Form 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2005

 

OR

 

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

 

For the transition period from                      to                     

 

Commission File Number: 333-124855

 


 

CENTENNIAL BANK HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE   41-2150446

(State or other jurisdiction

of incorporation or organization)

  (I.R.S. Employer Identification Number)

1331 Seventeenth St., Suite 300

Denver, CO

  80202
(Address of principal executive offices)   (Zip Code)

 

303-296-9600

(Registrant’s telephone number, including area code)

 


 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

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

 

As of October 31, 2005 there were 62,411,268 shares of the registrant’s common stock outstanding, including 1,286,131 shares of unvested restricted stock.

 


 

1


Table of Contents

 

TABLE OF CONTENTS

 

          Page

PART I—FINANCIAL INFORMATION

   3

ITEM 1.

  

Unaudited Consolidated Financial Statements

   3
    

Unaudited Consolidated Balance Sheets

   3
    

Unaudited Consolidated Statements of Operations

   5
    

Unaudited Consolidated Statements of Comprehensive Income (loss)

   7
    

Unaudited Consolidated Statements of Cash Flows

   9
    

Notes to Unaudited Consolidated Financial Statements

   10

ITEM 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   16

ITEM 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   28

ITEM 4.

  

Controls and Procedures

   29

PART II—OTHER INFORMATION

   30

ITEM 1.

  

Legal Proceedings

   30

ITEM 2.

  

Unregistered Sale of Equity Securities and Use of Proceeds

   30

ITEM 3.

  

Defaults Upon Senior Securities

   30

ITEM 4.

  

Submission of Matters to a Vote of Security Holders

   30

ITEM 5.

  

Other Information

   30

ITEM 6.

  

Exhibits

   31

SIGNATURES

   32

 

2


Table of Contents

 

PART I—FINANCIAL INFORMATION

 

ITEM 1. Unaudited Consolidated Financial Statements

 

CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except for share data)

 

     September 30,
2005


    December 31,
2004


 
     (Unaudited)        

Assets

              

Cash and due from banks

   $ 94,033     67,927  

Federal funds sold

     —       23,000  
    


 

Cash and cash equivalents

     94,033     90,927  
    


 

Time deposits with banks

     5,000     5,000  

Securities available for sale, at fair value

     122,097     125,687  

Securities held to maturity (fair value of $386 and $645 at September 30, 2005 and December 31, 2004)

     386     640  

Bank stocks, at cost

     24,834     12,770  

Other investments

     —       1,405  
    


 

Total investments

     152,316     145,502  
    


 

Loans held for sale

     6,015     7,301  

Loans, net of unearned discount

     1,763,533     1,641,821  

Less allowance for loan losses

     (25,019 )   (25,022 )
    


 

Net loans

     1,744,529     1,624,100  
    


 

Premises and equipment, net

     48,472     44,921  

Foreclosed assets

     2,532     5,707  

Accrued interest receivable

     11,375     9,062  

Goodwill

     331,626     328,185  

Other intangible assets, net

     44,087     53,360  

Other assets

     12,402     7,795  

Assets held for sale

     98,797     89,642  
    


 

Total assets

   $ 2,540,169     2,399,201  
    


 

 

3


Table of Contents

CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except for share data)

 

     September 30,
2005


    December 31,
2004


 
     (Unaudited)        

Liabilities and Stockholders’ Equity

              

Liabilities:

              

Deposits:

              

Noninterest-bearing demand

   $ 531,970     477,999  

Interest-bearing demand

     594,634     581,580  

Savings

     73,575     81,725  

Time

     521,430     537,195  
    


 

Total deposits

     1,721,609     1,678,499  

Securities sold under agreements to repurchase and federal fund purchases

     31,304     27,492  

Accrued interest payable

     3,292     2,313  

Borrowings

     118,335     39,770  

Subordinated debentures

     41,476     42,079  

Deferred tax liability, net

     12,278     12,076  

Other liabilities

     8,987     10,350  

Liabilities associated with assets held for sale

     80,854     71,208  
    


 

Total liabilities

     2,018,135     1,883,787  

Commitments and contingencies

              

Stockholders’ equity:

              

Common stock—$.001 par value; 100,000,000 shares authorized, 53,509,650 and 52,333,334 shares issued at September 30, 2005 and December 31, 2004; 53,079,250 and 52,333,334 outstanding at September 30, 2005 and December 31, 2004

     52     52  

Additional paid-in capital

     512,142     511,588  

Retained earnings

     13,614     3,796  

Accumulated other comprehensive income (loss)

     885     (22 )
    


 

       526,693     515,414  

Less cost of shares in treasury, 430,400 shares at September 30, 2005

     (4,659 )   —    
    


 

Total stockholders’ equity

     522,034     515,414  
    


 

Total liabilities and stockholders’ equity

   $ 2,540,169     2,399,201  
    


 

 

See “Notes to Unaudited Consolidated Financial Statements.”

 

4


Table of Contents

CENTENNIAL BANK HOLDINGS, INC.

AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except for share and per share data)

 

     Successor

   Predecessor

 
    

Three Months
Ended
September 30,

2005


   

Period from
July 17, 2004 to
September 30,

2004


  

Period from
July 1, 2004 to
July 16,

2004


 
     (Unaudited)     (Unaudited)    (Unaudited)  

Interest income:

                   

Loans, including fees

   $ 32,909     8,347    1,732  

Investment securities:

                   

Taxable

     49     102    42  

Tax-exempt

     714     4    —    

Dividends

     300     55    11  

Federal funds sold and other

     542     121    5  
    


 
  

Total interest income

     34,514     8,629    1,790  
    


 
  

Interest expense:

                   

Deposits

     6,648     1,251    393  

Federal funds purchased and repurchase agreements

     293     37    4  

Subordinated debentures

     669     313    93  

Borrowings

     1,031     94    35  
    


 
  

Total interest expense

     8,641     1,695    525  
    


 
  

Net interest income

     25,873     6,934    1,265  

Provision for loan losses

     —       —      3,700  
    


 
  

Net interest income (loss), after provision for loan losses

     25,873     6,934    (2,435 )

Noninterest income:

                   

Customer service and other fees

     2,035     752    186  

Gain on sale of loans

     433     —      —    

Gain on sale of assets

     260     18    189  

Other

     4     29    35  
    


 
  

Total noninterest income

     2,732     799    410  

Noninterest expense:

                   

Salaries and employee benefits

     9,828     2,334    971  

Occupancy expense

     1,651     435    102  

Furniture and equipment

     924     248    49  

Amortization of intangible assets

     2,968     296    —    

Merger, acquisition and transition expenses

     752     —      —    

Other general and administrative

     4,604     1,243    2,304  
    


 
  

Total noninterest expense

     20,727     4,556    3,426  
    


 
  

Income (loss) before income taxes

     7,878     3,177    (5,451 )

Income tax expense

     2,748     1,379    (1,288 )
    


 
  

Income (loss) from continuing operations

     5,130     1,798    (4,163 )

Loss on disposition of discontinued operations, net of tax

     (340 )   —      —    

Income from discontinued operations, net of tax

     340     —      —    
    


 
  

Net income (loss)

   $ 5,130     1,798    (4,163 )
    


 
  

Earnings (loss) per share—basic:

                   

Income (loss) from continuing operations

   $ 0.10     0.09    (2.67 )

Income from discontinued operations, net of tax

     —       —      —    

Net income (loss)

     0.10     0.09    (2.67 )

Earnings (loss) per share—diluted:

                   

Income (loss) from continuing operations

   $ 0.10     0.09    (2.67 )

Income from discontinued operations, net of tax

     —       —      —    

Net income (loss)

     0.10     0.09    (2.67 )

Weighted average shares outstanding

     51,902,934     19,000,000    1,557,568  

Effect of unvested share awards

     99,085     —      —    
    


 
  

Fully diluted average shares outstanding

     52,002,019     19,000,000    1,557,568  
    


 
  

 

See “Notes to Unaudited Consolidated Financial Statements.”

 

5


Table of Contents

CENTENNIAL BANK HOLDINGS, INC.

AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except for share and per share data)

 

     Successor

   Predecessor

 
    

Nine Months
Ended
September 30,

2005


   

Period from
July 17, 2004 to
September 30,

2004


  

Period from
January 1,

2004 to
July 16,
2004


 
     (Unaudited)     (Unaudited)       

Interest income:

                   

Loans, including fees

   $ 91,989     8,347    22,260  

Investment securities:

                   

Taxable

     697     102    485  

Tax-exempt

     1,797     4    10  

Dividends

     669     55    130  

Federal funds sold and other

     1,773     121    27  
    


 
  

Total interest income

     96,925     8,629    22,912  
    


 
  

Interest expense:

                   

Deposits

     15,041     1,251    5,340  

Federal funds purchased and repurchase agreements

     737     37    50  

Subordinated debentures

     1,839     313    1,054  

Borrowings

     2,237     94    353  
    


 
  

Total interest expense

     19,854     1,695    6,797  
    


 
  

Net interest income

     77,071     6,934    16,115  

Provision for loan losses

     1,700     —      4,700  
    


 
  

Net interest income, after provision for loan losses

     75,371     6,934    11,415  

Noninterest income:

                   

Customer service and other fees

     5,957     752    2,222  

Gain (loss) on sale of securities

     11     —      (66 )

Gain on sale of loans

     1,060     —      —    

Gain on sale of assets

     601     18    215  

Other

     20     29    55  
    


 
  

Total noninterest income

     7,649     799    2,426  

Noninterest expense:

                   

Salaries and employee benefits

     30,224     2,334    6,604  

Occupancy expense

     4,939     435    1,200  

Furniture and equipment

     2,590     248    662  

Amortization of intangible assets

     9,157     296    —    

Merger, acquisition and transition expenses

     8,436     —      —    

Other general and administrative

     11,581     1,243    6,048  
    


 
  

Total noninterest expense

     66,927     4,556    14,514  
    


 
  

Income (loss) before income taxes

     16,093     3,177    (673 )

Income tax expense

     5,482     1,379    411  
    


 
  

Income (loss) from continuing operations

     10,611     1,798    (1,084 )

Loss on disposition of discontinued operations, net of tax (Note 10)

     (1,584 )   —      —    

Income from discontinued operations, net of tax (Note 10)

     790     —      —    
    


 
  

Net income (loss)

   $ 9,817     1,798    (1,084 )
    


 
  

Earnings (loss) per share—basic:

                   

Income (loss) from continuing operations

   $ 0.20     0.09    (0.70 )

Loss from discontinued operations, net of tax

     (0.01 )   —      —    

Net income (loss)

     0.19     0.09    (0.70 )

Earnings (loss) per share—diluted:

                   

Income (loss) from continuing operations

   $ 0.20     0.09    (0.70 )

Loss from discontinued operations, net of tax

     (0.01 )   —      —    

Net income (loss)

     0.19     0.09    (0.70 )

Weighted average shares outstanding

     52,137,132     19,000,000    1,554,873  

Effect of unvested share awards

     33,391     —      —    
    


 
  

Fully diluted average shares outstanding

     52,170,523     19,000,000    1,554,873  
    


 
  

 

See “Notes to Unaudited Consolidated Financial Statements.”

 

6


Table of Contents

CENTENNIAL BANK HOLDINGS, INC.

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

 

     Successor

   Predecessor

 
    

Three Months
Ended
September 30,

2005


  

Period from
July 17, 2004 to
September 30,

2004


   Period from
July 1, 2004 to
July 16, 2004


 
     (Unaudited)    (Unaudited)    (Unaudited)  

Net income (loss)

   $ 5,130    1,798    (4,163 )

Other comprehensive income, net of tax

                  

Change in net unrealized gain on securities available for sale

     82    189    159  
    

  
  

Comprehensive income (loss)

   $ 5,212    1,987    (4,004 )
    

  
  

 

See “Notes to Unaudited Consolidated Financial Statements.”

 

7


Table of Contents

CENTENNIAL BANK HOLDINGS, INC.

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

 

     Successor

   Predecessor

 
    

Nine Months
Ended
September 30,

2005


  

Period from
July 17, 2004 to
September 30,

2004


  

Period from
January 1, 2004

to July 16, 2004


 
     (Unaudited)    (Unaudited)       

Net income (loss)

   $ 9,817    1,798    (1,084 )

Other comprehensive income (loss), net of tax

                  

Change in net unrealized gain (loss) on securities available for sale

     907    189    (66 )
    

  
  

Comprehensive income (loss)

   $ 10,724    1,987    (1,150 )
    

  
  

 

See “Notes to Unaudited Consolidated Financial Statements.”

 

8


Table of Contents

CENTENNIAL BANK HOLDINGS, INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

 

     (Successor)

    Predecessor

 
    

Nine months Ended
September 30,

2005
(Successor)


    Period from July
17, 2004 to
September 30,
2004


    Period from
January 1, 2004
to July 16, 2004


 
     (Unaudited)     (Unaudited)        

Cash flows from operating activities:

                        

Net income

   $ 9,817       1,798       (1,084 )

Adjustments to reconcile net income to net cash provided by operating activities:

                     —    

Depreciation and amortization of premises and equipment

     2,888       211       600  

Equity based compensation

     275       —         —    

Loss on disposition of discontinued operations

     1,584               —    

Gain on sale of foreclosed assets

     (503 )     2       18  

Loss on disposal of premises and equipment

     (98 )     (18 )     (51 )

Gain on sale of securities and mortgages

     (1,071 )     (36 )     66  

Stock dividends received

     (211 )     (25 )     (40 )

Net accretion and amortization on securities

     636       12       (38 )

Provision for loan losses

     1,700       —         4,700  

Deferred income tax benefit

     (3,323 )     1,379       (1,616 )

Amortization of intangibles and purchase accounting adjustments

     9,157       182       —    

Proceeds from sales of loans held for sale

     78,056       —         —    

Originations of loans held for sale

     (75,708 )     —         —    

Other

     559       —         —    

Net change in:

                        

Accrued interest receivable and other assets

     (15,553 )     (1,153 )     (991 )

Accrued interest payable and other liabilities

     12,669       262       1,675  
    


 


 


Net cash provided by operating activities

     20,874       2,614       3,239  
    


 


 


Cash flows from investing activities (net of assets and liabilities acquired in acquisitions):

                        

Cash paid for acquisitions, net of cash acquired of $19,884

     —         (135,116 )     —    

Activity in available-for-sale securities:

                        

Sales, maturities, prepayments, and calls

     135,374       15,044       151,089  

Purchases

     (143,164 )     (37,370 )     (153,116 )

Activity in held-to-maturity securities:

                        

Maturities, prepayments, and calls

     250       250       174  

Loan originations and principal collections, net

     (125,525 )     3,243       12,676  

Proceeds from sales of foreclosed assets

     5,204       301       4,260  

Proceeds from sale of other investments

     1,516       —         —    

Proceeds from sale of premises and equipment

     373       —         172  

Payments on discontinued operations

     (74 )     —         —    

Additions to premises and equipment

     (11,910 )     (140 )     (187 )
    


 


 


Net cash provided (used) by investing activities

     (137,956 )     (153,788 )     15,068  
    


 


 


Cash flows from financing activities (net of assets and liabilities acquired in acquisitions):

                        

Net change in deposits

     42,466       (38,631 )     (16,986 )

Net change in short-term borrowings

     58,405       10,558       (21,570 )

Net proceeds from (payments on) long-term debt

     20,163       (85 )     19,423  

Net change in federal funds purchased and repurchase agreements

     3,813       19,366       (2,976 )

Net proceeds from sale of common stock

     —         179,450       2,186  

Repurchase of common stock

     (4,659 )     —         (2,716 )
    


 


 


Net cash provided (used) by financing activities

     120,188       170,658       (22,639 )
    


 


 


Net change in cash and cash equivalents

     3,106       19,484       (4,332 )

Cash and cash equivalents, beginning of period

     90,927       —         23,731  
    


 


 


Cash and cash equivalents, end of period

   $ 94,033       19,484       19,399  
    


 


 


Supplemental disclosure of cash flow activity:

                        

Interest paid on deposits and borrowed funds

   $ 20,236     $ 1,340     $ 7,034  
    


 


 


Income taxes paid

   $ 5,798     $ 1,436     $ 664  
    


 


 


Supplemental disclosure of noncash activities:

                        

Loans transferred to other real estate owned

   $ 1,791     $ 852     $ 1,859  
    


 


 


 

See “Notes to Unaudited Consolidated Financial Statements.”

 

9


Table of Contents

 

CENTENNIAL BANK HOLDINGS, INC.

AND SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

(1) Organization, Operations and Basis of Presentation

 

Centennial Bank Holdings, Inc. and Subsidiaries (the Company), is primarily engaged in the business of banking, providing services to individual and corporate customers principally in Colorado.

 

On July 16, 2004, Centennial Bank Holdings, Inc. and its wholly owned subsidiary, Centennial Bank of the West (Predecessor) was acquired by Centennial C Corp (CCC) in a cash purchase funded by the proceeds of CCC’s sale of 18,500,000 shares of its common stock. Centennial Bank Holdings, Inc. was then merged with and into CCC, which changed its name to Centennial Bank Holdings, Inc. (Successor). For presentation purposes, consolidated statements of operations and comprehensive income (loss) are presented for the three and nine months ended September 30, 2005 and the period from July 17, 2004 to September 30, 2004 (Successor) and the periods from July 1, 2004 to July 16, 2004 and January 1, 2004 to July 16, 2004 (Predecessor). Consolidated cash flows are presented for the nine months ended September 30, 2005 (Successor) and the periods from July 17, 2004 to September 30, 2004 and January 1, 2004 to July 16, 2004 (Predecessor). On December 31, 2004, Centennial Bank Holdings, Inc. purchased all of the outstanding stock of Guaranty Corporation. Guaranty Corporation’s subsidiaries included Guaranty Bank and Trust Company, First National Bank of Strasburg, and Collegiate Peaks Bank. Accordingly, the consolidated balance sheets as of September 30, 2005 and December 31, 2004 (Successor) include the accounts of Guaranty Corporation and subsidiaries. These acquisitions were accounted for under the purchase method of accounting through which the purchase price was allocated to the tangible and intangible assets and liabilities acquired. The accompanying Predecessor financial statements do not reflect the effects of purchase accounting. As such, the consolidated financial statements of the Company are not comparable to the Predecessor financial statements for the periods prior to the acquisitions.

 

  (a) Basis of Presentation

 

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

 

  (b) Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheet and income and expense for the periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes include the allowance for loan losses, the valuation of foreclosed real estate, deferred tax assets and liabilities, goodwill and other intangible assets.

 

  (c) Impairment of Long-Lived Assets

 

In accordance with SFAS No. 144, long-lived assets, such as property, fixtures and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstance indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset, less costs to sell. Assets to be disposed are separately presented in the consolidated balance sheet and reported at the lower of the carrying value or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale are presented separately in the appropriate asset and liability sections of the consolidated balance sheet.

 

  (d) Goodwill and Other Intangible Assets

 

Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets associated with acquisition transactions. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, (SFAS No. 141), and SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies that intangible assets acquired in a purchase method business combination must meet certain criteria to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions in SFAS No. 142. SFAS No. 142 requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets (SFAS No. 144).

 

  (e) Segments of an Enterprise and Related Information

 

The operating information used by the Company’s chief executive officer for purposes of assessing performance and making operating decisions about the Company is the consolidated financial statements presented in this report. The Company has three active operating subsidiaries, namely, the bank subsidiaries, otherwise known as Centennial

 

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Bank of the West, Guaranty Bank and Trust Company, and Collegiate Peaks Bank. The Company applies the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, in determining its reportable segments and related disclosures. None of the Company’s other subsidiaries meets the 10% threshold for disclosure under SFAS No. 131.

 

  (f) Stock Incentive Plan

 

On April 5, 2005, the Company’s board of directors adopted the 2005 Stock Incentive Plan, or the Plan, subject to stockholder approval. The Plan provides for grants of stock options, restricted stock awards, restricted stock unit awards, stock awards with performance, service and market vesting conditions, stock appreciation rights, and other equity-based awards to key employees, nonemployee directors, consultants and prospective employees. At the Company’s annual meeting on June 2, 2005, the Company’s stockholders approved the Plan. In accordance with SFAS 123(R), Share-Based Payment, the Company records cost of services based on the fair value of the equity instruments issued as estimated at the grant date. The costs are recorded over the estimated requisite service period.

 

On August 11, 2005, pursuant to the Plan, the Company granted 1,178,816 shares of stock with performance or service vesting conditions. As of September 30, 2005, the Company had a total of 1,176,316 unvested shares of stock issued, which consisted of 996,500 of unvested shares with unfulfilled performance conditions and 182,316 unvested shares with unfulfilled service conditions. In accordance with SFAS 128 (As Amended), Earnings Per Share, diluted earnings per share does not include the potentially dilutive shares that may result from the stock awards with performance-based vesting conditions that may eventually vest.

 

The shares granted with performance vesting conditions vest based on the Company achieving certain performance measures. The Company expects 50% of the performance-based awards to vest based on financial results to be achieved for the year ending December 31, 2007, and the remaining 50% of the performance-based awards to vest during the years ending December 31, 2008 through December 31, 2011. The shares granted with service-based vesting conditions vest over a period of one to four years from the date of grant. Compensation expense related to the stock awards for the three and nine months ended September 30, 2005 was $275,000. No stock-based compensation expense was incurred in 2004.

 

  (g) Reclassifications

 

Certain amounts in prior year financial statements have been reclassified to conform to the current year presentation.

 

(2) Securities

 

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

 

     September 30, 2005

    

Amortized

Cost


  

Gross

Unrealized

Gains


  

Gross

Unrealized

Losses


    Fair
Value


     (In thousands)

Securities available for sale:

                      

U.S. treasuries

   $ 16,262    —      (85 )   16,177

U.S. government agencies

     9,491    —      (8 )   9,483

State and municipal

     53,277    1,484    (28 )   54,733

Mortgage-backed

     41,002    93    (398 )   40,697

Marketable equity securities

     1,003    4    —       1,007
    

  
  

 

Securities available for sale

   $ 121,035    1,581    (519 )   122,097
    

  
  

 

Securities held to maturity:

                      

Mortgage-backed

   $ 386    —      —       386
    

  
  

 
     December 31, 2004

    

Amortized

Cost


  

Gross

Unrealized

Gains


  

Gross

Unrealized

Losses


    Fair
Value


     (In thousands)

Securities available for sale:

                      

U.S. treasuries

   $ 38,170    —      —       38,170

U.S. government agencies

     8,482    —      (3 )   8,479

State and municipal

     34,320    1          34,321

Mortgage-backed

     43,748    124    (159 )   43,713

Marketable equity securities

     1,004    —      —       1,004
    

  
  

 

Securities available for sale

   $ 125,724    125    (162 )   125,687
    

  
  

 

Securities held to maturity:

                      

Mortgage-backed

   $ 640    5    —       645
    

  
  

 

 

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(3) Loans

 

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

 

     September 30,
2005


    December 31,
2004


 
     (In thousands)  

Loans on real estate:

              

Residential and commercial mortgage

   $ 507,813     638,007  

Construction

     451,137     308,545  

Equity lines of credit

     75,982     81,936  

Commercial loans

     587,762     458,171  

Agricultural loans

     65,466     62,199  

Lease financing

     785     912  

Installment loans to individuals

     50,776     64,625  

Overdrafts

     1,063     5,589  

SBA and other

     24,493     22,004  
    


 

       1,765,277     1,641,988  

Less:

              

Allowance for loan losses

     (25,019 )   (25,022 )

Net of unearned discount

     (1,744 )   (167 )
    


 

       1,738,514     1,616,799  

Loans held for sale

     6,015     7,301  
    


 

     $ 1,744,529     1,624,100  
    


 

 

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

 

     Three Months Ended
September 30,
2005


    Nine months Ended
September 30,
2005


 
     (In thousands)  

Balance, beginning of period

   $ 25,535     $ 25,022  

Provision for loan losses

     —         1,700  

Loans charged off

     (592 )     (2,481 )

Recoveries on loans previously charged-off

     76       778  
    


 


Balance, end of period

   $ 25,019     $ 25,019  
    


 


 

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

 

    

September 30,

2005


  

December 31,

2004


     (In thousands)

Impaired loans with a specific valuation allowance

   $ 23,383    27,970

Impaired loans without a specific valuation allowance

     4,374    7,632
    

  

Total impaired loans

   $ 27,757    35,602
    

  

Valuation allowance related to impaired loans

   $ 10,445    9,290
    

  

Average investment in impaired loans

   $ 35,459    11,422
    

  

 

Due to a recovery on an impaired loan, interest income of $245,000 was recognized on impaired loans during the nine months ended September 30, 2005. No interest income was recognized for the periods from January 1, 2004 to July 16, 2004 and July 17, 2004 to September 30, 2004. At September 30, 2005, no additional funds were committed to be advanced in connection with impaired loans. At September 30, 2005 and December 31, 2004, the total investment in loans on nonaccrual was approximately $8,352,000 and $11,905,000, respectively.

 

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(4) Goodwill and Other Intangible Assets

 

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

 

Intangible assets with definite lives are amortized over their respective estimated useful lives of two to 14 years to their estimated residual values and reviewed for impairment annually. The amortization expense represents the estimated decline in the value of the underlying deposits or loan customers acquired.

 

The changes in the carrying amount of goodwill for the periods ended September 30, 2005 and December 31, 2004 are as follows:

 

     Nine months Ended
September 30, 2005


   Year Ended
December 31, 2004


 
     (In thousands)  

Balance, beginning of period

   $ 328,185    9,226  

Elimination of preacquisition goodwill

     —      (9,226 )

Goodwill acquired on July 17, 2004

     —      104,684  

Goodwill acquired on December 31, 2004

     —      223,501  

Adjustment to goodwill

             

Increase related to income taxes

     3,441    —    
    

  

Balance, end of period

   $ 331,626    328,185  
    

  

 

The Company revised its estimated value for its discontinued operations in the second quarter of 2005 based on additional information available related to the sale of the Collegiate Peaks Bank subsidiary. The Company determined that it would have an estimated tax liability associated with the sale of Collegiate Peaks Bank, resulting in additional goodwill of $3,441,000.

 

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

 

    

Useful

life


   September 30,
2005


    December 31,
2004


 
          (In thousands)  

Non-compete employment agreement

   2 years    $ 3,606     3,720  

Core deposit intangible Centennial Bank

   10 years      4,715     4,715  

Core deposit intangible Guaranty Bank

   9 to 13.6 years      45,700     45,702  
         


 

            54,021     54,137  

Accumulated amortization

          (9,934 )   (777 )
         


 

          $ 44,087     53,360  
         


 

 

Amortization expense for intangible assets for the nine months ended September 30, 2005 and the period from July 17, 2004 to September 30, 2004 was $9,157,000 and $296,000, respectively.

 

(5) Borrowings

 

Borrowed funds include Treasury Tax and Loan notes, Federal Home Loan Bank (“FHLB”) borrowings, and a line of credit with First Tennessee. The FHLB borrowings are collateralized by a blanket pledge and security agreement. The Company had $118,335,000 and $39,770,000 outstanding under these borrowings at September 30, 2005 and December 31, 2004, with a total commitment of $275,219,000 at September 30, 2005.

 

(6) Subordinated Debentures and Trust Preferred Securities

 

Excluding unamortized premium of $247,000, the Company had a $41,229,000 aggregate balance of subordinated debentures outstanding with a weighted average cost of 7.9% at September 30, 2005. The subordinated debentures were issued in four separate series. Each issuance has a maturity of thirty years from its date of issue. The subordinated debentures were issued to trusts established by us, which in turn issued $40 million of trust preferred securities. Generally and with certain limitations, the Company is permitted to call the debentures subsequent to the first five or ten years, as applicable,

 

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after issue if certain conditions are met, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment of the trusts, the debentures or the preferred securities.

 

The following table summarizes the terms of each subordinated debenture issuance at September 30, 2005 (dollars in thousands):

 

Series


   Date
Issued


   Amount

   Maturity
Date


   Call
Date*


   Fixed or
Variable Rate


   Rate Adjuster

    Rate at
September
30, 2005


    Next Rate
Reset Date


CenBank Trust I

   9/7/2000    $ 10,310    9/7/2030    9/7/2010    Fixed    N/A     10.6 %   N/A

CenBank Trust II

   2/22/2001      5,155    2/22/2031    2/22/2011    Fixed    N/A     10.2 %   N/A

CenBank Trust III

   4/15/2004      15,454    4/15/2034    4/15/2009    Variable    LIBOR + 2.65 %   6.3 %   10/15/2005

Guaranty Capital Trust III

   7/7/2003      10,310    7/7/2033    7/7/2008    Variable    LIBOR + 3.10 %   6.7 %   10/15/2005

* Call date represents the earliest call date by the Company without penalty.

 

(7) Commitments

 

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

 

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

 

At the dates indicated, the following financial instruments were outstanding whose contract amounts represented credit risk:

 

     September 30,
2005
(Successor)


   December 31,
2004
(Successor)


     (In thousands)

Commitments to extend credit

   $ 563,214    468,059

Standby letters of credit

     33,425    71,266

Commercial letters of credit

     232    574

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Several of the commitments may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer. Commitments to extend credit under overdraft protection agreements are commitments for possible future extensions of credit to existing deposit customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

 

Stand-by letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Substantially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting those commitments if deemed necessary.

 

The Company enters into commercial letters of credit on behalf of its customers which authorize a third party to draw drafts on the Company up to a stipulated amount and with specific terms and conditions. A commercial letter of credit is a

 

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conditional commitment on the part of the Company to provide payment on drafts drawn in accordance with the terms of the commercial letter of credit.

 

(8) Capital Ratios

 

At September 30, 2005 and December 31, 2004, the Company had leverage ratios of 9.01% and 8.70%, Tier 1 risk-weighted capital ratios of 9.61% and 9.39%, and total risk-weighted capital ratios of 10.86% and 10.64%, respectively. The Company actively monitors its regulatory capital ratios to ensure that the Company and its bank subsidiaries are well capitalized under the applicable regulatory framework.

 

(9) Business Combination

 

On December 20, 2004, the Company entered into a definitive agreement to acquire all of the outstanding stock of First MainStreet Financial, Ltd. in exchange for approximately 10 million Company shares with an estimated value of $10.50 per share. The acquisition of First MainStreet was consummated as of October 1, 2005, pursuant to which First MainStreet Bank, N.A. was merged with and into Centennial Bank of the West.

 

(10) Assets Held for Sale and Discontinued Operations

 

On August 25, 2005, the Company entered into a definitive agreement to sell 100% of the outstanding stock of Collegiate Peaks Bank. The transaction is subject to regulatory approvals and is expected to close late in the fourth quarter of 2005. As of September 30, 2005, the Company has recorded an impairment of fair value for Collegiate Peaks Bank of $1,509,000. The $1,509,000 impairment consisted of 2005 net income of $790,000 that will not be reflected as an adjustment to the sale price, a $794,000 reduction to the value of the Collegiate Peaks Bank from its estimated value at December 31, 2004 of $18,434,000, offset by the payment of $74,000 of disposition costs during the nine months ended September 30, 2005. Earnings from Collegiate Peaks between September 30, 2005 and its disposition date will be offset by an increased impairment, as the purchase price will not be adjusted for the additional earnings. The Company had no income from operations from the subsidiary in 2004, as the subsidiary was acquired in connection with the purchase of Guaranty Corporation on December 31, 2004. The following table presents the assets and liabilities of the subsidiary which are held for sale at September 30, 2005 and the summary results of operations of the subsidiary for the nine months ended September 30, 2005:

 

     September 30, 2005

 
     (In thousands)  

Assets held for sale:

        

Cash and cash equivalents

   $ 17,174  

Investments

     16,377  

Loans and leases, net

     51,060  

Other intangible assets

     3,551  

Goodwill

     8,922  

Other assets

     3,222  

Fair value adjustment

     (1,509 )
    


Total assets held for sale

   $ 98,797  
    


Liabilities associated with assets held for sale:

        

Deposits

   $ 74,449  

Securities sold under repurchase agreements

     4,729  

Other liabilities

     1,676  
    


Total liabilities associated with assets held for sale

   $ 80,854  
    


 

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Table of Contents
     Nine months Ended
September 30, 2005


     (In thousands)

Interest income

   $ 3,499

Noninterest income

     317

Net income

     790

 

(11) Subsequent Events

 

On June 24, 2005, the Company announced the signing of a definitive agreement to acquire all the outstanding stock and options of Foothills Bank for $27.5 million in cash. Foothills Bank is located in Wheat Ridge, Colorado, and had $137 million in assets, $93 million in net loans and $126 million in deposits at September 30, 2005. This transaction was consummated as of November 1, 2005, pursuant to which Foothills Bank was merged with and into Guaranty Bank and Trust Company.

 

On November 8, 2005, the Company entered into a $70 million 364-day Revolving Credit Agreement with U.S. Bank National Association. This new revolving credit facility replaces the $20 million revolving credit facility the Company had in place with First Tennessee Bank National Association, which was terminated in connection with the Company entering into the new credit facility with U.S. Bank. The new credit facility is secured by a pledge of 100% of the outstanding capital stock of the Company’s bank subsidiary, Guaranty Bank and Trust Company, pursuant to a Pledge Agreement, dated as of November 8, 2005.

 

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

 

The following is management’s discussion and analysis of the major factors that influenced our financial performance for the three months and nine months ended September 30, 2005. This analysis should be read in conjunction with our 2004 consolidated financial statements as filed on our Form S-1 registration statement and with the unaudited financial statements and notes as set forth in this report. Unless the context requires otherwise, the terms “Company,” “us,” “we,” and “our” refers to Centennial Bank Holdings, Inc. on a consolidated basis.

 

Forward-Looking Information

 

Certain statements contained in this Quarterly Report on Form 10-Q (“Report”), including, without limitation, statements containing the words “believes”, “anticipates”, “intends”, “expects”, and words of similar import, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in those areas in which we operate, demographic changes, competition, fluctuations in interest rates, continued ability to attract and employ qualified personnel, changes in business strategy or development plans, changes in governmental regulation, credit quality, the availability of capital to fund the expansion of our business, economic, political and global changes arising from natural disasters, the war on terrorism, the conflict with Iraq and its aftermath, and other “Risk Factors” referenced in our Form S-1 registration statement, as supplemented from time to time. When relying on forward-looking statements to make decisions with respect to our Company, investors and others are cautioned to consider these and other risks and uncertainties. We can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. The forward-looking statements are made as of the date of this Report, and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. All forward-looking statements contained in this Report are expressly qualified by these cautionary statements.

 

Overview

 

We are a bank holding company providing banking and other financial services throughout our targeted Colorado markets to consumers and to small and medium-sized businesses, including the owners and employees of those businesses. We offer an array of banking products and services to the communities we serve, including accepting time and demand deposits, originating commercial loans, real estate loans, including construction loans and mortgage loans, Small Business Administration guaranteed loans and consumer loans. We derive our income primarily from interest received on real estate-related loans, commercial loans and leases and consumer loans and, to a lesser extent, fees from the sale or referral of loans, interest on investment securities and fees received in connection with servicing loan and deposit accounts. Our major operating expenses are the interest we pay on deposits and borrowings and general operating expenses. We rely primarily on locally generated deposits to provide us with funds for making loans.

 

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

 

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Background

 

On March 3, 2004, we were incorporated in Delaware under the name Centennial C Corp. On July 16, 2004, in a cash purchase funded by the proceeds of our sale of 18,500,000 shares of our common stock, we acquired our predecessor and changed our name to Centennial Bank Holdings, Inc. On December 31, 2004, we acquired Guaranty Corporation, a bank holding company and a Colorado corporation, which operated 18 branches in Colorado through its three banking subsidiaries. The acquisitions were accounted for using the purchase method of accounting. Centennial’s financial statements as of December 31, 2004 present the consolidated financial position of Centennial at December 31, 2004, which includes Guaranty.

 

For purposes of comparison and analysis of the three months ended September 30, 2005 to the three months ended September 30, 2004, the period from July 17, 2004 to September 30, 2004 has been combined with the Predecessor period from July 1 to July 16, 2004; and such combined period is hereinafter referred to as the “combined three-month period.” For purposes of comparison and analysis of the nine months ended September 30, 2005 to the nine months ended September 30, 2004, the period from July 17, 2004 to September 30, 2004 has been combined with the Predecessor period from January 1 to July 16, 2004 and such combined period is hereinafter referred to as the “combined nine-month period.”

 

Critical Accounting Policies

 

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

 

Allowance for Loan Losses

 

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

 

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

 

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

 

Investment in Debt and Equity Securities

 

We classify our investments in debt and equity securities as either held-to-maturity or available-for-sale in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Securities classified as held-to-maturity are recorded at cost or amortized cost. Available-for-sale securities are

 

17


Table of Contents

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

 

Deferred Income Taxes

 

Deferred income taxes reflect the estimated future tax effects of temporary differences between the reported amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced.

 

Impairment of Goodwill

 

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

 

Purchase Accounting

 

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations (SFAS No. 141), and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after September 30, 2001 as well as all purchase method business combinations completed after September 30, 2001. SFAS No. 141 also specifies that intangible assets acquired in a purchase method business combination must meet certain criteria to be recognized and reported apart from goodwill. In connection with our mergers and acquisitions, we estimate the fair value of assets and liabilities as required, including intangible assets, based on various methods, including market prices, discounted cash flows, and other present value valuation techniques. The valuation methods we use may require management to make numerous estimates and assumptions.

 

This discussion has highlighted those accounting policies that we consider to be critical to our financial reporting process. However, all the accounting policies are important, and therefore you are encouraged to review each of the policies included in Note 2 to our 2004 consolidated financial statements set forth in our Form S-1 registration statement as supplemented from time to time, to gain a better understanding of how our financial performance is measured and reported.

 

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Table of Contents

Results of Operations

 

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

 

    Three Months Ended September 30,

    Nine months Ended September 30,

 

(In thousands, except share data)


  2005
(Successor)


  2004
(Combined)


    Change -
Favorable
(Unfavorable)


    2005
(Successor)


    2004
(Combined)


    Change -
Favorable
(Unfavorable)


 

Results of Operations:

                                             

Interest income

  $ 34,514   $ 10,419     $ 24,095     $ 96,925     $ 31,541     $ 65,384  

Interest expense

    8,641     2,220       (6,421 )     19,854       8,492       (11,362 )
   

 


 


 


 


 


Net interest income

    25,873     8,199       17,674       77,071       23,049       54,022  

Provision for loan losses

    —       3,700       3,700       1,700       4,700       3,000  
   

 


 


 


 


 


Net interest income after provision for losses

    25,873     4,499       21,374       75,371       18,349       57,022  

Noninterest income

    2,732     1,209       1,523       7,649       3,225       4,424  

Noninterest expense

    20,727     7,982       (12,745 )     66,927       19,070       (47,857 )
   

 


 


 


 


 


Income (loss) before income taxes

    7,878     (2,274 )     10,152       16,093       2,504       13,589  

Provision for income taxes

    2,748     91       (2,657 )     5,482       1,790       (3,692 )
   

 


 


 


 


 


Income from continuing operations

    5,130     (2,365 )     7,495       10,611       714       9,897  

Income (loss) from discontinued operations

    —       —         —         (794 )     —         (794 )
   

 


 


 


 


 


Net income (loss)

  $ 5,130   $ (2,365 )   $ 7,495     $ 9,817     $ 714     $ 9,103  
   

 


 


 


 


 


Share Data:

                                             

Basic earnings per share

  $ 0.10   $ (0.12 )(a)     nm     $ 0.19     $ 0.04 (a)     nm  

Diluted earnings per share

  $ 0.10   $ (0.12 )(a)     nm     $ 0.19     $ 0.04 (a)     nm  

Average shares outstanding

    51,902,937     19,000,000       nm       52,137,132       19,000,000       nm  

Diluted average shares outstanding

    52,002,019     19,000,000       nm       52,170,523       19,000,000       nm  

 

(a)     Represents combined net loss of Predecessor and Successor divided by Successor weighted average basic or diluted shares outstanding for the respective period.
nm   -   Change in earnings (loss) per share is not meaningful due to the change in outstanding shares resulting from the acquisition of the predecessor in July 2004.

 

Net income increased $9.1 million from the combined nine-month period ended September 30, 2004 to $9.8 million for the nine months ended September 30, 2005. Excluding the net income of $8.8 million from the acquisition of Guaranty, the most significant changes between the nine-month period ended September 30, 2005 and the combined nine-month period ended September 30, 2004 are as follows: an increase in the provision for loan loss of $3.0 million and an increase in noninterest expenses of $3.7 million. During the nine months ended September 30, 2005, we experienced $0.8 million loss associated with our decision to sell our Collegiate Peaks Bank subsidiary, which represents the difference between the expected net proceeds from the sale and the amount estimated as its value at December 31, 2004.

 

Net interest income increased $54.0 million to $77.1 million from combined nine-month period ended September 30, 2004. The acquisition of Guaranty accounted for an increase of $52.8 million. Excluding the net interest income from Guaranty, net interest income increased by $1.3 million for the nine months ended September 30, 2005 from $23.0 million for the combined nine-month period ended September 30, 2004. This increase in net interest income was composed of a $3.3 million increase in interest income against a $2.0 million increase in interest expense.

 

Net Interest Income and Net Interest Margin

 

The Company had net interest income of $77.1 million and $25.9 million for the nine months and three months ended September 30, 2005. The Company’s interest income was $96.9 million and $34.5 million for the nine and three months ended September 30, 2005. Interest expense was $19.9 million and $8.6 million for the nine and three months ended September 30, 2005. Interest income and interest expense increased by $63.5 million and $10.7 million, respectively, in 2005 from the combined nine-month period ended September 30, 2004 due to the Guaranty acquisition.

 

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Table of Contents

The net interest income for the nine months ended September 30, 2005 increased by $54.0 million to $77.1 million from the combined nine-month period ended September 30, 2005. Net interest income increased by $17.7 million to $25.9 million for the three months ended September 30, 2005 from the combined three-month period ended September 30, 2004. The acquisition of Guaranty accounted for $52.8 million and $18.0 million for the nine and three-month period increases, respectively. Excluding the impact caused by the Guaranty transaction, the net interest income for the nine month period ended September 30, 2005 increased by $1.3 million, or 5.5%, from the combined nine-month period ended September 30, 2004. The primary driver of this increase was an increase in interest rates.

 

The net interest margin for the nine months ended September 30, 2005 was 5.56%, with a spread of 5% between the earnings on assets of 7.0% and cost of interest bearing liabilities of 2.0%. Our interest margin for the three months ended September 30, 2005 was 5.45%, with an interest spread of 4.7% between our yield on interest bearing assets and cost of interest bearing liabilities. The increasing interest rate environment led to an increase in both our yield on assets and cost of funds during the three months ended September 30, 2005, with the cost of fund increasing more than the yield on the assets. The lower interest margin for the three months ended September 30, 2005 as compared to the nine months ended September 30, 2005 is the result of a temporary increase to our certificate of deposit rates and money market rates that was implemented to increase our deposits.

 

20


Table of Contents

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

 

    Three months Ended September 30, 2005

    Nine months Ended September 30, 2005

 
    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:

                                   

Loans held for investment(1)(2)(3)

  $ 1,728,822   $ 32,909   7.55 %   $ 1,684,687   $ 91,989   7.30 %

Investments:

                                   

Taxable(1)

    75,816     638   3.34 %     84,940     2,121   3.34 %

Tax-exempt(4)

    54,822     626   4.53 %     46,279     1,797   5.19 %

Equity securities

    20,435     230   4.47 %     15,563     597   5.13 %

Other earning assets

    15,880     111   2.77 %     22,885     421   2.45 %
   

 

 

 

 

 

Total interest earning assets

    1,895,775     34,514   7.22 %     1,854,354     96,925   6.99 %

Non-earning assets:

                                   

Cash and due from banks

    62,416                 57,901            

Other assets

    514,748                 514,007            
   

             

           

Total assets

  $ 2,472,939               $ 2,426,262            
   

             

           

LIABILITIES AND STOCKHOLDERS’ EQUITY:

                                   

Interest-bearing liabilities:

                                   

Deposits:

                                   

Interest-bearing demand

  $ 106,906   $ 103   0.38 %   $ 113,303   $ 300   0.35 %

Money market

    498,507     2,605   2.07 %     514,444     6,298   1.64 %

Savings

    76,858     139   0.72 %     80,174     425   0.71 %

Time certificates of deposit

    494,306     3,801   3.05 %     455,962     8,018   2.35 %
   

 

 

 

 

 

Total interest-bearing deposits

    1,176,577     6,648   2.24 %     1,163,883     15,041   1.73 %

Borrowings:

                                   

Repurchase agreements

    31,252     249   3.16 %     30,330     608   2.68 %

Federal funds purchased

    4,771     44   3.66 %     5,279     132   3.34 %

Borrowings and subordinated debentures

    157,590     1,700   4.28 %     131,082     4,076   4.16 %
   

 

 

 

 

 

Total interest-bearing liabilities

    1,370,190     8,641   2.50 %     1,330,574     19,854   2.00 %

Noninterest-bearing liabilities:

                                   

Demand deposits

    482,336                 480,793            

Other liabilities

    102,445                 96,879            
   

             

           

Total liabilities

    1,954,971                 1,908,246            

Stockholders’ equity

    517,968                 518,016            
   

             

           

Total liabilities and stockholders’ equity

  $ 2,472,939               $ 2,426,262            
   

             

           

Net interest income

        $ 25,873               $ 77,071      
         

             

     

Net interest margin

              5.41 %               5.56 %
               

             

 

(1) Yields on loans and securities have not been adjusted to a tax-equivalent basis because the impact is not material.

 

(2) Includes average non-accrual loans of $9.2 million and $10.3 million for the three and nine month periods ended September 30, 2005, respectively.

 

(3) Net loan fees of $1.8 million and $5.9 million for the three and nine month periods ended September 30, 2005, respectively, are included in the yield computation.

 

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

 

Provision for Loan Losses

 

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

 

We recorded a charge to earnings through the provision for loan losses of $1.7 million for the nine months ended September 30, 2005 and $4.7 million for the combined nine-month period ended September 30, 2004. We recorded the 2005 provision due to the deterioration of several large loans during the first three months of 2005. The 2004 change reflected a $3.7 million charge during the combined three-month period ended September 30, 2004 that was due to a deterioration of several large loans in the loan portfolio.

 

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Table of Contents

Noninterest Income

 

The following table presents the major categories of noninterest income:

 

     Nine months Ended September 30,

 
     2005

  

Combined

2004


    Increase
(Decrease)


 
     (In thousands)  

Customer service and other fees

   $ 5,957    $ 2,974     $ 2,983  

Gain (loss) on sale of securities

     11      (66 )     75  

Gain on sale of assets

     601      233       368  

Net gain on sale of loans

     1,060      —         1,060  

Other

     20      84       (62 )
    

  


 


Total noninterest income

   $ 7,649    $ 3,225     $ 4,424  
    

  


 


 

Total noninterest income of $7.6 million for the nine months ended September 30, 2005 increased $4.4 million over the combined nine-month period ended September 30, 2004. The acquisition of Guaranty resulted in a $5.0 million increase to noninterest income. Excluding the impact of the Guaranty transaction, noninterest income decreased by $0.3 million, primarily due to a decrease in service charges and insufficient check fees.

 

Noninterest Expense

 

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

 

     Nine months Ended September 30,

     2005

  

Combined

2004


   Increase

     (In thousands)

Salaries and employee benefits

   $ 30,224    $ 8,938    $ 21,286

Occupancy

     4,939      1,635      3,304

Furniture and equipment

     2,590      910      1,680

Amortization

     9,157      296      8,861

Professional services

     1,795      644      1,151

Merger, acquisition and transition expenses

     8,436      2,240      6,196

Other

     9,786      4,407      5,379
    

  

  

Total noninterest expense

   $ 66,927    $ 19,070    $ 47,857
    

  

  

 

Total noninterest expense increased $47.9 million from the combined nine-month period ended September 30, 2004 to $66.9 million for the nine months ended September 30, 2005. Excluding the $44.2 million of noninterest expenses that are the result of the Guaranty acquisition, we incurred an increase in our noninterest expenses of $3.7 million. The primary drivers of the $3.7 million expense were $1.1 million in salaries and benefits, $1.4 million of merger and acquisition costs, $1.0 million in professional services, and $0.9 million of amortization expense. These increases were offset by $0.7 million in reduced costs for other noninterest expenses. The increase in salaries and benefits is the result of compensation programs for designated bank and holding company employees and officers deemed to be key contributors to the success of the Company. The costs associated with the programs have been recorded at the holding company. The merger and acquisition costs incurred during 2005 are associated with the acquisition and integration of Guaranty, while the costs incurred during the combined nine-month period ended September 30, 2004 constituted acquisition related costs for the acquisition of our Predecessor. Our professional services expense has increased primarily due to the costs of registering and operating as a company with publicly traded securities. We have contracted for internal audit and Sarbanes-Oxley implementation services and changed auditors in 2005. The increased amortization expense is the result of amortization of the core deposit intangible asset that was recorded in connection with the acquisition of our Predecessor.

 

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Table of Contents

Financial Condition

 

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

 

    

At September 30,

2005


   At December 31,
2004


   Increase
(Decrease)


     (In thousands)

Earning assets

   $ 1,917,580    $ 1,828,853    $ 88,727

Total assets

     2,540,169      2,399,201      140,968

Deposits

     1,721,609      1,678,499      43,110

 

Loans

 

The following table sets for the amount of our loans outstanding at the dates indicated.

 

     September 30,
2005


    December 31,
2004


    Increase
(Decrease)


    %
Change


 
     (In thousands)  

Real estate—mortgage

   $ 583,795     $ 719,943     $ (136,148 )   (18.9 )%

Real estate—construction

     451,137       308,545       142,592     46.2 %

Commercial

     587,762       458,171       129,591     28.3 %

Agricultural

     65,466       62,199       3,267     5.3 %

Consumer

     50,776       64,625       (13,849 )   (21.4 )%

Leases receivable and other

     26,341       28,505       (2,164 )   (7.6 )%
    


 


 


 

Total gross loans

     1,765,277       1,641,988       123,289     7.5 %

Less: allowance for loan losses

     (25,019 )     (25,022 )     (3 )   0.0 %

Unearned discount

     (1,744 )     (167 )     1,577     944.3 %
    


 


 


 

Net loans

   $ 1,738,514     $ 1,616,799     $ 121,715     7.5 %
    


 


 


 

Loans held for sale at lower of cost or market

   $ 6,015     $ 7,301     $ (1,286 )   (17.6 )%
    


 


 


 

 

Our lending portfolio increased 7.5%, or $121.7 million from December 31, 2004. We maintained a diversified loan portfolio and experienced balanced growth throughout our loan portfolio. The changes in balances for real estate – mortgage, real estate – construction and commercial loans was primarily driven by a change in classification methodology implemented after the acquisition of Guaranty to ensure consistency between the bank subsidiaries.

 

Nonperforming Assets

 

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

 

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

 

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

 

     September 30,
2005


    December 31,
2004


    Increase
(Decrease)


 
     (Dollars in thousands)  

Nonaccrual loans, not restructured

   $ 8,352     $ 11,905     $ (3,553 )

Accruing loans past due 90 days or more

     1,806       2,494       (688 )
    


 


 


Total nonperforming loans (NPLs)

     10,158       14,399       (4,241 )

Other real estate owned

     2,532       5,707       (3,175 )
    


 


 


Total nonperforming assets (NPAs)

   $ 12,690     $ 20,106     $ (7,416 )
    


 


 


Selected ratios:

                        

NPLs to total loans held for investment

     0.58 %     0.88 %     (0.30 )%

NPAs to total assets

     0.50 %     0.84 %     (0.34 )%

 

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Table of Contents

Nonperforming loans decreased by $4.2 million from December 31, 2004 to $10.2 million as of September 30, 2005. The majority of this decrease is due to a $3.6 million decrease in the nonaccrual loans as of September 30, 2005. Other real estate owned (“OREO”) decreased $3.2 million from December 31, 2004 to $2.5 million as of September 30, 2005. During 2005, we sold two OREO properties for $3.1 million that were held by Guaranty and had a carrying value of approximately $2.7 million. We believe that our OREO properties are readily marketable.

 

Impaired Loans

 

Impaired loans are commercial, commercial real estate, other real estate-related and individually significant mortgage and consumer loans for which it is probable that we will not be able to collect all amounts due according to the original contractual terms of the loan agreement. The category of impaired loans is not coextensive with the category of nonaccrual loans, although the two categories overlap. Nonaccrual loans include impaired loans which are not reviewed on an individual basis for impairment, and represent loans on which the accrual of interest is discontinued when collectibility of principal and interest is uncertain or payments of principal or interest have become contractually past due 90 days. We may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired if it is probable that we will collect all amounts due in accordance with the original contractual terms of the loan or the loan is not a commercial, commercial real estate, other real estate-related or an individually significant mortgage or consumer loan.

 

In determining whether or not a loan is impaired, we apply our loan review procedures on a case-by-case basis taking into consideration the circumstances surrounding the loan and borrower, including the collateral value, the reasons for the delay, the borrower’s prior payment record, the amount of the shortfall in relation to the principal and interest owed, and the length of the delay. We measure impairment on a loan-by-loan basis using either the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral if the loan is collateral dependent, less estimated selling costs. At September 30, 2005, we had $27.8 million of impaired loans. We had $17.4 million of loans out of the $27.8 million of impaired loans that had sufficient collateral to ensure collection of the outstanding loan balance. Included in the allowance for loan losses was $10.4 million for impaired loan balances in excess of the respective estimated collateral value.

 

Allowance for Loan Losses

 

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

 

Our methodology for evaluating the adequacy of the allowance for loan losses has two basic elements: first, the identification of impaired loans and the measurement of impairment for each individual loan identified; and second, a method for estimating an allowance for all other loans.

 

As discussed above, a loan is considered impaired when it is probable that we will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. A loan that has been purchased or acquired in a transfer is considered impaired when, based on current information and events, it is probable that we will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. We have evaluated the loans we acquired in our acquisitions of our predecessor and Guaranty for impairment, and management believes that no additional impairment exists at this time. Losses on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs.

 

In estimating the general allowance for loan losses, we group the balance of the loan portfolio into segments that have common characteristics, such as loan type, collateral type or risk rating. Loans typically segregated by risk rating are those that have been assigned risk ratings using regulatory definitions of “special mention,” “substandard,” and “doubtful”. Loans graded as “loss” are generally charged off immediately.

 

For each general allowance portfolio segment, we apply loss factors to calculate the required allowance. These loss factors are based upon at least three years of historical loss rates, adjusted for qualitative factors affecting loan portfolio collectibility as described above. Qualitative adjustment factors are expressed in basis points and adjust historical loss factors downward up to 40 basis points and upward up to 75 basis points.

 

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Table of Contents

The specific allowance for impaired loans and the general allowance are combined to determine the required allowance for loan losses. The amount calculated is compared to the actual allowance for loan losses at each quarter end and any shortfall is covered by an additional provision for loan losses. As a practical matter, our allowance methodology may show that an unallocated allowance exists at quarter end.

 

     Nine months Ended
September 30, 2005


 
     (Dollars in
thousands)
 

Allowance for loan losses:

        

Beginning balance, December 31, 2004

   $ 25,022  
    


Loan charge offs

        

Real estate—mortgage

     1,216  

Real estate—construction

     20  

Commercial

     921  

Agricultural

     —    

Consumer

     226  

Leases receivable and other

     98  
    


Total loan charge offs

     2,481  
    


Recoveries:

        

Real estate—mortgage

     95  

Real estate—construction

     84  

Commercial

     422  

Agricultural

     7  

Consumer

     69  

Lease receivable and other

     101  
    


Total recoveries

     778  
    


Net loan charge offs

     1,703  
    


Provision for the allowance for loan losses

     1,700  
    


Ending balance, September 30, 2005

   $ 25,019  
    


Loans held for investment

   $ 1,763,533  

Average loans held for investment

     1,679,761  

Non-performing loans

     10,158  

Selected ratios:

        

Net charge-offs to average loans held for investment

     0.10 %

Provision for the allowance for loans to average loans held for investment

     0.10 %

Allowance for loans to loans held for investment at end of period

     1.42 %

Allowance for loans to nonperforming loans

     246.30 %

 

The allowance for loan losses of $25.0 million at September 30, 2005 represented 1.4% of total loans and 246.3% of nonperforming loans as of that date. At December 31, 2004 the allowance for loan losses of $25.0 million represented 1.5% of total loans and 173.8% of nonperforming loans.

 

Investment Securities

 

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

 

The carrying value of our portfolio of investment securities at September 30, 2005 and December 31, 2004 was as follows:

 

     September 30,
2005


   December 31,
2004


   Increase
(Decrease)


    %
Change


 
     (In thousands)  

Securities available-for-sale:

                            

U.S. Treasury securities

   $ 16,177    $ 38,170    $ (21,993 )   (57.6 )%

U.S. Government agencies

     9,483      8,479      1,004     11.8 %

Obligations of state and political subdivisions

     54,733      34,321      20,412     59.5 %

Mortgage backed securities

     40,697      43,713      (3,016 )   (6.9 )%

Marketable equity securities

     1,007      1,004      3     0.3 %
    

  

  


 

Total securities available-for-sale

   $ 122,097    $ 125,687    $ (3,590 )   (2.9 )%
    

  

  


 

Securities held-to-maturity:

                            

Mortgage-backed securities

   $ 386    $ 640    $ 254     (39.7 )%
    

  

  


 

Bank stocks, at cost

   $ 24,834    $ 12,770    $ 12,064     94.5 %
    

  

  


 

 

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The carrying value of our investment securities at September 30, 2005 totaled $147.3 million compared to $139.1 million at December 31, 2004. We restructured the makeup of our investment portfolio during the first nine months of 2005 away from lower yielding securities to somewhat higher yielding securities with acceptable risk profiles. This restructuring accounts for the majority of the changes in the carrying values from December 31, 2004.

 

Borrowings

 

Excluding unamortized premium of $247,000, the Company had a $41,229,000 aggregate balance of subordinated debentures outstanding with a weighted average cost of 7.9% at September 30, 2005. The subordinated debentures were issued in four separate series. Each issuance has a maturity of thirty years from its date of issue. The subordinated debentures were issued to trusts established by us, which in turn issued $40 million of trust preferred securities. Generally and with certain limitations, the Company is permitted to call the debentures subsequent to the first five or ten years, as applicable, after issue if certain conditions are met, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment of the trusts, the debentures or the preferred securities. During the nine months ended September 30, 2005, $603,000 of premium on these trust preferred securities was amortized against interest expense.

 

Our borrowings at September 30, 2005 increased by $78.6 million from December 31, 2004 to $118.3 million. The primary reason for the additional borrowings was to fund the increase in our loan portfolio. For the period ended September 30, 2005, our loan portfolio increased by $120.4 million, which was funded by increased deposits of $43.1 million and the additional borrowings.

 

Borrowed funds include Treasury Tax and Loan notes, Federal Home Loan Bank (“FHLB”) borrowings, and a revolving line of credit with First Tennessee Bank National Association (“First Tennessee”). The FHLB borrowings are collateralized by a blanket pledge and security agreement and the stock of the Company’s subsidiaries. The Company had $118,335,000 and $39,770,000 outstanding under these borrowings at September 30, 2005 and December 31, 2004, with a total commitment of $275,219,000 at September 30, 2005.

 

On November 8, 2005, the Company entered into a $70 million 364-day Revolving Credit Agreement with U.S. Bank National Association. This new revolving credit facility replaces the $20 million revolving credit facility the Company had in place with First Tennessee, which was terminated in connection with the Company entering into the new credit facility with U.S. Bank. The new credit facility is secured by a pledge of 100% of the outstanding capital stock of the Company’s bank subsidiary, Guaranty Bank and Trust Company, pursuant to a Pledge Agreement, dated as of November 8, 2005.

 

Capital Resources

 

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

 

At September 30, 2005, the Company had a leverage ratio of 9.01%, Tier 1 risk-weighted capital ratio of 9.61% and total risk-weighted capital ratio of 10.86%. The Company actively monitors its regulatory capital ratios to ensure that the Company and its bank subsidiaries are well capitalized under the applicable regulatory framework.

 

Contractual Obligations

 

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

 

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

 

At the dates indicated, the following financial instruments were outstanding whose contract amounts represented credit risk:

 

    

September 30,
2005

(Successor)


  

December 31,
2004

(Successor)


     (In thousands)

Commitments to extend credit

   $ 563,214    468,059

Standby letters of credit

     33,425    71,266

Commercial letters of credit

     232    574

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Several of the commitments may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer. Commitments to extend credit under overdraft protection agreements are commitments for possible future extensions of credit to existing deposit customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

 

Stand-by letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Substantially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting those commitments if deemed necessary.

 

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

 

Off Balance Sheet Arrangements

 

We do not have off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, liquidity, capital expenditures or capital resources.

 

Liquidity

 

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

 

On a stand-alone basis, we currently rely on dividends from our subsidiary banks as the main source of liquidity. At September 30, 2005, the amount available for dividends from our banks, without regulatory approval, was $22.0 million. We require liquidity for the payment of interest on the subordinated debentures, for operating expenses, principally salaries and benefits, stock redemption and for the payment of dividends to our shareholders, if any.

 

The banks rely on deposits as their principal source of funds and, therefore, must be in a position to service depositors’ needs as they arise. Our goal is to maintain a loan-to-deposit ratio (total loans held for sale plus total loans and leases held for investment to total deposits) below approximately 90% and a liquidity ratio (liquid assets, including cash and due from banks, Federal funds sold and investment securities not pledged as collateral expressed as a percentage of total deposits) above approximately 15%.

 

Our deposits tend to be cyclical, decreasing at the beginning of the year and ramping up during the balance of the year. In addition, while fluctuations in the balances of a few large depositors may cause temporary increases and decreases in liquidity from time to time, we have not experienced difficulty in dealing with such fluctuations from existing liquidity sources.

 

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Table of Contents

Our liquidity may be impacted negatively, however, by several other factors, including expenses associated with unforeseen or pending litigation.

 

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

 

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

 

Our individual bank and holding company Asset Liability Management Committees, or our ALCOs, address interest rate risk. The committees are comprised of members of our senior management, with a board member on the holding company ALCO. The ALCO monitors interest rate risk by analyzing the potential impact on the net portfolio of equity value and net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. The ALCO manages our balance sheet in part to maintain the potential impact on net portfolio value and net interest income within acceptable ranges despite changes in interest rates.

 

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

 

We monitor and evaluate our interest rate risk position on a quarterly basis using traditional gap analysis, earnings at risk analysis and economic value at risk analysis under 100 and 200 basis point change scenarios. Each of these analyses measures different interest rate risk factors inherent in the balance sheet. Traditional gap analysis, although not a complete view of these risks, provides a fair representation of our current interest rate risk exposure. Traditional gap analysis calculates the dollar amount of mismatches between assets and liabilities, at certain time periods, whose interest rates are subject to repricing at their contractual maturity date or repricing period.

 

Gap Analysis

 

A traditional measure of a financial institution’s interest rate risk is the static gap analysis. A static gap is the difference between the amount of assets and liabilities that are expected to mature or reprice within a specific period. Generally, a positive gap benefits an institution during periods of rising interest rates, and a negative gap benefits an institution during periods of declining interest rates.

 

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Table of Contents

At September 30, 2005, we had a positive gap of $198 million or 7.8% percent of our total assets, that would be subject to repricing within one year, with a total positive gap of $555 million or 21.9% of our total assets. The following table sets forth information concerning repricing opportunities for our interest-earning assets and interest bearing liabilities as of September 30, 2005. The amount of assets and liabilities shown within a particular period were determined in accordance with their contractual maturities, except that adjustable rate products are included in the period in which they are first scheduled to adjust and not in the period in which they mature. Such assets and liabilities are classified by the earlier of their maturity or repricing date.

 

     Less than 3
months


    3 months to
1 year


    1 to 5
years


    Over 5
years


    Non-rate
sensitive


    Total

     (In thousands)

Interest-bearing cash and cash equivalents

   $ 20,735     $ 5,000     $ —       $ —       $ —       $ 25,735

Investment securities

     35,746       20,880       22,995       42,860       24,834       147,317

Loans, gross

     1,183,637       225,207       279,452       74,694       6,558       1,769,548

All other assets

     53,922       8,242       11,456       8,341       515,610       597,569
    


 


 


 


 


 

Totals

   $ 1,294,040     $ 259,329     $ 313,903     $ 125,895     $ 547,002     $ 2,540,169
    


 


 


 


 


 

Deposits

   $ 784,777     $ 350,378     $ 54,484     $ —       $ 531,970     $ 1,721,609

Assets under repurchase agreements and federal funds purchases

     31,304       —         —         —         —         31,304

Borrowings

     109,246       —         4,871       4,218       —         118,335

Subordinated debentures

     —         25,764       —         15,712       —         41,476

All other liabilities

     47,235       7,021       2,818       —         48,337       105,411

Stockholder’s equity

     —         —         —         —         522,034       522,034
    


 


 


 


 


 

Totals

   $ 972,562     $ 383,163     $ 62,173     $ 19,930     $ 1,102,341     $ 2,540,169
    


 


 


 


 


 

Period gap

     321,478       (123,834 )     251,730       105,965       (555,339 )      

Cumulative gap

     321,478       197,644       449,374       555,339                

Cumulative rate sensitive gap %

     12.7 %     7.8 %     17.7 %     21.9 %              

 

ITEM 4. Controls and Procedures

 

As of the end of the period covered by this report, an evaluation was carried out by the Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934). The Company’s disclosure controls were designed to provide a reasonable assurance that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer, have concluded that the Company’s disclosure controls and procedures are effective at September 30, 2005 to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 was (i) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

 

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

 

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Table of Contents

 

PART II—OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

On December 31, 2004, an adversary proceeding was filed in the United States Bankruptcy Court for the District of Colorado, by the trustees of the Will Hoover Company, or the Hoover Company, and William Gordon Hoover, Jr., or Hoover, seeking to avoid certain transfers that occurred over a four-year period commencing in 1999 under the United States Bankruptcy Code. The trustees allege that certain transfers were made by the Hoover Company and Hoover with actual fraudulent intent, that the transfers were made for less than reasonably equivalent value and occurred at a time when the Hoover Company and Hoover were insolvent, or were rendered insolvent by the transfers, and that certain other transfers were preferential as to other creditors, were made for less than reasonably equivalent value or were made by the Hoover Company or Hoover with actual fraudulent intent. On September 7, 2005, the Court granted in part our motion for summary judgment and dismissed $8.5 million of the claims relating to alleged transfers for payment of items credited in the check collection process. On November 10, 2005, the trustees filed a motion requesting reconsideration of the order dismissing those claims. We intend to file a response opposing the trustees’ motion. We intend to continue to vigorously contest the remaining claims, which amount to approximately $2.5 million.

 

On July 22, 2005 and August 18, 2005, two separate but similar actions were filed in the Denver District Court, Denver, Colorado by investors who provided funds to Hoover, the Hoover Company or related entities against Guaranty Bank and Trust Company and a former officer. The investors allege that certain activities of Guaranty Bank and its former officer with respect to the customer relationship with Hoover, the Hoover Company and related entities aided and abetted Hoover and the Hoover Company in securities violations, violations of the Colorado Organized Crime Control Act and a civil conspiracy causing the investors to incur damages. The investors are seeking actual and statutory treble damages against Guaranty Bank and its former officer. The alleged actual losses claimed in connection with such activities are in excess of $13.1 million. We intend to vigorously defend these actions.

 

At this time, we cannot determine whether the outcome of the above matters will have a material adverse impact on our consolidated financial position or results of operations.

 

We are party to various other legal proceedings in the ordinary course of business. We do not believe that the outcome of any of these matters will have a material adverse effect on our consolidated financial position or results of operations.

 

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

 

None.

 

ITEM 3. Defaults Upon Senior Securities

 

None.

 

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

 

None.

 

ITEM 5. Other Information

 

On November 8, 2005, the Company entered into a $70 million 364-day Revolving Credit Agreement with U.S. Bank National Association. This new revolving credit facility replaces the $20 million revolving credit facility the Company had in place with First Tennessee Bank National Association, which was terminated in connection with the Company entering into the new credit facility with U.S. Bank. The new credit facility is secured by a pledge of 100% of the outstanding capital stock of the Company’s bank subsidiary, Guaranty Bank and Trust Company, pursuant to a Pledge Agreement, dated as of November 8, 2005.

 

Under the new credit facility, the Company is able to borrow at an interest rate equal to, at the Company’s option, either (i) the lending bank’s federal funds rate plus 1.50%, (ii) the lending bank’s prime rate minus 0.75% or (iii) LIBOR plus 1.50%. As of November 10, 2005, the Company had an aggregate of $11.7 million in debt outstanding under the new credit facility. The new credit facility requires the Company to maintain certain financial and capital ratios, and contains, among other things, other covenants, conditions, representations and warranties and events of default customary for facilities of this type.

 

U.S. Bank performs various commercial banking services for the Company, for which they receive usual and customary fees.

 

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Table of Contents
ITEM 6. Exhibits

 

Exhibit

Number


 

Description


3.1   Certificate of Incorporation of the Company, as amended to date (incorporated herein by reference from Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (File No. 333-124855), as amended).
3.2   Bylaws of the Company, as amended to date (incorporated herein by reference from Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (File No. 333-124855), as amended).
10.1   Revolving Credit Agreement, dated as of November 8, 2005, between the Company and U.S. Bank National Association.
10.2   Pledge Agreement, dated as of November 8, 2005, between the Company and U.S. Bank National Association.
31.1   15d-14(a) Certification of Chief Executive Officer.
31.2   15d-14(a) Certification of Chief Financial Officer.
32.1   Section 1350 Certification of Chief Executive Officer.
32.2   Section 1350 Certification of Chief Financial Officer.

 

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Table of Contents

 

SIGNATURES

 

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

 

Date: November 11, 2005       CENTENNIAL BANK HOLDINGS, INC.
         /s/    PAUL W. TAYLOR        
        Paul W. Taylor
        Executive Vice President and Chief Financial Officer

 

32