6, 2007, the Company entered into Amendment No. 6 to the RevolvingCredit Agreement with U.S. Bank National Association to (1) modify the returnon average assets covenant toexclude the additional provision for loan losses in the third quarter 2007 thatwas mostly attributable to the Company’s decision to sell a portfolio of itsnonperforming and classified loans in a bulk sale, rather than continuing towork out each credit individually, and (2) extend the term of the RevolvingCredit Agreement to March 31, 2008.

 

 

37

----

  

**ITEM 6. Exhibits**

 
| **Exhibit****Number** | ** ** | **Description**                                                                                                                                                                                                                                                    |
|-----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |       |                                                                                                                                                                                                                                                               |
| 2.1                   |       | Loan Sale Agreement, dated October 26, 2007, by and  between Centennial Bank of the West, a wholly owned subsidiary of Registrant,  and CapFinancial CV2, LLC (incorporated by reference to Exhibit 2.1 to  Registrant’s Form 8-K filed on October 31, 2007). |
|                  |       |                                                                                                                                                                                                                                                               |
| 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 3.1 to Registrant’s Form 8-K filed on October  31, 2007).                                                                                                                |
|                  |       |                                                                                                                                                                                                                                                               |
| 10.1                  |       | Amendment No. 6 to Revolving Credit Agreement with  U.S. Bank National Association, dated November 6, 2007.                                                                                                                                                        |
|                  |       |                                                                                                                                                                                                                                                               |
| 31.1                  |       | Section 302 Certification of Chief Executive  Officer.                                                                                                                                                                                                             |
|                  |       |                                                                                                                                                                                                                                                               |
| 31.2                  |       | Section 302 Certification of Chief Financial  Officer.                                                                                                                                                                                                             |
|                  |       |                                                                                                                                                                                                                                                               |
| 32.1                  |       | Section 906 Certification of Chief Executive  Officer.                                                                                                                                                                                                             |
|                  |       |                                                                                                                                                                                                                                                               |
| 32.2                  |       | Section 906 Certification of Chief Financial  Officer.                                                                                                                                                                                                             |

 

 

 

 

38

----

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

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

 

 

 

39

----