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Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2011.

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transitions period from               to              

 


 

Commission File Number   001-15955

 


 

CoBiz Financial Inc.

(Exact name of registrant as specified in its charter)

 

COLORADO

 

84-0826324

(State or other jurisdiction of

 

(I.R.S. Employer Identification No)

incorporation or organization)

 

 

 

 

 

821 17th Street

 

 

Denver, CO

 

80202

(Address of principal executive offices)

 

(Zip Code)

 

(303) 293-2265

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

 

 

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

 

There were 37,044,328 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding at April 24, 2011.

 

 

 




Table of Contents

 

Item 1.  Condensed Consolidated Financial Statements (unaudited)

 

CoBiz Financial Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

At March 31, 2011 and December 31, 2010

(unaudited)

 

 

 

March 31,

 

December 31,

 

(in thousands)

 

2011

 

2010

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

31,299

 

$

15,929

 

Interest-bearing deposits and federal funds sold

 

57,081

 

8,237

 

Total cash and cash equivalents

 

88,380

 

24,166

 

 

 

 

 

 

 

Investment securities available for sale (cost of $594,584 and $626,023, respectively)

 

607,421

 

637,444

 

Investment securities held to maturity (fair value of $262 and $270, respectively)

 

255

 

262

 

Other investments

 

7,973

 

6,962

 

Total investments

 

615,649

 

644,668

 

 

 

 

 

 

 

Loans, net of allowance for loan losses of $61,995 and $65,892, respectively

 

1,574,169

 

1,577,835

 

Intangible assets, net of amortization of $4,711 and $4,551, respectively

 

3,877

 

4,119

 

Bank-owned life insurance

 

36,342

 

36,043

 

Premises and equipment, net of depreciation of $30,188 and $29,433, respectively

 

8,913

 

9,048

 

Accrued interest receivable

 

8,573

 

8,081

 

Deferred income taxes, net

 

15,432

 

16,449

 

Other real estate owned, net of valuation allowance of $6,800 and $5,879, respectively

 

23,581

 

25,095

 

Other

 

38,310

 

49,584

 

TOTAL ASSETS

 

$

2,413,226

 

$

2,395,088

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Demand

 

$

758,280

 

$

681,534

 

NOW and money market

 

696,114

 

663,572

 

Savings

 

9,590

 

9,144

 

Eurodollar

 

91,042

 

105,793

 

Certificates of deposits

 

378,258

 

429,325

 

Total deposits

 

1,933,284

 

1,889,368

 

Securities sold under agreements to repurchase

 

157,674

 

157,690

 

Other short-term borrowings

 

 

14,012

 

Accrued interest and other liabilities

 

23,460

 

38,930

 

Junior subordinated debentures

 

72,166

 

72,166

 

Subordinated notes payable

 

20,984

 

20,984

 

TOTAL LIABILITIES

 

2,207,568

 

2,193,150

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Cumulative preferred, $.01 par value; 2,000,000 shares authorized; and 64,450 issued and outstanding ($64,450 liquidation value)

 

1

 

1

 

Common, $.01 par value; 50,000,000 shares authorized; and 37,044,328 and 36,876,658 issued and outstanding, respectively

 

366

 

366

 

Additional paid-in capital

 

226,091

 

225,454

 

Accumulated deficit

 

(28,502

)

(30,414

)

Accumulated other comprehensive income, net of income tax of $4,722 and $3,882, respectively

 

7,702

 

6,331

 

TOTAL SHAREHOLDERS’ EQUITY

 

205,658

 

201,738

 

Noncontrolling interest

 

 

200

 

TOTAL EQUITY

 

205,658

 

201,938

 

TOTAL LIABILITIES AND EQUITY

 

$

2,413,226

 

$

2,395,088

 

 

See Notes to Condensed Consolidated Financial Statements

 

3



Table of Contents

 

CoBiz Financial Inc. and Subsidiaries

Three months ended March 31, 2011 and 2010

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

(unaudited)

 

 

 

Three months ended March 31,

 

(in thousands, except per share amounts)

 

2011

 

2010

 

INTEREST INCOME:

 

 

 

 

 

Interest and fees on loans

 

$

22,181

 

$

24,000

 

Interest and dividends on investment securities:

 

 

 

 

 

Taxable securities

 

5,909

 

5,748

 

Nontaxable securities

 

5

 

21

 

Dividends on securities

 

59

 

131

 

Federal funds sold and other

 

37

 

19

 

Total interest income

 

28,191

 

29,919

 

INTEREST EXPENSE:

 

 

 

 

 

Interest on deposits

 

2,252

 

3,710

 

Interest on short-term borrowings and securities sold under agreements to repurchase

 

212

 

307

 

Interest on subordinated debentures

 

1,483

 

1,149

 

Total interest expense

 

3,947

 

5,166

 

NET INTEREST INCOME BEFORE PROVISION

 

24,244

 

24,753

 

Provision for loan losses

 

1,640

 

13,820

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

22,604

 

10,933

 

NONINTEREST INCOME:

 

 

 

 

 

Service charges

 

1,239

 

1,258

 

Investment advisory and trust income

 

1,426

 

1,369

 

Insurance income

 

3,393

 

3,173

 

Investment banking income

 

744

 

301

 

Other income

 

1,230

 

784

 

Total noninterest income

 

8,032

 

6,885

 

NONINTEREST EXPENSE:

 

 

 

 

 

Salaries and employee benefits

 

15,147

 

15,366

 

Occupancy expenses, premises and equipment

 

3,354

 

3,434

 

Amortization of intangibles

 

160

 

161

 

FDIC and other assessments

 

1,340

 

1,240

 

Other real estate owned and loan workout costs

 

1,193

 

1,283

 

Net other than temporary impairment losses on securities recognized in earnings

 

234

 

199

 

Loss on securities, other assets and other real estate owned

 

1,128

 

1,224

 

Other

 

2,895

 

3,366

 

Total noninterest expense

 

25,451

 

26,273

 

INCOME (LOSS) BEFORE INCOME TAXES

 

5,185

 

(8,455

)

Provision (benefit) for income taxes

 

1,959

 

(3,436

)

NET INCOME (LOSS) BEFORE NONCONTROLLING INTEREST

 

3,226

 

(5,019

)

LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

 

322

 

NET INCOME (LOSS)

 

$

3,226

 

$

(4,697

)

 

 

 

 

 

 

UNREALIZED APPRECIATION (DEPRECIATION) ON SECURITIES AVAILABLE FOR SALE AND DERIVATIVE INSTRUMENTS , net of tax

 

1,371

 

(731

)

COMPREHENSIVE INCOME (LOSS)

 

$

4,597

 

$

(5,428

)

 

 

 

 

 

 

EARNINGS (LOSS) PER COMMON SHARE:

 

 

 

 

 

Basic

 

$

0.06

 

$

(0.15

)

Diluted

 

$

0.06

 

$

(0.15

)

 

See Notes to Condensed Consolidated Financial Statements

 

4



Table of Contents

 

CoBiz Financial Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2011 and 2010

(unaudited)

 

 

 

For the three months ended March 31,

 

(in thousands) 

 

2011

 

2010

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

3,226

 

$

(5,019

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Net amortization on investment securities

 

587

 

298

 

Depreciation and amortization

 

942

 

1,014

 

Amortization of net loan fees

 

64

 

(46

)

Provision for loan and credit losses

 

1,640

 

13,820

 

Stock-based compensation

 

424

 

419

 

Federal Home Loan Bank stock dividend

 

(3

)

(70

)

Deferred income taxes

 

145

 

19

 

Increase in cash surrender value of bank-owned life insurance

 

(299

)

(309

)

Excess tax benefit from stock-based compensation

 

 

(5

)

Supplemental executive retirement plan

 

33

 

156

 

Loss on securities, other assets and other real estate owned

 

1,362

 

1,423

 

Other operating activities, net

 

(6

)

(274

)

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

 

(5,001

)

Accrued interest and other liabilities

 

(2,223

)

(519

)

Accrued interest receivable

 

(492

)

(315

)

Other assets

 

3,043

 

(756

)

Net cash provided by operating activities

 

8,443

 

4,835

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of other investments

 

(1,011

)

 

Proceeds from other investments

 

231

 

191

 

Purchases of investment securities available for sale

 

(38,288

)

(60,760

)

Proceeds from sale of investment securities available for sale

 

 

501

 

Maturities of investment securities available for sale

 

56,774

 

43,674

 

Maturities of investment securities held to maturity

 

7

 

16

 

Restricted cash

 

7,354

 

 

Net proceeds from sale of loans, OREO and repossessed assets

 

5,050

 

6,146

 

Loan originations and repayments, net

 

(2,544

)

26,345

 

Purchase of premises and equipment

 

(645

)

(686

)

Other investing activities, net

 

10

 

 

Net cash provided by investing activities

 

26,938

 

15,427

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net increase (decrease) in demand, NOW, money market, Eurodollar and savings accounts

 

94,983

 

(3,264

)

Net decrease in certificates of deposits

 

(51,067

)

(25,049

)

Net increase (decrease) in short-term borrowings

 

(14,012

)

2,193

 

Net increase (decrease) in securities sold under agreements to repurchase

 

(16

)

3,150

 

Proceeds from issuance of common stock, net

 

124

 

197

 

Dividends paid on common stock

 

(368

)

(367

)

Dividends paid on preferred stock

 

(806

)

(806

)

Excess tax benefit from stock-based compensation

 

 

5

 

Other financing activities, net

 

(5

)

 

Net cash provided by (used in) financing activities

 

28,833

 

(23,941

)

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

64,214

 

(3,679

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

24,166

 

47,637

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

88,380

 

$

43,958

 

 

 

 

 

 

 

Cash paid (received) during the period for:

 

 

 

 

 

Interest

 

$

4,211

 

$

5,412

 

Income taxes

 

 

(442

)

 

 

 

 

 

 

Noncash activities:

 

 

 

 

 

Loans transferred to held for sale

 

3,000

 

 

Loans transferred to OREO and repossessed assets

 

1,567

 

9,164

 

Financed sales of loans held for sale

 

 

1,152

 

 

See Notes to Condensed Consolidated Financial Statements

 

5



Table of Contents

 

CoBiz Financial Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.                                      Condensed Consolidated Financial Statements

 

The accompanying unaudited condensed consolidated financial statements of CoBiz Financial Inc. (Parent), and its subsidiaries:  CoBiz Bank (Bank); CoBiz Insurance, Inc.; CoBiz GMB, Inc.; Financial Designs Ltd. (FDL); and CoBiz IM, Inc. (CoBiz IM), formerly CoBiz ACMG Inc., 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 nine locations in the Denver metropolitan area; one in Boulder; two near Vail; and seven in the Phoenix metropolitan area. As a state chartered bank, deposits are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (FDIC) and the Bank is subject to supervision, regulation and examination by the Federal Reserve, Colorado Division of Banking and the FDIC. Pursuant to such regulations, the Bank is subject to special restrictions, supervisory requirements and potential enforcement actions. CoBiz IM provides investment management services to institutions and individuals through its subsidiary, CoBiz Investment. FDL provides wealth transfer and related administrative support to individuals, families and employers. CoBiz Insurance, Inc. provides commercial and personal property and casualty insurance brokerage, employee benefits consulting, and risk management consulting services to small and medium-sized businesses and individuals. CoBiz Insurance, Inc. operates in the Denver metropolitan market as CoBiz Insurance — Colorado and in the Phoenix metropolitan market as CoBiz Insurance — Arizona. CoBiz GMB, Inc. provides investment banking services to middle-market companies through its wholly owned subsidiary, Green Manning & Bunch, Ltd. (GMB).

 

All 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, 2010, as filed with the U.S. Securities and Exchange Commission (SEC).

 

The condensed consolidated 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, 2011, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011.

 

6



Table of Contents

 

2.                                      Recent Accounting Pronouncements

 

In January 2011, the FASB issued ASU No. 2011-1, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (ASU 2011-1).  The FASB determined that certain provisions relating to troubled debt restructurings (TDRs) should be deferred until additional guidance and clarification on the definition of TDRs is issued.  In April 2011, the FASB issued ASU No. 2011-2, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU 2011-2). ASU 2011-2 amends ASC Topic 310 — Receivables, by clarifying guidance for creditors in determining whether a concession has been granted and whether a debtor is experiencing financial difficulties.  The amendments are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  ASU 2011-2 also makes disclosure requirements deferred under ASU 2011-1 effective for interim and annual periods beginning on or after June 15, 2011.  The Company has evaluated the effect of ASU 2011-2 and believes adoption will not have a material effect on the consolidated financial statements.

 

3.                                            Earnings (Loss) per Common Share and Dividends Declared per Common Share

 

Earnings (loss) per common share is calculated based on the two-class method prescribed in ASC 260.  The two-class method is an earnings allocation of undistributed earnings to common stock and securities that participate in dividends with common stock.  The Company’s restricted stock awards are considered participating securities as the award holders receive non-forfeitable dividends on unvested awards.  The impact of these shares is included in the common shareholder basic earnings per share for the three months ended March 31, 2011. The weighted average shares outstanding used in the calculation of basic and diluted loss per share are as follows:

 

 

 

Three months ended March 31,

 

(in thousands, except share amounts)

 

2011

 

2010

 

Net income (loss) attributable to CoBiz Financial Inc.

 

$

3,226

 

$

(4,697

)

Preferred stock dividends

 

(946

)

(938

)

Net income (loss) available to common shareholders

 

$

2,280

 

$

(5,635

)

 

 

 

 

 

 

Distributed earnings (1)

 

$

366

 

$

 

Undistributed earnings (loss)

 

1,896

 

(5,635

)

Earnings (loss) allocated to common stock

 

$

2,262

 

$

(5,635

)

 

 

 

 

 

 

Weighted average common shares - issued

 

36,928,031

 

36,728,064

 

Average nonvested restricted share awards

 

(309,408

)

(251,698

)

Weighted average common shares outstanding - basic

 

36,618,623

 

36,476,366

 

Effect of dilutive stock options outstanding

 

171,021

 

 

Weighted average common shares outstanding - diluted

 

36,789,644

 

36,476,366

 

 

 

 

 

 

 

Weighted average antidilutive common shares outstanding (2)

 

3,265,380

 

3,629,670

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.06

 

$

(0.15

)

Diluted earnings per share

 

$

0.06

 

$

(0.15

)

Dividends declared per share

 

$

0.01

 

$

0.01

 

 


(1) Dividends paid during the three months ended March 31, 2010 were not considered current period distributions.

(2) Shares excluded from the diluted earnings per share computation due to the antidilutive effect.

 

4.                                            Comprehensive Income (Loss)

 

Comprehensive income (loss) is the total of (1) net income (loss) plus (2) all other changes in net assets arising from non-owner sources, which are referred to as other comprehensive income (OCI).  Presented below are the changes in other comprehensive income (loss) for the periods indicated.

 

7



Table of Contents

 

 

 

Three months ended March 31,

 

(in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Other comprehensive items:

 

 

 

 

 

Unrealized gain on available for sale securities, net of reclassification to operations of $234 and $206

 

$

1,113

 

$

362

 

 

 

 

 

 

 

Change in OTTI-related component of unrealized gain

 

303

 

88

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative securities, net of reclassification to operations of $(354) and $292

 

795

 

(1,629

)

 

 

 

 

 

 

Tax benefit (provision) related to items of other comprehensive income

 

(840

)

448

 

Other comprehensive income (loss), net of tax

 

$

1,371

 

$

(731

)

 

5.                                            Investments

 

The amortized cost and estimated fair values of investment securities are summarized as follows:

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

unrealized

 

unrealized

 

fair

 

Amortized

 

unrealized

 

unrealized

 

fair

 

(in thousands)

 

cost

 

gains

 

losses

 

value

 

cost

 

gains

 

losses

 

value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities (MBS)

 

$

388,704

 

$

10,645

 

$

955

 

$

398,394

 

$

395,842

 

$

10,740

 

$

1,037

 

$

405,545

 

U.S. government agencies

 

55,204

 

283

 

33

 

55,454

 

80,214

 

449

 

44

 

80,619

 

Trust preferred securities

 

92,814

 

3,357

 

326

 

95,845

 

86,543

 

2,556

 

791

 

88,308

 

Corporate debt securities

 

53,594

 

1,468

 

52

 

55,010

 

58,204

 

1,425

 

34

 

59,595

 

Private label MBS

 

3,942

 

 

1,552

 

2,390

 

4,288

 

 

1,856

 

2,432

 

Municipal securities

 

326

 

2

 

 

328

 

932

 

13

 

 

945

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

594,584

 

$

15,755

 

$

2,918

 

$

607,421

 

$

626,023

 

$

15,183

 

$

3,762

 

$

637,444

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

255

 

$

7

 

$

 

$

262

 

$

262

 

$

8

 

$

 

$

270

 

 

The amortized cost and estimated fair value of investments in debt securities at March 31, 2011, by contractual maturity are shown below. Expected maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

 

 

 

Available for sale

 

Held to maturity

 

 

 

 

 

Estimated

 

 

 

Estimated

 

 

 

Amortized

 

fair

 

Amortized

 

fair

 

(in thousands)

 

cost

 

value

 

cost

 

value

 

Due in one year or less

 

$

13,478

 

$

13,694

 

$

 

$

 

Due after one year through five years

 

92,987

 

94,127

 

 

 

Due after five years through ten years

 

2,660

 

2,972

 

 

 

Due after ten years

 

92,813

 

95,844

 

 

 

Mortgage-backed securities

 

392,646

 

400,784

 

255

 

262

 

 

 

$

594,584

 

$

607,421

 

$

255

 

$

262

 

 

Market changes in interest rates and overall market illiquidity can result in fluctuations in the market price of securities resulting in temporary unrealized losses.  At March 31, 2011, 97% of the total unrealized loss of $2.9 million is comprised of mortgage-backed and trust preferred securities.  The Company has recognized other-than-temporary impairments (OTTI) of $2.0 million on these securities, including $0.2 million recognized during the three months ended March 31, 2011.  The trust preferred securities (TPS) are all single-entity issues that continue to pay their regularly scheduled dividend payments.

 

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Table of Contents

 

In reviewing the realizable value of its securities in a loss position, the Company considered the following factors: (1) the length of time and extent to which the market value had been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) investment downgrades by rating agencies; and (4) whether it is more likely than not that the Company will have to sell the security before a recovery in value.  When it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the security, and the fair value of the investment security is less than its amortized cost, an OTTI is recognized in earnings.

 

For debt securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, an OTTI is recognized.  OTTI is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between a security’s amortized cost basis and the discounted present value of expected future cash flows. The amount due to all other factors is recognized in other comprehensive income.

 

The Company has determined there was no unrecognized OTTI associated with the 34 securities noted within the table below at March 31, 2011.

 

 

 

Less than 12 months

 

12 months or Greater

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(in thousands)

 

value

 

loss

 

value

 

loss

 

value

 

loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

119,375

 

$

955

 

$

 

$

 

$

119,375

 

$

955

 

U.S. government agencies

 

4,961

 

33

 

 

 

4,961

 

33

 

Trust preferred securities

 

16,066

 

209

 

2,706

 

117

 

18,772

 

326

 

Corporate debt securities

 

6,975

 

52

 

 

 

6,975

 

52

 

Private label MBS

 

 

 

2,390

 

1,552

 

2,390

 

1,552

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

147,377

 

$

1,249

 

$

5,096

 

$

1,669

 

$

152,473

 

$

2,918

 

 

The following tables present a roll-forward of the credit loss component of OTTI on securities recognized in earnings during the three months ended March 31, 2011, and 2010.  The credit loss component represents the difference between the present value of expected future cash flows and the amortized cost basis of the security. The credit component of OTTI recognized in earnings is presented as an addition in two parts based upon whether the current period is the first time the debt security was credit impaired or if it is additional credit impairment. The credit loss component is reduced if the Company sells, intends to sell or believes it will be required to sell previously credit impaired debt securities. Additionally, the credit loss component is reduced if the Company receives cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security or when the security matures.

 

 

 

 

For the three months ended

 

(in thousands)

 

March 31, 2011

 

Balance at December 31, 2010

 

$

1,782

 

 

 

 

 

Additions (1):

 

 

 

Additional credit impairment

 

234

 

 

 

 

 

Balance at March 31, 2011

 

$

2,016

 

 


(1) Excludes OTTI on investments we intend to sell.

 

 

 

For the three months ended

 

(in thousands)

 

March 31, 2010

 

Balance at December 31, 2009

 

$

 1,331

 

 

 

 

 

Additions (1):

 

 

 

Additional credit impairment

 

199

 

 

 

 

 

Balance at March 31, 2010

 

$

 1,530

 

 


(1) Excludes OTTI on investments we intend to sell.

 

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Table of Contents

 

During the first quarter of 2011, the Company recognized a credit-related OTTI in earnings on two private-label MBS.  In determining the credit loss, the Company estimated expected future cash flows of the security by estimating the expected future cash flows of the underlying collateral and applying those collateral cash flows, together with any credit enhancements such as subordination interests owned by third parties, to the security. The expected future cash flows of the underlying collateral are determined using the remaining contractual cash flows adjusted for future expected credit losses (which consider current and future delinquencies, default rates and loss severities) and prepayments. The expected cash flows of the security are then discounted to arrive at a present value amount. The following table presents a summary of the significant inputs considered in determining the measurement of the credit loss component recognized in earnings for the three months ending March 31, 2011.

 

Inputs at March 31, 2011

 

Security #1

 

Security #2

 

Prepayment speed (CPR) (1)

 

13.6

%

8.9

%

Default rate (CDR) (2)

 

8.9

%

7.5

%

Severity (3)

 

51.6

%

45.9

%

 

 

 

 

 

 

Credit impairment (in thousands)

 

$

70

 

$

164

 

 


(1) Estimated prepayments as a percentage of outstanding loans

(2) Estimated default rate as a percentage of outstanding loans

(3) Estimated loss rate on collateral liquidations

 

Other investments at March 31, 2011 and December 31, 2010, consist of the following:

 

 

 

March 31,

 

December 31,

 

(in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Bank stocks — at cost

 

$

5,801

 

$

4,790

 

Investment in statutory trusts — equity method

 

2,172

 

2,172

 

 

 

$

7,973

 

$

6,962

 

 

Bank stocks — at cost consists primarily of stock in the FHLB which is part of the Federal Home Loan Bank System (FHLB System).  The Company’s investment is primarily related to maintaining a borrowing base with the FHLB.  As the Company’s liquidity position has improved, the need for a large borrowing base has decreased.  To the extent that the Company’s need for wholesale funding increases, the Company may purchase additional stock in the future.  The Company evaluates impairment in this investment based on the ultimate recoverability of the par value and at March 31, 2011, did not consider the investment to be other than temporarily impaired.

 

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Table of Contents

 

6.                                      Loans

 

Loans held for investment— Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, deferred fees or costs on originated loans, and unamortized premiums or discounts on purchased loans. Interest is accrued and credited to income daily based on the principal balance outstanding. The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal and interest. When a loan is designated as nonaccrual, the current period’s accrued interest receivable is charged against current earnings while any portions relating to prior periods are charged against the allowance for loan losses. Interest payments received on nonaccrual loans are generally applied to the principal balance of the loan. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured and there has been demonstrated performance in accordance with contractual terms.  The Company may elect to continue the accrual of interest when the loan is in the process of collection and the realizable value of collateral is sufficient to cover the principal balance and accrued interest.

 

Loans Held For Sale — Loans held for sale include loans the Company has demonstrated the ability and intent to sell.  Loans held for sale are primarily nonperforming loans.  Loans held for sale are carried at the lower of cost or fair value and are evaluated on a loan-by-loan basis.

 

Loan Origination Fees and Costs — Loan fees and certain costs of originating loans are deferred and the net amount is amortized over the contractual life of the related loans in accordance with Accounting Standards Codification (ASC) Topic 310-20, Nonrefundable Fees and Other Costs.

 

Allowance for Loan Losses — The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged against earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.

 

Impaired loans — Impaired loans, with the exception of groups of smaller-balance homogenous loans that are collectively evaluated for impairment, are defined as loans for which, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The Company determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Loans that are deemed to be impaired are evaluated in accordance with ASC Topic 310-10-35, Receivables — Subsequent Measurement (ASC 310) and ASC Topic 450-20, Loss Contingencies (ASC 450).  Included in impaired loans are troubled debt restructurings.  A troubled debt restructuring is a formal restructure of a loan where the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the loan balance or accrued interest, and extension of the maturity date.  Troubled debt restructurings are evaluated in accordance with ASC Topic 310-10-40, Troubled Debt Restructurings by Creditors. Interest payments on impaired loans are typically applied to principal unless collectability of principal is reasonably assured.

 

Allowance for Credit Losses — The allowance for credit losses is established as losses are estimated to have occurred through a provision for credit losses charged to earnings. The allowance for credit losses represents management’s recognition of a separate reserve for off-balance sheet loan commitments and letters of credit.

 

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Table of Contents

 

While the allowance for loan losses is recorded as a contra-asset to the loan portfolio on the condensed consolidated balance sheets, the allowance for credit losses is recorded under the caption “Accrued interest and other liabilities”. Although the allowances are presented separately on the balance sheets, any losses incurred from credit losses would be reported as a charge-off in the allowance for loan losses, as any loss would be recorded after the off-balance sheet commitment had been funded.

 

The following disclosure reports the Company’s loan portfolio segments and classes.  Segments are groupings of similar loans at a level which the Company has adopted systematic methods of documentation for determining its allowance for loan and credit losses. Classes are a disaggregation of the portfolio segments. Loan portfolio segments at March 31, 2011 and December 31, 2010 include:

 

(in thousands)

 

March 31, 2011

 

December 31, 2010

 

 

 

 

 

 

 

Commercial

 

$

562,369

 

$

564,882

 

Real estate - mortgage

 

777,304

 

784,009

 

Land acquisition & development

 

76,281

 

83,909

 

Real estate - construction

 

85,577

 

87,116

 

Consumer

 

99,525

 

94,661

 

Other

 

35,130

 

29,388

 

Loans held for investment

 

1,636,186

 

1,643,965

 

 

 

 

 

 

 

Allowance for loan losses

 

(61,995

)

(65,892

)

Unearned net loan fees

 

(22

)

(238

)

Net loans held for investment

 

$

1,574,169

 

$

1,577,835

 

 

During the three months ended March 31, 2011, the Company transferred two loans totaling $3.0 million from held for investment to held for sale.  These loans were sold during the first quarter and no gain or loss resulted from this transaction.   During the three months ended March 31, 2011, the Company purchased leases of $10.0 million included in the ‘Other’ loan category, none of which were of deteriorated credit quality.  The Company uses qualifying loans as collateral for advances and a line of credit from the FHLB.  The FHLB line of credit, which had a zero balance at March 31, 2011, was collateralized by loans of $590.2 million with a lending value of $308.1 million.

 

The Company maintains a loan review program independent of the lending function that is designed to reduce and control risk in the lending function. It includes the continuous monitoring of lending activities with 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.   The Company also has a systematic process to evaluate individual loans and pools of loans within our loan portfolio. The Company maintains 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 nonaccrual loan where collection or liquidation in full is highly questionable and improbable, and 8 representing a loss that has been or 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 that are graded 5 or lower are categorized as non-classified credits while loans graded 6 and higher are categorized as classified credits.  Loan grade changes are evaluated on a monthly basis.  Loans above a certain dollar amount that are adversely graded are reported to the Problem Loan Committee of the Bank and the Chief Credit Officer along with current financial information, a collateral analysis and an action plan.

 

The loan portfolio showing total non-classified and classified balances by loan class at March 31, 2011 and December 31, 2010 is summarized below:

 

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Table of Contents

 

 

 

At March 31, 2011

 

(in thousands)

 

Non-classified

 

Classified

 

Total

 

Commercial

 

 

 

 

 

 

 

Manufacturing

 

$

80,703

 

$

12,594

 

$

93,297

 

Finance and Insurance

 

72,389

 

1,729

 

74,118

 

Health Care

 

59,959

 

370

 

60,329

 

Real Estate Services

 

61,174

 

16,194

 

77,368

 

Construction

 

41,537

 

8,917

 

50,454

 

Retail Trade

 

20,558

 

4,298

 

24,856

 

Wholesale Trade

 

55,614

 

4,355

 

59,969

 

Other

 

114,239

 

7,739

 

121,978

 

 

 

506,173

 

56,196

 

562,369

 

Real estate - mortgage

 

 

 

 

 

 

 

Residential & Commercial Owner-Occupied

 

381,581

 

38,240

 

419,821

 

Residential & Commercial Investor

 

319,758

 

37,106

 

356,864

 

Other

 

619

 

 

619

 

 

 

701,958

 

75,346

 

777,304

 

Land Acquisition and development

 

 

 

 

 

 

 

Commercial

 

16,249

 

9,585

 

25,834

 

Residential

 

29,124

 

10,195

 

39,319

 

Other

 

8,603

 

2,525

 

11,128

 

 

 

53,976

 

22,305

 

76,281

 

Real estate - construction

 

 

 

 

 

 

 

Residential & Commercial Owner-Occupied

 

22,258

 

 

22,258

 

Residential & Commercial Investor

 

44,554

 

18,765

 

63,319

 

 

 

66,812

 

18,765

 

85,577

 

 

 

 

 

 

 

 

 

Consumer

 

95,273

 

4,252

 

99,525

 

Other

 

35,130

 

 

35,130

 

Unearned net loan fees

 

 

 

(22

)

 

 

 

 

 

 

 

 

Total Loans

 

$

1,459,322

 

$

176,864

 

$

1,636,164

 

 

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Table of Contents

 

 

 

At December 31, 2010

 

(in thousands)

 

Non-classified

 

Classified

 

Total

 

Commercial

 

 

 

 

 

 

 

Manufacturing

 

$

72,036

 

$

14,695

 

$

86,731

 

Finance and Insurance

 

75,258

 

2,061

 

77,319

 

Health Care

 

70,110

 

396

 

70,506

 

Real Estate Services

 

63,272

 

15,948

 

79,220

 

Construction

 

41,125

 

10,224

 

51,349

 

Retail Trade

 

22,516

 

4,367

 

26,883

 

Wholesale Trade

 

51,219

 

2,268

 

53,487

 

Other

 

111,387

 

8,000

 

119,387

 

 

 

506,923

 

57,959

 

564,882

 

Real estate - mortgage

 

 

 

 

 

 

 

Residential & Commercial Owner-Occupied

 

403,644

 

28,261

 

431,905

 

Residential & Commercial Investor

 

313,157

 

38,947

 

352,104

 

 

 

716,801

 

67,208

 

784,009

 

Land Acquisition & development

 

 

 

 

 

 

 

Commercial

 

17,540

 

10,050

 

27,590

 

Residential

 

33,168

 

10,613

 

43,781

 

Other

 

8,599

 

3,939

 

12,538

 

 

 

59,307

 

24,602

 

83,909

 

Real estate - construction

 

 

 

 

 

 

 

Residential & Commercial Owner-Occupied

 

22,411

 

 

22,411

 

Residential & Commercial Investor

 

43,939

 

20,766

 

64,705

 

 

 

66,350

 

20,766

 

87,116

 

 

 

 

 

 

 

 

 

Consumer

 

90,239

 

4,422

 

94,661

 

Other

 

29,388

 

 

29,388

 

Unearned net loan fees

 

 

 

(238

)

 

 

 

 

 

 

 

 

Total Loans

 

$

1,469,008

 

$

174,957

 

$

1,643,727

 

 

The allowance for loan losses (ALL) is established for the purpose of recognizing estimated loan impairments before loan losses on individual loans occur thereby resulting in a subsequent charge-off.  The ALL reflects probable but unconfirmed loan impairments in the Company’s loan portfolio as of the balance sheet date.

 

The Company estimates the ALL in accordance with ASC 310 for purposes of evaluating loan impairment on a loan-by-loan basis and ASC 450 for purposes of collectively evaluating loan impairment by grouping loans with common risk characteristics (i.e. risk classification, past-due status, type of loan, and collateral).

 

Specific Reserves — The Company continuously evaluates its reserve for loan losses to maintain an adequate level to absorb loan losses inherent in the loan portfolio. Reserves on loans identified as impaired are based on discounted expected cash flows using the loan’s initial effective interest rate, the observable market value of the loan or the fair value of the collateral for certain collateral-dependent loans. The fair value of the collateral is determined in accordance with ASC 820. Loans are considered to be impaired in accordance with the provisions of ASC 310, when it is probable that all amounts due in accordance with the contractual terms will not be collected. Factors contributing to the determination of specific reserves include the financial condition of the borrower, changes in the value of pledged collateral and general economic conditions.

 

General Reserves — General reserves are considered part of the allocated portion of the allowance. The Company uses a comprehensive loan grading process for our loan portfolios. Based on this process, a loss factor is assigned to each pool of graded loans.  A combination of loss experience and external loss data is used in determining the appropriate loss factor. This estimate represents the potential unconfirmed losses within the portfolio. In evaluating the adequacy of the ALL, management considers historical losses (Migration) as well as other factors including changes in:

 

·                  Lending policies and procedures

·                  National and local economic and business conditions and developments

 

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Table of Contents

 

·                  Nature and volume of portfolio

·                  Trends of the volume and severity of past-due and classified loans

·                  Trends in the volume of nonaccrual loans, troubled debt restructurings, and other loan modifications

·                  Credit concentrations

 

The aforementioned factors enable management to recognize environmental conditions contributing to inherent losses in the portfolio, which have not yet manifested in Migration.  Due to current and recent adverse economic conditions resulting in increased loan loss levels for the Company, management relies more heavily on actual empirical charge-off history.  Management believes Migration history adequately captures a great percentage of estimated losses within the portfolio.

 

In addition to the allocated reserve for graded loans, a portion of the allowance is determined by segmenting the portfolio into product groupings with similar risk characteristics.  Part of the segmentation involves assigning increased reserve factors to those lending activities deemed higher-risk such as leverage-financings, unsecured loans, certain loans lacking personal guarantees, land acquisition and development loans, and speculative real-estate loans.  This supplemental portion of the allowance includes our judgmental consideration of any additional amounts necessary for subjective factors such as economic uncertainties and excess concentration risks.

 

Unallocated Reserves — The unallocated reserve, which is judgmentally determined, is maintained to recognize the imprecision in estimating and measuring loss when evaluating reserves for individual loans or pools of loans.  Included in the unallocated reserve is a missed grade component that is intended to capture the inherent risk that certain loans may be assigned the incorrect loan grade.

 

In assessing the reasonableness of management’s assumptions, consideration is given to select peer ratios, industry standards and directional consistency of the ALL.  Ratio analysis highlights divergent trends in the relationship of the ALL to nonaccrual loans, to total loans and to historical charge-offs.  Although these comparisons can be helpful as a supplement to assess reasonableness of management assumptions, they are not, by themselves, sufficient basis for determining the adequacy of the ALL.  While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

 

Commercial Loans — Commercial loans consist of loans to small and medium-sized businesses in a wide variety of industries.  The Bank’s areas of emphasis in commercial lending include, but are not limited to, loans to wholesalers, manufacturers, construction and business services companies.  Commercial loans are generally collateralized by inventory, accounts receivable, equipment, real estate and other commercial assets, and may be supported by other credit enhancements such as personal guarantees.  Risk arises primarily due to a difference between expected and actual cash flows of the borrowers.  However, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans.  The fair value of the collateral securing these loans may fluctuate as market conditions change.  In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrowers’ ability to collect amounts due from its customers.

 

Real Estate Mortgage Loans — Real estate mortgage loans include various types of loans for which the Company holds real property as collateral.  Commercial real estate lending activity is typically restricted to owner-occupied properties or to investor properties that are owned by customers with a current banking relationship.  The primary risks of real estate mortgage loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral and significant increases in interest rates, which may make the real estate mortgage loan unprofitable.  Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

 

Land Acquisition and Development Loans — The Company has a portfolio of loans for the acquisition and future development of land for residential building projects, as well as finished lots prepared to enter the construction phase.  Due to overall market illiquidity and the significant value declines on raw land, the Company has ceased new lending activities for the acquisition and future development of land.  The primary risks include the borrower’s inability to pay and the inability of the Company to recover its investment due to a decline in the fair value of the underlying collateral.

 

Real Estate Construction Loans The Company originates loans to finance construction projects involving one- to four-family residences.  Residential construction loans are due upon the sale of the completed project and are

 

15



Table of Contents

 

generally collateralized by first liens on the real estate and have floating interest rates.  Construction loans are considered to have higher risks due to the ultimate repayment being sensitive to interest rate changes, governmental regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans.  Adverse economic conditions may negatively impact the real estate market which could affect the borrowers’ ability to complete and sell the project.  Additionally, the fair value of the underlying collateral may fluctuate as market conditions change.

 

Consumer Loans The Company provides a broad range of consumer loans to customers, including personal lines of credit, home equity loans and automobile loans.   Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of the underlying collateral.

 

Transactions in the allowance for loan losses by segment for the first quarter of 2011 are summarized below:

 

(in thousands)

 

Commercial

 

Real estate -
mortgage

 

Land acquisition
and development

 

Real estate -
construction

 

Consumer

 

Other

 

Unallocated

 

Total

 

Balance at January 1, 2011

 

$

17,169

 

$

17,677

 

$

14,938

 

$

6,296

 

$

3,373

 

$

354

 

$

6,085

 

$

65,892

 

Charge-offs

 

(447

)

(1,207

)

(1,173

)

(3,285

)

(182

)

 

 

(6,294

)

Recoveries

 

137

 

248

 

309

 

 

63

 

 

 

757

 

Provision

 

(211

)

2,947

 

(688

)

33

 

216

 

134

 

(791

)

1,640

 

Balance at March 31, 2011

 

$

16,648

 

$

19,665

 

$

13,386

 

$

3,044

 

$

3,470

 

$

488

 

$

5,294

 

$

61,995

 

 

The following table summarizes the allowance for loan losses on the basis of the Company’s impairment method:

 

At March 31, 2011 (in thousands)

 

Commercial

 

Real estate -
mortgage

 

Land acquisition
and development

 

Real estate -
construction

 

Consumer

 

Other

 

Unallocated

 

Total

 

Allowance for loan losses

 

$

16,648

 

$

19,665

 

$

13,386

 

$

3,044

 

$

3,470

 

$

488

 

$

5,294

 

$

61,995

 

Individually evaluated for impairment

 

3,536

 

4,540

 

527

 

567

 

1,350

 

 

 

10,520

 

Collectively evaluated for impairment

 

13,112

 

15,125

 

12,859

 

2,477

 

2,120

 

488

 

5,294

 

51,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses

 

$

61

 

$

 

$

 

$

 

$

 

$

 

$

 

$

61

 

Individually evaluated for impairment

 

61

 

 

 

 

 

 

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for investment

 

$

562,220

 

$

776,801

 

$

76,120

 

$

85,359

 

$

99,457

 

$

36,207

 

$

 

$

1,636,164

 

Individually evaluated for impairment

 

7,990

 

28,344

 

7,819

 

8,829

 

2,539

 

 

 

55,521

 

Collectively evaluated for impairment

 

554,230

 

748,457

 

68,301

 

76,530

 

96,918

 

36,207

 

 

1,580,643

 

 

At December 31, 2010 (in thousands)

 

Commercial

 

Real estate -
mortgage

 

Land acquisition
and development

 

Real estate -
construction

 

Consumer

 

Other

 

Unallocated

 

Total

 

Allowance for loan losses

 

$

17,169

 

$

17,677

 

$

14,938

 

$

6,296

 

$

3,373

 

$

354

 

$

6,085

 

$

65,892

 

Individually evaluated for impairment

 

3,615

 

2,402

 

694

 

3,755

 

1,414

 

 

 

11,880

 

Collectively evaluated for impairment

 

13,554

 

15,275

 

14,244

 

2,541

 

1,959

 

354

 

6,085

 

54,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses

 

$

61

 

$

 

$

 

$

 

$

 

$

 

$

 

$

61

 

Individually evaluated for impairment

 

61

 

 

 

 

 

 

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for investment

 

$

565,145

 

$

783,675

 

$

83,871

 

$

86,862

 

$

94,607

 

$

29,567

 

$

 

$

1,643,727

 

Individually evaluated for impairment

 

8,722

 

24,934

 

9,690

 

12,614

 

3,060

 

 

 

59,020

 

Collectively evaluated for impairment

 

556,423

 

758,741

 

74,181

 

74,248

 

91,547

 

29,567

 

 

1,584,707

 

 

Impaired loans, with the exception of groups of smaller-balance homogenous loans that are collectively evaluated for impairment, are defined as loans for which, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Loans that are deemed to be impaired are evaluated in accordance with ASC Topic 310-10-35, Receivables — Subsequent Measurement (ASC 310) and ASC Topic 450-20, Loss Contingencies (ASC 450).

 

Information on impaired loans at March 31, 2011 and December 31, 2010 is reported in the following table:

 

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At and for the three months ended March 31, 2011

 

(in thousands)

 

Recorded
investment on
impaired loans

 

Unpaid principal
balance

 

Recorded
investment with a
related ALL

 

Recorded
investment with
no related ALL

 

Average
recorded
investment

 

Related
allowance

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing

 

$

247

 

$

275

 

$

24

 

$

223

 

$

307

 

$

4

 

Finance and insurance

 

603

 

603

 

603

 

 

605

 

664

 

Real estate services

 

2,321

 

2,321

 

1,572

 

749

 

2,329

 

1,160

 

Construction

 

1,917

 

1,970

 

664

 

1,253

 

1,851

 

176

 

Retail trade

 

1,570

 

2,940

 

1,570

 

 

1,578

 

1,040

 

Wholesale trade

 

198

 

424

 

 

198

 

203

 

 

Other

 

1,134

 

1,532

 

716

 

418

 

1,569

 

552

 

 

 

7,990

 

10,065

 

5,149

 

2,841

 

8,442

 

3,596

 

Real estate - mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential & Commercial Owner-Occupied

 

10,551

 

12,230

 

7,418

 

3,133

 

7,980

 

2,344

 

Residential & Commercial Investor

 

1,503

 

2,086

 

746

 

757

 

1,937

 

746

 

 

 

12,054

 

14,316

 

8,164

 

3,890

 

9,917

 

3,090

 

Land acquisition and development

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

2,411

 

3,631

 

 

2,411

 

2,417

 

 

Residential

 

5,408

 

15,475

 

1,245

 

4,163

 

5,431

 

527

 

Other

 

 

 

 

 

1,051

 

 

 

 

7,819

 

19,106

 

1,245

 

6,574

 

8,899

 

527

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential & Commercial Investor

 

8,829

 

13,400

 

1,612

 

7,217

 

11,232

 

567

 

Consumer

 

2,539

 

2,599

 

2,360

 

179

 

2,743

 

1,350

 

Total

 

$

39,231

 

$

59,486

 

$

18,530

 

$

20,701

 

$

41,233

 

$

9,130

 

 

 

 

At and for the year ended December 31, 2010

 

(in thousands)

 

Recorded
investment on
impaired loans

 

Unpaid principal
balance

 

Recorded
investment with a
related ALL

 

Recorded
investment with
no related ALL

 

Average
recorded
investment

 

Related
allowance

 

Interest
income
recognized

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing

 

$

341

 

$

570

 

$

109

 

$

232

 

$

639

 

$

41

 

 

Finance and insurance

 

608

 

608

 

108

 

500

 

130

 

108

 

 

Health care

 

 

 

 

 

150

 

 

18

 

Real estate services

 

2,457

 

2,482

 

1,702

 

755

 

2,324

 

1,213

 

 

Construction

 

1,673

 

1,727

 

228

 

1,445

 

1,588

 

154

 

 

Retail trade

 

1,669

 

3,219

 

1,597

 

72

 

2,581

 

1,067

 

 

Wholesale trade

 

221

 

457

 

11

 

210

 

1,742

 

6

 

 

Other

 

1,753

 

2,680

 

1,322

 

431

 

2,617

 

1,026

 

 

 

 

8,722

 

11,743

 

5,077

 

3,645

 

11,771

 

3,615

 

18

 

Real estate - mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential & Commercial Owner-Occupied

 

6,865

 

9,374

 

2,622

 

4,243

 

11,979

 

733

 

 

Residential & Commercial Investor

 

18,069

 

19,138

 

14,024

 

4,045

 

10,459

 

1,669

 

504

 

Other

 

 

 

 

 

787

 

 

2

 

 

 

24,934

 

28,512

 

16,646

 

8,288

 

23,225

 

2,402

 

506

 

Land acquisition and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

2,430

 

3,651

 

 

2,430

 

6,913

 

 

 

Residential

 

5,684

 

16,291

 

1,468

 

4,216

 

6,669

 

694

 

8

 

Other

 

1,576

 

4,461

 

 

1,576

 

3,997

 

 

 

 

 

9,690

 

24,403

 

1,468

 

8,222

 

17,579

 

694

 

8

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential & Commercial Investor

 

12,614

 

13,931

 

11,015

 

1,599

 

11,193

 

3,755

 

7

 

Consumer

 

3,060

 

3,120

 

2,423

 

637

 

1,284

 

1,414

 

 

Total

 

$

59,020

 

$

81,709

 

$

36,629

 

$

22,391

 

$

65,052

 

$

11,880

 

$

539

 

 

For the three months ending March 31, 2011, interest income recognized on impaired loans was immaterial.  At March 31, 2011 and December 31, 2010, there were no outstanding commitments on restructured loans.

 

Additional information on impaired loans is reported in the following table:

 

 

 

At March 31,

 

At December 31,

 

(in thousands)

 

2011

 

2010

 

Nonaccrual loans

 

$

38,003

 

$

41,271

 

Troubled debt restructurings

 

1,228

 

1,261

 

Impaired loans

 

39,231

 

42,532

 

Loans 90 days or more delinquent and still accruing

 

1,238

 

202

 

Performing troubled debt restructurings

 

$

 

$

16,488

 

 

Nonaccrual loans are those loans for which the accrual of interest has been discontinued.  Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that the collection of interest is doubtful.  A delinquent loan is generally placed on

 

17



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nonaccrual status when it becomes 90 days past due.  When a loan is placed on nonaccrual status, all accrued and unpaid interest on the loan is reversed and deducted from earnings as a reduction of reported interest income.  No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.  When issues relating to a nonaccrual loan are finally resolved, there may ultimately be an actual write-down or charge-off of the principal balance of the loan, which may necessitate additional charges to earnings.  Loans that have been modified in a formal restructuring are typically returned to accrual status when there has been a sustained period of performance (generally six months) under the modified terms, the borrower has shown the ability and willingness to repay and the Company expects to collect all amounts due under the modified terms.

 

The Company’s nonaccrual loans by class at March 31, 2011 and December 31, 2010 are reported in the following table:

 

 

 

March 31,

 

December 31,

 

(in thousands)

 

2011

 

2010

 

Commercial

 

 

 

 

 

Manufacturing

 

$

247

 

$

341

 

Finance and insurance

 

603

 

608

 

Real estate services

 

2,321

 

2,457

 

Construction

 

1,917

 

1,673

 

Retail trade

 

1,570

 

1,669

 

Wholesale trade

 

198

 

221

 

Other

 

1,134

 

1,753

 

Total commercial

 

7,990

 

8,722

 

Real estate - mortgage

 

 

 

 

 

Residential & Commercial Owner-Occupied

 

10,551

 

6,865

 

Residential & Commercial Investor

 

1,503

 

1,581

 

Total real estate - mortgage

 

12,054

 

8,446

 

Land acquisition and development

 

 

 

 

 

Commercial

 

2,411

 

2,430

 

Residential

 

5,408

 

5,684

 

Other

 

 

1,576

 

Total acquisition and development

 

7,819

 

9,690

 

Real estate - construction

 

 

 

 

 

Residential & commercial investor

 

8,829

 

12,614

 

Consumer

 

2,539

 

3,060

 

Total nonaccrual loans

 

$

39,231

 

$

42,532

 

 

The following table summarizes the aging of the Company’s loan portfolio at March 31, 2011:

 

18



Table of Contents

 

 

 

At March 31, 2011

 

(in thousands)­

 

30 - 59 Days
past due

 

60 - 89 Days
past due

 

90+ Days
past due

 

Total past
due

 

Current

 

Total loans

 

Recorded
investment in
loans 90 days or
more past due
and accruing

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing

 

$

4,000

 

$

 

$

 

$

4,000

 

$

89,297

 

$

93,297

 

$

 

Finance and insurance

 

747

 

103

 

1,166

 

2,016

 

72,102

 

74,118

 

666

 

Health care

 

 

314

 

 

314

 

60,015

 

60,329

 

 

Real estate services

 

150

 

217

 

500

 

867

 

76,501

 

77,368

 

 

Construction

 

77

 

781

 

1,432

 

2,290

 

48,164

 

50,454

 

50

 

Retail trade

 

284

 

423

 

961

 

1,668

 

23,188

 

24,856

 

 

Wholesale trade

 

12

 

 

214

 

226

 

59,743

 

59,969

 

16

 

Other

 

237

 

23

 

542

 

802

 

121,176

 

121,978

 

 

 

 

5,507

 

1,861

 

4,815

 

12,183

 

550,186

 

562,369

 

732

 

Real estate - mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential & Commercial Owner-Occupied

 

5,270

 

4,341

 

6,335

 

15,946

 

403,875

 

419,821

 

 

Residential & Commercial Investor

 

2,408

 

730

 

1,315

 

4,453

 

352,411

 

356,864

 

 

 

 

 

 

 

 

619

 

619

 

 

 

 

7,678

 

5,071

 

7,650

 

20,399

 

756,905

 

777,304

 

 

Land acquisition and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,842

 

1,353

 

3,195

 

22,639

 

25,834

 

 

Residential

 

180

 

505

 

3,942

 

4,627

 

34,692

 

39,319

 

 

Other

 

 

 

 

 

11,128

 

11,128

 

 

 

 

180

 

2,347

 

5,295

 

7,822

 

68,459

 

76,281

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential & Commercial Owner-Occupied

 

 

 

 

 

22,258

 

22,258

 

 

Residential & Commercial Investor

 

1,774

 

 

8,830

 

10,604

 

52,715

 

63,319

 

 

 

 

1,774

 

 

8,830

 

10,604

 

74,973

 

85,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

422

 

252

 

2,701

 

3,375

 

96,150

 

99,525

 

506

 

Other

 

598

 

78

 

 

676

 

34,454

 

35,130

 

 

Unearned net loan fees

 

 

 

 

 

 

 

 

 

 

 

(22

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

16,159

 

$

9,609

 

$

29,291

 

$

55,059

 

$

1,581,127

 

$

1,636,164

 

$

1,238

 

 

7.             Intangible Assets

 

The Company’s intangible assets and related accumulated amortization at the dates indicated consist of the following:

 

 

 

Customer

 

 

 

contracts, lists

 

(in thousands)

 

and relationships

 

December 31, 2010

 

$

4,119

 

Disposal

 

(82

)

Amortization

 

(160

)

March 31, 2011

 

$

3,877

 

 

During the three months ended March 31, 2011, the Company sold a book of business related to an insurance product line that was no longer being pursued.  Amortization expense on intangible assets for each of the five succeeding years (excluding approximately $0.5 million to be recognized for the remaining nine months of fiscal 2011) is estimated in the following table.

 

(in thousands)

 

 

 

2012

 

$

638

 

2013

 

426

 

2014

 

316

 

2015

 

300

 

2016

 

300

 

 

19



Table of Contents

 

8.               Derivatives

 

ASC Topic 815 — Derivative and Hedging, (ASC 815) contains the authoritative guidance on accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities.  As required by ASC 815, the Company records all derivatives on the consolidated balance sheets at fair value.

 

The Company is exposed to certain risks arising from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.  Specifically, the Company uses derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable-rate loan assets and variable-rate borrowings.

 

The Company’s objective in using derivatives is to minimize the impact of interest rate fluctuations on the Company’s interest income and to reduce asset sensitivity. To accomplish this objective, the Company uses interest-rate swaps as part of its cash flow hedging strategy. For accounting purposes, these swaps are designated as hedging the overall changes in cash flows related to portfolios of the Company’s Prime-based loans. Specifically, the Company has designated as the hedged transactions the first Prime-based interest payments received by the Company each calendar month during the term of the swaps that, in the aggregate for each period, are interest payments on principal from specified portfolios equal to the notional amount of the swaps.

 

The Company also 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 to offset the customer contracts.  These customer accommodation interest rate swap contracts are not designated as hedging instruments.

 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on our condensed consolidated balance sheets.

 

 

 

Asset derivatives

 

Liability derivatives

 

 

 

 

 

Fair value at

 

 

 

Fair value at

 

 

 

Balance sheet

 

March 31,

 

December 31,

 

Balance sheet

 

March 31,

 

December 31,

 

(in thousands)

 

classification

 

2011

 

2010

 

classification

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging :

 

 

 

 

 

 

 

 

 

 

 

 

 

Instruments under ASC 815 Interest rate swap

 

Other assets

 

$

508

 

$

504

 

Accrued interest and other liabilities

 

$

921

 

$

1,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging :

 

 

 

 

 

 

 

 

 

 

 

 

 

Instruments under ASC 815 Interest rate swap

 

Other assets

 

$

4,278

 

$

4,840

 

Accrued interest and other liabilities

 

$

4,534

 

$

5,106

 

 

Cash Flow Hedges of Interest Rate Risk — For hedges of the Company’s variable-rate loan assets, interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount.  For hedges of the Company’s variable-rate borrowings, interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments. In February 2009, the Company executed a series of interest-rate swap transactions designated as cash flow hedges that are effective for interest payments starting in 2010.  The intent of the transactions was to fix the effective interest rate for payments due on its junior subordinated debentures with the objective of reducing the Company’s exposure to adverse changes in cash flows relating to payments on its LIBOR-based floating rate debt.  The swaps have contractual lives ranging between five and 14 years.  Select critical terms of the cash flow hedges are as follows:

 

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Table of Contents

 

 

 

 

 

 

 

 

 

Hedged item

 

Notional

 

Fixed rate

 

Termination date

 

(in thousands)

 

 

 

 

 

 

 

CoBiz Statutory Trust I

 

$

20,000

 

6.04

%

March 17, 2015

 

CoBiz Capital Trust II

 

$

30,000

 

5.99

%

April 23, 2020

 

CoBiz Capital Trust III

 

$

20,000

 

5.02

%

March 30, 2024

 

 

In addition to the cash flow hedges in the table above, the Company had two interest rate swaps with an aggregate notional amount of $30.0 million designated as cash flow hedges of interest rate risk at March 31, 2011.

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. These derivatives were used to hedge the variable cash inflows associated with existing pools of Prime-based loans, as well as variable cash outflows associated with its junior subordinated debentures.  The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company’s derivatives did not have any hedge ineffectiveness recognized in earnings during the three months ended March 31, 2011.

 

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income or expense as interest payments are received/made on the Company’s variable-rate assets/liabilities. During the next 12 months, the Company estimates that $0.3 million will be reclassified as an increase to interest income and $2.1 million will be reclassified as an increase to interest expense.

 

Non-designated Hedges —  Derivatives not designated as hedges are not speculative and result from a service the Company provides to its customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. At March 31, 2011, the Company had 77 interest rate swaps with an aggregate notional amount of $175.7 million related to this program. During the three months ended March 31, 2011, the Company recognized nominal net gains related to changes in fair value of these swaps. During the three months ended March 31, 2010, the Company recognized a net loss of $0.1 million related to changes in fair value of these swaps. The gains and losses arising from changes in the fair value of these swaps are included in “Other income” in the accompanying condensed consolidated statements of operations.

 

The table below summarizes gains and losses recognized in OCI in conjunction with our derivatives designated as hedging instruments for the three months ended March 31, 2011.

 

 

 

Gain (loss) recognized in OCI

 

 

 

(Effective portion)

 

 

 

for the three months ended March 31,

 

(in thousands)

 

2011

 

2010

 

Cash flow hedges:

 

 

 

 

 

Interest rate swap

 

$

795

 

$

(1,629

)

 

 

 

Gain (loss) reclassified from accumulated OCI into earnings

 

 

 

(Effective portion)

 

 

 

for the three months ended March 31,

 

(in thousands)

 

2011

 

2010

 

Cash flow hedges:

 

 

 

 

 

Interest rate swap

 

$

(354

)

$

292

 

 

The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.  Also,

 

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the Company has agreements with certain of its derivative counterparties that contain a provision where if the Bank fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

 

At March 31, 2011, the fair value of derivatives in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk, related to these agreements was $4.7 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $14.5 million against its obligations under these agreements.  At March 31, 2011, the Company was not in default with any of its debt covenants.

 

9.               Long-Term Debt

 

A summary of the outstanding subordinated debentures at March 31, 2011, is as follows:

 

(in thousands)

 

At March 31, 2011

 

Original Interest Rate

 

Effective Interest Rate

 

Maturity date

 

Earliest call date

 

Junior subordinated debentures:

 

 

 

 

 

 

 

 

 

 

 

CoBiz Statutory Trust I

 

$

20,619

 

3-month LIBOR + 2.95%

 

Fixed 6.04%

 

September 17, 2033

 

June 17, 2011

 

CoBiz Capital Trust II

 

30,928

 

3-month LIBOR + 2.60%

 

Fixed 5.99%

 

July 23, 2034

 

April 23, 2011

 

CoBiz Capital Trust III

 

20,619

 

3-month LIBOR + 1.45%

 

Fixed 5.02%

 

September 30, 2035

 

June 30, 2011

 

Total junior subordinated debentures

 

$

72,166

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other long-term debt:

 

 

 

 

 

 

 

 

 

 

 

Subordinated notes payable

 

$

20,984

 

Fixed 9.00%

 

Fixed 9.00%

 

August 18, 2018

 

August 18, 2013

 

 

Effective for interest payments beginning in February 2010, the Company fixed the interest rate on its junior subordinated debentures through a series of interest rate swaps.  For further discussion of the interest rate swaps and the corresponding terms, see Note 8 to the Condensed Consolidated Financial Statements.

 

10.          Share-Based Compensation Plans

 

During the three months ended March 31, 2011 and 2010, the Company recognized compensation expense (net of estimated forfeitures) of $0.4 million for share-based compensation awards for which the requisite service was rendered in the period. Estimated forfeitures are periodically evaluated based on historical and expected forfeiture behavior.

 

The Company uses the Black-Scholes model to estimate the fair value of stock options using various interest, dividend, volatility and expected life assumptions. Expected life is evaluated on an ongoing basis using historical and expected exercise behavior assumptions.

 

The following table summarizes changes in option awards during the three months ended March 31, 2011.

 

 

 

 

 

Weighted average

 

 

 

 

 

exercise

 

 

 

Shares

 

price

 

 

 

 

 

 

 

Outstanding – December 31, 2010

 

2,659,750

 

$

12.70

 

Granted

 

 

 

Exercised

 

 

 

Forfeited

 

142,488

 

11.55

 

 

 

 

 

 

 

Outstanding – March 31, 2011

 

2,517,262

 

$

12.77

 

 

 

 

 

 

 

Exercisable – March 31, 2011

 

1,774,128

 

$

14.98

 

 

The following table summarizes changes in stock awards for the three months ended March 31, 2011.

 

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Table of Contents

 

 

 

 

 

Weighted average

 

 

 

 

 

grant date

 

 

 

Shares

 

fair value

 

Unvested – December 31, 2010

 

261,390

 

$

6.77

 

Granted

 

147,867

 

6.52

 

Vested

 

3,733

 

10.24

 

Forfeited

 

 

 

 

 

 

 

 

 

Unvested – March 31, 2011

 

405,524

 

$

6.65

 

 

At March 31, 2011, there was $3.1 million of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Company’s equity incentive plans.  The cost is expected to be recognized over a weighted average period of 2.1 years.

 

11.          Segments

 

The Company’s segments consist of Commercial Banking, Investment Banking, Wealth Management, Insurance and Corporate Support and Other.  The financial information for each business segment reflects that information which is specifically identifiable or which is allocated based on an internal allocation method.  In conjunction with the Company’s strategic initiative to create a focused wealth management offering, the Company changed its operating segments in the third quarter of 2010 to reflect an internal realignment of its wealth management components.  As part of this change, the Investment Advisory and Trust segment that was previously reported has been renamed Wealth Management and a business line has been moved from Insurance into the new Wealth Management segment.  All prior period disclosures have been adjusted to conform to the new presentation.

 

Results of operations and selected financial information by operating segment are as follows:

 

 

 

 

 

Investment

 

 

 

 

 

Corporate

 

 

 

For the three months ended March 31, 2011

 

Commercial

 

Banking

 

Wealth

 

 

 

Support and

 

 

 

(in thousands)

 

Banking

 

Services

 

Management

 

Insurance

 

Other

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income statement

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

27,945

 

$

3

 

$

1

 

$

 

$

242

 

$

28,191

 

Total interest expense

 

2,508

 

 

14

 

2

 

1,423

 

3,947

 

Provision for loan losses

 

1,327

 

 

 

 

313

 

1,640

 

Noninterest income

 

2,459

 

744

 

2,280

 

2,539

 

10

 

8,032

 

Noninterest expense

 

8,098

 

893

 

2,388

 

2,361

 

11,711

 

25,451

 

Management fees and allocations

 

6,145

 

35

 

151

 

86

 

(6,417

)

 

Provision (benefit) for income taxes

 

6,952

 

(58

)

(54

)

71

 

(4,952

)

1,959

 

Net income (loss)

 

5,374

 

(123

)

(218

)

19

 

(1,826

)

3,226

 

 

 

 

 

 

Investment

 

 

 

 

 

Corporate

 

 

 

For the three months ended March 31, 2010

 

Commercial

 

Banking

 

Wealth

 

 

 

Support and

 

 

 

(in thousands)

 

Banking

 

Services

 

Management

 

Insurance

 

Other

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income statement

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

29,556

 

$

1

 

$

 

$

 

$

362

 

$

29,919

 

Total interest expense

 

4,085

 

 

9

 

3

 

1,069

 

5,166

 

Provision for loan losses

 

11,361

 

 

 

 

2,459

 

13,820

 

Noninterest income

 

2,396

 

301

 

2,198

 

2,344

 

(354

)

6,885

 

Noninterest expense

 

8,779

 

976

 

2,279

 

2,374

 

11,865

 

26,273

 

Management fees and allocations

 

6,076

 

41

 

170

 

86

 

(6,373

)

 

Provision (benefit) for income taxes

 

2,503

 

(271

)

(99

)

58

 

(5,627

)

(3,436

)

Net loss before noncontrolling interest

 

(852

)

(444

)

(161

)

(177

)

(3,385

)

(5,019

)

Net loss attributable to noncontrolling interest

 

 

 

 

 

322

 

322

 

Net loss

 

(852

)

(444

)

(161

)

(177

)

(3,063

)

(4,697

)

 

12.            Fair Value Measurements

 

ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability.  As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant

 

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assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

 

·      Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

·      Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals.

 

·      Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity.

 

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

A description of the valuation methodologies used for financial instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

 

Available for sale securities — At March 31, 2011, the Company holds, as part of its investment portfolio, available for sale securities reported at fair value consisting of MBS, municipal securities and trust preferred securities.  The fair value of the majority of MBS and municipal securities are determined using widely accepted valuation techniques including matrix pricing and broker-quote based applications.  Inputs include benchmark yields, reported trades, issuer spreads, prepayment speeds and other relevant items.  As a result, the Company has determined that these valuations fall within Level 2 of the fair value hierarchy.  Private-label MBS are valued using broker-dealer quotes.  As the private-label MBS market has become increasingly illiquid, these securities are being valued more often based on modeling techniques rather than observable trades.  Accordingly, the Company has determined the appropriate input level for the private-label MBS is Level 3.  The Company also holds TPS that are recorded at fair values based on unadjusted quoted market prices for identical securities in an active market.  The majority of the TPS are actively traded in the market and as a result, the Company has determined that the valuation of these securities falls within Level 1 of the fair value hierarchy.  The Company also holds a small number of TPS for which unadjusted market prices are not available or the market is not active.  For these securities, broker-dealer quotes or valuations based on similar but not identical securities are used and the Company has determined that these valuations fall within Level 2 of the fair value hierarchy.

 

During the three months ended March 31, 2011, the Company recognized credit-related OTTI of $0.2 million.  Credit-related OTTI is reported in “Net other than temporary impairment losses on securities recognized in earnings” and non-credit related OTTI is reported in “Loss on securities, other assets and other real estate owned” in the condensed consolidated statement of operations.

 

Derivative financial instruments — The Company uses interest rate swaps as part of its cash flow strategy to manage its interest rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including strike price, forward rates, volatility estimates, and discount rates.  The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

 

Pursuant to guidance in ASC 820, credit valuation adjustments are incorporated into the valuation to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings and thresholds.

 

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Table of Contents

 

The Company uses Level 2 and Level 3 inputs to determine the valuation of its derivatives portfolio.  The valuation of derivative instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs (Level 2 inputs), including interest rate curves and implied volatilities. The estimates of fair value are made by an independent third party using a standardized methodology that nets the discounted expected future cash receipts and cash payments (based on observable market inputs). Level 3 inputs include the credit valuation adjustments which use estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.  At March 31, 2011, the Company assessed the impact of the Level 3 inputs on the overall derivative valuations in terms of the significance of the credit valuation adjustments in basis points and as a percentage of the overall derivative portfolio valuation and the overall notional value.  The Company’s assessment determined that credit valuation adjustments were not significant to the overall valuation of the portfolio.  In addition, the significance of the credit value adjustments and overall derivative portfolio to the Company’s financial statements was considered.  As a result of the insignificance of the credit value adjustments to the derivative portfolio valuations and the Company’s financial statements, the Company classified the derivative valuations in their entirety in Level 2.

 

Private equity investments — The valuation of nonpublic private equity investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such assets.  The carrying values of private equity investments are adjusted either upwards or downwards from the transaction price to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through ongoing reviews by management.  A variety of factors are reviewed and monitored to assess positive and negative changes in valuation including, but not limited to, current operating performance and future expectations of the particular investment, industry valuations of comparable public companies, changes in market outlook and the third-party financing environment.  In determining valuation adjustments resulting from the investment review process, emphasis is placed on current company performance and market conditions.  As a result, the Company has determined that private equity investments are classified in Level 3 of the fair value hierarchy.  The value of private equity investments was not material at March 31, 2011.

 

Impaired Loans — Certain collateral-dependent impaired loans are reported at the fair value of the underlying collateral.  Impairment is measured based on the fair value of the collateral, which is typically derived from appraisals that take into consideration prices in observed transactions involving similar assets and similar locations.  The fair value of other impaired loans is measured using a discounted cash flow analysis considered to be a Level 3 input.

 

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis at March 31, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

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Table of Contents

 

 

 

Fair value measurements using:

 

 

 

Balance at

 

Quoted prices in
active markets for
identical assets

 

Significant other
observable inputs

 

Significant
unobservable
inputs

 

(in thousands)

 

March 31, 2011

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities (MBS)

 

$

398,394

 

$

 

$

398,394

 

$

 

Private-label MBS

 

2,390

 

 

 

2,390

 

U.S. government agencies

 

55,454

 

 

55,454

 

 

Trust preferred securities

 

95,845

 

85,975

 

9,870

 

 

Corporate debt securities

 

55,010

 

 

55,010

 

 

Municipal securities

 

328

 

 

328

 

 

Total available for sale securities

 

$

607,421

 

$

85,975

 

$

519,056

 

$

2,390

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

Cash flow hedge - interest rate swap

 

$

508

 

$

 

$

508

 

$

 

Reverse interest rate swap

 

4,278

 

 

4,278

 

 

Total derivative assets

 

$

4,786

 

$

 

$

4,786

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

Cash flow hedge - interest rate swap

 

$

921

 

$

 

$

921

 

$

 

Reverse interest rate swap

 

4,534

 

 

4,534

 

 

Total derivative liabilities

 

$

5,455

 

$

 

$

5,455

 

$

 

 

 

 

Fair value measurements using:

 

 

 

Balance at

 

Quoted prices in
active markets for
identical assets

 

Significant other
observable inputs

 

Significant
unobservable
inputs

 

(in thousands)

 

December 31, 2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities (MBS)

 

$

407,977

 

$

 

$

405,545

 

$

 

Private-label MBS

 

2,432

 

 

 

2,432

 

U.S. government agencies

 

80,619

 

 

80,619

 

 

Trust preferred securities

 

88,308

 

79,093

 

9,215

 

 

Corporate debt securities

 

59,595

 

 

59,595

 

 

Municipal securities

 

945

 

 

945

 

 

Total available for sale securities

 

$

637,444

 

$

79,093

 

$

555,919

 

$

2,432

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

Cash flow hedge - interest rate swap

 

$

504

 

$

 

$

504

 

$

 

Reverse interest rate swap

 

4,840

 

 

4,840

 

 

Total derivative assets

 

$

5,344

 

$

 

$

5,344

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

Cash flow hedge - interest rate swap

 

$

1,712

 

$

 

$

1,712

 

$

 

Reverse interest rate swap

 

5,106

 

 

5,106

 

 

Total derivative liabilities

 

$

6,818

 

$

 

$

6,818

 

$

 

 

A reconciliation of the beginning and ending balances of assets measured at fair value, on a recurring basis, using Level 3 inputs follows:

 

(in thousands)

 

For the three
months ended
March 31, 2011

 

For the year
ended
December 31, 2010

 

Beginning balance

 

$

2,432

 

2,373

 

Transfers in

 

 

 

Realized loss on OTTI

 

(234

)

(451

)

Paydowns

 

(170

)

(714

)

Net accretion (amortization)

 

59

 

158

 

Unrealized gain included in comprehensive income

 

303

 

1,066

 

Ending balance

 

$

2,390

 

2,432

 

 

26



Table of Contents

 

Fair value is used on a nonrecurring basis to evaluate certain financial assets and financial liabilities in specific circumstances.  The following tables present the Company’s assets measured at fair value on a nonrecurring basis at March 31, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

 

 

Fair value measurements using:

 

 

 

Balance at

 

Quoted prices in
active markets for
identical assets

 

Significant
other
observable
inputs

 

Significant
unobservable
inputs

 

(in thousands)

 

March 31, 2011

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Impaired loans (net of allowance):

 

$

45,001

 

$

 

$

 

$

45,001

 

 

During the three months ended March 31, 2011, the Company recorded a provision for loan losses of $4.9 million and charged-off $6.3 million of impaired loans.

 

 

 

Fair value measurements using:

 

 

 

Balance at

 

Quoted prices in
active markets for
identical assets

 

Significant
other
observable
inputs

 

Significant
unobservable
inputs

 

(in thousands)

 

December 31, 2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Impaired loans (net of allowance):

 

$

47,616

 

$

 

$

 

$

47,616

 

 

During the year ended December 31, 2010, the Company recorded a provision for loan losses of $42.1 million and charge-offs on impaired loans of $44.1 million.

 

Fair value is also used on a nonrecurring basis for nonfinancial assets and nonfinancial liabilities such as foreclosed assets, other real estate owned, intangible assets, nonfinancial assets and liabilities evaluated in a goodwill impairment analysis and other nonfinancial assets measured at fair value for purposes of assessing impairment.  A description of the valuation methodologies used for nonfinancial assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

 

Other real estate owned (OREO) — OREO represents real property acquired by the Company either through foreclosure or through a deed in lieu thereof from the borrower.  The fair value of OREO is based on property appraisals adjusted at management’s discretion to reflect anticipated declines in the fair value of properties since the time the appraisal analysis was performed.  It has been the Company’s experience that appraisals quickly become outdated due to the volatile real-estate environment.  Therefore, the inputs used to determine the fair value of OREO fall within Level 3.

 

Intangible assets — Intangible assets consist of a non-amortizing trade name that was initially recorded at fair value.  Intangible assets are subject to impairment testing whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  The fair value of intangible assets is based on an income approach using a present value model, considered a Level 3 input by the Company.

 

The following tables present the Company’s nonfinancial assets measured at fair value on a nonrecurring basis at March 31, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

 

 

Fair value measurements using:

 

 

 

 

 

Balance at

 

Quoted prices in
active markets for
identical assets

 

Significant
other
observable
inputs

 

Significant
unobservable inputs

 

Total loss
for the three
months ended

 

(in thousands)

 

March 31, 2011

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

March 31, 2011

 

OREO

 

$

24,822

 

$

 

$

 

$

24,822

 

$

(1,101

)

 

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Fair value measurements using:

 

 

 

 

 

Balance at

 

Quoted prices in
active markets for
identical assets

 

Significant
other
observable
inputs

 

Significant
unobservable inputs

 

Total gain (loss) for
the year ended

 

(in thousands)

 

December 31, 2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

December 31, 2010

 

OREO

 

$

26,416

 

$

 

$

 

$

26,416

 

$

(7,392

)

Tradename

 

 

 

 

 

(149

)

 

In accordance with ASC 310, the fair value of OREO recorded as an asset is reduced by estimated selling costs.  The following table is a reconciliation of the fair value measurement of OREO disclosed pursuant to ASC 820 to the amount recorded on the consolidated balance sheet:

 

 

 

At

 

At

 

(in thousands)

 

March 31, 2011

 

December 31, 2010

 

OREO recorded at fair value

 

$

24,822

 

$

26,416

 

Estimated selling costs

 

(1,241

)

(1,321

)

OREO

 

$

23,581

 

$

25,095

 

 

OREO valuation adjustments and additional gains or losses at the time of sales are recognized in current earnings under the caption “Loss on securities, other assets and other real estate owned.”  Below is a summary of OREO transactions during the three months ended March 31, 2011:

 

(in thousands)

 

 

OREO

 

At December 31, 2010

 

 

$

25,095

 

Foreclosed loans

2,833

 

 

 

Charge-offs

(1,266

)

 

 

Transferred in

 

 

1,567

 

OREO sales

 

 

(1,980

)

Net loss on sale and valuation adjustments

 

 

(1,101

)

At March 31, 2011

 

 

23,581

 

Estimated selling costs

 

 

1,241

 

OREO recorded at fair value

 

 

$

24,822

 

 

The following table includes the estimated fair value of the Company’s financial instruments. The methodologies for estimating the fair value of financial assets and financial liabilities measured at fair value on a recurring and nonrecurring basis are discussed above.  The methodologies for estimating the fair value for other financial assets and financial liabilities are discussed below.  The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts at March 31, 2011 and December 31, 2010.

 

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Table of Contents

 

 

 

At March 31, 2011

 

At December 31, 2010

 

 

 

 

 

Estimated

 

 

 

Estimated

 

 

 

Carrying

 

fair

 

Carrying

 

fair

 

(in thousands)

 

value

 

value

 

value

 

value

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

88,380

 

$

88,380

 

$

24,166

 

$

24,166

 

Restricted cash

 

8,518

 

8,518

 

15,872

 

15,872

 

Investment securities available for sale

 

594,584

 

607,421

 

637,444

 

637,444

 

Investment securities held to maturity

 

255

 

262

 

262

 

270

 

Other investments

 

7,973

 

7,973

 

6,962

 

6,962

 

Loans — net

 

1,574,169

 

1,576,845

 

1,577,835

 

1,562,844

 

Accrued interest receivable

 

8,573

 

8,573

 

8,081

 

8,081

 

Interest rate swaps

 

4,786

 

4,786

 

5,344

 

5,344

 

Bank-owned life insurance

 

36,342

 

36,342

 

36,043

 

36,043

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,933,284

 

$

1,934,556

 

$

1,889,368

 

$

1,891,107

 

Other short-term borrowings

 

 

 

14,012

 

14,012

 

Securities sold under agreements to repurchase

 

157,674

 

159,327

 

157,690

 

154,776

 

Accrued interest payable

 

666

 

666

 

930

 

930

 

Junior subordinated debentures

 

72,166

 

72,166

 

72,166

 

72,166

 

Subordinated notes payable

 

20,984

 

18,521

 

20,984

 

18,610

 

Interest rate swaps

 

5,455

 

5,455

 

6,818

 

6,818

 

 

The estimation methodologies utilized by the Company are summarized as follows:

 

Cash, cash equivalents and restricted cash — The carrying amount of cash, cash equivalents and restricted cash, is a reasonable estimate of fair value.

 

Other investments — The estimated fair value of other investments approximates their carrying value.

 

Loans — The fair value of loans is estimated by discounting future contractual cash flows using the estimated market rate that reflects credit and liquidity risk inherent in the loans. In computing the estimate of fair value for all loans, the estimated cash flows and/or carrying value have been reduced by specific and general reserves for loan losses.

 

Accrued interest receivable/payable — The carrying amount of accrued interest receivable/payable is a reasonable estimate of fair value due to the short-term nature of these amounts.

 

Bank-owned life insurance — The carrying amount of bank-owned life insurance is based on the cash surrender value of the policies and is a reasonable estimate of fair value.

 

Deposits — The fair value of certificates of deposit is estimated by discounting the expected life using an index of the U.S. Treasury curve. Non-maturity deposits are reflected at their carrying value for purposes of estimating fair value.

 

Short-term borrowings — The estimated fair value of short-term borrowings approximates their carrying value, due to their short-term nature.

 

Securities sold under agreements to repurchase — Estimated fair value is based on discounting cash flows for comparable instruments.

 

Junior subordinated debentures — The estimated fair value of junior subordinated debentures approximates their carrying value, due to the variable interest rate paid on the debentures.

 

Subordinated notes payable — The estimated fair value of subordinated notes payable is based on discounting cash flows for comparable instruments.

 

Commitments to extend credit and standby letters of credit — The Company’s off-balance sheet commitments are funded at current market rates at the date they are drawn upon. It is management’s opinion that the fair value of these commitments would approximate their carrying value, if drawn upon.

 

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Table of Contents

 

The fair value estimates presented herein are based on pertinent information available to management at March 31, 2011 and December 31, 2010. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 

13.                                    Regulatory Matters

 

The following table shows capital amounts, ratios and regulatory thresholds at March 31, 2011:

 

At March 31, 2011

 

 

 

 

 

(in thousands)

 

Company

 

Bank

 

 

 

 

 

 

 

Shareholders’ equity (GAAP capital)

 

$

205,658

 

$

212,266

 

Disallowed intangible assets

 

(3,620

)

 

Unrealized gain on available for sale securities

 

(7,959

)

(7,959

)

Unrealized (gain) loss on cash flow hedges

 

257

 

(199

)

Subordinated debentures

 

65,985

 

 

Disallowed deferred tax asset

 

(8,860

)

(2,224

)

Other deductions

 

(128

)

 

Tier I regulatory capital

 

$

251,333

 

$

201,884

 

 

 

 

 

 

 

Subordinated notes payable and debentures

 

$

24,999

 

$

 

Allowance for loan losses

 

24,692

 

24,344

 

Total risk-based regulatory capital

 

$

301,024

 

$

226,228

 

 

At March 31, 2011

 

Company

 

Bank

 

 

 

Risk-based

 

Leverage

 

Risk-based

 

Leverage

 

(in thousands)

 

Tier I

 

Total capital

 

Tier I

 

Tier I

 

Total capital

 

Tier I

 

Regulatory capital

 

$

251,333

 

$

301,024

 

$

251,333

 

$

201,884

 

$

226,228

 

$

201,884

 

Well-capitalized requirement

 

116,280

 

193,800

 

119,953

 

114,608

 

191,014

 

117,836

 

Regulatory capital - excess

 

$

135,053

 

$

107,224

 

$

131,381

 

$

87,276

 

$

35,214

 

$

84,048

 

Capital ratios

 

13.0

%

15.5

%

10.5

%

10.6

%

11.8

%

8.6

%

Minimum capital requirement

 

4.0

%

8.0

%

4.0

%

4.0

%

8.0

%

4.0

%

Well capitalized requirement(1)

 

6.0

%

10.0

%

5.0

%

6.0

%

10.0

%

5.0

%

 


(1) The ratios for the well-capitalized requirement are only applicable to the Bank.  However, the Company manages its capital position as if the requirement applies to the consolidated entity and has presented the ratios as if they also applied to the Company.

 

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Table of Contents

 

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

 

This discussion should be read in conjunction with our condensed 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 to consolidated financial statements included in our Form 10-K for the year ended December 31, 2010. For a discussion of the segments included in our principal activities, see Note 11 to the condensed consolidated 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 professionals, small and medium-sized businesses, and high-net-worth individuals. Our operating segments include: commercial banking, investment banking, wealth management and insurance.

 

Earnings are derived primarily from our net interest income, which is interest income less interest expense, and our noninterest income earned from fee-based business lines and banking service fees, offset by noninterest expense. As the majority of our assets are interest-earning and our liabilities are interest-bearing, changes in interest rates impact our net interest margin, the largest component of our operating revenue (which is defined as net interest income plus noninterest income). We manage our interest-earning assets and interest-bearing liabilities to reduce the impact of interest rate changes on our operating results. We also have focused on reducing our dependency on our net interest margin by increasing our noninterest income.

 

Industry Overview

 

Information reviewed by the Federal Open Market Committee (FOMC) in March 2011 indicated that the economic recovery is continuing to strengthen and the labor market is improving.  Consumer spending and business investment has expanded, but the housing market continues to be depressed.  Data through January 2011 for the S&P/Case-Shiller Home Price Indices showed further deceleration in annual growth rates from December 2010. This marked the sixth monthly decline in the indices.  While certain commodity prices have increased, the overall risk of long-term inflation has remained stable. Thus, the FOMC has maintained the target range for the federal funds rate at 0-25 basis points, with the expectation that economic conditions will warrant maintaining this range for an extended period.  The FOMC also reaffirmed its intention to continue its quantitative easing policy and will purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011 to increase the money supply.

 

The unemployment rate decreased from 9.4% in December 2010 to 8.8% at March 2011.  This marks the fourth consecutive month that the unemployment rate has fallen and is the lowest rate since March 2009.  Bank failures have also continued to weigh on the industry and have increased assessment rates for all banks.  During 2009, 140 banks failed and went into receivership with the FDIC, causing estimated losses of $35.6 billion to the Depository Insurance Fund.  In 2010, another 157 banks went into receivership, causing an additional $24.2 billion in losses.  The number of failures in 2010 was an 18-year high.  In 2011, the FDIC has taken possession of 28 banks, including two banks in Colorado and one bank in Arizona.  The FDIC’s “problem list” stood at 884 at December 31, 2010, up from 702 at the end of 2009 and 252 at the end of 2008.

 

In the fourth quarter of 2010, FDIC-insured commercial banks reported a combined net income of $21.7 billion, the highest level in two years.  Full-year net income for 2010 of $87.5 billion was also the highest since 2007.  Driving the increase in earnings were reductions in loan loss provisions and goodwill impairments.  More than two out of three FDIC-insured institutions reported improved year-over-year earnings.  The percentage of unprofitable institutions fell to 21% in 2010, from 30.6 percent in 2009.  This is the first time in six years that the percentage of institutions reporting a loss has declined.  However, operating revenue growth continues to be a challenge for the industry, growing only 1.7% over 2009 and declining 1.3% in the fourth quarter of 2010 from the third quarter of 2010.  The sluggish revenue growth has been primarily attributed to declining loan balances and a fall in deposit service charges.

 

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Table of Contents

 

Financial and Operational Highlights

 

Noted below are some of the Company’s significant financial performance measures and operational results for the first three months of 2011:

 

·            Net income for the three months ended March 31, 2011 was $3.2 million, compared to a net loss of $4.7 million for the same period in 2010.

 

·            Diluted earnings per share for the three months ended March 31, 2011 was $0.06, compared to a diluted loss per share of $0.15 for the same period in 2010.

 

·            Earnings for the three months ended March 31, 2011 were negatively impacted by valuation losses of $1.4 million. The majority of the losses were on OREO properties. Valuation adjustments and losses for the first quarter of 2010 were also $1.4 million.

 

·            Net interest income on a tax-equivalent basis was $24.4 million for the three months ended March 31, 2011, compared to $24.9 million for the same period in 2010.

 

·            The net interest margin on a tax-equivalent basis was 4.41% for the three months ended March 31, 2011, compared to 4.52% for the same period in 2010.

 

·            Gross loans decreased $7.6 million from December 31, 2010.

 

·            Provision for loan and credit losses for the three months ended March 31, 2011 was $1.6 million, compared to $13.8 million for the first quarter of 2010.  The provision for loan losses has decreased for seven consecutive quarters since it peaked in the second quarter 2009 at $35.2 million.

 

·            Net loan charge-offs totaled $5.5 million for the three months ended March 31, 2011, or 1.4% annualized of average loans during the period, compared to 3.9% annualized for the same period in 2010.

 

·            Nonperforming assets decreased to $64.0 million or 2.7% of total assets at March 31, 2011, compared to $67.8 million or 2.8% of total assets at December 31, 2010.

 

·            The allowance for loan and credit losses decreased to 3.8% of total loans at March 31, 2011, from 4.0% at December 31, 2010.

 

·            The Company’s total risk-based capital ratio was 15.5% at both March 31, 2011 and December 31, 2010.

 

Critical Accounting Policies

 

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which 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. 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 may be highly uncertain at the time of the estimate. Different estimates we could reasonably have used, or changes in the assumptions that could occur, could have a material effect on our financial condition or results of operations. In addition to the discussion on fair value measurements and deferred taxes below, a description of our critical accounting policies was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Fair Value Measurements.  The Company measures or monitors certain assets and liabilities on a fair value basis in accordance with GAAP.  ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability.  As a basis for considering market participant

 

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Table of Contents

 

assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Fair value may be used on a recurring basis for certain assets and liabilities such as available for sale securities and derivatives in which fair value is the primary basis of accounting.  Similarly, fair value may be used on a nonrecurring basis to evaluate certain assets or liabilities such as impaired loans and other real estate owned (OREO).  Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions in accordance with ASC 820 to determine the instrument’s fair value.  At March 31, 2011, 25.4% or $612.2 million of total assets represented assets recorded at fair value on a recurring basis.  At March 31, 2011, 0.3% or $5.5 million of total liabilities represented liabilities recorded at fair value on a recurring basis.  Assets recorded at fair value on a nonrecurring basis represented $45.0 million or 1.9% of total assets.

 

At March 31, 2011, the Company holds, as part of its investment portfolio, available for sale securities reported at fair value consisting of MBS, government agencies, municipal securities, and corporate debt securities.  The fair value of the majority of these securities are determined using widely accepted valuation techniques, including matrix pricing and broker-quote based applications, considered Level 2 inputs.  The Company also holds trust preferred securities the majority of which are recorded at fair value based on quoted market prices, considered by the Company Level 1 inputs.  Certain private-label MBS valued using broker-dealer quotes based on proprietary broker models, which are considered by the Company an unobservable input (Level 3), totaled $2.4 million at March 31, 2011.  Investments incorporating Level 3 inputs as part of their valuation represent 0.1% of total assets at the report date.  The Company recognized losses of $0.2 million on the private-label MBS for the three months ended March 31, 2011.  Unrealized losses on the private-label MBS of $1.6 million were recorded in accumulated other comprehensive income at March 31, 2011.

 

The Company uses interest rate swaps as part of its cash flow strategy to manage its interest rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. To comply with the provisions of ASC 820, credit valuation adjustments are incorporated into the valuation to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs (i.e. estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties).  However, at March 31, 2011 and December 31, 2010, the Company has concluded that the impact of the credit valuation adjustments on the overall valuation of its derivative positions is not significant.  Therefore, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 

Certain collateral-dependent impaired loans are reported at the fair value of the underlying collateral.  Impairment is measured based on the fair value of the collateral, which is typically derived from appraisals taking into consideration prices in observed transactions involving similar assets and similar locations, in accordance with GAAP.  The fair value of other impaired loans is measured using a discounted cash flow analysis.

 

OREO represents real property taken by the Bank either through foreclosure or through a deed in lieu thereof from the borrower.  At the time of foreclosure, OREO is measured at fair value, less selling costs, which becomes its new costs basis.  Subsequent to acquisition, OREO is carried at the lower of cost or fair value, less selling costs.  Fair values are based on property appraisals, generally considered a Level 2 input by the Company.  However, where the Company has adjusted an appraisal valuation downward due to its expectation of market conditions, the adjusted value is considered a Level 3 input.

 

Deferred Tax Assets.  At March 31, 2011, the Company has recorded a net deferred tax asset of $15.4 million which relates primarily to expected future deductions arising in large part from the allowance for loan losses.  Since there is no absolute assurance that these assets will be realized, the Company evaluates its ability to carryback losses, its tax planning strategies and forecasts of future earnings to determine the need for a valuation allowance on these assets.  If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance may be established.

 

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Table of Contents

 

We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income.  These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.  At March 31, 2011, the Company has a valuation allowance of $15.6 million that was established in 2010.  The Company did not increase or decrease the valuation allowance during the first quarter of 2011.  An additional valuation allowance for deferred tax assets may be required if the amounts of taxes recoverable through loss carry backs decline, if we project lower levels of future taxable income, or we project lower levels of tax planning strategies.  Such additional valuation allowance would be established through a charge to income tax expense that would adversely affect our operating results.

 

Financial Condition

 

Total assets of $2.4 billion at March 31, 2011 were comparable to total assets at December 31, 2010.  The following paragraphs discuss changes in the relative mix of certain assets classes and reasons for such changes.

 

Investments.  The Company manages its investment portfolio to provide interest income and to meet the collateral requirements for public deposits, our customer repurchase program and wholesale borrowings. Investments decreased slightly to 25.5% of total assets at March 31, 2011, from 26.9% at December 31, 2010.

 

The investment portfolio is primarily comprised of MBS explicitly (GNMA) and implicitly (FNMA and FHLMC) backed by the U.S. Government. The portfolio does not hold any securities exposed to sub-prime mortgage loans. The investment portfolio also includes single-issuer trust preferred securities and corporate debt securities. The corporate debt securities portfolio is mainly comprised of four issuers in the Fortune 100.  The entire corporate debt securities portfolio is investment grade with a rating of BBB+ or better.  None of the issuing institutions are in default nor have interest payments on the trust preferred securities been deferred.

 

Purchases of $38.3 million during the quarter were primarily comprised of MBS and trust preferred securities.  Maturities and paydowns of $56.8 million were attributed to the MBS and agencies portfolio.  The net unrealized gain on available-for-sale securities increased $1.4 million to $12.8 million at March 31, 2011 from $11.4 million at December 31, 2010.  OTTI of $0.2 million on two private-label MBS was recognized during the first quarter of 2011. At March 31, 2011, an additional unrealized loss of $1.6 million on private-label MBS was recognized in other comprehensive income. The Company may recognize additional losses on these securities if the underlying credit metrics were to worsen in the future.

 

 

 

 

 

 

 

 

 

% of

 

 

 

March 31, 2011

 

% of

 

unrealized

 

unrealized

 

AVAILABLE FOR SALE SECURITIES

 

Book value

 

Fair value

 

portfolio

 

gain (loss)

 

gain (loss)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

388,704

 

$

398,394

 

65.5

%

$

9,690

 

75.5

%

U.S. government agencies

 

55,204

 

55,454

 

9.1

%

250

 

2.0

%

Trust preferred securities

 

92,814

 

95,845

 

15.8

%

3,031

 

23.6

%

Corporate debt securities

 

53,594

 

55,010

 

9.1

%

1,416

 

11.0

%

Municipal securities

 

326

 

328

 

0.1

%

2

 

0.0

%

Private label MBS

 

3,942

 

2,390

 

0.4

%

(1,552

)

(12.1

)%

Total available for sale securities

 

$

594,584

 

$

607,421

 

100.0

%

$

12,837

 

100.0

%

 

The Company also has Other Investments carried at cost with a value of $8.0 million at March 31, 2011, an increase of $1.0 million from $7.0 million at December 31, 2010.  During the three months ended March 31, 2011, the Company bought $1.0 million of FHLB stock.  The Company’s investment is primarily related to a borrowing base maintained with the FHLB.  These balances are dependent upon the Company’s liquidity position.  To the extent that the Company’s need for wholesale funding increases, the Company may purchase additional stock in the future.

 

Loans.  Gross loans were $1.64 billion at March 31, 2011 and December 31, 2010.  During the first quarter of 2011 the Company advanced $72.4 million in new credit relationships and an additional $62.2 million on existing lines.  Credit extensions were offset by paydowns and maturities of $135.9 million and charge-offs of $6.3 million during the three months ended March 31, 2011.

 

34



Table of Contents

 

(in thousands)

 

March 31, 2011

 

December 31, 2010

 

March 31, 2010

 

LOANS

 

Amount

 

% of Portfolio

 

Amount

 

% of Portfolio

 

Amount

 

% of Portfolio

 

Commercial

 

$

562,220

 

35.7

%

$

565,145

 

35.8

%

$

566,321

 

34.2

%

Real estate - mortgage

 

776,801

 

49.4

%

783,675

 

49.7

%

832,918

 

50.3

%

Land acquisition & development

 

76,120

 

4.8

%

83,871

 

5.3

%

122,657

 

7.4

%

Real estate - construction

 

85,359

 

5.4

%

86,862

 

5.5

%

116,725

 

7.0

%

Consumer

 

99,457

 

6.3

%

94,607

 

6.0

%

72,198

 

4.4

%

Other

 

36,207

 

2.3

%

29,567

 

1.9

%

17,055

 

1.0

%

Gross loans

 

1,636,164

 

103.9

%

1,643,727

 

104.2

%

1,727,874

 

104.3

%

Less allowance for loan losses

 

(61,995

)

(3.9

)%

(65,892

)

(4.2

)%

(71,903

)

(4.3

)%

Total net loans

 

$

1,574,169

 

100.0

%

$

1,577,835

 

100.0

%

$

1,655,971

 

100.0

%

 

The overall decline of $7.6 million in loans is attributed to four loan categories:  land acquisition and development ($7.8 million); real estate — mortgage ($6.9 million); commercial ($2.9 million); and construction ($1.5 million).  These declines were offset by increases of $4.8 million and $6.6 million in the consumer and other loans categories, respectively.  The decrease in the land acquisition and development and construction loan portfolios is primarily the result of ongoing efforts to reduce high risk loan concentration levels.  Growth in the consumer and other loan categories resulted from the introduction of new products, such as jumbo mortgages and tax-exempt financing.

 

The allowance for loan losses decreased $3.9 million during the first quarter of 2011 as a result of net charge-offs of $5.5 million, offset by $1.6 million in provision for loan losses.  See the Provision and Allowance for Loan and Credit Losses section and Note 6 of this report for additional discussion.

 

Deferred Income Taxes.  Deferred income taxes decreased $1.0 million to $15.4 million at March 31, 2011 from $16.4 million at December 31, 2010. The decrease was primarily attributed to the tax effect of the net change in the allowance for loan losses.  Also contributing to the decrease was the tax effect of the change in fair value of interest rate swaps and available for sale securities.  The Company established a valuation allowance at December 31, 2010 in the amount of $15.6 million that was not adjusted during the first quarter of 2011.  An additional valuation allowance for deferred tax assets may be required if the amounts of taxes recoverable through loss carry backs decline, future taxable income levels decrease, or lower levels of tax planning strategies are anticipated.

 

Other Real Estate Owned.  OREO decreased $1.5 million to $23.6 million at March 31, 2011 from $25.1 million at December 31, 2010.  During the first quarter of 2011, the Company foreclosed on seven properties with a fair value of $1.6 million; received sales proceeds of $2.0 million; and recognized losses on OREO sales and valuation adjustments of $1.1 million. At March 31, 2011, $11.9 million OREO was in Colorado and $11.7 million was in Arizona.

 

Other Assets.  Other Assets decreased by $11.3 million to $38.3 million at March 31, 2011 from $49.6 million at December 31, 2010.  The change is primarily attributable to the following declines: $7.4 million in cash deposits pledged to correspondent banks as collateral for confirming letters of credit; $1.8 million in taxes receivable; $0.6 million in the fair market value of derivatives; $1.2 million in prepaid expenses (primarily prepaid FDIC insurance assessments); and $0.2 million in the value of private equity partnership investments.

 

Deposits.  Total deposits increased $43.9 million to $1.93 billion at March 31, 2011 from $1.89 billion at December 31, 2010.  The primary contributors to the increase were a $76.7 million increase in noninterest-bearing deposits and a $32.5 million increase in NOW and money market accounts.  Offsetting these increases was a $54.1 million decrease in reciprocal CDARS, which is attributed to a single customer relationship.  The CDARS program provided through a third party and is designed to provide full FDIC insurance on deposit amounts larger than the stated maximum by exchanging or reciprocating larger depository relationships with other member banks. Our depositors’ funds are broken into smaller amounts and placed with other banks that are members of the network. Each member bank issues CDs in amounts under $250,000, so the entire deposit is eligible for FDIC insurance. CDARS are technically brokered deposits; however, the Company considers the reciprocal deposits placed through the CDARS program as core funding due to the customer relationship that generated the transaction and does not report the balances as brokered sources in its internal or external financial reports. Noninterest bearing deposits represented 39.2% of total deposits at March 31, 2011, compared to 36.1% at December 31, 2010.

 

35



Table of Contents

 

(in thousands)

 

March 31, 2011

 

December 31, 2010

 

March 31, 2010

 

DEPOSITS AND CUSTOMER REPURCHASE AGREEMENTS

 

Amount

 

% of Portfolio

 

Amount

 

% of Portfolio

 

Amount

 

% of Portfolio

 

NOW and money market

 

$

696,114

 

33.2

%

$

663,572

 

32.4

%

$

720,202

 

34.6

%

Savings

 

9,590

 

0.5

%

9,144

 

0.5

%

10,780

 

0.4

%

Eurodollar

 

91,042

 

4.4

%

105,793

 

5.2

%

102,029

 

4.9

%

Certificates of deposits under $100,000

 

39,860

 

1.9

%

41,845

 

2.0

%

49,779

 

2.4

%

Certificates of deposits $100,000 and over

 

234,830

 

11.2

%

229,701

 

11.2

%

336,443

 

16.1

%

Reciprocal CDARS

 

103,568

 

5.0

%

157,679

 

7.7

%

186,900

 

9.0

%

Brokered deposits

 

 

0.0

%

100

 

0.0

%

1,397

 

0.1

%

Total interest-bearing deposits

 

1,175,004

 

56.2

%

1,207,834

 

59.0

%

1,407,530

 

67.5

%

Noninterest-bearing demand deposits

 

758,280

 

36.3

%

681,534

 

33.3

%

532,990

 

25.6

%

Customer repurchase agreements

 

157,674

 

7.5

%

157,690

 

7.7

%

142,944

 

6.9

%

Total deposits and customer repurchase agreements

 

$

2,090,958

 

100.0

%

$

2,047,058

 

100.0

%

$

2,083,464

 

100.0

%

 

Securities Sold Under Agreements to Repurchase.  Securities sold under agreement to repurchase are transacted with customers as a way to enhance our customers’ interest-earning ability.  The Company does not consider customer repurchase agreements to be a wholesale funding source, but rather an additional treasury management service provided to our customer base. Our customer repurchase agreements are based on an overnight investment sweep that can fluctuate based on our customers’ operating account balances. Securities sold under agreements to repurchase at March 31, 2011 were comparable to balances at December 31, 2010.

 

Other Short-Term Borrowings.  Other short-term borrowings normally consist of federal funds purchased and overnight and term borrowings from the Federal Home Loan Bank (FHLB).  Other short-term borrowings are used as part of our liquidity management strategy and fluctuate based on the Company’s cash position. The Company’s wholesale funding needs are largely dependent on core deposit levels which can be volatile in uncertain economic conditions and sensitive to competitive pricing. Significant growth in deposits and a reduction in the loan portfolio since the beginning of 2009 reduced the Company’s need for wholesale borrowings.  At March 31, 2011 there were no short-term borrowings outstanding, a decrease of $14.0 million from December 31, 2010.  However, if we are unable to retain deposits or maintain deposit balances at a level sufficient to fund asset growth, our composition of interest-bearing liabilities will shift toward additional wholesale funds, which historically have a higher interest cost than our core deposits.

 

Accrued Interest and Other Liabilities.  Accrued interest and other liabilities decreased $15.5 million, or 39.7%, to $23.5 million at March 31, 2011, compared to $38.9 million at December 31, 2010.  The decrease is due to a decline of $12.1 million in liabilities accrued for investment purchases in 2010 and settled in 2011.  Also contributing to the decline in other liabilities was a $1.7 million decrease in accrued bonuses due to 2010 payments made in the first quarter, offset by 2011 bonus accruals.  The fair value of interest rate swaps in a liability position decreased $1.4 million from December 31, 2010.

 

36



Table of Contents

 

Results of Operations

 

Overview

 

The following table presents the condensed consolidated statements of operations for the three months ended March 31, 2011 and 2010.

 

 

 

For the three months
ended March 31,

 

Increase/(decrease)

 

(in thousands)

 

2011

 

2010

 

Amount

 

%

 

Interest income

 

$

28,191

 

$

29,919

 

$

(1,728

)

(5.8

)%

Interest expense

 

3,947

 

5,166

 

(1,219

)

(23.6

)%

NET INTEREST INCOME BEFORE PROVISION

 

24,244

 

24,753

 

(509

)

(2.1

)%

Provision for loan losses

 

1,640

 

13,820

 

(12,180

)

(88.1

)%

NET INTEREST INCOME AFTER PROVISION

 

22,604

 

10,933

 

11,671

 

106.8

%

Noninterest income

 

8,032

 

6,885

 

1,147

 

16.7

%

Noninterest expense

 

25,451

 

26,273

 

(822

)

(3.1

)%

INCOME (LOSS) BEFORE INCOME TAXES

 

5,185

 

(8,455

)

13,640

 

(161.3

)%

Provision (benefit) for income taxes

 

1,959

 

(3,436

)

5,395

 

(157.0

)%

NET INCOME (LOSS)

 

3,226

 

(5,019

)

8,245

 

(164.3

)%

Noncontrolling interest

 

 

322

 

(322

)

100.0

%

NET INCOME (LOSS) AFTER NONCONTROLLING INTEREST

 

$

3,226

 

$

(4,697

)

$

7,923

 

(168.7

)%

 

The annualized return on average assets for the three months ended March 31, 2011 and 2010 was 0.54% and (0.78)%, respectively.  The annualized return on average shareholders’ equity for the three months ended March  31, 2011 and 2010 was 6.38% and (8.26)%, respectively. Improvement in return on average assets and shareholders’ equity is primarily attributable to a reduction in the provision for loan losses of $12.2 million. For the three months ended March 31, 2011 and 2010, the efficiency ratio was 74.63% and 77.75%, respectively.

 

Net Interest Income.  The largest component of our net income is normally our net interest income.  Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.

 

As the majority of our assets are interest-earning and our liabilities are interest-bearing, changes in interest rates may impact our net interest margin. The Federal Open Market Committee (“FOMC”) uses the fed funds rate, which is the interest rate used by banks to lend to each other, to influence interest rates and the national economy. Changes in the fed funds rate have a direct correlation to changes in the prime rate, the underlying index for most of the variable-rate loans issued by the Company.  The FOMC has held the target federal funds rate at a range of 0-25 basis points since December 2008.

 

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 on a taxable equivalent basis, and the average rate earned or paid for the three months ended March 31, 2011 and 2010.

 

37



Table of Contents

 

 

 

Three months ended March 31,

 

 

 

 

 

2011

 

 

 

 

 

2010

 

 

 

 

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

 

 

Average

 

earned

 

yield

 

Average

 

earned

 

yield

 

(in thousands)

 

balance

 

or paid

 

or cost (1)

 

balance

 

or paid

 

or cost (1)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and other

 

$

39,250

 

$

37

 

0.38

%

$

17,204

 

$

19

 

0.44

%

Investment securities (2)

 

629,085

 

5,991

 

3.81

%

537,517

 

5,933

 

4.42

%

Loans (2), (3)

 

1,645,283

 

22,369

 

5.44

%

1,754,384

 

24,138

 

5.50

%

Allowance for loan losses

 

(65,855

)

 

 

 

 

(74,330

)

 

 

 

 

Total interest-earning assets

 

2,247,763

 

28,397

 

4.89

%

2,234,775

 

30,090

 

5.20

%

Noninterest-earning assets

 

163,767

 

 

 

 

 

196,244

 

 

 

 

 

Total assets

 

$

2,411,530

 

 

 

 

 

$

2,431,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW and money market

 

$

676,374

 

$

1,106

 

0.66

%

$

703,959

 

$

1,330

 

0.77

%

Savings

 

9,363

 

5

 

0.22

%

10,406

 

10

 

0.39

%

Eurodollar

 

97,667

 

182

 

0.75

%

111,958

 

262

 

0.94

%

Certificates of deposit

 

 

 

 

 

 

 

 

 

 

 

 

 

Brokered under $100,000

 

21

 

 

1.37

%

5,616

 

30

 

2.17

%

Reciprocal CDARS

 

149,592

 

263

 

0.71

%

174,013

 

506

 

1.18

%

Under $100,000

 

41,291

 

107

 

1.05

%

51,204

 

214

 

1.69

%

$100,000 and over

 

229,409

 

589

 

1.04

%

345,324

 

1,358

 

1.59

%

Total interest-bearing deposits

 

1,203,717

 

2,252

 

0.76

%

1,402,480

 

3,710

 

1.07

%

Other borrowings

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

156,799

 

207

 

0.53

%

132,258

 

291

 

0.88

%

Other short-term borrowings

 

6,261

 

5

 

0.32

%

23,583

 

16

 

0.27

%

Long term-debt

 

93,150

 

1,483

 

6.37

%

93,150

 

1,149

 

4.93

%

Total interest-bearing liabilities

 

1,459,927

 

3,947

 

1.09

%

1,651,471

 

5,166

 

1.26

%

Noninterest-bearing demand accounts

 

721,311

 

 

 

 

 

531,742

 

 

 

 

 

Total deposits and interest-bearing liabilities

 

2,181,238

 

 

 

 

 

2,183,213

 

 

 

 

 

Other noninterest-bearing liabilities

 

24,917

 

 

 

 

 

15,935

 

 

 

 

 

Total liabilities

 

2,206,155

 

 

 

 

 

2,199,148

 

 

 

 

 

Total equity

 

205,375

 

 

 

 

 

231,871

 

 

 

 

 

Total liabilities and equity

 

$

2,411,530

 

 

 

 

 

$

2,431,019

 

 

 

 

 

Net interest income - taxable equivalent

 

 

 

$

24,450

 

 

 

 

 

$

24,924

 

 

 

Net interest spread

 

 

 

 

 

3.80

%

 

 

 

 

3.94

%

Net interest margin - taxable equivalent

 

 

 

 

 

4.41

%

 

 

 

 

4.52

%

Ratio of average interest-earning assets to average interest-bearing liabilities

 

153.96

%

 

 

 

 

135.32

%

 

 

 

 

 


(1)               Average yield or cost for the three months ended March 31, 2011 and 2010 has been annualized, and is not necessarily indicative of results for the entire year.

(2)               Yields include adjustments for tax-exempt interest income based on the Company’s effective tax rate.

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

 

Net interest income on a tax-equivalent basis for the three months ended March 31, 2011, decreased $0.5 million over the prior-year period.  The decrease was driven primarily by a reduction in the loan portfolio offset in part by an overall reduction in interest costs. Declining deposit interest costs were attributed both to changes in deposit composition and rate declines.  Higher yielding CDs and money markets have shifted to noninterest bearing demand deposits.  However, rates associated with the junior subordinated debt, which were effectively fixed late in the first quarter of 2010, increased (see Note 8 to the condensed consolidated financial statements). For the three months ending March 31, 2011, compared to the same period in 2010, the yield on average interest-earning assets decreased 31 basis points to 4.89%, while rates on average interest-bearing liabilities decreased by 17 basis points to 1.09%. The Company’s improved liquidity position over the past year has negatively impacted the net interest margin as we have maintained larger balances in cash and investment securities that have a lower yield than the loan portfolio. The Company expects to redeploy its excess liquidity into higher yielding loans in future quarters.

 

38



Table of Contents

 

Noninterest Income

 

The following table presents noninterest income for the three months ended March 31, 2011 and 2010.

 

 

 

 

 

For the three months
ended March 31,

 

Increase/(decrease)

 

(in thousands)

 

2011

 

2010

 

Amount

 

%

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

Service charges

 

$

1,239

 

$

1,258

 

$

(19

)

(1.5

)%

Investment advisory and trust income

 

1,426

 

1,369

 

57

 

4.2

%

Insurance income

 

3,393

 

3,173

 

220

 

6.9

%

Investment banking income

 

744

 

301

 

443

 

147.2

%

Other income

 

1,230

 

784

 

446

 

56.9

%

Total noninterest income

 

$

8,032

 

$

6,885

 

$

1,147

 

16.7

%

 

Noninterest income includes revenues earned from sources other than interest income.  These sources include:  service charges and fees on deposit accounts; letters of credit and ancillary loan fees; income from investment advisory and trust services; income from life insurance and wealth transfer products; benefits brokerage; property and casualty insurance; retainer and success fees from investment banking engagements; and increases in the cash surrender value of bank-owned life insurance.

 

Service Charges.  Service charges primarily consist of fees earned from our treasury management services.  Customers are given the option to pay for these services in cash or by offsetting the fees for these services against an earnings credit that is given for maintaining noninterest-bearing deposits.  Service charges were slightly lower for the three months ended March 31, 2011, compared to the same period in 2010.

 

Investment Advisory and Trust Income.  Investment advisory and trust income for the three months ended March 31, 2011, showed improvement over the prior year period.  Fees earned are generally based on a percentage of the assets under management (AUM) and market volatility has a direct impact on earnings.

 

At March 31, 2011, discretionary AUM, comprised primarily of equity securities, increased $50.7 million to $819.2 million compared to $768.5 million one year earlier.  Total AUM (discretionary and custodial assets) was $1.59 billion at March 31, 2011 compared to $1.52 billion at March 31, 2010.

 

Insurance Income.  Insurance income is derived from three main areas: wealth transfer, benefits consulting, and property and casualty. The majority of fees earned on wealth transfer transactions are earned at the inception of the product offering in the form of commissions. Fees on these products are transactional by nature and fee income can fluctuate from period to period based on the volume and size of transactions that have been closed.  Revenue from benefits consulting and property and casualty is a more recurring revenue source as policies and contracts generally renew or rewrite on an annual or more frequent basis.

 

For the three months ended on March 31, 2011 and 2010, insurance revenues were earned from the following product lines:

 

 

 

Three months ended March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Wealth transfer and executive compensation

 

23.0

%

24.2

%

Benefits consulting

 

27.6

%

25.4

%

Property and casualty

 

47.2

%

48.3

%

Fee income

 

2.2

%

2.1

%

Total

 

100.0

%

100.0

%

 

Insurance income increased $0.2 million or 6.9% to $3.4 million during the three months ended March 31, 2011, compared to the same period in 2010, primarily attributed to an increase in commissions from employee benefits.

 

39



Table of Contents

 

Investment Banking Income.  Investment banking income includes retainer fees which are recognized over the expected term of the engagement and success fees which are recognized when the transaction is completed and collectability of fees is reasonably assured. Investment banking income is transactional by nature and will fluctuate based on the number of clients engaged and transactions successfully closed. Investment banking income for the three months ended March 31, 2011, increased $0.4 million compared to the same period in 2010 due to higher success fees earned in the current period.

 

Other Income.  Other income is comprised of increases in the cash surrender value of bank-owned life insurance, earnings on equity method investments, swap fees, merchant charges, bankcard fees, wire transfer fees, foreign exchange fees and safe deposit income.  Other income increased $0.4 million for the three months ended March 31, 2011, compared to the same period in 2010, due primarily to revenue earned on the sale of interest rate swaps to commercial banking clients.

 

Noninterest Expense

 

The following table presents noninterest expense for the three months ended March 31, 2011 and 2010:

 

 

 

For the three months
ended March 31,

 

Increase/(decrease)

 

(in thousands)

 

2011

 

2010

 

Amount

 

%

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

14,723

 

$

14,947

 

$

(224

)

(1.5

)%

Stock-based compensation expense

 

424

 

419

 

5

 

1.2

%

Occupancy expenses, premises and equipment

 

3,354

 

3,434

 

(80

)

(2.3

)%

Amortization of intangibles

 

160

 

161

 

(1

)

(0.6

)%

FDIC and other assessments

 

1,340

 

1,240

 

100

 

8.1

%

OREO and loan workout costs

 

1,193

 

1,283

 

(90

)

(7.0

)%

Net OTTI on securities recognized in earnings

 

234

 

199

 

35

 

17.6

%

Loss on securities, other assets and OREO

 

1,128

 

1,224

 

(96

)

(7.8

)%

Other operating expenses

 

2,895

 

3,366

 

(471

)

(14.0

)%

Total noninterest expense

 

$

25,451

 

$

26,273

 

$

(822

)

(3.1

)%

 

Salaries and Employee Benefits.  Salaries and employee benefits decreased $0.2 million or 1.5% during the three months ended March 31, 2011, compared to the same period in 2010, largely due to lower bonus compensation expense. Bonus compensation is based on the Company’s overall financial performance as well as performance measures specific to employees and is adjusted throughout the year. The Company’s full-time equivalent employees remained stable with 543 at the end of the first quarter of 2011 from 545 a year earlier.

 

Share-based Compensation. The Company uses share-based compensation to recruit new employees  and reward and retain existing employees.  The Company recognizes compensation costs for the grant-date fair value of awards issued to employees.  The Company expects to continue using share-based compensation in the future.

 

Occupancy Costs.  Occupancy costs consist primarily of rent, depreciation, utilities, property taxes and insurance.  Occupancy costs decreased $0.1 million during the three months ended March 31, 2011 compared to the same period in 2010, attributed primarily to declines in common area management fees of the leased facilities.

 

FDIC and Other Assessments.  FDIC and other assessments consist of premiums paid by FDIC-insured institutions and by Colorado chartered banks.  The assessments of the Colorado Division of Banking are based on statutory and risk classification factors.  The FDIC assessments are based on the balance of domestic deposits and the Company’s regulatory rating.  The increase in FDIC and other assessments for the three months ended March 31, 2011, compared to the same period in 2010 was directly related to an increase in the TLGP Transaction Account Guarantee Program assessment rate which increased beginning with the second quarter of 2010.

 

40



Table of Contents

 

OREO and Loan Workout Costs.  Carrying costs and workout expenses of nonperforming loans and OREO decreased $0.1 million or 7.0% for the three months ended March 31, 2011, compared to the same period in 2010. OREO and loan costs continue to be significant even as the Company reduced the level of its nonperforming assets. Nonperforming assets at March 31, 2011 and 2010, were $64.1 million and $100.0 million, respectively.

 

Net OTTI on Securities Recognized in Earnings.  For debt securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the credit component of OTTI is recognized in earnings.  The credit loss component is the difference between a security’s amortized cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate. The amount due to all other factors is recognized in other comprehensive income.  During the first quarter of 2011, OTTI of $0.2 million was recognized relating to two private-label MBS. At March 31, 2011, an additional unrealized loss of $1.6 million on private-label MBS was recognized in other comprehensive income. The Company may recognize additional losses on these securities if the underlying credit metrics worsen in the future.  Private-label MBS comprise 0.4% of the carrying value of the overall available for sale portfolio.

 

Loss on Securities, Other Assets, and OREO. The loss on securities, other assets and OREO was comprised of the following:

 

 

 

For the three months
ended March 31,

 

Increase (decrease)

 

(in thousands)

 

2011

 

2010

 

Amount

 

%

 

Available for sale securities

 

$

 

$

7

 

$

(7

)

100.0

%

Loans held for sale

 

 

349

 

(349

)

100.0

%

OREO

 

1,101

 

945

 

156

 

16.5

%

Other

 

27

 

(77

)

104

 

(135.1

)%

Total

 

$

1,128

 

$

1,224

 

$

(96

)

(7.8

)%

 

OREO losses for the three months ended March 31, 2011, related primarily to valuation adjustments on two properties in the portfolio.

 

Other Operating Expenses.  Other operating expenses consist primarily of business development expenses (meals, entertainment and travel), charitable donations, professional services (auditing, legal, marketing and courier), and provision expense for off-balance sheet commitments. Other operating expenses for the three months ended March 31, 2011, decreased $0.4 million compared to the prior year period, a reduction related to legal and professional services expense.

 

Provision and Allowance for Loan and Credit Losses

 

The following table presents the provision for loan and credit losses for the three months ended March 31, 2011 and 2010:

 

 

 

Three months ended March 31,

 

Increase /

 

(in thousands)

 

2011

 

2010

 

(decrease)

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

$

1,640

 

$

13,820

 

$

(12,180

)

Provison for credit losses (included in other expenses)

 

 

 

 

 

 

 

 

 

 

 

 

Total provision for loan and credit losses

 

$

1,640

 

$

13,820

 

$

(12,180

)

 

The decrease in the provision for loan and credit losses of $12.2 million for the three months ended March 31, 2011, over the prior year period is primarily attributable to a declining trend in new problem loans and an overall improvement in asset quality.  The decrease in provision for loan and credit losses during the three months ended March 31, 2010, marked the seventh consecutive quarterly decrease.  Provision for loan and credit losses peaked

 

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during the second quarter of 2009 at $35.1 million.  The Company’s improvement with respect to asset quality is consistent with overall industry trends.  The fourth quarter of 2010 marked the lowest level in loan loss provisioning for FDIC-insured institutions in more than three years and nonperforming asset balances declined for the third consecutive quarter according to the FDIC.

 

All loans are continually monitored to identify potential problems with repayment and collateral deficiency.  At March 31, 2011, the allowance for loan and credit losses was 3.79% of total loans, compared to 4.01% at December 31, 2010, and 4.17% at March 31, 2010.  The combination of slowing loan performance problems and proactive provisioning resulted in a higher ratio of allowance for loan and credit losses to nonperforming loans at March 31, 2011 (153.34%) and at December 31, 2010 (154.33%) as compared to March 31, 2010 (101.41%).  Though management believes the current allowance provides adequate coverage of potential problems in the loan portfolio as a whole, continued negative economic trends could adversely affect future earnings and asset quality.

 

The allowance for loan losses represents management’s recognition of the risks of extending credit and its evaluation of the quality of the loan portfolio. The allowance is maintained to provide for probable losses related to specifically identified loans and for losses inherent in the loan portfolio that have been incurred as of the balance sheet date. The allowance is based on various factors affecting the loan portfolio, including a review of problem loans, business conditions, historical loss experience, evaluation of the quality of the underlying collateral, and holding and disposal costs. The allowance is increased by additional charges to operating income and reduced by loans charged off, net of recoveries.

 

During the three months ended March 31, 2011, the Company had net charge-offs of $5.5 million compared to $17.0 million a year earlier.  Approximately 69% of the total year-to-date net charge-offs were generated by Colorado relationships while 31% was generated by Arizona relationships.  The great majority of net charge-offs is concentrated within three categories:  real estate — construction (59%), real estate — mortgage (17%), and land A&D (16%). Net charge-offs relating to a single Colorado relationship represented approximately 59% of total net charge-offs for the first quarter.

 

The allowance for credit losses represents management’s recognition of a separate reserve for off-balance sheet loan commitments and letters of credit.  While the allowance for loan losses is recorded as a contra-asset to the loan portfolio on the consolidated balance sheet, the allowance for credit losses is recorded in “Accrued interest and other liabilities” in the accompanying condensed consolidated balance sheet.  Although the allowances are presented separately on the balance sheet, any losses incurred from credit losses would be reported as a charge-off in the allowance for loan losses, since any loss would be recorded after the off-balance sheet commitment had been funded.  Due to the relationship of these allowances as extensions of credit underwritten through a comprehensive risk analysis, information on both the allowance for loan and credit losses positions is presented in the following table.

 

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Table of Contents

 

 

 

Three months ended

 

Year ended

 

Three months ended

 

(in thousands)

 

March 31, 2011

 

December 31, 2010

 

March 31, 2010

 

 

 

 

 

 

 

 

 

Balance of allowance for loan losses at beginning of period

 

$

65,892

 

$

75,116

 

$

75,116

 

Charge-offs:

 

 

 

 

 

 

 

Commercial

 

447

 

8,357

 

859

 

Real estate — mortgage

 

1,207

 

11,490

 

399

 

Land acquisition and development

 

1,173

 

23,077

 

14,709

 

Real estate — construction

 

3,285

 

6,181

 

1,874

 

Consumer

 

182

 

1,079

 

15

 

Other

 

 

443

 

386

 

Total charge-offs

 

6,294

 

50,627

 

18,242

 

Recoveries:

 

 

 

 

 

 

 

Commercial

 

137

 

2,361

 

554

 

Real estate — mortgage

 

248

 

451

 

7

 

Land acquisition and development

 

309

 

2,662

 

536

 

Real estate — construction

 

 

655

 

 

Consumer

 

63

 

134

 

111

 

Other

 

 

13

 

1

 

Total recoveries

 

757

 

6,276

 

1,209

 

Net charge-offs

 

(5,537

)

(44,351

)

(17,033

)

Provision for loan losses charged to operations

 

1,640

 

35,127

 

13,820

 

Balance of allowance for loan losses at end of period

 

$

61,995

 

$

65,892

 

$

71,903

 

 

 

 

 

 

 

 

 

Balance of allowance for credit losses at beginning of period

 

$

61

 

$

155

 

$

155

 

Provision for credit losses charged to operations

 

 

(94

)

 

Balance of allowance for credit losses at end of period

 

$

61

 

$

61

 

$

155

 

 

 

 

 

 

 

 

 

Total provision for loan and credit losses charged to operations

 

$

1,640

 

$

35,033

 

$

13,820

 

 

 

 

 

 

 

 

 

Ratio of net charge-offs to average loans

 

0.34

%

2.62

%

0.97

%

 

 

 

 

 

 

 

 

Average loans outstanding during the period

 

$

1,645,283

 

$

1,693,546

 

$

1,754,384

 

 

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Table of Contents

 

Nonperforming Assets

 

Nonperforming assets consist of nonaccrual loans, past due loans, repossessed assets and OREO.  The following table presents information regarding nonperforming assets as of the dates indicated:

 

 

 

At March 31,

 

At December 31,

 

At March 31,

 

(in thousands)

 

2011

 

2010

 

2010

 

Nonperforming loans:

 

 

 

 

 

 

 

Loans 90 days or more past due and still accruing interest

 

$

1,238

 

$

202

 

$

2,054

 

Nonaccrual loans:

 

 

 

 

 

 

 

Commercial

 

7,990

 

8,722

 

19,087

 

Real estate - mortgage

 

12,054

 

8,446

 

15,889

 

Land acquisition and development

 

7,819

 

9,690

 

23,559

 

Real estate - construction

 

8,829

 

12,614

 

9,531

 

Consumer and other

 

2,539

 

3,060

 

937

 

Total nonaccrual loans

 

39,231

 

42,532

 

69,003

 

Total nonperforming loans

 

40,469

 

42,734

 

71,057

 

OREO and repossessed assets

 

23,581

 

25,095

 

28,951

 

Total nonperforming assets

 

$

64,050

 

$

67,829

 

$

100,008

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

$

61,995

 

$

65,892

 

$

71,903

 

Allowance for credit losses

 

61

 

61

 

155

 

Allowance for loan and credit losses

 

$

62,056

 

$

65,953

 

$

72,058

 

Nonperforming assets to total assets

 

2.65

%

2.83

%

4.13

%

Nonperforming loans to total loans

 

2.47

%

2.60

%

4.11

%

Nonperforming loans and OREO to total loans and OREO

 

3.86

%

4.06

%

5.69

%

Allowance for Loan and Credit Losses to Total Loans (excluding loans held for sale)

 

3.79

%

4.01

%

4.17

%

Allowance for loan and credit losses to nonperforming loans

 

153.34

%

154.33

%

101.41

%

 

Of the $64.1 million in nonperforming assets, 45% were in Colorado and 55% were in Arizona at March 31, 2011.  OREO and repossessed assets represent 37% of total nonperforming assets while the remaining 63% is comprised of nonaccrual and 90-day past due and still accruing interest loans.  Nonperforming loans are concentrated primarily within the real estate mortgage (30%), commercial (22%), and construction (22%) categories.  Nonperforming assets have improved during the last two quarters.  The Company has dedicated significant resources to the workout and resolution of nonaccrual loans and OREO and continues to closely monitor the financial condition of its clients.

 

Segment Results

 

Prior to September 30, 2010, the Company reported five operating segments: Commercial Banking, Investment Banking, Investment Advisory and Trust, Insurance and Corporate Support and Other.  In third quarter of 2010 the Company changed its segments, which included renaming Investment Advisory and Trust to Wealth Management.  All prior period disclosures in the following tables have been adjusted to conform to the current presentation.

 

Certain financial metrics and discussion of the results for the three months ended March 31, 2011 and 2010, of each operating segment, are presented below.

 

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Table of Contents

 

Commercial Banking

 

 

 

Commercial Banking

 

 

 

 

 

 

 

Three months ended March 31,

 

Increase/(decrease)

 

(in thousands)

 

2011

 

2010

 

Amount

 

%

 

Income Statement

 

 

 

 

 

 

 

 

 

Net interest income

 

$

25,437

 

$

25,471

 

$

(34

)

(0

)%

Provision for loan losses

 

1,327

 

11,361

 

(10,034

)

(88

)%

Noninterest income

 

2,459

 

2,396

 

63

 

3

%

Noninterest expense

 

8,098

 

8,779

 

(681

)

(8

)%

Provision for income taxes

 

6,952

 

2,503

 

4,449

 

178

%

Net income before management fees and overhead

 

11,519

 

5,224

 

6,295

 

121

%

Management fees and overhead allocations, net of tax

 

6,145

 

6,076

 

69

 

1

%

Net income (loss)

 

$

5,374

 

$

(852

)

$

6,226

 

731

%

 

 

 

 

 

 

 

 

 

 

Other information

 

 

 

 

 

 

 

 

 

Full-time equivalent employees

 

206.9

 

208.7

 

 

 

 

 

 

Net income for the Commercial Banking segment during the three months ended March 31, 2011, increased $6.2 million compared to the same period in 2010. The increase is primarily the result of a decrease in provision for loan losses offset by increased tax provision expense. The provision decline relates directly to the Company’s efforts to aggressively reserve for problem loans when repayment risks are first identified.  Over the last 12 months, the Company has taken deliberate action to reduce high-risk loan concentrations and improve overall asset quality.  Provision expense has now decreased each quarter since peaking in the second quarter of 2009. Noninterest expense declines relate to reductions in salaries and benefits and one-time costs associated with the closure of an Arizona branch in the first quarter of 2010.

 

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Table of Contents

 

Investment Banking

 

 

 

Investment Banking Services

 

 

 

 

 

 

 

Three months ended March 31,

 

Increase/(decrease)

 

(in thousands)

 

2011

 

2010

 

Amount

 

%

 

Income Statement

 

 

 

 

 

 

 

 

 

Net interest income

 

$

3

 

$

1

 

$

2

 

200

%

Noninterest income

 

744

 

301

 

443

 

147

%

Noninterest expense

 

893

 

976

 

(83

)

(9

)%

Benefit for income taxes

 

(58

)

(271

)

213

 

79

%

Net loss before management fees and overhead

 

(88

)

(403

)

315

 

78

%

Management fees and overhead allocations, net of tax

 

35

 

41

 

(6

)

(15

)%

Net loss

 

$

(123

)

$

(444

)

$

321

 

72

%

 

 

 

 

 

 

 

 

 

 

Other information

 

 

 

 

 

 

 

 

 

Full-time equivalent employees

 

16.6

 

21.9

 

 

 

 

 

 

Net loss for the Investment Banking segment decreased for the three month period ended March 31, 2011, compared to the year earlier period.  The segment closed one transaction in 2011, while no transactions were closed in the first quarter of 2010.  Industry-wide, deal volumes improved throughout 2010 with buyers and sellers returning to the market as valuations improved from lows established in 2009.

 

Wealth Management

 

 

 

Wealth Management

 

 

 

 

 

 

 

Three months ended March 31,

 

Increase/(decrease)

 

(in thousands)

 

2011

 

2010

 

Amount

 

%

 

Income Statement

 

 

 

 

 

 

 

 

 

Net interest income

 

$

(13

)

$

(9

)

$

(4

)

(44

)%

Noninterest income

 

2,280

 

2,198

 

82

 

4

%

Noninterest expense

 

2,388

 

2,279

 

109

 

5

%

Benefit for income taxes

 

(54

)

(99

)

45

 

45

%

Net income (loss) before management fees and overhead

 

(67

)

9

 

(76

)

(844

)%

Management fees and overhead allocations, net of tax

 

151

 

170

 

(19

)

(11

)%

Net loss

 

$

(218

)

$

(161

)

$

(57

)

(35

)%

 

 

 

 

 

 

 

 

 

 

Other information

 

 

 

 

 

 

 

 

 

Full-time equivalent employees

 

55.9

 

56.6

 

 

 

 

 

 

Net loss for the Wealth Management segment increased for the three month period ended March 31, 2011, compared to the year earlier period.  Revenue generated from wealth transfer transactions (typically facilitated through the use of whole life insurance products) and from investment advisory increased slightly during the first quarter of 2011, compared to the first quarter of 2010.  An increase in noninterest expense more than offset the revenue growth.  The increase in noninterest expense was attributed primarily to occupancy and marketing costs.

 

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Table of Contents

 

Insurance revenues generated by wealth transfer are transactional by nature, with the majority of revenues earned at the time of the sale. Over the past several quarters these revenues have been lower than historical standards due broader economic uncertainties.  Whole life products generally require large, up-front cash premiums and potential clients have hesitated to make this investment.  The Company believes these fears have subsided as the equity-market recovery has taken hold and believes client outlook as it affects sales of high-end life insurance vehicles is improving.

 

Investment advisory revenues are generally a percentage of assets under management (AUM) and provide a revenue stream that can fluctuate with movement in the larger equity markets.

 

Average discretionary AUM for the quarter ended March 31, 2011, increased by $50.7 million or 6.6% to $819.2 million compared to $768.5 million in the first quarter of 2010. Total AUM, including custody and advisory assets, were $1.59 billion and $1.52 billion at March 31, 2011 and 2010, respectively.

 

Insurance

 

 

 

Insurance

 

 

 

 

 

 

 

Three months ended March 31,

 

Increase/(decrease)

 

(in thousands)

 

2011

 

2010

 

Amount

 

%

 

Income Statement

 

 

 

 

 

 

 

 

 

Net interest income

 

$

(2

)

$

(3

)

$

1

 

33

%

Noninterest income

 

2,539

 

2,344

 

195

 

8

%

Noninterest expense

 

2,361

 

2,374

 

(13

)

(1

)%

Provision for income taxes

 

71

 

58

 

13

 

22

%

Net income (loss) before management fees and overhead

 

105

 

(91

)

196

 

215

%

Management fees and overhead allocations, net of tax

 

86

 

86

 

 

%

Net income (loss)

 

$

19

 

$

(177

)

$

196

 

111

%

 

 

 

 

 

 

 

 

 

 

Other information

 

 

 

 

 

 

 

 

 

Full-time equivalent employees

 

53.1

 

56.5

 

 

 

 

 

 

Net income for the three months ended March 31, 2011 increased $0.2 million compared to the prior year period. Revenues growth in the current quarter was primarily attributed to the employee benefits business.  The employee benefit group upgraded its sales staff in 2010 and is experiencing an increase in new business as a result.

 

Employee benefit and P&C revenues are more stable from period to period and have a recurring revenue stream.  Employee benefits sales commissions have faced pressure in recent quarters as clients have responded to the economy by reducing headcount and reducing coverage.  P&C commissions have also faced longstanding

 

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Table of Contents

 

downward pressure as a soft premium environment persists, and clients have changed limits and their revenues, payrolls and property valuations have declined.

 

The P&C industry continues to experience a soft premium market and revenue gains are largely dependant on volume growth.  The Employee Benefits business remains attentive to new healthcare legislation and the potential impact on its current and prospective clients.  The Company has a large client base to which it could potentially cross-sell insurance business products.  The Company has focused on refining its internal referral program to maximize its cross-sell opportunities.

 

Corporate Support and Other

 

 

 

Corporate Support

 

 

 

 

 

 

 

Three months ended March 31,

 

Increase/(decrease)

 

(in thousands)

 

2011

 

2010

 

Amount

 

%

 

Income Statement

 

 

 

 

 

 

 

 

 

Net interest income

 

$

(1,181

)

$

(707

)

$

(474

)

(67

)%

Provision for loan losses

 

313

 

2,459

 

(2,146

)

(87

)%

Noninterest income

 

10

 

(354

)

364

 

103

%

Noninterest expense

 

11,711

 

11,865

 

(154

)

(1

)%

Benefit for income taxes

 

(4,952

)

(5,627

)

675

 

12

%

Net loss before management fees and overhead

 

(8,243

)

(9,758

)

1,515

 

16

%

Management fees and overhead allocations, net of tax

 

(6,417

)

(6,373

)

(44

)

(1

)%

Net loss attributable to noncontrolling interest

 

 

(322

)

322

 

100

%

Net loss

 

$

(1,826

)

$

(3,063

)

$

1,237

 

40

%

 

 

 

 

 

 

 

 

 

 

Other information

 

 

 

 

 

 

 

 

 

Full-time equivalent employees

 

210.8

 

201.1

 

 

 

 

 

 

The Corporate Support and Other segment is composed of activities of the parent company (Parent); non-production, back-office support operations; and eliminating transactions in consolidation.  Non-production, back-office operations include human resources, accounting and finance, information technology, and loan and deposit operations.  The Company has a process for allocating these support operations back to the production lines based on an internal allocation methodology that is updated annually.

 

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Net loss for the Corporate Support and Other segment decreased for the three month period ended March 31, 2011, compared to the year earlier period.  The primary component of net interest income (expense) for the segment is interest expense related to the Company’s long-term debt (see Note 9 to the condensed consolidated financial statements). The average yield on the Company’s long-term debt for the three months ended March 31, 2011 increased 144 basis points (1.44%) to 6.37% compare to 4.93% for the year-earlier period.  Late in the first quarter of 2010, interest expense on a portion of variable-rate debt was fixed through the use of interest rate swaps (see Note 8 to the condensed consolidated financial statements).

 

The provision for loan losses relates to a non-performing loan portfolio that the Parent purchased from the Bank in 2009.  This portfolio has steadily decreased since the 2009 purchase due to loan repayments and collateral sales, reducing the overall provision for loan losses.  In addition, asset quality improvement within the portfolio has also contributed to the decline in the provision for loan losses.

 

The $0.4 million increase in noninterest income during the three months ended March 31, 2011 relates primarily to a reduction in losses on private equity investments.

 

Noninterest expense includes salaries and benefits of employees of the Parent and support functions as well as the nonemployee overhead operating costs not directly associated with another segment.  Costs were stable in the current period, declining 1% from the year earlier period.

 

Contractual Obligations and Commitments

 

Summarized below are the Company’s contractual obligations (excluding deposit liabilities) to make future payments at March 31, 2011:

 

 

 

 

 

After one

 

After three

 

 

 

 

 

 

 

Within

 

but within

 

but within

 

After

 

 

 

(in thousands)

 

one year

 

three years

 

five years

 

five years

 

Total

 

Repurchase agreements (1)

 

$

157,674

 

$

 

$

 

$

 

$

157,674

 

Operating lease obligations

 

5,849

 

9,973

 

8,675

 

7,599

 

32,096

 

Long-term debt obligations (2)

 

6,024

 

31,844

 

7,660

 

117,032

 

162,560

 

Preferred Stock, Series B dividend (3)

 

3,223

 

69,994

 

 

 

73,217

 

Supplemental executive retirement plan

 

 

 

 

3,760

 

3,760

 

Total contractual obligations

 

$

172,770

 

$

111,811

 

$

16,335

 

$

128,391

 

$

429,307

 

 


(1)          Interest on these obligations has been excluded due to the short-term nature of the instruments.

 

(2)          Principal repayment of the junior subordinated debentures is assumed to be at the contractual maturity and interest has been estimated through the applicable dates.  Principal repayment of the subordinated notes payable is assumed to be at the first available call date in August 2013.  See Note 9 to the condensed consolidated financial statements for a schedule of specific maturities and possible call dates. Interest on the junior subordinated debentures is calculated at the fixed rate associated with the applicable hedging instrument through the instrument maturity date then at the currently applicable variable-rate through contractual maturity and is reported in the “due within” categories during which the interest expense is expected to be incurred.  Included in long-term debt obligations are estimated interest payments related to subordinated debt (junior and unsecured) of $6.0 million due “Within one year”, $10.9 million due “After one but within three years”, $7.7 million due “After three but within five years” and $44.9 million due “After five years.”  Variable-rate interest payments on junior subordinated debentures after maturity of the related fixed interest rate swap hedge are estimates based on current rates and actual payments will differ.

 

(3)          Cumulative Perpetual Preferred Stock (Series B) issued to the US Treasury in December 2008 includes dividends payable at 5% on $64.5 million and is reflected as an obligation in the related “due within” categories.  The preferred shares are shown in the table as being due in the “After three but within five years” category which assumes the

 

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Table of Contents

 

$64.5 million in preferred stock will be redeemed in the fourth quarter of 2013 after which time the dividend rate increases to 9%.

 

The contractual amount of the Company’s financial instruments with off-balance sheet risk at March 31, 2011, is presented below, classified by the type of commitment and the term within which the commitment expires:

 

 

 

 

 

After one

 

After three

 

 

 

 

 

 

 

Within

 

but within

 

but within

 

After

 

 

 

(in thousands)

 

one year

 

three years

 

five years

 

five years

 

Total

 

Unfunded loan commitments

 

$

307,556

 

$

166,655

 

$

16,686

 

$

7,097

 

$

497,994

 

Standby letters of credit

 

44,650

 

13,080

 

3,223

 

 

60,953

 

Commercial letters of credit

 

273

 

 

 

 

273

 

Unfunded commitments for unconsolidated investments

 

4,867

 

 

 

 

4,867

 

Company guarantees

 

1,219

 

 

 

 

1,219

 

Total commitments

 

$

358,564

 

$

179,735

 

$

19,909

 

$

7,097

 

$

565,305

 

 

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the liquidity, credit enhancement and financing needs of its customers.  These financial instruments include legally binding commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.  Credit risk is the principal risk associated with these instruments.  The contractual amounts of these instruments represent the amount of credit risk should the instruments be fully drawn upon and the customer defaults.

 

To control the credit risk associated with entering into commitments and issuing letters of credit, the Company uses the same credit quality, collateral policies, and monitoring controls in making commitments and letters of credit as it does with its lending activities.  The Company evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation.

 

Legally binding commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit obligate the Company to meet certain financial obligations of its customers if, under the contractual terms of the agreement, the customers are unable to do so. The financial standby letters of credit issued by the Company are irrevocable.  Payment is only guaranteed under these letters of credit upon the borrower’s failure to perform its obligations to the beneficiary.

 

Approximately $32.1 million of total loan commitments at March 31, 2011, represent commitments to extend credit at fixed rates of interest, which exposes the Company to some degree of interest-rate risk.

 

The Company has also entered into interest rate swap agreements under which it is required to either receive cash or pay cash to a counterparty depending on changes in interest rates.  The interest rate swaps are carried at fair value on the Condensed Consolidated Balance Sheets with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The fair value of interest rate swaps recorded on the balance sheet at March 31, 2011, do not represent the actual amounts that will ultimately be received or paid under the contracts since the fair value is based on estimated future interest rates and are therefore excluded from the table above.

 

Liquidity and Capital Resources

 

Liquidity refers to the Company’s ability to generate adequate amounts of cash to meet financial obligations to its customers and shareholders in order to fund loans, to respond to deposit outflows and to cover operating expenses.  Maintaining a level of liquid funds through asset/liability management seeks to ensure that these needs are met at a reasonable cost.  Liquidity is essential to compensate for fluctuations in the balance sheet and provide funds for growth and normal operating expenditures.  Sources of funds include customer deposits,

 

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scheduled amortization of loans, loan prepayments, scheduled maturities of investments and cash flows from mortgage-backed securities.  Liquidity needs may also be met by deposit growth, converting assets into cash, raising funds in the brokered certificate of deposit market or borrowing using lines of credit with correspondent banks, the FHLB, the FRB or the Treasury.  Longer-term liquidity needs may be met by selling securities available for sale or raising additional capital.

 

Liquidity management is the process by which the Company manages the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost. 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. These funding commitments include withdrawals by depositors, credit commitments to borrowers, shareholder dividends, debt payments, expenses of its operations and capital expenditures. Liquidity is monitored and closely managed by the Company’s Asset and Liability Committee (ALCO), a group of senior officers from the lending, deposit gathering, finance and treasury areas. ALCO’s primary responsibilities are to ensure the necessary level of funds are available for normal operations as well as maintain a contingency funding policy to ensure that liquidity stress events are quickly identified and management plans are in place to respond. This is accomplished through the use of policies which establish limits and require measurements to monitor liquidity trends, including management reporting that identifies the amounts and costs of all available funding sources.

 

The Company’s current liquidity position is expected to be more than adequate to fund expected asset growth. Historically, our primary source of funds has been customer deposits.  Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and unscheduled loan prepayments — which are influenced by fluctuations in the general level of interest rates, returns available on other investments, competition, economic conditions, and other factors — are less predictable.

 

Available funding through correspondent lines at March 31, 2011, totaled $459.8 million, which represents 20.4% of the Company’s earning assets.  Available funding is comprised of $155.0 million in available federal funds purchased lines and $304.8 million in FHLB borrowing capacity. In addition, the Company had $82.3 million in securities available to be pledged for collateral for additional FHLB borrowings at March 31, 2011.

 

Liquidity from asset categories is provided through cash and interest-bearing deposits with other banks, which totaled $88.4 million at March 31, 2011, compared to $24.2 million at December 31, 2010.  Additional asset liquidity sources include principal and interest payments from securities in the Company’s investment portfolio and cash flows from its amortizing loan portfolio.  Liability liquidity sources include attracting deposits at competitive rates.  The Company is not utilizing brokered deposits at March 31, 2011 and core deposits represent 100% of the Company’s deposit base.

 

The Company’s loan to core deposit ratio decreased to 84.6% at March 31, 2011, from 87.0% at December 31, 2010.  The combination of the decline in the loan portfolio and the increase in the deposit portfolio has allowed the Company to maintain low levels of wholesale borrowings (short-term borrowings and brokered CDs).  At March 31, 2011, the Company had no outstanding wholesale borrowings.  Wholesale borrowings decreased to an average of $6.3 million in 2011 from an average of $23.6 million during the first quarter of 2010.

 

The Company uses various forms of short-term borrowings for cash management and liquidity purposes. These forms of borrowings include federal funds purchased, securities sold under agreements to repurchase, and borrowings from the FHLB. At March 31, 2011, the Bank has approved unsecured federal funds purchase lines with six correspondent banks with an aggregate credit line of $155.0 million. The Company regularly uses its federal funds purchase lines to manage its daily cash position.  However, availability to access funds through those lines is dependent upon the cash position of the correspondent banks and there may be times when certain lines are not available.  In addition, certain lines require a one day rest period after a specified number of consecutive days of accessing the lines.  With the overall tightening in the credit markets, certain correspondent lines have been reduced or may not be available due to liquidity issues specific to our correspondents.  During 2010, the Company’s aggregate correspondent credit lines decreased $80.0 million due to three lines becoming unavailable during the year.  The Bank also has a line of credit from the FHLB that is limited by the amount of eligible collateral available to secure it and the Company’s investment in FHLB stock.  Borrowings under the FHLB line are required to be secured by unpledged securities and qualifying loans. Borrowings may also be used

 

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on a longer-term basis to support expanded lending activities and to match the maturity or repricing intervals of assets.

 

At the holding company level, our primary sources of funds are dividends paid from the Bank and fee-based subsidiaries, management fees assessed to the Bank and the fee-based business lines, proceeds from the issuance of common stock, and other capital markets activity.  The main use of this liquidity is the quarterly payment of dividends on our common and preferred stock, quarterly interest payments on the subordinated debentures and notes payable, payments for mergers and acquisitions activity (including potential earn-out payments), and payments for the salaries and benefits for the employees of the holding company.

 

The approval of the Colorado State Banking Board is required prior to the declaration of any dividend by the Bank if the total of all dividends declared by the Bank in any calendar year exceeds the total of its net profits for that year combined with the retained net profits for the preceding two years. In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 provides that the Bank cannot pay a dividend if it will cause the Bank to be “undercapitalized.”  At March 31, 2011, the Bank was restricted in its ability to pay dividends to the holding company as its earnings in the prior two years, net of dividends paid during those years, were negative.  The Company’s ability to pay dividends on its common stock depends upon the availability of dividends from the Bank, earnings from its fee-based businesses, and upon the Company’s compliance with the capital adequacy guidelines of the Federal Reserve Board of Governors (see Note 13 of the notes to the condensed consolidated financial statements).  The holding company has a liquidity policy that requires the maintenance of at least 18 months of liquidity on the balance sheet based on projected cash usages, exclusive of dividends from the Bank.  At March 31, 2011, the holding company had a liquidity position that provides for approximately 2.5 years of liquidity.

 

At March 31, 2011, shareholders’ equity totaled $205.7 million, a $3.9 million increase from December 31, 2010.  The increase was primarily due to $3.2 million in net income; an increase of $1.4 million in other comprehensive income resulting from net unrealized gains on derivatives and available for sale securities; and $0.5 million in stock-based compensation expense, and employee stock purchase plan activity.  These increases were offset by dividends paid on preferred stock of $0.8 million; and dividends paid on common stock of $0.4 million.

 

We anticipate that our cash and cash equivalents, expected cash flows from operations together with alternative sources of funding are sufficient to meet our anticipated cash requirements for working capital, loan originations, capital expenditures and other obligations for at least the next 12 months.  We continually monitor existing and alternative financing sources to support our capital and liquidity needs, including but not limited to, debt issuance, common stock issuance and deposit funding sources.  Based on our current financial condition and our results of operations, we believe the Company will be able to sustain its ability to raise adequate capital through one of these financing sources.

 

We are subject to minimum risk-based capital limitations as set forth by federal banking regulations at both the consolidated Company level and the Bank level. Under the risk-based capital guidelines, different categories of assets, including certain off-balance sheet items, such as loan commitments in excess of one year and letters of credit, are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base. For purposes of the risk-based capital guidelines, total capital is defined as the sum of “Tier 1” and “Tier 2” capital elements, with Tier 2 capital being limited to 100% of Tier 1 capital. Tier 1 capital includes, with certain restrictions, common shareholders’ equity, perpetual preferred stock and minority interests in consolidated subsidiaries. Tier 2 capital includes, with certain limitations, perpetual preferred stock not included in Tier 1 capital, certain maturing capital instruments, and the allowance for loan and credit losses. At March 31, 2011, the Bank was well-capitalized with a Tier 1 Capital ratio of 10.6%, and Total Capital ratio of 11.8%. The minimum ratios to be considered well-capitalized under the risk-based capital standards are 6% and 10%, respectively. At the holding company level, the Company’s Tier 1 Capital ratio at March 31, 2011, was 13.0% and its Total Capital ratio 15.6%.  In order to comply with the regulatory capital constraints, the Company and its Board of Directors constantly monitor the capital level and its anticipated needs based on the Company’s growth. The Company has identified sources of additional capital that could be used if needed, and monitors the costs and benefits of these sources, which include both the public and private markets.

 

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Effects of Inflation and Changing Prices

 

The primary impact of inflation on our operations is increased operating costs.  Unlike most retail or manufacturing companies, virtually all of the assets and liabilities of a financial institution such as 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.

 

Forward Looking Statements

 

This report contains forward-looking statements that describe CoBiz’s future plans, strategies and expectations. All forward-looking statements are based on assumptions and involve risks and uncertainties, many of which are beyond our control and which may cause our actual results, performance or achievements to differ materially from the results, performance or achievements contemplated by the forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or words of similar meaning, or future or conditional verbs such as “would,” “could” or “may.” Forward-looking statements speak only as of the date they are made.  Such risks and uncertainties include, among other things:

 

·                  Risks and uncertainties described in our reports filed with the Securities and Exchange Commission, including our most recent Form 10-K.

·                  Competitive pressures among depository and other financial institutions nationally and in our market areas may increase significantly.

·                  Adverse changes in the economy or business conditions, either nationally or in our market areas, could increase credit-related losses and expenses and/or limit growth.

·                  Increases in defaults by borrowers and other delinquencies could result in increases in our provision for losses on loans and related expenses.

·                  Our ability to manage growth effectively, including the successful expansion of our customer support, administrative infrastructure and internal management systems, could adversely affect our results of operations and prospects.

·                  Fluctuations in interest rates and market prices could reduce our net interest margin and asset valuations and increase our expenses.

·                  Our net interest margin may be negatively impacted if we are unable to profitably deploy excess cash into higher yielding loans or investments.

·                  The consequences of continued bank acquisitions and mergers in our market areas, resulting in fewer but much larger and financially stronger competitors, could increase competition for financial services to our detriment.

·                  Our continued growth will depend in part on our ability to enter new markets successfully and capitalize on other growth opportunities.

·                  Changes in legislative or regulatory requirements applicable to us and our subsidiaries could increase costs, limit certain operations and adversely affect results of operations.

·                  Changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations may increase our tax expense or adversely affect our customers’ businesses.

·                  If we were to conclude that an additional valuation allowance is necessary for our net deferred tax asset, such conclusion could result in a non-cash valuation charge which would adversely affect our results of operations.

 

In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements in this report. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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Item 3.            Quantitative and Qualitative Disclosures about Market Risk

 

At March 31, 2011, 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 year ended December 31, 2010.

 

Item 4.            Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.  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 at March 31, 2011, the end of the period covered by this report (Evaluation Date), pursuant to Exchange Act Rule 13a-15(e).  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 SEC filings.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in the SEC’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.

 

Changes in Internal Control.   During the quarter that ended on the Evaluation Date, there were no changes in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

Item 6.            Exhibits

 

Exhibits and Index of Exhibits.

 

31.1             Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.

31.2             Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.

32.1             Section 1350 Certification of the Chief Executive Officer.

32.2             Section 1350 Certification of the Chief Financial Officer.

 

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 FINANCIAL INC.

 

 

 

 

 

 

 

 

 

 

Date:

April 29, 2011

 

 

By:

/s/ Steven Bangert

 

 

 

 

 

Steven Bangert

 

 

 

 

 

Chairman and CEO

 

 

 

 

 

 

Date:

April 29, 2011

 

 

By:

/s/ Lyne B. Andrich

 

 

 

 

 

Lyne B. Andrich

 

 

 

 

 

EVP and CFO

 

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