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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark one)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the fiscal year ended December 31, 2000.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from to
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Commission file number 000-24445
COBIZ INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-0826324
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
821 17TH STREET
DENVER, CO 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 293-2265
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
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 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 if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting common equity held by
non-affiliates of the registrant as of March 27, 2001 computed by reference to
the closing price on the Nasdaq National Market was $81,219,645.
The number of shares outstanding of the registrant's sole class of
common stock on March 27, 2001 was 8,416,187.
Documents incorporated by reference: Portions of the registrant's proxy
statement to be filed with the Securities and Exchange Commission in connection
with the registrant's 2001 annual meeting of shareholders are incorporated by
reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Business............................................................................3
Item 2. Properties.........................................................................23
Item 3. Legal Proceedings..................................................................23
Item 4. Submission of Matters to a Vote of Security Holders................................23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................................23
Item 6. Selected Financial Data............................................................25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................................26
Item 7A. Quantitative and Quantitative Disclosures About Market Risk........................36
Item 8. Financial Statements and Supplementary Data........................................36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................................37
PART III
Item 10. Directors and Executive Officers of the Registrant................................37
Item 11. Executive Compensation.............................................................37
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................37
Item 13. Certain Relationships and Related Transactions.....................................37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................38
Index to Consolidated Financial Statements....................................... F-1
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that describe CoBiz's
future plans, strategies and expectations. All forward-looking statements are
based on assumptions and involve risks and uncertainties, many of which are
beyond our control and which may cause our actual results, performance or
achievements to differ materially from the results, performance or achievements
contemplated by the forward-looking statements. Such risks and uncertainties
include, among other things:
o Competitive pressures among depository and other financial
institutions nationally and in our market areas may increase
significantly.
o Adverse changes in the economy or business conditions, either
nationally or in our market areas, could increase
credit-related losses and expenses.
o Increases in defaults by borrowers and other delinquencies
could result in increases in our provision for losses on loans
and leases and related expenses.
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o Our inability to manage growth effectively, including the
successful expansion of our customer support, administrative
infrastructure and internal management systems, could
adversely affect our results of operations and prospects.
o Fluctuations in interest rates and market prices could reduce
our net interest margins and asset valuations and increase our
expenses.
o The consequences of continued bank acquisitions and mergers in
our market areas, resulting in fewer but much larger and
financially stronger competitors, could increase competition
for financial services to our detriment.
o Our continued growth will depend in part on our ability to
enter new markets successfully and capitalize on other growth
opportunities.
o Changes in legislative or regulatory requirements applicable
to us and our subsidiaries could increase costs, limit certain
operations and adversely affect results of operations.
o Changes in tax requirements, including tax rate changes, new
tax laws and revised tax law interpretations may increase our
tax expense or adversely affect our customers' businesses.
In light of these risks, uncertainties and assumptions, you
should not place undue reliance on any forward-looking statements in this
report. We undertake no obligation to publicly update or otherwise revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
ITEM 1. BUSINESS
OVERVIEW
CoBiz Inc. ("CoBiz") is a financial holding company headquartered in
Denver, Colorado. We were incorporated in Colorado on February 19, 1980 as
Equitable Bancorporation, Inc. Our wholly-owned subsidiary Colorado Business
Bank, N.A. (the "Bank"), is a full-service business banking institution with
nine Colorado locations, including six in the Denver metropolitan area, two in
Boulder and one in Edwards, just west of Vail. As of December 31, 2000, we had
total assets of $633.1 million, net loans and leases of $444.7 million and
deposits of $450.8 million. We provide a broad range of banking products and
services, including credit, cash management, investment, deposit and trust
products and employee benefits consulting and insurance brokerage services, to
our targeted customer base of small- and medium-sized businesses and high net
worth individuals. Each of our locations operates as a separate business bank,
with significant local decision-making authority. Support functions such as
accounting, data processing, bookkeeping, credit administration, loan operations
and investment and cash management services are conducted centrally from our
downtown Denver office. As a result of this operating approach, we believe that
we are well positioned to attract and serve our target customers, combining the
elements of personalized service found in community banks with sophisticated
banking products and services traditionally offered by larger regional banks.
For a discussion of the segments included in our principal activities, see Note
15 of Notes to Consolidated Financial Statements.
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On March 8, 2001, we acquired First Capital Bank of Arizona. The
acquisition was structured as a merger between First Capital Bank and a
wholly-owned subsidiary we formed to participate in the merger. First Capital
Bank shareholders received shares of our common stock in the merger. As a result
of the merger, First Capital Bank became our wholly owned subsidiary. First
Capital Bank is an Arizona state-chartered commercial bank with two locations
serving Phoenix and the surrounding area of Maricopa County, Arizona. As of
December 31, 2000, First Capital Bank had total assets of $106.3 million, net
loans of $72.8 million and deposits of $92.1 million. First Capital Bank
provides commercial banking services to a targeted customer base of small- and
medium-sized businesses and high net worth individuals. Because the acquisition
of First Capital Bank was not completed until 2001, the discussion in this
report regarding CoBiz's business strategy and market areas served focuses only
on the Colorado market. For a discussion of the acquisition and the Arizona
market, see "First Capital Bank Acquisition."
BUSINESS STRATEGY
Our primary strategy is to differentiate ourselves from our competitors by
providing our local bank presidents with substantial decision-making authority.
In all areas of our operations, we focus on attracting and retaining the highest
quality personnel by maintaining an entrepreneurial culture and decentralized
banking approach. In order to realize our strategic objectives, we are pursuing
the following strategies:
Internal growth. We believe that the Colorado market provides us with
significant opportunities for internal growth. The market is currently dominated
by a number of large regional and national financial institutions that have
acquired Colorado-based banks. We believe that this consolidation has created
gaps in the banking industry's ability to serve certain customers in the Denver
metropolitan area because small- and medium-sized businesses often are not large
enough to warrant significant marketing focus and customer service from these
large banks. In addition, we believe that these banks often do not satisfy the
needs of high net worth individuals who desire personal attention from
experienced bankers. Similarly, we believe that many of the remaining
independent banks in the region do not provide the sophisticated banking
products and services that such customers require. Through our ability to
combine personalized service, experienced personnel who are established in their
community, sophisticated technology and a broad product line, we believe that we
will continue to achieve strong internal growth by attracting customers
currently banking at both larger and smaller financial institutions and by
expanding our business with existing customers. A significant amount of our loan
and lease growth to date has resulted from pre-existing customer relationships
established by our lending officers and senior management team.
De novo branching. We also intend to continue exploring growth
opportunities to expand through de novo branching in areas with high
concentrations of our target customers in Colorado and other western states. We
intend to use Colorado Business Bank -- Boulder as our model for further de novo
branching. Colorado Business Bank -- Boulder opened in November 1995 with a
staff of three experienced lending officers recruited from the Boulder branch of
a large national bank. We began our Boulder operations in a relatively small
space in an office building in downtown Boulder, rather than in a traditional,
free-standing bank building, thereby substantially decreasing overhead. As a
result of the market's acceptance of our business banking model, Colorado
Business Bank -- Boulder has grown significantly and relocated to a new larger
location. In addition, we added a second Boulder location. As of December 31,
2000, our Boulder locations had an aggregate of $94.7 million in loans and $69.2
million in deposits.
New product lines. We also will seek to grow through the addition of new
product lines. Our product development efforts are focused on providing enhanced
credit, cash management, investment, deposit and trust products to our target
customer base. Within the past few years, we have greatly expanded our
commercial real estate lending department to allow for the origination of larger
and more
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complex real estate loans. In addition, we began to offer trust and estate
administration services in March 1998, employee benefits consulting in 2000, and
we recently introduced insurance brokerage services. We believe that offering
such complementary products allows us to both broaden our relationships with
existing customers and attract new customers to our core business. In addition,
we believe that the fees generated by these services will increase our
non-interest income.
Expanding existing banking relationships. We are normally not a transaction
lender and typically require that borrowers enter into a multiple product
banking relationship with us, including deposits and cash management services,
in connection with the receipt of credit from the Bank. We believe that such
relationships provide us with the opportunity to introduce our customers to a
broader array of the products and services offered by us and generate additional
non-interest income. In addition, we believe that this philosophy aids in
customer retention.
Capitalizing on the use of technology. We believe that we have been able to
distinguish ourselves from traditional community banks operating in our market
through the use of technology. Our data processing system allows us to provide
upgraded Internet banking, expanded cash management products and check and
document imaging, as well as a 24-hour voice response system. Other services
currently offered by the Bank include controlled disbursement, lock box,
repurchase agreements and sweep investment accounts. In addition to providing
sophisticated services for our customers, we utilize technology extensively in
our internal systems and operational support functions to improve customer
service, maximize efficiencies and provide management with the information and
analyses necessary to manage our growth effectively.
Emphasizing high quality customer service. We believe that our ability to
offer high quality customer service provides us with a competitive advantage
over many regional banks that operate in the Denver metropolitan area. We
emphasize customer service in all aspects of our operations and identify
customer service as an integral component of our employee training programs.
Moreover, we are constantly exploring methods to make banking an easier and more
convenient process for our customers. For example, we offer a courier service to
pick up deposits for customers who are not in close proximity to any of the
Bank's nine locations or simply do not have the time to go to the Bank.
Maintaining asset quality and controlling interest rate risk. We seek to
maintain asset quality through a program that includes regular reviews of loans
by responsible loan officers and ongoing monitoring of the loan and lease
portfolio by a loan review officer who reports directly to the audit committee
of our board of directors. As of December 31, 2000, our ratio of nonperforming
loans and leases to total loans and leases was 0.10%. In addition, we seek to
control our exposure to changing interest rates by attempting to maintain an
interest rate profile within a narrow range around an earnings neutral position.
An important element of this focus has been to emphasize variable rate loans and
investments funded by deposits which also mature or re-price over periods of
twelve months or less.
Achieving efficiencies and economies of scale through centralized
administrative and support operations. We seek to maximize operational and
support efficiencies in a manner consistent with maintaining high quality
customer service. We have consolidated various management and administrative
functions, including accounting, data processing, bookkeeping, credit
administration, loan operations and investment and cash management services, at
our downtown Denver office. We believe that this structure allows our bank
personnel to focus on customer service and sales strategies adapted to each
community that we serve.
Acquisitions. On March 8, 2001, we completed our acquisition of First
Capital Bank of Arizona, our first bank outside the Colorado market area. For a
discussion of the acquisition, see "First Capital Bank
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Acquisition." We intend to continue to explore acquisitions of financial
institutions or financial services entities, including opportunities in Colorado
and other western states.
Our approach to expansion is predicated on recruiting key personnel to
lead new initiatives. While we normally consider an array of new locations and
product lines as potential expansion initiatives, we will generally proceed only
upon identifying quality management personnel with a loyal customer following in
the community or experienced in the product line that is the target of the
initiative. We believe that, by focusing on individuals who are established in
their communities and are experienced in offering sophisticated banking products
and services, we enhance our market position and add growth opportunities.
MARKET AREAS SERVED
Our primary market area is the Denver metropolitan area, which is
comprised of the counties of Denver, Boulder, Adams, Arapahoe, Douglas and
Jefferson. The Denver metropolitan area enjoyed a 2.2% increase in population
from July 1999 to July 2000. This six-county area is one of the fastest growing
regions in the nation, helping to make Colorado the third fastest growing state
in the United States. Denver's economy is also expanding, posting 5.2% growth in
non-farm employment from January 2000 to December 2000. This rapid expansion
helped to drive the unemployment rate down to 1.8% at December 2000. Per capita
income rose 7.2% between 1996 and 1998, which was the fourth highest per capita
income growth rate in the country. Companies with less than 50 employees make up
Denver's single largest employment group. The economy has diversified over the
years, with significant representation in technology, communications,
manufacturing, tourism, transportation and financial services. In June 1999, we
expanded in Colorado beyond the Denver metropolitan area by establishing an
office, Colorado Business Bank of the Rockies, in Edwards, Colorado, which is
located in the rapidly developing Vail valley. We have two locations each in
downtown Denver, Boulder and Littleton and one location each in Golden, the
Denver Technological Center ("DTC") and the Vail valley. The second downtown
Denver location was relocated to a new facility which opened in the second
quarter of 2000. The following is selected additional market data regarding the
Colorado markets we serve:
o Downtown Denver is the business center of metropolitan Denver.
o Boulder has one of the highest concentrations of small businesses and affluent
individuals in the Rocky Mountain region.
o The Littleton locations serve a more residential area, including Highlands
Ranch, one of the fastest growing communities in the Denver metropolitan area.
o The western metropolitan area served by the Golden location contains a number
of newer industrial and office parks.
o The area around DTC features a high concentration of office parks and
businesses. A large number of high net worth individuals live and work in the
area.
o The Vail valley is anchored by Vail, a prime mountain resort with a vigorous
construction market for high-end primary and second homes. Construction activity
in this area is fueling growth in other commercial businesses supporting the
expanding population base in the market.
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LENDING ACTIVITIES
General. We provide a broad range of commercial and retail lending
services, including commercial loans, commercial and residential real estate
construction loans, commercial and residential real estate mortgage loans,
consumer loans, revolving lines of credit and equipment lease financing,
including both operating and direct financing leases. Our primary lending focus
is commercial and real estate lending to small- and medium-sized businesses that
have annual sales of $2 million to $50 million and businesses and individuals
with borrowing requirements of $200,000 to $4 million. As of December 31, 2000,
substantially all of our outstanding loans and leases were to customers within
Colorado. Interest rates charged on loans vary with the degree of risk,
maturity, underwriting and servicing costs, principal amount and extent of other
banking relationships with the customer, and are further subject to competitive
pressures, money market rates, availability of funds and government regulations.
As of December 31, 2000, approximately 67% of our loans and leases were at
interest rates that float with our base rate or some other reference rate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for an analysis of the interest rates on our loans.
Credit Procedures and Review. We address credit risk through internal
credit policies and procedures, including underwriting criteria, officer and
customer lending limits, a multi-layered loan approval process for larger loans,
periodic document examination, justification for any exceptions to credit
policies, loan review and concentration monitoring. In addition, we provide
ongoing loan officer training and review. We have a continuous loan review
process designed to promote early identification of credit quality problems. All
loan officers are charged with the responsibility of reviewing, no less
frequently than monthly, all past due loans in their respective portfolios. In
addition, each of the loan officers establishes a watch list of loans to be
reviewed monthly by the boards of directors of Colorado Business Bank and CoBiz.
The loan and lease portfolio is also monitored regularly by a loan review
officer who reports directly to the audit committee of the boards of directors
of Colorado Business Bank and CoBiz.
Composition of Loan and Lease Portfolio. The following table sets forth
the composition of our loan and lease portfolio at the dates indicated.
At December 31,
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2000 1999 1998 1997 1996
--------------- ---------------- ---------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ----- --------- ----- --------- -----
(Dollars in thousands)
Commercial..................... $147,111 33.1 $130,428 37.7 $104,745 46.9 $ 78,152 47.6 $ 58,727 53.0
Real estate - mortgage......... 187,083 42.1 123,341 35.6 56,941 25.5 40,262 24.6 24,491 22.1
Real estate - construction..... 65,851 14.8 53,552 15.5 34,210 15.3 27,786 16.9 19,119 17.3
Consumer....................... 26,466 5.9 21,873 6.3 16,913 7.6 11,732 7.2 8,266 7.5
Direct financing leases - net.. 24,087 5.4 21,485 6.2 13,741 6.2 8,407 5.1 1,805 1.6
-------- ----- -------- ----- -------- ----- --------- ----- --------- -----
Loans and leases............... $450,598 101.3 $350,679 101.3 $226,550 101.5 $ 166,339 101.4 $ 112,408 101.5
Less allowance for loan and
lease losses................... (5,860) (1.3) (4,585) (1.3) (3,271) (1.5) (2,248) (1.4) (1,660) (1.5)
-------- ----- -------- ----- -------- ----- --------- ----- --------- -----
Net loans and leases........... $444,738 100.0 $346,094 100.0 $223,279 100.0 $ 164,091 100.0 $ 110,748 100.0
======== ===== ======== ===== ======== ===== ========= ===== ========= =====
Under federal law, the aggregate amount of loans that we may make to
one borrower is generally limited to 15% of our unimpaired capital, surplus,
undivided profits and allowance for loan and lease losses. As of December 31,
2000, our individual legal lending limit was $9.9 million. Our board of
directors has established an internal lending limit of $5.7 million. To
accommodate customers whose financing needs exceed our internal lending limits,
and to address portfolio concentration concerns, we sell loan participations to
outside participants, including HR Financial, an entity controlled by Howard R.
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Ross, a member of our board of directors. See "Certain Relationships and Related
Transactions." At December 31, 2000, 1999 and 1998, the outstanding balances of
loan participations sold by us were $18.9 million, $17.6 million and $14.8
million, respectively. We have retained servicing rights on all loan
participations sold. As of December 31, 2000, we had loan participations
purchased from other banks totaling $6.9 million. We use the same analysis in
deciding whether or not to purchase a participation in a loan as we would in
deciding whether to originate the same loan.
In the ordinary course of business, we enter into various types of
transactions that include commitments to extend credit. We apply the same credit
standards to these commitments as we apply to our other lending activities and
have included these commitments in our lending risk evaluations. Our exposure to
credit loss under commitments to extend credit is represented by the amount of
these commitments.
Commercial Loans. Commercial lending consists of loans to small- and
medium-sized businesses in a wide variety of industries. The Bank's areas of
emphasis in commercial lending include, but are not limited to, loans to
wholesalers, manufacturers and business services companies. We provide a broad
range of commercial loans, including lines of credit for working capital
purposes and term loans for the acquisition of equipment and other purposes.
Commercial loans are generally collateralized by inventory, accounts receivable,
equipment, real estate and other commercial assets and may be supported by other
credit enhancements such as personal guarantees. However, where warranted by the
overall financial condition of the borrower, loans may be made on an unsecured
basis. Terms of commercial loans generally range from one to five years, and the
majority of such loans have floating interest rates.
Real Estate Mortgage Loans. Real estate mortgage loans include various
types of loans for which we hold real property as collateral. We generally
restrict commercial real estate lending activity to owner-occupied properties or
to investor properties that are owned by customers with which we have a current
banking relationship. We make commercial real estate loans at both fixed and
floating interest rates, with maturities generally ranging from five to fifteen
years. The Bank's underwriting standards generally require that a commercial
real estate loan not exceed 75% of the appraised value of the property securing
the loan. In addition, we originate SBA loans on owner-occupied properties with
maturities of up to 25 years in which the SBA allows for financing of up to 90%
of the project cost and takes a security position that is subordinated to us. We
also originate residential mortgage loans on a limited basis as a service to our
preferred customers.
The primary risks of real estate mortgage loans include the borrower's
inability to pay, material decreases in the value of the real estate that is
being held as collateral and significant increases in interest rates, which may
make the real estate mortgage loan unprofitable. We do not actively seek
permanent mortgage loans for our own portfolio, but, rather, syndicate such
loans to other financial institutions. However, for those permanent mortgage
loans that are extended, we attempt to apply conservative loan-to-value ratios
and obtain personal guarantees and generally require a strong history of debt
servicing capability and fully amortized terms of 15 years or less.
Real Estate Construction Loans. We originate loans to finance
construction projects involving one-to four-family residences. We provide
financing to residential developers that we believe have demonstrated a
favorable record of accurately projecting completion dates and budgeting
expenses. We provide loans for the construction of both pre-sold projects and
projects built prior to the location of a specific buyer, although loans for
projects built prior to the identification of a specific buyer are provided on a
more selective basis. Residential construction loans are due upon the sale of
the completed project and are generally collateralized by first liens on the
real estate and have floating interest rates. In addition, these loans are
generally secured by personal guarantees to provide an additional source of
repayment. We generally require that a permanent financing commitment be in
place before we make a residential
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construction loan. Moreover, we generally monitor construction draws monthly and
inspect property to ensure that construction is progressing as projected. Our
underwriting standards generally require that the principal amount of the loan
be no more than 75% of the appraised value of the completed construction
project. Values are determined only by approved independent appraisers.
We also originate loans to finance the construction of multi-family,
office, industrial and tax credit projects. These projects are predominantly
owned by the user of the property or are sponsored by financially strong
developers who maintain an ongoing banking relationship with us. Our
underwriting standards generally require that the principal amount of these
loans be no more than 65% of the appraised value. Values are determined only by
approved independent appraisers.
We selectively provide loans for the acquisition and development of
land for residential building projects by financially strong developers who
maintain an ongoing banking relationship with us. For this category of loans,
our underwriting standards generally require that the principal amount of these
loans be no more than 65% of the appraised value. Values are determined only by
approved independent appraisers.
Consumer Loans. We provide a broad range of consumer loans to
customers, including personal lines of credit, home equity loans and automobile
loans. In order to improve customer service, continuity and customer retention,
management of business banking customers often work with the same loan officer
who handles their business banking relationships.
Direct Financing Leases. We provide lease financing as a complement to
our other lending services. These leases are structured as either operating or
direct financing leases, under which we retain title to the leased assets as
security for payment. Only direct financing leases are included in our loan and
lease portfolio. Operating leases are reported as investment in operating
leases.
NONPERFORMING ASSETS
Our nonperforming assets consist of nonaccrual loans and leases,
restructured loans and leases, past due loans and leases and other real estate
owned. The following table sets forth information with respect to these assets
at the dates indicated.
At December 31,
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2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(Dollars in thousands)
Nonperforming loans and leases:
Loans and leases 90 days or more delinquent
and still accruing interest ..................... $ 37 $ 49 $ 4 $ -- $ --
Nonaccrual loans and leases ........................ 431 634 125 470 234
Restructured loans and leases ...................... -- -- 338 341 348
--------- --------- --------- --------- ---------
Total nonperforming loans and leases ........... 468 683 467 811 582
Real estate acquired by foreclosure ................... -- -- -- -- 109
--------- --------- --------- --------- ---------
Total nonperforming assets ..................... $ 468 $ 683 $ 467 $ 811 $ 691
========= ========= ========= ========= =========
Allowance for loan and lease losses ................... $ 5,860 $ 4,585 $ 3,271 $ 2,248 $ 1,660
========= ========= ========= ========= =========
Ratio of nonperforming assets to total assets ......... 0.07 % 0.14 % 0.13 % 0.31 % 0.36 %
Ratio of nonperforming loans and leases to total
loans and leases .................................. 0.10 0.19 0.21 0.49 0.52
Ratio of allowance for loan and lease losses to
total loans and leases ............................ 1.30 1.31 1.44 1.35 1.48
Ratio of allowance for loan and lease losses to
nonperforming loans and leases .................... 1,252.14 671.30 700.43 277.19 285.22
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Accrual of interest is discontinued on a loan or lease when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that the collection of
interest is doubtful. A delinquent loan or lease is generally placed on
nonaccrual status when it becomes 90 days past due. When a loan or lease is
placed on nonaccrual status, all accrued and unpaid interest on the loan or
lease is reversed and deducted from earnings as a reduction of reported interest
income. No additional interest is accrued on the loan or lease balance until the
collection of both principal and interest becomes reasonably certain. When the
issues relating to a nonaccrual loan or lease are finally resolved, there may
ultimately be an actual write down or charge-off of the principal balance of the
loan or lease, which may necessitate additional charges to earnings.
Restructured loans and leases are those for which concessions, including the
reduction of interest rates below a rate otherwise available to the borrower, or
the deferral of interest or principal, have been granted due to the borrower's
weakened financial condition. Interest on restructured loans and leases is
accrued at the restructured rates when it is anticipated that no loss of
original principal will occur. The additional interest income that would have
been recognized for the years ended December 31, 2000, 1999 and 1998 if our
nonaccrual and restructured loans and leases had been current in accordance with
their original terms, and the interest income on nonaccrual and restructured
loans and leases actually included in our net income for such periods, was not
material. Real estate acquired by foreclosure includes deeds acquired under
agreements with delinquent borrowers. Real estate acquired by foreclosure is
appraised annually and is carried at the lesser of fair market value less
anticipated closing costs or the balance of the related loan. As of December 31,
2000, we did not own any real estate acquired in foreclosure proceedings or
under agreements with delinquent borrowers. In addition to the nonperforming
assets described above, at December 31, 2000, we had 47 loan and lease
relationships considered by management to be potential problem loans or leases,
with outstanding principal totaling approximately $6.6 million. A potential
problem loan or lease is one as to which management has concerns about the
borrower's future performance under the terms of the loan or lease contract. For
our protection, management monitors these loans and leases closely. These loans
and leases are current as to the principal and interest and, accordingly, are
not included in the nonperforming asset categories. However, further
deterioration may result in the loan or lease being classified as nonperforming.
The level of potential problem loans and leases is factored into the
determination of the adequacy of the allowance for loan and lease losses.
Analysis of Allowance for Loan and Lease Losses. The allowance for loan
and lease losses represents management's recognition of the risks of extending
credit and its evaluation of the quality of the loan and lease portfolio. The
allowance for loan and lease losses is maintained at a level considered adequate
to provide for loan and lease losses, based on various factors affecting the
loan and lease portfolio, including a review of problem loans and leases,
business conditions, historical loss experience, evaluation of the quality of
the underlying collateral and holding and disposal costs. The allowance is
increased by additional charges to operating income and reduced by loans and
leases charged off, net of recoveries. The following table sets forth
information regarding changes in our allowance for loan and lease losses for the
periods indicated.
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For the year ended December 31,
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2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(Dollars in thousands)
Balance of allowance for loan and lease
losses at beginning of period......... $ 4,585 $ 3,271 $ 2,248 $ 1,660 $ 1,392
--------- --------- --------- --------- ---------
Charge-offs:
Commercial.............................. (189) (100) (200) (356) (275)
Real estate-- mortgage.................. (16) -- -- -- --
Real estate-- construction.............. -- (5) -- -- (47)
Consumer................................ (67) (80) (32) (38) (6)
Direct financing leases................. (225) -- (4) -- --
--------- --------- --------- --------- ---------
Total charge-offs.................... (497) (185) (236) (394) (328)
--------- --------- --------- --------- ---------
Recoveries:
Commercial.............................. 37 24 66 6 61
Real estate-- mortgage.................. -- -- -- -- --
Real estate-- construction.............. -- -- -- -- 39
Consumer................................ 20 2 5 27 3
Direct financing leases................. 2 -- -- -- --
--------- --------- --------- --------- ---------
Total recoveries..................... 59 26 71 33 103
--------- --------- --------- --------- ---------
Net charge-offs............................. (438) (159) (165) (361) (225)
Provisions for loan and lease losses
charged to operations.................. 1,713 1,473 1,188 949 493
--------- --------- --------- --------- ---------
Balance of allowance for loan and lease
losses at end of period................ $ 5,860 $ 4,585 $ 3,271 $ 2,248 $ 1,660
========= ========= ========= ========= =========
Ratio of net charge-offs to average
loans and leases....................... (.11%) (.06%) (.08%) (.26%) (.23%)
Average loans and leases outstanding
during the period...................... $ 390,063 $ 281,796 $ 197,851 $ 138,787 $ 98,075
Additions to the allowance for loan and lease losses, which are charged
as expenses on our income statement, are made periodically to maintain the
allowance at the appropriate level, based on our analysis of the potential risk
in the loan and lease portfolio. Loans and leases charged off, net of amounts
recovered from such loans and leases, reduce the allowance for loan and lease
losses. The amount of the allowance is a function of the levels of loans and
leases outstanding, the level of non-performing loans and leases, historical
loan and lease loss experience, the amount of loan and lease losses actually
charged against the reserve during a given period and current and anticipated
economic conditions. At December 31, 2000, the allowance for loan and lease
losses equaled 1.30% of total loans and leases. Federal regulatory agencies, as
part of their examination process, review our loans and leases and allowance for
loan and lease losses. We believe that our allowance for loan and lease losses
is adequate to cover anticipated loan and lease losses. However, management may
determine a need to increase the allowance for loan and lease losses, or
regulators, when reviewing the Bank's loan and lease portfolio in the future,
may request the Bank to increase such allowance. Either of these events could
adversely affect our earnings. Further, there can be no assurance that our
actual loan and lease losses will not exceed the allowance for loan and lease
losses.
The following table sets forth the allowance for loan and lease losses
by category to the extent specific allocations have been determined relative to
particular categories of loans or leases.
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At December 31,
--------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
Loans in Loans in Loans in
category category category
as a as a as a
Amount of % of total Amount of % of total Amount of % of total
allowance gross loans allowance gross loans allowance gross loans
---------- ----------- ---------- ----------- ---------- -----------
(Dollars in thousands)
Commercial................ $ 1,536 32.6% $ 1,120 37.2% $ 832 46.2%
Real estate-mortgage...... 1,102 41.6 728 35.2 522 25.1
Real estate-construction.. 572 14.6 284 15.3 508 15.1
Consumer.................. 210 5.9 233 6.2 99 7.5
Direct financing leases... 215 5.3 183 6.1 243 6.1
Unallocated............... 2,225 -- 2,037 -- 1,067 --
---------- ---------- ---------- ---------- ---------- ----------
Total..................... $ 5,860 100.0% $ 4,585 100.0% $ 3,271 100.0%
========== ========== ========== ========== ========== ==========
At December 31,
----------------------------------------------------
1997 1996
------------------------ ------------------------
Loans in Loans in
category category
as a as a
Amount of % of total Amount of % of total
allowance gross loans allowance gross loans
---------- ----------- ---------- -----------
(Dollars in thousands)
Commercial................. $ 811 47.0% $ 510 52.2%
Real estate-mortgage....... 296 24.2 189 21.8
Real estate-construction... 318 16.7 237 17.0
Consumer................... 73 7.0 51 7.4
Direct financing leases.... -- 5.1 -- 1.6
Unallocated................ 750 -- 673 --
---------- ---------- ---------- ----------
Total...................... $ 2,248 100.0% $ 1,660 100.0%
========== ========== ========== ==========
The unallocated portion of the allowance is intended to cover loss
exposure related to potential problem loans or leases for which no specific
allocation has been estimated. Management attempts to quantify, on a quarterly
basis, unidentified loss exposure in our portfolio overall. We continually
analyze historical loss/trends in assessing the unallocated portion of the
allowance. General economic conditions and commercial trends influence the level
of the unallocated portion of the allowance, as well as growth of the loan and
lease portfolio. We also specifically monitor concentrations of real estate and
large credits. We believe that any allocation of the allowance into categories
creates an appearance of precision that does not exist. The allocation table
should not be interpreted as an indication of the specific amounts, by loan or
lease classification, to be charged to the allowance. We believe that the table
is a useful device for assessing the adequacy of the allowance as a whole. The
table has been derived in part by applying historical loan and lease loss ratios
to both internally classified loans and leases and the portfolio as a whole in
determining the allocation. The allowance is utilized as a single unallocated
allowance available for all loans and leases.
INVESTMENTS
Our investment portfolio is comprised of securities rated "A" or better
by various nationally recognized rating agencies, with the majority of the
portfolio either maturing or repricing within a one- to seven-year period. Our
practice is to purchase primarily U.S. Treasury and U.S. government agency
securities. Since November 1994, we have invested primarily in mortgage-backed
securities that reprice annually. Our investment strategies are reviewed at the
meetings of the asset and liability management committee.
Our mortgage-backed securities are typically classified as available
for sale. Our goals with respect to our securities portfolio are to:
o Maximize safety and soundness.
o Provide adequate liquidity.
o Maximize rate of return within the constraints of applicable liquidity
requirements.
o Complement asset/liability management strategies.
The following table sets forth the book value of the securities in our
investment portfolio by type at the dates indicated.
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At December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands)
U.S. Treasury and U.S. government agency securities..... $ 8,991 $ 11,884 $ 17,764
Mortgage-backed securities.............................. 132,266 94,393 87,104
State and municipal bonds............................... 1,009 799 965
Federal Reserve and FHLB stock.......................... 3,168 2,455 1,961
Other investments....................................... 650 390 143
---------- ---------- ----------
Total................................................... $ 146,084 $ 109,921 $ 107,937
========== ========== ==========
The following table sets forth the book value, maturity or repricing
frequency and approximate yield of the securities in our investment portfolio at
December 31, 2000.
Maturity or Repricing
-----------------------------------------------------------------------------------
Within 1 year 1 - 5 years 5 - 10 years Over 10 years Total book value
------------------- ------------------- -------------------- ------------------- --------------------
Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1)
-------- -------- -------- -------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
U.S. Treasury and U.S.
government agency
securities......... $ 1,850 6.18% $ -- -- $ -- -- $ 7,141 6.38% $ 8,991 6.34%
Mortgage-backed
securities....... 100,141 7.24 7,940 5.83% 13,546 5.50% 10,639 7.00 132,266 6.96
State and municipal
bonds............ -- -- -- -- 309 6.68 700 7.43 1,009 7.20
Federal Reserve and
FHLB stock....... -- -- -- -- -- -- 3,168 7.63 3,168 7.63
Other investments..... -- -- 650 16.79 -- -- -- -- 650 16.79
-------- -------- -------- -------- --------
Total........... $101,991 7.22 $ 8,590 6.66 $ 13,855 5.53 $ 21,648 6.90 $146,084 6.98
======== ======== ======== ======== ========
(1) Yields do not include adjustments for tax-exempt interest because the
amount of such interest is not material.
DEPOSITS
Our primary source of funds has historically been customer deposits. We
offer a variety of accounts for depositors, which are designed to attract both
short- and long-term deposits. These accounts include certificates of deposit,
savings accounts, money market accounts, checking and negotiable order of
withdrawal accounts and individual retirement accounts. At December 31, 2000,
$131.2 million, or 29%, of our deposits were noninterest-bearing deposits. We
believe that we receive a large amount of noninterest-bearing deposits because
we provide customers with the option of paying for services in cash or by
maintaining additional noninterest-bearing account balances. However, since
proposed changes in United States legislation would allow for the payment of
interest on commercial accounts, there can be no assurance that we will be able
to continue to maintain such a high level of noninterest-bearing deposits.
Interest-bearing accounts earn interest at rates based on competitive market
factors and our desire to increase or decrease certain types of maturities or
deposits. We have not actively sought brokered deposits and do not currently
intend to do so. The following tables present the average balances for each
major category of deposits and the weighted average interest rates paid for
interest-bearing deposits for the periods indicated.
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For the year ended December 31,
-----------------------------------------------------------------------------------
2000 1999 1998
------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Average average Average average Average average
balance interest rate balance interest rate balance interest rate
---------- ------------- ----------- ------------- -------- ------------
(Dollars in thousands)
NOW and money market accounts........... $ 172,976 4.18% $ 122,688 3.30% $ 85,558 3.31%
Savings................................. 5,821 2.20 6,546 2.22 6,227 2.59
Certificates of deposit
under $100,000...................... 25,654 5.77 25,950 5.09 21,507 5.42
Certificates of deposit
$100,000 and over................... 105,292 6.04 64,844 5.15 47,453 5.60
---------- ---------- ----------
Total interest-bearing deposits... 309,743 4.91 220,028 4.02 160,745 4.24
Noninterest-bearing demand deposits..... 117,690 -- 101,793 -- 76,223 --
---------- ---------- ----------
Total deposits.................... $ 427,433 3.55 $ 321,821 2.75 $ 236,968 2.87
========== ========== ==========
Maturities of certificates of deposit of $100,000 and more are as
follows:
At December 31, 2000
---------------------
Remaining maturity (Dollars in thousands)
- ------------------
Less than three months....................... $ 65,098
Three months up to six months................ 21,227
Six months up to one year.................... 18,760
One year and over............................ 4,421
----------
Total..................................... $ 109,506
==========
SHORT-TERM BORROWINGS
Our short-term borrowings include federal funds purchased, securities
sold under agreements to repurchase, which generally mature within 60 days, and
advances from the Federal Home Loan Bank of Topeka ("FHLB-Topeka"). The
following table sets forth information relating to our short-term borrowings.
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At or for the year
ended December 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands)
Federal funds purchased
Balance at end of period....................................... $ 10,400 $ 1,300 $ 3,500
Average balance outstanding for the period..................... 2,808 4,403 4,956
Maximum amount outstanding at any month end during the period.. 11,320 13,000 17,000
Weighted average interest rate for the period.................. 6.77% 5.40% 5.54%
Weighted average interest rate at period end................... 6.69 4.00 5.06
Securities sold under agreement to repurchase
Balance at end of period....................................... $ 65,827 $ 33,053 $ 24,956
Average balance outstanding for the period..................... 47,876 40,421 18,811
Maximum amount outstanding at any month end during the period.. 68,306 51,982 24,956
Weighted average interest rate for the period.................. 5.54% 4.41% 4.72%
Weighted average interest rate at period end................... 5.64 4.53 3.31
FHLB advances
Balance at end of period....................................... $ 35,840 $ 30,980 $ 26,120
Average balance outstanding for the period..................... 21,994 18,041 4,626
Maximum amount outstanding at any month end during the period.. 45,840 32,050 26,120
Weighted average interest rate for the period.................. 6.49% 5.48% 6.07%
Weighted average interest rate at period end................... 6.53 5.88 5.47
COMPETITION
The banking business in the Denver metropolitan area is highly
competitive and is currently dominated by a number of large regional financial
institutions, including U.S. Bancorp, Inc., Banc One Corporation, Zions
Bancorporation, KeyCorp and Wells Fargo & Company. In addition to these regional
banks, there are a number of community banks that operate in the area,
including, Guaranty Bank and Trust Company, Colorado State Bank & Trust,
FirstBank Holding Company of Colorado and Union Bank and Trust. We compete for
loans and deposits with other commercial banks (including those listed above),
savings and loan associations, finance companies, credit unions and mortgage
bankers. In addition to the traditional financial institutions, we also compete
for loans with brokerage and investment banking companies, nonfinancial
institutions, including retail stores that maintain their own credit programs,
and governmental agencies that make available low cost or guaranteed loans to
certain borrowers. Particularly in times of high interest rates, we also face
significant competition for deposits from sellers of short-term money market
securities and other corporate and government securities.
By virtue of their larger capital bases or affiliation with larger
multi-bank holding companies, many of our competitors have substantially greater
capital resources and lending limits than we do and perform other functions that
we offer only through correspondents. Interstate banking is permitted in
Colorado, and, since January 1, 1997, unlimited state-wide branch banking is
permitted. As a result, we may experience greater competition in our primary
service areas. Our business, financial condition, results of operations and cash
flows may be adversely affected by an increase in competition. Moreover,
recently enacted and proposed legislation has focused on expanding the ability
of participants in the banking and thrift industries to engage in other lines of
business. The enactment of such legislation could put us at a competitive
disadvantage because we may not have the capital to participate in other lines
of business to the same extent as more highly capitalized banks and thrift
holding companies.
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EMPLOYEES
As of February 28, 2001, we had 170 employees, including 164 full-time
employees. No Company employee is covered by a collective bargaining agreement,
and we believe that our relationship with our employees is good.
SUPERVISION AND REGULATION
CoBiz and the Bank are extensively regulated under federal and Colorado
law. These laws and regulations are primarily intended to protect depositors and
federal deposit insurance funds, not shareholders of CoBiz. The following
information summarizes certain material statutes and regulations affecting CoBiz
and the Bank and is qualified in its entirety by reference to the particular
statutory and regulatory provisions. Any change in applicable laws, regulations
or regulatory policies may have a material adverse effect on the business,
financial condition, results of operations and cash flows of CoBiz and the Bank.
We are unable to predict the nature or extent of the effects that fiscal or
monetary policies, economic controls or new federal or state legislation may
have on our business and earnings in the future.
THE HOLDING COMPANY
General. CoBiz is a financial holding company registered under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and is subject to
regulation, supervision and examination by the Board of Governors of the Federal
Reserve System (the "FRB"). CoBiz is required to file an annual report with the
FRB and such other reports as the FRB may require pursuant to the BHCA.
Acquisitions. As a financial holding company, we are required to obtain
the prior approval of the FRB before acquiring direct or indirect ownership or
control of more than 5% of the voting shares of a bank or bank holding company.
The FRB will not approve any acquisition, merger or consolidation that would
result in substantial anti-competitive effects, unless the anti-competitive
effects of the proposed transaction are outweighed by a greater public interest
in meeting the needs and convenience of the public. In reviewing applications
for such transactions, the FRB also considers managerial, financial, capital and
other factors, including the record of performance of the applicant and the bank
or banks to be acquired under the Community Reinvestment Act of 1977, as amended
(the "CRA"). See "-- The Bank -- Community Reinvestment Act" below.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, as amended (the "1994 Act"), which became effective September 29, 1995,
displaces state laws governing interstate bank acquisitions. Under the 1994 Act,
a financial or bank holding company may, subject to some limitations, acquire a
bank outside of its home state without regard to local law. Thus, an
out-of-state holding company could acquire the Bank, and we could acquire a bank
outside of Colorado.
All acquisitions pursuant to the 1994 Act require regulatory approval.
In reviewing applications under the 1994 Act, an applicant's record under the
CRA must be considered, and a determination must be made that the transaction
will not result in any violations of federal or state antitrust laws. In
addition, there is a limit of 25% on the amount of deposits in insured
depository institutions in Colorado that can be controlled by any bank or bank
holding company.
The 1994 Act also permits bank subsidiaries of a financial or bank
holding company to act as agents for affiliated institutions by receiving
deposits, renewing time deposits, closing loans, servicing loans and receiving
payments on loans. As a result, a relatively small Colorado bank owned by an
out-of-state holding company could make available to customers in Colorado some
of the services of a larger affiliated institution located in another state.
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The Gramm-Leach-Bliley Act of 1999 eliminates many of the restrictions
placed on the activities of certain qualified financial or bank holding
companies. Effective March 11, 2000, a bank holding company can qualify as a
"financial holding company" and expand into a wide variety of financial
services, including securities activities, insurance and merchant banking
without the prior approval of the FRB. CoBiz has qualified as a financial
holding company.
Capital Adequacy. The FRB monitors, on a consolidated basis, the
capital adequacy of financial or bank holding companies that have total assets
in excess of $150 million by using a combination of risk-based and leverage
ratios. Failure to meet the capital guidelines may result in the application by
the FRB of supervisory or enforcement actions. Under the risk-based capital
guidelines, different categories of assets, including certain off-balance sheet
items, such as loan commitments in excess of one year and letters of credit, are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. For purposes of the risk-based capital
guidelines, total capital is defined as the sum of "Tier 1" and "Tier 2" capital
elements, with Tier 2 capital being limited to 100% of Tier 1 capital. Tier 1
capital includes, with certain restrictions, common shareholders' equity,
perpetual preferred stock (no more than 25% of Tier 1 capital being comprised of
cumulative preferred stock or trust preferred stock) and minority interests in
consolidated subsidiaries. Tier 2 capital includes, with certain limitations,
perpetual preferred stock not included in Tier 1 capital, certain maturing
capital instruments and the allowance for loan and lease losses (limited to
1.25% of risk-weighted assets). The regulatory guidelines require a minimum
ratio of total capital to risk-weighted assets of 8% (of which at least 4% must
be in the form of Tier 1 capital). The FRB has also implemented a leverage
ratio, which is defined to be a company's Tier 1 capital divided by its average
total consolidated assets. The minimum required leverage ratio for top-rated
bank holding companies is 3%, but most companies are required to maintain an
additional cushion of at least 100 to 200 basis points.
The table below sets forth the Company's ratios at December 31, 2000 of
(i) total capital to risk-weighted assets, (ii) Tier 1 capital to risk-weighted
assets and (iii) Tier 1 leverage ratio.
At December 31, 2000
--------------------
Minimum
Ratio Actual required
- ----- ------ --------
Total capital to risk-weighted assets 14.0% 8.0%
Tier I capital to risk-weighted assets 11.9% 4.0%
Tier I leverage ratio 9.2% 4.0%
Support of Banks. As discussed below, the Bank is also subject to
capital adequacy requirements. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991 (the "FDICIA"), CoBiz could be required to guarantee the
capital restoration plan of the Bank, should the Bank become "undercapitalized"
as defined in the FDICIA and the regulations thereunder. See "-- The Bank --
Capital Adequacy." Our maximum liability under any such guarantee would be the
lesser of 5% of the Bank's total assets at the time it became undercapitalized
or the amount necessary to bring the Bank into compliance with the capital plan.
The FRB also has stated that financial or bank holding companies are subject to
the "source of strength doctrine," which requires such holding companies to
serve as a source of "financial and managerial" strength to their subsidiary
banks.
The FDICIA requires the federal banking regulators to take "prompt
corrective action" with respect to capital-deficient institutions. In addition
to requiring the submission of a capital restoration
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plan, the FDICIA contains broad restrictions on certain activities of
undercapitalized institutions involving asset growth, acquisitions, branch
establishment and expansion into new lines of business. With certain exceptions,
an insured depository institution is prohibited from making capital
distributions, including dividends, and is prohibited from paying management
fees to control persons, if the institution would be undercapitalized after any
such distribution or payment.
THE BANK
General. The Bank is a national banking association, the deposits of
which are insured by the Bank Insurance Fund of the FDIC (the "FDIC"), and is
subject to supervision, regulation and examination by the Office of the
Comptroller of the Currency (the "OCC") and by the FDIC. Pursuant to such
regulations, the Bank is subject to special restrictions, supervisory
requirements and potential enforcement actions. The FRB's supervisory authority
over CoBiz can also affect the Bank.
Branching. In Colorado, since January 1, 1997, no limitations are
placed on the number of branches a bank may establish, and any bank which has
had its charter approved or conditionally or preliminarily approved on or after
April 1, 1991, may, upon 30 days' written notice to the Colorado banking board,
be converted to a branch of any bank.
Community Reinvestment Act. The CRA requires the Bank to adequately
meet the credit needs of the communities in which it operates. The CRA allows
regulators to reject an applicant seeking, among other things, to make an
acquisition or establish a branch, unless it has performed satisfactorily under
the CRA. Federal regulators regularly conduct examinations to assess the
performance of financial institutions under the CRA. In its most recent CRA
examination, the Bank received a satisfactory rating.
Transactions with Affiliates. The Bank is subject to Section 23A of the
Federal Reserve Act, which limits the amount of loans to, investments in, and
certain other transactions with, affiliates of the Bank, requires certain levels
of collateral for such loans or transactions, and limits the amount of advances
to third parties that are collateralized by the securities or obligations of
affiliates, unless the affiliate is a bank and is at least 80% owned by the
Company. If the affiliate is a bank and is at least 80% owned by the Company,
such transactions are generally exempted from these restrictions, except as to
"low quality" assets, as defined under the Federal Reserve Act, and transactions
not consistent with safe and sound banking practices. In addition, Section 23A
generally limits transactions with affiliates of the Bank to 10% of the Bank's
capital and surplus and generally limits all transactions with affiliates to 20%
of the Bank's capital and surplus.
Section 23B of the Federal Reserve Act requires that certain
transactions between the Bank and any affiliate must be on substantially the
same terms, or at least as favorable to the Bank, as those prevailing at the
time for comparable transactions with, or involving, non-affiliated companies
or, in the absence of comparable transactions, on terms and under circumstances,
including credit standards, that in good faith would be offered to, or would
apply to, non-affiliated companies. The aggregate amount of the Bank's loans to
its officers, directors and principal shareholders (or their affiliates) is
limited to the amount of its unimpaired capital and surplus, unless the FDIC
determines that a lesser amount is appropriate.
A violation of the restrictions of Section 23A or Section 23B of the
Federal Reserve Act may result in the assessment of civil monetary penalties
against the Bank or a person participating in the conduct of the affairs of the
Bank or the imposition of an order to cease and desist such violation.
Dividend Restrictions. Dividends paid by the Bank are expected to
provide substantially all of our cash flow. The approval of the OCC is required
prior to the declaration of any dividend by the Bank
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19
if the total of all dividends declared by the Bank in any calendar year exceeds
the total of its net profits of that year combined with the retained net profits
for the preceding two years. In addition, the FDICIA provides that the Bank
cannot pay a dividend if it will cause the Bank to be "undercapitalized." See
"-- The Bank -- Capital Adequacy."
Examinations. The OCC periodically examines and evaluates national
banks. Based upon such an evaluation, the examining regulator may revalue the
assets of an insured institution and require that it establish specific reserves
to compensate for the difference between the value determined by the regulator
and the book value of such assets.
Capital Adequacy. Federal regulations establish minimum requirements
for the capital adequacy of depository institutions that are generally the same
as those established for bank holding companies. See "-- The Holding Company --
Capital Adequacy." Banks with capital ratios below the required minimum are
subject to certain administrative actions, including the termination of deposit
insurance and the appointment of a receiver, and may also be subject to
significant operating restrictions pursuant to regulations promulgated under the
FDICIA. See "-- The Holding Company -- Support of Banks."
The following table sets forth the capital ratios of the Bank at
December 31, 2000.
At December 31, 2000
---------------------
Minimum
Ratio Actual required
- ----- ------ --------
Total capital to risk-weighted assets 13.5% 8.0%
Tier I capital to risk-weighted assets 12.3% 4.0%
Tier I leverage ratio 9.8% 4.0%
Pursuant to the FDICIA, regulations have been adopted defining five
capital levels: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Increasingly
severe restrictions are placed on a depository institution as its capital level
classification declines. An institution is critically undercapitalized if it has
a tangible equity to total assets ratio less than or equal to 2%. An institution
is adequately capitalized if it has a total risk-based capital ratio less than
10%, but greater than or equal to 8%, or a Tier 1 risk-based capital ratio less
than 6%, but greater than or equal to 4%, or a leverage ratio less than 5%, but
greater than or equal to 4% (3% in certain circumstances). An institution is
well capitalized if it has a total risk-based capital ratio of 10% or greater, a
Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater, and the institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive to meet and maintain a
specific capital level for any capital measure. Under these regulations, as of
December 31, 2000, the Bank was well capitalized, which classification places no
significant restrictions on the Bank's activities.
Internal Operating Requirements. Federal regulations promote the safety
and soundness of individual institutions by specifically addressing, among other
things: (1) internal controls, information systems and internal audit systems;
(2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5)
asset growth; and (6) compensation and benefit standards for management
officials.
Real Estate Lending Evaluations. Federal regulators have adopted
uniform standards for the evaluation of loans secured by real estate or made to
finance improvements to real estate. The Bank is required to establish and
maintain written internal real estate lending policies consistent with safe and
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20
sound banking practices. The guidelines establish loan to value ratio
limitations on real estate loans, which are equal to or higher than the loan to
value limitations established by CoBiz.
Deposit Insurance Premiums. Under current regulations, FDIC-insured
depository institutions that are members of the FDIC pay insurance premiums at
rates based on their assessment risk classification, which is determined, in
part, based on the institution's capital ratios and, in part, on factors that
the FDIC deems relevant to determine the risk of loss to the FDIC. Assessment
rates range from $0 to $0.27 per $100. The Bank currently does not pay an
assessment rate on insured deposits. This classification for determination of
assessment rate may be reviewed semi-annually.
Restrictions on Loans to One Borrower. Under federal law, the aggregate
amount of loans that may be made to one borrower by the Bank is generally
limited to 15% of its unimpaired capital, surplus, undivided profits and
allowance for loan and lease losses. The Bank seeks participations to
accommodate borrowers whose financing needs exceed the Bank's lending limits.
CHANGING REGULATORY STRUCTURE
Regulation of the activities of national and state banks and their
holding companies imposes a heavy burden on the banking industry. The FRB, OCC
and FDIC all have extensive authority to police unsafe or unsound practices and
violations of applicable laws and regulations by depository institutions and
their holding companies. These agencies can assess civil monetary penalties,
issue cease and desist or removal orders, seek injunctions and publicly disclose
such actions. Moreover, the authority of these agencies has expanded in recent
years, and the agencies have not yet fully tested the limits of their powers.
The laws and regulations affecting banks and financial or bank holding
companies have changed significantly in recent years, and there is reason to
expect that changes will continue in the future, although it is difficult to
predict the outcome of these changes. From time to time, various bills are
introduced in the United States Congress with respect to the regulation of
financial institutions. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial services
industry. In particular, recently enacted and proposed legislation has focused
on expanding the ability of participants in the banking industry to engage in
other lines of business. The enactment of such legislation could put us at a
competitive disadvantage because we may not have the capital to participate in
other lines of business to the same extent as more highly capitalized financial
or bank holding companies. We cannot predict whether any of these proposals will
be adopted or, if adopted, how these proposals would affect us.
MONETARY POLICY
The monetary policy of the FRB has a significant effect on the
operating results of financial or bank holding companies and their subsidiaries.
Among the means available to the FRB to affect the money supply are open market
transactions in U.S. government securities, changes in the discount rate on
member bank borrowings and changes in reserve requirements against member bank
deposits. These means are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, and their use
may affect interest rates charged on loans or paid on deposits. FRB monetary
policies have materially affected the operations of commercial banks in the past
and are expected to continue to do so in the future. The nature of future
monetary policies and the effect of such policies on the business and earnings
of CoBiz and its subsidiaries cannot be predicted.
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21
FIRST CAPITAL BANK ACQUISITION
On March 8, 2001, we completed our acquisition of First Capital Bank of
Arizona. The acquisition was structured as a merger between First Capital Bank
and a wholly-owned subsidiary we formed to participate in the merger. As a
result of the merger, First Capital Bank became our wholly owned subsidiary.
First Capital Bank serves the Phoenix, Arizona metropolitan area, which
is located principally in Maricopa County. More than half of Arizona's
population resides in Maricopa County, which includes the cities of Phoenix,
Tempe, Mesa, Scottsdale, Glendale, Chandler and Peoria. According to U.S. Census
data, Arizona is the second fastest growing state in the nation. Arizona
experienced a population growth rate of 30.4% between 1990 and 1999 as compared
to the national growth rate of 9.6% during the same period. Maricopa County had
a total population of approximately 2.9 million at the end of 1999. The area
experienced an increase of approximately 78,000 people from 1998 to 1999.
Arizona's economic sectors include trade, manufacturing, mining, agriculture,
construction and tourism, with services constituting the largest economic
sector. According to statistics published by the Arizona Department of Commerce,
Arizona has attracted high-technology industries which have a total economic
impact of $33 billion in the state, representing nearly 56% of all manufacturing
employment. As of August 2000, the unemployment rate was 4.0%.
The First Capital Bank acquisition represents the first step in
implementing our strategy for expansion into geographic markets outside
Colorado. The Phoenix market was selected because it is similar to the Denver
market in many ways, with a strong economy and rapidly growing population and a
concentration of small- to medium-sized businesses and high net worth
individuals. First Capital Bank was selected because CoBiz and First Capital
Bank have very similar target customer bases and approaches to serving those
target customers. The acquisition of First Capital Bank gives CoBiz the platform
to execute its successful branching strategy in Arizona, opening new bank
locations led by experienced local bankers. CoBiz intends to grow First Capital
Bank by offering CoBiz's expanded range of products and services to First
Capital Bank's customers, by expanding First Capital Bank's marketing programs
and by opening additional branches in the Phoenix area.
First Capital Bank shareholders received shares of our common stock in
the merger. The exchange ratio was based on the average closing price of our
common stock for the 20 trading days ending three trading days prior to the
merger. The average closing price of our common stock during that period was
$17.41, which resulted in an exchange ratio of 2.266 shares of our common stock
for each share of First Capital Bank common stock. At that ratio, a total of
approximately 1,653,258 shares of our common stock were issuable in the merger,
subject to adjustment for fractional shares. The former shareholders of First
Capital Bank owned approximately 19.65% of the issued and outstanding shares of
our common stock immediately after the merger.
The following table sets forth selected financial data of First Capital
Bank for and as of the end of each of the years in the five-year period ended
December 31, 2000. Such data are derived from First Capital Bank's audited
financial statements. Results for past periods are not necessarily indicative of
results to be expected for any future period.
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At or for the year ended December 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996(1)
------------ ------------ ------------ ------------ ------------
(Dollars in thousands, except per share amounts)
STATEMENT OF INCOME DATA:
Interest income......................... $ 8,328 $ 6,301 $ 4,366 $ 2,182 $ 221
Interest expense........................ 4,030 2,796 1,854 818 70
------------ ------------ ------------ ------------ ------------
Net interest income..................... 4,298 3,505 2,512 1,364 151
Provision for loan losses............... 373 179 155 201 50
------------ ------------ ------------ ------------ ------------
Net interest income after provision for
loan losses......................... 3,925 3,326 2,357 1,163 101
Noninterest income...................... 312 352 201 132 40
Noninterest expense..................... 2,325 2,408 2,082 1,287 453
------------ ------------ ------------ ------------ ------------
Pre-tax income (loss)................... 1,912 1,270 476 8 (312)
Provision for income taxes.............. 721 459 52 -- --
Cumulative effect of accounting change
for organizational costs............ -- -- (45) -- --
------------ ------------ ------------ ------------ ------------
Net income (loss)................. $ 1,191 $ 811 $ 379 $ 8 $ (312)
============ ============ ============ ============ ============
Earnings per share - basic (2).... $ 1.63 $ 1.11 $ 0.52 $ 0.02 $ (0.65)
============ ============ ============ ============ ============
Earnings per share - diluted (2).. $ 1.54 $ 1.07 $ 0.51 $ 0.02 $ (0.65)
============ ============ ============ ============ ============
BALANCE SHEET DATA:
Total assets............................ $ 106,314 $ 86,430 $ 67,159 $ 38,251 $ 13,360
Investments............................. 20,482 16,716 13,244 -- --
Loans................................... 73,865 63,211 43,467 27,870 5,008
Allowance for loan losses............... 959 586 407 251 50
Deposits................................ 91,790 74,984 57,626 29,249 8,119
Common shareholders' equity............. 11,401 9,928 9,407 8,962 5,231
KEY RATIOS:
Return on average total assets.......... 1.25% 1.04 % 0.72 % 0.03 % (8.06 )%
Return on average shareholders' equity.. 11.95 8.44 4.12 0.13 (14.00)
Average common equity to average assets. 10.42 12.31 17.57 24.95 57.57
Net interest margin (3)................. 4.74 4.80 5.15 5.63 5.89
Efficiency ratio (4).................... 50.44 64.50 78.70 86.00 237.20
Nonperforming assets to total assets.... -- -- -- -- --
Nonperforming loans to total loans (5).. -- -- -- -- --
Allowance for loan losses to total loans 1.30 0.94 0.95 0.91 1.00
Allowance for loan losses to
nonperforming loans (5)............. -- -- -- -- --
Net charge-offs to average loans (5).... -- -- -- -- --
(1) The information presented represents a partial year. First Capital Bank
commenced operations on August 7, 1996. Key ratios were computed after
annualizing this five-month operational period.
(2) Restated for a 5% stock dividend paid in the second quarter of 2000.
(3) Yields do not include adjustments for tax-exempt interest because the
amount of such interest is not material.
(4) Efficiency ratio is computed by dividing noninterest expense by the sum
of net interest income before provision for loan losses and
noninterest income, excluding nonrecurring gains.
(5) First Capital Bank did not have any nonperforming loans or other real
estate owned at the end of the periods disclosed, and has not had any
charge-offs since it began operations in 1996. A nonperforming loan is
defined as a loan that is placed on nonaccrual status, a troubled debt
restructuring, or a loan greater than 90 days pas due as to principal
and/or interest payment.
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23
ITEM 2. PROPERTIES
As of March 28, 2001, we had nine banking locations and one leasing
office in Colorado. Our executive offices are located at 821 Seventeenth Street,
Denver, Colorado, 80202. We lease our executive offices from Kesef, LLC
("Kesef"), an entity owned by certain directors of CoBiz and the Bank. See
"Certain Relationships and Related Transactions" under Item 13 of Part III. The
term of the lease expires in 2009. CoBiz leases all of its facilities. The
following table sets forth specific information on each location.
Lease
Location Address Expiration
- -------- ----------------------------------------------------- ----------
Denver 821 Seventeenth Street, Denver, Colorado, 80202 2009
Tremont 1275 Tremont, Denver, Colorado, 80202 2014
Littleton 101 West Mineral Avenue, Littleton, Colorado, 80120 2005
Prince 2409 West Main Street, Littleton, Colorado, 80120 2004
Boulder 2025 Pearl Street, Boulder, Colorado 80302 2009
Boulder North 2550 North Broadway, Boulder, Colorado 80302 2004
West Metro 15710 West Colfax Avenue, Golden, Colorado 80401 2004
DTC 8400 East Prentice Avenue, Englewood, Colorado 80111 2003
Rockies 439 Edwards Access Road, Edwards, Colorado, 81632 2004
Leasing office 999 Eighteenth Street, Suite 2400, Denver, Colorado, 80202 2001
All leased properties are considered in good operating condition and
are believed adequate for our present and foreseeable future operations. We do
not anticipate any difficulty in leasing additional suitable space upon
expiration of any present lease terms. First Capital Bank of Arizona has two
banking locations. It leases it main location in Phoenix, Arizona and owns its
branch in Surprise, Arizona.
ITEM 3. LEGAL PROCEEDINGS
Periodically and in the ordinary course of business, various claims and
lawsuits which are incidental to our business are brought against, or by, us. We
believe that the ultimate liability, if any, resulting from such claims or
lawsuits will not have a material adverse effect on the business, financial
condition or results of operations of CoBiz.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of CoBiz is traded on the Nasdaq Stock Market under
the symbol "COBZ". At March 27, 2001, there were approximately 461 shareholders
of record of CoBiz Common Stock, including the First Capital Bank shareholders
who became our shareholders when we acquired First Capital Bank on March 8,
2001. Prior to June 18, 1998, there was no public market for our Common Stock.
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24
The following table presents the range of high and low closing sale
prices of our Common Stock for each quarter within the two most recent fiscal
years as reported by the Nasdaq Stock Market and the per-share dividends
declared in each quarter during that period.
Cash
dividends
High Low declared
---- --- ---------
1999:
First quarter 13.063 11.000 --
Second quarter 12.375 10.500 --
Third quarter 13.438 10.750 0.05
Fourth quarter 14.875 11.125 0.05
2000:
First quarter 14.375 12.125 0.05
Second quarter 14.000 12.500 0.05
Third quarter 17.000 12.938 0.06
Fourth quarter 17.875 15.875 0.06
The timing and amount of future dividends are at the discretion of the
board of directors of CoBiz and will depend upon the consolidated earnings,
financial condition, liquidity and capital requirements of CoBiz and its
subsidiaries, the amount of cash dividends paid to CoBiz by its subsidiaries,
applicable government regulations and policies and other factors considered
relevant by the board of directors of CoBiz. The board of directors of CoBiz
anticipates that it will continue to pay quarterly dividends in amounts
determined based on the factors discussed above. Capital distributions,
including dividends, by institutions such as the Bank are subject to
restrictions tied to the institution's earnings. See "Supervision and Regulation
- -- The Bank -- Dividend Restrictions" included under Item 1 of Part I.
On the dates listed below, CoBiz issued the following numbers of shares
of its Common Stock to five employees upon exercise of options issued under its
Incentive Stock Option Plan at prices ranging from $2.33 to $13.00 per share,
for an aggregate purchase price of $85,767:
Date Shares of Common Stock issued
------------------- -----------------------------
January 18, 2000 9,425
January 21, 2000 18,850
February 28, 2000 2,356
September 28, 2000 1,057
November 30, 2000 1,550
The shares were issued without registration under the Securities Act of
1933, as amended, in reliance on the exemption afforded by Section 4(2) of the
Act and Regulation D promulgated thereunder.
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25
ITEM 6. SELECTED FINANCIAL DATA
At or for the year ended December 31,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ----------- ----------- ------------ -----------
(Dollars in thousands, except per share data)
STATEMENT OF INCOME DATA:
Interest income............................ $ 46,573 $ 32,409 $ 23,899 $ 18,147 $ 13,711
Interest expense........................... 20,510 11,854 8,577 7,016 5,323
------------ ----------- ----------- ------------ -----------
Net interest income........................ 26,063 20,555 15,322 11,131 8,388
Provision for loan and lease losses........ 1,713 1,473 1,188 949 493
------------ ----------- ----------- ------------ -----------
Net interest income after provision for
loan and lease losses................... 24,350 19,082 14,134 10,182 7,895
Noninterest income......................... 4,721 4,610 4,246 3,303 1,794
Noninterest expense........................ 17,816 15,771 13,133 10,387 7,827
------------ ----------- ----------- ------------ -----------
Income before taxes........................ 11,255 7,921 5,247 3,098 1,862
Provision for income taxes................. 4,503 3,002 2,031 1,245 762
------------ ----------- ----------- ------------ -----------
Net income............................ $ 6,752 $ 4,919 $ 3,216 $ 1,853 $ 1,100
============ =========== =========== ============ ===========
Earnings per share - basic............ $ 1.01 $ 0.74 $ 0.53 $ 0.37 $ 0.29
============ =========== =========== ============ ===========
Earnings per share - diluted.......... $ 0.98 $ 0.72 $ 0.51 $ 0.36 $ 0.29
============ =========== =========== ============ ===========
Cash dividends declared per common
share.............................. $ 0.22 $ 0.10 -- -- --
============ =========== =========== ============ ===========
BALANCE SHEET DATA:
Total assets............................... $ 633,063 $ 492,009 $ 366,550 $ 264,059 $ 190,645
Total investments.......................... 146,084 109,921 107,937 58,784 57,571
Loans and leases........................... 450,598 350,679 226,550 166,339 112,408
Allowance for loan and lease losses........ 5,860 4,585 3,271 2,248 1,660
Deposits................................... 450,777 383,329 273,028 221,058 155,310
Company obligated mandatorily
redeemable preferred securities
of subsidiary trust holding
solely subordinated debentures.......... 20,000 -- -- -- --
Preferred shareholders' equity............. -- -- -- 1,500 --
Common shareholders' equity................ 47,087 40,351 37,172 15,925 10,189
KEY RATIOS:
Return on average total assets............. 1.21 % 1.15 % 1.08 % 0.83 % 0.64 %
Return on average common shareholders'
equity.................................. 15.58 12.67 11.80 12.21 11.47
Dividend payout ratio...................... 21.78 13.51 - - -
Average common equity to average assets.... 7.78 9.11 9.10 6.35 5.54
Net interest margin (1).................... 5.05 5.28 5.71 5.52 5.46
Efficiency ratio (2)....................... 58.20 62.94 67.78 72.32 76.87
Nonperforming assets to total assets....... 0.07 0.14 0.13 0.31 0.36
Nonperforming loans and leases to total
loans and leases........................ 0.10 0.19 0.21 0.49 0.52
Allowance for loan and lease losses to
total loans and leases.................. 1.30 1.31 1.44 1.35 1.48
Allowance for loan and lease losses to
nonperforming loans and leases.......... 1,252.14 671.30 700.40 277.19 285.22
Net charge-offs to average loans and leases 0.11 0.06 0.08 0.26 0.23
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26
(1) Yields do not include adjustments for tax-exempt interest because the
amount of such interest is not material.
(2) Efficiency ratio is computed by dividing noninterest expense by the sum
of net interest income before provision for loan and lease losses and
noninterest income, excluding nonrecurring gains.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
CoBiz was acquired by a group of private investors in September 1994.
In March 1997, we completed a private placement of 1,102,725 shares of common
stock at a price of $3.61 per share, for net proceeds of approximately $4.0
million, which we used to fund our continuing growth. We completed the initial
public offering of our common stock in June 1998. We sold a total of 1,610,000
shares of common stock at $12.00 per share yielding net proceeds of $17.5
million, after deducting underwriting commissions and other expenses.
On June 19, 2000, we issued 30-year capital trust preferred securities
in the aggregate amount of $20,000,000. The trust preferred securities bear a
cumulative fixed interest rate of 10% per annum and mature on June 30, 2030.
Interest distributions are payable quarterly. We may defer the payment of
interest at any time for a period not exceeding 20 consecutive quarters provided
that the deferral period does not extend past the stated maturity. During any
such deferral period, our ability to pay dividends on our common shares will be
restricted. Subject to approval by the FRB, the trust preferred securities may
be redeemed prior to maturity at our option on or after June 30, 2005. Portions
of the trust preferred securities qualify as Tier I capital under regulatory
definitions. Issuance costs consisting primarily of underwriting discounts and
professional fees of approximately $1 million were capitalized and are being
amortized over five years to noninterest expense using the straight-line method.
Our management has focused on developing an organization with
personnel, management systems and products that will allow us to compete
effectively and position us for growth. The cost of this process relative to our
size has been high. In addition, we have operated with excess capacity during
the start-up phases of various projects. As a result, relatively high levels of
noninterest expense have adversely affected our earnings over the past several
years. Salaries and employee benefits comprised most of this overhead category.
However, we believe that our compensation levels have allowed us to recruit and
retain a highly qualified management team capable of implementing our business
strategies. We believe that our compensation policies, which include the
granting of options to purchase common stock to many employees, have highly
motivated our employees and have enhanced our ability to maintain customer
loyalty and generate earnings. While we will continue to add personnel to lead
new growth initiatives, including middle management, we believe that our senior
management and systems infrastructure are adequate to support our anticipated
growth without incurring proportionate increases in general, administrative and
other noninterest expenses.
From December 31, 1995 to December 31, 2000, our shareholders' equity
increased 418%, from $9.1 million to $47.1 million. During that same time
period, our outstanding loans and leases (net) increased 409%, from $87.3
million to $444.7 million. This increase has primarily been the result of our
focus on local relationship banking and commercial lending to small- and
medium-sized businesses and high net worth individuals. In addition, we have
emphasized building and maintaining asset quality through our credit
underwriting and monitoring process. Nonperforming assets have ranged from 0.07%
to 0.58% of total assets during this period. We have maintained asset quality,
while continuing to build our allowance for loan and lease losses. Our allowance
for loan and lease losses increased 321%, from $1.4 million as of December 31,
1995 to $5.9 million as of December 31, 2000.
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This discussion should be read in conjunction with our consolidated
financial statements and notes thereto included in this Form 10-K beginning on
page F- 1. For a description of our accounting policies, see Note 1 of Notes to
Consolidated Financial Statements. For a discussion of the segments included in
our principal activities, see Note 15 of Notes to Consolidated Financial
Statements.
FINANCIAL CONDITION
DECEMBER 31, 2000, COMPARED TO DECEMBER 31, 1999
Our total assets increased by $141.1 million to $633.1 million as of
December 31, 2000, from $492.0 million as of December 31, 1999. A consistent
focus on internal growth and sustained loan demand allowed our loan and lease
portfolio (net) to increase by $98.6 million, from $346.1 million at December
31, 1999, to $444.7 million as of December 31, 2000. Total investments were
$146.1 million as of December 31, 2000, compared to $109.9 million as of
December 31, 1999. The increase in the investment portfolio was possible due to
strong deposit growth and the proceeds from the trust preferred securities
issued in June of 2000. Deposits increased by $67.5 million to $450.8 million as
of December 31, 2000, from $383.3 million as of December 31, 1999.
Noninterest-bearing deposits increased by $24.7 million, and interest-bearing
deposits increased by $42.8 million. Low-cost demand deposits comprised 29% of
total deposits as of December 31, 2000. Federal funds purchased and securities
sold under agreements to repurchase increased by $41.9 million at December 31,
2000 to $76.2 million. Of this total, $65.8 million represents repurchase
agreements transacted on behalf of our customers and is not considered a
wholesale borrowing source. The increase in deposits and customer repurchase
agreements is attributable, in part, to an increased emphasis on deposit
generation included in banker production goals. Advances from the FHLB-Topeka
were $35.8 million at December 31, 2000, compared to $31.0 million at December
31, 1999.
DECEMBER 31, 1999, COMPARED TO DECEMBER 31, 1998
Our total assets increased by $125.4 million to $492.0 million as of
December 31, 1999, from $366.6 million as of December 31, 1998. Our loan and
lease portfolio (net) increased by $122.8 million, from $223.3 million at
December 31, 1998, to $346.1 million as of December 31, 1999. The strong loan
growth was attributable to a robust Colorado economy. Total investments were
$109.9 million as of December 31, 1999, compared to $107.9 million as of
December 31, 1998. The nominal increase in the investment portfolio was the
result of utilizing our funding resources primarily to support loan demand,
rather than investment purchases. Deposits were $383.3 million as of December
31, 1999, compared to $273.0 million as of December 31, 1998, a 40.4% increase.
Noninterest-bearing deposits increased by $11.3 million, and interest-bearing
deposits increased by $99.0 million. Low-cost demand deposits comprised 28% of
total deposits as of December 31, 1999, and 35% of total deposits as of December
31, 1998. Federal funds purchased and securities sold under agreements to
repurchase increased by $5.9 million, to $34.4 million as of December 31, 1999
from $28.5 million as of December 31, 1998. Repurchase agreements transacted on
behalf of our customers were $33.1 million at December 31, 1999 and $25.0
million at December 31, 1998. Outstanding advances from the FHLB-Topeka were
$31.0 million at December 31, 1999 compared to $26.1 million as of December 31,
1998.
NET INTEREST INCOME
The largest component of our net income is our net interest income. Net
interest income is the difference between interest income, principally from
loans, leases and investment securities, and interest expense, principally on
customer deposits and borrowings. Changes in net interest income result from
changes in volume, net interest spread and net interest margin. Volume refers to
the average dollar levels of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference
27
28
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Net interest margin refers to net interest income
divided by average interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities.
The following table presents, for the periods indicated, certain
information related to our average asset and liability structure and our average
yields on assets and average costs of liabilities. Such yields are derived by
dividing income or expense by the average balance of the corresponding assets or
liabilities.
For the year ended December 31,
--------------------------------------------------------------------------------------
2000 1999
------------------------------------------ -----------------------------------------
Interest Average Interest Average
Average earned yield Average earned yield
balance or paid or cost balance or paid or cost
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
ASSETS:
Federal funds sold and other................ $ 8,788 $ 557 6.34% $ 3,160 $ 176 5.57%
Investment securities (1)................... 122,639 8,076 6.59 108,121 6,299 5.83
Loans and leases (2)........................ 390,063 37,940 9.73 281,796 25,934 9.20
Allowance for loan and lease losses......... (5,165) -- -- (3,810) -- --
----------- ----------- ----------- -----------
Total interest-earning assets........... 516,325 46,573 9.02 389,267 32,409 8.33
Noninterest-earning assets:
Cash and due from banks................... 23,220 20,915
Other..................................... 17,485 15,837
----------- -----------
Total assets............................ $ 557,030 $ 426,019
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Deposits:
NOW and money market accounts............. $ 172,976 7,225 4.18 $ 122,688 4,044 3.30
Savings................................... 5,821 128 2.20 6,546 145 2.22
Certificates of deposit:
Under $100,000........................... 25,654 1,479 5.77 25,950 1,320 5.09
$100,000 and over........................ 105,292 6,362 6.04 64,844 3,337 5.15
----------- ----------- ----------- -----------
Total interest-bearing deposits......... 309,743 15,194 4.91 220,028 8,846 4.02
Other borrowings:
Securities and loans sold under...........
agreements to repurchase and federal
funds purchased......................... 50,684 2,845 5.61 44,824 2,020 4.51
FHLB advances............................. 21,994 1,427 6.49 18,041 988 5.48
Long-term borrowings...................... -- -- -- -- -- --
Company obligated mandatorily
redeemable preferred securities......... 10,546 1,044 9.90 -- -- --
----------- ----------- ----------- -----------
Total interest-bearing liabilities.. 392,967 20,510 5.22 282,893 11,854 4.19
Noninterest-bearing demand accounts......... 117,690 101,793
----------- -----------
Total deposits and interest-bearing
liabilities....................... 510,657 384,686
Other noninterest-bearing liabilities....... 3,035 2,504
----------- -----------
Total liabilities and preferred
securities........................ 513,692 387,190
Shareholders' equity........................ 43,338 38,829
----------- -----------
Total liabilities and shareholders'
equity............................ $ 557,030 $ 426,019
=========== ===========
Net interest income......................... $ 26,063 $ 20,555
=========== ==========
Net interest spread......................... 3.80 % 4.14%
Net interest margin......................... 5.05 % 5.28%
Ratio of average interest-earning assets
to average interest-bearing liabilities... 131.39 % 137.60 %
For the year ended December 31,
----------------------------------------
1998
----------------------------------------
Interest Average
Average earned yield
balance or paid or cost
----------- ----------- -----------
ASSETS:
Federal funds sold and other................ $ 2,588 $ 135 5.22%
Investment securities (1)................... 70,525 4,124 5.85
Loans and leases (2)........................ 197,851 19,640 9.93
Allowance for loan and lease losses......... (2,794) -- --
----------- -----------
Total interest-earning assets........... 268,170 23,899 8.91
Noninterest-earning assets:
Cash and due from banks................... 15,224
Other..................................... 15,346
-----------
Total assets............................ $ 298,740
===========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Deposits:
NOW and money market accounts............. $ 85,558 2,827 3.30
Savings................................... 6,227 161 2.59
Certificates of deposit:
Under $100,000........................... 21,507 1,166 5.42
$100,000 and over........................ 47,453 2,658 5.60
----------- -----------
Total interest-bearing deposits......... 160,745 6,812 4.24
Other borrowings:
Securities and loans sold under
agreements to repurchase and federal
funds purchased......................... 23,767 1,183 4.98
FHLB advances............................. 4,626 281 6.07
Long-term borrowings...................... 3,678 301 8.18
Company obligated mandatorily
redeemable preferred securities......... -- -- --
----------- -----------
Total interest-bearing liabilities.. 192,816 8,577 4.45
Noninterest-bearing demand accounts......... 76,223
-----------
Total deposits and interest-bearing
liabilities....................... 269,039
Other noninterest-bearing liabilities....... 1,786
-----------
Total liabilities and preferred
securities........................ 270,825
Shareholders' equity........................ 27,915
-----------
Total liabilities and shareholders'
equity............................ $ 298,740
===========
Net interest income......................... $ 15,322
==========
Net interest spread......................... 4.46%
Net interest margin......................... 5.71%
Ratio of average interest-earning assets....
to average interest-bearing liabilities... 139.08 %
(1) Yields do not include adjustments for tax-exempt interest because the
amount of such interest is not material.
(2) Loan fees included in interest income are not material. Nonaccrual
loans and leases are included in average loans and leases outstanding.
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29
The following table illustrates, for the periods indicated, the changes
in the levels of interest income and interest expense attributable to changes in
volume or rate. Changes in net interest income due to both volume and rate have
been included in the changes due to rate.
Year ended December 31, Year ended December 31,
2000 compared with year 1999 compared with year
ended December 31, 1999 ended December 31, 1998
increase (decrease) increase (decrease)
in net interest income in net interest income
due to changes in due to changes in
------------------------ -----------------------
Volume Rate Total Volume Rate Total
----------- --------- -------- --------- ---------- --------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold ................................. $ 313 $ 68 $ 381 $ 29 $ (14) $ 15
Investments (1) .................................... 846 931 1,777 2,199 2 2,201
Loans and leases (2) ............................... 9,964 2,042 12,006 8,332 (2,038) 6,294
-------- -------- -------- -------- -------- --------
Total interest-earning assets ............... 11,123 3,041 14,164 10,560 (2,050) 8,510
Interest-bearing liabilities:
NOW and money market accounts ..................... 1,658 1,523 3,181 1,227 (10) 1,217
Savings ........................................... (16) (1) (17) 8 (24) (16)
Certificates of deposits:
Under $100,000 ................................ (15) 174 159 241 (87) 154
$100,000 and over ............................. 2,082 943 3,025 974 (295) 679
Short-term borrowings:
Securities and loans sold under agreements to
repurchase and federal funds purchased ......... 264 561 825 1,048 (211) 837
FHLB notes payable ................................ 216 223 439 869 (137) 732
Long-term borrowings .............................. -- -- -- (301) -- (301)
Company obligated mandatorily redeemable
preferred securities ........................... 1,044 -- 1,044 -- -- --
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities .......... 5,233 3,423 8,656 4,066 (764) 3,302
-------- -------- -------- -------- -------- --------
Net increase (decrease) in net interest income .... $ 5,890 $ (382) $ 5,508 $ 6,494 $ (1,286) $ 5,208
======== ======== ======== ======== ======== ========
(1) Yields do not include adjustments for tax-exempt interest because the
amount of such interest is not material.
(2) Loan fees included in interest income are not material. Nonaccrual loans
and leases are included in average loans and leases outstanding.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK--ASSET/LIABILITY
MANAGEMENT
Asset/liability management is concerned with the timing and magnitude
of repricing assets compared to liabilities. It is our objective to generate
stable growth in net interest income and to attempt to control risks associated
with interest rate movements. In general, our strategy is to reduce the impact
of changes in interest rates on net interest income by maintaining a favorable
match between the maturities or repricing dates of our interest-earning assets
and interest-bearing liabilities. We adjust interest sensitivity during the year
through changes in the mix of assets and liabilities. We do not utilize
derivative financial instruments to manage our interest rate risk. Our asset and
liability management strategy is formulated and monitored by the asset/liability
committee, in accordance with policies approved by the board of directors of the
Bank. This committee meets regularly to review, among other things, the
sensitivity of our assets and liabilities to interest rate changes, the book and
market values of assets and liabilities, unrealized gains and losses, purchase
and sale activity, and maturities of investments and borrowings. The
asset/liability committee also approves and establishes pricing and funding
decisions with respect to our overall asset and liability composition. The
committee reviews our liquidity, cash flow flexibility, maturities of
investments, deposits and borrowings, deposit activity, current market
conditions,
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and general levels of interest rates. To effectively measure and
manage interest rate risk, we use simulation analysis to determine the impact on
net interest income of changes in interest rates under various interest rate
scenarios. From these simulations, interest rate risk is quantified and
appropriate strategies are developed and implemented.
The following table presents an analysis of the sensitivity inherent in
our net interest income and market value of equity. The interest rate scenario
presented in the table includes interest rates at December 31, 2000 as adjusted
by instantaneous rate changes upward and downward of up to 200 basis points.
Since there are limitations inherent in any methodology used to estimate the
exposure to changes in market interest rates, this analysis is not intended to
be a forecast of the actual effect of a change in market interest rates. The
market value sensitivity analysis presented includes assumptions that (i) the
composition of our interest sensitive assets and liabilities existing at
December 31, 2000 will remain constant over the twelve-month measurement period;
and (ii) that changes in market rates are parallel and instantaneous across the
yield curve regardless of duration or repricing characteristics of specific
assets or liabilities. Further, the analysis does not contemplate any actions
that we might undertake in response to changes in market interest rates.
Accordingly, this analysis is not intended to and does not provide a precise
forecast of the effect actual changes in market rates will have on us.
Change in interest rates in basis points
-------------------------------------------
(200) (100) 0 +100 +200
----- ----- ---- ---- ----
Impact on:
Net interest income (4.4)% (2.5)% 0.0% 2.9% 4.7%
Market value of equity 0.2% (0.1)% 0.0% (0.7)% (2.2)%
Our results of operations depend significantly on net interest income.
Like most financial institutions, our interest income and cost of funds are
affected by general economic conditions and by competition in the marketplace.
Rising and falling interest rate environments can have various impacts on net
interest income, depending on the interest rate profile (i.e., the difference
between the repricing of interest-earning assets and interest-bearing
liabilities), the relative changes in interest rates that occur when various
assets and liabilities reprice, unscheduled repayments of loans and leases and
investments, early withdrawals of deposits and other factors. As a general rule,
banks with positive interest rate gaps are more likely to be susceptible to
declines in net interest income in periods of falling interest rates, while
banks with negative interest rate gaps are more likely to experience declines in
net interest income in periods of rising interest rates. As of December 31,
2000, our cumulative interest rate gap for the period of less than one year was
a positive 10.13%. Therefore, assuming no change in our gap position, a rise in
interest rates is likely to result in increased net interest income, while a
decline in interest rates is likely to result in decreased net interest income.
This is a one-day position that is continually changing and is not indicative of
our position at any other time. While the gap position is a useful tool in
measuring interest rate risk and contributes toward effective asset and
liability management, shortcomings are inherent in gap analysis since certain
assets and liabilities may not move proportionally as interest rates change.
Consequently, in addition to gap analysis, we use the simulation model discussed
above to test the interest rate sensitivity of net interest income and the
balance sheet. The following table sets forth the estimated maturity or
repricing, and the resulting interest rate gap, of our interest-earning assets
and interest-bearing liabilities at December 31, 2000. All amounts in the table
are based on contractual pricing schedules. Actual prepayment and withdrawal
experience may vary significantly from the assumptions reflected in the table.
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Estimated maturity or repricing at December 31, 2000
-----------------------------------------------------------------
Three months
Less than to less than One to Over
three months one year five years five years Total
------------ ------------ ---------- ---------- ---------
(Dollars in thousands)
Interest-earning assets:
Fixed rate loans.............................. $ 10,911 $ 22,946 $ 78,986 $ 11,590 $124,433
Floating rate loans........................... 234,072 1,773 64,479 1,754 302,078
Lease financing............................... 2,628 7,189 14,252 18 24,087
Investment securities held to maturity
and available for sale..................... 13,157 88,834 8,590 35,503 146,084
Federal funds sold............................ -- -- -- -- --
-------- -------- -------- -------- --------
Total interest-earning assets..................... $260,768 $120,742 $166,307 $ 48,865 $596,682
Interest-bearing liabilities:
NOW and money market accounts................. $ 1,010 $ 75,977 $ 87,419 $ 15,143 $179,549
Savings....................................... 268 590 1,877 2,627 5,362
Certificates of deposit under $100,000........ 9,903 13,202 2,057 -- 25,162
Certificates of deposit $100,000 and over..... 65,098 39,986 4,422 -- 109,506
Securities and loans sold under agreements to
repurchase and federal funds purchased...... 76,227 -- -- -- 76,227
Federal Home Loan Bank advances............... -- 35,140 560 140 35,840
Company obligated mandatorily redeemable
preferred securities........................ -- -- 20,000 -- 20,000
-------- -------- -------- -------- --------
Total interest-bearing liabilities................ $152,506 $164,895 $116,335 $ 17,910 $451,646
-------- -------- -------- -------- --------
Interest rate gap................................. $108,262 $(44,153) $ 49,972 $ 30,955 $145,036
======== ======== ======== ======== ========
Cumulative interest rate gap...................... $108,262 $ 64,109 $114,081 $145,036
======== ======== ======== ========
Cumulative interest rate gap to total assets...... 17.10% 10.13% 18.02% 22.91%
To manage these relationships, we evaluate the following factors:
liquidity, equity, debt/capital ratio, anticipated prepayment rates, portfolio
maturities, maturing assets and maturing liabilities. Our asset and liability
management committee is responsible for establishing procedures that enable us
to achieve our goals while adhering to prudent banking practices and existing
loan and investment policies. Our policy is intended to control the exposure of
our operations to changing interest rates by attempting to maintain a position
within a narrow range around an "earnings neutral position," which is defined as
the mix of assets and liabilities that generates the net interest margin that is
least affected by interest rate changes.
We have focused on maintaining balance between interest rate sensitive
assets and liabilities and repricing frequencies. An important element of this
focus has been to emphasize variable rate loans and investments funded by
deposits that also mature or reprice over periods of twelve months or less.
The following table presents, at December 31, 2000, loans and leases by
maturity in each major category of our portfolio. Actual maturities may differ
from the contractual maturities shown below as a result of renewals and
prepayments. Loan renewals are evaluated in the same manner as new credit
applications.
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At December 31, 2000
---------------------------------------------
Less than One to Over
one year five years five years Total
--------- ---------- ---------- --------
(Dollars in thousands)
Commercial...................... $ 85,798 $ 51,706 $ 9,607 $147,111
Real estate - mortgage.......... 50,103 66,608 70,372 187,083
Real estate - construction...... 62,897 2,954 -- 65,851
Consumer........................ 11,227 14,693 546 26,466
Direct financing leases - net... 9,817 14,252 18 24,087
-------- -------- -------- --------
Total loans and leases..... $219,842 $150,213 $ 80,543 $450,598
======== ======== ======== ========
As of December 31, 2000, of the $230.8 million of loans and leases with
maturities of one year or more, approximately $104.9 million were fixed rate
loans and leases and $125.9 million were variable rate loans and leases.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000, COMPARED TO YEAR ENDED DECEMBER 31, 1999
Earnings Performance. Net earnings available to common shareholders
were $6.8 million for the year ended December 31, 2000, compared with $4.9
million for the year ended December 31, 1999, an increase of 37%. This increase
was primarily due to an increase in net interest income of $5.5 million.
Earnings per share on a fully diluted basis for 2000 were $0.98, versus $0.72
for the same period a year ago, an increase of 36%. On an operating basis,
before the amortization of goodwill, consolidated net income available to common
shareholders for the year ended December 31, 2000 and 1999, was $7.2 million and
$5.4 million, or $1.04 and $0.78 per diluted share, respectively. Return on
average tangible assets was 1.30% in the year 2000, compared with 1.27% in 1999.
Return on average tangible common shareholders' equity was 18.29% for the year
ended December 31, 2000, versus 15.59% for the year ended December 31, 1999.
Total assets increased to $633.1 million at December 31, 2000, a 29% increase
from $492.0 million at December 31, 1999. Strong loan production was responsible
for much of this growth. Net loans and leases grew $98.6 million from 1999 to
2000.
Net Interest Income. Net interest income before provision for loan and
lease losses was $26.1 million for the year ended December 31, 2000, an increase
of $5.5 million, or 27%, compared with the year ended December 31, 1999. Yields
on our interest-earning assets improved by 69 basis points to 9.02% for the year
ended December 31, 2000, from 8.33% for the year ended December 31, 1999. The
yield improvement on interest earning assets is principally the result of the
prime rate increasing by 100 basis points from December 1999 to December 2000.
Yields paid on interest-bearing liabilities increased by 102 basis points during
this same period. The net interest margin was 5.05% for the year ended December
31, 2000, down from 5.28% for the year ended December 31, 1999. Part of the
margin compression related to the $20 million of trust preferred securities
issued in June of 2000. Also contributing to the decrease in the net interest
margin was heightened competition for customer deposits, which resulted in
higher costs of interest-bearing deposits. Although the growth in volume of our
average interest-earning assets helped mitigate the margin compression,
continued increases in interest rates could adversely affect both our cost of
funds and loan originations, resulting in lower net interest margins in
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future operating periods. Average earning assets increased by 33% to $516.3
million for 2000, from $389.3 million for 1999.
Provision and Allowance for Loan and Lease Losses. The provision for
loan and lease losses increased by $240,000 to $1.7 million for the year ended
December 31, 2000, up from $1.5 million for the year ended December 31, 1999.
This increase was due to the increase in total loans and leases outstanding and
is not reflective of a deterioration of credit quality. Key indicators of asset
quality have remained favorable (minimal changes in nonperforming asset trends),
while average outstanding loan amounts have increased to $390.1 million for
2000, up from $281.8 million for 1999. As of December 31, 2000, the allowance
for loan and lease losses amounted to $5.9 million, or 1.30% of total loans and
leases.
Noninterest Income. We reported a modest increase in noninterest income
for 2000. Total noninterest income was $4.7 million for the year ended December
31, 2000, compared to $4.6 million for the year ended December 31, 1999. The
increase was primarily attributable to growth in trust fees, other banking
service related fees, and gains on the disposition of operating lease equipment
returns. Deposit service charges were flat, period over period. Historically,
increases in deposit service charges have not corresponded with the growth in
deposit balances. This is due to our offering customers the choice of either
paying for services in cash or by maintaining additional noninterest-bearing
account balances. In addition, there was a net decrease in operating lease
rentals, which was the result of concentrating our marketing efforts in 2000 on
originating loans, rather than leases. We focused on generating loans, as
opposed to leases, because the interest spreads on loans have been more
favorable than leases. Net investment in operating leases was $2.4 million at
December 31, 2000, compared to $4.0 million at December 31, 1999. During 1999,
we realized gains of $44,000 on the sale of investment securities. There were no
sales of investment securities during 2000.
Noninterest Expense. Total noninterest expense increased by $2.0
million to $17.8 million for the year ended December 31, 2000, up from $15.8
million for the year ended December 31, 1999. During this period, however, the
efficiency ratio before goodwill amortization improved to 56.8% for the year
ended December 31, 2000, down from 61.2% for the comparable period in 1999. The
improvement in the efficiency ratio is the result of revenues growing at a
faster rate than expenses. The increases in noninterest expenses reflect our
ongoing investment in personnel, technology and office space needed to
accommodate internal growth. In the second quarter of 1999, our Boulder bank
relocated, a second Boulder location was added and the Vail valley location
opened. The expenses of those new facilities were included in noninterest
expense for only a portion of the year ended December 31, 1999, but for all of
2000. Offsetting the increases in salaries and occupancy costs was a decrease of
$397,000 in depreciation expense on operating leases. As discussed above,
management dedicated less resources to originating leases in 2000. Included in
our noninterest expense for the year ended 2000 and 1999 is goodwill
amortization of $439,000. Goodwill of $6.4 million was recorded in connection
with our original acquisition in 1994 and is being amortized over a 15-year
period. The amortization of this asset adversely affects our net income,
although it has no effect on our cash flow.
YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998
Earnings Performance. Net income was a record $4.9 million in 1999,
compared to $3.2 million in 1998. This increase was primarily due to a $5.2
million increase in net interest income from 1998 to 1999. On an operating
basis, before the amortization of goodwill, consolidated net income available to
common shareholders for the years ended 1999 and 1998, was $5.4 million and $3.6
million, or $0.78 and $0.59 per diluted share, respectively. Return on average
tangible assets was 1.27% in 1999, compared with 1.24% in 1998. Return on
average tangible common shareholders' equity was 15.59% for 1999, versus 16.39%
for 1998. Total assets increased to $492.0 million at December 31, 1999, a 34.2%
increase
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from $366.6 million at December 31, 1998. Strong loan production was responsible
for much of this growth. Net loans and leases grew $122.8 million from 1998 to
1999.
Net Interest Income. Net interest income before provision for loan and
lease losses was $20.5 million for the year ended December 31, 1999, an increase
of $5.2 million, or 34%, compared with the year ended December 31, 1998.
Interest income increased 35.6%, to $32.4 million in 1999 from $23.9 million in
1998. In 1999, interest on loans and leases increased by $6.3 million and
interest on investments increased by $2.2 million. Of the $8.5 million increase
in 1999, $10.6 million was due to volume increases, which were partially offset
by a negative rate variance of $2.1 million. Average loan and lease volumes were
up by $83.9 million from 1998, and average investments were up by $37.6 million.
The yield on average interest-earning assets was 8.33% for 1999, compared with
8.91% in 1998. The drop in yield is attributable to a decreasing rate
environment. On average, yields on investment securities remained flat at 5.85%
in 1999 and 1998. Yields on average loans and leases decreased to 9.20% in 1999,
from 9.93% in 1998. Interest expense increased 38.5%, to $11.9 million in 1999,
from $8.6 million in 1998. The increases were primarily due to higher volumes of
interest-bearing liabilities. In 1999, average interest-bearing deposits and
average interest-bearing liabilities grew by $59.3 million and $91.0 million,
respectively, from 1998, while the cost of interest-bearing liabilities dropped
to 4.19% from 4.45% during the same period. The result was $3.3 million of
additional interest expense in 1999.
Provision for Loan and Lease Losses. The provision for loan and lease
losses was $1,473,000 in 1999, compared to $1,188,000 in 1998. This increase was
due to the increase in total loans and leases outstanding, and was not
reflective of a deterioration of credit quality. In 1999, both the ratio of
non-performing loans to total loans, and the ratio of net charge-offs to average
loans declined from the previous two years. Net charge-offs were $159,000 in
1999, versus $165,000 in 1998.
Noninterest Income. Noninterest income increased 8.6%, to $4.6 million
in 1999 from $4.2 million in 1998. The moderate increase from 1998 relates to a
decrease in rental income associated with operating leases. Operating lease
income was $2.3 million in 1999, compared to $2.4 million in 1998. During 1999,
Colorado Business Leasing focused on originating direct finance type leases
rather than operating leases. We believe that other noninterest income, such as
deposit service charges, has not grown at the same rate as loan and deposit
volumes in part because customers are provided the option of paying for services
in cash or by maintaining additional noninterest-bearing account balances.
Although the use of compensating balances in lieu of fees decreases noninterest
income, it positively impacts the net interest margin by increasing the level of
noninterest-bearing deposits. At December 31, 1999, 27.8% of our deposits were
noninterest-bearing deposits.
Noninterest Expense. Total operating expenses were $15.7 million in
1999 and $13.1 million in 1998. Overall, noninterest expenses were up 19.9% from
1998. Of this increase, approximately $1.3 million represented additional
personnel costs and $1.0 million represented increased occupancy costs. The
increases in expenses reflect our ongoing investment in personnel, technology
and office space needed to accommodate growth. In addition, $2.0 million of the
noninterest expense incurred in 1999 was related to depreciation expense from
operating leases. Although operating expenses have increased each year to
accommodate our growth, the efficiency ratio continues to improve because we
consistently generate revenues at a faster rate than expenses. The efficiency
ratio before goodwill amortization was 61.16% for the year ended 1999 and 65.54%
for 1998. Included in our noninterest expense for the years ended 1999 and 1998
is goodwill amortization of $439,000 and $434,000, respectively. Goodwill of
$6.4 million was recorded in connection with our original acquisition in 1994
and is being amortized over a 15-year period. The amortization of this asset
adversely affects our net income, although it has no effect on our cash flow.
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LIQUIDITY AND CAPITAL RESOURCES
Our liquidity management objective is to ensure our ability to satisfy
the cash flow requirements of depositors and borrowers and to allow us to
sustain our operations. Historically, our primary source of funds has been
customer deposits. Scheduled loan and lease repayments are a relatively stable
source of funds, while deposit inflows and unscheduled loan and lease
prepayments, which are influenced by fluctuations in the general level of
interest rates, returns available on other investments, competition, economic
conditions and other factors, are relatively unstable. Borrowings may be used on
a short-term basis to compensate for reductions in other sources of funds (such
as deposit inflows at less than projected levels). Borrowings may also be used
on a longer term basis to support expanded lending activities and to match the
maturity or repricing intervals of assets.
We use various forms of short-term borrowings for cash management and
liquidity purposes on a limited basis. These forms of borrowings include federal
funds purchased, securities sold under agreements to repurchase, the State of
Colorado Treasury's Time Deposit program and borrowings from the FHLB-Topeka.
The Bank has approved federal funds purchase lines with six other banks with an
aggregate credit line of $51 million. In addition, the Bank may apply for up to
$20 million of State of Colorado time deposits. The Bank also has a line of
credit from the FHLB-Topeka that is limited by the amount of eligible collateral
available to secure it. Borrowings under the FHLB-Topeka line are required to be
secured by unpledged securities and qualifying loans. At December 31, 2000, we
had $111.0 million in unpledged securities and qualifying loans available to
collateralize FHLB-Topeka borrowings and securities sold under agreements to
repurchase. We also have a $20 million revolving credit line facility with
American National Bank and Trust Company available for liquidity needs.
During 2000, cash and cash equivalents increased by $6.1 million. This
increase was primarily the result of $131.9 million in cash provided by
financing activities (mainly customer deposits, repurchase agreements and $20
million of proceeds from the issuance of trust preferred securities). Offsetting
this increase was cash used in investing activities of $135.6 million (mainly
loan and lease originations and security purchases) and net cash of $9.8 million
provided by operating activities.
During 1999, cash and cash equivalents decreased by $1.4 million. This
decrease was primarily the result of cash used in investing activities of $132.0
million (mainly loan and lease originations and security purchases). Offsetting
cash outflows from investing activities was $120.4 million of cash provided by
financing activities (mainly customer deposits). Net cash of $10.2 million was
provided by operating activities.
Dividends paid by the Bank provide cash to CoBiz for various purposes,
including the payment of dividends on its common stock. The approval of the
Office of the Comptroller of the Currency is required prior to the declaration
of any dividend by the bank if the total of all dividends declared by the bank
in any calendar year exceeds the total of its net profits for that year combined
with the retained net profits for the preceding two years. In addition, the
Federal Deposit Insurance Corporation Improvement Act of 1991 provides that the
bank cannot pay a dividend if it will cause the bank to be "undercapitalized."
CoBiz's ability to pay dividends on its common stock depends upon the
availability of dividends from the Bank, and upon CoBiz's compliance with the
capital adequacy guidelines of the FRB. See Item 1 "Business - Supervision and
Regulation" and Note 12 of Notes to the Consolidated Financial Statements of
CoBiz for an analysis of the compliance of the Bank and CoBiz with applicable
capital adequacy guidelines.
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EFFECTS OF INFLATION AND CHANGING PRICES
The primary impact of inflation on our operations is increased
operating costs. Unlike most retail or manufacturing companies, virtually all of
the assets and liabilities of a financial institution such as CoBiz are monetary
in nature. As a result, the impact of interest rates on a financial
institution's performance is generally greater than the impact of inflation.
Although interest rates do not necessarily move in the same direction, or to the
same extent, as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates. Over short periods of time,
interest rates may not move in the same direction, or at the same magnitude, as
inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138
(collectively, "SFAS 133"). SFAS 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000, and accordingly, CoBiz adopted SFAS
133 on January 1, 2001. SFAS 133 requires business enterprises to recognize all
derivatives as either assets or liabilities in their financial statements and to
record such instruments at fair value. Any change in fair value of such
derivatives are required to be recognized in the statement of income or
comprehensive income in the period of change. Statement No. 133 did not have a
significant impact on CoBiz's financial statements.
In September of 2000, the FASB issued SFAS No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
a replacement of FASB Statement No. 125" ("SFAS 140"). This statement replaces
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." It revises the standard for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS's No. 125's
provisions without reconsideration. Implementation of SFAS No. 140 is not
expected to have a material effect on our financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Quantitative and Qualitative Disclosures
About Market Risk--Asset/Liability Management."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the reports thereon, the
notes thereto beginning at page F-1 of this Form 10-K, which financial
statements, reports, notes and data are incorporated herein by reference.
The following selected quarterly financial data of CoBiz for each of
the quarters in the two years ended December 31, 2000 are unaudited and, in the
opinion of CoBiz management, reflect all adjustments (consisting of normal and
recurring adjustments) considered necessary for a fair presentation of such
data.
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For the quarter ended
--------------------------------------------------------------------------------------------------
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2000 2000 2000 2000 1999 1999 1999 1999
------------ ------------- -------- --------- ------------ ------------- -------- ---------
Unaudited
(In thousands, except per share amounts)
Interest income ................ $13,314 $12,146 $10,986 $10,127 $ 9,368 $ 8,467 $ 7,659 $ 6,915
Interest expense ............... 6,212 5,609 4,583 4,106 3,687 3,081 2,690 2,396
Net interest income ............ 7,102 6,537 6,403 6,021 5,681 5,386 4,969 4,519
Net income ..................... 1,839 1,698 1,721 1,494 1,497 1,273 1,142 1,007
Earnings per share - basic ..... $ 0.27 $ 0.25 $ 0.26 $ 0.22 $ 0.23 $ 0.19 $ 0.17 $ 0.15
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share - diluted ... $ 0.27 $ 0.25 $ 0.25 $ 0.22 $ 0.21 $ 0.19 $ 0.17 $ 0.15
======= ======= ======= ======= ======= ======= ======= =======
Cash dividends declared per
common share ............... $ 0.06 $ 0.06 $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ -- $ --
======= ======= ======= ======= ======= ======= ======= =======
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning CoBiz directors and officers called for by this
item will be included in the Company's definitive Proxy Statement prepared in
connection with the 2001 Annual Meeting of Shareholders and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning the compensation of CoBiz executives called for
by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 2001 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management called for by this item will be included in the Company's
definitive Proxy Statement prepared in connection with the 2001 Annual Meeting
of Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF COBIZ
Information concerning certain relationships and transactions between
CoBiz and its affiliates called for by this item will be included in the
Company's definitive Proxy Statement prepared in connection with the 2001 Annual
Meeting of Shareholders and is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS.
See Index to Consolidated Financial Statements.
(b) EXHIBITS AND INDEX OF EXHIBITS.
(1) 2 Amended and Restated Agreement and Plan of Merger dated
November 28, 2000.
(2)(3) 3.1 Amended and restated Articles of Incorporation of the
Registrant, as amended.
(2) 3.2 Amended and restated Bylaws of the Registrant.
(4) 4.1 Form of Indenture
(4) 4.2 Form of Subordinated Debenture (included as an exhibit to
Exhibit 4.1)
(4) 4.3 Certificate of Trust
(4) 4.4 Form of Trust Agreement
(4) 4.5 Form of Amended and Restated Trust Agreement
(4) 4.6 Form of Capital Securities Certificate (included as an exhibit
to Exhibit 4.5)
(4) 4.7 Form of Capital Securities Guarantee Agreement
(4) 4.8 Form of Agreement of Expenses and Liabilities (included as an
exhibit to Exhibit 4.5)
(2) 10.1 CoBiz Inc. 1998 Stock Incentive Plan.
(2) 10.2 Amended and Restated CoBiz Inc. 1997 Incentive Stock Option
Plan.
(2) 10.3 Amended and Restated CoBiz Inc. 1995 Incentive Stock Option
Plan.
(2) 10.4 Shareholders Agreement of Colorado Business Leasing, Inc.,
dated as of March 29, 1996, by and among The Women's Bank,
N.A., Richard M. Hall, Jr., James F. Enssle, Andrea J. Johnson
and Colorado Business Leasing, Inc.
+(2) 10.5 License Agreement, dated as of November 19, 1997, by and
between Jack Henry & Associates, Inc. and Colorado Business
Bank, N.A.
+(2) 10.6 Contract Modification, dated as of November 19, 1997, by and
between Jack Henry & Associates, Inc. and Colorado Business
Bank, N.A.
+(2) 10.7 Computer Software Maintenance Agreement, dated as of November
19, 1997, by and between Jack Henry & Associates, Inc. and
Colorado Business Bank, N.A.
38
39
(2) 10.8 Employment Agreement, dated as of March 1, 1995, by and
between Equitable Bankshares of Colorado, Inc. and Jonathan C.
Lorenz.
(2) 10.9 Employment Agreement, dated as of May 8, 1995, by and between
Equitable Bankshares of Colorado, Inc. and Virginia K.
Berkeley.
(2) 10.10 Employment Agreement, dated as of January 3, 1998, by and
between CoBiz Inc. and Richard J. Dalton.
(2) 10.11 Employment Agreement, dated as of February 29, 1996, by and
between Equitable Bankshares of Colorado, Inc. and Darrell J.
Schulte.
(2) 10.12 Employment Agreement, dated as of June 12, 1995, by and
between CoBiz Inc. and Charles E. Holmes.
(2) 10.13 Employment Agreement, dated as of November 16, 1997, by and
between CoBiz Inc. and Andrew L. Bacon.
(2) 10.14 Employment Agreement, dated as of October 1, 1997, by and
between CoBiz Inc. and K. Denise Albrecht.
(2) 10.15 Employment Agreement, dated as of March 29, 1996, by and
between Colorado Business Leasing, Inc. and Richard M. Hall,
Jr.
(2) 10.16 Employment Agreement, dated as of September 29, 1995, by and
between Equitable Bankshares of Colorado, Inc. and Katherine
H. Kaley.
(2) 10.17 Employment Agreement, dated as of January 8, 1996, by and
between CoBiz Inc. and Robert J. Ostertag.
(2) 10.18 Retail Lease, dated as of April 1, 1991, by and between
Southbridge Plaza, L.P. and Equitable Bank of Littleton, N.A.
(2) 10.19 First Amendment to Retail Lease, dated as of January 4, 1996,
by and between Southbridge Plaza, L.P. and Colorado Business
Bank, N.A., formerly known as Equitable Bank of Littleton,
N.A.
(2) 10.20 Office Lease, dated as of December 2, 1996, by and between
Elliott Kiowa, Inc. and Colorado Business Bank, N.A.
(2) 10.21 Lease, dated as of December 1, 1997, by and between Spencer
Enterprises and Colorado Business Bank, N.A.
(2) 10.22 Office Lease, dated as of February 23, 1996, by and between
Colorado Business Leasing, Inc. and Denver Place Associates
Limited Partnership.
(5) 10.23 Lease Agreement between Kesef, LLC and CoBiz Inc.
(5) 10.24 Office Lease Between SFP Realty, Ltd., L.L.P. and Colorado
Business Bank of Boulder National Association
39
40
(5) 10.25 Office Building Lease between Hanover Resources Inc. and
Colorado Business Bank, N.A.
(5) 10.26 Employment Agreement between CoBiz Inc. and Kevin G. Quinn
(6) 10.27 Lease Agreement between Edwards Interchange II, LLC and
Colorado Business Bank, National Association
(6) 10.28 Office Lease between Bank One, Colorado, N.A., as Trustee for
the Frank G. Jamison Trust, dated September 2, 1956 and
Colorado Business Bank, N.A.
(7) 10.29 Lease, dated July 27, 1999, between Joan H. Travis and
Colorado Business Bank, N.A.
(7) 10.30 Employment Agreement, dated April 12, 1999, by and between
CoBiz Inc. and Randal Garman.
(8) 10.31 Employment Agreement, dated May 20, 1998, by and between CoBiz
Inc. and J. Henry Schonewise.
(9) 10.32 Employment Agreement, dated January 1, 2000, by and between
Colorado Business Bankshares, Inc. and Lyne Andrich.
(9) 10.33 Promissory note between American National Bank and Trust
Company of Chicago and Colorado Business Bankshares, Inc.
(10) 10.34 First Amendment to Lease Agreement between Kesef, LLC and
Colorado Business Bankshares, Inc. dated May 1, 1998.
(11) 10.35 2000 Employee Stock Purchase Plan.
21 List of subsidiaries
23 Consent of Deloitte & Touche LLP
- ------------
(1) Incorporated herein by reference from the Registrant's Registration
Statement on Form S-4 (File No. 333-51866).
(2) Incorporated herein by reference from the Registrant's Registration
Statement on Form SB-2 (File No. 333-50037).
(3) Incorporated herein by reference from the Registrant's Current Report on
Form 8-K, as filed on March 23, 2001.
(4) Incorporated herein by reference from the Registrant's Registration
Statement on Form S-1 (File No. 333-37674).
(5) Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1998, as filed on November
13, 1998.
(6) Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1999, as filed on May 17, 1999.
40
41
(7) Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1999, as filed on November
12, 1999.
(8) Incorporated herein by reference from the Registrant's Annual Report on
Form 10-KSB for the year ended December 31, 1999, as filed on March 30,
2000.
(9) Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000, as filed on May 12, 2000.
(10) Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000, as filed on November
14, 2000.
(11) Incorporated herein by reference from the Registrant's Proxy Statement
filed in connection with its 2000 annual meeting of shareholders, as filed
on April 19, 2000.
+ Confidential treatment has been granted by the Securities and Exchange
Commission as to certain portions of exhibit. Such portions have been
redacted.
41
42
(c) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended
December 31, 2000.
(d) FINANCIAL STATEMENT SCHEDULES.
All financial statement schedules are omitted because they are
not required or because the required information is included in the
financial statements and/or related notes.
42
43
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 29, 2001
CoBiz Inc.
By: /s/ Steven Bangert
------------------------------
Steven Bangert
Chairman of the Board of Directors
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature: Title: Date:
/s/ Steven Bangert Chairman of the Board and
- --------------------------- Chief Executive Officer March 29, 2001
Steven Bangert
/s/ Jonathan C. Lorenz Vice Chairman of the Board
- --------------------------- and President March 29, 2001
Jonathan C. Lorenz
/s/ Richard J. Dalton Executive Vice President and
- --------------------------- Chief Financial Officer March 29, 2001
Richard J. Dalton
/s/ Lyne B. Andrich Senior Vice President and
- --------------------------- Controller March 29, 2001
Lyne B. Andrich
/s/ Virginia K. Berkeley
- ---------------------------
Virginia K. Berkeley Director March 29, 2001
/s/ Mark S. Kipnis
- ---------------------------
Mark S. Kipnis Director March 29, 2001
/s/ Noel N. Rothman
- ---------------------------
Noel N. Rothman Director March 29, 2001
/s/ Howard R. Ross
- ---------------------------
Howard R. Ross Director March 29, 2001
/s/ Michael B. Burgamy
- ---------------------------
Michael B. Burgamy Director March 29, 2001
/s/ Timothy J. Travis
- ---------------------------
Timothy J. Travis Director March 29, 2001
43
44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.................................................................. F-2
Consolidated Statements of Condition as of December 31, 2000 and 1999 ........................ F-3
Consolidated Statements of Income and Comprehensive Income for the Years
Ended December 31, 2000, 1999 and 1998 ..................................................... F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998 ........................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 ........................................................... F-7
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2000, 1999 and 1998 ............................................................ F-8
F-1
45
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CoBiz Inc.
Denver, Colorado
We have audited the accompanying consolidated statements of condition of CoBiz
Inc. (formerly Colorado Business Bankshares, Inc.) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of income
and comprehensive income, shareholders' equity, and cash flows for the three
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 2000 and 1999, and the results of their operations and their cash
flows for the three years ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
March 8, 2001
Denver, Colorado
F-2
46
COBIZ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
ASSETS 2000 1999
Cash and due from banks $ 24,836,000 $ 18,687,000
Investment securities available for sale (cost of
$137,291,000 and $102,949,000, respectively) 137,898,000 101,456,000
Investment securities held to maturity (fair value
of $4,407,000 and $5,648,000, respectively) 4,368,000 5,620,000
Other investments 3,818,000 2,845,000
------------ ------------
Total investments 146,084,000 109,921,000
------------ ------------
Loans and leases, net 444,738,000 346,094,000
Excess of cost over fair value of net assets
acquired, net 3,804,000 4,243,000
Investment in operating leases 2,400,000 4,047,000
Premises and equipment, net 3,612,000 3,606,000
Accrued interest receivable 3,224,000 2,167,000
Deferred income taxes 1,845,000 2,192,000
Other 2,520,000 1,052,000
------------ ------------
TOTAL ASSETS $633,063,000 $492,009,000
============ ============
See notes to consolidated financial statements.
F-3
47
- --------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY 2000 1999
LIABILITIES:
Deposits:
Demand $ 131,198,000 $ 106,492,000
NOW and money market 179,549,000 148,685,000
Savings 5,362,000 5,896,000
Certificates of deposit 134,668,000 122,256,000
------------- -------------
Total deposits 450,777,000 383,329,000
Federal funds purchased 10,400,000 1,300,000
Securities sold under agreements to repurchase 65,827,000 33,053,000
Advances from the Federal Home Loan Bank 35,840,000 30,980,000
Accrued interest and other liabilities 3,132,000 2,996,000
Company obligated mandatorily redeemable preferred securities
of a subsidiary trust holding solely subordinated debentures 20,000,000 --
------------- -------------
Total liabilities 585,976,000 451,658,000
MINORITY INTEREST
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Cumulative preferred, $.01 par value; 2,000,000 shares
authorized; None outstanding -- --
Common, $.01 par value; 25,000,000 shares authorized;
6,713,355 and 6,674,659 issued and outstanding, respectively 67,000 67,000
Additional paid-in capital 30,144,000 29,994,000
Retained earnings 16,500,000 11,224,000
Accumulated other comprehensive income (loss), net of income
tax of $231,000 and $(559,000), respectively 376,000 (934,000)
------------- -------------
Total shareholders' equity 47,087,000 40,351,000
------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 633,063,000 $ 492,009,000
============= =============
See notes to consolidated financial statements.
F-4
48
COBIZ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
2000 1999 1998
INTEREST INCOME:
Interest and fees on loans and leases $ 37,940,000 $ 25,934,000 $ 19,640,000
Interest on investments:
Taxable securities 7,793,000 6,087,000 3,898,000
Nontaxable securities 65,000 68,000 81,000
Dividends 218,000 144,000 144,000
Federal funds sold and other 557,000 176,000 136,000
------------ ------------ ------------
Total interest income 46,573,000 32,409,000 23,899,000
INTEREST EXPENSE:
Interest on deposits 15,194,000 8,846,000 6,812,000
Interest on short-term borrowings 4,272,000 3,008,000 1,464,000
Interest on mandatorily redeemable preferred
securities of a subsidiary trust 1,044,000 -- --
Interest on note payable -- -- 301,000
------------ ------------ ------------
Total interest expense 20,510,000 11,854,000 8,577,000
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN AND LEASE LOSSES 26,063,000 20,555,000 15,322,000
PROVISION FOR LOAN AND LEASE LOSSES 1,713,000 1,473,000 1,188,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 24,350,000 19,082,000 14,134,000
------------ ------------ ------------
NONINTEREST INCOME:
Service charges 1,150,000 1,152,000 945,000
Operating lease income 1,988,000 2,348,000 2,370,000
Trust fee income 631,000 283,000 --
Other income 952,000 783,000 769,000
Gain on sale of investment securities -- 44,000 162,000
------------ ------------ ------------
Total noninterest income 4,721,000 4,610,000 4,246,000
------------ ------------ ------------
NONINTEREST EXPENSE:
Salaries and employee benefits 9,444,000 8,124,000 6,836,000
Occupancy expenses, premises and equipment 3,372,000 2,831,000 1,868,000
Depreciation on leases 1,618,000 2,015,000 1,889,000
Amortization of intangibles 442,000 442,000 442,000
Other 2,940,000 2,359,000 2,098,000
------------ ------------ ------------
Total noninterest expense 17,816,000 15,771,000 13,133,000
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 11,255,000 7,921,000 5,247,000
PROVISION FOR INCOME TAXES 4,503,000 3,002,000 2,031,000
------------ ------------ ------------
NET INCOME 6,752,000 4,919,000 3,216,000
------------ ------------ ------------
UNREALIZED APPRECIATION (DEPRECIATION)
ON INVESTMENT SECURITIES AVAILABLE
FOR SALE, net of tax 1,310,000 (1,228,000) 184,000
------------ ------------ ------------
COMPREHENSIVE INCOME $ 8,062,000 $ 3,691,000 $ 3,400,000
============ ============ ============
EARNINGS PER SHARE:
Basic $ 1.01 $ 0.74 $ 0.53
============ ============ ============
Diluted $ 0.98 $ 0.72 $ 0.51
============ ============ ============
Cash dividends per share $ 0.22 $ 0.10 $ --
============ ============ ============
See notes to consolidated financial statements.
F-5
49
COBIZ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK ADDITIONAL PREFERRED STOCK OTHER
SHARES PAID-IN SHARES RETAINED COMPREHENSIVE
ISSUED AMOUNT CAPITAL ISSUED AMOUNT EARNINGS INCOME TOTAL
BALANCE, JANUARY 1, 1998 4,874,968 $49,000 $11,933,000 1,500 $ 1,500,000 $ 3,833,000 $ 110,000 $17,425,000
ISSUANCE OF COMMON STOCK 1,610,000 16,000 17,508,000 -- -- -- -- 17,524,000
REDEMPTION OF PREFERRED STOCK -- -- -- (1,500) $(1,500,000) -- -- (1,500,000)
OPTIONS EXERCISED 188,500 2,000 398,000 -- -- -- -- 400,000
DIVIDENDS PAID - PREFERRED
($51.29 per share) -- -- -- -- -- (77,000) -- (77,000)
NET CHANGE IN UNREALIZED
APPRECIATION ON INVESTMENT
SECURITIES AVAILABLE FOR SALE,
net of income taxes of $110,000 -- -- -- -- -- -- 184,000 184,000
NET INCOME -- -- -- -- -- 3,216,000 -- 3,216,000
--------- ------- ----------- ------ ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 6,673,468 67,000 29,839,000 -- -- 6,972,000 294,000 37,172,000
TAX EFFECT ON EXERCISE OF NON-
QUALIFIED STOCK OPTIONS -- -- 146,000 -- -- -- -- 146,000
OPTIONS EXERCISED 1,191 -- 9,000 -- -- -- -- 9,000
DIVIDENDS PAID - COMMON
($ .10 per share) -- -- -- -- -- (667,000) -- (667,000)
NET CHANGE IN UNREALIZED
DEPRECIATION ON INVESTMENT
SECURITIES AVAILABLE FOR SALE,
net of income taxes of ($731,000) -- -- -- -- -- -- (1,228,000) (1,228,000)
NET INCOME -- -- -- -- -- 4,919,000 -- 4,919,000
--------- ------- ----------- ------ ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 6,674,659 67,000 29,994,000 -- -- 11,224,000 (934,000) 40,351,000
OPTIONS EXERCISED 33,238 -- 85,000 -- -- -- -- 85,000
EMPLOYEE STOCK PURCHASE PLAN 5,458 -- 65,000 -- -- -- -- 65,000
DIVIDENDS PAID - COMMON
($.22 per share) -- -- -- -- -- (1,476,000) -- (1,476,000)
NET CHANGE IN UNREALIZED
APPRECIATION ON INVESTMENT
SECURITIES AVAILABLE FOR SALE,
net of income taxes of $787,000 -- -- -- -- -- -- 1,310,000 1,310,000
NET INCOME -- -- -- -- -- 6,752,000 -- 6,752,000
--------- ------- ----------- ------ ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2000 6,713,355 $67,000 $30,144,000 -- $ -- $16,500,000 $ 376,000 $47,087,000
========= ======= =========== ====== =========== =========== =========== ===========
See notes to consolidated financial statements.
F-6
50
COBIZ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,752,000 $ 4,919,000 $ 3,216,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Net amortization on investment securities 104,000 195,000 248,000
Depreciation and amortization 3,218,000 3,447,000 2,964,000
Provision for loan and lease losses 1,713,000 1,473,000 1,188,000
Deferred income taxes (444,000) (527,000) (264,000)
Gain on sale of investment securities -- (44,000) (162,000)
(Gain) loss on sale of premises and equipment (92,000) (4,000) 30,000
Changes in:
Accrued interest receivable (1,057,000) (570,000) (266,000)
Other assets (527,000) (53,000) 620,000
Accrued interest and other liabilities 136,000 1,368,000 (18,000)
------------- ------------- -------------
Net cash provided by operating activities 9,803,000 10,204,000 7,556,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in other investments (973,000) (741,000) 119,000
Purchase of investment securities available for sale (62,889,000) (48,851,000) (86,941,000)
Maturities of investment securities held to maturity 1,243,000 3,740,000 5,503,000
Proceeds from maturities and sale of investment securities
available for sale 28,448,000 41,759,000 32,374,000
Loan and lease originations and repayments, net (100,817,000) (126,409,000) (63,431,000)
Purchase of premises and equipment (1,230,000) (1,724,000) (2,579,000)
Proceeds from sale of premises and equipment 649,000 251,000 573,000
------------- ------------- -------------
Net cash used in investing activities (135,569,000) (131,975,000) (114,382,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market, and savings accounts 55,036,000 57,518,000 53,351,000
Net increase (decrease) in certificates of deposit 12,412,000 52,783,000 (1,381,000)
Net increase (decrease) in federal funds purchased 9,100,000 (2,200,000) 3,500,000
Net increase in securities sold under agreements to repurchase 32,774,000 8,097,000 11,932,000
Advances from the Federal Home Loan Bank 85,800,000 110,400,000 24,000,000
Repayment of advances from the Federal Home Loan Bank (80,940,000) (105,540,000) (1,140,000)
Payment on notes payable -- -- (7,500,000)
Proceeds from issuance of mandatorily redeemable preferred securities
of a subsidiary trust 20,000,000 -- --
Dividends paid on common stock (1,476,000) (667,000) --
Net increase in debt issuance cost (941,000) -- --
Proceeds from options exercised 150,000 9,000 400,000
Proceeds from issuance of common stock -- -- 17,524,000
Dividends paid on preferred stock -- -- (77,000)
Redemption of preferred stock -- -- (1,500,000)
------------- ------------- -------------
Net cash provided by financing activities 131,915,000 120,400,000 99,109,000
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 6,149,000 $ (1,371,000) $ (7,717,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 18,687,000 20,058,000 27,775,000
------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 24,836,000 $ 18,687,000 $ 20,058,000
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF
CASH INFORMATION:
Cash paid during the year for:
Interest $ 20,402,000 $ 11,446,000 $ 8,549,000
============= ============= =============
Income taxes $ 5,306,000 $ 2,889,000 $ 2,542,000
============= ============= =============
See notes to consolidated financial statements.
F-7
51
COBIZ INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting practices of CoBiz Inc., formerly Colorado
Business Bankshares, Inc. ("Parent"), its wholly-owned subsidiary, the
Colorado Business Bank, N.A. ("Bank"), and its 80% owned equipment leasing
subsidiary, Colorado Business Leasing, Inc. ("Leasing"), CoBiz Connect and
Colorado Business Bankshares Capital Trust I, collectively referred to as
the "Company or CoBiz," conform to accounting principles generally
accepted in the United States of America and prevailing practices within
the banking industry.
The Bank is a commercial banking institution with eight locations in the
Denver metropolitan area, and one in Edwards, Colorado. Leasing provides
equipment leasing primarily to middle-market companies. In preparing its
financial statements, management of the Company is required to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
significantly from those estimates. Material estimates that are
particularly susceptible to significant changes in the near-term relate to
the determination of the allowance for loan and lease losses, the
valuation of real estate acquired through foreclosures or in satisfaction
of loans, lease residuals and valuation of property under operating
leases. The following is a summary of the Company's significant accounting
and reporting policies.
CONSOLIDATION - The consolidated financial statements include the accounts
of the Parent, the Bank, Leasing, CoBiz Connect and Colorado Business
Bankshares Capital Trust I. Intercompany balances and transactions are
eliminated in consolidation. Losses attributable to minority shareholders
of Leasing have exceeded their share of equity of Leasing.
CASH AND DUE FROM BANKS - The Company considers all liquid investments
with original maturities of three months or less to be cash equivalents.
INVESTMENTS - The Company classifies its investment securities as held to
maturity, available for sale, or trading according to management's intent.
As of December 31, 2000 and 1999, the Company had no trading securities.
a. Investment Securities Held to Maturity - Bonds, notes and debentures
for which the Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for premiums and discounts.
b. Investment Securities Available for Sale - Available for sale
securities consist of bonds, notes, and debentures not classified as
held to maturity securities and are reported at fair market value as
determined by quoted market prices. Unrealized holding gains and
losses, net of tax, are reported as a net amount in accumulated
other comprehensive income (loss) until realized.
Premiums and discounts are recognized in interest income using the
level-yield method over the period to maturity. Declines in the fair value
of individual investment securities held to maturity and available for
sale below their cost that are other than temporary are recorded as
write-downs of the individual securities to their fair value and the
related write-downs are included in earnings as realized losses.
F-8
52
Gains and losses on disposal of investment securities are determined using
the specific-identification method.
Other investments, including primarily Federal Home Loan Bank and Federal
Reserve Bank stock, are accounted for under the cost method.
LOANS AND LEASES - Loans and leases that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off
are reported at their outstanding principal balance adjusted for any
charge-offs, the allowance for loan and lease losses, deferred fees or
costs on originated loans and leases, and unamortized premiums or
discounts on purchased loans. Loan fees and certain costs of originating
loans and leases are deferred and the net amount is amortized over the
contractual life of the related loans and leases. Interest is accrued and
credited to income daily based on the principal balance outstanding. The
accrual of interest income is generally discontinued when a loan or lease
becomes 90 days past due as to principal and interest. When a loan is
designated as nonaccrual, the current period's accrued interest receivable
is charged against current earnings while any portions applicable to prior
periods are charged against the allowance for loan and lease losses.
Interest payments received on nonaccrual loans are applied to the
principal balance of the loan. Management may elect to continue the
accrual of interest when the loan is in the process of collection and the
realizable value of collateral is sufficient to cover the principal
balance and accrued interest.
NET INVESTMENT IN DIRECT FINANCING LEASES - The Company has entered into
various lease agreements which are accounted for as direct financing
leases, in accordance with Statement of Financial Accounting Standards No.
13.
Under this method, the present value of the future lease payments, the
present value of the unguaranteed residual and initial direct costs are
recorded as assets, which are equal to the fair value of the equipment
leased. In each period, initial direct costs are amortized and interest
income, which is included in income from direct financing leases, is
recognized as a constant percentage return on the net investment in the
lease.
Residual values are established at lease inception equal to the estimated
value, as determined by the Company, to be received from the equipment
following termination of the initial lease. In estimating such values, the
Company considers all relevant information and circumstances regarding the
equipment and the lessee. Any permanent reduction in the estimated
residual value of lease property is charged to operations in the period in
which it occurs.
ALLOWANCE FOR LOAN AND LEASE LOSSES - The allowance for loan and lease
losses is established as losses are estimated to have occurred through a
provision for loan and lease losses charged to earnings. Loan and lease
losses are charged against the allowance when management believes the
uncollectibilty of a loan or lease balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan and lease losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibilty of the loans in light of historical experience, the nature
and volume of the loan and lease portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining
F-9
53
impairment include payment status, collateral value, and the probability
of collecting scheduled principal and interest payments when due. Loans
that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED - Excess of cost
over fair value of net assets acquired is amortized by the straight-line
method over 15 years. The Company reviews such assets for impairment at
least annually.
INVESTMENT IN OPERATING LEASES - The Company has entered into various
equipment leases accounted for as operating leases in accordance with
Statement of Financial Accounting Standards No. 13. The equipment, which
is reported as investment in operating leases, is depreciated over the
estimated useful life or lease term, if shorter.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization, which is calculated by the
straight-line method over the estimated useful lives of the respective
assets as follows:
Furniture, fixtures and equipment 3 to 10 years
Leasehold improvements are capitalized and amortized using the
straight-line method over the terms of the respective leases or the
estimated useful lives of the improvements, whichever is shorter.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE - Assets acquired by foreclosure
or in settlement of debt and held for sale are valued at estimated fair
value as of the date of foreclosure, and a related valuation allowance is
provided for estimated costs to sell the assets. Management periodically
evaluates the value of foreclosed assets held for sale and increases the
valuation allowance for any subsequent declines in fair value less selling
costs. Subsequent declines in value are charged to operations.
INCOME TAXES - A deferred income tax liability or asset is recognized for
temporary differences which exist in the recognition of certain income and
expense items for financial statement reporting purposes in periods
different than for tax reporting purposes. The provision for income taxes
is based on the amount of current and deferred income taxes payable or
refundable at the date of the financial statements as measured by the
provisions of current tax laws.
STOCK-BASED COMPENSATION - The Company accounts for its stock options
using the intrinsic value based method and makes pro forma disclosures of
net income and earnings per share using the fair value based method (see
Note 10).
EARNINGS PER SHARE - Basic earnings per share is based on net income
divided by the weighted average number of common shares outstanding during
the period. The weighted average number of shares outstanding used to
compute diluted earnings per share include the number of additional common
shares that would be outstanding if the potential dilutive common shares
and common share equivalents had been issued at the beginning of the year.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1999
and 1998 financial statements to conform with the 2000 presentation.
F-10
54
RECENT ACCOUNTING PRONOUNCEMENTS - The Company adopted the provisions of
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as of January 1, 2001. The Company believes that it currently
has no derivative instruments and thus adoption of the statement had no
effect on the consolidated financial statements of the Company.
2. INVESTMENTS
The amortized cost and estimated fair values of investment securities are
summarized as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2000 COST GAINS LOSSES VALUE
AVAILABLE FOR SALE SECURITIES:
Mortgage-backed securities $127,539,000 $ 1,111,000 $ 411,000 $128,239,000
U.S. treasury 1,526,000 -- 17,000 1,509,000
Obligations of states and
political subdivisions 975,000 34,000 -- 1,009,000
U.S. government agencies 7,251,000 -- 110,000 7,141,000
------------ ------------ ------------ ------------
$137,291,000 $ 1,145,000 $ 538,000 $137,898,000
============ ============ ============ ============
HELD TO MATURITY SECURITIES:
Mortgage-backed securities $ 4,027,000 $ 45,000 $ 1,000 $ 4,071,000
U.S. government agencies 341,000 -- 5,000 336,000
------------ ------------ ------------ ------------
$ 4,368,000 $ 45,000 $ 6,000 $ 4,407,000
============ ============ ============ ============
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1999 COST GAINS LOSSES VALUE
AVAILABLE FOR SALE SECURITIES:
Mortgage-backed securities $ 90,467,000 $ 464,000 $ 1,326,000 $ 89,605,000
U.S. treasury 3,540,000 -- 73,000 3,467,000
Obligations of states and
political subdivisions 275,000 34,000 -- 309,000
U.S. government agencies 8,667,000 -- 592,000 8,075,000
------------ ------------ ------------ ------------
$102,949,000 $ 498,000 $ 1,991,000 $101,456,000
============ ============ ============ ============
F-11
55
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
HELD TO MATURITY SECURITIES:
Mortgage-backed securities $4,788,000 $ 40,000 $ 3,000 $4,825,000
Obligations of states and
political subdivisions 490,000 4,000 -- 494,000
U.S. government agencies 342,000 -- 13,000 329,000
---------- ---------- ---------- ----------
$5,620,000 $ 44,000 $ 16,000 $5,648,000
========== ========== ========== ==========
The amortized cost and estimated fair value of investments in debt
securities at December 31, 2000 by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
penalties.
AVAILABLE FOR SALE HELD TO MATURITY
----------------------------- -----------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
Due in one year or less $ 1,526,000 $ 1,509,000 $ -- $ --
Due after one year through five years -- -- -- --
Due after five years through ten years 275,000 309,000 341,000 336,000
Due after ten years 7,951,000 7,841,000
Mortgage-backed securities 127,539,000 128,239,000 4,027,000 4,071,000
------------ ------------ ------------ ------------
$137,291,000 $137,898,000 $ 4,368,000 $ 4,407,000
============ ============ ============ ============
During the years ended December 31, 2000, 1999 and 1998, there were no
sales of held to maturity securities. Proceeds from sales of investment
securities available for sale totaled $0, $9,858,000 and $14,716,000,
respectively during the years ended December 31, 2000, 1999 and 1998. The
related gross realized gains were $0, $48,000 and $162,000, respectively.
Investment securities with an approximate fair value of $12,469,000 and
$15,897,000 were pledged to secure public deposits of $4,898,000 and
$12,146,000 at December 31, 2000 and 1999, respectively.
Obligations of states and political subdivisions at December 31, 2000 and
1999 do not include any single issuer for which the aggregate carrying
amount exceeds 10% of the Company's shareholders' equity.
Other investments at December 31, 2000 consists primarily of Federal Home
Loan Bank stock (carrying value $2,292,000) and Federal Reserve Bank stock
(carrying value $876,000). In addition, the Bank had $650,000 in an
investment partnership being accounted for under the cost method. The Bank
has committed to investing up to $1,500,000 in the partnership. Certain
shareholders and directors have also invested in and received consulting
fees from the partnership.
F-12
56
3. LOANS AND LEASES
Categories of loans and leases, net of deferred fees include:
2000 1999
Commercial $147,190,000 $129,808,000
Real estate - mortgage 187,556,000 123,668,000
Real estate - construction 66,275,000 53,802,000
Consumer 26,467,000 21,880,000
Direct financing leases 26,562,000 24,206,000
------------ ------------
454,050,000 353,364,000
Less: Allowance for loan and lease losses 5,860,000 4,585,000
Unearned net loan and lease fees 3,452,000 2,685,000
------------ ------------
$444,738,000 $346,094,000
============ ============
The majority of the Company's lending and leasing activities are with
customers located in the Denver metropolitan area.
In the ordinary course of business, the Company makes various direct and
indirect loans to officers and directors of the Company and its
subsidiaries at competitive rates. Activity with respect to officer and
director loans is as follows for the years ended December 31, 2000, 1999
and 1998, respectively:
2000 1999 1998
Balance, beginning of period $ 3,696,000 $ 2,914,000 $ 2,139,000
New loans 12,259,000 9,653,000 7,240,000
Principal paydowns and payoffs (9,641,000) (8,871,000) (6,465,000)
------------ ------------ ------------
Balance, end of period $ 6,314,000 $ 3,696,000 $ 2,914,000
============ ============ ============
The Company sells participations in loans to an entity controlled by the
Chairman of the Board of Directors and a member of the Board of Directors.
The amount of participations outstanding with the affiliate were $550,000
and $1,304,000 at December 31, 2000 and 1999, respectively.
F-13
57
Transactions in the allowance for loan and lease losses are summarized as
follows:
YEARS ENDED
DECEMBER 31,
2000 1999 1998
Balance, beginning of year $ 4,585,000 $ 3,271,000 $ 2,248,000
Provision for loan and lease losses 1,713,000 1,473,000 1,188,000
----------- ----------- -----------
6,298,000 4,744,000 3,436,000
Loans charged off, net of recoveries of
$59,000, $26,000 and $71,000 for 2000,
1999 and 1998, respectively (438,000) (159,000) (165,000)
----------- ----------- -----------
Balance, end of year $ 5,860,000 $ 4,585,000 $ 3,271,000
=========== =========== ===========
The recorded investment in loans that are considered to be impaired under
SFAS No. 114 as amended by SFAS No. 118 (all of which were on a
non-accrual basis) was $431,000 and $634,000 at December 31, 2000 and
1999, respectively (all of which have a related allowance for loan and
lease loss). The allowance for loan and lease losses applicable to
impaired loans was $92,000 and $160,000 at December 31, 2000 and 1999,
respectively. Interest of $8,000, $46,000 and $43,000 was recognized on
average impaired loans of $732,000, $543,000 and $639,000, during 2000,
1999 and 1998, respectively. The amount of additional interest income that
would have been recorded if the loans had been current in accordance with
the original terms is insignificant for the years ended December 31, 2000,
1999 and 1998.
4. INVESTMENT IN LEASES
The Company is the lessor of equipment under agreements expiring in
various future years. Certain of the equipment leases provide for
additional rents, based on use in excess of a stipulated minimum number of
hours, and allow the lessees to purchase the equipment for fair value at
the end of the lease terms.
Property leased or held for lease to others under operating leases
consists of the following:
2000 1999
Equipment $5,330,000 $6,862,000
Unamortized initial direct costs 39,000 73,000
---------- ----------
5,369,000 6,935,000
Less accumulated depreciation 2,969,000 2,888,000
---------- ----------
Total $2,400,000 $4,047,000
========== ==========
F-14
58
The Company's net investment in direct financing leases consists of the
following at December 31, 2000 and 1999:
2000 1999
Minimum lease payments receivable $ 25,134,000 $ 22,968,000
Unamortized initial direct costs 443,000 354,000
Estimated unguaranteed residual values 617,000 503,000
Unearned income (3,017,000) (2,340,000)
------------ ------------
Total $ 23,177,000 $ 21,485,000
============ ============
At December 31, 2000, future minimum lease payments receivable under
direct financing leases and noncancelable operating leases are as follows:
DIRECT OPERATING
FINANCING LEASES OPERATING LEASES
2001 $ 10,929,000 $ 1,332,000
2002 7,544,000 948,000
2003 4,366,000 246,000
2004 1,726,000 17,000
2005 558,000 --
Thereafter 11,000 --
------------ -----------
Total $ 25,134,000 $ 2,543,000
============ ===========
5. PREMISES AND EQUIPMENT
The major classes of premises and equipment are summarized as follows:
DECEMBER 31,
2000 1999
Leasehold improvements $ 2,337,000 $ 1,807,000
Furniture, fixtures, and equipment 5,751,000 5,393,000
----------- -----------
8,088,000 7,200,000
Accumulated depreciation (4,476,000) (3,594,000)
----------- -----------
$ 3,612,000 $ 3,606,000
=========== ===========
F-15
59
6. CERTIFICATES OF DEPOSIT
The composition of certificates of deposit is as follows:
2000 1999
Less than $100,000 $ 25,162,000 $ 23,870,000
$100,000 and more 109,506,000 98,386,000
------------ ------------
$134,668,000 $122,256,000
============ ============
Related interest expense is as follows:
2000 1999 1998
Less than $100,000 $1,479,000 $1,320,000 $1,166,000
$100,000 and more 6,362,000 3,337,000 2,658,000
---------- ---------- ----------
$7,841,000 $4,657,000 $3,824,000
========== ========== ==========
Maturities of certificates of deposit of $100,000 and more are as follows:
2000
Less than three months $ 65,098,000
Three months up to six months 21,227,000
Six months up to one year 18,760,000
One year and over 4,421,000
------------
$109,506,000
============
7. BORROWED FUNDS
The Company has advances from the Federal Home Loan Bank of Topeka (FHLB)
with interest rates that range from 6.42% to 6.89%. Advances are
collateralized by qualifying loans and investment securities not otherwise
pledged as collateral. At December 31, 2000 the FHLB advances are
collateralized by loans of $82,460,000 and investment securities of
$1,805,000.
F-16
60
Aggregate annual maturities of advances are as follows:
YEAR
2001 $35,140,000
2002 140,000
2003 140,000
2004 140,000
2005 140,000
Thereafter 140,000
-----------
Total $35,840,000
===========
Securities sold under agreements to repurchase are summarized as follows:
DECEMBER 31,
2000 1999
Securities (principally mortgage-backed securities) with an
estimated fair value of $76,677,000 in 2000 and $53,827,000
in 1999 $65,827,000 $33,053,000
=========== ===========
The Company enters into sales of securities under agreements to
repurchase. The amounts received under these agreements represent
short-term borrowings and are reflected as a liability in the consolidated
statements of condition. Securities sold under agreements to repurchase
averaged $47,876,000, $40,421,000 and $18,811,000 and the maximum amounts
outstanding at any month-end during 2000, 1999 and 1998 were $68,306,000,
$51,982,000 and $24,956,000, respectively. At December 31, 2000, the
weighted average interest rate was 5.64%.
Maturities of repurchase agreements are summarized as follows at December
31, 2000:
Overnight $61,223,000
Up to 30 days 4,604,000
-----------
$65,827,000
===========
8. COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF A SUBSIDIARY TRUST
In June 2000, the Company created a wholly-owned trust, Colorado Business
Bankshares Capital Trust I, a trust formed under the laws of the State of
Delaware (the "Trust"). The Trust issued $20,000,000 of 10.0% trust
preferred securities and invested the proceeds thereof in 10.0% junior
subordinated debentures of CoBiz Inc. The securities provide cumulative
distributions at a 10% annual rate and the Company records the
distributions in interest expense on the consolidated statement of income.
The junior subordinated debentures will mature and the capital securities
must be redeemed on June 30, 2030, which date may be shortened to a date
not earlier that June 30, 2005, if certain conditions are met (including
the Company having received prior approval of the Federal Reserve and any
other required regulatory approvals). The junior subordinated debentures
may be prepaid if certain events occur, including a change in tax status
or regulatory capital treatment of the trust preferred securities. In each
case, redemption will be made at par, plus the accrued and unpaid
distributions thereon through the redemption date.
F-17
61
9. INCOME TAXES
The components of consolidated income tax expense are as follows:
YEARS ENDED
DECEMBER 31,
2000 1999 1998
Current tax expense $ 4,947,000 $ 3,529,000 $ 2,295,000
Deferred tax benefit (444,000) (527,000) (264,000)
----------- ----------- -----------
Total $ 4,503,000 $ 3,002,000 $ 2,031,000
=========== =========== ===========
A deferred tax asset or liability is recognized for the tax consequences
of temporary differences in the recognition of revenue and expense for
financial and tax reporting purposes. The net change during the year in
the deferred tax asset or liability results in a deferred tax expense or
benefit. The temporary differences, tax effected, which give rise to the
Company's net deferred tax assets are as follows:
DECEMBER 31,
2000 1999
Deferred tax assets:
Allowance for loan and lease losses $2,134,000 $1,594,000
Unrealized loss on investment securities available for sale -- 559,000
Direct financing leases 889,000 438,000
Deferred loan fees 496,000 309,000
Vacation and other accrued liabilities 89,000 49,000
Other -- 84,000
---------- ----------
Total deferred tax assets 3,608,000 3,033,000
---------- ----------
Deferred tax liabilities:
Depreciation 545,000 227,000
Sale of assets 457,000 288,000
Unrealized gain on investment securities available for sale 231,000 --
Deferred initial direct lease costs 305,000 179,000
Prepaid assets 206,000 147,000
Other 19,000 --
---------- ----------
Total deferred tax liabilities 1,763,000 841,000
---------- ----------
Net deferred tax assets $1,845,000 $2,192,000
========== ==========
F-18
62
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
2000 1999 1998
Computed at the statutory rate
(35% in 2000, 34% in 1999 and 1998) $ 3,939,000 $ 2,693,000 $ 1,784,000
Increase (decrease) resulting from:
Tax exempt interest income on loans
and securities (23,000) (22,000) (24,000)
Nondeductible goodwill amortization 154,000 149,000 148,000
State income taxes, net of federal income
tax effect 350,000 256,000 71,000
Meals and entertainment 35,000 26,000 --
Other 48,000 (100,000) 52,000
----------- ----------- -----------
Actual tax provision $ 4,503,000 $ 3,002,000 $ 2,031,000
=========== =========== ===========
10. SHAREHOLDERS' EQUITY
PREFERRED STOCK - The Board of Directors is authorized, among other
things, to fix the designation and the powers, preferences and relative
participating, optional and other special rights for preferred shares. All
outstanding preferred stock was redeemed in 1998.
STOCK OPTIONS - The Company has adopted several incentive stock option
plans to reward and provide long-term incentives for directors and key
employees of the Company. The term of all options issued may not exceed
ten years.
The 1995 Incentive Stock Option Plan (the "1995 Plan") authorizes the
issuance of 197,925 shares of Common Stock. One-fourth of the options
included under the 1995 Plan vest on each of the first four anniversaries
of the grant. Under the 1995 Plan, Incentive Stock Options may not be
granted at an exercise price of less than the fair market value of the
Common Stock on the date of grant. Shares available for grant at December
31, 2000 totaled 483.
The 1997 Incentive Stock Option Plan (the "1997 Plan") reserves 101,036
shares for issuance at not less than the market value of the Company's
stock at the date of grant. The majority of the options issued under the
1997 Plan are exercisable commencing one year from the date of grant and
vest 25% per year thereafter becoming fully exercisable after four years.
Shares available for grant at December 31, 2000 totaled 9,934.
The 1998 Stock Incentive Plan (the "1998 Plan") reserves 425,000 shares of
Common Stock for issuance, and the maximum number of shares underlying
awards that may be granted to an individual employee in a calendar year is
22,500 shares of Common Stock. The exercise price for options granted
under the 1998 Plan must be at least equal to 100% of the fair market
value of the Common Stock on the date of grant. The 1998 Plan permits the
granting of Incentive Stock Options and non-qualified stock options.
Options granted under the 1998 Plan have vesting schedules ranging from
immediately exercisable to being exercisable four years from the grant
date. Shares available for grant at December 31, 2000 totaled 192,048.
F-19
63
The following is a summary of changes in shares under option:
2000 1999 1998
. WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding, beginning of year 438,723 $ 8.10 277,826 $ 3.83 245,051 $ 3.12
Granted 89,800 14.52 166,110 15.94 39,844 8.60
Exercised 33,238 2.58 1,191 7.43 -- --
Forfeited 8,563 14.73 4,022 8.49 7,069 6.15
------- ------ ------- ------ ------- ------
Outstanding, end of year 486,722 $ 9.78 438,723 $ 8.10 277,826 $ 3.83
======= ====== ======= ====== ======= ======
Options exercisable, end of year 286,610 $ 7.32 234,264 $ 5.46 127,827 $ 2.75
======= ====== ======= ====== ======= ======
The outstanding options at December 31, 2000 were exercisable at prices
ranging from $2.12 to $18.00 per share. The weighted-average remaining
contractual life of options outstanding at December 31, 2000 was 6.80
years.
The Company has elected to continue to account for its stock options using
the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 and related interpretations. Accordingly, no compensation
cost has been recognized for its stock option plans. The Company estimated
the fair value of options granted in 2000, 1999 and 1998 to be $339,000,
$538,000 and $41,000, respectively using the Black-Scholes option pricing
model prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation." The fair value of each stock option grant is estimated
using the Black-Scholes option pricing model with the following weighted
average assumptions for 2000, 1999 and 1998, respectively: risk-free
interest rate of 5.03%, 6.56% and 4.72%; expected dividend yield of 1.53%,
1.64% and 0%; expected life of five years; and expected volatility of
33.04%, 38.09% and 36.16%. Had compensation cost been determined based on
fair value at the grant date for the Company's stock options and based on
the fair value of shares issued pursuant to the employee stock purchase
plan described below in accordance with SFAS No. 123, the proforma effect
on net income in 2000, 1999 and 1998 would have been a decrease of
$168,000, $131,000 and $48,000, respectively. The effect on earnings per
share is not material.
DIVIDENDS - At December 31, 2000, the Company's ability to pay dividends
on its common stock, if it determines to do so, is largely dependent upon
the payment of dividends by the Bank. At December 31, 2000, the Bank could
have paid total dividends to the Company of approximately $13.2 million,
without prior regulatory approval.
F-20
64
EARNINGS PER SHARE - Income available to common shareholders and the
weighted average shares outstanding used in the calculation of Basic and
Diluted Earnings Per Share are as follows:
2000 1999 1998
Net income $6,752,000 $4,919,000 $3,216,000
Less: Preferred stock dividends -- -- 77,000
---------- ---------- ----------
Income available to common
shareholders $6,752,000 $4,919,000 $3,139,000
---------- ---------- ----------
Weighted average shares outstanding -
basic earnings per share 6,703,961 6,673,484 5,880,419
Effect of dilutive securities - stock
options 189,513 191,509 214,488
---------- ---------- ----------
Weighted average shares outstanding -
diluted earnings per share 6,893,474 6,864,993 6,094,097
========== ========== ==========
EMPLOYEE STOCK PURCHASE PLAN - In January 2000, the Company's Board of
Directors approved the adoption of an Employee Stock Purchase Plan
("ESPP"), which provides that all employees may elect to have a percentage
of their payroll deducted and applied to the purchase of Common Stock at a
discount. In addition, the Company may make a matching contribution up to
50% of an employee's deduction toward the purchase of additional Common
Stock. The ESPP is administered by a committee of two or more directors of
the Company appointed by the Board of Directors that are not employees or
officers of the Company. During the year ended December 31, 2000, 5,458
shares were issued.
11. COMMITMENTS AND CONTINGENCIES
EMPLOYEE PROFIT SHARING TRUST - The Company has a defined contribution
pension plan covering substantially all employees. Employees may
contribute up to 15% of their compensation with the Company's
discretionary matching within the limits defined for a 401(k) Plan.
Employer contributions charged to expense for 2000, 1999 and 1998, were
$334,000, $277,000 and $149,000, respectively.
F-21
65
LEASE COMMITMENTS - The Company entered into various operating lease
agreements for office space. Most of the leases are subject to rent
escalation provisions in subsequent years, and have renewal options at the
end of the initial lease terms. Total rental expense for the years ended
December 31, 2000, 1999 and 1998 was $1,269,000, $1,034,000 and $686,000,
respectively. In 1998, certain officers and directors acquired the
building in which the corporate office is located and certain banking
operations are performed. The Company's corporate office lease expires
June 30, 2009. Future minimum lease payments at December 31, 2000 under
all noncancelable operating leases are as follows:
2001 $1,479,000
2002 1,455,000
2003 1,421,000
2004 1,237,000
2005 1,119,000
Thereafter 3,238,000
----------
Total $9,949,000
==========
Minimum payments have not been reduced by minimum sublease rentals of
$35,000 due in the future under a non-cancelable sublease.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK - In the normal course
of business the Company has entered into financial instruments which are
not reflected in the accompanying consolidated financial statements. These
financial instruments include commitments to extend credit and stand-by
letters of credit. The Company had the following commitments as of
December 31, 2000:
Commitments to originate commercial or
real estate construction loans and unused
lines of credit granted to customers $186,913,000
============
Commitments to fund consumer loans:
Personal lines of credit and equity lines $ 10,045,000
============
Overdraft protection plans $ 6,133,000
============
Letters of credit $ 7,512,000
============
The Company makes contractual commitments to extend credit and provide
standby letters of credit, which are binding agreements to lend money to
its customers at predetermined interest rates for a specific period of
time. The credit risk involved in issuing these financial instruments is
essentially the same as that involved in granting on-balance sheet
financial instruments. As such, the Company's exposure to credit loss in
the event of non-performance by the counter-party to the financial
instrument is represented by the contractual amounts of those instruments.
However, the Company applies the same credit policies, standards and
ongoing reassessments in making commitments and conditional obligations as
they do for loans. In addition, the amount and type of collateral
obtained, if deemed necessary upon extension of a loan commitment or
standby letter of credit, is essentially the same as the collateral
requirements provided for loans. Additional risk associated with providing
these commitments arise when they are drawn upon, such as the demands on
liquidity the Bank would experience if a significant portion were drawn
down at the same time. However, this is considered unlikely, as many
commitments expire without being drawn upon and therefore do not
necessarily represent future cash requirements.
F-22
66
EMPLOYMENT CONTRACTS - Certain officers of the Company have entered into
employment agreements providing for salaries and fringe benefits. In
addition, severance is provided in the event of termination for other than
cause and under certain changes in control a lump sum payment is required.
OTHER MATTERS - The Company is involved in various lawsuits which have
arisen in the normal course of business. It is management's opinion, based
upon advice of legal counsel, that the ultimate outcome of these lawsuits
will not have a material impact upon the financial condition or results of
operations of the Company.
12. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company and the
Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier I capital (as defined
in the regulations) to risk-weighted assets, and of Tier I capital to
average assets. Management believes, as of December 31, 2000 and 1999,
that the Company and Bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 2000, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the following table. There are no conditions or events that management
believes have changed the Bank's categories.
F-23
67
The following table shows the Company and the Bank's actual capital
amounts and ratios and regulatory thresholds as of December 31, 2000 and
1999:
TO BE "WELL
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AS OF ---------------------- ----------------------- ------------------------
DECEMBER 31, 2000 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
COMPANY
Total capital
(to risk weighted assets) $68,765,000 14.0% $39,185,000 8.0% N/A N/A
Tier I capital
(to risk weighted assets) 58,475,000 11.9% 19,592,000 4.0% N/A N/A
Tier I capital
(to average assets) 58,475,000 9.2% 25,397,000 4.0% N/A N/A
COLORADO BUSINESS BANK, N.A
Total capital
(to risk weighted assets) $66,041,000 13.5% $39,148,000 8.0% $48,960,000 10.0%
Tier I capital
(to risk weighted assets) 60,181,000 12.3% 19,584,000 4.0% 29,376,000 6.0%
Tier I capital
(to average assets) 60,181,000 9.8% 24,558,000 4.0% 30,697,000 5.0%
TO BE "WELL
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AS OF ---------------------- ----------------------- ------------------------
DECEMBER 31, 1999 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
COMPANY
Total capital
(to risk weighted assets) $41,622,000 10.7% $31,265,000 8.0% N/A N/A
Tier I capital
(to risk weighted assets) 37,037,000 9.5% 15,632,000 4.0% N/A N/A
Tier I capital
(to average assets) 37,037,000 7.8% 18,893,000 4.0% N/A N/A
COLORADO BUSINESS BANK, N.A.
Total capital
(to risk weighted assets) $40,297,000 10.3% $31,242,000 8.0% $39,052,000 10.0%
Tier I capital
(to risk weighted assets) 35,712,000 9.1% 15,621,000 4.0% 23,431,000 6.0%
Tier I capital
(to average assets) 35,712,000 7.6% 18,872,000 4.0% 23,591,000 5.0%
F-24
68
13. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the total of (1) net income plus (2) all
other changes in net assets arising from non-owner sources, which are
referred to as other comprehensive income (loss). Presented below are the
changes in other comprehensive income (loss) for the periods indicated.
2000 1999 1998
Other comprehensive income (loss), before tax:
Unrealized gain (loss) on available for sale
securities arising during the period $ 2,097,000 $(1,959,000) $ 455,000
Reclassification adjustment for gains (losses)
arising during the period -- -- (161,000)
----------- ----------- -----------
Other comprehensive income (loss), before tax 2,097,000 (1,959,000) 294,000
Tax (expense) benefit related to items of other
comprehensive income (loss) (787,000) 731,000 (110,000)
----------- ----------- -----------
Other comprehensive income (loss), net of tax $ 1,310,000 $(1,228,000) $ 184,000
=========== =========== ===========
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of the Company's
financial instruments is made in accordance with the requirements of SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments." The
estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data in
order to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
DECEMBER 31, 2000 DECEMBER 31, 1999
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
Financial assets:
Cash and due from banks $ 24,836,000 $ 24,836,000 $ 18,687,000 $ 18,687,000
Investment securities available for sale 137,898,000 137,898,000 101,456,000 101,456,000
Investment securities held to maturity 4,368,000 4,407,000 5,620,000 5,648,000
Other investments 3,818,000 3,818,000 2,845,000 2,845,000
Loans and leases, net 444,738,000 442,103,000 346,094,000 340,028,000
Accrued interest receivable 3,224,000 3,224,000 2,167,000 2,167,000
Financial liabilities:
Deposits 450,777,000 419,239,000 383,329,000 348,011,000
Federal funds purchased 10,400,000 10,400,000 1,300,000 1,300,000
Securities sold under agreements to
repurchase 65,827,000 65,827,000 33,053,000 33,050,000
Advances from Federal Home Loan Bank 35,840,000 35,861,000 30,980,000 30,926,000
Accrued interest payable 934,000 934,000 829,000 829,000
Company obligated mandatorily redeemable
preferred securities of a subsidiary trust 20,000,000 19,993,000 -- --
F-25
69
The estimation methodologies utilized by the Company are summarized as
follows:
CASH AND CASH EQUIVALENTS - For cash and due from banks the carrying
amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES - For investment securities, fair value equals the
quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
investment securities.
OTHER INVESTMENTS - The estimated fair value of other investments
approximates their carrying value.
LOANS AND LEASES - The fair value of fixed rate loans and leases is
estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. In computing the estimate of fair
value for all loans and leases, the estimated cash flows and/or carrying
value have been reduced by specific and general reserves for loan losses.
ACCRUED INTEREST RECEIVABLE/PAYABLE - The carrying amount of accrued
interest receivable/payable is a reasonable estimate of fair value due to
the short-term nature of these amounts.
DEPOSITS - The fair value of demand deposits, NOW, savings accounts, and
money market deposits is estimated by discounting the expected life of
each deposit category at an index of the Federal Home Loan Bank advance
rate curve. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits with similar
remaining maturities.
FEDERAL FUNDS PURCHASED - The estimated fair value of variable rate
borrowed funds approximates their carrying value.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND ADVANCES FROM THE
FEDERAL HOME LOAN BANK - Estimated fair value is based on discounting cash
flows for comparable instruments.
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A
SUBSIDIARY TRUST - The fair value of company obligated mandatorily
redeemable preferred securities is calculated at the quoted market price.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - The Company's
off-balance sheet commitments are funded at current market rates at the
date they are drawn upon. It is management's opinion that the fair value
of these commitments would approximate their carrying value, if drawn
upon.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 2000 and 1999.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
15. SEGMENTS
The Company's principal activities include Commercial Banking and
Equipment Leasing. Commercial banking offers a broad range of
sophisticated banking products and services, including credit, cash
management, investment, deposit and trust products. The Equipment Leasing
segment offers leasing programs for computers, telecommunications
equipment, telephone systems, business furniture, manufacturing equipment,
materials handling equipment and other capital equipment.
F-26
70
The financial information for each business segment reflect those which
are specifically identifiable or which are allocated based on an internal
allocation method. The allocation has been consistently applied for all
periods presented. Revenues from affiliated transactions, principally the
Commercial Banking division's funding of the Equipment Leasing activity,
are charged generally at rates available to and transacted with
unaffiliated customers.
Results of operations and selected financial information by operating
segment are as follows:
YEARS ENDED
DECEMBER 31,
DOLLARS IN THOUSANDS: 2000 1999 1998
Total interest income:
Commercial Banking $ 46,430 $ 32,201 $ 24,022
Equipment Leasing 1,725 1,435 932
All Other 7 25 89
Eliminations (1,589) (1,252) (1,144)
-------- -------- --------
Consolidated $ 46,573 $ 32,409 $ 23,899
======== ======== ========
Total interest expense:
Commercial Banking $ 19,473 $ 11,843 $ 8,335
Equipment Leasing 1,582 1,261 1,085
All Other 1,044 -- 301
Eliminations (1,589) (1,250) (1,144)
-------- -------- --------
Consolidated $ 20,510 $ 11,854 $ 8,577
======== ======== ========
Provision for loan and lease losses:
Commercial Banking $ 1,472 $ 1,425 $ 1,114
Equipment Leasing 241 48 74
-------- -------- --------
Consolidated $ 1,713 $ 1,473 $ 1,188
======== ======== ========
Noninterest income:
Commercial Banking $ 2,642 $ 2,243 $ 1,769
Equipment Leasing 2,316 2,538 2,521
All Other 954 782 384
Eliminations (1,191) (953) (428)
-------- -------- --------
Consolidated $ 4,721 $ 4,610 $ 4,246
======== ======== ========
Depreciation and amortization:
Commercial Banking $ 1,493 $ 1,366 $ 1,032
Equipment Leasing 1,664 2,053 1,914
All Other 61 28 18
-------- -------- --------
Consolidated $ 3,218 $ 3,447 $ 2,964
======== ======== ========
Income tax expense (benefit):
Commercial Banking $ 5,236 $ 3,043 $ 2,341
Equipment Leasing 26 69 (36)
All Other (759) (110) (274)
-------- -------- --------
Consolidated $ 4,503 $ 3,002 $ 2,031
======== ======== ========
F-27
71
YEARS ENDED
DECEMBER 31,
DOLLARS IN THOUSANDS: 2000 1999 1998
Net income (loss):
Commercial Banking $ 8,124 $ 5,140 $ 3,649
Equipment Leasing 35 146 (52)
All Other (1,274) (195) (433)
Eliminations (133) (172) 52
--------- --------- ---------
Consolidated $ 6,752 $ 4,919 $ 3,216
========= ========= =========
Identifiable assets:
Commercial Banking $ 631,770 $ 491,376 $ 365,837
Equipment Leasing 25,402 26,137 18,512
All Other 3,155 1,990 889
Eliminations (27,264) (27,494) (18,688)
--------- --------- ---------
Consolidated $ 633,063 $ 492,009 $ 366,550
========= ========= =========
Capital expenditures:
Commercial Banking $ 1,102 $ 1,469 $ 2,416
Equipment Leasing 5 77 32
All Other 122 178 131
--------- --------- ---------
Consolidated $ 1,229 $ 1,724 $ 2,579
========= ========= =========
16. ACQUISITION-RELATED ACTIVITY (UNAUDITED)
On March 8, 2001, CoBiz completed the acquisition of First Capital Bank of
Arizona ("First Capital Bank"). The acquisition was structured as a merger
between First Capital Bank and a wholly-owned subsidiary formed to
participate in the merger. First Capital Bank is an Arizona
state-chartered commercial bank with two locations serving Phoenix and the
surrounding area of Maricopa County, Arizona. As a result of the merger,
each outstanding share of First Capital Bank common stock was converted
into 2.266 shares of CoBiz common stock, resulting in the issuance of
approximately 1,653,000 shares of CoBiz common stock to the former First
Capital Bank shareholders. In addition, CoBiz assumed approximately
244,000 options that had been issued to First Capital Bank employees. This
transaction was accounted for as a pooling of interests. Under this method
of accounting, the recorded assets, liabilities, shareholders' equity,
income and expenses of CoBiz and First Capital Bank will be combined and
reflected at their historical amounts. CoBiz's total assets, total
deposits and total shareholders' equity on the date of the merger were
approximately $640.8 million, $456.4 million and $48.0 million,
respectively. First Capital Bank's total assets, total deposits and total
shareholders' equity on the date of the merger amounted to approximately
$109.8 million, $95.5 million and $11.6 million, respectively.
On March 1, 2001, CoBiz completed its acquisition of Milek Insurance
Services, Inc ("Milek"). The agency, which was renamed CoBiz Insurance,
Inc., provides commercial and personal property and casualty insurance
brokerage, as well as, risk management consulting services to small- and
medium-sized businesses and individuals. The shareholders of Milek
received 44,463 shares of CoBiz common stock, valued at $780,000, as
consideration for the acquisition. This transaction was also accounted for
as a pooling of interests.
F-28
72
The following table presents the historical results for CoBiz, First
Capital Bank and Milek and the consolidated results of operations after
giving effect to the acquisitions.
HISTORICAL PRO FORMA
COBIZ COMBINED
(UNAUDITED)
Year ended December 31, 2000
Net interest income $26,063,000 $30,363,000
Noninterest income 4,721,000 5,745,000
Net income 6,752,000 8,124,000
Net income per common share:
Basic $ 1.01 $ 0.97
Diluted 0.98 0.93
Year ended December 31, 1999
Net interest income $20,555,000 $24,064,000
Noninterest income 4,610,000 5,622,000
Net income 4,919,000 5,885,000
Net income per common share:
Basic $ 0.74 $ 0.70
Diluted 0.72 0.68
Year ended December 31, 1998
Net interest income $15,322,000 $17,836,000
Noninterest income 4,246,000 5,052,000
Net income 3,216,000 3,666,000
Net income per common share:
Basic $ 0.53 $ 0.47
Diluted 0.51 0.46
* * * * * *
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73
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
(1) 2 Amended and Restated Agreement and Plan of Merger dated
November 28, 2000.
(2)(3) 3.1 Amended and restated Articles of Incorporation of the
Registrant, as amended.
(2) 3.2 Amended and restated Bylaws of the Registrant.
(4) 4.1 Form of Indenture
(4) 4.2 Form of Subordinated Debenture (included as an exhibit to
Exhibit 4.1)
(4) 4.3 Certificate of Trust
(4) 4.4 Form of Trust Agreement
(4) 4.5 Form of Amended and Restated Trust Agreement
(4) 4.6 Form of Capital Securities Certificate (included as an exhibit
to Exhibit 4.5)
(4) 4.7 Form of Capital Securities Guarantee Agreement
(4) 4.8 Form of Agreement of Expenses and Liabilities (included as an
exhibit to Exhibit 4.5)
(2) 10.1 CoBiz Inc. 1998 Stock Incentive Plan.
(2) 10.2 Amended and Restated CoBiz Inc. 1997 Incentive Stock Option
Plan.
(2) 10.3 Amended and Restated CoBiz Inc. 1995 Incentive Stock Option
Plan.
(2) 10.4 Shareholders Agreement of Colorado Business Leasing, Inc.,
dated as of March 29, 1996, by and among The Women's Bank,
N.A., Richard M. Hall, Jr., James F. Enssle, Andrea J. Johnson
and Colorado Business Leasing, Inc.
+(2) 10.5 License Agreement, dated as of November 19, 1997, by and
between Jack Henry & Associates, Inc. and Colorado Business
Bank, N.A.
+(2) 10.6 Contract Modification, dated as of November 19, 1997, by and
between Jack Henry & Associates, Inc. and Colorado Business
Bank, N.A.
+(2) 10.7 Computer Software Maintenance Agreement, dated as of November
19, 1997, by and between Jack Henry & Associates, Inc. and
Colorado Business Bank, N.A.
74
(2) 10.8 Employment Agreement, dated as of March 1, 1995, by and
between Equitable Bankshares of Colorado, Inc. and Jonathan C.
Lorenz.
(2) 10.9 Employment Agreement, dated as of May 8, 1995, by and between
Equitable Bankshares of Colorado, Inc. and Virginia K.
Berkeley.
(2) 10.10 Employment Agreement, dated as of January 3, 1998, by and
between CoBiz Inc. and Richard J. Dalton.
(2) 10.11 Employment Agreement, dated as of February 29, 1996, by and
between Equitable Bankshares of Colorado, Inc. and Darrell J.
Schulte.
(2) 10.12 Employment Agreement, dated as of June 12, 1995, by and
between CoBiz Inc. and Charles E. Holmes.
(2) 10.13 Employment Agreement, dated as of November 16, 1997, by and
between CoBiz Inc. and Andrew L. Bacon.
(2) 10.14 Employment Agreement, dated as of October 1, 1997, by and
between CoBiz Inc. and K. Denise Albrecht.
(2) 10.15 Employment Agreement, dated as of March 29, 1996, by and
between Colorado Business Leasing, Inc. and Richard M. Hall,
Jr.
(2) 10.16 Employment Agreement, dated as of September 29, 1995, by and
between Equitable Bankshares of Colorado, Inc. and Katherine
H. Kaley.
(2) 10.17 Employment Agreement, dated as of January 8, 1996, by and
between CoBiz Inc. and Robert J. Ostertag.
(2) 10.18 Retail Lease, dated as of April 1, 1991, by and between
Southbridge Plaza, L.P. and Equitable Bank of Littleton, N.A.
(2) 10.19 First Amendment to Retail Lease, dated as of January 4, 1996,
by and between Southbridge Plaza, L.P. and Colorado Business
Bank, N.A., formerly known as Equitable Bank of Littleton,
N.A.
(2) 10.20 Office Lease, dated as of December 2, 1996, by and between
Elliott Kiowa, Inc. and Colorado Business Bank, N.A.
(2) 10.21 Lease, dated as of December 1, 1997, by and between Spencer
Enterprises and Colorado Business Bank, N.A.
(2) 10.22 Office Lease, dated as of February 23, 1996, by and between
Colorado Business Leasing, Inc. and Denver Place Associates
Limited Partnership.
(5) 10.23 Lease Agreement between Kesef, LLC and CoBiz Inc.
(5) 10.24 Office Lease Between SFP Realty, Ltd., L.L.P. and Colorado
Business Bank of Boulder National Association
75
(5) 10.25 Office Building Lease between Hanover Resources Inc. and
Colorado Business Bank, N.A.
(5) 10.26 Employment Agreement between CoBiz Inc. and Kevin G. Quinn
(6) 10.27 Lease Agreement between Edwards Interchange II, LLC and
Colorado Business Bank, National Association
(6) 10.28 Office Lease between Bank One, Colorado, N.A., as Trustee for
the Frank G. Jamison Trust, dated September 2, 1956 and
Colorado Business Bank, N.A.
(7) 10.29 Lease, dated July 27, 1999, between Joan H. Travis and
Colorado Business Bank, N.A.
(7) 10.30 Employment Agreement, dated April 12, 1999, by and between
CoBiz Inc. and Randal Garman.
(8) 10.31 Employment Agreement, dated May 20, 1998, by and between CoBiz
Inc. and J. Henry Schonewise.
(9) 10.32 Employment Agreement, dated January 1, 2000, by and between
Colorado Business Bankshares, Inc. and Lyne Andrich.
(9) 10.33 Promissory note between American National Bank and Trust
Company of Chicago and Colorado Business Bankshares, Inc.
(10) 10.34 First Amendment to Lease Agreement between Kesef, LLC and
Colorado Business Bankshares, Inc. dated May 1, 1998.
(11) 10.35 2000 Employee Stock Purchase Plan.
21 List of subsidiaries
23 Consent of Deloitte & Touche LLP
- ------------
(1) Incorporated herein by reference from the Registrant's Registration
Statement on Form S-4 (File No. 333-51866).
(2) Incorporated herein by reference from the Registrant's Registration
Statement on Form SB-2 (File No. 333-50037).
(3) Incorporated herein by reference from the Registrant's Current Report on
Form 8-K, as filed on March 23, 2001.
(4) Incorporated herein by reference from the Registrant's Registration
Statement on Form S-1 (File No. 333-37674).
(5) Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1998, as filed on November
13, 1998.
(6) Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1999, as filed on May 17, 1999.
76
(7) Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1999, as filed on November
12, 1999.
(8) Incorporated herein by reference from the Registrant's Annual Report on
Form 10-KSB for the year ended December 31, 1999, as filed on March 30,
2000.
(9) Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000, as filed on May 12, 2000.
(10) Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000, as filed on November
14, 2000.
(11) Incorporated herein by reference from the Registrant's Proxy Statement
filed in connection with its 2000 annual meeting of shareholders, as filed
on April 19, 2000.
+ Confidential treatment has been granted by the Securities and Exchange
Commission as to certain portions of exhibit. Such portions have been
redacted.