Edgar Filing: Centennial Bank Holdings, Inc.

Form 10-Q

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, 2006

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

For the transition period from to

Commission File Number: 000-51556

CENTENNIAL BANK HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		41-2150446
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1331 Seventeenth St., Suite 300 Denver, CO		80202
(Address of principal executive offices)		(Zip Code)

303-296-9600

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “Accelerated Filer and Large Accelerated Filer” in Rule 12B-2 of the Exchange Act. (check one): Large Accelerated Filer ¨ Accelerated Filer ¨ Non-accelerated Filer 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 November 2, 2006 there were 58,167,715 shares of the registrant’s common stock outstanding, including 1,764,025 shares of unvested stock grants.

TABLE OF CONTENTS


			Page
		Forward-Looking Statements and Factors that Could Affect Future Results	3

PART I—FINANCIAL INFORMATION			4

	ITEM 1.	Unaudited Consolidated Financial Statements	4

		Unaudited Consolidated Balance Sheets	4

		Unaudited Consolidated Statements of Income	5

		Unaudited Consolidated Statements of Comprehensive Income	6

		Consolidated Statement of Changes in Stockholders’ Equity	7

		Unaudited Consolidated Statements of Cash Flows	8

		Notes to Unaudited Condensed Consolidated Financial Statements	9

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	33

	ITEM 4.	Controls and Procedures	34

PART II—OTHER INFORMATION			35

	ITEM 1.	Legal Proceedings	35

	ITEM 1A.	Risk Factors	36

	ITEM 2.	Unregistered Sale of Equity Securities and Use of Proceeds	36

	ITEM 3.	Defaults Upon Senior Securities	36

	ITEM 4.	Submission of Matters to a Vote of Security Holders	36

	ITEM 5.	Other Information	37

	ITEM 6.	Exhibits	38

Forward-Looking Statements and Factors that Could Affect Future Results

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

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

•

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

•

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

•

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

•

Inflation and interest rate, securities market and monetary fluctuations.

•

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

•

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

•

Changes in consumer spending, borrowings and savings habits.

•

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

•

Technological changes.

•

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

•

The ability to increase market share and control expenses.

•

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

•

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

•

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

•

Changes in our organization, compensation and benefit plans.

•

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

•

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

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

PART I—FINANCIAL INFORMATION

ITEM 1. Unaudited Consolidated Financial Statements

CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)


	September 30, 2006			December 31, 2005
	(In thousands, except for share data)
Assets
Cash and due from banks	$	63,782		$	88,852
Federal funds sold		7,800			10,090

Total cash and cash equivalents		71,582			98,942

Securities available for sale, at fair value		164,284			143,081
Securities held to maturity (fair value of $10,042 and $5,686 at September 30, 2006 and December 31, 2005)		10,133			5,798
Bank stocks, at cost		31,683			26,874

Total investments		206,100			175,753

Loans held for sale		2,100			6,820
Loans, net of unearned discount		1,979,406			2,067,593
Less allowance for loan losses		(25,977	)		(27,475	)

Net loans		1,955,529			2,046,938

Premises and equipment, net		76,575			73,429
Goodwill		391,346			392,507
Other intangible assets, net		44,558			54,922
Other assets		43,549			39,996
Assets held for sale		97,408			98,270

Total assets	$	2,886,647		$	2,980,757

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand	$	524,808		$	593,811
Interest-bearing demand		793,852			722,030
Savings		88,695			99,496
Time		560,909			633,015

Total deposits		1,968,264			2,048,352

Securities sold under agreements to repurchase and federal fund purchases		36,635			44,399
Borrowings		136,965			130,198
Subordinated debentures		41,239			41,275
Interest payable and other liabilities		28,270			37,368
Liabilities associated with assets held for sale		80,059			80,417

Total liabilities		2,291,432			2,382,009

Stockholders’ equity:
Common stock—$0.001 par value; 100,000,000 shares authorized, 63,961,010 shares issued, 58,483,606 shares outstanding at September 30, 2006 (includes 1,719,275 shares of unvested stock); 63,159,692 shares issued, 60,403,764 shares outstanding at December 31, 2005 (includes 1,278,631 shares of unvested stock)		64			63
Additional paid-in capital		613,972			612,089
Shares to be issued for deferred compensation obligations		751			—
Retained earnings		37,453			18,478
Accumulated other comprehensive income		22			93
Treasury stock, at cost, 5,477,404 and 2,725,928 shares, respectively		(57,047	)		(31,975	)

Total stockholders’ equity		595,215			598,748

Total liabilities and stockholders’ equity	$	2,886,647		$	2,980,757

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
	(In thousands, except share data)
Interest income:
Loans, including fees	$	41,427	$	32,909	$	122,592	$	91,989
Investment securities:
Taxable		713		49		2,207		697
Tax-exempt		1,454		714		3,420		1,797
Dividends		485		300		1,345		669
Federal funds sold and other		145		542		336		1,773

Total interest income		44,224		34,514		129,900		96,925

Interest expense:
Deposits		12,283		6,648		33,963		15,041
Federal funds purchased and repurchase agreements		351		293		905		737
Subordinated debentures		972		669		2,720		1,839
Borrowings		1,623		1,031		4,022		2,237

Total interest expense		15,229		8,641		41,610		19,854

Net interest income		28,995		25,873		88,290		77,071
Provision for credit losses		1,566		–		1,566		1,700

Net interest income, after provision for loan losses		27,429		25,873		86,724		75,371
Noninterest income:
Customer service and other fees		3,015		2,035		8,640		5,957
Other		459		697		1,551		1,692

Total noninterest income		3,474		2,732		10,191		7,649
Noninterest expense:
Compensation and employee benefits		12,006		9,828		35,523		30,224
Occupancy		1,891		1,651		5,937		4,939
Furniture and equipment		1,286		924		3,682		2,590
Amortization of intangible assets		2,858		2,968		8,855		9,157
Merger, acquisition and transition		239		752		1,866		8,436
Other general and administrative		4,662		4,604		13,823		11,581

Total noninterest expense		22,942		20,727		69,686		66,927

Income before income taxes		7,961		7,878		27,229		16,093
Income tax expense		2,521		2,748		9,123		5,482

Income from continuing operations		5,440		5,130		18,106		10,611
Income (loss) from discontinued operations, net of tax		380		–		869		(794	)

Net income	$	5,820	$	5,130	$	18,975	$	9,817

Earnings per share–basic:
Income from continuing operations	$	0.10	$	0.10	$	0.31	$	0.20
Income (loss) from discontinued operations, net of tax		–		–		0.02		(0.01	)
Net income		0.10		0.10		0.33		0.19
Earnings per share–diluted:
Income from continuing operations	$	0.10	$	0.10	$	0.31	$	0.20
Income (loss) from discontinued operations, net of tax		–		–		0.02		(0.01	)
Net income		0.10		0.10		0.33		0.19
Weighted average shares outstanding-basic		57,093,056		51,902,934		58,060,683		52,137,132
Weighted average shares outstanding-diluted		57,499,412		52,002,019		58,394,354		52,170,523

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006			2005
	(In thousands)
Net income	$	5,820	$	5,130	$	18,975		$	9,817
Other comprehensive income (loss), net of tax:
Change in net unrealized gain (loss) on securities available for sale		496		82		(71	)		907

Comprehensive income	$	6,316	$	5,212	$	18,904		$	10,724

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)


	Shares of Common Stock		Common Stock and Additional Paid-in Capital			Shares to be Issued for Deferred Compensation Obligations		Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income			Totals
	(In thousands, except share data)
Balance, December 31, 2005	60,403,764		$	612,152		$	—	$	(31,975	)	$	18,478	$	93		$	598,748
Comprehensive income:
Net income	—			—			—		—			18,975		—			18,975
Change in net unrealized loss on securities available for sale	—			—			—		—			—		(71	)		(71	)

Total comprehensive income																	18,904
Stock compensation awards, net	473,442			—			—		—			—		—			—
Earned stock award compensation	—			2,382			—		—			—		—			2,382
Repurchase of common stock	(2,393,600	)		—			—		(25,072	)		—		—			(25,072	)
Shares to be issued for settlement of deferred compensation obligations	—			(500	)		751		—			—		—			251
Tax effect of equity compensation	—			2			—		—			—		—			2

Balance, September 30, 2006	58,483,606		$	614,036		$	751	$	(57,047	)	$	37,453	$	22		$	595,215

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statement of Cash Flows (Unaudited)


	Nine Months Ended September 30,
	2006			2005
	(In thousands)
Cash flows from operating activities:
Net income	$	18,975		$	9,817
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		1,588			1,700
Stock compensation costs		2,382			275
Depreciation and amortization		13,370			12,045
Loss (gain) on sale of securities and loans		(775	)		(1,071	)
Loss (gain) on sale of real estate owned and assets		(196	)		(601	)
Impairment of discontinued operations		201			1,584
Other		(434	)		984
Proceeds from sales of loans held for sale		55,390			78,056
Originations of loans held for sale		(49,896	)		(75,708	)
Net change in:
Accrued interest receivable and other assets		4,301			(15,553	)
Accrued interest payable and other liabilities		(8,355	)		9,346

Net cash provided by operating activities		36,551			20,874

Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, prepayments, and calls		70,981			135,374
Purchases		(96,679	)		(143,164	)
Activity in held-to-maturity securities and bank stocks:
Maturities, prepayments, and calls		297			250
Purchases		(4,395	)
Loan originations and principal collections, net		76,324			(125,525	)
Proceeds from sales of foreclosed assets		1,784			5,204
Proceeds from sales of premises and equipment		6,382			373
Additions to premises and equipment		(13,318	)		(11,910	)
Proceeds from sale of subsidiary and other investment		1,835			1,516
Payments on discontinued operations		—			(74	)

Net cash provided (used) by investing activities		43,211			(137,956	)

Cash flows from financing activities:
Net change in deposits		(83,754	)		42,466
Net change in short-term borrowings		7,172			58,405
Repayment of long-term debt		(388	)		20,163
Net change in federal funds purchased and repurchase agreements		(4,824	)		3,813
Repurchase of common stock		(25,328	)		(4,659	)

Net cash provided (used) by financing activities		(107,122	)		120,188

Net change in cash and cash equivalents		(27,360	)		3,106
Cash and cash equivalents, beginning of period		98,942			90,927

Cash and cash equivalents, end of period	$	71,582		$	94,033

Supplemental disclosure of cash flow activity:
Interest paid on deposits and borrowed funds	$	42,776		$	20,236
Income taxes paid		18,393			5,798
Supplemental disclosure of non-cash activities:
Loans transferred to other real estate owned		5,094			1,791

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

CENTENNIAL BANK HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(1) Organization, Operations and Basis of Presentation

Centennial Bank Holdings, Inc. is a financial holding company and a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as a holding company for our subsidiaries. As of September 30, 2006, those subsidiaries were Guaranty Bank and Trust Company, Centennial Bank of the West, and Collegiate Peaks Bank, referred to as Guaranty Bank, CBW, and Collegiate Peaks, respectively. Collegiate Peaks was held for sale as of September 30, 2006, with completion of the sale on November 1, 2006. Reference to “Banks” means Guaranty Bank and CBW, and “Company” means Centennial Bank Holdings, Inc. on a consolidated basis with the Banks, Collegiate Peaks and First MainStreet Insurance, which was sold on March 1, 2006.

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

(a) Basis of Presentation

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

(b) Use of Estimates

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

(c) Allowance for Credit Losses

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

The allowance for credit losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. Loans that are deemed to be uncollectible are charged off and deducted from the allowance for loan losses. The provision for loan losses and recoveries on loans previously charged off are added to the allowance for loan losses. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for credit losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in lending commitments and irrevocable payment obligations.

(d) Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over the fair value of the net assets of businesses acquired. Goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually. Other intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life. Goodwill is reviewed for impairment at least annually or whenever events or changes in circumstance indicate that the carrying value may be greater than fair value. The goodwill impairment analysis is based on an evaluation of reporting units. The Company has one significant reporting unit – banking operations.

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

(e) Impairment of Long-Lived Assets

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

(f) Stock Incentive Plan

The Company’s Amended and Restated 2005 Stock Incentive Plan (“Plan”) provides for up to 2,500,000 grants of stock options, stock awards, stock units awards, performance stock awards, stock appreciation rights, and other equity-based awards to key employees, nonemployee directors, consultants and prospective employees. As of September 30, 2006, the Company has only granted stock awards. The Company accounts for the equity-based compensation using the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment. The Company recognizes expense for services received in a share-based payment transaction as services are received. That cost is recognized over the period during which an employee or director provides service in exchange for the award. The Company has issued stock awards that vest based on service periods from one to four years, and performance conditions. The maximum contractual term for the performance-based share awards is December 31, 2012. Costs are recognized over a weighted-average period of 4.6 years.

The compensation cost of employee and director services received in exchange for stock awards is based on the grant-date fair value of the award (as determined by quoted market prices). The stock compensation expense recognized reflects estimated forfeitures, adjusted as necessary based on actual forfeitures. The Company recognized $874,000 and $2,382,000 in compensation expense for services rendered for the three and nine months ended September 30, 2006, respectively. The Company recognized $275,000 in compensation expense for services rendered for the three and nine months ended September 30, 2005. At September 30, 2006, the Company had a total of 1,719,275 unvested restricted shares of stock issued and outstanding. At September 30, 2006, there was $11,483,000 of unrecognized compensation costs related to unvested share-based compensation granted under the Plan.


	Shares		Weighted Average Fair Value on Award Date
Outstanding at December 31, 2005	1,278,631		$	10.88
Awarded	801,318			10.48
Forfeited	(327,876	)		10.97
Vested	(32,798	)		10.50

Outstanding at September 30, 2006	1,719,275		$	10.82

The weighted-average grant-date fair value of stock awards for the nine month period ended September 30, 2005 was $10.80 per share.

(g) Deferred Compensation Plans

The Company has Deferred Compensation Plans (the “Plans”) that allow directors and certain key employees to voluntarily defer compensation. Compensation expense is recorded for the deferred compensation and a related liability is recognized. Participants may elect designated investment options for the notional investment of their deferred compensation. The recorded obligations are adjusted for deemed income or loss related to the investments selected. Participants in certain Plans are given the opportunity to elect to have all or a portion of their deferred compensation earn a rate of return equal to the total return on the Company’s common stock. The Plans do not provide for diversification of a participant’s assets allocated to Company common stock and assets allocated to Company common stock can only be settled with a fixed number of shares of stock. In accordance with Emerging Issues Task Force Issue 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested, the deferred compensation obligation associated with Company common stock is classified as a component of stockholders’ equity. Subsequent changes in the fair value of the common stock are not reflected in earnings or stockholders’ equity of the Company. Company common stock held by the Company for the satisfaction of obligations of the Plans is classified as treasury stock. The Company held 75,249 and 50,000 shares of Company common stock for deferred compensation plan obligations at September 30, 2006 and December 31, 2005, respectively, which are recorded as treasury stock.

(g) Impact of Recently Issued Accounting Standards

During July 2006, the Financial Accounting Standards Board adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 was issued to clarify the requirements of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, relating to the recognition of income tax benefits. FIN 48 addresses recognizing and measuring tax benefits when the benefits’ realization is uncertain. The cumulative effect of applying the provisions of FIN 48 upon adoption will be reported as an adjustment to beginning retained earnings. FIN 48 is effective for public companies with fiscal years beginning after December 15, 2006. We do not expect there to be any material effect on either our results of operations or financial condition when we adopt FIN 48.

SFAS No. 157, Fair Value Measurements defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. We do not expect there to be any material effect on either our results of operations or financial condition when we adopt FAS No. 157 This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. We do not expect there to be any material effect on either our results of operations or financial condition when we adopt FAS No. 158.

In September 2006, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 addresses how the effects of prior year uncorrected errors must be considered in quantifying misstatements in current year financial statements. The effects of prior year uncorrected errors include potential accumulation of improper amounts that may result in a material misstatement on the balance sheet or the reversal of prior period errors in the current period that result in a material misstatement of the current period income statement amounts. Adjustments to current or prior period financial statements would be required in the event that after application of various approaches for assessing materiality of misstatement in current period financial statements and consideration of all relevant quantitative and qualitative factors, a misstatement is determined to be material. SAB 108 will be applicable to all financial statements issued by the Company after November 15, 2006.

(i) 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, 2006
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
	(In thousands)
Securities available for sale:
U.S. treasuries	$	5,005	—	(7	)	4,998
U.S. government agencies		5,417	—	(26	)	5,391
State and municipal		112,539	1,419	(905	)	113,053
Mortgage-backed		40,766	54	(802	)	40,018
Marketable equity securities		822	2	—		824

Securities available for sale	$	164,549	1,475	(1,740	)	164,284

Securities held to maturity:
Mortgage-backed	$	10,133	23	(114	)	10,042


	December 31, 2005
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
	(In thousands)
Securities available for sale:
U.S. treasuries	$	13,165	—	(89	)	13,076
U.S. government agencies		5,391	—	(24	)	5,367
State and municipal		72,110	949	(166	)	72,893
Mortgage-backed		50,797	29	(783	)	50,043
Marketable equity securities		1,697	5	—		1,702

Securities available for sale	$	143,160	983	(1,062	)	143,081

Securities held to maturity:
Mortgage-backed	$	5,798	—	(112	)	5,686

Certain individual securities have been in a continuous unrealized loss position for 12 months or longer at September 30, 2006. These securities have fluctuated in value since their purchase dates because of changes in market interest rates. The Company has concluded that the continuous unrealized loss position of 12 months or longer is a result of the level of market interest rates and not a result of the underlying issuers’ ability to repay and are, therefore, temporarily impaired. In addition, we have the ability to hold these securities until their fair value recovers to their cost. Accordingly, an impairment was not recognized in our consolidated statements of income.

(3) Loans

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


	September 30, 2006			December 31, 2005
	(In thousands)
Loans on real estate:
Residential and commercial mortgage	$	663,170		$	584,590
Construction		463,468			530,716
Equity lines of credit		60,817			70,386
Commercial loans		654,829			724,929
Agricultural loans		54,805			71,707
Lease financing		7,392			677
Installment loans to individuals		53,714			63,121
Overdrafts		1,213			2,006
SBA and other		24,326			24,321

		1,983,734			2,072,453
Less:
Allowance for loan losses		(25,977	)		(27,475	)
Net of unearned discount		(4,328	)		(4,860	)

	$	1,953,410		$	2,040,118

Loans available for sale	$	2,100		$	6,820

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


	Quarter Ended September 30, 2006			Nine Months Ended September 30, 2006
Balance, beginning of period	$	25,297		$	27,475
Provision for loan losses		2,239			1,956
Loans charged off		(1,736	)		(4,839	)
Recoveries on loans previously charged-off		177			1,385

Balance, end of period	$	25,977		$	25,977

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


	Quarter Ended September 30, 2006			Nine Months Ended September 30, 2006
Balance, beginning of period	$	1,001		$	718
Provision (credit) for losses on unfunded commitments		(673	)		(390	)

Balance, end of period	$	328		$	328

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


	September 30, 2006		December 31, 2005
	(In thousands)
Impaired loans with a specific valuation allowance	$	16,514	$	44,267
Impaired loans without a specific valuation allowance		27,770		6,023

Total impaired loans	$	44,284	$	50,290

Valuation allowance related to impaired loans	$	6,468	$	10,360

Average investment in impaired loans	$	43,935	$	38,425

Interest income of $2,790,000 was recognized on impaired loans for the period ended September 30, 2006. At September 30, 2006 and December 31, 2005, nonaccrual loans were $26,812,000 and $29,608,000, respectively.

(4) Goodwill and Other Intangible Assets

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

Other intangible assets with definite lives are amortized over their respective estimated useful lives to their estimated residual values. 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 nine months ended September 30, 2006 is as follows:


	Nine Months Ended September 30, 2006
		(In thousands	)
Balance, beginning of period	$	392,507
Goodwill associated with disposal of subsidiary (Note 10)		(1,161	)

Balance, end of period	$	391,346

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


	Useful life	September 30, 2006			December 31, 2005
		(In thousands)
Noncompete employment agreements	2 years	$	3,606		$	3,706
Core deposit intangible assets	7 –15 years		62,975			62,975
Expirations – First MainStreet Insurance	7 years		—			1,477

			66,581			68,158
Accumulated amortization			(22,023	)		(13,236	)

		$	44,558		$	54,922

Amortization expense for intangible assets for the nine months ended September 30, 2006 and 2005 was $8,855,000 and $9,157,000, respectively.

(5) Borrowings

Borrowings include Treasury Tax and Loan notes, Federal Home Loan Bank (“FHLB”) borrowings, and a revolving credit agreement with U.S. Bank National Association. The Company had $136,965,000 and $130,198,000 outstanding under these obligations at September 30, 2006 and December 31, 2005, respectively, with a total available commitment of $383,251,000 at September 30, 2006.

At September 30, 2006, borrowings consisted of a line of credit and term notes at the Federal Home Loan Bank, of $107,000,000 and $14,610,000, respectively, $14,700,000 under the U.S. Bank revolving credit agreement and a $655,000 Treasury Tax and Loan note balance.

The maximum allowable balance for borrowing at the Federal Home Loan Bank at September 30, 2006 was $312,251,000. The interest rate on the line of credit varies with the federal funds rate. The term notes have fixed interest rates that range from 2.52% to 6.22%. A blanket pledge and security agreement with the Federal Home Loan Bank, which encompasses certain loans and securities, serves as collateral for these borrowings.

The $70 million revolving credit agreement, as amended, with U.S. Bank National Association contains financial covenants, including maintaining a minimum return on average assets, a maximum nonperforming assets to total loans ratio and regulatory capital ratios that qualify the Company as well-capitalized. As of September 30, 2006, the Company had $14.7 million drawn on this line and was in compliance with all debt covenants. The interest rate varies based on a spread over the federal funds rate, with a rate of 6.8% at September 30, 2006. The line of credit is secured by Guaranty Bank stock.

(6) Subordinated Debentures and Trust Preferred Securities

The Company had $41,239,000 and $41,275,000 in aggregate principal balances of subordinated debentures outstanding with a weighted average cost of 9.1% and 8.3% at September 30, 2006 and December 31, 2005, respectively. The subordinated debentures were issued in four separate series. Each issuance has a maturity of thirty years from its date of issue. The subordinated debentures were issued to trusts established by the Company, which in turn issued $40 million of trust preferred securities. Generally and with certain limitations, the Company is permitted to call the debentures subsequent to the first five or ten years, as applicable, after issue if certain conditions are met, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment of the trusts, the debentures or the preferred securities.

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

The following table summarizes the terms of each subordinated debenture issuance at September 30, 2006 (dollars in thousands):

Series

Date

Issued

Principal

Amount

Maturity
Date

Call Date*

Fixed or
Variable
Rate

Rate Adjuster

Rate at
September 30,
2006

Next Rate
Reset Date

CenBank Trust I

9/7/2000

10,310

9/7/2030

9/7/2010

Fixed

N/A

10.60

N/A

CenBank Trust II

2/22/2001

5,155

2/22/2031

2/22/2011

Fixed

N/A

10.20

N/A

CenBank Trust III

4/15/2004

15,464

4/15/2034

4/15/2009

Variable

LIBOR + 2.65

8.14

10/16/2006

Guaranty Capital Trust III

7/7/2003

10,310

7/7/2033

7/7/2008

Variable

LIBOR + 3.10

8.59

10/16/2006

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

(7) Commitments

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

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

At the dates indicated, the following commitments were outstanding:


	September 30, 2006		December 31, 2005
	(In thousands)
Contractual Obligations
Commitments to extend credit	$	514,893	$	634,737
Standby letters of credit		31,920		37,952
Commercial letters of credit		266		472

Totals	$	547,079	$	673,161

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

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

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

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

(8) Capital Ratios

At September 30, 2006 and December 31, 2005, the Company had leverage ratios of 8.55% and 7.97%, Tier 1 risk-weighted capital ratios of 9.27% and 8.83%, and total risk-weighted capital ratios of 10.48% and 10.08%, 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) Merger, Acquisition and Transition Expenses

The Company recorded merger, acquisition, and transition expenses of $239,000 and $1,866,000 for the three and nine months ended September 30, 2006, respectively, and included $1,425,000 of contractual severance obligations associated with the management transition announced in May 2006.

(10) Assets Held for Sale and Discontinued Operations

Business Disposition

On March 1, 2006, the Company sold substantially all of the assets of its First MainStreet Insurance, Ltd. subsidiary for $3,215,000, of which $1,835,000 was paid in cash at closing, and the release of the Company from certain contractual obligations. The sale of the subsidiary did not result in a gain or loss due to a reallocation of the initial goodwill allocated to First MainStreet Insurance, Ltd. First MainStreet Insurance, Ltd. net income for the period from January 1, 2006 to March 1, 2006 of $17,000 is included in income from discontinued operations for the nine months ended September 30, 2006.

Assets Held for Sale

On June 19, 2006, the Company signed a definitive agreement to sell Collegiate Peaks to a new group of investors. This agreement followed the August 25, 2005 definitive agreement for the sale of Collegiate Peaks that was terminated on April 25, 2006. The Company consummated the sale of Collegiate Peaks as of November 1, 2006. Pursuant to the Company’s 2005 decision to sell Collegiate Peaks, the Company classified Collegiate Peaks’ assets and liabilities as held for sale at the lower of cost or fair value as of September 30, 2006 and December 31, 2005. The following tables present the assets and liabilities of Collegiate Peaks that are presented as held for sale in the consolidated balance sheets at September 30, 2006 and December 31, 2005, and the results of operations that are presented in discontinued operations for the nine months ended September 30, 2006.


	September 30, 2006		December 31, 2005
	(In thousands)
Assets held for sale:
Cash and cash equivalents	$	15,306	$	19,869
Investments		16,400		16,647
Loans and leases, net		52,195		48,150
Other intangible assets		3,458		3,528
Goodwill		8,922		8,922
Other assets		1,127		1,154

Total assets held for sale	$	97,408	$	98,270

Liabilities associated with assets held for sale:
Deposits	$	70,780	$	74,069
Securities sold under repurchase agreements		7,621		4,682
Other liabilities		1,658		1,666

Total liabilities associated with assets held for sale	$	80,059	$	80,417


	Nine Months Ended
	September 30, 2006		September 30, 2005
Interest income	$	4,115	$	3,499
Noninterest income		280		317
Net income from discontinued operations, net of tax		1,061		790

The income from discontinued operations consisted of the following:


	Nine Months Ended September 30, 2006
Net income – First MainStreet Insurance, Ltd.	$	17
Net income – Collegiate Peaks		1,061
Impairment of Collegiate Peaks assets		(325	)
Tax benefit		124
Intercompany elimination		(8	)

Income from discontinued operations	$	869

(11) Contingencies

for less than reasonably equivalent value and occurred at a time when the Hoover Company and Hoover were insolvent, or were rendered insolvent by the transfers, and that certain other transfers were preferential as to other creditors, were made for less than reasonably equivalent value or were made by the Hoover Company or Hoover with actual fraudulent intent. On September 7, 2005, the Bankruptcy Court granted, in part, Guaranty Bank’s initial response and dismissed $8.5 million of the claims relating to alleged transfers for payment of items credited in the check collection process. On November 10, 2005, the trustees filed a motion in District Court requesting reconsideration of the Bankruptcy Court’s order dismissing those claims. The District Court summarily denied the trustees’ motion on November 21, 2005. The Trustees filed another motion for reconsideration with the Bankruptcy Court on November 9, 2006. We intend to vigorously oppose the motion.

On August 29, 2006, Guaranty Bank filed a motion for partial summary judgment on the trustees’ claims to recover payments on alleged overdrafts in the amount of approximately $1.7 million. The motion is pending at this time. On September 1, 2006, the trustees amended the complaint to include a claim, based on similar arguments, to recover interest payments on loans to Hoover and the Hoover Company in the amount of $0.1 million. We continue to vigorously contest the remaining claims, which amount to approximately $2.9 million, approximately $1.7 million of which are the subject of the pending motion for partial summary judgment. We have established a reserve that, after consultation with our counsel, we have determined is appropriate for this litigation.

On July 22, 2005 and August 18, 2005, two separate but similar actions (i.e., the Barnes action and Teper action, respectively) were filed against Guaranty Bank and a former officer in the Denver District Court, Denver, Colorado by investors who provided funds to Hoover, the Hoover Company or related entities. The investors allege that certain activities of Guaranty Bank and its former officer with respect to the customer relationship with Hoover, the Hoover Company and related entities aided and abetted Hoover and the Hoover Company in securities violations and violations of the Colorado Organized Crime Control Act and amounted to a civil conspiracy, causing the investors to incur damages. The 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 approximately $13.0 million, of which approximately $12.2 million relate to the Barnes action and approximately $0.8 million relate to the Teper action. In a series of preliminary rulings in April 2006 relating to both actions, the District Court dismissed a number of the claims representing alleged damages in excess of $1.0 million.

The court recently entered judgment in favor of Guaranty Bank and its officer with respect to the claims brought by two of the three plaintiffs in the Teper action. Only one plaintiff remains in the Teper action. The alleged actual losses of the remaining plaintiff are approximately $0.6 million. We will continue to vigorously defend both the Barnes action and Teper action.

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. To the extent these suits are not settled or dismissed, the Company will incur ongoing legal costs, to the extent such legal costs will not be covered by insurance, which could have an adverse impact on our results of operations.

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

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

This MD&A should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report and Items 1, 1A, 6, 7, 7A and 8 of our 2005 Annual Report on Form 10-K. Also, please see the disclosure in the “Forward-Looking Statements and Factors that Could Affect Future Results” section in this report for certain other factors that could cause actual results or future events to differ materially from those anticipated in the forward-looking statements included in this report or from historical performance.

Overview

We are a financial holding company and a bank holding company providing banking and other financial services throughout our targeted Colorado markets to consumers and to small and medium-sized businesses, including the owners and employees of those businesses, through our bank subsidiaries. At September 30, 2006, those subsidiaries included Guaranty Bank and Trust Company, Centennial Bank of the West, and Collegiate Peaks Bank, which was held for sale at September 30, 2006, with completion of the sale on November 1, 2006. Unless the context requires otherwise, the terms “Company,” “us,” “we,” and “our” refers to Centennial Bank Holdings, Inc. on a consolidated basis. We refer to Guaranty Bank and Trust Company as Guaranty Bank, Centennial Bank of the West as CBW, and Collegiate Peaks Bank as Collegiate Peaks. We refer to Guaranty Bank and CBW as the Banks.

We offer an array of banking products and services to the communities we serve, including accepting time and demand deposits, originating commercial loans, real estate loans, including construction loans and commercial 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.

On October 1, 2005, we consummated our stock-for-stock acquisition of First MainStreet Financial, Ltd., a financial holding company, pursuant to which it’s wholly owned subsidiary, First MainStreet Bank, N.A., merged with and into CBW. First MainStreet Financial’s insurance agency, First MainStreet Insurance, Ltd., was subsequently sold by us on March 1, 2006. The acquisition of First MainStreet resulted in the issuance of 9,517,727 shares of our common stock. We acquired $245.2 million of loans and $332.8 million of deposits as a result of the First MainStreet acquisition. On November 1, 2005, we completed the acquisition of Foothills Bank, which was merged into Guaranty Bank. Foothills had $90.8 million in loans and deposits of $114.2 million at consummation of the transaction.

On June 19, 2006, the Company signed a definitive agreement to sell Collegiate Peaks to a new group of management-led investors. This agreement followed the August 25, 2005 definitive agreement for the sale of Collegiate Peaks that was terminated on April 25, 2006. The Company consummated the sale of Collegiate Peaks as of November 1, 2006. Pursuant to the Company’s 2005 decision to sell Collegiate Peaks, the Company classified Collegiate Peaks’ assets and liabilities as held for sale at the lower of cost or fair value as of September 30, 2006 and December 31, 2005.

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,
	2006		2005		Change - Favorable (Unfavorable)			2006		2005			Change - Favorable (Unfavorable)
(In thousands, except share data)
Results of Operations:
Interest income	$	44,224	$	34,514	$	9,710		$	129,900	$	96,925		$	32,975
Interest expense		15,229		8,641		(6,588	)		41,610		19,854			(21,756	)

Net interest income		28,995		25,873		3,122			88,290		77,071			11,219
Provision for credit losses		1,566		—		(1,566	)		1,566		1,700			134

Net interest income after provision for loan losses		27,429		25,873		1,556			86,724		75,371			11,353
Noninterest income		3,474		2,732		742			10,191		7,649			2,542
Noninterest expense		22,942		20,727		(2,215	)		69,686		66,927			(2,759	)

Income before income taxes		7,961		7,878		83			27,229		16,093			11,136
Income tax expense		2,521		2,748		227			9,123		5,482			(3,641	)

Income from continuing operations		5,440		5,130		310			18,106		10,611			7,495
Income (loss) from discontinued operations, net of tax		380		—		380			869		(794	)		1,663

Net income	$	5,820	$	5,130	$	690		$	18,975	$	9,817		$	9,158

Share Data:
Basic earnings per share	$	0.10	$	0.10	$	0.00		$	0.33	$	0.19		$	0.14
Diluted earnings per share	$	0.10	$	0.10	$	0.00		$	0.33	$	0.19		$	0.14
Average shares outstanding		57,093,056		51,902,934		5,190,119			58,060,683		52,137,132			5,923,551
Diluted average shares outstanding		57,499,412		52,002,019		5,497,393			58,394,354		52,170,523			6,223,831

Net income for the three and nine month periods ended September 30, 2006 reflected increases over the same prior year periods of $0.7 million and $9.2 million, respectively. These increases in net income were significantly impacted by inclusion of First MainStreet and Foothills Bank, acquired in the fourth quarter of 2005, in the 2006 operating results. The impact on net income of those acquisitions on the change between third quarter 2006 and third quarter 2005 was mitigated by our $1.6 million provision for credit losses in the third quarter 2006. The increase in the year to date earnings at September 30, 2006 from the September 30, 2005 year to date earnings was further affected by a first quarter 2005 charge of $4.9 million for change of control and retention bonuses related to the December 31, 2004 acquisition of Guaranty Corporation.

Net Interest Income and Net Interest Margin

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


	Quarter Ended
	September 30, 2006			June 30, 2006			March 31, 2006			December 31, 2005			September 30, 2005
Net interest income	$	28,995		$	29,388		$	29,907		$	30,797		$	25,873
Interest rate spread		4.45	%		4.66	%		4.67	%		4.54	%		4.72	%
Net interest margin		5.34	%		5.51	%		5.44	%		5.39	%		5.41	%

Net interest income increased for third quarter 2006 from the same period of the previous year by $3.1 million, while the net interest margin decreased by 7 basis points. The change in net interest income was significantly impacted by the fourth quarter 2005 acquisitions of First MainStreet and Foothills Bank and increases in the targeted federal funds rate from the fourth quarter 2005 through the second quarter of 2006.

The 5.34% net interest margin for third quarter 2006 reflected a decrease of 17 basis points from the second quarter 2006 net interest margin. The yield on interest earning assets increased during the quarter. However, the third quarter decrease in deposits led to using more costly funding sources, which resulted in an increase in the cost of funds. This shift in funding sources is the primary factor in the lower net interest margin.

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


	Quarter Ended September 30,
	2006						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:
Gross loans, net of unearned fees (1)(2)(3)	$	1,947,126	$	41,427	8.44	%	$	1,728,822	$	32,909	7.55	%
Investment securities(1)
Taxable		61,554		713	4.59	%		75,816		638	3.34	%
Tax-exempt		112,292		1,542	5.45	%		54,822		626	4.53	%
Equity Securities (4)		30,731		485	6.27	%		20,435		230	4.47	%
Other earning assets		3,244		57	6.88	%		15,880		111	2.77	%

Total interest-earning assets		2,154,947		44,224	8.14	%		1,895,775		34,514	7.22	%

Non-earning assets:
Cash and due from banks		73,837						62,416
Other assets		621,997						514,748

Total assets	$	2,850,781					$	2,472,939

LIABILITIES AND STOCKHOLDER’S EQUITY:
Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	159,634	$	194	0.48	%	$	106,906	$	103	0.38	%
Money Market		647,741		5,909	3.62	%		498,507		2,605	2.07	%
Savings		91,928		173	0.75	%		76,858		139	0.72	%
Time certificates of deposit		548,846		6,007	4.34	%		494,306		3,801	3.05	%

Total interest-bearing deposits		1,448,149		12,283	3.36	%		1,176,577		6,648	2.24	%
Borrowings:
Repurchase agreements		31,083		349	4.45	%		31,252		249	3.16	%
Federal funds purchased		122		2	4.94	%		4,771		44	3.66	%
Subordinated debentures		41,239		972	9.35	%		41,608		669	6.38	%
Borrowings		115,591		1,623	5.57	%		115,982		1,031	3.53	%

Total interest-bearing liabilities		1,636,184		15,229	3.69	%		1,370,190		8,641	2.50	%

Noninterest bearing liabilities:
Demand deposits		508,993						482,336
Other liabilities		110,275						102,445

Total liabilities		2,255,452						1,954,971
Stockholders’ equity		595,329						517,968

Total liabilities and stockholders’ equity	$	2,850,781					$	2,472,939

Net interest income			$	28,995					$	25,873

Net interest margin					5.34	%					5.41	%

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

(2)	Average gross loans include nonaccrual loans, which were $26.8 million and $8.4 million at September 30, 2006 and 2005, respectively.

(3)	Net loan fees of $1.5 million and $1.9 million for the three months ended September 30, 2006 and 2005 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.


	Nine Months Ended September 30,
	2006						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:
Gross loans, net of unearned fees (1)(2)(3)	$	1,984,197	$	122,592	8.26	%	$	1,684,687	$	91,989	7.30	%
Investment securities(1)
Taxable		69,112		2,207	4.27	%		84,940		2,121	3.34	%
Tax-exempt		87,066		3,420	5.25	%		46,279		1,797	5.19	%
Equity Securities (4)		29,874		1,345	6.02	%		15,563		597	5.13	%
Other earning assets		5,054		336	8.88	%		22,885		421	2.46	%

Total interest-earning assets		2,175,303		129,900	7.98	%		1,854,354		96,925	6.99	%

Non-earning assets:
Cash and due from banks		76,109						57,901
Other assets		622,119						514,007

Total assets	$	2,873,531					$	2,426,262

LIABILITIES AND STOCKHOLDER’S EQUITY:
Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	169,415	$	538	0.42	%	$	113,303	$	300	0.35	%
Money market		624,450		15,527	3.32	%		514,444		6,298	1.64	%
Savings		95,581		534	0.75	%		80,174		425	0.71	%
Time certificates of deposit		576,471		17,364	4.03	%		455,962		8,018	2.35	%

Total interest-bearing deposits		1,465,917		33,964	3.10	%		1,163,883		15,041	1.73	%
Borrowings:
Repurchase agreements		26,982		872	4.32	%		30,330		605	2.67	%
Federal funds purchased		563		20	4.75	%		5,279		132	3.34	%
Subordinated debentures		41,245		2,720	8.82	%		41,808		1,839	5.88	%
Borrowings		105,850		4,035	5.10	%		89,274		2,237	3.35	%

Total interest-bearing liabilities		1,640,557		41,610	3.39	%		1,330,574		19,854	1.99	%

Noninterest bearing liabilities:
Demand deposits		522,537						480,793
Other liabilities		110,580						96,879

Total liabilities		2,273,674						1,908,246
Stockholders’ equity		599,857						518,016

Total liabilities and stockholders’ equity	$	2,873,531					$	2,426,262

Net interest income			$	88,290					$	77,071

Net interest margin					5.43	%					5.56	%

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

(2)	Average gross loans include nonaccrual loans, which were $26.8 million and $8.4 million at September 30, 2006 and 2005, respectively.

(3)	Net loan fees of $5.3 million and $5.9 million for the nine months ended September 30, 2006 and 2005 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.

Year to date 2006 net interest income increased from the same period of the previous year by $11.2 million, while the net interest margin decreased by 13 basis points to 5.43%. The changes in net interest income and net interest margin were impacted by the fourth quarter 2005 acquisitions of First MainStreet and Foothills Bank and increases in the targeted federal funds rate from the fourth quarter 2005 through the second quarter of 2006.

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable

to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.


	Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
	Net Change			Rate			Volume
	(In thousands)
Interest income:
Loans held for investment	$	30,603		$	13,013		$	17,590
Investment securities
Taxable		86			260			(174	)
Tax-exempt		1,623			21			1,602
Equity Securities		748			119			629
Other earning assets		(85	)		(121	)		36

Total interest income		32,975			13,292			19,683

Interest expense:
Deposits:
Interest-bearing demand		238			68			170
Money Market		9,229			7,644			1,585
Savings		109			24			85
Time certificates of deposit		9,346			6,818			2,528
Repurchase agreements		267			325			(58	)
Federal funds purchased		(112	)		100			(212	)
Subordinated debentures		881			905			(24	)
Borrowings		1,798			1,326			472

Total interest expense		21,756			17,210			4,546

Net interest income	$	11,219		$	(3,918	)	$	15,137

The increase in our net interest income caused by an increase in volume was driven by the fourth quarter 2005 acquisitions of First MainStreet and Foothills Bank. The impact of the rising interest rate environment caused a decrease in our net interest income of $3.9 million, reflecting that our interest-bearing liabilities had greater interest rate sensitivity than our interest-earning assets.

Provision for Credit Losses

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

The nine month period ended September 30, 2006 reflected a $1.6 million third quarter 2006 provision for credit losses, while the nine month period ended September 30, 2005 reflected a $1.7 million first quarter 2005 provision for credit losses.

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

Noninterest Income

The following table presents the major categories of noninterest income:


	Quarter Ended
(In thousands)	September 30, 2006		June 30, 2006		March 31, 2006			December 31, 2005			September 30, 2005
Noninterest income:
Customer service and other fees	$	3,015	$	2,993	$	2,632		$	2,524		$	2,035
Gain (loss) on sale of securities		6		—		(5	)		(16	)		—
Gain on sale of loans		229		230		314			256			433
Gain (loss) on sale of assets		108		179		(91	)		(195	)		260
Other		116		203		262			97			4

Total noninterest income	$	3,474	$	3,605	$	3,112		$	2,666		$	2,732

After increases in noninterest income in the 2006 first and second quarters of 17% and 16%, respectively, our third quarter 2006 noninterest income decreased from the second quarter 2006 by $131,000, or 4%, to $3.5 million. The growth in customer service and other fees moderated in the third quarter, after accelerated growth in the first two quarters of 2006 that resulted from the introduction of new deposit products and a new service charge structure in early 2006.

In the third quarter 2006, we discontinued our residential mortgage group. The residential mortgage group generated $229,000 and $773,000 of income from the sale of mortgages for the three and nine months ended September 30, 2006.

Our increase in noninterest income for the third quarter 2006 over the third quarter 2005 was impacted by the fourth quarter 2005 acquisitions of First MainStreet and Foothills Bank.

Noninterest Expense

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


	Quarter Ended
	September 30, 2006		June 30, 2006		March 31, 2006		December 31, 2005		September 30, 2005
	(In thousands)
Compensation and employee benefits	$	12,006	$	12,082	$	11,435	$	11,202	$	9,828
Occupancy expense		1,891		1,995		2,052		1,947		1,651
Furniture and equipment		1,286		1,230		1,165		1,188		924
Amortization of intangible assets		2,858		2,998		2,998		3,232		2,968
Merger, acquisition and transition expenses		239		1,540		88		1,995		752
Other general and administrative		4,662		5,159		4,002		5,492		4,604

Total noninterest expense	$	22,942	$	25,004	$	21,740	$	25,056	$	20,727

Noninterest expense for third quarter 2006 of $22.9 million decreased from the second quarter 2006 by $2.1 million. Merger, acquisition and transition expenses decreased by $1.3 million. This decrease was the result of $1.5 million second quarter charges that were partially offset by third quarter 2006 costs primarily associated with the discontinuance of our residential mortgage group. Third quarter 2006 other general and administrative costs decreased by $0.5 million from the second quarter 2006, primarily due to a reduction in professional services expense. Third quarter 2006 salary expense was essentially the same as compared to the second quarter 2006 despite employee additions to our business banking unit and the hiring of other officer-level employees.

Third quarter 2006 noninterest expense was $2.2 million greater than noninterest expense for third quarter 2005. This increase in noninterest expense is due primarily to additional expenses resulting from the First MainStreet and Foothills Bank acquisitions.

FINANCIAL CONDITION

The following sets forth certain key consolidated balance sheet data:


	September 30, 2005		June 30, 2006		March 31, 2006		December 31, 2005		September 30, 2005
	(In thousands)
Net loans (including loans held for sale)	$	1,955,529	$	1,906,513	$	1,983,882	$	2,046,938	$	1,744,529
Total assets		2,886,647		2,850,281		2,916,510		2,980,757		2,540,169
Deposits		1,968,264		1,998,055		2,077,076		2,048,352		1,721,609

Loans

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


	September 30, 2006			June 30, 2006			March 31, 2006			December 31, 2005			September 30, 2005
	(In thousands)
Real estate - Mortgage	$	663,170		$	583,020		$	595,860		$	584,590		$	288,534
Real estate - Construction		463,468			486,060			504,426			530,716			670,416
Equity lines of credit		60,817			64,355			67,284			70,386			75,982
Commercial		654,829			664,202			702,556			724,929			587,762
Agricultural		54,805			52,897			57,054			71,707			65,466
Consumer		53,714			54,955			56,986			63,121			50,776
Leases receivable and other		32,931			26,470			25,714			27,004			26,341

Total gross loans		1,983,734			1,931,959			2,009,880			2,072,453			1,765,277
Less: allowance for loan losses		(25,977	)		(25,297	)		(26,999	)		(27,475	)		(25,019	)
Unearned discount		(4,328	)		(4,737	)		(4,729	)		(4,860	)		(1,744	)

Net Loans	$	1,953,429		$	1,901,925		$	1,978,152		$	2,040,118		$	1,738,514

Loans held for sale	$	2,100		$	4,588		$	5,730		$	6,820		$	6,015

At September 30, 2006, total loans, net of unearned discount, of $2.0 billion were $92.9 million less than the December 31, 2005 balance and $49.7 million greater than the June 30, 2006 balance. The decline in the loan portfolio from December 31, 2005 was primarily due to the increased pace of loan repayments in our real estate portfolio in the first two quarters of 2006, tempered by an increase in the third quarter 2006 real estate loan portfolio of $55.2 million. The third quarter 2006 real estate loan portfolio increases were derived from organic growth.

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.


	Quarter Ended
	September 30, 2006			June 30, 2006			March 31, 2006			December 31, 2005			September 30, 2005
	(In thousands)
Nonaccrual loans, not restructured	$	26,812		$	30,684		$	28,746		$	29,608		$	8,352
Accruing loans past due 90 days or more		396			84			1			131			1,806
Other real estate owned		5,090			1,041			1,267			1,465			2,532

Total nonperforming assets	$	32,298		$	31,809		$	30,014		$	31,204		$	12,690

Nonperforming loans	$	27,208		$	30,768		$	28,747		$	29,739		$	10,158
Other impaired loans		17,076			16,166			11,841			20,551			17,599

Total impaired loans	$	44,284		$	46,934		$	40,588		$	50,290		$	27,757
Allocated allowance for loan losses		(6,468	)		(5,685	)		(9,296	)		(10,360	)		(10,445	)

Net investment in impaired loans	$	37,816		$	41,249		$	31,292		$	39,930		$	17,312

Charged-off loans	$	(1,736	)	$	(2,012	)	$	(1,091	)	$	(3,060	)	$	(592	)
Recoveries		177			593			615			679			76

Net charge-off loans	$	(1,559	)	$	(1,419	)	$	(476	)	$	(2,381	)	$	(516	)

Allowance for loan losses	$	25,977		$	25,297		$	26,999		$	27,475		$	25,019

Allowance for loan losses to loans, net of unearned discount		1.31	%		1.31	%		1.35	%		1.33	%		1.43	%
Allowance for loan losses to nonaccrual loans		96.89	%		82.44	%		93.92	%		92.80	%		299.56	%
Allowance for loan losses to nonperforming assets		95.48	%		79.53	%		89.95	%		88.05	%		197.16	%
Allowance for loan losses to impaired loans		58.66	%		53.90	%		66.52	%		54.63	%		90.14	%
Nonperforming assets to loans, net of deferred fees and costs, and other real estate owned		1.63	%		1.65	%		1.50	%		1.51	%		0.73	%
Annualized net charge-offs (recoveries) to average loans		0.32	%		0.29	%		0.09	%		0.53	%		0.12	%
Nonperforming loans to loans, net of unearned discount		1.37	%		1.59	%		1.43	%		1.44	%		58.00	%

Nonperforming assets of $32.3 million at September 30, 2006 reflected increases of $0.5 million from June 30, 2006 and $0.1 million from December 31, 2005. The increase from June 30, 2006 in nonperforming assets consists primarily of a $4.0 million increase in OREO and a $3.9 million decrease in nonaccrual loans. In September 2006, we transferred the $4.2 million balance of a single loan relationship to OREO.

Our nonperforming loans and impaired loans decreased by $2.5 million and $6.0 million from December 31, 2005, respectively. The ratio of our allowance for loan losses to nonaccrual loans and allowance for loan losses to impaired loans each increased 4 percentage points from December 31, 2005.

At September 30, 2006, the allowance for loan losses was $26.0 million, which represents an increase of $0.7 million from June 30, 2006 and a decrease of $1.5 million from December 31, 2005. The ratio of the allowance for loan losses to nonperforming assets was 95.5% at September 30, 2006 and represented an increase of 16.0 percentage points and 7.4 percentage points from June 30, 2006 and December 31, 2005, respectively. The ratio of the allowance for loan losses to loans, net of unearned discount, was 1.3% at September 30, 2006, June 30, 2006 and December 31, 2005. Management believes that the allowance for loan losses is adequate to cover potential losses in the company’s loan portfolio based on its analysis of loans, including the collateral position of identified substandard loans.

Allowance for Loan Losses

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

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


	Nine Months Ended September 30,
Allowance for Loan Losses	2006		2005
	(In thousands)
Balance, beginning of period	$	27,475	$	25,022
Loan charge-offs:
Real estate - mortgage		1,594		1,216
Real estate - construction		1,981		20
Commercial		871		921
Agricultural		24		—
Consumer		348		226
Lease receivable and other		21		98

Total loan charge-offs:		4,839		2,481

Recoveries:
Real estate - mortgage		211		95
Real estate - construction		48		84
Commercial		919		422
Agricultural		29		7
Consumer		178		69
Lease receivable and other		—		101

Total loan recoveries		1,385		778

Net loan charge-offs		3,454		1,703
Provision for loan losses		1,956		1,700

Balance, end of period	$	25,977	$	25,019

The allowance for loan losses of $26.0 million at September 30, 2006 represented 1.3% of loans, net of unearned discount and 96.9% of nonaccrual loans. At December 31, 2005, the allowance for loan losses was 1.3% of the loans, net of unearned discount and 92.8% of nonaccrual loans. Nonperforming loans with high collateral value to loan value require a relatively smaller reserve than uncollateralized loans or loans with minimal collateral coverage. At September 30, 2006, our nonperforming loans continued to have estimated collateral values in relation to loan values that allow for an allowance to nonperforming loan ratio of less than 100%.

Through September 2006, we charged off $4.8 million, of which $1.9 million was associated with the balance transfer of a single loan relationship to OREO. Excluding the charge-off of this single loan relationship, the 2006 charge-offs were $0.5 million greater than our charge-offs for the same period of the prior year. Our recoveries for the nine months ended September 30, 2006 were $0.6 million greater than the recoveries for the same period in the prior year.

Investment Securities

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

The carrying value of our portfolio of investment securities at September 30, 2006 and December 31, 2005 was as follows:


	September 30, 2006		December 31, 2005		Increase Decrease			% Change
	(In thousands)
Securities available-for-sale:
U.S. Treasury securities	$	4,998	$	13,076	$	(8,078	)	(61.8	)%
U.S. Government agencies		5,391		5,367		24		0.4	%
Obligations of states and political subdivisions		113,053		72,893		40,160		55.1	%
Mortgage backed securities		40,018		50,043		(10,025	)	(20.0	)%
Marketable equity securities		824		1,702		(878	)	(51.6	)%

Total securities available-for-sale	$	164,284	$	143,081	$	21,203		14.8	%

Securities held-to-maturity:

Mortgage-backed	$	10,133	$	5,798	$	4,244		73.2	%

The carrying value of our investment securities at September 30, 2006 was $164.3 million, compared to December 31, 2005 of $143.1 million. Our state and political subdivisions balance increased by $40.2 million, $40.0 million of which represents the addition of a second quarter loan that was structured as a municipal security. The decrease in U.S. Treasury securities was the result of the maturity of several U.S. Treasury securities, with the decrease in mortgage-backed securities caused by paydowns.

Deposits

At September 30, 2006, our deposits were $2.0 billion, which reflects a decrease of $80.1 million from December 31, 2005 and a decrease of $29.8 million from June 30, 2006. Since December 31, 2005, certificates of deposits declined $72.1 million. Certificates of deposit represented 28.5% of total deposits at September 30, 2006 down from 30.9% at December 31, 2005. The decline in certificates of deposit was due to our continuing strategy to reduce our reliance on certificates of deposit as a funding source.


	At September 30, 2006				At December 31, 2005
	Balance		% of Total		Balance		% of Total
	(Dollars in thousands)
Noninterest bearing deposits	$	524,808	26.66	%	$	593,811	28.99	%
Interest bearing demand		159,732	8.12	%		160,283	7.82	%
Money market		634,120	32.22	%		561,747	27.42	%
Savings		88,695	4.50	%		99,496	4.86	%
Time		560,909	28.50	%		633,015	30.91	%

	$	1,968,264	100.00	%	$	2,048,352	100.00	%

Borrowings and Subordinated Debentures

At September 30, 2006, our outstanding borrowings were $137.0 million. These borrowings consisted of $107.0 million and $14.6 million on a line of credit and term notes at the Federal Home Loan Bank, respectively, $14.7 million on a U.S. Bank revolving credit agreement, and a $0.7 million Treasury Tax and Loan balance.

Our maximum credit allowance for total borrowings at the Federal Home Loan Bank as of September 30, 2006 was $383.3 million. The interest rate on the line of credit varies with the federal funds rate. The term notes have fixed interest rates that range from 2.52% to 6.22%. We have a blanket pledge and security agreement with the Federal Home Loan Bank, which encompasses certain loans and securities as collateral for these borrowings.

We have a $70 million revolving credit agreement, as amended, with U.S. Bank National Association that contains financial covenants, including maintaining a minimum return on average assets, a maximum nonperforming assets to total loans ratio and regulatory capital ratios that qualify the Company as well-capitalized. The interest rate on this revolving credit agreement, which varies based on a spread over the federal funds rate, was 6.78% at September 30, 2006. We were in compliance with all debt covenants at quarter end. This agreement is secured by Guaranty Bank stock. U.S. Bank performs various banking services for the Company for which they receive usual and customary fees in addition to providing us with this credit facility.

At September 30, 2006, we had a $41,239,000 aggregate principal balance of subordinated debentures outstanding with a weighted average cost of 9.1%. The subordinated debentures were issued in four separate series. Each issuance has a maturity of thirty years from its date of issue. The subordinated debentures were issued to trusts established by us, which in turn issued $40 million of trust preferred securities. Generally and with certain limitations, the Company is permitted to call the debentures subsequent to the first five or ten years, as applicable, after issue if certain conditions are met, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment of the trusts, the debentures or the preferred securities.

Capital Resources

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

At September 30, 2006, the Company had a total risk-weighted capital ratio of 10.48%, a Tier 1 risk-weighted capital ratio of 9.27% and a leverage ratio of 8.55%. The Company actively monitors its regulatory capital ratios to ensure that the Company and its bank subsidiaries are well capitalized under the applicable regulatory framework.

Contractual Obligations and Off-Balance Sheet Arrangements

At September 30, 2006, the following financial instruments were outstanding whose contract amounts represented credit risk:


	September 30, 2006		December 31, 2005
	(In thousands)
Contractual Obligations
Commitments to extend credit	$	514,893	$	634,737
Standby letters of credit		31,920		37,952
Commercial letters of credit		266		472

Totals	$	547,079	$	673,161

Liquidity

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

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

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

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

Application of Critical Accounting Policies and Accounting Estimates

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

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

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

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

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

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

This discussion has highlighted those accounting policies that we consider to be critical to our financial reporting process. However, all the accounting policies are important, and therefore you are encouraged to review each of the policies included in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2005 to gain a better understanding of how our financial performance is measured and reported.

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

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

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

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

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

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

At September 30, 2006, we had a negative gap of 4.2% of our total assets, which represents the $120 million deficiency of interest-earning assets under interest-bearing liabilities that would reprice within one year. Our cumulative gap indicates that we have $502.1 million of assets in excess of liabilities that are subject to repricing. The following table sets forth information concerning repricing opportunities for our interest-earning assets and interest-bearing liabilities as of September 30, 2006. 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			Nonrate Sensitive			Total
	(Dollars in thousands)
Interest-bearing cash and cash equivalents	$	7,835		$	—		$	—		$	—		$	—		$	7,835
Investment securities		36,775			7,142			31,141			99,359			31,683			206,100
Loans, gross		1,114,585			243,510			457,795			140,449			25,167			1,981,506
All other assets		40,262			8,999			24,584			6,826			610,535			691,206

Totals	$	1,199,457		$	259,651		$	513,520		$	246,634		$	667,385		$	2,886,647

Deposits	$	1,055,330		$	293,579		$	94,547		$	—		$	524,808		$	1,968,264
Assets under repurchase agreements and federal funds purchases		36,635			—			—			—			—			36,635
Borrowings		122,355			14,699			—			—			(89	)		136,965
Subordinated debentures		—			—			—			41,239			—			41,239
All other liabilities		49,146			7,345			2,271			—			49,567			108,329
Stockholder’s equity		—			—			—			—			595,215			595,215

Totals	$	1,263,466		$	315,623		$	96,818		$	41,239		$	1,169,501		$	2,886,647

Period gap (assets minus liabilities)		(64,009	)		(55,972	)		416,702			205,395			(502,116	)
Cumulative gap		(64,009	)		(119,981	)		296,721			502,116
Cumulative rate sensitive gap %		(2.2	)%		(4.2	)%		10.3	%		17.4	%

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, 2006 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.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

On December 31, 2004, an adversary proceeding was filed against Guaranty Bank and Trust Company in the United States Bankruptcy Court for the District of Colorado, by the trustees of the Will Hoover Company, or the Hoover Company, and William Gordon Hoover, Jr., or Hoover, seeking to avoid certain transfers that occurred over a four-year period commencing in 1999 under the United States Bankruptcy Code. The trustees 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 Bankruptcy Court granted, in part, Guaranty Bank’s initial response and dismissed $8.5 million of the claims relating to alleged transfers for payment of items credited in the check collection process. On November 10, 2005, the trustees filed a motion in District Court requesting reconsideration of the Bankruptcy Court’s order dismissing those claims. The District Court summarily denied the trustees’ motion on November 21, 2005. The Trustees filed another motion for reconsideration with the Bankruptcy Court on November 9, 2006. We intend to vigorously oppose the motion.

ITEM 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

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

(a)

None.

(b)

None.

(c) The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the third quarter 2006.


Period	Total Number of Shares Purchased⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans⁽²⁾	Maximum Number of Shares that May Yet Be Purchased Under the Plans at the End of the Period
July 1 to July 31, 2006	500,000	$	10.13	500,000	966,400
August 1 to August 31, 2006	310,000		10.09	310,000	656,400
September 1 to September 30, 2006	N/A		N/A	N/A	N/A

Total	810,000	$	10.11	810,000	656,400

⁽¹⁾	No shares were purchased other than as part of a publicly announced plan.

⁽²⁾

On March 2, 2006, we announced a stock repurchase program to repurchase up to 3,000,000 shares of our common stock from time to time over a one-year period in the open market or through private transactions. Shares purchased through September 30, 2006 under this plan were 2,343,600. As of November 2, 2006, the Company has 220,510 shares remaining to be repurchased under this plan. On October 25, 2006, we announced a new stock repurchase program to repurchase up to 2,500,000 shares of our common stock from time to time over a one-year period in the open market or through private transactions. This new program is not reflected in the above table.

ITEM 3. Defaults Upon Senior Securities

None.

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

None.

ITEM 5. Other Information

On November 7, 2006, we renewed our $70 million 364-day Revolving Credit Agreement with U.S. Bank National Association. This agreement requires the Company to comply with certain financial covenants, including maintaining a minimum return on average assets, a maximum nonperforming assets to total loans ratio and regulatory capital ratios that qualify the Company as well-capitalized. This agreement also contains other covenants, conditions, representations and warranties and events of default customary for facilities of this type. This 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 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 7, 2006, the Company had no outstanding balance under the credit facility. The amendment renewing the Revolving Credit Agreement is filed as Exhibit 10.3 to this Form 10-Q.

In addition to this credit facility, U.S. Bank performs various banking services for the Company for which they receive usual and customary fees.

On November 8, 2006, the Company amended and restated its financial advisory services agreement with Castle Creek Financial LLC, of which John M. Eggemeyer, the Company’s Chairman of the Board, is a co-founder and the chief executive officer. The amendments to the agreement were immaterial to the Company. The amended and restated services agreement is filed as Exhibit 10.2 to this Form 10-Q.

ITEM 6. Exhibits


Exhibit Number		Description

3.1		Amended and Restated Certification of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Registrant’s Form S-1 Registration Statement (No. 333-124855)).

3.2		Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Registrant’s Form S-1 Registration Statement (No. 333-124855)).

10.1†		Change-in-Control Agreement, dated July 24, 2006, between Sherri L. Heronema and the Registrant (incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed on July 25, 2006).

10.2		Services Agreement, dated as of November 8, 2006, by and between Castle Creek Financial LLC and the Registrant

10.3		Amendment No. 3 to the Revolving Credit Agreement, dated November 7, 2006, between U.S. Bank National Association and the Registrant.

31.1		Section 302 Certification of Chief Executive Officer.

31.2		Section 302 Certification of Chief Financial Officer.

32.1		Section 906 Certification of Chief Executive Officer.

32.2		Section 906 Certification of Chief Financial Officer.

†	Indicates a management contract or compensatory plan or arrangement

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 13, 2006		CENTENNIAL BANK HOLDINGS, INC.

		/s/ PAUL W. TAYLOR
		Paul W. Taylor
		Executive Vice President and Chief Financial Officer

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