ITEM 1. BUSINESS
OVERVIEW
CoBiz Inc. ("CoBiz") is a financial holding company headquartered in Denver, Colorado. We were incorporated in Colorado on February 19, 1980 as Equitable Bancorporation, Inc. Our wholly-owned subsidiary Colorado Business Bank, N.A. (the "Bank"), is a full-service business banking institution with nine Colorado locations, including six in the Denver metropolitan area, two in Boulder and one in Edwards, just west of Vail. As of December 31, 2000, we had total assets of $633.1 million, net loans and leases of $444.7 million and deposits of $450.8 million. We provide a broad range of banking products and services, including credit, cash management, investment, deposit and trust products and employee benefits consulting and insurance brokerage services, to our targeted customer base of small- and medium-sized businesses and high net worth individuals. Each of our locations operates as a separate business bank, with significant local decision-making authority. Support functions such as accounting, data processing, bookkeeping, credit administration, loan operations and investment and cash management services are conducted centrally from our downtown Denver office. As a result of this operating approach, we believe that we are well positioned to attract and serve our target customers, combining the elements of personalized service found in community banks with sophisticated banking products and services traditionally offered by larger regional banks. For a discussion of the segments included in our principal activities, see Note 15 of Notes to Consolidated Financial Statements.
On March 8, 2001, we acquired First Capital Bank of Arizona. The acquisition was structured as a merger between First Capital Bank and a wholly-owned subsidiary we formed to participate in the merger. First Capital Bank shareholders received shares of our common stock in the merger. As a result of the merger, First Capital Bank became our wholly owned subsidiary. First Capital Bank is an Arizona state-chartered commercial bank with two locations serving Phoenix and the surrounding area of Maricopa County, Arizona. As of December 31, 2000, First Capital Bank had total assets of $106.3 million, net loans of $72.8 million and deposits of $92.1 million. First Capital Bank provides commercial banking services to a targeted customer base of small- and medium-sized businesses and high net worth individuals. Because the acquisition of First Capital Bank was not completed until 2001, the discussion in this report regarding CoBiz's business strategy and market areas served focuses only on the Colorado market. For a discussion of the acquisition and the Arizona market, see "First Capital Bank Acquisition."
BUSINESS STRATEGY
Our primary strategy is to differentiate ourselves from our competitors by providing our local bank presidents with substantial decision-making authority. In all areas of our operations, we focus on attracting and retaining the highest quality personnel by maintaining an entrepreneurial culture and decentralized banking approach. In order to realize our strategic objectives, we are pursuing the following strategies:
Internal growth. We believe that the Colorado market provides us with significant opportunities for internal growth. The market is currently dominated by a number of large regional and national financial institutions that have acquired Colorado-based banks. We believe that this consolidation has created gaps in the banking industry's ability to serve certain customers in the Denver metropolitan area because small- and medium-sized businesses often are not large enough to warrant significant marketing focus and customer service from these large banks. In addition, we believe that these banks often do not satisfy the needs of high net worth individuals who desire personal attention from experienced bankers. Similarly, we believe that many of the remaining independent banks in the region do not provide the sophisticated banking products and services that such customers require. Through our ability to combine personalized service, experienced personnel who are established in their community, sophisticated technology and a broad product line, we believe that we will continue to achieve strong internal growth by attracting customers currently banking at both larger and smaller financial institutions and by expanding our business with existing customers. A significant amount of our loan and lease growth to date has resulted from pre-existing customer relationships established by our lending officers and senior management team.
De novo branching. We also intend to continue exploring growth opportunities to expand through de novo branching in areas with high concentrations of our target customers in Colorado and other western states. We intend to use Colorado Business Bank -- Boulder as our model for further de novo branching. Colorado Business Bank -- Boulder opened in November 1995 with a staff of three experienced lending officers recruited from the Boulder branch of a large national bank. We began our Boulder operations in a relatively small space in an office building in downtown Boulder, rather than in a traditional, free-standing bank building, thereby substantially decreasing overhead. As a result of the market's acceptance of our business banking model, Colorado Business Bank -- Boulder has grown significantly and relocated to a new larger location. In addition, we added a second Boulder location. As of December 31, 2000, our Boulder locations had an aggregate of $94.7 million in loans and $69.2 million in deposits.
New product lines. We also will seek to grow through the addition of new product lines. Our product development efforts are focused on providing enhanced credit, cash management, investment, deposit and trust products to our target customer base. Within the past few years, we have greatly expanded our commercial real estate lending department to allow for the origination of larger and more
complex real estate loans. In addition, we began to offer trust and estate administration services in March 1998, employee benefits consulting in 2000, and we recently introduced insurance brokerage services. We believe that offering such complementary products allows us to both broaden our relationships with existing customers and attract new customers to our core business. In addition, we believe that the fees generated by these services will increase our non-interest income.
Expanding existing banking relationships. We are normally not a transaction lender and typically require that borrowers enter into a multiple product banking relationship with us, including deposits and cash management services, in connection with the receipt of credit from the Bank. We believe that such relationships provide us with the opportunity to introduce our customers to a broader array of the products and services offered by us and generate additional non-interest income. In addition, we believe that this philosophy aids in customer retention.
Capitalizing on the use of technology. We believe that we have been able to distinguish ourselves from traditional community banks operating in our market through the use of technology. Our data processing system allows us to provide upgraded Internet banking, expanded cash management products and check and document imaging, as well as a 24-hour voice response system. Other services currently offered by the Bank include controlled disbursement, lock box, repurchase agreements and sweep investment accounts. In addition to providing sophisticated services for our customers, we utilize technology extensively in our internal systems and operational support functions to improve customer service, maximize efficiencies and provide management with the information and analyses necessary to manage our growth effectively.
Emphasizing high quality customer service. We believe that our ability to offer high quality customer service provides us with a competitive advantage over many regional banks that operate in the Denver metropolitan area. We emphasize customer service in all aspects of our operations and identify customer service as an integral component of our employee training programs. Moreover, we are constantly exploring methods to make banking an easier and more convenient process for our customers. For example, we offer a courier service to pick up deposits for customers who are not in close proximity to any of the Bank's nine locations or simply do not have the time to go to the Bank.
Maintaining asset quality and controlling interest rate risk. We seek to maintain asset quality through a program that includes regular reviews of loans by responsible loan officers and ongoing monitoring of the loan and lease portfolio by a loan review officer who reports directly to the audit committee of our board of directors. As of December 31, 2000, our ratio of nonperforming loans and leases to total loans and leases was 0.10%. In addition, we seek to control our exposure to changing interest rates by attempting to maintain an interest rate profile within a narrow range around an earnings neutral position. An important element of this focus has been to emphasize variable rate loans and investments funded by deposits which also mature or re-price over periods of twelve months or less.
Achieving efficiencies and economies of scale through centralized administrative and support operations. We seek to maximize operational and support efficiencies in a manner consistent with maintaining high quality customer service. We have consolidated various management and administrative functions, including accounting, data processing, bookkeeping, credit administration, loan operations and investment and cash management services, at our downtown Denver office. We believe that this structure allows our bank personnel to focus on customer service and sales strategies adapted to each community that we serve.
Acquisitions. On March 8, 2001, we completed our acquisition of First Capital Bank of Arizona, our first bank outside the Colorado market area. For a discussion of the acquisition, see "First Capital Bank
Acquisition." We intend to continue to explore acquisitions of financial institutions or financial services entities, including opportunities in Colorado and other western states.
Our approach to expansion is predicated on recruiting key personnel to lead new initiatives. While we normally consider an array of new locations and product lines as potential expansion initiatives, we will generally proceed only upon identifying quality management personnel with a loyal customer following in the community or experienced in the product line that is the target of the initiative. We believe that, by focusing on individuals who are established in their communities and are experienced in offering sophisticated banking products and services, we enhance our market position and add growth opportunities.
MARKET AREAS SERVED
Our primary market area is the Denver metropolitan area, which is comprised of the counties of Denver, Boulder, Adams, Arapahoe, Douglas and Jefferson. The Denver metropolitan area enjoyed a 2.2% increase in population from July 1999 to July 2000. This six-county area is one of the fastest growing regions in the nation, helping to make Colorado the third fastest growing state in the United States. Denver's economy is also expanding, posting 5.2% growth in non-farm employment from January 2000 to December 2000. This rapid expansion helped to drive the unemployment rate down to 1.8% at December 2000. Per capita income rose 7.2% between 1996 and 1998, which was the fourth highest per capita income growth rate in the country. Companies with less than 50 employees make up Denver's single largest employment group. The economy has diversified over the years, with significant representation in technology, communications, manufacturing, tourism, transportation and financial services. In June 1999, we expanded in Colorado beyond the Denver metropolitan area by establishing an office, Colorado Business Bank of the Rockies, in Edwards, Colorado, which is located in the rapidly developing Vail valley. We have two locations each in downtown Denver, Boulder and Littleton and one location each in Golden, the Denver Technological Center ("DTC") and the Vail valley. The second downtown Denver location was relocated to a new facility which opened in the second quarter of 2000. The following is selected additional market data regarding the Colorado markets we serve:
o Downtown Denver is the business center of metropolitan Denver.
o Boulder has one of the highest concentrations of small businesses and affluent individuals in the Rocky Mountain region.
o The Littleton locations serve a more residential area, including Highlands Ranch, one of the fastest growing communities in the Denver metropolitan area.
o The western metropolitan area served by the Golden location contains a number of newer industrial and office parks.
o The area around DTC features a high concentration of office parks and businesses. A large number of high net worth individuals live and work in the area.
o The Vail valley is anchored by Vail, a prime mountain resort with a vigorous construction market for high-end primary and second homes. Construction activity in this area is fueling growth in other commercial businesses supporting the expanding population base in the market.
LENDING ACTIVITIES
General. We provide a broad range of commercial and retail lending services, including commercial loans, commercial and residential real estate construction loans, commercial and residential real estate mortgage loans, consumer loans, revolving lines of credit and equipment lease financing, including both operating and direct financing leases. Our primary lending focus is commercial and real estate lending to small- and medium-sized businesses that have annual sales of $2 million to $50 million and businesses and individuals with borrowing requirements of $200,000 to $4 million. As of December 31, 2000, substantially all of our outstanding loans and leases were to customers within Colorado. Interest rates charged on loans vary with the degree of risk, maturity, underwriting and servicing costs, principal amount and extent of other banking relationships with the customer, and are further subject to competitive pressures, money market rates, availability of funds and government regulations. As of December 31, 2000, approximately 67% of our loans and leases were at interest rates that float with our base rate or some other reference rate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for an analysis of the interest rates on our loans.
Credit Procedures and Review. We address credit risk through internal credit policies and procedures, including underwriting criteria, officer and customer lending limits, a multi-layered loan approval process for larger loans, periodic document examination, justification for any exceptions to credit policies, loan review and concentration monitoring. In addition, we provide ongoing loan officer training and review. We have a continuous loan review process designed to promote early identification of credit quality problems. All loan officers are charged with the responsibility of reviewing, no less frequently than monthly, all past due loans in their respective portfolios. In addition, each of the loan officers establishes a watch list of loans to be reviewed monthly by the boards of directors of Colorado Business Bank and CoBiz. The loan and lease portfolio is also monitored regularly by a loan review officer who reports directly to the audit committee of the boards of directors of Colorado Business Bank and CoBiz.
Composition of Loan and Lease Portfolio. The following table sets forth the composition of our loan and lease portfolio at the dates indicated.
Under federal law, the aggregate amount of loans that we may make to one borrower is generally limited to 15% of our unimpaired capital, surplus, undivided profits and allowance for loan and lease losses. As of December 31, 2000, our individual legal lending limit was $9.9 million. Our board of directors has established an internal lending limit of $5.7 million. To accommodate customers whose financing needs exceed our internal lending limits, and to address portfolio concentration concerns, we sell loan participations to outside participants, including HR Financial, an entity controlled by Howard R.
Ross, a member of our board of directors. See "Certain Relationships and Related Transactions." At December 31, 2000, 1999 and 1998, the outstanding balances of loan participations sold by us were $18.9 million, $17.6 million and $14.8 million, respectively. We have retained servicing rights on all loan participations sold. As of December 31, 2000, we had loan participations purchased from other banks totaling $6.9 million. We use the same analysis in deciding whether or not to purchase a participation in a loan as we would in deciding whether to originate the same loan.
In the ordinary course of business, we enter into various types of transactions that include commitments to extend credit. We apply the same credit standards to these commitments as we apply to our other lending activities and have included these commitments in our lending risk evaluations. Our exposure to credit loss under commitments to extend credit is represented by the amount of these commitments.
Commercial Loans. Commercial lending consists of loans to small- and medium-sized businesses in a wide variety of industries. The Bank's areas of emphasis in commercial lending include, but are not limited to, loans to wholesalers, manufacturers and business services companies. We provide a broad range of commercial loans, including lines of credit for working capital purposes and term loans for the acquisition of equipment and other purposes. Commercial loans are generally collateralized by inventory, accounts receivable, equipment, real estate and other commercial assets and may be supported by other credit enhancements such as personal guarantees. However, where warranted by the overall financial condition of the borrower, loans may be made on an unsecured basis. Terms of commercial loans generally range from one to five years, and the majority of such loans have floating interest rates.
Real Estate Mortgage Loans. Real estate mortgage loans include various types of loans for which we hold real property as collateral. We generally restrict commercial real estate lending activity to owner-occupied properties or to investor properties that are owned by customers with which we have a current banking relationship. We make commercial real estate loans at both fixed and floating interest rates, with maturities generally ranging from five to fifteen years. The Bank's underwriting standards generally require that a commercial real estate loan not exceed 75% of the appraised value of the property securing the loan. In addition, we originate SBA loans on owner-occupied properties with maturities of up to 25 years in which the SBA allows for financing of up to 90% of the project cost and takes a security position that is subordinated to us. We also originate residential mortgage loans on a limited basis as a service to our preferred customers.
The primary risks of real estate mortgage loans include the borrower's inability to pay, material decreases in the value of the real estate that is being held as collateral and significant increases in interest rates, which may make the real estate mortgage loan unprofitable. We do not actively seek permanent mortgage loans for our own portfolio, but, rather, syndicate such loans to other financial institutions. However, for those permanent mortgage loans that are extended, we attempt to apply conservative loan-to-value ratios and obtain personal guarantees and generally require a strong history of debt servicing capability and fully amortized terms of 15 years or less.
Real Estate Construction Loans. We originate loans to finance construction projects involving one-to four-family residences. We provide financing to residential developers that we believe have demonstrated a favorable record of accurately projecting completion dates and budgeting expenses. We provide loans for the construction of both pre-sold projects and projects built prior to the location of a specific buyer, although loans for projects built prior to the identification of a specific buyer are provided on a more selective basis. Residential construction loans are due upon the sale of the completed project and are generally collateralized by first liens on the real estate and have floating interest rates. In addition, these loans are generally secured by personal guarantees to provide an additional source of repayment. We generally require that a permanent financing commitment be in place before we make a residential
construction loan. Moreover, we generally monitor construction draws monthly and inspect property to ensure that construction is progressing as projected. Our underwriting standards generally require that the principal amount of the loan be no more than 75% of the appraised value of the completed construction project. Values are determined only by approved independent appraisers.
We also originate loans to finance the construction of multi-family, office, industrial and tax credit projects. These projects are predominantly owned by the user of the property or are sponsored by financially strong developers who maintain an ongoing banking relationship with us. Our underwriting standards generally require that the principal amount of these loans be no more than 65% of the appraised value. Values are determined only by approved independent appraisers.
We selectively provide loans for the acquisition and development of land for residential building projects by financially strong developers who maintain an ongoing banking relationship with us. For this category of loans, our underwriting standards generally require that the principal amount of these loans be no more than 65% of the appraised value. Values are determined only by approved independent appraisers.
Consumer Loans. We provide a broad range of consumer loans to customers, including personal lines of credit, home equity loans and automobile loans. In order to improve customer service, continuity and customer retention, management of business banking customers often work with the same loan officer who handles their business banking relationships.
Direct Financing Leases. We provide lease financing as a complement to our other lending services. These leases are structured as either operating or direct financing leases, under which we retain title to the leased assets as security for payment. Only direct financing leases are included in our loan and lease portfolio. Operating leases are reported as investment in operating leases.
NONPERFORMING ASSETS
Our nonperforming assets consist of nonaccrual loans and leases, restructured loans and leases, past due loans and leases and other real estate owned. The following table sets forth information with respect to these assets at the dates indicated.
Accrual of interest is discontinued on a loan or lease when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that the collection of interest is doubtful. A delinquent loan or lease is generally placed on nonaccrual status when it becomes 90 days past due. When a loan or lease is placed on nonaccrual status, all accrued and unpaid interest on the loan or lease is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan or lease balance until the collection of both principal and interest becomes reasonably certain. When the issues relating to a nonaccrual loan or lease are finally resolved, there may ultimately be an actual write down or charge-off of the principal balance of the loan or lease, which may necessitate additional charges to earnings. Restructured loans and leases are those for which concessions, including the reduction of interest rates below a rate otherwise available to the borrower, or the deferral of interest or principal, have been granted due to the borrower's weakened financial condition. Interest on restructured loans and leases is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. The additional interest income that would have been recognized for the years ended December 31, 2000, 1999 and 1998 if our nonaccrual and restructured loans and leases had been current in accordance with their original terms, and the interest income on nonaccrual and restructured loans and leases actually included in our net income for such periods, was not material. Real estate acquired by foreclosure includes deeds acquired under agreements with delinquent borrowers. Real estate acquired by foreclosure is appraised annually and is carried at the lesser of fair market value less anticipated closing costs or the balance of the related loan. As of December 31, 2000, we did not own any real estate acquired in foreclosure proceedings or under agreements with delinquent borrowers. In addition to the nonperforming assets described above, at December 31, 2000, we had 47 loan and lease relationships considered by management to be potential problem loans or leases, with outstanding principal totaling approximately $6.6 million. A potential problem loan or lease is one as to which management has concerns about the borrower's future performance under the terms of the loan or lease contract. For our protection, management monitors these loans and leases closely. These loans and leases are current as to the principal and interest and, accordingly, are not included in the nonperforming asset categories. However, further deterioration may result in the loan or lease being classified as nonperforming. The level of potential problem loans and leases is factored into the determination of the adequacy of the allowance for loan and lease losses.
Analysis of Allowance for Loan and Lease Losses. The allowance for loan and lease losses represents management's recognition of the risks of extending credit and its evaluation of the quality of the loan and lease portfolio. The allowance for loan and lease losses is maintained at a level considered adequate to provide for loan and lease losses, based on various factors affecting the loan and lease portfolio, including a review of problem loans and leases, business conditions, historical loss experience, evaluation of the quality of the underlying collateral and holding and disposal costs. The allowance is increased by additional charges to operating income and reduced by loans and leases charged off, net of recoveries. The following table sets forth information regarding changes in our allowance for loan and lease losses for the periods indicated.
Additions to the allowance for loan and lease losses, which are charged as expenses on our income statement, are made periodically to maintain the allowance at the appropriate level, based on our analysis of the potential risk in the loan and lease portfolio. Loans and leases charged off, net of amounts recovered from such loans and leases, reduce the allowance for loan and lease losses. The amount of the allowance is a function of the levels of loans and leases outstanding, the level of non-performing loans and leases, historical loan and lease loss experience, the amount of loan and lease losses actually charged against the reserve during a given period and current and anticipated economic conditions. At December 31, 2000, the allowance for loan and lease losses equaled 1.30% of total loans and leases. Federal regulatory agencies, as part of their examination process, review our loans and leases and allowance for loan and lease losses. We believe that our allowance for loan and lease losses is adequate to cover anticipated loan and lease losses. However, management may determine a need to increase the allowance for loan and lease losses, or regulators, when reviewing the Bank's loan and lease portfolio in the future, may request the Bank to increase such allowance. Either of these events could adversely affect our earnings. Further, there can be no assurance that our actual loan and lease losses will not exceed the allowance for loan and lease losses.
The following table sets forth the allowance for loan and lease losses by category to the extent specific allocations have been determined relative to particular categories of loans or leases.
The unallocated portion of the allowance is intended to cover loss exposure related to potential problem loans or leases for which no specific allocation has been estimated. Management attempts to quantify, on a quarterly basis, unidentified loss exposure in our portfolio overall. We continually analyze historical loss/trends in assessing the unallocated portion of the allowance. General economic conditions and commercial trends influence the level of the unallocated portion of the allowance, as well as growth of the loan and lease portfolio. We also specifically monitor concentrations of real estate and large credits. We believe that any allocation of the allowance into categories creates an appearance of precision that does not exist. The allocation table should not be interpreted as an indication of the specific amounts, by loan or lease classification, to be charged to the allowance. We believe that the table is a useful device for assessing the adequacy of the allowance as a whole. The table has been derived in part by applying historical loan and lease loss ratios to both internally classified loans and leases and the portfolio as a whole in determining the allocation. The allowance is utilized as a single unallocated allowance available for all loans and leases.
INVESTMENTS
Our investment portfolio is comprised of securities rated "A" or better by various nationally recognized rating agencies, with the majority of the portfolio either maturing or repricing within a one- to seven-year period. Our practice is to purchase primarily U.S. Treasury and U.S. government agency securities. Since November 1994, we have invested primarily in mortgage-backed securities that reprice annually. Our investment strategies are reviewed at the meetings of the asset and liability management committee.
Our mortgage-backed securities are typically classified as available for sale. Our goals with respect to our securities portfolio are to:
o Maximize safety and soundness.
o Provide adequate liquidity.
o Maximize rate of return within the constraints of applicable liquidity requirements.
o Complement asset/liability management strategies.
The following table sets forth the book value of the securities in our investment portfolio by type at the dates indicated.
The following table sets forth the book value, maturity or repricing frequency and approximate yield of the securities in our investment portfolio at December 31, 2000.
(1) Yields do not include adjustments for tax-exempt interest because the amount of such interest is not material.
DEPOSITS
Our primary source of funds has historically been customer deposits. We offer a variety of accounts for depositors, which are designed to attract both short- and long-term deposits. These accounts include certificates of deposit, savings accounts, money market accounts, checking and negotiable order of withdrawal accounts and individual retirement accounts. At December 31, 2000, $131.2 million, or 29%, of our deposits were noninterest-bearing deposits. We believe that we receive a large amount of noninterest-bearing deposits because we provide customers with the option of paying for services in cash or by maintaining additional noninterest-bearing account balances. However, since proposed changes in United States legislation would allow for the payment of interest on commercial accounts, there can be no assurance that we will be able to continue to maintain such a high level of noninterest-bearing deposits. Interest-bearing accounts earn interest at rates based on competitive market factors and our desire to increase or decrease certain types of maturities or deposits. We have not actively sought brokered deposits and do not currently intend to do so. The following tables present the average balances for each major category of deposits and the weighted average interest rates paid for interest-bearing deposits for the periods indicated.
Maturities of certificates of deposit of $100,000 and more are as follows:
SHORT-TERM BORROWINGS
Our short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, which generally mature within 60 days, and advances from the Federal Home Loan Bank of Topeka ("FHLB-Topeka"). The following table sets forth information relating to our short-term borrowings.
COMPETITION
The banking business in the Denver metropolitan area is highly competitive and is currently dominated by a number of large regional financial institutions, including U.S. Bancorp, Inc., Banc One Corporation, Zions Bancorporation, KeyCorp and Wells Fargo & Company. In addition to these regional banks, there are a number of community banks that operate in the area, including, Guaranty Bank and Trust Company, Colorado State Bank & Trust, FirstBank Holding Company of Colorado and Union Bank and Trust. We compete for loans and deposits with other commercial banks (including those listed above), savings and loan associations, finance companies, credit unions and mortgage bankers. In addition to the traditional financial institutions, we also compete for loans with brokerage and investment banking companies, nonfinancial institutions, including retail stores that maintain their own credit programs, and governmental agencies that make available low cost or guaranteed loans to certain borrowers. Particularly in times of high interest rates, we also face significant competition for deposits from sellers of short-term money market securities and other corporate and government securities.
By virtue of their larger capital bases or affiliation with larger multi-bank holding companies, many of our competitors have substantially greater capital resources and lending limits than we do and perform other functions that we offer only through correspondents. Interstate banking is permitted in Colorado, and, since January 1, 1997, unlimited state-wide branch banking is permitted. As a result, we may experience greater competition in our primary service areas. Our business, financial condition, results of operations and cash flows may be adversely affected by an increase in competition. Moreover, recently enacted and proposed legislation has focused on expanding the ability of participants in the banking and thrift industries to engage in other lines of business. The enactment of such legislation could put us at a competitive disadvantage because we may not have the capital to participate in other lines of business to the same extent as more highly capitalized banks and thrift holding companies.
EMPLOYEES
As of February 28, 2001, we had 170 employees, including 164 full-time employees. No Company employee is covered by a collective bargaining agreement, and we believe that our relationship with our employees is good.
SUPERVISION AND REGULATION
CoBiz and the Bank are extensively regulated under federal and Colorado law. These laws and regulations are primarily intended to protect depositors and federal deposit insurance funds, not shareholders of CoBiz. The following information summarizes certain material statutes and regulations affecting CoBiz and the Bank and is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws, regulations or regulatory policies may have a material adverse effect on the business, financial condition, results of operations and cash flows of CoBiz and the Bank. We are unable to predict the nature or extent of the effects that fiscal or monetary policies, economic controls or new federal or state legislation may have on our business and earnings in the future.
THE HOLDING COMPANY
General. CoBiz is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the "FRB"). CoBiz is required to file an annual report with the FRB and such other reports as the FRB may require pursuant to the BHCA.
Acquisitions. As a financial holding company, we are required to obtain the prior approval of the FRB before acquiring direct or indirect ownership or control of more than 5% of the voting shares of a bank or bank holding company. The FRB will not approve any acquisition, merger or consolidation that would result in substantial anti-competitive effects, unless the anti-competitive effects of the proposed transaction are outweighed by a greater public interest in meeting the needs and convenience of the public. In reviewing applications for such transactions, the FRB also considers managerial, financial, capital and other factors, including the record of performance of the applicant and the bank or banks to be acquired under the Community Reinvestment Act of 1977, as amended (the "CRA"). See "-- The Bank -- Community Reinvestment Act" below.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended (the "1994 Act"), which became effective September 29, 1995, displaces state laws governing interstate bank acquisitions. Under the 1994 Act, a financial or bank holding company may, subject to some limitations, acquire a bank outside of its home state without regard to local law. Thus, an out-of-state holding company could acquire the Bank, and we could acquire a bank outside of Colorado.
All acquisitions pursuant to the 1994 Act require regulatory approval. In reviewing applications under the 1994 Act, an applicant's record under the CRA must be considered, and a determination must be made that the transaction will not result in any violations of federal or state antitrust laws. In addition, there is a limit of 25% on the amount of deposits in insured depository institutions in Colorado that can be controlled by any bank or bank holding company.
The 1994 Act also permits bank subsidiaries of a financial or bank holding company to act as agents for affiliated institutions by receiving deposits, renewing time deposits, closing loans, servicing loans and receiving payments on loans. As a result, a relatively small Colorado bank owned by an out-of-state holding company could make available to customers in Colorado some of the services of a larger affiliated institution located in another state.
The Gramm-Leach-Bliley Act of 1999 eliminates many of the restrictions placed on the activities of certain qualified financial or bank holding companies. Effective March 11, 2000, a bank holding company can qualify as a "financial holding company" and expand into a wide variety of financial services, including securities activities, insurance and merchant banking without the prior approval of the FRB. CoBiz has qualified as a financial holding company.
Capital Adequacy. The FRB monitors, on a consolidated basis, the capital adequacy of financial or bank holding companies that have total assets in excess of $150 million by using a combination of risk-based and leverage ratios. Failure to meet the capital guidelines may result in the application by the FRB of supervisory or enforcement actions. Under the risk-based capital guidelines, different categories of assets, including certain off-balance sheet items, such as loan commitments in excess of one year and letters of credit, are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a "risk-weighted" asset base. For purposes of the risk-based capital guidelines, total capital is defined as the sum of "Tier 1" and "Tier 2" capital elements, with Tier 2 capital being limited to 100% of Tier 1 capital. Tier 1 capital includes, with certain restrictions, common shareholders' equity, perpetual preferred stock (no more than 25% of Tier 1 capital being comprised of cumulative preferred stock or trust preferred stock) and minority interests in consolidated subsidiaries. Tier 2 capital includes, with certain limitations, perpetual preferred stock not included in Tier 1 capital, certain maturing capital instruments and the allowance for loan and lease losses (limited to 1.25% of risk-weighted assets). The regulatory guidelines require a minimum ratio of total capital to risk-weighted assets of 8% (of which at least 4% must be in the form of Tier 1 capital). The FRB has also implemented a leverage ratio, which is defined to be a company's Tier 1 capital divided by its average total consolidated assets. The minimum required leverage ratio for top-rated bank holding companies is 3%, but most companies are required to maintain an additional cushion of at least 100 to 200 basis points.
The table below sets forth the Company's ratios at December 31, 2000 of (i) total capital to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets and (iii) Tier 1 leverage ratio.
Support of Banks. As discussed below, the Bank is also subject to capital adequacy requirements. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"), CoBiz could be required to guarantee the capital restoration plan of the Bank, should the Bank become "undercapitalized" as defined in the FDICIA and the regulations thereunder. See "-- The Bank -- Capital Adequacy." Our maximum liability under any such guarantee would be the lesser of 5% of the Bank's total assets at the time it became undercapitalized or the amount necessary to bring the Bank into compliance with the capital plan. The FRB also has stated that financial or bank holding companies are subject to the "source of strength doctrine," which requires such holding companies to serve as a source of "financial and managerial" strength to their subsidiary banks.
The FDICIA requires the federal banking regulators to take "prompt corrective action" with respect to capital-deficient institutions. In addition to requiring the submission of a capital restoration
plan, the FDICIA contains broad restrictions on certain activities of undercapitalized institutions involving asset growth, acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons, if the institution would be undercapitalized after any such distribution or payment.
THE BANK
General. The Bank is a national banking association, the deposits of which are insured by the Bank Insurance Fund of the FDIC (the "FDIC"), and is subject to supervision, regulation and examination by the Office of the Comptroller of the Currency (the "OCC") and by the FDIC. Pursuant to such regulations, the Bank is subject to special restrictions, supervisory requirements and potential enforcement actions. The FRB's supervisory authority over CoBiz can also affect the Bank.
Branching. In Colorado, since January 1, 1997, no limitations are placed on the number of branches a bank may establish, and any bank which has had its charter approved or conditionally or preliminarily approved on or after April 1, 1991, may, upon 30 days' written notice to the Colorado banking board, be converted to a branch of any bank.
Community Reinvestment Act. The CRA requires the Bank to adequately meet the credit needs of the communities in which it operates. The CRA allows regulators to reject an applicant seeking, among other things, to make an acquisition or establish a branch, unless it has performed satisfactorily under the CRA. Federal regulators regularly conduct examinations to assess the performance of financial institutions under the CRA. In its most recent CRA examination, the Bank received a satisfactory rating.
Transactions with Affiliates. The Bank is subject to Section 23A of the Federal Reserve Act, which limits the amount of loans to, investments in, and certain other transactions with, affiliates of the Bank, requires certain levels of collateral for such loans or transactions, and limits the amount of advances to third parties that are collateralized by the securities or obligations of affiliates, unless the affiliate is a bank and is at least 80% owned by the Company. If the affiliate is a bank and is at least 80% owned by the Company, such transactions are generally exempted from these restrictions, except as to "low quality" assets, as defined under the Federal Reserve Act, and transactions not consistent with safe and sound banking practices. In addition, Section 23A generally limits transactions with affiliates of the Bank to 10% of the Bank's capital and surplus and generally limits all transactions with affiliates to 20% of the Bank's capital and surplus.
Section 23B of the Federal Reserve Act requires that certain transactions between the Bank and any affiliate must be on substantially the same terms, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with, or involving, non-affiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, non-affiliated companies. The aggregate amount of the Bank's loans to its officers, directors and principal shareholders (or their affiliates) is limited to the amount of its unimpaired capital and surplus, unless the FDIC determines that a lesser amount is appropriate.
A violation of the restrictions of Section 23A or Section 23B of the Federal Reserve Act may result in the assessment of civil monetary penalties against the Bank or a person participating in the conduct of the affairs of the Bank or the imposition of an order to cease and desist such violation.
Dividend Restrictions. Dividends paid by the Bank are expected to provide substantially all of our cash flow. The approval of the OCC is required prior to the declaration of any dividend by the Bank
if the total of all dividends declared by the Bank in any calendar year exceeds the total of its net profits of that year combined with the retained net profits for the preceding two years. In addition, the FDICIA provides that the Bank cannot pay a dividend if it will cause the Bank to be "undercapitalized." See "-- The Bank -- Capital Adequacy."
Examinations. The OCC periodically examines and evaluates national banks. Based upon such an evaluation, the examining regulator may revalue the assets of an insured institution and require that it establish specific reserves to compensate for the difference between the value determined by the regulator and the book value of such assets.
Capital Adequacy. Federal regulations establish minimum requirements for the capital adequacy of depository institutions that are generally the same as those established for bank holding companies. See "-- The Holding Company -- Capital Adequacy." Banks with capital ratios below the required minimum are subject to certain administrative actions, including the termination of deposit insurance and the appointment of a receiver, and may also be subject to significant operating restrictions pursuant to regulations promulgated under the FDICIA. See "-- The Holding Company -- Support of Banks."
The following table sets forth the capital ratios of the Bank at December 31, 2000.
Pursuant to the FDICIA, regulations have been adopted defining five capital levels: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Increasingly severe restrictions are placed on a depository institution as its capital level classification declines. An institution is critically undercapitalized if it has a tangible equity to total assets ratio less than or equal to 2%. An institution is adequately capitalized if it has a total risk-based capital ratio less than 10%, but greater than or equal to 8%, or a Tier 1 risk-based capital ratio less than 6%, but greater than or equal to 4%, or a leverage ratio less than 5%, but greater than or equal to 4% (3% in certain circumstances). An institution is well capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. Under these regulations, as of December 31, 2000, the Bank was well capitalized, which classification places no significant restrictions on the Bank's activities.
Internal Operating Requirements. Federal regulations promote the safety and soundness of individual institutions by specifically addressing, among other things: (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; and (6) compensation and benefit standards for management officials.
Real Estate Lending Evaluations. Federal regulators have adopted uniform standards for the evaluation of loans secured by real estate or made to finance improvements to real estate. The Bank is required to establish and maintain written internal real estate lending policies consistent with safe and
sound banking practices. The guidelines establish loan to value ratio limitations on real estate loans, which are equal to or higher than the loan to value limitations established by CoBiz.
Deposit Insurance Premiums. Under current regulations, FDIC-insured depository institutions that are members of the FDIC pay insurance premiums at rates based on their assessment risk classification, which is determined, in part, based on the institution's capital ratios and, in part, on factors that the FDIC deems relevant to determine the risk of loss to the FDIC. Assessment rates range from $0 to $0.27 per $100. The Bank currently does not pay an assessment rate on insured deposits. This classification for determination of assessment rate may be reviewed semi-annually.
Restrictions on Loans to One Borrower. Under federal law, the aggregate amount of loans that may be made to one borrower by the Bank is generally limited to 15% of its unimpaired capital, surplus, undivided profits and allowance for loan and lease losses. The Bank seeks participations to accommodate borrowers whose financing needs exceed the Bank's lending limits.
CHANGING REGULATORY STRUCTURE
Regulation of the activities of national and state banks and their holding companies imposes a heavy burden on the banking industry. The FRB, OCC and FDIC all have extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and their holding companies. These agencies can assess civil monetary penalties, issue cease and desist or removal orders, seek injunctions and publicly disclose such actions. Moreover, the authority of these agencies has expanded in recent years, and the agencies have not yet fully tested the limits of their powers.
The laws and regulations affecting banks and financial or bank holding companies have changed significantly in recent years, and there is reason to expect that changes will continue in the future, although it is difficult to predict the outcome of these changes. From time to time, various bills are introduced in the United States Congress with respect to the regulation of financial institutions. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial services industry. In particular, recently enacted and proposed legislation has focused on expanding the ability of participants in the banking industry to engage in other lines of business. The enactment of such legislation could put us at a competitive disadvantage because we may not have the capital to participate in other lines of business to the same extent as more highly capitalized financial or bank holding companies. We cannot predict whether any of these proposals will be adopted or, if adopted, how these proposals would affect us.
MONETARY POLICY
The monetary policy of the FRB has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the means available to the FRB to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits. FRB monetary policies have materially affected the operations of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of CoBiz and its subsidiaries cannot be predicted.
FIRST CAPITAL BANK ACQUISITION
On March 8, 2001, we completed our acquisition of First Capital Bank of Arizona. The acquisition was structured as a merger between First Capital Bank and a wholly-owned subsidiary we formed to participate in the merger. As a result of the merger, First Capital Bank became our wholly owned subsidiary.
First Capital Bank serves the Phoenix, Arizona metropolitan area, which is located principally in Maricopa County. More than half of Arizona's population resides in Maricopa County, which includes the cities of Phoenix, Tempe, Mesa, Scottsdale, Glendale, Chandler and Peoria. According to U.S. Census data, Arizona is the second fastest growing state in the nation. Arizona experienced a population growth rate of 30.4% between 1990 and 1999 as compared to the national growth rate of 9.6% during the same period. Maricopa County had a total population of approximately 2.9 million at the end of 1999. The area experienced an increase of approximately 78,000 people from 1998 to 1999. Arizona's economic sectors include trade, manufacturing, mining, agriculture, construction and tourism, with services constituting the largest economic sector. According to statistics published by the Arizona Department of Commerce, Arizona has attracted high-technology industries which have a total economic impact of $33 billion in the state, representing nearly 56% of all manufacturing employment. As of August 2000, the unemployment rate was 4.0%.
The First Capital Bank acquisition represents the first step in implementing our strategy for expansion into geographic markets outside Colorado. The Phoenix market was selected because it is similar to the Denver market in many ways, with a strong economy and rapidly growing population and a concentration of small- to medium-sized businesses and high net worth individuals. First Capital Bank was selected because CoBiz and First Capital Bank have very similar target customer bases and approaches to serving those target customers. The acquisition of First Capital Bank gives CoBiz the platform to execute its successful branching strategy in Arizona, opening new bank locations led by experienced local bankers. CoBiz intends to grow First Capital Bank by offering CoBiz's expanded range of products and services to First Capital Bank's customers, by expanding First Capital Bank's marketing programs and by opening additional branches in the Phoenix area.
First Capital Bank shareholders received shares of our common stock in the merger. The exchange ratio was based on the average closing price of our common stock for the 20 trading days ending three trading days prior to the merger. The average closing price of our common stock during that period was $17.41, which resulted in an exchange ratio of 2.266 shares of our common stock for each share of First Capital Bank common stock. At that ratio, a total of approximately 1,653,258 shares of our common stock were issuable in the merger, subject to adjustment for fractional shares. The former shareholders of First Capital Bank owned approximately 19.65% of the issued and outstanding shares of our common stock immediately after the merger.
The following table sets forth selected financial data of First Capital Bank for and as of the end of each of the years in the five-year period ended December 31, 2000. Such data are derived from First Capital Bank's audited financial statements. Results for past periods are not necessarily indicative of results to be expected for any future period.
(1) The information presented represents a partial year. First Capital Bank commenced operations on August 7, 1996. Key ratios were computed after annualizing this five-month operational period.
(2) Restated for a 5% stock dividend paid in the second quarter of 2000.
(3) Yields do not include adjustments for tax-exempt interest because the amount of such interest is not material.
(4) Efficiency ratio is computed by dividing noninterest expense by the sum of net interest income before provision for loan losses and noninterest income, excluding nonrecurring gains.
(5) First Capital Bank did not have any nonperforming loans or other real estate owned at the end of the periods disclosed, and has not had any charge-offs since it began operations in 1996. A nonperforming loan is defined as a loan that is placed on nonaccrual status, a troubled debt restructuring, or a loan greater than 90 days pas due as to principal and/or interest payment.
ITEM 2.
ITEM 2. PROPERTIES
As of March 28, 2001, we had nine banking locations and one leasing office in Colorado. Our executive offices are located at 821 Seventeenth Street, Denver, Colorado, 80202. We lease our executive offices from Kesef, LLC ("Kesef"), an entity owned by certain directors of CoBiz and the Bank. See "Certain Relationships and Related Transactions" under Item 13 of Part III. The term of the lease expires in 2009. CoBiz leases all of its facilities. The following table sets forth specific information on each location.
All leased properties are considered in good operating condition and are believed adequate for our present and foreseeable future operations. We do not anticipate any difficulty in leasing additional suitable space upon expiration of any present lease terms. First Capital Bank of Arizona has two banking locations. It leases it main location in Phoenix, Arizona and owns its branch in Surprise, Arizona.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Periodically and in the ordinary course of business, various claims and lawsuits which are incidental to our business are brought against, or by, us. We believe that the ultimate liability, if any, resulting from such claims or lawsuits will not have a material adverse effect on the business, financial condition or results of operations of CoBiz.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of fiscal 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of CoBiz is traded on the Nasdaq Stock Market under the symbol "COBZ". At March 27, 2001, there were approximately 461 shareholders of record of CoBiz Common Stock, including the First Capital Bank shareholders who became our shareholders when we acquired First Capital Bank on March 8, 2001. Prior to June 18, 1998, there was no public market for our Common Stock.
The following table presents the range of high and low closing sale prices of our Common Stock for each quarter within the two most recent fiscal years as reported by the Nasdaq Stock Market and the per-share dividends declared in each quarter during that period.
The timing and amount of future dividends are at the discretion of the board of directors of CoBiz and will depend upon the consolidated earnings, financial condition, liquidity and capital requirements of CoBiz and its subsidiaries, the amount of cash dividends paid to CoBiz by its subsidiaries, applicable government regulations and policies and other factors considered relevant by the board of directors of CoBiz. The board of directors of CoBiz anticipates that it will continue to pay quarterly dividends in amounts determined based on the factors discussed above. Capital distributions, including dividends, by institutions such as the Bank are subject to restrictions tied to the institution's earnings. See "Supervision and Regulation - -- The Bank -- Dividend Restrictions" included under Item 1 of Part I.
On the dates listed below, CoBiz issued the following numbers of shares of its Common Stock to five employees upon exercise of options issued under its Incentive Stock Option Plan at prices ranging from $2.33 to $13.00 per share, for an aggregate purchase price of $85,767:
The shares were issued without registration under the Securities Act of 1933, as amended, in reliance on the exemption afforded by Section 4(2) of the Act and Regulation D promulgated thereunder.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) Yields do not include adjustments for tax-exempt interest because the amount of such interest is not material.
(2) Efficiency ratio is computed by dividing noninterest expense by the sum of net interest income before provision for loan and lease losses and noninterest income, excluding nonrecurring gains.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
CoBiz was acquired by a group of private investors in September 1994. In March 1997, we completed a private placement of 1,102,725 shares of common stock at a price of $3.61 per share, for net proceeds of approximately $4.0 million, which we used to fund our continuing growth. We completed the initial public offering of our common stock in June 1998. We sold a total of 1,610,000 shares of common stock at $12.00 per share yielding net proceeds of $17.5 million, after deducting underwriting commissions and other expenses.
On June 19, 2000, we issued 30-year capital trust preferred securities in the aggregate amount of $20,000,000. The trust preferred securities bear a cumulative fixed interest rate of 10% per annum and mature on June 30, 2030. Interest distributions are payable quarterly. We may defer the payment of interest at any time for a period not exceeding 20 consecutive quarters provided that the deferral period does not extend past the stated maturity. During any such deferral period, our ability to pay dividends on our common shares will be restricted. Subject to approval by the FRB, the trust preferred securities may be redeemed prior to maturity at our option on or after June 30, 2005. Portions of the trust preferred securities qualify as Tier I capital under regulatory definitions. Issuance costs consisting primarily of underwriting discounts and professional fees of approximately $1 million were capitalized and are being amortized over five years to noninterest expense using the straight-line method.
Our management has focused on developing an organization with personnel, management systems and products that will allow us to compete effectively and position us for growth. The cost of this process relative to our size has been high. In addition, we have operated with excess capacity during the start-up phases of various projects. As a result, relatively high levels of noninterest expense have adversely affected our earnings over the past several years. Salaries and employee benefits comprised most of this overhead category. However, we believe that our compensation levels have allowed us to recruit and retain a highly qualified management team capable of implementing our business strategies. We believe that our compensation policies, which include the granting of options to purchase common stock to many employees, have highly motivated our employees and have enhanced our ability to maintain customer loyalty and generate earnings. While we will continue to add personnel to lead new growth initiatives, including middle management, we believe that our senior management and systems infrastructure are adequate to support our anticipated growth without incurring proportionate increases in general, administrative and other noninterest expenses.
From December 31, 1995 to December 31, 2000, our shareholders' equity increased 418%, from $9.1 million to $47.1 million. During that same time period, our outstanding loans and leases (net) increased 409%, from $87.3 million to $444.7 million. This increase has primarily been the result of our focus on local relationship banking and commercial lending to small- and medium-sized businesses and high net worth individuals. In addition, we have emphasized building and maintaining asset quality through our credit underwriting and monitoring process. Nonperforming assets have ranged from 0.07% to 0.58% of total assets during this period. We have maintained asset quality, while continuing to build our allowance for loan and lease losses. Our allowance for loan and lease losses increased 321%, from $1.4 million as of December 31, 1995 to $5.9 million as of December 31, 2000.
This discussion should be read in conjunction with our consolidated financial statements and notes thereto included in this Form 10-K beginning on page F- 1. For a description of our accounting policies, see Note 1 of Notes to Consolidated Financial Statements. For a discussion of the segments included in our principal activities, see Note 15 of Notes to Consolidated Financial Statements.
FINANCIAL CONDITION
DECEMBER 31, 2000, COMPARED TO DECEMBER 31, 1999
Our total assets increased by $141.1 million to $633.1 million as of December 31, 2000, from $492.0 million as of December 31, 1999. A consistent focus on internal growth and sustained loan demand allowed our loan and lease portfolio (net) to increase by $98.6 million, from $346.1 million at December 31, 1999, to $444.7 million as of December 31, 2000. Total investments were $146.1 million as of December 31, 2000, compared to $109.9 million as of December 31, 1999. The increase in the investment portfolio was possible due to strong deposit growth and the proceeds from the trust preferred securities issued in June of 2000. Deposits increased by $67.5 million to $450.8 million as of December 31, 2000, from $383.3 million as of December 31, 1999. Noninterest-bearing deposits increased by $24.7 million, and interest-bearing deposits increased by $42.8 million. Low-cost demand deposits comprised 29% of total deposits as of December 31, 2000. Federal funds purchased and securities sold under agreements to repurchase increased by $41.9 million at December 31, 2000 to $76.2 million. Of this total, $65.8 million represents repurchase agreements transacted on behalf of our customers and is not considered a wholesale borrowing source. The increase in deposits and customer repurchase agreements is attributable, in part, to an increased emphasis on deposit generation included in banker production goals. Advances from the FHLB-Topeka were $35.8 million at December 31, 2000, compared to $31.0 million at December 31, 1999.
DECEMBER 31, 1999, COMPARED TO DECEMBER 31, 1998
Our total assets increased by $125.4 million to $492.0 million as of December 31, 1999, from $366.6 million as of December 31, 1998. Our loan and lease portfolio (net) increased by $122.8 million, from $223.3 million at December 31, 1998, to $346.1 million as of December 31, 1999. The strong loan growth was attributable to a robust Colorado economy. Total investments were $109.9 million as of December 31, 1999, compared to $107.9 million as of December 31, 1998. The nominal increase in the investment portfolio was the result of utilizing our funding resources primarily to support loan demand, rather than investment purchases. Deposits were $383.3 million as of December 31, 1999, compared to $273.0 million as of December 31, 1998, a 40.4% increase. Noninterest-bearing deposits increased by $11.3 million, and interest-bearing deposits increased by $99.0 million. Low-cost demand deposits comprised 28% of total deposits as of December 31, 1999, and 35% of total deposits as of December 31, 1998. Federal funds purchased and securities sold under agreements to repurchase increased by $5.9 million, to $34.4 million as of December 31, 1999 from $28.5 million as of December 31, 1998. Repurchase agreements transacted on behalf of our customers were $33.1 million at December 31, 1999 and $25.0 million at December 31, 1998. Outstanding advances from the FHLB-Topeka were $31.0 million at December 31, 1999 compared to $26.1 million as of December 31, 1998.
NET INTEREST INCOME
The largest component of our net income is our net interest income. Net interest income is the difference between interest income, principally from loans, leases and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference
between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.
The following table presents, for the periods indicated, certain information related to our average asset and liability structure and our average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities.
(1) Yields do not include adjustments for tax-exempt interest because the amount of such interest is not material.
(2) Loan fees included in interest income are not material. Nonaccrual loans and leases are included in average loans and leases outstanding.
The following table illustrates, for the periods indicated, the changes in the levels of interest income and interest expense attributable to changes in volume or rate. Changes in net interest income due to both volume and rate have been included in the changes due to rate.
(1) Yields do not include adjustments for tax-exempt interest because the amount of such interest is not material.
(2) Loan fees included in interest income are not material. Nonaccrual loans and leases are included in average loans and leases outstanding.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK--ASSET/LIABILITY MANAGEMENT
Asset/liability management is concerned with the timing and magnitude of repricing assets compared to liabilities. It is our objective to generate stable growth in net interest income and to attempt to control risks associated with interest rate movements. In general, our strategy is to reduce the impact of changes in interest rates on net interest income by maintaining a favorable match between the maturities or repricing dates of our interest-earning assets and interest-bearing liabilities. We adjust interest sensitivity during the year through changes in the mix of assets and liabilities. We do not utilize derivative financial instruments to manage our interest rate risk. Our asset and liability management strategy is formulated and monitored by the asset/liability committee, in accordance with policies approved by the board of directors of the Bank. This committee meets regularly to review, among other things, the sensitivity of our assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activity, and maturities of investments and borrowings. The asset/liability committee also approves and establishes pricing and funding decisions with respect to our overall asset and liability composition. The committee reviews our liquidity, cash flow flexibility, maturities of investments, deposits and borrowings, deposit activity, current market conditions,
and general levels of interest rates. To effectively measure and manage interest rate risk, we use simulation analysis to determine the impact on net interest income of changes in interest rates under various interest rate scenarios. From these simulations, interest rate risk is quantified and appropriate strategies are developed and implemented.
The following table presents an analysis of the sensitivity inherent in our net interest income and market value of equity. The interest rate scenario presented in the table includes interest rates at December 31, 2000 as adjusted by instantaneous rate changes upward and downward of up to 200 basis points. Since there are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates, this analysis is not intended to be a forecast of the actual effect of a change in market interest rates. The market value sensitivity analysis presented includes assumptions that (i) the composition of our interest sensitive assets and liabilities existing at December 31, 2000 will remain constant over the twelve-month measurement period; and (ii) that changes in market rates are parallel and instantaneous across the yield curve regardless of duration or repricing characteristics of specific assets or liabilities. Further, the analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. Accordingly, this analysis is not intended to and does not provide a precise forecast of the effect actual changes in market rates will have on us.
Our results of operations depend significantly on net interest income. Like most financial institutions, our interest income and cost of funds are affected by general economic conditions and by competition in the marketplace. Rising and falling interest rate environments can have various impacts on net interest income, depending on the interest rate profile (i.e., the difference between the repricing of interest-earning assets and interest-bearing liabilities), the relative changes in interest rates that occur when various assets and liabilities reprice, unscheduled repayments of loans and leases and investments, early withdrawals of deposits and other factors. As a general rule, banks with positive interest rate gaps are more likely to be susceptible to declines in net interest income in periods of falling interest rates, while banks with negative interest rate gaps are more likely to experience declines in net interest income in periods of rising interest rates. As of December 31, 2000, our cumulative interest rate gap for the period of less than one year was a positive 10.13%. Therefore, assuming no change in our gap position, a rise in interest rates is likely to result in increased net interest income, while a decline in interest rates is likely to result in decreased net interest income. This is a one-day position that is continually changing and is not indicative of our position at any other time. While the gap position is a useful tool in measuring interest rate risk and contributes toward effective asset and liability management, shortcomings are inherent in gap analysis since certain assets and liabilities may not move proportionally as interest rates change. Consequently, in addition to gap analysis, we use the simulation model discussed above to test the interest rate sensitivity of net interest income and the balance sheet. The following table sets forth the estimated maturity or repricing, and the resulting interest rate gap, of our interest-earning assets and interest-bearing liabilities at December 31, 2000. All amounts in the table are based on contractual pricing schedules. Actual prepayment and withdrawal experience may vary significantly from the assumptions reflected in the table.
To manage these relationships, we evaluate the following factors: liquidity, equity, debt/capital ratio, anticipated prepayment rates, portfolio maturities, maturing assets and maturing liabilities. Our asset and liability management committee is responsible for establishing procedures that enable us to achieve our goals while adhering to prudent banking practices and existing loan and investment policies. Our policy is intended to control the exposure of our operations to changing interest rates by attempting to maintain a position within a narrow range around an "earnings neutral position," which is defined as the mix of assets and liabilities that generates the net interest margin that is least affected by interest rate changes.
We have focused on maintaining balance between interest rate sensitive assets and liabilities and repricing frequencies. An important element of this focus has been to emphasize variable rate loans and investments funded by deposits that also mature or reprice over periods of twelve months or less.
The following table presents, at December 31, 2000, loans and leases by maturity in each major category of our portfolio. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments. Loan renewals are evaluated in the same manner as new credit applications.
As of December 31, 2000, of the $230.8 million of loans and leases with maturities of one year or more, approximately $104.9 million were fixed rate loans and leases and $125.9 million were variable rate loans and leases.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000, COMPARED TO YEAR ENDED DECEMBER 31, 1999
Earnings Performance. Net earnings available to common shareholders were $6.8 million for the year ended December 31, 2000, compared with $4.9 million for the year ended December 31, 1999, an increase of 37%. This increase was primarily due to an increase in net interest income of $5.5 million. Earnings per share on a fully diluted basis for 2000 were $0.98, versus $0.72 for the same period a year ago, an increase of 36%. On an operating basis, before the amortization of goodwill, consolidated net income available to common shareholders for the year ended December 31, 2000 and 1999, was $7.2 million and $5.4 million, or $1.04 and $0.78 per diluted share, respectively. Return on average tangible assets was 1.30% in the year 2000, compared with 1.27% in 1999. Return on average tangible common shareholders' equity was 18.29% for the year ended December 31, 2000, versus 15.59% for the year ended December 31, 1999. Total assets increased to $633.1 million at December 31, 2000, a 29% increase from $492.0 million at December 31, 1999. Strong loan production was responsible for much of this growth. Net loans and leases grew $98.6 million from 1999 to 2000.
Net Interest Income. Net interest income before provision for loan and lease losses was $26.1 million for the year ended December 31, 2000, an increase of $5.5 million, or 27%, compared with the year ended December 31, 1999. Yields on our interest-earning assets improved by 69 basis points to 9.02% for the year ended December 31, 2000, from 8.33% for the year ended December 31, 1999. The yield improvement on interest earning assets is principally the result of the prime rate increasing by 100 basis points from December 1999 to December 2000. Yields paid on interest-bearing liabilities increased by 102 basis points during this same period. The net interest margin was 5.05% for the year ended December 31, 2000, down from 5.28% for the year ended December 31, 1999. Part of the margin compression related to the $20 million of trust preferred securities issued in June of 2000. Also contributing to the decrease in the net interest margin was heightened competition for customer deposits, which resulted in higher costs of interest-bearing deposits. Although the growth in volume of our average interest-earning assets helped mitigate the margin compression, continued increases in interest rates could adversely affect both our cost of funds and loan originations, resulting in lower net interest margins in
future operating periods. Average earning assets increased by 33% to $516.3 million for 2000, from $389.3 million for 1999.
Provision and Allowance for Loan and Lease Losses. The provision for loan and lease losses increased by $240,000 to $1.7 million for the year ended December 31, 2000, up from $1.5 million for the year ended December 31, 1999. This increase was due to the increase in total loans and leases outstanding and is not reflective of a deterioration of credit quality. Key indicators of asset quality have remained favorable (minimal changes in nonperforming asset trends), while average outstanding loan amounts have increased to $390.1 million for 2000, up from $281.8 million for 1999. As of December 31, 2000, the allowance for loan and lease losses amounted to $5.9 million, or 1.30% of total loans and leases.
Noninterest Income. We reported a modest increase in noninterest income for 2000. Total noninterest income was $4.7 million for the year ended December 31, 2000, compared to $4.6 million for the year ended December 31, 1999. The increase was primarily attributable to growth in trust fees, other banking service related fees, and gains on the disposition of operating lease equipment returns. Deposit service charges were flat, period over period. Historically, increases in deposit service charges have not corresponded with the growth in deposit balances. This is due to our offering customers the choice of either paying for services in cash or by maintaining additional noninterest-bearing account balances. In addition, there was a net decrease in operating lease rentals, which was the result of concentrating our marketing efforts in 2000 on originating loans, rather than leases. We focused on generating loans, as opposed to leases, because the interest spreads on loans have been more favorable than leases. Net investment in operating leases was $2.4 million at December 31, 2000, compared to $4.0 million at December 31, 1999. During 1999, we realized gains of $44,000 on the sale of investment securities. There were no sales of investment securities during 2000.
Noninterest Expense. Total noninterest expense increased by $2.0 million to $17.8 million for the year ended December 31, 2000, up from $15.8 million for the year ended December 31, 1999. During this period, however, the efficiency ratio before goodwill amortization improved to 56.8% for the year ended December 31, 2000, down from 61.2% for the comparable period in 1999. The improvement in the efficiency ratio is the result of revenues growing at a faster rate than expenses. The increases in noninterest expenses reflect our ongoing investment in personnel, technology and office space needed to accommodate internal growth. In the second quarter of 1999, our Boulder bank relocated, a second Boulder location was added and the Vail valley location opened. The expenses of those new facilities were included in noninterest expense for only a portion of the year ended December 31, 1999, but for all of 2000. Offsetting the increases in salaries and occupancy costs was a decrease of $397,000 in depreciation expense on operating leases. As discussed above, management dedicated less resources to originating leases in 2000. Included in our noninterest expense for the year ended 2000 and 1999 is goodwill amortization of $439,000. Goodwill of $6.4 million was recorded in connection with our original acquisition in 1994 and is being amortized over a 15-year period. The amortization of this asset adversely affects our net income, although it has no effect on our cash flow.
YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998
Earnings Performance. Net income was a record $4.9 million in 1999, compared to $3.2 million in 1998. This increase was primarily due to a $5.2 million increase in net interest income from 1998 to 1999. On an operating basis, before the amortization of goodwill, consolidated net income available to common shareholders for the years ended 1999 and 1998, was $5.4 million and $3.6 million, or $0.78 and $0.59 per diluted share, respectively. Return on average tangible assets was 1.27% in 1999, compared with 1.24% in 1998. Return on average tangible common shareholders' equity was 15.59% for 1999, versus 16.39% for 1998. Total assets increased to $492.0 million at December 31, 1999, a 34.2% increase
from $366.6 million at December 31, 1998. Strong loan production was responsible for much of this growth. Net loans and leases grew $122.8 million from 1998 to 1999.
Net Interest Income. Net interest income before provision for loan and lease losses was $20.5 million for the year ended December 31, 1999, an increase of $5.2 million, or 34%, compared with the year ended December 31, 1998. Interest income increased 35.6%, to $32.4 million in 1999 from $23.9 million in 1998. In 1999, interest on loans and leases increased by $6.3 million and interest on investments increased by $2.2 million. Of the $8.5 million increase in 1999, $10.6 million was due to volume increases, which were partially offset by a negative rate variance of $2.1 million. Average loan and lease volumes were up by $83.9 million from 1998, and average investments were up by $37.6 million. The yield on average interest-earning assets was 8.33% for 1999, compared with 8.91% in 1998. The drop in yield is attributable to a decreasing rate environment. On average, yields on investment securities remained flat at 5.85% in 1999 and 1998. Yields on average loans and leases decreased to 9.20% in 1999, from 9.93% in 1998. Interest expense increased 38.5%, to $11.9 million in 1999, from $8.6 million in 1998. The increases were primarily due to higher volumes of interest-bearing liabilities. In 1999, average interest-bearing deposits and average interest-bearing liabilities grew by $59.3 million and $91.0 million, respectively, from 1998, while the cost of interest-bearing liabilities dropped to 4.19% from 4.45% during the same period. The result was $3.3 million of additional interest expense in 1999.
Provision for Loan and Lease Losses. The provision for loan and lease losses was $1,473,000 in 1999, compared to $1,188,000 in 1998. This increase was due to the increase in total loans and leases outstanding, and was not reflective of a deterioration of credit quality. In 1999, both the ratio of non-performing loans to total loans, and the ratio of net charge-offs to average loans declined from the previous two years. Net charge-offs were $159,000 in 1999, versus $165,000 in 1998.
Noninterest Income. Noninterest income increased 8.6%, to $4.6 million in 1999 from $4.2 million in 1998. The moderate increase from 1998 relates to a decrease in rental income associated with operating leases. Operating lease income was $2.3 million in 1999, compared to $2.4 million in 1998. During 1999, Colorado Business Leasing focused on originating direct finance type leases rather than operating leases. We believe that other noninterest income, such as deposit service charges, has not grown at the same rate as loan and deposit volumes in part because customers are provided the option of paying for services in cash or by maintaining additional noninterest-bearing account balances. Although the use of compensating balances in lieu of fees decreases noninterest income, it positively impacts the net interest margin by increasing the level of noninterest-bearing deposits. At December 31, 1999, 27.8% of our deposits were noninterest-bearing deposits.
Noninterest Expense. Total operating expenses were $15.7 million in 1999 and $13.1 million in 1998. Overall, noninterest expenses were up 19.9% from 1998. Of this increase, approximately $1.3 million represented additional personnel costs and $1.0 million represented increased occupancy costs. The increases in expenses reflect our ongoing investment in personnel, technology and office space needed to accommodate growth. In addition, $2.0 million of the noninterest expense incurred in 1999 was related to depreciation expense from operating leases. Although operating expenses have increased each year to accommodate our growth, the efficiency ratio continues to improve because we consistently generate revenues at a faster rate than expenses. The efficiency ratio before goodwill amortization was 61.16% for the year ended 1999 and 65.54% for 1998. Included in our noninterest expense for the years ended 1999 and 1998 is goodwill amortization of $439,000 and $434,000, respectively. Goodwill of $6.4 million was recorded in connection with our original acquisition in 1994 and is being amortized over a 15-year period. The amortization of this asset adversely affects our net income, although it has no effect on our cash flow.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity management objective is to ensure our ability to satisfy the cash flow requirements of depositors and borrowers and to allow us to sustain our operations. Historically, our primary source of funds has been customer deposits. Scheduled loan and lease repayments are a relatively stable source of funds, while deposit inflows and unscheduled loan and lease prepayments, which are influenced by fluctuations in the general level of interest rates, returns available on other investments, competition, economic conditions and other factors, are relatively unstable. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer term basis to support expanded lending activities and to match the maturity or repricing intervals of assets.
We use various forms of short-term borrowings for cash management and liquidity purposes on a limited basis. These forms of borrowings include federal funds purchased, securities sold under agreements to repurchase, the State of Colorado Treasury's Time Deposit program and borrowings from the FHLB-Topeka. The Bank has approved federal funds purchase lines with six other banks with an aggregate credit line of $51 million. In addition, the Bank may apply for up to $20 million of State of Colorado time deposits. The Bank also has a line of credit from the FHLB-Topeka that is limited by the amount of eligible collateral available to secure it. Borrowings under the FHLB-Topeka line are required to be secured by unpledged securities and qualifying loans. At December 31, 2000, we had $111.0 million in unpledged securities and qualifying loans available to collateralize FHLB-Topeka borrowings and securities sold under agreements to repurchase. We also have a $20 million revolving credit line facility with American National Bank and Trust Company available for liquidity needs.
During 2000, cash and cash equivalents increased by $6.1 million. This increase was primarily the result of $131.9 million in cash provided by financing activities (mainly customer deposits, repurchase agreements and $20 million of proceeds from the issuance of trust preferred securities). Offsetting this increase was cash used in investing activities of $135.6 million (mainly loan and lease originations and security purchases) and net cash of $9.8 million provided by operating activities.
During 1999, cash and cash equivalents decreased by $1.4 million. This decrease was primarily the result of cash used in investing activities of $132.0 million (mainly loan and lease originations and security purchases). Offsetting cash outflows from investing activities was $120.4 million of cash provided by financing activities (mainly customer deposits). Net cash of $10.2 million was provided by operating activities.
Dividends paid by the Bank provide cash to CoBiz for various purposes, including the payment of dividends on its common stock. The approval of the Office of the Comptroller of the Currency is required prior to the declaration of any dividend by the bank if the total of all dividends declared by the bank in any calendar year exceeds the total of its net profits for that year combined with the retained net profits for the preceding two years. In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 provides that the bank cannot pay a dividend if it will cause the bank to be "undercapitalized." CoBiz's ability to pay dividends on its common stock depends upon the availability of dividends from the Bank, and upon CoBiz's compliance with the capital adequacy guidelines of the FRB. See Item 1 "Business - Supervision and Regulation" and Note 12 of Notes to the Consolidated Financial Statements of CoBiz for an analysis of the compliance of the Bank and CoBiz with applicable capital adequacy guidelines.
EFFECTS OF INFLATION AND CHANGING PRICES
The primary impact of inflation on our operations is increased operating costs. Unlike most retail or manufacturing companies, virtually all of the assets and liabilities of a financial institution such as CoBiz are monetary in nature. As a result, the impact of interest rates on a financial institution's performance is generally greater than the impact of inflation. Although interest rates do not necessarily move in the same direction, or to the same extent, as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. Over short periods of time, interest rates may not move in the same direction, or at the same magnitude, as inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138 (collectively, "SFAS 133"). SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000, and accordingly, CoBiz adopted SFAS 133 on January 1, 2001. SFAS 133 requires business enterprises to recognize all derivatives as either assets or liabilities in their financial statements and to record such instruments at fair value. Any change in fair value of such derivatives are required to be recognized in the statement of income or comprehensive income in the period of change. Statement No. 133 did not have a significant impact on CoBiz's financial statements.
In September of 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125" ("SFAS 140"). This statement replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." It revises the standard for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS's No. 125's provisions without reconsideration. Implementation of SFAS No. 140 is not expected to have a material effect on our financial position or results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures About Market Risk--Asset/Liability Management."
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the reports thereon, the notes thereto beginning at page of this Form 10-K, which financial statements, reports, notes and data are incorporated herein by reference.
The following selected quarterly financial data of CoBiz for each of the quarters in the two years ended December 31, 2000 are unaudited and, in the opinion of CoBiz management, reflect all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation of such data.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning CoBiz directors and officers called for by this item will be included in the Company's definitive Proxy Statement prepared in connection with the 2001 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning the compensation of CoBiz executives called for by this item will be included in the Company's definitive Proxy Statement prepared in connection with the 2001 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and management called for by this item will be included in the Company's definitive Proxy Statement prepared in connection with the 2001 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF COBIZ
Information concerning certain relationships and transactions between CoBiz and its affiliates called for by this item will be included in the Company's definitive Proxy Statement prepared in connection with the 2001 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS.
See Index to Consolidated Financial Statements.
(b) EXHIBITS AND INDEX OF EXHIBITS.
- ------------
(1) Incorporated herein by reference from the Registrant's Registration Statement on Form S-4 (File No. 333-51866).
(2) Incorporated herein by reference from the Registrant's Registration Statement on Form SB-2 (File No. 333-50037).
(3) Incorporated herein by reference from the Registrant's Current Report on Form 8-K, as filed on March 23, 2001.
(4) Incorporated herein by reference from the Registrant's Registration Statement on Form S-1 (File No. 333-37674).
(5) Incorporated herein by reference from the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1998, as filed on November 13, 1998.
(6) Incorporated herein by reference from the Registrant's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999, as filed on May 17, 1999.
(7) Incorporated herein by reference from the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999, as filed on November 12, 1999.
(8) Incorporated herein by reference from the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1999, as filed on March 30, 2000.
(9) Incorporated herein by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, as filed on May 12, 2000.
(10) Incorporated herein by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, as filed on November 14, 2000.
(11) Incorporated herein by reference from the Registrant's Proxy Statement filed in connection with its 2000 annual meeting of shareholders, as filed on April 19, 2000.
+ Confidential treatment has been granted by the Securities and Exchange Commission as to certain portions of exhibit. Such portions have been redacted.
(c) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended December 31, 2000.
(d) FINANCIAL STATEMENT SCHEDULES.
All financial statement schedules are omitted because they are not required or because the required information is included in the financial statements and/or related notes.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 2001
CoBiz Inc. By: /s/ Steven Bangert ------------------------------ Steven Bangert Chairman of the Board of Directors
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of CoBiz Inc. Denver, Colorado
We have audited the accompanying consolidated statements of condition of CoBiz Inc. (formerly Colorado Business Bankshares, Inc.) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income and comprehensive income, shareholders' equity, and cash flows for the three years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the three years ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
March 8, 2001 Denver, Colorado
COBIZ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION DECEMBER 31, 2000 AND 1999 - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
COBIZ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
COBIZ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
COBIZ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
COBIZ INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 - --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting practices of CoBiz Inc., formerly Colorado Business Bankshares, Inc. ("Parent"), its wholly-owned subsidiary, the Colorado Business Bank, N.A. ("Bank"), and its 80% owned equipment leasing subsidiary, Colorado Business Leasing, Inc. ("Leasing"), CoBiz Connect and Colorado Business Bankshares Capital Trust I, collectively referred to as the "Company or CoBiz," conform to accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.
The Bank is a commercial banking institution with eight locations in the Denver metropolitan area, and one in Edwards, Colorado. Leasing provides equipment leasing primarily to middle-market companies. In preparing its financial statements, management of the Company is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for loan and lease losses, the valuation of real estate acquired through foreclosures or in satisfaction of loans, lease residuals and valuation of property under operating leases. The following is a summary of the Company's significant accounting and reporting policies.
CONSOLIDATION - The consolidated financial statements include the accounts of the Parent, the Bank, Leasing, CoBiz Connect and Colorado Business Bankshares Capital Trust I. Intercompany balances and transactions are eliminated in consolidation. Losses attributable to minority shareholders of Leasing have exceeded their share of equity of Leasing.
CASH AND DUE FROM BANKS - The Company considers all liquid investments with original maturities of three months or less to be cash equivalents.
INVESTMENTS - The Company classifies its investment securities as held to maturity, available for sale, or trading according to management's intent. As of December 31, 2000 and 1999, the Company had no trading securities.
a. Investment Securities Held to Maturity - Bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts.
b. Investment Securities Available for Sale - Available for sale securities consist of bonds, notes, and debentures not classified as held to maturity securities and are reported at fair market value as determined by quoted market prices. Unrealized holding gains and losses, net of tax, are reported as a net amount in accumulated other comprehensive income (loss) until realized.
Premiums and discounts are recognized in interest income using the level-yield method over the period to maturity. Declines in the fair value of individual investment securities held to maturity and available for sale below their cost that are other than temporary are recorded as write-downs of the individual securities to their fair value and the related write-downs are included in earnings as realized losses.
Gains and losses on disposal of investment securities are determined using the specific-identification method.
Other investments, including primarily Federal Home Loan Bank and Federal Reserve Bank stock, are accounted for under the cost method.
LOANS AND LEASES - Loans and leases that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan and lease losses, deferred fees or costs on originated loans and leases, and unamortized premiums or discounts on purchased loans. Loan fees and certain costs of originating loans and leases are deferred and the net amount is amortized over the contractual life of the related loans and leases. Interest is accrued and credited to income daily based on the principal balance outstanding. The accrual of interest income is generally discontinued when a loan or lease becomes 90 days past due as to principal and interest. When a loan is designated as nonaccrual, the current period's accrued interest receivable is charged against current earnings while any portions applicable to prior periods are charged against the allowance for loan and lease losses. Interest payments received on nonaccrual loans are applied to the principal balance of the loan. Management may elect to continue the accrual of interest when the loan is in the process of collection and the realizable value of collateral is sufficient to cover the principal balance and accrued interest.
NET INVESTMENT IN DIRECT FINANCING LEASES - The Company has entered into various lease agreements which are accounted for as direct financing leases, in accordance with Statement of Financial Accounting Standards No. 13.
Under this method, the present value of the future lease payments, the present value of the unguaranteed residual and initial direct costs are recorded as assets, which are equal to the fair value of the equipment leased. In each period, initial direct costs are amortized and interest income, which is included in income from direct financing leases, is recognized as a constant percentage return on the net investment in the lease.
Residual values are established at lease inception equal to the estimated value, as determined by the Company, to be received from the equipment following termination of the initial lease. In estimating such values, the Company considers all relevant information and circumstances regarding the equipment and the lessee. Any permanent reduction in the estimated residual value of lease property is charged to operations in the period in which it occurs.
ALLOWANCE FOR LOAN AND LEASE LOSSES - The allowance for loan and lease losses is established as losses are estimated to have occurred through a provision for loan and lease losses charged to earnings. Loan and lease losses are charged against the allowance when management believes the uncollectibilty of a loan or lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan and lease losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibilty of the loans in light of historical experience, the nature and volume of the loan and lease portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED - Excess of cost over fair value of net assets acquired is amortized by the straight-line method over 15 years. The Company reviews such assets for impairment at least annually.
INVESTMENT IN OPERATING LEASES - The Company has entered into various equipment leases accounted for as operating leases in accordance with Statement of Financial Accounting Standards No. 13. The equipment, which is reported as investment in operating leases, is depreciated over the estimated useful life or lease term, if shorter.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less accumulated depreciation and amortization, which is calculated by the straight-line method over the estimated useful lives of the respective assets as follows:
Furniture, fixtures and equipment 3 to 10 years
Leasehold improvements are capitalized and amortized using the straight-line method over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE - Assets acquired by foreclosure or in settlement of debt and held for sale are valued at estimated fair value as of the date of foreclosure, and a related valuation allowance is provided for estimated costs to sell the assets. Management periodically evaluates the value of foreclosed assets held for sale and increases the valuation allowance for any subsequent declines in fair value less selling costs. Subsequent declines in value are charged to operations.
INCOME TAXES - A deferred income tax liability or asset is recognized for temporary differences which exist in the recognition of certain income and expense items for financial statement reporting purposes in periods different than for tax reporting purposes. The provision for income taxes is based on the amount of current and deferred income taxes payable or refundable at the date of the financial statements as measured by the provisions of current tax laws.
STOCK-BASED COMPENSATION - The Company accounts for its stock options using the intrinsic value based method and makes pro forma disclosures of net income and earnings per share using the fair value based method (see Note 10).
EARNINGS PER SHARE - Basic earnings per share is based on net income divided by the weighted average number of common shares outstanding during the period. The weighted average number of shares outstanding used to compute diluted earnings per share include the number of additional common shares that would be outstanding if the potential dilutive common shares and common share equivalents had been issued at the beginning of the year.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1999 and 1998 financial statements to conform with the 2000 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS - The Company adopted the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as of January 1, 2001. The Company believes that it currently has no derivative instruments and thus adoption of the statement had no effect on the consolidated financial statements of the Company.
2. INVESTMENTS
The amortized cost and estimated fair values of investment securities are summarized as follows:
The amortized cost and estimated fair value of investments in debt securities at December 31, 2000 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
During the years ended December 31, 2000, 1999 and 1998, there were no sales of held to maturity securities. Proceeds from sales of investment securities available for sale totaled $0, $9,858,000 and $14,716,000, respectively during the years ended December 31, 2000, 1999 and 1998. The related gross realized gains were $0, $48,000 and $162,000, respectively.
Investment securities with an approximate fair value of $12,469,000 and $15,897,000 were pledged to secure public deposits of $4,898,000 and $12,146,000 at December 31, 2000 and 1999, respectively.
Obligations of states and political subdivisions at December 31, 2000 and 1999 do not include any single issuer for which the aggregate carrying amount exceeds 10% of the Company's shareholders' equity.
Other investments at December 31, 2000 consists primarily of Federal Home Loan Bank stock (carrying value $2,292,000) and Federal Reserve Bank stock (carrying value $876,000). In addition, the Bank had $650,000 in an investment partnership being accounted for under the cost method. The Bank has committed to investing up to $1,500,000 in the partnership. Certain shareholders and directors have also invested in and received consulting fees from the partnership.
3. LOANS AND LEASES
Categories of loans and leases, net of deferred fees include:
The majority of the Company's lending and leasing activities are with customers located in the Denver metropolitan area.
In the ordinary course of business, the Company makes various direct and indirect loans to officers and directors of the Company and its subsidiaries at competitive rates. Activity with respect to officer and director loans is as follows for the years ended December 31, 2000, 1999 and 1998, respectively:
The Company sells participations in loans to an entity controlled by the Chairman of the Board of Directors and a member of the Board of Directors. The amount of participations outstanding with the affiliate were $550,000 and $1,304,000 at December 31, 2000 and 1999, respectively.
Transactions in the allowance for loan and lease losses are summarized as follows:
The recorded investment in loans that are considered to be impaired under SFAS No. 114 as amended by SFAS No. 118 (all of which were on a non-accrual basis) was $431,000 and $634,000 at December 31, 2000 and 1999, respectively (all of which have a related allowance for loan and lease loss). The allowance for loan and lease losses applicable to impaired loans was $92,000 and $160,000 at December 31, 2000 and 1999, respectively. Interest of $8,000, $46,000 and $43,000 was recognized on average impaired loans of $732,000, $543,000 and $639,000, during 2000, 1999 and 1998, respectively. The amount of additional interest income that would have been recorded if the loans had been current in accordance with the original terms is insignificant for the years ended December 31, 2000, 1999 and 1998.
4. INVESTMENT IN LEASES
The Company is the lessor of equipment under agreements expiring in various future years. Certain of the equipment leases provide for additional rents, based on use in excess of a stipulated minimum number of hours, and allow the lessees to purchase the equipment for fair value at the end of the lease terms.
Property leased or held for lease to others under operating leases consists of the following:
The Company's net investment in direct financing leases consists of the following at December 31, 2000 and 1999:
At December 31, 2000, future minimum lease payments receivable under direct financing leases and noncancelable operating leases are as follows:
5. PREMISES AND EQUIPMENT
The major classes of premises and equipment are summarized as follows:
6. CERTIFICATES OF DEPOSIT
The composition of certificates of deposit is as follows:
Related interest expense is as follows:
Maturities of certificates of deposit of $100,000 and more are as follows:
7. BORROWED FUNDS
The Company has advances from the Federal Home Loan Bank of Topeka (FHLB) with interest rates that range from 6.42% to 6.89%. Advances are collateralized by qualifying loans and investment securities not otherwise pledged as collateral. At December 31, 2000 the FHLB advances are collateralized by loans of $82,460,000 and investment securities of $1,805,000.
Aggregate annual maturities of advances are as follows:
Securities sold under agreements to repurchase are summarized as follows:
The Company enters into sales of securities under agreements to repurchase. The amounts received under these agreements represent short-term borrowings and are reflected as a liability in the consolidated statements of condition. Securities sold under agreements to repurchase averaged $47,876,000, $40,421,000 and $18,811,000 and the maximum amounts outstanding at any month-end during 2000, 1999 and 1998 were $68,306,000, $51,982,000 and $24,956,000, respectively. At December 31, 2000, the weighted average interest rate was 5.64%.
Maturities of repurchase agreements are summarized as follows at December 31, 2000:
8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A SUBSIDIARY TRUST
In June 2000, the Company created a wholly-owned trust, Colorado Business Bankshares Capital Trust I, a trust formed under the laws of the State of Delaware (the "Trust"). The Trust issued $20,000,000 of 10.0% trust preferred securities and invested the proceeds thereof in 10.0% junior subordinated debentures of CoBiz Inc. The securities provide cumulative distributions at a 10% annual rate and the Company records the distributions in interest expense on the consolidated statement of income. The junior subordinated debentures will mature and the capital securities must be redeemed on June 30, 2030, which date may be shortened to a date not earlier that June 30, 2005, if certain conditions are met (including the Company having received prior approval of the Federal Reserve and any other required regulatory approvals). The junior subordinated debentures may be prepaid if certain events occur, including a change in tax status or regulatory capital treatment of the trust preferred securities. In each case, redemption will be made at par, plus the accrued and unpaid distributions thereon through the redemption date.
9. INCOME TAXES
The components of consolidated income tax expense are as follows:
A deferred tax asset or liability is recognized for the tax consequences of temporary differences in the recognition of revenue and expense for financial and tax reporting purposes. The net change during the year in the deferred tax asset or liability results in a deferred tax expense or benefit. The temporary differences, tax effected, which give rise to the Company's net deferred tax assets are as follows:
A reconciliation of income tax expense at the statutory rate to the Company's actual income tax expense is shown below:
10. SHAREHOLDERS' EQUITY
PREFERRED STOCK - The Board of Directors is authorized, among other things, to fix the designation and the powers, preferences and relative participating, optional and other special rights for preferred shares. All outstanding preferred stock was redeemed in 1998.
STOCK OPTIONS - The Company has adopted several incentive stock option plans to reward and provide long-term incentives for directors and key employees of the Company. The term of all options issued may not exceed ten years.
The 1995 Incentive Stock Option Plan (the "1995 Plan") authorizes the issuance of 197,925 shares of Common Stock. One-fourth of the options included under the 1995 Plan vest on each of the first four anniversaries of the grant. Under the 1995 Plan, Incentive Stock Options may not be granted at an exercise price of less than the fair market value of the Common Stock on the date of grant. Shares available for grant at December 31, 2000 totaled 483.
The 1997 Incentive Stock Option Plan (the "1997 Plan") reserves 101,036 shares for issuance at not less than the market value of the Company's stock at the date of grant. The majority of the options issued under the 1997 Plan are exercisable commencing one year from the date of grant and vest 25% per year thereafter becoming fully exercisable after four years. Shares available for grant at December 31, 2000 totaled 9,934.
The 1998 Stock Incentive Plan (the "1998 Plan") reserves 425,000 shares of Common Stock for issuance, and the maximum number of shares underlying awards that may be granted to an individual employee in a calendar year is 22,500 shares of Common Stock. The exercise price for options granted under the 1998 Plan must be at least equal to 100% of the fair market value of the Common Stock on the date of grant. The 1998 Plan permits the granting of Incentive Stock Options and non-qualified stock options. Options granted under the 1998 Plan have vesting schedules ranging from immediately exercisable to being exercisable four years from the grant date. Shares available for grant at December 31, 2000 totaled 192,048.
The following is a summary of changes in shares under option:
The outstanding options at December 31, 2000 were exercisable at prices ranging from $2.12 to $18.00 per share. The weighted-average remaining contractual life of options outstanding at December 31, 2000 was 6.80 years.
The Company has elected to continue to account for its stock options using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for its stock option plans. The Company estimated the fair value of options granted in 2000, 1999 and 1998 to be $339,000, $538,000 and $41,000, respectively using the Black-Scholes option pricing model prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation." The fair value of each stock option grant is estimated using the Black-Scholes option pricing model with the following weighted average assumptions for 2000, 1999 and 1998, respectively: risk-free interest rate of 5.03%, 6.56% and 4.72%; expected dividend yield of 1.53%, 1.64% and 0%; expected life of five years; and expected volatility of 33.04%, 38.09% and 36.16%. Had compensation cost been determined based on fair value at the grant date for the Company's stock options and based on the fair value of shares issued pursuant to the employee stock purchase plan described below in accordance with SFAS No. 123, the proforma effect on net income in 2000, 1999 and 1998 would have been a decrease of $168,000, $131,000 and $48,000, respectively. The effect on earnings per share is not material.
DIVIDENDS - At December 31, 2000, the Company's ability to pay dividends on its common stock, if it determines to do so, is largely dependent upon the payment of dividends by the Bank. At December 31, 2000, the Bank could have paid total dividends to the Company of approximately $13.2 million, without prior regulatory approval.
EARNINGS PER SHARE - Income available to common shareholders and the weighted average shares outstanding used in the calculation of Basic and Diluted Earnings Per Share are as follows:
EMPLOYEE STOCK PURCHASE PLAN - In January 2000, the Company's Board of Directors approved the adoption of an Employee Stock Purchase Plan ("ESPP"), which provides that all employees may elect to have a percentage of their payroll deducted and applied to the purchase of Common Stock at a discount. In addition, the Company may make a matching contribution up to 50% of an employee's deduction toward the purchase of additional Common Stock. The ESPP is administered by a committee of two or more directors of the Company appointed by the Board of Directors that are not employees or officers of the Company. During the year ended December 31, 2000, 5,458 shares were issued.
11. COMMITMENTS AND CONTINGENCIES
EMPLOYEE PROFIT SHARING TRUST - The Company has a defined contribution pension plan covering substantially all employees. Employees may contribute up to 15% of their compensation with the Company's discretionary matching within the limits defined for a 401(k) Plan. Employer contributions charged to expense for 2000, 1999 and 1998, were $334,000, $277,000 and $149,000, respectively.
LEASE COMMITMENTS - The Company entered into various operating lease agreements for office space. Most of the leases are subject to rent escalation provisions in subsequent years, and have renewal options at the end of the initial lease terms. Total rental expense for the years ended December 31, 2000, 1999 and 1998 was $1,269,000, $1,034,000 and $686,000, respectively. In 1998, certain officers and directors acquired the building in which the corporate office is located and certain banking operations are performed. The Company's corporate office lease expires June 30, 2009. Future minimum lease payments at December 31, 2000 under all noncancelable operating leases are as follows:
Minimum payments have not been reduced by minimum sublease rentals of $35,000 due in the future under a non-cancelable sublease.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK - In the normal course of business the Company has entered into financial instruments which are not reflected in the accompanying consolidated financial statements. These financial instruments include commitments to extend credit and stand-by letters of credit. The Company had the following commitments as of December 31, 2000:
The Company makes contractual commitments to extend credit and provide standby letters of credit, which are binding agreements to lend money to its customers at predetermined interest rates for a specific period of time. The credit risk involved in issuing these financial instruments is essentially the same as that involved in granting on-balance sheet financial instruments. As such, the Company's exposure to credit loss in the event of non-performance by the counter-party to the financial instrument is represented by the contractual amounts of those instruments. However, the Company applies the same credit policies, standards and ongoing reassessments in making commitments and conditional obligations as they do for loans. In addition, the amount and type of collateral obtained, if deemed necessary upon extension of a loan commitment or standby letter of credit, is essentially the same as the collateral requirements provided for loans. Additional risk associated with providing these commitments arise when they are drawn upon, such as the demands on liquidity the Bank would experience if a significant portion were drawn down at the same time. However, this is considered unlikely, as many commitments expire without being drawn upon and therefore do not necessarily represent future cash requirements.
EMPLOYMENT CONTRACTS - Certain officers of the Company have entered into employment agreements providing for salaries and fringe benefits. In addition, severance is provided in the event of termination for other than cause and under certain changes in control a lump sum payment is required.
OTHER MATTERS - The Company is involved in various lawsuits which have arisen in the normal course of business. It is management's opinion, based upon advice of legal counsel, that the ultimate outcome of these lawsuits will not have a material impact upon the financial condition or results of operations of the Company.
12. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 2000 and 1999, that the Company and Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2000, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events that management believes have changed the Bank's categories.
The following table shows the Company and the Bank's actual capital amounts and ratios and regulatory thresholds as of December 31, 2000 and 1999:
13. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the total of (1) net income plus (2) all other changes in net assets arising from non-owner sources, which are referred to as other comprehensive income (loss). Presented below are the changes in other comprehensive income (loss) for the periods indicated.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of the Company's financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The estimation methodologies utilized by the Company are summarized as follows:
CASH AND CASH EQUIVALENTS - For cash and due from banks the carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES - For investment securities, fair value equals the quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar investment securities.
OTHER INVESTMENTS - The estimated fair value of other investments approximates their carrying value.
LOANS AND LEASES - The fair value of fixed rate loans and leases is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In computing the estimate of fair value for all loans and leases, the estimated cash flows and/or carrying value have been reduced by specific and general reserves for loan losses.
ACCRUED INTEREST RECEIVABLE/PAYABLE - The carrying amount of accrued interest receivable/payable is a reasonable estimate of fair value due to the short-term nature of these amounts.
DEPOSITS - The fair value of demand deposits, NOW, savings accounts, and money market deposits is estimated by discounting the expected life of each deposit category at an index of the Federal Home Loan Bank advance rate curve. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits with similar remaining maturities.
FEDERAL FUNDS PURCHASED - The estimated fair value of variable rate borrowed funds approximates their carrying value.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND ADVANCES FROM THE FEDERAL HOME LOAN BANK - Estimated fair value is based on discounting cash flows for comparable instruments.
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A SUBSIDIARY TRUST - The fair value of company obligated mandatorily redeemable preferred securities is calculated at the quoted market price.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - The Company's off-balance sheet commitments are funded at current market rates at the date they are drawn upon. It is management's opinion that the fair value of these commitments would approximate their carrying value, if drawn upon.
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2000 and 1999. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
15. SEGMENTS
The Company's principal activities include Commercial Banking and Equipment Leasing. Commercial banking offers a broad range of sophisticated banking products and services, including credit, cash management, investment, deposit and trust products. The Equipment Leasing segment offers leasing programs for computers, telecommunications equipment, telephone systems, business furniture, manufacturing equipment, materials handling equipment and other capital equipment.
The financial information for each business segment reflect those which are specifically identifiable or which are allocated based on an internal allocation method. The allocation has been consistently applied for all periods presented. Revenues from affiliated transactions, principally the Commercial Banking division's funding of the Equipment Leasing activity, are charged generally at rates available to and transacted with unaffiliated customers.
Results of operations and selected financial information by operating segment are as follows:
16. ACQUISITION-RELATED ACTIVITY (UNAUDITED)
On March 8, 2001, CoBiz completed the acquisition of First Capital Bank of Arizona ("First Capital Bank"). The acquisition was structured as a merger between First Capital Bank and a wholly-owned subsidiary formed to participate in the merger. First Capital Bank is an Arizona state-chartered commercial bank with two locations serving Phoenix and the surrounding area of Maricopa County, Arizona. As a result of the merger, each outstanding share of First Capital Bank common stock was converted into 2.266 shares of CoBiz common stock, resulting in the issuance of approximately 1,653,000 shares of CoBiz common stock to the former First Capital Bank shareholders. In addition, CoBiz assumed approximately 244,000 options that had been issued to First Capital Bank employees. This transaction was accounted for as a pooling of interests. Under this method of accounting, the recorded assets, liabilities, shareholders' equity, income and expenses of CoBiz and First Capital Bank will be combined and reflected at their historical amounts. CoBiz's total assets, total deposits and total shareholders' equity on the date of the merger were approximately $640.8 million, $456.4 million and $48.0 million, respectively. First Capital Bank's total assets, total deposits and total shareholders' equity on the date of the merger amounted to approximately $109.8 million, $95.5 million and $11.6 million, respectively.
On March 1, 2001, CoBiz completed its acquisition of Milek Insurance Services, Inc ("Milek"). The agency, which was renamed CoBiz Insurance, Inc., provides commercial and personal property and casualty insurance brokerage, as well as, risk management consulting services to small- and medium-sized businesses and individuals. The shareholders of Milek received 44,463 shares of CoBiz common stock, valued at $780,000, as consideration for the acquisition. This transaction was also accounted for as a pooling of interests.
The following table presents the historical results for CoBiz, First Capital Bank and Milek and the consolidated results of operations after giving effect to the acquisitions.
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EXHIBIT INDEX
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(1) Incorporated herein by reference from the Registrant's Registration Statement on Form S-4 (File No. 333-51866).
(2) Incorporated herein by reference from the Registrant's Registration Statement on Form SB-2 (File No. 333-50037).
(3) Incorporated herein by reference from the Registrant's Current Report on Form 8-K, as filed on March 23, 2001.
(4) Incorporated herein by reference from the Registrant's Registration Statement on Form S-1 (File No. 333-37674).
(5) Incorporated herein by reference from the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1998, as filed on November 13, 1998.
(6) Incorporated herein by reference from the Registrant's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999, as filed on May 17, 1999.
(7) Incorporated herein by reference from the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999, as filed on November 12, 1999.
(8) Incorporated herein by reference from the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1999, as filed on March 30, 2000.
(9) Incorporated herein by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, as filed on May 12, 2000.
(10) Incorporated herein by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, as filed on November 14, 2000.
(11) Incorporated herein by reference from the Registrant's Proxy Statement filed in connection with its 2000 annual meeting of shareholders, as filed on April 19, 2000.
+ Confidential treatment has been granted by the Securities and Exchange Commission as to certain portions of exhibit. Such portions have been redacted.