U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

 

FORM 10-Q

 

ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended March 31, 2005.
o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

Commission File Number   000-24445

 

 

CoBiz Inc.

(Exact name of registrant as specified in its charter)

 

COLORADO		84-0826324
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
821 l7th Street Denver, CO		80202
(Address of principal executive offices)		(Zip Code)
(303)  293-2265
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.

 

 

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

 

 

There were 22,118,514 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding as of April 27, 2005.

 

 

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.	Unregistered Sales of 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
SIGNATURES

 

 

Item 1.  Financial Statements

 

CoBiz Inc

Consolidated Statements of Condition

March 31, 2005 and December 31, 2004

(unaudited)

(Dollars in thousands)

 

		March 31, 2005			December 31, 2004
Assets
Cash and due from banks		$	41,272		$	32,345
Investments:
Investment securities available for sale (cost of $475,794 and $473,485, respectively)		470,924			472,323
Investment securities held to maturity (fair value of $1,068 and $1,222, respectively)		1,057			1,196
Other investments		14,604			13,651
Total investments		486,585			487,170
Loans and leases, net of allowance for loan and lease losses of $14,992 and $14,674, respectively		1,124,397			1,099,633
Goodwill		38,446			37,581
Intangible assets		3,457			3,598
Bank owned life insurance		23,775			15,552
Premises and equipment, net		9,170			8,320
Accrued interest receivable		6,290			5,448
Deferred income taxes		6,910			4,304
Other		5,381			5,610
TOTAL ASSETS		$	1,745,683		$	1,699,561
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Demand		372,708			355,974
NOW and Money Market		443,176			463,013
Savings		11,618			10,684
Certificates of Deposits		361,029			317,339
Total Deposits		1,188,531			1,147,010
Federal funds purchased		—			67,150
Securities sold under agreements to repurchase		255,845			233,221
Advances from Federal Home Loan Bank		91,250			45,000
Accrued interest and other liabilities		15,727			13,458
Junior subordinated debentures		71,472			71,637
TOTAL LIABILITIES		$	1,622,825		$	1,577,476
Shareholders’ Equity:
Cumulative preferred, $.01 par value; 2,000,000 shares authorized; None outstanding
Common, $.01 par value; 25,000,000 shares authorized; 22,045,971 and 21,950,759 issued and outstanding, respectively		220			220
Additional paid-in capital		66,237			65,890
Retained earnings		60,676			56,840
Accumulated other comprehensive (loss) net of income tax of $(2,619) and $(531), respectively		(4,275		)	(865		)
Total shareholders’ equity		$	122,858		$	122,085
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,745,683		$	1,699,561

 

See notes to consolidated financial statements

 

1

 

CoBiz Inc

Consolidated Statements of Income and Comprehensive Income

(Unaudited)

(Dollars in thousands)

 

		Three months ended March 31,
		2005			2004
INTEREST INCOME:
Interest and fees on loans and leases		$	18,491		$	14,038
Interest and dividends on investment securities:
Taxable securities		4,361			2,836
Nontaxable securities		52			44
Dividends on securities		110			80
Federal funds sold and other		75			23
Total interest income		23,089			17,021
INTEREST EXPENSE:
Interest on deposits		3,149			2,111
Interest on short-term borrowings and FHLB advances		2,087			970
Interest on junior subordinated debentures		1,038			502
Total interest expense		6,274			3,583
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES		16,815			13,438
Provision for loan and lease losses		435			405
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		16,380			13,033
NONINTEREST INCOME:
Service charges		720			716
Trust and advisory fees		1,003			880
Insurance revenue		2,849			1,932
Investment banking revenues		1,578			534
Other income		525			412
Gain on sale of other assets and securities		—			268
Total noninterest income		6,675			4,742
NONINTEREST EXPENSE:
Salaries and employee benefits		10,078			7,570
Occupancy expenses, premises and equipment		2,627			2,263
Amortization of intangibles		141			138
Other		2,454			2,055
Loss on sale of other assets and security write-down		117			—
Total noninterest expense		15,417			12,026
INCOME BEFORE INCOME TAXES		7,638			5,749
Provision for income taxes		2,812			2,194
NET INCOME		$	4,826		$	3,555
UNREALIZED (DEPRECIATION) APPRECIATION ON INVESTMENT SECURITIES AVAILABLE FOR SALE AND DERIVATIVE INSTRUMENTS, net of tax		(3,410		)	748
COMPREHENSIVE INCOME		$	1,416		$	4,303
EARNINGS PER SHARE:
Basic		$	0.22		$	0.17
Diluted		$	0.21		$	0.16

 

See notes to consolidated financial statements

 

2

 

CoBiz Inc.

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2005 and 2004

(Unaudited)

(Dollars in Thousands)

 

		2005			2004
		(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	4,826		$	3,555
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities		442			501
Depreciation and amortization		979			869
Write-down of impaired investment security		107			—
Provision for loan and lease losses		435			405
FHLB Stock Dividend		(66		)	—
Deferred income taxes		(518		)	(159		)
Loss (gain) on sale of equipment and securities		11			(268		)
Increase in cash surrender value of bank owned life insurance		(202		)	(111		)
Changes in operating assets and liabilities
Accrued interest receivable		(842		)	(41		)
Other assets		165			(900		)
Accrued interest and other liabilities		(315		)	(103		)
Net cash provided by operating activities		5,022			3,748
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of other investments		(994		)	(69		)
Purchase of investment securities available for sale		(34,693		)	(60,453		)
Maturities of investment securities held to maturity		139			81
Maturities of investment securities available for sale		31,942			58,030
Cash paid for GMB earn-out		(1,145		)	—
Cash paid for FDL earn-out		—			(9,449		)
Purchase of bank owned life insurance		(8,020		)	—
Loan and lease originations and repayments, net		(25,199		)	(26,309		)
Purchase of premises and equipment		(699		)	(937		)
Proceeds from sale of premises and equipment		31			34
Net cash used in investing activities		(38,638		)	(39,072		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand, NOW, money market,
and savings accounts		(2,169		)	10,383
Net  increase (decrease) in certificates of deposit		43,690			(1,793		)
Net (decrease) increase in federal funds purchased		(67,150		)	28,700
Net increase in securities sold under agreements to repurchase		22,624			6,980
Advances from the Federal Home Loan Bank		3,403,000			114,000
Repayments of advances from the Federal Home Loan Bank		(3,356,750		)	(123,128		)
Proceeds from exercise of stock options		288			795
Dividends paid on common stock		(990		)	(866		)
Net cash provided by financing activities		42,543			35,071
NET  INCREASE IN CASH AND CASH EQUIVALENTS		8,927			(253		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		32,345			34,659
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	41,272		$	34,406

 

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:  CoBiz ACMG, Inc.; CoBiz Bank, N.A. (“Bank”); CoBiz Insurance, Inc.; Colorado Business Leasing, Inc. (“Leasing”); CoBiz GMB, Inc.; and Financial Designs Ltd. (“FDL”), all collectively referred to as the “Company” or “CoBiz,” conform to accounting principles generally accepted in the United States of America for interim financial information and prevailing practices within the banking industry.  The Bank operates in its Colorado market areas under the name Colorado Business Bank (“CBB”) and in its Arizona market areas under the name Arizona Business Bank (“ABB”).

 

The Bank is a commercial banking institution with eight locations in the Denver, Colorado metropolitan area, two in Boulder and one in Edwards, Colorado, and six in the Phoenix, Arizona metropolitan area.  CoBiz ACMG, Inc. provides investment management services to institutions and individuals through its subsidiary Alexander Capital Management Group, LLC (“ACMG”). FDL provides wealth transfer, 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 & 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, 2004, as filed with the Securities and Exchange Commission (“SEC”).

 

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, 2005 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2005.  Certain reclassifications have been made to prior balances to conform to the current year presentation.

 

Stock Based Compensation

 

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 the fair value of options granted during the year is amortized over the vesting period):

 

4

 

		Three months ended March 31,
		2005			2004
		(dollars in thousands)
Net income, as reported		$	4,826		$	3,555
Less: stock-based compensation determined under the fair value method		(192		)	(212		)
Pro forma net income		$	4,634		$	3,343
Earnings per share:
As reported - basic		$	0.22		$	0.17
As reported - diluted		$	0.21		$	0.16
Pro forma - basic		$	0.21		$	0.16
Pro forma - diluted		$	0.20		$	0.15
Pro forma - basic			22,024			21,390
Pro forma - diluted			23,125			22,472

 

2.                                      Recent Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.

 

SFAS 123(R) specifies that the fair value of an employee stock option must be based on an observable market price of an option with the same or similar terms and conditions if one is available or, if an observable market price is not available, the fair value must be estimated using a valuation technique that (1) is applied in a manner consistent with the fair value measurement objective and the other requirements of the Statement, (2) is based on established principles of financial economic theory and generally applied to that field, and (3) reflects all substantive characteristics of the instrument. SFAS 123(R) permits entities to use any option-pricing model that meets the fair value objective in the Statement.

 

In April 2005, the SEC amended Rule 4-01(a) of Regulation S-X regarding the compliance date for SFAS 123(R).  The amendment postpones the effective date for the Company to January 1, 2006.  As of the effective date, the Company will apply the Statement using a modified version of prospective application. Under that transition method, compensation cost is recognized for (1) all awards granted after the required effective date and to awards modified, cancelled, or repurchased after that date and (2) the portion of prior awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated for either recognition or pro forma disclosures under SFAS 123.  Currently, the Company offers several stock option plans and an employee share purchase plan that will be impacted by this Statement. The quantitative impact of this Statement on the Company will depend upon various factors, among them being the Company’s future compensation strategy which is currently being evaluated.

 

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, “TOPIC 14: Share-based payment” (“SAB 107”) which was effective immediately.  SAB 107 addresses the interaction between SFAS 123(R) and certain SEC rules and regulations and provides views regarding the valuation of share-based payment arrangements for public companies.  The Company does not expect the requirements of SAB 107 to have a material impact on its consolidated financial statements.

 

5

 

In March 2004, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus regarding EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The consensus provides guidance for evaluating whether an investment is other-than-temporarily impaired and requires certain disclosures for equity investments accounted for under the cost method. On September 30, 2004, the FASB Board issued Staff Position FSP No. EITF 03-1-1 which delayed the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of Issue 03-1. During the delay, the guidance in SEC Staff Accounting Bulletin Topic 5M Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities and paragraph 16 of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, are the standards for determining other-than-temporary impairments. The Company does not expect the requirements of EITF 03-1 to have a material impact on its consolidated financial statements.

 

3.                                      Earnings per Common Share

 

The weighted average shares outstanding used in the calculation of basic and diluted earnings per share are as follows:

 

		Three months ended March 31,
		2005		2004
Weighted average shares outstanding - basic earnings per share		22,024,475		21,389,813
Effect of dilutive securities		1,100,340		1,081,985
Weighted average shares outstanding - diluted earnings per share		23,124,815		22,471,798

 

As of March 31, 2005 and 2004, 16,963 and 85,219 options, respectively, were excluded from the earnings per share computation solely because their effect was anti-dilutive.

 

4.                                      Stock Dividend

 

On April 13, 2004, the Board of Directors approved a three-for-two stock split that was effected through a stock dividend for shareholders of record as of April 26, 2004, payable May 3, 2004. As a result of the dividend, 7,239,102 additional shares of CoBiz common stock were issued, with fractional shares paid in cash.  Shares of CoBiz common stock began trading on a post-dividend basis on May 4, 2004.  All shares and per share amounts included in this report have been adjusted to give retroactive effect to the stock split.

 

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.

 

6

 

		Three months ended March 31,
		2005			2004
		(in thousands)
Other comprehensive (loss) income, before tax:
Unrealized (loss) gain on available for sale securities arising during the period		$	(3,707	)	$	1,469
Unrealized loss on derivative securities, net of reclassification to operations of $262		$	(1,791	)	—
Reclassification adjustment for realized gains arising during the period		$	—		(260		)
Tax benefit (expense) related to items of other comprehensive income		$	2,088		(461		)
Other comprehensive (loss) income, net of tax		$	(3,410	)	$	748

 

6.                                      Goodwill and Intangible Assets

 

A summary of goodwill, adjustments to goodwill and total assets by operating segment as of March 31, 2005, is noted below.  The increase in goodwill is primarily related to an additional accrual through March 31, 2005 for the ACMG earn-out that was paid in the second quarter of 2005.

 

											Total
		Goodwill									Assets
		December 31, 2004			Acquisitions and adjustments			March 31, 2005			March 31, 2005
		(dollars in thousands)
Colorado Business Bank		$	12,779		$	256		$	13,035		$	1,299,198
Arizona Business Bank		1,661			43			1,704			412,344
Investment banking services		5,232			47			5,279			6,828
Investment advisory and Trust		3,364			519			3,883			5,100
Insurance		14,545			—			14,545			20,195
Corporate support and other		—			—			—			2,018
Total		$	37,581		$	865		$	38,446		$	1,745,683

 

As of March 31, 2005, and December 31, 2004, the Company’s intangible assets and related accumulated amortization consisted of the following:

 

					Employment and
		Customer Contracts, Lists			Non-Solicitation
		and Relationships			Agreements			Total
December 31, 2004		$	3,536		$	62		$	3,598
Amortization		137			4			141
March 31, 2005		$	3,399		$	58		$	3,457

 

The Company recorded amortization expense of $141,000 during the three months ended March 31, 2005, compared to $138,000 in the same period of 2004.  Amortization expense on intangible assets for each of the five succeeding years is estimated as follows (dollars in thousands):

 

7

 

2006		$	473
2007		472
2008		413
2009		364
2010		363
Total		$	2,085

 

7.                                      Derivatives

 

Asset/Liability Management Hedges

 

As part of its overall risk management, the Company pursues various asset and liability management strategies, which may include obtaining derivative financial instruments to mitigate the impact of interest fluctuations on the Company’s net interest margin.

 

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 10% junior subordinated debentures 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 the same payment dates, maturity date and call provisions as the related 10% junior subordinated debentures.  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 10% junior subordinated debentures.  The interest-rate swap is a derivative financial instrument and has been designated as a fair value hedge of the 10% junior subordinated debentures.  Because the critical terms of the interest rate swap match the terms of the 10% junior subordinated debentures, the swap qualifies for “short-cut method” accounting treatment under SFAS No. 133.

 

The 10% junior subordinated debentures become callable at par in June of 2005.  The Company is currently evaluating alternative funding sources, and it is likely that these debentures will be called.  If the debentures are called, the fair value hedge accounted for under the short-cut method will be canceled.  To cancel this swap, the Company will have to pay a settlement amount to its counterparty.  As of March 31, 2005, the fair value of the swap, which is a liability to the Company, is $0.7 million.

 

The Company has entered into several interest rate swap agreements for the purpose of minimizing the asset-sensitivity of the Company’s financial statements and the impact from interest rate fluctuations.  Under these interest rate swap agreements, the Company receives a fixed rate and pays a variable rate based on the Prime Rate (“Prime”). The swaps qualify as cash flow hedges under SFAS No. 133, as amended, and are designated as hedges of the variability of cash flows the Company receives from certain variable-rate loans indexed to Prime. In accordance with SFAS No. 133, the swap agreements are measured at fair value and reported as an asset or liability on the consolidated balance sheet. The portion of the change in the fair value of the swaps that are deemed effective in hedging the cash flows of the designated assets are recorded in accumulated other comprehensive income and reclassified into interest income when such cash flows occur in the future. Any ineffectiveness resulting from the hedges are recorded as a gain or loss in the consolidated statement of income as part of noninterest income.

 

8

 

Customer Accommodation Derivatives

 

The Company offers an interest-rate hedge program that includes derivative products such as swaps, caps, floors and collars to assist its customers in managing their interest-rate risk profile.  In order to eliminate the interest-rate risk associated with offering these products, the Company enters into derivative contracts with third parties that are a perfect offset to the customer contracts.

 

Derivatives — Summary Information

 

		March 31,
		2005						2004
		Notional			Estimated Fair Value			Notional			Estimated Fair Value
Asset/Liability management hedges:
Fair value hedge - interest rate swap		$	20,000		$	(695	)	$	20,000		$	(276	)
Cash flow hedge - interest rate swap		120,000			(2,026		)	—			—
Customer accomodation derivative
Interest rate swap		$	1,138		$	(28	)	$	—		$	—
Reverse interest rate swap		1,138			28			—			—

 

		Interest Rate Received		Interest Rate Paid
Asset/Liability hedges		6.85	%	5.90	%
Customer accomodation hedges		6.20	%	6.20	%

 

8.                                      Segments

 

The Company’s principal areas of activity consist of commercial banking, investment banking, trust and advisory services, insurance, and corporate support and other.

 

The Company distinguishes its commercial banking segments based on geographic markets served. Currently, reportable commercial banking segments are CBB and ABB. CBB is a full-service business bank with eleven Colorado locations, including eight in the Denver metropolitan area, two locations in Boulder and one in Edwards, just west of Vail.  ABB is based in Phoenix, Arizona and has bank offices in Surprise, Tempe, Scottsdale, Gilbert and Phoenix, 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 Trust and Advisory Services segment consists of the operations of ACMG and CoBiz Private Asset Management (“PAM”). ACMG is an SEC-registered investment management firm that manages stock and bond portfolios for individuals and institutions. CoBiz Private Asset Management offers wealth management and investment advisory services, fiduciary (trust) services, and estate administration services.

 

The Insurance segment includes the activities of FDL and CoBiz Insurance, Inc. FDL provides employee benefits consulting and brokerage, wealth transfer planning and preservation for high-net-worth individuals, and executive benefits and compensation planning. CoBiz Insurance, Inc. provides commercial and personal property and casualty insurance brokerage, as well as risk management consulting services to individuals and small and medium-sized businesses.

 

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 the Parent.

 

9

 

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

 

		For the Quarter ended March 31, 2005
		Colorado Business Bank			Arizona Business Bank			Investment Banking Services			Investment Advisory and Trust			Insurance			Corporate Support and Other			Consolidated
Income Statement
Total interest income		$	17,765		$	5,251		$	6		$	3		$	18		$	46		$	23,089
Total interest expense		4,306			959			—			—			—			1,009			6,274
Net interest income		13,459			4,292			6			3			18			(963		)	16,815
Provision for loan and lease losses		340			195			—			—			—			(100		)	435
Net interest income after provision for loan and lease losses		13,119			4,097			6			3			18			(863		)	16,380
Noninterest income		983			261			1,578			1,003			2,849			1			6,675
Noninterest expense and minority interest		3,459			2,349			996			851			2,185			5,577			15,417
Income before income taxes		10,643			2,009			588			155			682			(6,439		)	7,638
Provision for income taxes		3,874			735			226			61			264			(2,348		)	2,812
Net income before management fees and overhead allocations		$	6,769		$	1,274		$	362		$	94		$	418		$	(4,091	)	$	4,826
Management fees and overhead allocations, net of tax		2,149			657			34			40			64			(2,944		)	—
Net income		$	4,620		$	617		$	328		$	54		$	354		$	(1,147	)	$	4,826

 

		At March 31, 2005
Balance Sheet
Total assets		$	1,299,198		$	412,344		$	6,828		$	5,100		$	20,195		$	2,018		$	1,745,683
Total gross loans and leases		828,334			310,872			—			—			—			183			1,139,389
Total deposits & customer repurchase agreements		1,094,214			241,358			—			532			—			—			1,336,104

 

		For the Quarter ended March 31, 2004
		Colorado Business Bank			Arizona Business Bank			Investment Banking Services			Investment Advisory and Trust			Insurance			Corporate Support and Other			Consolidated
Income Statement
Total interest income		$	13,475		$	3,514		$	1		$	7		$	1		$	23		$	17,021
Total interest expense		2,387			700			—			3			—			493			3,583
Net interest income		11,088			2,814			1			4			1			(470		)	13,438
Provision for loan and lease losses		271			134			—			—			—			—			405
Net interest income after provision for loan and lease losses		10,817			2,680			1			4			1			(470		)	13,033
Noninterest income		1,061			327			534			880			1,932			8			4,742
Noninterest expense and minority interest		3,559			1,632			683			753			1,670			3,729			12,026
Income before income taxes		8,319			1,375			(148		)	131			263			(4,191		)	5,749
Provision for income taxes		3,110			526			(56		)	53			133			(1,572		)	2,194
Net income before management fees and overhead allocations		$	5,209		$	849		$	(92	)	$	78		$	130		$	(2,619	)	$	3,555
Management fees and overhead allocations, net of tax		1,547			389			27			21			47			(2,031		)	—
Net income		$	3,662		$	460		$	(119	)	$	57		$	83		$	(588	)	$	3,555

 

		At March 31, 2004
Balance Sheet
Total assets		$	1,137,454		$	295,436		$	5,663		$	4,789		$	19,811		$	229		$	1,463,382
Total gross loans and leases		755,242			213,525			—			—			—			1,009			969,776
Total deposits & customer repurchase agreements		885,105			200,735			—			1,282			—			—			1,087,122

 

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.  Certain terms used in this discussion are defined in the notes to these financial statements.  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, 2004.

 

10

 

For a discussion of the segments included in our principal activities, see Note 8 to these financial statements.

 

Executive Summary

 

The Company is a financial holding company that offers a broad array of financial service products to its target market of small and medium-sized businesses and high-net-worth individuals.  Our operating segments include our commercial banking franchise, Colorado Business Bank and Arizona Business Bank; Investment Banking Services; Investment Advisory and Trust; and Insurance.

 

Earnings are derived primarily from our net interest income, which is interest income less interest expense, and our noninterest income earned from our fee-based business lines and banking service fees, offset by noninterest expense.  We have focused on reducing our dependency on our net interest margin by increasing our noninterest income.

 

We believe that through the combination of our commercial banking franchise and our fee-based businesses, we are uniquely situated to service our commercial clients throughout their business lifecycle.  We are able to help our customers grow by providing banking services from our bank franchise, capital planning from GMB, and employee and executive benefits packages from FDL.  We can assist in planning for the future with wealth transfer planning and business succession from FDL.  We are able to protect assets with property and casualty insurance from CoBiz Insurance.  We can facilitate exit and retirement strategies with mergers and acquisitions (“M&A”) services from GMB and investment management services with ACMG.  We are also able to preserve our customers’ wealth with trust and fiduciary services from PAM, investment management services from ACMG and wealth transfer services from FDL.

 

Our primary strategy is to differentiate ourselves from our competitors by providing our local presidents with substantial decision-making authority and expanding our products to meet the needs of small to medium-sized businesses and high-net-worth individuals. In all areas of our operations, we focus on attracting and retaining the highest quality personnel by maintaining an entrepreneurial culture and decentralized business approach.

 

In the two main geographic regions in which we operate, Colorado and Arizona, the markets are dominated by out-of-state banks.  We believe this provides us with tremendous opportunity to grow organically.  We intend to grow through the addition of new de novo banks.  During 2004, we opened a bank in Arizona and a bank in Colorado.  In February 2005, we opened an additional Arizona location in the East Valley and anticipate opening a location in the Chandler area during June 2005.

 

In March 2005, we announced the hiring of a senior insurance brokerage executive to establish operations in the Phoenix marketplace to offer property and casualty insurance.  We feel that this strategy, similar to our de novo approach in banking, will be a cost-effective way to enter the Arizona market.

 

Financial Highlights

 

•                  Net income for the three months ended March 31, 2005 was $4.8 million, an increase of 36%, compared to $3.6 million for the same period in 2004.  Diluted earnings per share for the three months ended March 31, 2005 were $0.21, an increase of 31%, compared to $0.16 for the same period in 2004.

 

11

 

•                  Net interest income on a tax-equivalent basis for the three months ended March 31, 2005 increased 25% to $16.9 million, compared to $13.5 million for the same period in 2004, primarily due to an increase in earning assets, offset by an increase in the yield paid on interest-bearing liabilities.  Our net interest margin on a tax-equivalent basis was 4.24% for the three months ended March 31, 2005, compared to 4.16% for the same period in 2004.

 

•                  Gross loans and leases increased 2.3% from December 31, 2004, or 9.1% on an annualized basis.

 

•                  Deposits increased 3.6% from December 31, 2004, or 14.7% on an annualized basis.

 

•                  Asset quality remained strong, with non-performing assets as a percentage of total assets at 0.06%, compared to 0.14% for the first quarter of 2004.

 

•                  Investment Banking Services achieved a 196% increase in revenue, compared to the first quarter of 2004.

 

•                  Insurance achieved a 47% increase in revenue, primarily due to wealth transfer products, compared to the first quarter of 2004.  Employee benefit revenue within the Insurance segment, which is recurring by nature, also showed good growth, increasing by 31%.

 

•                  Investment Advisory and Trust achieved a 14% increase in revenue, primarily due to an increase in assets under management, compared to the first quarter of 2004.

 

•                  Our efficiency ratio improved to 65.13% from 67.14% in the first quarter of 2004.  The improvement in our efficiency ratio is attributed to the growth of our fee-based businesses.

 

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 reported financial condition or results of operations.

 

Allowance for Loan and Lease Losses

 

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 maintain a loan review program independent of the lending function that is designed to reduce and control risk in the lending function. It includes the monitoring of lending activities with

 

12

 

respect to underwriting and processing new loans, preventing insider abuse and timely follow-up and corrective action for loans showing signs of deterioration in quality.  We also have a systematic process to evaluate individual loans and pools of loans within our loan and lease portfolio.  We maintain a loan grading system whereby each loan is assigned a grade between 1 and 8, with 1 representing the highest quality credit, 7 representing a non-accrual loan, and 8 representing a loss that will be charged-off.  Grades are assigned based upon the degree of risk associated with repayment of a loan in the normal course of business pursuant to the original terms.  Loans above a certain dollar amount that are adversely graded are reported to the Loan Committee and the Chief Credit Officer along with current financial information, a collateral analysis and an action plan.  Individual loans that are deemed to be impaired are evaluated in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114 “Accounting by Creditors for Impairment of a Loan.” 

 

In determining the appropriate level of the allowance for loan and lease losses, we analyze the various components of the loan and lease portfolio, including all significant credits, on an individual basis. When analyzing the adequacy, we segment the loan and lease portfolio into components with similar characteristics, such as risk classification, past due status, type of loan, industry or collateral.  Possible factors that may impact the allowance for loan and lease losses include, but are not limited to:

 

•                  Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.

•                  Changes in national and local economic and business conditions and developments, including the condition of various market segments.

•                  Changes in the nature and volume of the portfolio.

•                  Changes in the experience, ability, and depth of lending management and staff.

•                  Changes in the trend of the volume and severity of past-due and classified loans; and trends in the volume of non-accrual loans, troubled debt restructurings, and other loan modifications.

•                  The existence and effect of any concentrations of credit, and changes in the level of such concentrations.

•                  The effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the current portfolio.

 

Refer to the Provision and Allowance for Loan and Lease Losses section under Results of Operations below for further discussion on management’s methodology.

 

Recoverability of Goodwill

 

SFAS No. 142 “Goodwill and Other Intangible Assets,” requires that we evaluate on an annual basis (or whenever events occur which may indicate possible impairment) whether any portion of our recorded goodwill is impaired.  The recoverability of goodwill is a critical accounting policy that requires subjective estimates in the preparation of the consolidated financial statements.  Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount, including goodwill.  If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired.  If the fair value of the reporting unit is less than the carrying amount, goodwill is considered impaired.  We estimate the fair value of our reporting units using market multiples of comparable entities, including recent transactions, or a combination of market multiples and a discounted cash flow methodology.

 

Determining the fair value of a reporting unit requires a high degree of subjective management assumption. Discounted cash flow valuation models are utilized that incorporate such variables as revenue growth rates, expense trends, discount rates and terminal values. Based upon an evaluation of

 

13

 

key data and market factors, management selects from a range the specific variables to be incorporated into the valuation model.

 

We conducted our annual evaluation of our reporting units as of December 31, 2004.  As discussed in our Annual Report on Form 10-K for the period ending December 31, 2004, the estimated fair value of all reporting units exceeded their carrying values and goodwill impairment was not deemed to exist.  The fair value calculations were also tested for sensitivity to reflect reasonable variations, including keeping all other variables constant and reducing projected revenue growth and projected cost savings.  Using this sensitivity approach, there was no impairment identified in any reporting unit.

 

We also have other policies that we consider to be key accounting policies; however, these policies, which are disclosed in Note 1 of Notes to Consolidated Financial Statements, 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

 

Total assets increased by $46.1 million to $1.75 billion as of March 31, 2005, from $1.70 billion as of December 31, 2004.  The increase in total assets is primarily due to growth in net loans.  The increase in total assets was largely funded by deposits.

 

The following table sets forth the balance of loans and leases and deposits as of March 31, 2005,  December 31, 2004 and March 31, 2004 (dollars in thousands):

 

		March 31, 2005					December 31, 2004					March 31, 2004
					% of					% of					% of
		Amount			Portfolio		Amount			Portfolio		Amount			Portfolio
LOANS AND LEASES
Commercial		$	399,623		35.5	%	$	386,954		35.2	%	$	332,884		34.8	%
Real Estate - mortgage		537,493			47.8	%	527,266			47.9	%	457,415			47.8	%
Real Estate - construction		127,374			11.3	%	121,138			11.0	%	110,386			11.5	%
Consumer		62,948			5.6	%	65,792			6.0	%	58,386			6.1	%
Municipal Leases		11,768			1.0	%	12,858			1.2	%	9,696			1.0	%
Small business leases		183			0.0	%	299			0.0	%	1,009			0.1	%
Loans and leases		1,139,389			101.3	%	1,114,307			101.3	%	969,776			101.3	%
Less allowance for loan and lease losses		(14,992		)	(1.3	)%	(14,674		)	(1.3	)%	(12,660		)	(1.3	)%
Net loan and leases		$	1,124,397		100.0	%	$	1,099,633		100.0	%	$	957,116		100.0	%

 

		March 31, 2005					December 31, 2004					March 31, 2004
					% of					% of					% of
		Amount			Portfolio		Amount			Portfolio		Amount			Portfolio
DEPOSITS AND CUSTOMER REPURCHASE AGREEMENTS
NOW and money market accounts		$	443,176		33.2	%	$	463,013		35.5	%	$	349,781		32.1	%
Savings		11,618			0.9	%	10,684			0.8	%	9,299			0.9	%
Certificates of deposits under $100,000		86,944			6.5	%	76,544			5.9	%	80,231			7.4	%
Certificates of deposits $100,000 and over		274,085			20.5	%	240,795			18.5	%	215,507			19.8	%
Total interest-earning deposits		815,823			61.1	%	791,036			60.7	%	654,818			60.2	%
Noninterest-bearing demand deposits		372,708			27.9	%	355,974			27.3	%	312,949			28.8	%
Customer repurchase agreements		147,573			11.0	%	156,093			12.0	%	119,355			11.0	%
Total deposits and customer repurchase agreements		$	1,336,104		100.0	%	$	1,303,103		100.0	%	$	1,087,122		100.0	%

 

Gross loans and leases increased by $25.1 million as of March 31, 2005, from $1.1 billion as of December 31, 2004.  The increase in loans and leases is primarily due to growth in our commercial and real estate portfolios.  For the quarter ending March 31, 2005, loans and leases have grown at an annualized rate of 9.1%.  The majority of the growth during the first quarter came from Arizona, as the banks opened during 2004 have continued to penetrate the market.

 

Deposits increased by $41.5 million to $1.2 billion as of March 31, 2005, from $1.1 billion as of December 31, 2004. The increase in deposits was primarily from growth in certificate of deposits, which represented 31% and 28% of total deposits for March 31, 2005, and December 31, 2004, respectively.

 

14