U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

 

FORM 10-Q

 

 

 

Commission File Number   000-24445

 

 

CoBiz Inc.

(Exact name of registrant as specified in its charter)

 

 

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    ý                                                    No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

 

Yes    ý                                                    No   o

 

There were 13,645,465 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding as of April 21, 2003.

 

 

CoBiz Inc.

 

PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES

 

 

Item 1.  Financial Statements

 

CoBiz Inc.

Consolidated Statements of Condition

March 31, 2003 and December 31, 2002

(unaudited)

 

		March 31, 2003			December 31, 2002
		(in thousands)
ASSETS
Cash and due from banks		$	39,169		$	33,252
Investments:
Investment securities available for sale (cost of $274,667 and $257,888, respectively)		278,413			262,237
Investment securities held to maturity (fair value of $2,118 and $2,282, respectively)		2,069			2,245
Other investments		7,826			7,806
Total investments		288,308			272,288
Loans and leases, net		806,883			788,481
Goodwill		8,341			8,341
Intangible assets		443			489
Investment in operating leases		125			443
Premises and equipment, net		5,477			5,337
Accrued interest receivable		4,032			3,893
Deferred income taxes		2,535			2,537
Other		3,937			3,588
TOTAL ASSETS		$	1,159,250		$	1,118,649
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand		$	260,329		$	212,987
NOW and money market		292,738			305,954
Savings		8,291			6,950
Certificates of deposit		327,360			331,074
Total deposits		888,718			856,965
Federal funds purchased		7,800			8,700
Securities sold under agreements to repurchase		128,839			115,517
Advances from Federal Home Loan Bank		25,560			30,560
Accrued interest and other liabilities		4,639			4,900
Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures		19,882			20,000
Total liabilities		1,075,438			1,036,642
Minority Interests		—			3
Shareholders’ equity:
Cumulative preferred, $.01 par value; 2,000,000 shares authorized; None outstanding		—			—
Common, $.01 par value; 25,000,000 shares authorized; 13,305,885 and 113,271,999 issued and outstanding, respectively		133			133
Additional paid-in capital		46,479			46,284
Retained earnings		34,882			32,895
Accumulated other comprehensive income net of income tax of $1,428 and $1,657, respectively		2,318			2,692
Total shareholders’ equity		83,812			82,004
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,159,250		$	1,118,649

 

See notes to consolidated financial statements.

 

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CoBiz Inc.

Consolidated Statements of Income and Comprehensive Income

(unaudited)

 

		Three months ended March 31,
		2003			2002
		(in thousands)
INTEREST INCOME:
Interest and fees on loans and leases		$	12,742		$	12,049
Interest and dividends on investment securities:
Taxable securities		2,824			2,510
Nontaxable securities		71			64
Dividends on securities		67			73
Federal funds sold and other		4			9
Total interest income		15,708			14,705
INTEREST EXPENSE:
Interest on deposits		2,922			3,442
Interest on short-term borrowings and FHLB advances		553			775
Interest on mandatorily redeemable preferred securities of subsidiary trust		309			500
Total interest expense		3,784			4,717
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES		11,924			9,988
Provision for loan and lease losses		418			588
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		11,506			9,400
NONINTEREST INCOME:
Service charges		611			530
Operating lease income		36			261
Trust and fiduciary fees		198			160
Insurance revenue		516			296
Investment banking revenues		182			501
Other income		362			622
Total noninterest income		1,905			2,370
NONINTEREST EXPENSE:
Salaries and employee benefits		5,743			4,470
Occupancy expenses, premises and equipment		1,739			1,380
Depreciation on leases		43			219
Amortization of intangibles		46			35
Other		1,687			1,490
Total noninterest expense		9,258			7,594
MINORITY INTERESTS		(3		)	(3		)
INCOME BEFORE INCOME TAXES		4,156			4,179
Provision for income taxes		1,501			1,608
NET INCOME		$	2,655		$	2,571
UNREALIZED DEPRECIATION ON INVESTMENT SECURITIES AVAILABLE FOR SALE, net of tax		(374		)	(608		)
COMPREHENSIVE INCOME		$	2,281		$	1,963
EARNINGS PER SHARE:
Basic		$	0.20		$	0.20
Diluted		$	0.19		$	0.19

 

See notes to consolidated financial statements.

 

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CoBiz Inc.

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2003 and 2002

(unaudited)

 

		2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	2,655		$	2,571
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities		136			95
Depreciation and amortization		732			690
Provision for loan and lease losses		418			588
Deferred income taxes		232			(438		)
Minority interests		(3		)	(3		)
Gain on sale of premises and equipment		(65		)	(7		)
Changes in:
Accrued interest receivable		(139		)	(237		)
Other assets		(402		)	508
Accrued interest and other liabilities		(378		)	1,016
Net cash provided by operating activities		3,186			4,783
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of other investments		(20		)	(2		)
Purchase of investment securities available for sale		(39,143		)	(16,030		)
Maturities of investment securities held to maturity		174			246
Maturities of investment securities available for sale		22,229			20,512
Loan and lease originations and repayments, net		(18,815		)	(30,113		)
Purchase of premises and equipment		(925		)	(325		)
Proceeds from sale of premises and equipment		529			17
Net cash used in investing activities		(35,971		)	(25,695		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market, and savings accounts		35,467			22,564
Net (decrease) increase in certificates of deposit		(3,714		)	26,545
Net (decrease) increase in federal funds purchased		(900		)	1,150
Net increase in securities sold under agreements to repurchase		13,322			13,014
Advances from the Federal Home Loan Bank		190,000			170,500
Repayments of advances from the Federal Home Loan Bank		(195,000		)	(205,500		)
Proceeds from exercise of stock options		195			84
Dividends paid on common stock		(668		)	(594		)
Net cash provided by financing activities		38,702			27,763
NET INCREASE IN CASH AND CASH EQUIVALENTS		5,917			6,851
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		33,252			18,879
CASH AND CASH EQUIVALENTS, END OF PERIOD		39,169			25,730

 

See notes to consolidated financial statements.

 

3

 

CoBiz Inc. and Subsidiaries

Notes to Consolidated Condensed Financial Statements

(unaudited)

 

1.                                      Consolidated Condensed Financial Statements

 

The accompanying consolidated condensed financial statements are unaudited and include the accounts of CoBiz Inc. (“Parent”), and its wholly owned subsidiaries:  Financial Designs, Ltd. (“FDL”, formerly CoBiz Connect, Inc.), CoBiz Insurance Inc., Colorado Business Bankshares Capital Trust I, CoBiz Bank, N.A. (the “Bank,” previously named American Business Bank, N.A.), the Bank’s equipment leasing subsidiary, Colorado Business Leasing, Inc. (“Leasing”), and CoBiz GMB, Inc. (98% owned).  The Bank operates in its Colorado market areas under the name Colorado Business Bank (“CBB”) and in its Arizona market area under the name Arizona Business Bank (“ABB”).

 

The Bank is a commercial banking institution with eight locations in the Denver metropolitan area, one in Edwards, Colorado, and four in the Phoenix Metropolitan area.  Leasing provides equipment leasing primarily to mid-market companies.  FDL provides employee benefits consulting, insurance brokerage and related administrative support to employers.  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.  CoBiz GMB, Inc., provides investment banking services to middle-market companies through its wholly owned subsidiary, Green Manning and Bunch, Ltd. (“GMB”).

 

All significant intercompany accounts and transactions have been eliminated. These financial statements and notes thereto should be read in conjunction with, and are qualified in their entirety by, our Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission.

 

The consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normally recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2003.

 

2.                                      ACQUISITIONS

 

On April 1, 2003, the Company acquired Alexander Capital Management Group, Inc. (“ACMG”), an SEC registered investment adviser firm based in Denver, Colorado. The acquisition of ACMG was completed through a merger of ACMG into a wholly owned subsidiary that we formed in order to consummate the transaction and then a subsequent contribution of the assets and liabilities of the merged entity into a newly formed limited liability company called Alexander Capital Management Group, LLC (“ACMG LLC”).

 

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On April 14, 2003, the Company acquired Financial Designs Ltd. (“FDL”), a provider of wealth transfer and employee benefit services based in Denver, Colorado. The acquisition of FDL was completed through a merger of FDL into CoBiz Connect, Inc., a wholly owned subsidiary of CoBiz that has provided employee benefits consulting services since 2000.  The surviving corporation will continue to use the FDL name.

 

3.                                      Earnings per Common Share

 

Income available to common shareholders and the weighted average shares outstanding used in the calculation of Basic and Diluted Earnings Per Share is as follows:

 

		Three months ended March 31,
		2003			2002
		(in thousands, except share amounts)
Income available to common shareholders		$	2,655		$	2,571
Income impact of assumed conversions:
Convertible CoBiz GMB, Inc. Class B shares		(3		)	(3		)
Income available to common shareholders plus assumed conversions		$	2,652		$	2,568
Weighted average shares outstanding - basic earnings per share		13,282,225			13,139,434
Effect of dilutive securities - stock options		479,661			632,186
Weighted average shares outstanding - diluted earnings per share		13,761,886			13,771,620

 

As of March 31, 2003 and 2002, 455,665 and 1,194 options, respectively, were excluded from the earnings per share computation solely because their effect was anti-dilutive.

 

4.                                      Recent Accounting Pronouncements

 

Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization.  In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles currently included in goodwill, reassessment of the useful lives of existing recognized intangibles, and the identification of reporting units for purposes of assessing potential future impairments of goodwill.  SFAS No. 142 also required the Company to complete a transitional goodwill impairment test six months from the date of adoption.  Upon adoption of SFAS No. 142, the Company determined that goodwill was not impaired and reclassified a $150,000 intangible asset characterized as lease premium from goodwill into intangible assets.  For additional discussion on the impact of adopting SFAS No. 142, see Note 5.

 

Effective January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” which addresses financial accounting and reporting for

 

5

 

the impairment of long-lived assets and long-lived assets to be disposed of.  The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

 

Effective December 31, 2002, the Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  This Statement requires that a liability, for a cost associated with an exit or disposal activity, be recognized when the liability is incurred rather than when management commits to an exit plan (as currently required under EITF No. 94-3).  This Statement also establishes that fair value is the objective for initial measurement of the liability. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

 

Effective October 1, 2002, the Company adopted SFAS No. 147, “Acquisitions of Certain Financial Institutions, an amendment of FASB Statement No. 72 and 144 and FASB Interpretation No. 9.”  This Statement provides guidance on the accounting for the acquisition of a financial institution.  SFAS No. 147 states that the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination represents goodwill and should be accounted for under SFAS No. 142.  The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

 

Effective December 15, 2002, the Company adopted SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” an amendment of FASB Statement No. 123.  SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation.  It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation.  Finally, it amends APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information.  The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

 

If the fair value based method of accounting under SFAS No. 123 had been applied, the Company's net income available for common shareholders and earnings per common share would have been reduced to the pro forma amounts indicated below (assuming that fair value of options granted during the year are amortized over the vesting period):

 

		Three months ended March 31,
		2003			2002
Net income, as reported		$	2,655		$	2,571
Less: stock-based compensation determined under the fair value method		(208		)	(253		)
Pro forma net income		$	2,447		$	2,318
Earnings per share:
As reported - basic		$	0.20		$	0.20
As reported - diluted		$	0.19		$	0.19
Pro forma - basic		$	0.18		$	0.18
Pro forma - diluted		$	0.18		$	0.17

 

Effective January 1, 2003, the Company adopted FASB Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  FIN No. 45 considers standby letters of credit, excluding commercial letters of credit and other lines of credit, a guarantee of the Company.  The Company enters into a standby letter of credit to guarantee performance of a customer to a third party.  These guarantees are primarily issued to support public and private borrowing arrangements.  The credit risk involved is represented by the contractual amounts of those instruments.  Under the standby letters of credit, the Company is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary so long as all performance criteria have been met.  The adoption of FIN No. 45 did not have a material impact on the Company’s consolidated financial statements.

 

In January 2003, the FASB issued Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities,” which addresses consolidation by business enterprises of variable interest entities.  FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  FIN No. 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date.  It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it

 

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acquired before February 1, 2003.  The Company does not expect the requirements of FIN No. 46 to have a material impact on its consolidated financial statements.

 

5.                                      Comprehensive Income

 

Comprehensive income 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.  Presented below are the changes in other comprehensive income for the periods indicated.

 

		Three months ended March 31,
		2003			2002
		(in thousands)
Other comprehensive income, before tax:
Unrealized loss on available for sale securities arising during the period		$	(604	)	$	(982	)
Tax benefit related to items of other comprehensive income		230			374
Other comprehensive income, net of tax		$	(374	)	$	(608	)

 

6.                                      Goodwill and Intangible Assets

 

As discussed in Note 3, the Company adopted SFAS No. 142 in January 2002, which requires companies to stop amortizing goodwill and certain intangible assets.  Instead, SFAS No. 142 requires that goodwill and intangible assets with an indefinite life be reviewed for impairment upon adoption (January 1, 2002) and annually thereafter.

 

Under SFAS No. 142, goodwill impairment is deemed to exist when the carrying value of a reporting unit exceeds its estimated fair value.  The Company’s reporting units are generally consistent with the operating segments identified in Note 8.  The Company estimates the fair value of the reporting units using multiples of comparable entities, including recent transactions, or a combination of multiples and a discounted cash flow analysis.  As of the most recent annual evaluation, the estimated fair value of all reporting units exceeded their carrying values and goodwill impairment was not deemed to exist.

 

A summary of goodwill and total assets by operating segment as of March 31, 2003 is as follows:

 

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		March 31, 2003
		Goodwill			Total Assets
		(in thousands)
Colorado Business Bank		$	4,360		$	934,956
Arizona Business Bank		255			213,367
Investment Banking Services		3,486			4,497
Other Fee Based Services		240			2,234
Corporate Support and Other		—			4,196
Total		$	8,341		$	1,159,250

 

As of March 31, 2003 and December 31, 2002, the Company’s intangible assets and related accumulated amortization consisted of the following:

 

		March 31, 2003									December 31, 2002
		Gross			Accumulated Amortization			Net			Gross			Accumulated Amortization			Net
		(in thousands)
Intangible assets subject to amortization:
Customer list		$	293		$	(104	)	$	189		$	293		$	(86	)	$	207
Lease premium		216			(149		)	67			216			(133		)	83
Customer contracts and relationships		236			(49		)	187			236			(37		)	199
Total		$	745		$	(302	)	$	443		$	745		$	(256	)	$	489

 

The Company recorded amortization expense of $46,000 related to intangible assets during the three months ended March 31, 2003, compared to $35,000 (excluding goodwill) in the same period of 2002.  Amortization expense on intangible assets for each of the five succeeding years is estimated as follows (in thousands):

 

2004		$	141
2005		82
2006		30
2007		29
2008		15
Total		$	297

 

7.                                      Derivatives

 

In January 2003, the Company entered into an interest rate swap agreement with a notional amount of $20,000,000.  The swap effectively converted the Company’s fixed interest rate obligation under the trust preferred securities to a variable interest rate obligation, decreasing the asset sensitivity of the Company’s statement of condition by more closely matching our variable rate assets with variable rate liabilities.  The swap has a notional amount equal to the outstanding principal amount of the related trust preferred securities, together with the same payment dates, maturity date and call provisions as the related trust preferred securities.  Under the swap, the Company pays interest at a variable rate equal to a spread over 90-day LIBOR, adjusted quarterly, and the Company receives a fixed rate equal to the interest that the Company is obligated to pay on the related trust preferred securities.  The interest rate swap is a derivative financial instrument and has been designated as a fair value hedge of the trust

 

8

 

preferred securities.  Because the critical terms of the interest rate swap match the term of the trust preferred securities, the swap qualifies for “short-cut method” accounting treatment under SFAS No. 133.  The fair market value of the swap totaling $118,000 at March 31, 2003 is included in Accrued Interest and Other Liabilities in the Consolidated Statement of Condition.

 

8.                                      Segments

 

Our principal areas of activity consist of commercial banking, investment banking, other fee based services (which includes insurance and private asset management) and corporate support and other.

 

The Company distinguishes its commercial banking segments based on geographic markets served. Currently, our reportable commercial banking segments are CBB and ABB. CBB is a full-service business bank with nine Colorado locations, including six in the Denver metropolitan area, two in Boulder and one in Edwards, just west of Vail. ABB is based in Phoenix, Arizona and has branch offices in Surprise, Tempe and Scottsdale, Arizona.

 

The investment banking segment consists of the operations of GMB, which provides middle-market companies with merger and acquisition advisory services, institutional private placements of debt and equity and other strategic financial advisory services.

 

The other fee based services segment includes the activities of Financial Designs, Ltd., CoBiz Insurance, Inc. and CoBiz Private Asset Management. Financial Designs, Ltd., provides employee benefits consulting, insurance brokerage and related administrative support to employers. 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. CoBiz Private Asset Management is a separate business division within the Bank that offers wealth management and investment advisory services, fiduciary (trust) services and estate administration services.

 

 Corporate support and other consists of activities that are not directly attributable to the other reportable segments.  Included in this category are the activities of Leasing, centralized bank operations, the Company’s treasury function (i.e., investment management and wholesale funding), and activities of Parent and Colorado Business Bankshares Capital Trust I.

 

The financial information for each business segment reflects that information which is specifically identifiable or which is allocated based on an internal allocation method.  The results of operations and selected financial information by operating segment are as follows:

 

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		For the three months ended March 31, 2003
		Colorado Business Bank			Arizona Business Bank			Investment Banking Services			Other Fee Based Services			Corporate Support and Other			Consolidated
		(in thousands)
Income statement
Total interest income		$	12,111		$	3,016		$	2		$	6		$	573		$	15,708
Total interest expense		2,163			687			—			—			934			3,784
Net interest income		9,948			2,329			2			6			(361		)	11,924
Provision for loan and lease losses		243			175			—			—			—			418
Net interest income after provision for loan and lease losses		9,705			2,154			2			6			(361		)	11,506
Noninterest income		717			138			186			720			144			1,905
Noninterest expense and minority interest		2,650			1,204			830			611			3,960			9,255
Income before income taxes		7,772			1,088			(642		)	115			(4,177		)	4,156
Provision for income taxes		2,900			413			(243		)	44			(1,613		)	1,501
Net income before management fees and overhead allocations		$	4,872		$	675		$	(399	)	$	71		$	(2,564	)	$	2,655
Management fees and overhead allocations, net of tax		1,806			360			16			59			(2,241		)	—
Net income		$	3,066		$	315		$	(415	)	$	12		$	(323	)	$	2,655
		At March 31, 2003
Balance sheet
Total assets		$	934,956		$	213,367		$	4,497		$	2,234		$	4,196		$	1,159,250
Total gross loans and leases		657,422			155,892			—			—			4,355			817,669
Total deposits and customer repurchase agreements		838,098			178,989			—			470			—			1,017,557
		For the three months ended March 31, 2002
		Colorado Business Bank			Arizona Business Bank			Investment Banking Services			Other Fee Based Services			Corporate Support and Other			Consolidated
		(in thousands)
Income statement
Total interest income		$	11,166		$	1,963		$	3		$	6		$	1,567		$	14,705
Total interest expense		2,553			869			—			—			1,295			4,717
Net interest income		8,613			1,094			3			6			272			9,988
Provision for loan and lease losses		279			135			—			—			174			588
Net interest income after provision for loan and lease losses		8,334			959			3			6			98			9,400
Noninterest income		941			96			501			458			374			2,370
Noninterest expense		2,251			785			701			521			3,333			7,591
Income before income taxes		7,024			270			(197		)	(57		)	(2,861		)	4,179
Provision for income taxes		2,675			102			(71		)	(21		)	(1,077		)	1,608
Net income before management fees and overhead allocations		$	4,349		$	168		$	(126	)	$	(36	)	$	(1,784	)	$	2,571
Management fees and overhead allocations, net of tax		1,173			217			9			33			(1,432		)	—
Net income		$	3,176		$	(49	)	$	(135	)	$	(69	)	$	(352	)	$	2,571
		At March 31, 2002
Balance sheet
Total assets		$	793,295		$	142,090		$	1,250		$	1,121		$	18,393		$	956,149
Total gross loans and leases		592,351			108,457			—			—			12,083			712,891
Total deposits and customer repurchase agreements		666,205			119,515			—			758			—			786,478

 

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

 

This discussion should be read in conjunction with our consolidated financial statements and notes thereto included in this Form 10-Q. For a description of our accounting policies, see Note 1 of Notes to Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2002.

 

10

 

For a discussion of the segments included in our principal activities, see Note 7 of Notes to Consolidated Financial Statements.

 

Critical Accounting Policies

 

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  In making those critical accounting estimates we are required to make assumptions about matters that are highly uncertain at the time of the estimate.  Different estimates we could reasonably have used, or changes in the assumptions that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.

 

The allowance for loan and lease losses is a critical accounting policy that requires subjective estimates in the preparation of the consolidated financial statements.  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 loans and leases 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.

 

We also have other policies that we consider to be key accounting policies; however, these policies, which are disclosed in Note 1 in our Form 10-K for the year ended December 31, 2002, do not meet the definition of critical accounting policies because they do not generally require us to make estimates or judgments that are difficult or subjective.

 

Financial Condition

 

The following table sets forth the balance of loans and leases and deposits as of March 31, 2003, December 31, 2002 and March 31, 2002 (in thousands):

 

11

 

		March 31, 2003					December 31, 2002					March 31, 2002
		Amount			% of Portfolio		Amount			% of Portfolio		Amount			% of Portfolio
Total Loans and Leases:
Commercial		$	255,168		31.6	%	$	254,389		32.3	%	$	226,486		32.2	%
Real estate – mortgage		371,781			46.1	%	366,841			46.5	%	323,015			45.9	%
Real estate – construction		126,486			15.7	%	114,753			14.6	%	109,031			15.5	%
Consumer		52,019			6.4	%	50,853			6.4	%	37,823			5.4	%
Municipal leases		7,860			1.0	%	6,219			0.8	%	4,463			0.6	%
Small business leases		4,355			0.5	%	5,814			0.7	%	12,073			1.7	%
Loans and leases		$	817,669		101.3	%	$	798,869		101.3	%	$	712,891		101.3	%
Less allowance for loan and lease losses		(10,786		)	(1.3	)%	(10,388		)	(1.3	)%	(9,317		)	(1.3	)%
Net loans and leases		$	806,883		100.0	%	$	788,481		100.0	%	$	703,574		100.0	%
Total Deposits and Customer Repurchase Agreements
NOW and money market accounts		$	292,739		28.8	%	$	305,954		31.5	%	$	256,953		32.7	%
Savings		8,291			0.8	%	6,950			0.7	%	7,190			0.9	%
Certificates of deposit under $100,000		136,260			13.4	%	117,155			12.0	%	107,989			13.7	%
Certificates of deposit $100,000 and over		191,099			18.8	%	213,919			22.0	%	166,437			21.2	%
Total interest-bearing deposits		$	628,389		61.8	%	$	643,978		66.2	%	$	538,569		68.5	%
Noninterest-bearing demand deposits		260,329			25.6	%	212,987			21.9	%	165,732			21.1	%
Customer repurchase agreements		128,839			12.6	%	115,517			11.9	%	82,177			10.4	%
Total deposits and customer repurchase agreements		$	1,017,557		100.0	%	$	972,482		100.0	%	$	786,478		100.0	%

 

Our total assets increased by $40.6 million to $1.16 billion as of March 31, 2003, from $1.12 billion as of December 31, 2002. A consistent focus on internal growth allowed our loan and lease portfolio (net) to increase by $18.4 million, to $806.9 million as of March 31, 2003, from $788.5 million at December 31, 2002. Total investments were $288.3 million as of March 31, 2003, compared to $272.3 million as of December 31, 2002. The increase in investments was driven by strong growth in deposits and customer repurchase agreements.

 

Deposits increased by $31.8 million to $888.7 million as of March 31, 2003, from $857.0 million as of December 31, 2002. Securities sold under agreements to repurchase were $128.8 million at March 31, 2003 and $115.5 million at December 31, 2002.  All of the repurchase agreements outstanding at March 31, 2003 were transacted on behalf of our customers and are not considered a wholesale borrowing source. The increase in deposits and customer repurchase agreements is attributable, in part, to the bear market as investors have pulled out of equities and into safer harbors such as certificates of deposit, money market accounts and real estate.  An increased emphasis on deposit generation included in banker production goals has also impacted our deposit growth.

 

Advances from the Federal Home Loan Bank of Topeka (“FHLB”) were $25.6 million at March 31, 2003, compared to $30.6 million at December 31, 2002.  The decrease in FHLB borrowings was possible because of the strong deposit growth in the three months ended March 31, 2003.

 

Results of Operations

 

Overview

 

The following table presents the condensed statements of income for the three months ended March 31, 2003 and 2002.

 

12

 

		Three months ended March 31,
								Increase (decrease)
		2003			2002			Amount			%
		(in thousands)
Interest income		$	15,708		$	14,705		$	1,003		7	%
Interest expense		3,784			4,717			(933		)	(20	)%
Net interest income before provision for loan and lease losses		11,924			9,988			1,936			19	%
Provision for loan and lease losses		418			588			(170		)	(29	)%
Net interest income after provision for loan and lease losses		11,506			9,400			2,106			22	%
Noninterest income		1,905			2,370			(465		)	(20	)%
Noninterest expense and minority interests		9,255			7,591			1,664			22	%
Income before income taxes		4,156			4,179			(23		)	(1	)%
Provision for income taxes		1,501			1,608			(107		)	(7	)%
Net income		$	2,655		$	2,571		$	84		3	%
Nonrecurring charges,  net of tax		—			—			—			—
Reported net income		$	2,655		$	2,571		$	84		3	%

 

Net income was $2.7 million for the quarter ended March 31, 2003 compared to $2.6 million for the same period in 2002. Net interest income before provision for loan and lease losses increased by $1.9 million to $11.9 million for the quarter ended March 31, 2003, from $10.0 million for the quarter ended March 31, 2002. Earnings per share on a fully diluted basis for the first quarter were $0.19 for both 2003 and 2002.  Annualized return on average assets was 0.95% for the quarter ended March 31, 2003, versus 1.10% for the quarter ended March 31, 2002.  Annualized return on average common shareholders’ equity was 12.99% for the quarter ended March 31, 2003, versus 14.61% for the quarter ended March 31, 2002.

 

Net Interest Income

 

Net interest income before provision for loan and lease losses was $11.9 million for the quarter ended March 31, 2003, an increase of $1.9 million, or 19%, compared with the quarter ended March 31, 2002. Yields on our interest-earning assets decreased by 73 basis points to 5.81% for the three months ended March 31, 2003, from 6.54% for the three months ended March 31, 2002.  Yields paid on interest-bearing liabilities decreased by 80 basis points during this same period. The net interest margin was 4.47% for the quarter ended March 31, 2003, down slightly from 4.50% for the quarter ended March 31, 2002.

 

The Bank has historically maintained an asset-sensitive interest rate profile, and was negatively impacted by the 50 basis point decrease in the prime rate during the fourth quarter of 2002.  Mitigating the impact from the decrease in the prime rate was an interest rate swap the Company entered into in January of 2003.  The swap effectively converted our 10% fixed rate trust preferred securities into a variable rate liability based on a spread over three month LIBOR, for a combined rate of 5.61% at March 31, 2003.

 

The following tables set forth the average amounts outstanding for each category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts and the average rate earned or paid for the three months ended March 31, 2003 and 2002.

 

13

 

		For the three months ended March 31,
		Average balance			Interest earned or paid			Average yield or cost(1)		Average balance			Interest earned or paid			Average yield or cost(1)
		(in thousands)
ASSETS:
Federal funds sold and other		$	824		$	4		1.94	%	$	1,645		$	9		2.19	%
Investment securities(2)		281,762			2,962			4.20	%	209,682			2,647			5.05	%
Loans and leases(3)		809,182			12,742			6.30	%	697,796			12,049			6.91	%
Allowance for loan and lease losses		(10,547		)	—					(9,166		)	—
Total interest-earning assets		1,081,221			15,708			5.81	%	899,957			14,705			6.54	%
Noninterest-earning assets:
Cash and due from banks		31,599								26,265
Other		23,666								23,566
Total assets		$	1,136,486							$	949,788
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Deposits:
NOW and money market accounts		$	294,835		$	652		0.90	%	$	247,860		$	873		1.43	%
Savings		7,534			11			0.59	%	6,606			13			0.80	%
Certificates of deposit:
Under $100,000		137,857			1,023			3.01	%	101,233			1,084			4.34	%
$100,000 and over		190,330			1,236			2.63	%	164,639			1,472			3.63	%
Total interest-bearing deposits		630,556			2,922			1.88	%	520,338			3,442			2.68	%
Other borrowings:
Securities and loans sold under agreements to repurchase and federal funds purchased		132,217			345			1.04	%	101,346			397			1.57	%
FHLB advances		39,893			208			2.09	%	70,367			378			2.15	%
Company obligated mandatorily redeemable preferred securities		19,999			309			6.18	%	20,000			500			10.00	%
Total interest-bearing liabilities		822,665			3,784			1.86	%	712,051			4,717			2.68	%
Noninterest-bearing demand accounts		227,207								162,210
Total deposits and interest-bearing liabilities		1,049,872								874,261
Other noninterest-bearing liabilities		3,742								4,136
Total liabilities and preferred securities		1,053,614								878,397
Shareholders’ equity		82,872								71,391
Total liabilities and shareholders’ equity		$	1,136,486							$	949,788
Net interest income					$	11,924							$	9,988
Net interest spread								3.95	%							3.86	%
Net interest margin								4.47	%							4.50	%
Ratio of average interest-earning assets to average interest-bearing liabilities		131.43		%						126.39		%

 

(1)                                  Average yield or cost for the three months ended March 31, 2003 and 2002 has been annualized and is not necessarily indicative of results for the entire year.

(2)                                  Yields do not include adjustments for tax-exempt interest because the amount of such interest is not material.

(3)                                  Loan fees included in interest income are not material.  Nonaccrual loans and leases are included in average loans and leases outstanding.

 

14

 

Noninterest Income

 

The following table presents noninterest income for the three months ended March 31, 2003 and 2002.

 

		Three months ended March 31,
								Increase (decrease)
		2003			2002			Amount			%
		(in thousands)
Deposit service charges		$	611		$	530		$	81		15	%
Operating lease income		36			261			(225		)	(86%	)
Other loan fees		159			165			(7		)	(4%	)
Trust and fiduciary fees		198			160			38			24	%
Insurance revenue		516			296			220			74	%
Investment banking revenue		182			501			(319		)	(64%	)
Other income		138			421			(283		)	(67%	)
Gain on sale of other assets		65			36			29			82	%
Total noninterest income		$	1,905		$	2,370		$	(465	)	(20%	)

 

Noninterest income for the first quarter of 2003 was $1.9 million, compared to noninterest income of $2.4 million for the first quarter of 2002.  We are continually looking for opportunities to expand into fee-based business lines that are complementary to our existing market niche. In March 2000, we opened CoBiz Connect, Inc. (which was merged into Financial Designs, Ltd. On April 1, 2003), an employee benefits brokerage and consulting firm specializing in the needs of small- to mid-sized employers. In March 2001, we acquired CoBiz Insurance, Inc., a property and casualty insurance agency. In July 2001, we acquired GMB, expanding our product line to include investment banking services.  In April 2003, we acquired Alexander Capital Management Group (“ACMG”), an SEC-registered investment management firm that manages stock and bond portfolios for individuals and institutions. Also in April 2003, we acquired Financial Designs Ltd. a leading provider of wealth transfer and employee benefit services for individuals and companies in the Rocky Mountain region.

 

We believe offering such complementary products allows us to both broaden our relationships with existing customers and attract new customers to our core business. We believe the fees generated by these services will eventually increase our noninterest income and reduce our dependency on net interest income. Noninterest income as a percentage of operating revenues was 14% and 19% for the three months ended March 31, 2003 and 2002, respectively.

 

Deposit service charges for the three months ended March 31, 2003 were $0.6 million, compared to $0.5 million for the same period in 2002. The increase was driven primarily by an increase in cash management analysis fees.

 

There was a net decrease in operating lease rentals, which is the result of concentrating our marketing efforts on originating loans, rather than leases.  The interest spreads on loans have been more favorable than on our leases.  Net investment in operating leases was $0.1 million at March 31, 2003, compared to $1.2 million at March 31, 2002.

 

Other loan fees, consisting primarily of letter of credit, mortgage origination and loan documentation fees have remained static.

 

15

 

Trust and fiduciary fees from our Private Asset Management division are up year over year.  The increase is primarily due to an increase in assets under management.

 

Insurance commissions for the three months ended March 31, 2003 and 2002 were $0.5 million and $0.3 million, respectively. Overall, commissions from Financial Designs and CoBiz Insurance have shown steady growth as they continue to expand their client base.

 

Investment banking revenue for the three months ended March 31, 2003 and 2002 was $0.2 million and $0.5 million, respectively.  Included in the revenue for the first quarter of 2002 were $0.3 million related to success fees for investment banking deals that were closed.  The revenue for the first quarter of 2003 represents fees received for services rendered under monthly retainer agreements and does not include any success fees.

 

Other income for the three months ended March 31, 2003 and 2002 was $0.1 million and $0.4 million, respectively.  Included in other income for the first three months of 2002 were non-recurring gains of $0.2 million on an excess recovery over the amount of a loan charged off in 1997 and a $0.1 million gain on the exercise of warrants taken in connection with a loan transaction.

 

Noninterest Expense

 

The following table presents noninterest expense for the three months ended March 31, 2003 and 2002.

 

		Three months ended March 31,
								Increase (decrease)
		2003			2002			Amount			%
		(in thousands)
Salaries and employee benefits		$	5,743		$	4,470		$	1,273		28	%
Occupancy expenses, premises and equipment		1,739			1,380			359			26	%
Depreciation on leases		43			219			(176		)	(80%	)
Amortization of intangibles		46			35			11			31	%
Other operating expenses		1,687			1,490			197			13	%
Total other expense		$	9,258		$	7,594		$	1,664		22	%

 

The decrease in depreciation on operating leases was a result of dedicating fewer resources to originating leases and it is expected that depreciation will continue to decrease. The decrease in depreciation expense mitigates part of the decline in operating lease rental income.

 

The 28% increase in salaries and employee benefits  was due primarily to the hiring of additional personnel required to accommodate the Company’s growth, as well as cost of living and performance raises awarded to employees effective January 1, 2003.  The Company’s full time equivalent employees were 289 and 261 at March 31, 2003 and 2002, respectively.

 

Overall, the increases in noninterest expenses reflect our ongoing investment in personnel, technology and office space needed to accommodate internal growth and the expansion of our business through acquisitions.

 

16

 

Provision and Allowance for Loan and Lease Losses

 

The provision for loan and lease losses was $0.4 million for the three months ended March 31, 2003, compared to $0.6 million for the three months ended March 31, 2002.  Key indicators of asset quality have remained favorable, while average outstanding loan amounts have increased to $809.2 million for the first three months of 2003, up from $697.8 million for the first three months of 2002. As of March 31, 2003, the allowance for loan and lease losses amounted to $10.8 million, or 1.32% of total loans and leases, compared to 1.31% at March 31, 2002.

 

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.  We maintain an allowance for loan and lease losses based upon a number of factors, including, among others, the amount of problem loans and leases, general economic conditions, historical loss experience, and the evaluation of the underlying collateral and holding and disposal costs.  In addition to unallocated allowances, specific allowances are provided for individual loans when ultimate collection is considered questionable by management after reviewing the current status of those loans that are contractually past due and considering the net realizable value of the collateral for the loans.  Management actively monitors our asset quality and will charge off loans against the allowance for loan and lease losses when appropriate and will provide specific loss allowances when necessary.  Although management believes it uses the best information available to make determinations with respect to the allowance for loan and lease losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations.  In addition, the determination of the allowance for loan and lease losses is subject to review by our regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.  The following table presents, for the periods indicated, an analysis of the allowance for loan and lease losses and other related data.

 

17

 

		Three months ended March 31, 2003			Year ended December 31, 2002			Three months ended March 31, 2002
		(in thousands)
Balance of allowance for loan and lease losses at beginning of period		$	10,388		$	8,872		$	8,872
Charge-offs:
Commercial		(39		)	(552		)	(216		)
Real estate — mortgage		(2		)	(65		)	—
Consumer		(2		)	(75		)	(22		)
Direct financing leases		(19		)	(903		)	(231		)
Total charge-offs		(62		)	(1,595		)	(469		)
Recoveries:
Commercial		4			371			326
Real estate — mortgage		—			17			—
Consumer		21			3			—
Direct financing leases		17			130			—
Total recoveries		42			521			326
Net charge-offs		(20		)	(1,074		)	(143		)
Provisions for loan and lease losses charged to operations		418			2,590			588
Balance of allowance for loan and lease losses at end of period		$	10,786		$	10,388		$	9,317
Ratio of net charge-offs to average loans and leases(1)		(0.01%		)	(0.15%		)	(0.08%		)
Average loans and leases outstanding during the period		$	809,182		$	737,151		$	697,796

 

(1)                                  The ratios for the three months ended March 31, 2003 and 2002 have been annualized. The March 31, 2003 ratio is not necessarily indicative of the results for the entire year.

 

Nonperforming Assets

 

Nonperforming assets consist of nonaccrual loans and leases, restructured loans and leases, past due loans and leases, repossessed assets and other real estate owned.  Nonperforming assets were $3.0 million as of March 31, 2003, compared with $2.4 million as of December 31, 2002 and $3.6 million as of March 31, 2002.  The following table presents information regarding nonperforming assets as of the dates indicated:

 

18

 

		At March 31, 2003			At December 31, 2002			At March 31, 2002
		(in thousands)
Nonperforming loans and leases:
Loans and leases 90 days or more delinquent and still accruing interest		$	227		$	8		$	—
Nonaccrual loans and leases		2,824			2,434			3,593
Total nonperforming loans and leases		3,051			2,442			3,593
Repossessed assets		—			6			—
Total nonperforming assets		$	3,051		$	2,448		$	3,593
Allowance for loan and lease losses		$	10,786		$	10,388		$	9,317
Ratio of nonperforming assets to total assets		0.26		%	0.22		%	0.38		%
Ratio of nonperforming loans and leases to total loans and leases		0.37		%	0.31		%	0.50		%
Ratio of allowance for loan and lease losses to total loans and leases		1.32		%	1.30		%	1.31		%
Ratio of allowance for loan and lease losses to to nonperforming loans and leases		353.52		%	425.39		%	259.31		%

 

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 general levels of interest rates, returns available on other investments, competition, economic conditions and other factors, are relatively unpredictable.  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 purchases, securities sold under agreements to repurchase, the State of Colorado Treasury’s Time Deposit program, and borrowings from the FHLB.  The Bank has approved federal funds purchase lines with six other banks with an aggregate credit line of $102.0 million. In addition, the Bank may apply for up to $63.23 million of State of Colorado time deposits. The Bank also has lines of credit from the FHLB that are limited by the amount of eligible collateral available to secure the lines. Borrowings under the FHLB lines are required to be secured by unpledged securities and qualifying loans. At March 31, 2003, we had $123.3 million in unpledged securities and qualifying loans available to collateralize FHLB borrowings and secu rities sold under agreements to repurchase.

 

We also use dividends paid by the Bank to provide cash flow. However, 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 of 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 Board of Governors of the Federal Reserve System.

 

19

 

During the first three months of 2003, cash and cash equivalents increased by $6.0 million. This increase was primarily the result of $38.7 million provided by financing activities (mainly customer deposits) and net cash of $3.2 million provided by operating activities, offset by $35.9 million net cash used by investing activities (mainly loan originations and security purchases).

 

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 the Bank 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

 

Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization.  In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles currently included in goodwill, reassessment of the useful lives of existing recognized intangibles, and the identification of reporting units for purposes of assessing potential future impairments of goodwill.  SFAS No. 142 also required the Company to complete a transitional goodwill impairment test six months from the date of adoption.  Upon adoption of SFAS No. 142, the Company determined that goodwill was not impaired and reclassified a $150,000 intangible asset characterized as lease premium from goodwill into intangible assets.  For additional discussion on the impact of adopting SFAS No. 142, see Note 6 in Notes to Consolidated Condensed Financial Statements.

 

Effective January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” which addresses financial accounting and reporting for the impairment of long-lived assets and long-lived assets to be disposed of.  The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

 

Effective December 31, 2002, the Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  This Statement requires that a liability, for a cost associated with an exit or disposal activity, be recognized when the liability is incurred rather than when management commits to an exit plan (as currently required under EITF No. 94-3).  This Statement also establishes that fair value is the objective for initial measurement of the liability. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

 

Effective October 1, 2002, the Company adopted SFAS No. 147, “Acquisitions of Certain Financial Institutions, an amendment of FASB Statement No. 72 and 144 and FASB Interpretation No. 9.”  This Statement provides guidance on the accounting for the acquisition of a financial institution.  SFAS No. 147 states that the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination represents goodwill and should be accounted for under SFAS No. 142.  The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

 

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Effective December 15, 2002, the Company adopted SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” an amendment of FASB Statement No. 123.  SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation.  It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation.  Finally, it amends APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information.  The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

 

If the fair value based method of accounting under SFAS No. 123 had been applied, the Company's net income available for common shareholders and earnings per common share would have been reduced to the pro forma amounts indicated below (assuming that fair value of options granted during the year are amortized over the vesting period):

 

		Three months ended March 31,
		2003			2002
Net income, as reported		$	2,655		$	2,571
Less: stock-based compensation determined under the fair value method		(208		)	(253		)
Pro forma net income		$	2,447		$	2,318
Earnings per share:
As reported - basic		$	0.20		$	0.20
As reported - diluted		$	0.19		$	0.19
Pro forma - basic		$	0.18		$	0.18
Pro forma - diluted		$	0.18		$	0.17

 

Effective January 1, 2003, the Company adopted FASB Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  FIN No. 45 considers standby letters of credit, excluding commercial letters of credit and other lines of credit, a guarantee of the Company.  The Company enters into a standby letter of credit to guarantee performance of a customer to a third party.  These guarantees are primarily issued to support public and private borrowing arrangements.  The credit risk involved is represented by the contractual amounts of those instruments.  Under the standby letters of credit, the Company is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary so long as all performance criteria have been met.  The adoption of FIN No. 45 did not have a material impact on the Company’s consolidated financial statements.

 

In January 2003, the FASB issued Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities,” which addresses consolidation by business enterprises of variable interest entities.  FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  FIN No. 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date.  It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.  The Company does not expect the requirements of FIN No. 46 to have a material impact on its consolidated financial statements.

 

Forward Looking Statements

 

The discussion in this report contains forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  The forward-looking statements involve risks and uncertainties that affect our operations, financial performance and other factors as discussed in our filings with the Securities and Exchange Commission.  These risks include the impact of economic conditions and interest rates, loan and lease losses, risks related to the execution of our growth strategy, the possible loss of key personnel, factors that could affect our ability to compete in its trade areas, changes in regulations and government policies and other factors discussed in our filings with the Securities and Exchange Commission.

 

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

As of March 31, 2003, there have been no material changes in the quantitative and qualitative information about market risk provided pursuant to Item 305 of Regulation S-K as presented in our Form 10-K for the period ended December 31, 2002.

 

Item 4.  Controls and Procedures

 

Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission filings.  There have been no significant changes in the Company’s internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

 

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

PART II.  OTHER INFORMATION

 

Item 6.                                                           Exhibits and Reports on Form 8-K.

 

(a)                                  Exhibits

 

Exhibits and Index of Exhibits.

 

(1)		2		Amended and Restated Agreement and Plan of Merger dated November 28, 2000.
(2)		3.1		Amended and Restated Articles of Incorporation of the Registrant.
(3)		3.2		Amendment to Articles of Incorporation.
(9)		3.3		Amendment to Articles of Incorporation
(2)		3.4		Amended and Restated Bylaws of the Registrant.
(9)		3.5		Amendment to Bylaws

 

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(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		License Agreement, dated at November 19, 1997, by and between Jack Henry & Associates, Inc. and Colorado Business Bank, N.A.
+(2)		10.5		Contract Modification, dated at November 19, 1997, by and between Jack Henry & Associates, Inc. and Colorado Business Bank, N.A.
+(2)		10.6		Computer Software Maintenance Agreement, dated at November 19, 1997, by and between Jack Henry & Associates, Inc. and Colorado Business Bank, N.A.
(2)		10.7		Employment Agreement, dated at March 1, 1995, by and between Equitable Bankshares of Colorado, Inc. and Jonathan C. Lorenz.
(2)		10.8		Employment Agreement, dated at May 8, 1995, by and between Equitable Bankshares of Colorado, Inc. and Virginia K. Berkeley.
(2)		10.9		Employment Agreement, dated at January 3, 1998, by and between CoBiz Inc. and Richard J. Dalton.
(5)		10.10		Lease Agreement between Kesef, LLC and CoBiz Inc.
(6)		10.11		Employment Agreement, dated January 1, 2000, by and between Colorado Business Bankshares, Inc. and Lyne Andrich.
(7)		10.12		First Amendment to Lease Agreement between Kesef, LLC and Colorado

 

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				Business Bankshares, Inc. dated May 1, 1998.
(8)		10.13		2000 Employee Stock Purchase Plan.
(9)		10.14		2002 Equity Incentive Plan
		21		List of subsidiaries
		99.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		99.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(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-Q for the quarter ended March 31, 2000, as filed on May 12, 2000.
(7)		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.
(8)		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.
(9)		Incorporated herein by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as filed on August 14, 2002.
+		Confidential treatment has been granted by the Securities and Exchange Commission as to certain portions of exhibit.  Such portions have been redacted.

 

(b)                                 Reports on Form 8-K

 

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On January 21, 2003 we filed a current report on Form 8-K reporting that we issued a press release on January 16, 2003 with the financial results for the quarter and year ended December 31, 2002.

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

			CoBIZ INC.
Date:	May 14, 2003		By	/s/ Steven Bangert
			Steven Bangert, Chief Executive Officer and Chairman
Date:	May 14, 2003		By	/s/ Richard J. Dalton
			Richard J. Dalton, Executive Vice President and Chief Financial Officer

 

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Certification

 

I, Steve Bangert, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of CoBiz, Inc.;

 

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.               The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)             evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)              all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)             any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Dated:	May 14, 2003		/s/ Steven Bangert
			Steven Bangert Chief Executive Officer and Chairman

 

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Certification

 

I, Richard J. Dalton, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of CoBiz, Inc.;

 

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.               The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)             evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

d)             all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

e)              any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Dated:	May 14, 2003		/s/ Richard J. Dalton
			Richard J. Dalton Chief Financial Officer

 

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