10-K 1 a13-1478_110k.htm 10-K

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark one)

 

x      Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the fiscal year ended December 31, 2012.

 

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

 

For the transition period from                     to                    

 

Commission file number 001-15955

 

COBIZ FINANCIAL INC.

(Exact name of registrant as specified in its charter)

 

COLORADO

 

84-0826324

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

821 17th St., Denver, CO

 

80202

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (303) 312-3400

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

The NASDAQ Stock Market LLC

 

Securities Registered Pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.  Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No x

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant at June 30, 2012, computed by reference to the closing price on the NASDAQ Global Select Market was $147,517,463.  Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock (as publicly reported by such persons pursuant to Section 13 and Section 16 of the Securities Exchange Act of 1934) have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

The number of shares outstanding of the registrant’s sole class of common stock as of February 8, 2013, was 39,827,876.

 

Documents incorporated by reference: Portions of the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2013 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

Item 1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4.

Mine Safety Disclosures

 

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases of Equity Securities

Item 6.

Selected Financial Data

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Item 8.

Financial Statements and Supplementary Data

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A.

Controls and Procedures

Item 9B.

Other Information

 

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

Item 11.

Executive Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13.

Certain Relationships and Related Transactions and Director Independence

Item 14.

Principal Accounting Fees and Services

 

 

PART IV

 

Item 15.

Exhibits and Financial Statement Schedules

 

 

SIGNATURES

 

Index to Consolidated Financial Statements

 

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A WARNING ABOUT FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements that describe CoBiz Financial’s future plans, strategies and expectations. All forward-looking statements are based on assumptions and involve risks and uncertainties, many of which are beyond our control and which may cause our actual results, performance or achievements to differ materially from the results, performance or achievements contemplated by the forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or words of similar meaning, or future or conditional verbs such as “would,” “should,” “could” or “may.” Forward-looking statements speak only at the date they are made. Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” and elsewhere in this report, including, without limitation, in conjunction with the forward-looking statements included in this report.

 

We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

PART I

 

Item 1. Business

 

Overview

 

CoBiz Financial Inc. (CoBiz or the Company) is a diversified financial services company headquartered in Denver, CO. Through our subsidiary companies, we combine elements of personalized service found in community banks with sophisticated financial products and services traditionally offered by larger regional banks that we market to our targeted customer base of professionals, high-net-worth individuals and small to mid-sized businesses. At December 31, 2012, we had total assets of $2.7 billion, net loans of $1.9 billion and deposits of $2.1 billion. We were incorporated in Colorado on February 19, 1980.

 

Our wholly owned subsidiary CoBiz Bank (the Bank) is a full-service business banking institution serving two markets, Colorado and Arizona. In Colorado, the Bank operates under the name Colorado Business Bank and has 12 locations, including nine in the Denver metropolitan area, one in Boulder and two in the Vail area. In Arizona, the Bank operates under the name Arizona Business Bank and has six locations serving the Phoenix metropolitan area and the surrounding area of Maricopa County. Each of the Bank’s locations is led by a local president with substantial decision-making authority. We focus on attracting and retaining high-quality personnel by maintaining an entrepreneurial culture and a decentralized business approach. We centrally support our bank and fee-based businesses with back-office services from our downtown Denver offices.

 

Our banking products are complemented by our fee-based business lines.  Through a combination of internal growth and acquisitions, our fee-based business lines have grown to include employee benefits brokerage and consulting, insurance brokerage, investment banking and investment management services. We believe 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 the fees generated by these services will increase our noninterest income and decrease our dependency on net interest income.

 

Segments

 

The Wealth Management segment has historically provided investment management, trust administration and wealth transfer planning through the sale and servicing of life insurance policies.  In conjunction with an initiative to focus on fee-based services with sustainable revenue streams and a profitable foundation, the Company made the decision to close its trust department and sell its wealth transfer business.  On December 31, 2012, the Company sold substantially all of the assets of its wealth transfer planning business from its subsidiary, Financial Designs Ltd (FDL), to an entity owned by certain former employees of that business unit.  Included in the sale of assets was the trade name FDL and as such, the FDL subsidiary was renamed CoBiz Insurance — Employee Benefits, Inc. (CEB).

 

Additionally, during the fourth quarter of 2012, the Company began the process of transitioning its trust customers to another local bank.  The transition is anticipated to be completed by March 31, 2013.  As the trust department was closed and not sold, the Company will not receive any compensation for the transition of its trust customers.   However, the other local bank has agreed to work with the Company to develop a transition plan to encourage certain transferred accounts to

 

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appoint CoBiz Investment Management, LLC as registered investment advisor with respect to any investment services required to service the transferred accounts.  The operations of the wealth transfer division and the trust department have been reported as discontinued operations throughout this report (all within the Wealth Management segment).

 

We operate five distinct segments, as follows:

 

·                  Commercial Banking

·                  Investment Banking

·                  Wealth Management

·                  Insurance

·                  Corporate Support and Other

 

The Company’s segments, excluding Corporate Support and Other, consist of various products and activities that are set forth in the following chart:

 

Commercial Banking through:

·

Commercial banking

Colorado Business Bank

·

Real estate banking

Arizona Business Bank

·

Private banking

 

·

Interest-rate hedging

 

·

Depository products

 

·

Treasury management

Investment Banking through:

·

Merger and acquisition advisory services

Green Manning & Bunch, Ltd.

·

Institutional private placements of debt and equity

 

·

Strategic financial advisory services

Wealth Management through:

·

Customized client investment policy

CoBiz Investment Management, LLC

·

Proprietary bond and equity offerings

 

·

Tailored asset allocation strategies

 

·

Financial planning

 

·

Carefully vetted investment options utilizing external managers

 

·

Investment management

Insurance through:

·

Employee benefits and retirement planning

CoBiz Insurance, Inc.

·

Individual benefits

CoBiz Insurance - Employee Benefits, Inc.

·

Commercial lines

 

·

Professional lines

 

·

Private client

 

·

Risk management services

 

For a complete discussion of the segments included in our principal activities and certain financial information for each segment, see Note 18 to the consolidated financial statements.

 

Mission Statement

 

Our mission is to serve the complete financial needs of successful businesses, business owners, professionals and high-net worth individuals.  We create thoughtful, integrated, comprehensive solutions tailored to each customer’s needs, thereby freeing them to succeed personally and professionally.  Our long-term goal is to return economic value to our shareholders at a better risk-adjusted return than that of our competitors.

 

Our core values are:

 

·                  Focus on the customer

·                  Place people at the core

·                  Act with integrity

·                  Give back to the community

·                  Create sustained shareholder value

·                  Have fun and be well

 

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Business Strategy

 

Our primary strategy is to differentiate ourselves from our competitors by providing our local presidents with substantial decision-making authority, and expanding our products and services to build long-term relationships that meet the needs of small to mid-sized businesses, business owners and professionals in high-growth Western markets. In all areas of our operations, we focus on attracting and retaining the highest-quality personnel by maintaining an entrepreneurial culture and decentralized business approach. In order to realize our strategic objectives, we are pursuing the following strategies:

 

Organic Growth. We believe the Colorado and Arizona markets provide us with significant long-term opportunities for internal growth. These markets continue to be dominated by a number of large regional and national financial institutions that have acquired locally based banks. We believe this consolidation has created gaps in the banking industry’s ability to serve certain customers in these market areas because small- and medium-sized businesses often are not large enough to warrant significant marketing focus and customer service from large banks. In addition, we believe these banks often do not satisfy the needs of professionals and high-net-worth individuals who desire personal attention from experienced bankers. Similarly, we believe many of the remaining independent banks in the region do not provide the sophisticated banking products and services 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 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.

 

The following table details the Company’s market share of deposits in Colorado and Arizona, as well as other banks headquartered in our market areas and out-of-state banks as reported by the Federal Deposit Insurance Corporation (FDIC) and SNL Financial at June 30, 2012 and 2011.

 

 

 

June 30, 2012

 

June 30, 2011

 

Market share

 

Colorado %

 

Arizona %

 

Colorado %

 

Arizona %

 

CoBiz Bank

 

1.58

 

0.49

 

1.49

 

0.46

 

Other in-state banks

 

35.05

 

10.13

 

37.17

 

11.07

 

Out-of-state banks

 

63.37

 

89.38

 

61.34

 

88.47

 

Total

 

100.00

 

100.00

 

100.00

 

100.00

 

 

 

 

 

 

 

 

 

 

 

Deposit market share rank

 

13th

 

17th

 

13th

 

17th

 

 

The following table details the Company’s deposit market share by Metropolitan Statistical Area (MSA):

 

 

 

June 30, 2012

 

June 30, 2011

 

MSA

 

Deposit Market
Share Rank

 

Market Share %

 

Deposit Market
Share Rank

 

Market Share %

 

Denver-Aurora-Broomfield, CO

 

8th

 

2.25

 

10th

 

2.09

 

Boulder, CO

 

10th

 

2.97

 

11th

 

2.90

 

Edwards, CO

 

9th

 

2.28

 

8th

 

2.45

 

Phoenix-Mesa-Glendale, AZ

 

15th

 

0.68

 

16th

 

0.63

 

 

Loan portfolio growth and diversification.  We have emphasized expanding our overall loan products in recent years in order to diversify and grow the loan portfolio.  In recent years, we have introduced jumbo mortgage lending, tax-exempt financing, asset-based lending and a niche focused on medical lending.  The addition of these products has enabled the Bank to continue to grow its loan portfolio in a competitive and challenging environment.

 

Fee-based business lines. We began offering employee benefits brokerage and consulting in 2000; Property and Casualty (P&C) insurance brokerage and investment banking services in 2001; and investment management services in 2003.

 

When evaluating complementary business lines, the Company considers:

 

·                  Businesses where the revenue potential can be enhanced by our core banking franchise.

·                  Businesses that provide financial services and related products to our target market.

·                  Businesses where clients value relationships, service and product quality over price.

·                  Businesses with sustainable operating margins.

 

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Establish strong brand awareness.  We have developed a cohesive and comprehensive approach to our internal and external communications efforts to leverage the power of each subsidiary as part of the larger company.  Our brand platform has unified the look and feel of the CoBiz identity across the Company. With a target market that is similar across subsidiaries, our strong brand awareness helps generate cross-sell opportunities while strengthening client relationships.

 

Expanding existing banking relationships. We are normally not a transactional lender and typically require that borrowers enter into a multiple-product banking relationship with us, including deposits and treasury management services, in connection with the receipt of credit from the Bank. We believe such relationships provide us the opportunity to introduce our customers to a broader array of the products and services offered by us and generate additional noninterest income. In addition, we believe this philosophy aids in customer retention.

 

Emphasizing high-quality customer service. We believe our ability to offer high-quality customer service provides us with a competitive advantage over many regional banks that operate in our market areas. 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.

 

Maintaining asset quality. We seek to maintain asset quality through a program that includes regular reviews of loans and ongoing monitoring of the loan portfolio by a loan review department that reports to the Chief Operations Officer of the Company but submits reports directly to the audit committee of our Board of Directors. At December 31, 2012, our ratio of nonperforming loans to total loans was 1.02%, compared to 1.66% at December 31, 2011.

 

Controlling interest rate risk. 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 that also mature or reprice over periods of 12 months or less.  We have also incorporated interest rate floors in many of our variable rate loans to set a higher initial rate in this low rate environment and to preserve our net interest income in the event of interest rate decreases.  We actively monitor our interest rate profile in regular meetings of our Asset-Liability Management Committee.

 

Focus on cost efficiencies.  We have heavily invested in our current infrastructure in order to efficiently process and record transactions across all of our business units.  As we move forward, we plan to maintain a focus on expense management.

 

Capital management.  We strive to maintain a strong capital base to provide for the safety and soundness of the Company while also providing an acceptable return to our shareholders.  In light of recent economic developments and proposed changes to regulatory capital requirements, the Company considers the appropriate mix of capital instruments and liquidity when allocating capital resources to new projects and approving dividend distributions.

 

Expansion. We intend to continue to explore acquisitions of financial institutions or financial service entities within our market areas of Colorado and Arizona.  However, the focus of 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 focusing on individuals who are established in their communities and experienced in offering sophisticated financial products and services will enhance our market position and add growth opportunities.

 

Market Areas Served

 

We operate in two western markets in the United States — Colorado and Arizona. These markets are currently dominated by a number of large regional and national financial institutions that have acquired locally based banks. The Company’s success is dependent to a significant degree on the economic conditions of these two geographical markets.  The current economic downturn has negatively impacted both markets.  The Colorado market was slower to enter the recession than other areas of the country.  Conversely, the Arizona market was one of the states that led the nation into the recession and has been significantly impacted by unemployment, job losses and foreclosure rates.  However, the long-term prospects of both markets remain positive due to the diversity of industry sectors, favorable business environment, educated workforces and reputation as high quality of life markets.

 

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Our market areas include the Denver metropolitan area, which is comprised of the counties of Denver, Boulder, Adams, Arapahoe, Douglas, Broomfield and Jefferson; the Vail Valley, in Eagle County; and the Phoenix metropolitan area, which is located principally in Maricopa County.

 

Colorado.  Denver’s economy has diversified over the years with significant representation in various industries. The Denver metropolitan area is one of the fastest-growing regions in the nation, helping to make Colorado the fifth-fastest growing state in the United States in terms of percentage population growth from April 2010 to July 2012.  We have two locations each in downtown Denver, Littleton and the Vail Valley, and one location each in Boulder, Commerce City, Cherry Creek, the Denver Technological Center (DTC), Golden and Louisville.

 

Arizona. Arizona consistently had one of the highest population growth rates in the nation during the latter half of the 20th century, including being the second fastest-growing state in terms of percentage population growth from 2000 to 2010 and the ninth-fastest growing state from April 2010 to July 2012. Our banks are located in Maricopa County, one of the nation’s largest counties in terms of population size.

 

Market Snapshot.  The following table contains selected data for the markets we serve.

 

 

Colorado Snapshot

 

 

Arizona Snapshot

 

 

 

 

 

 

Demographics

 

 

Demographics

·

Colorado population: 5.1 million

 

·

Arizona population: 6.5 million

·

Metropolitan Denver population: 2.6 million

 

·

Metropolitan Phoenix population: 4.3 million

·

Population projected to increase 35% to 5.8 million as measured from 2000 to 2030

 

·

Population projected to increase 109% to 10.7 million as measured from 2000 to 2030

·

Median household income 2011: $54,595

 

·

Median household income 2011: $48,434

·

Projected household income change from from 2011 to 2016: 19.06%

 

·

Projected household income change from from 2011 to 2016: 16.28%

·

Median home price for Metropolitan Denver at September 30, 2012: $230,114

 

·

Median home price for Metropolitan Phoenix at September 30, 2012: $143,751

 

 

 

 

 

 

Significant Industries

 

 

Significant Industries

·

Technology

 

·

Services

·

Communications

 

·

Trade

·

Manufacturing

 

·

Manufacturing

·

Tourism

 

·

Mining

·

Transportation

 

·

Agriculture

·

Aerospace

 

·

Construction

·

Biomedical/Healthcare

 

·

Tourism

·

Financial Services

 

 

 

 

 

 

 

 

 

Economic Outlook

 

 

Economic Outlook

·

Preliminary unemployment rate at December 2012 was 7.6%, down from 8.9% in December 2011 (national average of 8.5%)

 

·

Preliminary unemployment rate at December 2012 was 7.9%, down from 9.2% in December 2011 (national average of 8.5%)

·

State with the 9th highest job growth between September 2011 and September 2012

 

·

State with the 6th highest job growth between September 2011 and September 2012

 

Competition

 

CoBiz and its subsidiaries face competition in all of our principal business activities, not only from other financial holding companies and commercial banks, but also from savings and loan associations, credit unions, asset-based lenders, finance companies, mortgage companies, leasing companies, insurance companies, investment advisors, mutual funds, securities brokers and dealers, investment banks, other domestic and foreign financial institutions, and various nonfinancial institutions.

 

Please see “Risk Factors” below for additional information.

 

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Employees

 

At December 31, 2012, we had 512 employees, including 508 full-time equivalent employees. Employees of the Company are entitled to participate in a variety of employee benefit programs, including: equity plans; an employee stock purchase plan; a 401(k) plan; various comprehensive medical, accident and group life insurance plans; and paid vacations. No Company employee is covered by a collective bargaining agreement and we believe our relationship with our employees to be excellent.

 

Supervision and Regulation

 

CoBiz and the Bank are extensively regulated under federal, Colorado and Arizona law. These laws and regulations are primarily intended to protect depositors, borrowers 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 (FRB). CoBiz is required to file an annual report with the FRB and such other reports as may be required pursuant to the BHCA.

 

Securities Exchange Act of 1934. CoBiz has a class of securities registered with the Securities Exchange Commission (SEC) under the Securities Exchange Act of 1934 (the Exchange Act). The Exchange Act requires the Company to file periodic reports with the SEC, governs the Company’s disclosure in proxy solicitations and regulates insider trading transactions.  The Company is listed on The NASDAQ Global Select Market (NASDAQ) and is subject to the rules of the NASDAQ.

 

Emergency Economic Stabilization Act of 2008 (EESA).  Deteriorating market conditions in 2008 led to the issuance of the EESA that was signed into law on October 3, 2008.  The EESA authorized the Troubled Asset Relief Plan (TARP) with an objective to ease the downturn in the credit cycle.  The TARP provided up to $700 billion to the Department of the Treasury (Treasury) to buy mortgages and other troubled assets, to provide guarantees and to inject capital into financial institutions.  As part of the $700 billion TARP, the Treasury established a Capital Purchase Program (CPP), which allows the Treasury to purchase up to $250 billion of senior preferred shares issued by U.S. financial institutions.

 

On December 19, 2008, the Company entered into an agreement with the Treasury pursuant to the CPP to issue shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, par value $0.01 per share, having a liquidation preference of $1,000 per share (the Series B Preferred Stock) for an aggregate purchase price of $64.5 million.  The Company also issued a warrant with a 10-year term to acquire 895,968 shares of its common stock at an exercise price of $10.79.  On September 8, 2011, the Company redeemed all $64.5 million of Series B Preferred Stock from the Treasury, concurrent with the issuance of preferred stock under the Small Business Lending Fund discussed below.  On November 17, 2011 the Treasury sold the warrant issued by the Company to a third party in a private auction.  The warrant will continue to be outstanding under the terms originally issued to the Treasury.

 

American Recovery and Reinvestment Act of 2009 (ARRA).  To further stimulate the lagging economy, President Obama signed the ARRA into law on February 17, 2009.  Title VII of the ARRA contains limits on executive compensation for senior executive officers of participants in the CPP for as long as any financial assistance provided under the TARP remain outstanding.  The limitations include a prohibition on incentives that may encourage unsafe behavior; a provision for the recovery of bonuses in the event of materially inaccurate financial statements; a prohibition on the payment of golden parachutes; and the prohibition of the accrual or payment of any bonus, retention award or incentive compensation.  The prohibition on retention awards does not include the issuance of restricted stock as long as the restricted stock does not fully vest during the period in which the Series B Preferred Stock is outstanding and the fair value of the award does not exceed 1/3 of the receiving officers’ annual compensation.  On June 15, 2009, the Treasury issued an interim final rule, TARP Standards For Compensation and Corporate Governance, to provide guidance on the executive compensation and corporate governance provisions of the EESA as amended by the ARRA.  These limitations applied to certain officers of the Company until September 8, 2011, the date the Company fully redeemed the Series B Preferred Stock.

 

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Small Business Lending Fund (SBLF).  Enacted as part of the Small Business Jobs Act, the SBLF was a $30 billion fund that encouraged lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion.  Qualifying institutions were eligible to sell Tier 1-qualifiying preferred stock to the Treasury.  The dividend rate on the preferred stock was initially a maximum of 5%.  The dividend rate decreases as the qualifying institution’s small business lending increases, and can fall as low as 1%.  However, if small business lending does not increase in the first two years, the rate will increase to 9%.  After 4.5 years, the rate will increase to 9% if the bank has not repaid the SBLF funding.  The maximum amount of available SBLF funding to a qualifying institution was limited to 5% of risk-weighted assets for institutions up to $1 billion in assets.  For institutions with more than $1 billion and less than $10 billion in assets, the maximum was 3% of risk-weighted assets.

 

The SBLF was available to participants in the CPP as a method to refinance preferred stock issued through that program.  On September 8, 2011, the Company entered into an agreement under the SBLF, pursuant to which the Company issued and sold to the Treasury, for an aggregate purchase price of $57.4 million, 57,366 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series C (Series C Preferred Stock), par value $0.01 per share, having a liquidation value of $1,000 per share. The proceeds from the issuance of the Series C Preferred Stock, along with other available funds, were used to redeem the Series B Preferred Stock issued through the CPP.  The Company files quarterly reports with the Treasury on its qualifying small business lending that may reduce the dividend rate on the Series C Preferred Stock.

 

Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).  On July 21, 2010, President Obama signed into law the Dodd-Frank Act. The Dodd-Frank Act comprehensively reforms the regulation of financial institutions, products and services.  Many of the provisions of the Dodd-Frank Act have been the subject of proposed and final rules by the SEC, FDIC and Federal Reserve.  However, the full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.

 

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.

 

Gramm-Leach-Bliley Act of 1999 (the GLB Act). The GLB Act eliminates many of the restrictions placed on the activities of certain qualified financial or bank holding companies. A “financial holding company” such as CoBiz can expand into a wide variety of financial services, including securities activities, insurance and merchant banking without the prior approval of the FRB, provided that certain conditions are met, including a requirement that all subsidiary depository institutions be “well capitalized.”

 

Dividend Restrictions.  Dividends on the Company’s capital stock (common and preferred stock) are prohibited under the terms of the junior subordinated debenture agreements (see Note 9 to the consolidated financial statements) if the Company is in continuous default on its payment obligations to the capital trusts, has elected to defer interest payments on the debentures or extends the interest payment period.  At December 31, 2012, the Company was not in default, had not elected to defer interest payments and had not extended the interest payment period on any of the subordinated debt issuances.

 

Pursuant to the terms of the agreement executed in the issuance of the Series C Preferred Stock, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its common stock will be subject to restrictions in the event that the Company fails to declare and pay full dividends on the Series C Preferred Stock.  In addition, the Company may declare and pay dividends on its common stock or any other stock junior to the Series C Preferred Stock, or repurchase shares of any such stock, only if after payment of such dividends or repurchase of such shares the Company’s Tier 1 Capital would be at least 90% of the Signing Date Tier 1 Capital, as set forth in the Articles of Amendment establishing the Series C Preferred Stock.

 

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 $500 million by using a combination of risk-based and leverage ratios.

 

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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 noncontrolling 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 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 FRB has established a minimum ratio of 3% for “strong holding companies” as defined by the FRB. For most other holding companies, the minimum required leverage ratio is 4%, but may be higher based on particular circumstances or risk profile.

 

For regulatory capital purposes, the Series B and Series C Preferred Stock are treated as an unrestricted core capital element included in Tier 1 Capital.

 

The table below sets forth the capital ratios of the Company:

 

 

 

At December 31, 2012

 

Ratio

 

Actual %

 

Minimum Required %

 

Total capital to risk-weighted assets

 

16.5

 

8.0

 

Tier I capital to risk-weighted assets

 

14.3

 

4.0

 

Tier I leverage ratio

 

12.2

 

4.0

 

 

In June 2012, the U.S. federal banking agencies issued three notices of proposed rulemaking that would revise and replace the current regulatory capital rules.  The proposals were initially intended to be effective on January 1, 2013, but the agencies have deferred implementation due to the volume of comments related to the proposed rules.  In the Basel III notice of proposed rulemaking, the agencies proposal included the implementation of a new common equity Tier 1 minimum capital requirement and a higher minimum Tier 1 capital requirement. Common equity is the highest quality equity and most loss absorbing form of capital and establishes the base of Tier 1 common equity as adjusted for minority interests and various deductions.  The minimum Tier 1 common equity ratio under Basel III is 4.5%.  Depending on the final form of the Basel III capital standards, the outcome will likely result in a higher capital requirement, greater volatility in regulatory capital and the elimination of trust preferred instruments in regulatory capital.  It is expected that final rules will be issued in 2013.

 

Future rulemaking and regulatory changes on capital requirements may impact the Company as it continues to grow and evaluate M&A activity.

 

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 and to not conduct operations in an unsafe or unsound manner.

 

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.

 

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Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act). The Sarbanes-Oxley Act is intended to address systemic and structural weaknesses of the capital markets in the United States that were perceived to have contributed to corporate scandals. The Sarbanes-Oxley Act also attempts to enhance the responsibility of corporate management by, among other things, (i) requiring the chief executive officer and chief financial officer of public companies to provide certain certifications in their periodic reports regarding the accuracy of the periodic reports filed with the SEC, (ii) prohibiting officers and directors of public companies from fraudulently influencing an accountant engaged in the audit of the company’s financial statements, (iii) requiring chief executive officers and chief financial officers to forfeit certain bonuses in the event of a restatement of financial results, (iv) prohibiting officers and directors found to be unfit from serving in a similar capacity with other public companies, (v) prohibiting officers and directors from trading in the company’s equity securities during pension blackout periods, and (vi) requiring the SEC to issue standards of professional conduct for attorneys representing public companies. In addition, public companies whose securities are listed on a national securities exchange or association must satisfy the following additional requirements: (a) the company’s audit committee must appoint and oversee the company’s auditors; (b) each member of the company’s audit committee must be independent; (c) the company’s audit committee must establish procedures for receiving complaints regarding accounting, internal accounting controls and audit-related matters; (d) the company’s audit committee must have the authority to engage independent advisors; and (e) the company must provide appropriate funding to its audit committee, as determined by the audit committee.

 

The Bank

 

General. The Bank is a state-chartered banking institution, the deposits of which are insured by the Deposit Insurance Fund (DIF) of the FDIC, and is subject to supervision, regulation and examination by the Colorado Division of Banking, the FRB and the FDIC. Prior to 2007, the Bank was a nationally chartered institution and also subject to the supervision of the Office of the Comptroller of the Currency (OCC). 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.

 

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.

 

USA Patriot Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA Patriot Act) is intended to allow the federal government to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money-laundering requirements.

 

Among its provisions, the USA Patriot Act requires each financial institution to: (i) establish an anti-money-laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, the USA Patriot Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. Financial institutions must comply with Section 326 of the Act which provides minimum procedures for identification verification of new customers.  On March 9, 2006, the USA Patriot Improvement and Reauthorization Act of 2005 (Reauthorization Act of 2005 ) was signed by the President to extend and modify the original Act.  The Reauthorization Act of 2005 makes permanent 14 of the original provisions of the USA Patriot Act that had been set to expire.

 

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 a single affiliate 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.

 

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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.

 

Regulation W of the Federal Reserve Act, which became effective on April 1, 2003, addresses the application of Sections 23A and 23B to credit exposure arising out of derivative transactions between an insured institution and its affiliates and intra-day extensions of credit by an insured depository institution to its affiliates. The rule requires institutions to adopt policies and procedures reasonably designed to monitor, manage and control credit exposures arising out of transactions and to clarify that the transactions are subject to Section 23B of the Federal Reserve Act.

 

Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by a holding company or its affiliates.

 

Dividend Restrictions. Dividends paid by the Bank and management fees from the Bank and our fee-based business lines provide substantially all of the Company’s cash flow. The approval of the Colorado Division of Banking 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.”

 

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, 2012

 

Ratio

 

Actual %

 

Minimum Required %

 

Total capital to risk-weighted assets

 

13.4

 

8.0

 

Tier I capital to risk-weighted assets

 

12.1

 

4.0

 

Tier I leverage ratio

 

10.3

 

4.0

 

 

Pursuant to the FDICIA, regulations have been adopted defining five capital levels: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Increasingly severe restrictions are placed on a depository institution as its capital level classification declines. An institution is critically undercapitalized if it has a tangible equity to total assets ratio less than or equal to 2%. An institution is adequately capitalized if it has a total risk-based capital ratio less than 10%, but greater than or equal to 8%; or a Tier 1 risk-based capital ratio less than 6%, but greater than or equal to 4%; or a leverage ratio less than 5%, but greater than or equal to 4% (3% in certain circumstances). An institution is well capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater; and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. Under these regulations, at December 31, 2012, the Bank was well capitalized, which places no significant restrictions on the Bank’s activities.

 

Examinations. The FRB and the Colorado Division of Banking periodically examines and evaluates 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.

 

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Restrictions on Loans to One Borrower. Under state 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 losses. The Bank seeks participations to accommodate borrowers whose financing needs exceed the Bank’s lending limits.

 

Brokered Deposits.  Well-capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are generally not permitted to accept brokered deposits.

 

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 Company has established loan-to-value ratio limitations on real estate loans, which are more stringent than the loan-to-value limitations established by regulatory guidelines.

 

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 factors that the FDIC deems relevant to determine the risk of loss to the FDIC.  In 2007, the annual assessment rates changed to a range of 5 to 43 basis points, an increase from the 0 to 27 basis point range that had been in effect since 1996.  In 2009, the base assessment rate range for Risk Category I institutions increased to 7 to 24 basis points as part of the FDIC’s Restoration Plan for the DIF.  This increase was necessary to replenish the DIF due to the number of recent failures of FDIC-insured institutions.  As part of the assessments that began April 1, 2009, the FDIC introduced three new adjustments that may impact the assessment base.  These adjustments are for 1) a potential decrease for long-term unsecured debt, 2) a potential increase for secured liabilities above a threshold amount and 3) for non-risk category 1 institutions, a potential increase for brokered deposits above a threshold amount.  The base assessment rates for Risk Categories II — IV range from 17 to 78 basis points.

 

On February 7, 2011, the FDIC finalized new rules for an assessment calculation as required by the Dodd-Frank Act.  The final rules change the assessment base from deposits to average daily consolidated assets less average monthly tangible equity (which is defined as Tier 1 Capital) and also changes the base assessment rates.  The final rules took effect April 1, 2011.  Under the new assessments, the base assessment rate for a Risk Category I institution is 5 to 9 basis points and the base assessment rates for Risk Categories II — IV range from 14 to 35 basis points.  The Company’s assessments decreased in 2011 under the new calculation. The amount an institution is assessed is based upon statutory factors that includes the degree of risk the institution poses to the insurance fund and may be reviewed semi-annually. A change in our risk category would negatively impact our assessment rates.

 

Additionally, all institutions insured by the FDIC Bank Insurance Fund are assessed fees to cover the debt of the Financing Corporation, the successor of the insolvent Federal Savings and Loan Insurance Corporation.  The current assessment rate effective for the first quarter of 2013 is 0.16 basis points (0.64 basis points annually).  The assessment rate is adjusted quarterly.

 

On May 22, 2009, the FDIC voted to levy a special assessment on insured institutions as part of the FDIC’s efforts to rebuild the DIF and help maintain public confidence in the banking system.  The special assessment was 5 basis points on each FDIC-insured depository institution’s assets, minus its Tier 1 capital, as of June 30, 2009.  On September 30, 2009, the Company paid a special assessment of $1.2 million.

 

On November 12, 2009, the FDIC voted to require insured institutions to prepay slightly over three years of estimated insurance assessments. The pre-payment allows the FDIC to strengthen the cash position of the DIF immediately without immediately impacting earnings of the industry.  At December 31, 2012, the Company had pre-paid assessments of $1.4 million to be applied to future assessments.  For risk-based capital purposes, the pre-payment was assigned a zero percent risk weighting.

 

Federal Home Loan Bank Membership.  The Bank is a member of the Federal Home Loan Bank of Topeka (FHLB).  Each member of the FHLB is required to maintain a minimum investment in capital stock. The Board of Directors of the FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements.  Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Board.  Because the extent of any obligation to increase our investment in the FHLB depends entirely upon the occurrence of a future event, potential future payments to the FHLB are not determinable.

 

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Fee-Based Business Lines

 

CoBiz Investment Management, LLC (CIM), is registered with the SEC under the Investment Advisers Act of 1940. The Investment Advisers Act of 1940 imposes numerous obligations on registered investment advisers, including fiduciary duties, recordkeeping requirements, operational requirements and disclosure obligations. Many aspects of CIM’s business are subject to various federal and state laws and regulations. These laws and regulations generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict CIM from carrying on its investment management business in the event that they fail to comply with such laws and regulations. In such event, the possible sanctions which may be imposed include the suspension of individual employees, business limitations on engaging in the investment management business for specified periods of time, the revocation of any such company’s registration as an investment adviser, and other censures or fines.

 

Green Manning & Bunch, Ltd. (GMB), our investment banking subsidiary, is registered as a broker-dealer under the Exchange Act and is subject to regulation by the SEC and the Financial Industry Regulatory Authority (FINRA). GMB is subject to the SEC’s net capital rule designed to enforce minimum standards regarding the general financial condition and liquidity of a broker-dealer. Under certain circumstances, this rule limits the ability of the Company to make withdrawals of capital and receive dividends from GMB. GMB’s regulatory net capital consistently exceeded such minimum net capital requirements in fiscal 2012. The securities industry is one of the most highly regulated in the United States, and failure to comply with related laws and regulations can result in the revocation of broker-dealer licenses; the imposition of censures or fines; and the suspension or expulsion from the securities business of a firm, its officers or employees.

 

CoBiz Insurance Inc., acting as an insurance producer, must obtain and keep in force an insurance producer’s license with the State of Arizona and Colorado. In order to write insurance in other states, they are required to obtain non-resident insurance licenses. All premiums belonging to insurance carriers and all unearned premiums belonging to customers received by the agency must be treated in a fiduciary capacity.

 

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, FDIC, OCC (national charters only) and State banking divisions 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.

 

The laws and regulations affecting banks and financial or bank holding companies have changed significantly in recent years, and there is reason to expect 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.

 

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 the Company and its subsidiaries cannot be predicted.

 

Website Availability of Reports Filed with the SEC

 

The Company maintains an Internet website located at www.cobizfinancial.com on which, among other things, the Company makes available, free of charge, various reports that it files with or furnishes to the SEC, including its annual reports, quarterly reports, current reports and proxy statements. These reports are made available as soon as reasonably practicable after they are filed with or furnished to the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Additional information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information

 

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regarding issuers that file electronically with the SEC. The Company has also made available on its website its Audit, Compensation and Governance and Nominating Committee charters and corporate governance guidelines. The content on any website referred to in this filing is not incorporated by reference into this filing unless expressly noted otherwise.

 

Item 1A.  Risk Factors

 

Our business may be adversely affected by the highly regulated environment in which we operate.

 

We are subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors’ funds, FDIC funds, customers and the banking system as a whole, rather than stockholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things.

 

As a financial holding company, we are subject to regulation and supervision primarily by the Federal Reserve. The Bank, as Colorado-chartered bank, is subject to regulation and supervision by the Colorado Division of Banking. We undergo periodic examinations by these regulators, which have extensive discretion and authority to prevent or remedy unsafe or unsound practices or violations of law by banks and financial service holding companies.

 

The primary federal and state banking laws and regulations that affect us are described in this report under the section captioned “Supervision and Regulation.” These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time.  Such changes, including changes regarding interpretations and implementation, could affect us in substantial and unpredictable ways and could have a material adverse effect on our business, financial condition and results of operations. Further, such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with applicable laws, regulations or policies could result in sanctions by regulatory agencies, civil monetary penalties, and/or damage to the our reputation, which could have a material adverse effect on our business, financial condition and results of operations. The policies of the Federal Reserve also have a significant impact on us. Among other things, the Federal Reserve’s monetary policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits, and can also affect the value of financial instruments we hold and the ability of borrowers to repay their loans, which could have a material adverse effect on our business, financial condition and results of operations.

 

Certain actions by the U.S. Federal Reserve could cause a flattening of the yield curve, which could adversely affect our business, financial condition and results of operations.

 

In September 2011, the U.S. Federal Reserve announced “Operation Twist,” which was a program under which it initially intended to purchase, through the end of June 2012, $400 billion of U.S. Treasury securities with remaining maturities between six and 30 years and sell an equal amount of U.S. Treasury securities with remaining maturities of three years or less.  In June 2012, it was announced that the Federal Open Market Committee had decided to continue the program through the end of 2012.  The intent of Operation Twist was to put downward pressure on longer-term interest rates, which has resulted in a flattening of the yield curve and which may result in increased prepayment rates on our investment portfolio and a lower yield on our loan portfolio due to lower long-term interest rates, both of which would lead to a narrowing of our net interest margin.  Consequently, Operation Twist and any other future securities purchase programs of the U.S. Federal Reserve could materially adversely affect our business, financial condition, results of operations.

 

Difficult conditions in the financial services markets have adversely affected the business and results of operations of the Company.

 

Dramatic declines in the housing and commercial real estate market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail.  Many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers including other financial institutions. The Company has historically used federal funds purchased as a short-term liquidity source and, while the Company continues to actively use this source, further credit tightening in the market could reduce funding lines available to the Company.  This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of general business activity.

 

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Weakness in the economy and in the real estate market, including specific weakness within the markets where our banks do business, has adversely affected us and may continue to adversely affect us.

 

In general, all of our business segments were negatively impacted by market conditions in 2009-2011. During that period, there was a downturn in the real estate market, a slow-down in construction and an oversupply of real estate for sale.  While the overall economy and the business of the Company has begun to recover, any additional softening in our real estate markets could hurt our business as a majority of our loans are secured by real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature.

 

Substantially all of our real property collateral is located in Arizona and Colorado.  Declines in real estate prices would reduce the value of real estate collateral securing our loans.  Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be further diminished, and we would be more likely to suffer losses on defaulted loans.

 

Our Insurance segment’s revenues have been adversely affected by a continued soft premium market for property and casualty insurance; volatility in the broader equity market has negatively impacted Wealth Management earnings; and Investment Banking transactions have been curtailed due to market uncertainty and valuation issues.

 

Continued weakness could have a material adverse effect on our business, financial condition, results of operations and cash flows and on the market for our common stock.

 

Our allowance for loan losses may not be adequate to cover actual loan losses.

 

As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment.  Credit losses are inherent in the lending business and could have a material adverse effect on our operating results.  We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for potential losses based on a number of factors.  If our assumptions are wrong, our allowance for loan losses may not be sufficient to cover our losses, thereby having an adverse effect on our operating results, and may cause us to increase the allowance in the future.  In addition, we intend to increase the number and amount of loans we originate, and we cannot guarantee that we will not experience an increase in delinquencies and losses as these loans continue to age, particularly if the economic conditions in Colorado and Arizona further deteriorate.  The actual amount of future provisions for loan losses cannot be determined at any specific point in time and may exceed the amounts of past provisions.  Additions to our allowance for loan losses would decrease our net income.

 

Our commercial real estate and construction loans are subject to various lending risks depending on the nature of the borrower’s business, its cash flow and our collateral.

 

Our commercial real estate loans involve higher principal amounts than other loans, and repayment of these loans may be dependent on factors outside our control or the control of our borrowers. Repayment of commercial real estate loans is generally dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Rental income may not rise sufficiently over time to meet increases in the loan rate at repricing or increases in operating expenses, such as utilities and taxes. As a result, impaired loans may be more difficult to identify without some seasoning. Because payments on loans secured by commercial real estate often depend upon the successful operation and management of the properties, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation. If the cash flow from the property is reduced, the borrower’s ability to repay the loan and the value of the security for the loan may be impaired.

 

Repayment of our commercial loans is often dependent on cash flow of the borrower, which may be unpredictable, and collateral securing these loans may fluctuate in value. Generally, this collateral is accounts receivable, inventory, equipment or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

 

Our construction loans are based upon estimates of costs to construct and the value associated with the completed project. These estimates may be inaccurate due to the uncertainties inherent in estimating construction costs, as well as

 

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the market value of the completed project and the effects of governmental regulation of real property making it relatively difficult to accurately evaluate the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. Delays in completing the project may arise from labor problems, material shortages and other unpredictable contingencies. If the estimate of construction costs is inaccurate, we may be required to advance additional funds to complete construction. If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project.

 

Our consumer loans generally have a higher risk of default than our other loans.

 

Consumer loans entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of damage, loss or depreciation. The remaining deficiency often does not warrant further collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

 

We may not realize our deferred income tax assets. In addition, our built in losses could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.

 

The Company may experience negative or unforeseen tax consequences.  We review the probability of the realization of our net deferred tax assets each period based on forecasts of taxable income.  This review uses historical results, projected future operating results based upon approved business plans, eligible carryforward and carryback periods, tax-planning opportunities and other relevant considerations.  Adverse changes in the profitability and financial outlook in the U.S. and our industry may require the creation of an additional valuation allowance to reduce our net deferred tax assets.  Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on the Company’s results of operations and financial condition.

 

In addition, the benefit of our built-in losses would be reduced if we experience an “ownership change,” as determined under Internal Revenue Code Section 382 (Section 382). A Section 382 ownership change occurs if a stockholder or a group of stockholders who are deemed to own at least 5% of our common stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. If an ownership change occurs, Section 382 would impose an annual limit on the amount of built-in losses we can use to reduce our taxable income equal to the product of the total value of our outstanding equity immediately prior to the ownership change (reduced by certain items specified in Section 382) and the federal long-term tax-exempt interest rate in effect for the month of the ownership change. A number of complex rules apply to calculating this annual limit.

 

While the complexity of Section 382’s provisions and the limited knowledge any public company has about the ownership of its publicly traded stock make it difficult to determine whether an ownership change has occurred, we currently believe that an ownership change has not occurred. However, if an ownership change were to occur, the annual limit Section 382 may impose could result in a limitation of the annual deductibility of our built-in losses.

 

The value of securities in our investment securities portfolio may be negatively affected by disruptions in securities markets.

 

The market for some of the investment securities held in our portfolio has been volatile.  Market conditions may negatively affect the value of securities.  There can be no assurance that the declines in market value associated with these disruptions will not result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

 

The Company may be adversely affected by the soundness of other financial institutions.

 

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company

 

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cannot be realized or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse affect on the Company’s financial condition and results of operations.

 

Supervisory guidance on commercial real estate concentrations could restrict our activities and impose financial requirements or limitations on the conduct of our business.

 

The OCC, the FRB and the FDIC finalized joint supervisory guidance in 2006 on sound risk management practices for concentrations in commercial real estate lending. The guidance is intended to help ensure that institutions pursuing a significant commercial real estate lending strategy remain healthy and profitable while continuing to serve the credit needs of their communities. The agencies are concerned that rising commercial real estate loan concentrations may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in commercial real estate markets. The guidance reinforces and enhances existing regulations and guidelines for safe and sound real estate lending. The guidance provides supervisory criteria, including numerical indicators to assist in identifying institutions with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny. The guidance does not limit banks’ commercial real estate lending, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. Lending and risk management practices of the Company will be taken into account in supervisory evaluation of capital adequacy. Our commercial real estate portfolio at December 31, 2012, did not meet the definition of commercial real estate concentration as set forth in the final guidelines. If the Company is considered to have a concentration in the future and our risk management practices are found to be deficient, it could result in increased reserves and capital costs.

 

To the extent that any of the real estate securing our loans becomes subject to environmental liabilities, the value of our collateral will be diminished.

 

In certain situations, under various federal, state and local environmental laws, ordinances and regulations as well as the common law, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on such property or damage to property or personal injury. Such laws may impose liability whether or not the owner or operator was responsible for the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which properties may be used or businesses may be operated, and these restrictions may require expenditures by one or more of our borrowers. Such laws may be amended so as to require compliance with stringent standards which could require one or more of our borrowers to make unexpected expenditures, some of which could be substantial. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. One or more of our borrowers may be responsible for such costs which would diminish the value of our collateral. The cost of defending against claims of liability, of compliance with environmental regulatory requirements or of remediating any contaminated property could be substantial and require a material portion of the cash flow of one or more of our borrowers, which would diminish the ability of any such borrowers to repay our loans.

 

Changes in interest rates may affect our profitability.

 

Our profitability is, in part, a function of the spread between the interest rates earned on investments and loans, and the interest rates paid on deposits and other interest-bearing liabilities. Our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities structures are such that they are affected differently by a change in interest rates. As a result, an increase or decrease in interest rates, the length of loan terms or the mix of adjustable and fixed-rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We have traditionally managed our assets and liabilities in such a way that we have a positive interest rate gap. 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 and are more likely to experience increases in net interest income in periods of rising interest rates.  In addition, an increase in interest rates may adversely affect the ability of some borrowers to pay the interest on and principal of their loans.

 

Our fee-based businesses are subject to quarterly and annual volatility in their revenues and earnings.

 

Our fee-based businesses have historically experienced, and are likely to continue to experience, quarterly and annual volatility in revenues and earnings.  With respect to our investment banking services segment, GMB, the delay in the initiation or the termination of a major new client engagement, or any changes in the anticipated closing date of client transactions can directly affect revenues and earnings for a particular quarter or year.  With respect to our insurance

 

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segment, CoBiz Insurance Inc. and CoBiz Insurance-Employee Benefits, our revenues and earnings also can experience quarterly and annual volatility, depending on the timing of the initiation or termination of a major new client engagement.  With respect to our investment advisory business, our revenues and earnings are dependent on the value of our assets under management, which in turn are heavily dependent upon general conditions in debt and equity markets.  Any significant volatility in debt or equity markets are likely to directly affect revenues and earnings of CIM for a particular quarter or year.  In addition, a substantial portion of the revenues and earnings of our wealth management segment are often generated during our fourth quarter as many of their clients seek to finalize their wealth transfer and estate plans by year end.

 

We rely heavily on our management, and the loss of any of our senior officers may adversely affect our operations.

 

Consistent with our policy of focusing growth initiatives on the recruitment of qualified personnel, we are highly dependent on the continued services of a small number of our executive officers and key employees. The loss of the services of any of these individuals could adversely affect our business, financial condition, results of operations and cash flows. The failure to recruit and retain key personnel could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our business and financial condition may be adversely affected by competition.

 

The banking business in the Denver and Phoenix metropolitan areas is highly competitive and is currently dominated by a number of large regional and national financial institutions. In addition to these regional and national banks, there are a number of smaller commercial banks that operate in these areas. We compete for loans and deposits with banks, savings and loan associations, finance companies, credit unions, and mortgage bankers. In addition to traditional financial institutions, we also compete for loans with brokerage and investment banking companies, 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 multibank holding companies, many of our competitors have substantially greater capital resources and lending limits than we have and perform other functions that we offer only through correspondents. Interstate banking and unlimited state-wide branch banking are permitted in Colorado and Arizona. As a result, we have experienced, and expect to continue to experience, greater competition in our primary service areas. Our business, financial condition, results of operations and cash flows may be adversely affected by competition, including any 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 financial service holding companies.

 

We may be required to make capital contributions to the Bank if it becomes undercapitalized.

 

Under federal law, a financial holding company may be required to guarantee a capital plan filed by an undercapitalized bank subsidiary with its primary regulator. If the subsidiary defaults under the plan, the holding company may be required to contribute to the capital of the subsidiary bank in an amount equal to the lesser of 5% of the Bank’s assets at the time it became undercapitalized or the amount necessary to bring the Bank into compliance with applicable capital standards. Therefore, it is possible that we will be required to contribute capital to our subsidiary bank or any other bank that we may acquire in the event that such bank becomes undercapitalized. If we are required to make such capital contribution at a time when we have other significant capital needs, our business, financial condition, results of operations and cash flows could be adversely affected.

 

We continually encounter technological change, and we may have fewer resources than our competitors to continue to invest in technological improvements.

 

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We cannot assure that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

 

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An interruption in or breach in security of our information systems, including the occurrence of a cyber incident or a deficiency in our cybersecurity may result in a loss of customer business or damage to our brand image.

 

We rely heavily on communications and information systems to conduct our business.   Any failure, interruption or cyber incident of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposits, and servicing or loan origination systems.  A cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to information systems to disrupt operations, corrupt data, or steal confidential information.  The occurrence of any failures, interruptions or cyber incidents could result in a loss of customer business and have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

We are subject to restrictions on the ability to pay dividends to and  repurchase shares of common stock because of our participation in the SBLF.

 

Under the terms of the securities purchase agreement between us and the Treasury in connection with the SBLF transaction, our ability to pay dividends on or repurchase our common stock is subject to a limit requiring us generally not to reduce our Tier 1 capital from the level on the SBLF closing date by more than 10%.  If we fail to pay an SBLF dividend, there are further restrictions on our ability to pay dividends on or repurchase our common stock.  In addition, if the Company’s qualified small business lending does not increase over its initial baseline, the dividend rate on the Series C Preferred Stock may increase.

 

We are subject to significant government regulation, and any regulatory changes may adversely affect us.

 

The banking industry is heavily regulated under both federal and state law. These regulations are primarily intended to protect customers, not our creditors or shareholders. As a financial holding company, we are also subject to extensive regulation by the FRB, in addition to other regulatory and self-regulatory organizations. Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of such changes, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Item 1B. Unresolved Staff Comments

 

None.

 

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Item 2. Properties

 

At December 31, 2012, we had 12 bank locations, three fee-based locations and an operations center in Colorado and six bank locations and a fee-based location in Arizona. Our executive offices are located at 821 17th St., Denver, Colorado, 80202.  We lease our executive offices and our Northeast office from entities partly owned or controlled by a director of the Company. See “Certain Relationships and Related Transactions and Director Independence” under Item 13 of Part III and Note 15 to the consolidated financial statements. The terms of these leases expire between 2013 and 2022. The Company leases all of its facilities with the exception of the Prince branch in Littleton, Colorado which the Company purchased during 2010. The following table sets forth specific information on each location.

 

Bank Locations

 

Address

 

Lease
Expiration

Colorado:

 

 

 

 

Prince

 

2409 W. Main St., Littleton, CO 80120

 

Owned

Eagle

 

212 Chambers Ave., Unit 3, Eagle, CO 81631

 

2013

Northeast

 

4695 Quebec St., Denver, CO 80216

 

2013

Boulder

 

2025 Pearl St., Boulder, CO 80302

 

2014

Northwest

 

400 Centennial Pkwy., Ste. 100, Louisville, CO 80027

 

2014

Tremont

 

1275 Tremont Pl., Denver, CO 80204

 

2014

Vail Valley

 

56 Edwards Village Blvd., Ste. 130, Edwards, CO 81632

 

2014

West Metro

 

15710 W. Colfax Ave., Golden, CO 80401

 

2015

Denver

 

821 17th St., Denver, CO 80202

 

2016

Denver Operations Center

 

717 17th St., Ste. 400, Denver, CO 80202

 

2020

DTC

 

4582 S. Ulster Street Parkway, Ste. 100, Denver, CO 80237

 

2020

Cherry Creek

 

301 University Blvd., Stes. 100 & 200, Denver, CO 80206

 

2017

Littleton

 

1600 West Mineral, Littleton, CO 80120

 

2022

Arizona:

 

 

 

 

Chandler

 

2727 W. Frye Rd., Ste. 100, Chandler, AZ 85224

 

2014

East Valley

 

1757 E. Baseline Rd., Ste. 101, Gilbert, AZ 85233

 

2017

Phoenix

 

2600 N. Central Ave., Ste. 2000, Phoenix, AZ 85004

 

2017

Scottsdale

 

6909 E. Greenway Pkwy., Ste. 150, Scottsdale, AZ 85254

 

2018

Scottsdale Fashion Square

 

7150 E. Camelback Rd., Ste. 100, Scottsdale, AZ 85251

 

2018

Tempe

 

1620 W. Fountainhead Pkwy., Ste. 119, Tempe, AZ 85282

 

2018

 

 

Fee-Based Locations

 

Address

 

Lease
Expiration

CoBiz Insurance Inc.:

 

 

 

 

Colorado

 

821 17th St., Denver, CO 80202

 

2016

Arizona

 

2600 N. Central Ave., Ste. 1950, Phoenix, AZ 85004

 

2017

 

 

 

 

 

CoBiz Investment Management, LLC

 

1099 18th St., Ste. 3000, Denver, CO 80202

 

2018

 

 

 

 

 

Green Manning & Bunch, Ltd.

 

1515 Wynkoop St., Ste. 800, Denver, CO 80202

 

2020

 

All locations are 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.

 

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, based on the dollar amount of the claims outstanding at the end of the year, the ultimate liability, if any, resulting from such claims or lawsuits will not have a material adverse effect on the business, financial condition, results of operations or cash flows of the Company.

 

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Item 4.  Mine Safety Disclosures

 

None.

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market for Registrant’s Common Equity

 

The common stock of the Company is traded on the NASDAQ Global Select Market under the symbol “COBZ.”  At February 8, 2013, there were approximately 517 shareholders of record of CoBiz common stock.

 

The following table presents the range of high and low sale prices of our common stock for each quarter within the two most recent fiscal years as reported by the NASDAQ Global Select Market and the per-share dividends declared in each quarter during that period.

 

 

 

High

 

Low

 

Cash Dividends Declared

2011:

 

 

 

 

 

 

First Quarter

 

$

7.02

 

$

5.54

 

$

0.01

Second Quarter

 

7.00

 

5.93

 

0.01

Third Quarter

 

6.54

 

4.36

 

0.01

Fourth Quarter

 

5.84

 

4.22

 

0.01

2012:

 

 

 

 

 

 

First Quarter

 

$

7.32

 

$

5.22

 

$

0.01

Second Quarter

 

7.10

 

5.77

 

0.02

Third Quarter

 

7.37

 

6.16

 

0.02

Fourth Quarter

 

7.50

 

6.35

 

0.02

 

On January 17, 2013, the Company announced that its quarterly dividend for the first quarter of 2013 had increased to $0.03 per share.  The timing and amount of future dividends declared by the Board of Directors of the Company will depend upon the consolidated earnings, financial condition, liquidity and capital requirements of the Company and its subsidiaries, the amount of cash dividends paid to the Company by its subsidiaries, applicable government regulations and policies, and other factors considered relevant by the Board of Directors of the Company.  The Company is subject to certain covenants pursuant to the issuance of its junior subordinated debentures as described in Note 9 to the consolidated financial statements that could limit our ability to pay dividends.

 

Pursuant to the terms of the securities purchase agreement executed in the issuance of the Series C Preferred Stock in connection with the SBLF program, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its common stock will be subject to restrictions in the event that the Company fails to declare and pay full dividends on the Series C Preferred Stock.  At December 31, 2012, the Company has paid all required dividends under the purchase agreement when due.

 

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”  and “The Holding Company” — Dividend Restrictions” included under Item 1 of Part I.

 

The following table compares the cumulative total return on a hypothetical investment of $100 in CoBiz common stock on December 31, 2007 and the closing prices on each of the five years in the period ended December 31, 2012, with the hypothetical cumulative total return on the Russell 2000 Index, the NASDAQ Bank Index and the SNL U.S. Bank NASDAQ Index for the comparable period.  Historically, the Company has provided a comparison to the NASDAQ Bank Index which includes domestic and foreign bank stocks.  While this comparison is provided in the table below through 2012, the Company intends to replace this index with the SNL U.S. Bank NASDAQ Index in future reports.  The Company believes the SNL U.S. Bank NASDAQ Index will provide a relevant comparison to domestic banks.

 

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Comparison of Cumulative Total Return

 

GRAPHIC

 

 

 

12/31/2007

 

12/31/2008

 

12/31/2009

 

12/31/2010

 

12/31/2011

 

12/31/2012

 

CoBiz Financial Inc.

 

$

100.00

 

$

67.14

 

$

33.43

 

$

43.08

 

$

41.16

 

$

53.85

 

NASDAQ Bank Index

 

$

100.00

 

$

78.47

 

$

65.69

 

$

75.00

 

$

67.12

 

$

79.69

 

Russell 2000 Index

 

$

100.00

 

$

66.20

 

$

84.18

 

$

106.80

 

$

102.33

 

$

119.04

 

SNL U.S. Bank NASDAQ

 

$

100.00

 

$

72.62

 

$

58.91

 

$

69.51

 

$

61.67

 

$

73.51

 

 

Item 6. Selected Financial Data

 

The following table sets forth selected financial data for the Company for the periods indicated. In the fourth quarter of 2012, the Company made the decision to close its trust department and sell its wealth transfer business.  Both of these lines of business are part of the Company’s Wealth Management segment.  The results of operations and earnings per share for trust and wealth transfer have been reported as discontinued operations retrospectively for all periods presented in the following table.

 

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Table of Contents

 

 

 

At or for the year ended December 31,

 

(in thousands, except per share data)

 

2012

 

2011

 

2010

 

2009

 

2008

 

Statement of income data:

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

106,128

 

$

111,264

 

$

115,979

 

$

129,450

 

$

144,908

 

Interest expense

 

12,750

 

14,863

 

19,148

 

26,066

 

49,557

 

Net interest income before provision for loan losses

 

93,378

 

96,401

 

96,831

 

103,384

 

95,351

 

Provision for loan losses

 

(4,733

)

4,002

 

35,127

 

105,815

 

39,796

 

Net interest income (loss) after provision for loan losses

 

98,111

 

92,399

 

61,704

 

(2,431

)

55,555

 

Noninterest income

 

30,559

 

30,823

 

29,517

 

23,512

 

29,130

 

Noninterest expense

 

91,166

 

95,821

 

103,345

 

113,522

 

83,209

 

Income (loss) before taxes

 

37,504

 

27,401

 

(12,124

)

(92,441

)

1,476

 

Provision (benefit) for income taxes

 

13,258

 

(5,808

)

10,158

 

(32,522

)

(367

)

Net income (loss) before noncontrolling interest

 

$

24,246

 

$

33,209

 

$

(22,282

)

$

(59,919

)

$

1,843

 

Less: net (income) loss attributable to noncontrolling interest

 

 

 

(209

)

314

 

(379

)

Net income (loss) from continuing operations

 

24,246

 

33,209

 

(22,491

)

(59,605

)

1,464

 

Discontinued operations, net of tax

 

324

 

253

 

(146

)

(23,436

)

(136

)

Net income (loss)

 

$

24,570

 

$

33,462

 

$

(22,637

)

$

(83,041

)

$

1,328

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share from continuing operations

 

$

0.54

 

$

0.75

 

$

(0.72

)

$

(2.18

)

$

0.06

 

Diluted earnings (loss) per common share from continuing operations

 

$

0.54

 

$

0.75

 

$

(0.72

)

$

(2.18

)

$

0.06

 

Basic earnings (loss) per common share from discontinued operations

 

$

0.01

 

$

0.01

 

$

 

$

(0.80

)

$

(0.01

)

Diluted earnings (loss) per common share from discontinued operations

 

$

0.01

 

$

0.01

 

$

 

$

(0.80

)

$

(0.01

)

Basic earnings (loss) per common share

 

$

0.55

 

$

0.76

 

$

(0.72

)

$

(2.98

)

$

0.05

 

Diluted earnings (loss) per common share

 

$

0.55

 

$

0.76

 

$

(0.72

)

$

(2.98

)

$

0.05

 

Cash dividends declared per common share

 

$

0.07

 

$

0.04

 

$

0.04

 

$

0.10

 

$

0.28

 

Dividend payout ratio

 

12.73

%

5.26

%

NM

 

NM

 

560.00

%

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,653,641

 

$

2,423,504

 

$

2,395,088

 

$

2,466,015

 

$

2,684,275

 

Total investments

 

571,665

 

633,308

 

644,668

 

545,980

 

500,448

 

Loans

 

1,926,432

 

1,637,424

 

1,643,727

 

1,780,866

 

2,031,253

 

Allowance for loan losses

 

46,866

 

55,629

 

65,892

 

75,116

 

42,851

 

Loans held for sale

 

 

 

 

1,820

 

 

Deposits

 

2,129,260

 

1,918,406

 

1,889,368

 

1,968,833

 

1,639,031

 

Junior subordinated debentures

 

72,166

 

72,166

 

72,166

 

72,166

 

72,166

 

Subordinated notes payable

 

20,984

 

20,984

 

20,984

 

20,984

 

20,984

 

Shareholders’ equity

 

257,051

 

220,082

 

201,738

 

230,451

 

252,099

 

 

 

 

 

 

 

 

 

 

 

 

 

Key ratios:

 

 

 

 

 

 

 

 

 

 

 

Return on average total assets

 

0.98

%

1.39

%

(0.93

)%

(3.25

)%

0.05

%

Pre-tax, pre-provision return on assets (PTPP ROA)(1)

 

1.34

%

1.49

%

1.27

%

1.63

%

1.79

%

Return on average shareholders’ equity

 

10.15

%

16.23

%

(10.17

)%

(35.23

)%

0.67

%

Average shareholders’ equity to average total assets

 

9.65

%

8.58

%

9.15

%

9.22

%

7.80

%

Net interest margin

 

4.08

%

4.35

%

4.37

%

4.38

%

4.08

%

Efficiency ratio(2)

 

74.00

%

73.01

%

76.49

%

68.27

%

65.10

%

Nonperforming assets to total assets

 

1.14

%

1.89

%

2.83

%

4.24

%

1.75

%

Nonperforming loans to total loans

 

1.02

%

1.66

%

2.60

%

4.44

%

2.02

%

Allowance for loan and credit losses to total loans

 

2.43

%

3.40

%

4.01

%

4.23

%

2.12

%

Allowance for loan and credit losses to nonperforming loans

 

237.75

%

204.38

%

154.33

%

97.28

%

104.95

%

Net charge-offs to average loans

 

0.23

%

0.86

%

2.62

%

3.78

%

0.87

%

 


(1) Pre-tax pre-provision earnings (PTPP) is a non-GAAP measure and is calculated as total revenue less noninterest expense (excluding impairment and valuation losses).  The Company believes that PTPP is a useful financial measure that enables investors and others to assess the Company’s ability to generate capital to cover credit losses and is a reflection of earnings generated by the core business.

 

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Table of Contents

 

 

 

At and for the year ended December 31,

 

(in thousands)

 

2012

 

2011

 

2010

 

2009

 

2008

 

Net income - GAAP

 

$

24,570

 

$

33,462

 

$

(22,637

)

$

(83,041

)

$

1,328

 

Adjusted for:

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

13,429

 

(5,654

)

10,028

 

(32,859

)

(91

)

Provision for loan and credit losses

 

(4,768

)

3,976

 

35,033

 

105,711

 

39,479

 

Net other than temporary impairment losses on securities recognized in earnings

 

297

 

771

 

451

 

922

 

 

Loss on securities, other assets and other real estate owned

 

65

 

3,145

 

7,977

 

4,677

 

4,592

 

Goodwill impairment

 

 

 

 

46,160

 

 

Pre-tax, pre-provision earnings

 

$

33,593

 

$

35,700

 

$

30,852

 

$

41,570

 

$

45,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average assets

 

$

2,508,222

 

$

2,403,960

 

$

2,434,002

 

$

2,556,706

 

$

2,529,901

 

PTPP ROA

 

1.34

%

1.49

%

1.27

%

1.63

%

1.79

%

 

(2) Efficiency ratio is computed by dividing noninterest expense by the sum of net interest income before provision for loan losses and noninterest income, excluding gains and losses on asset sales and valuation adjustments.

NM - Not Meaningful

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Company is a financial holding company that offers a broad array of financial service products to its target market of professionals, small and medium-sized businesses, and high-net-worth individuals. Our operating segments include: Commercial Banking, Investment Banking, Wealth Management, and Insurance.

 

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

 

During the economic and industry turmoil since 2008, we have continued to focus on developing an organization with personnel, management systems and products that will allow us to compete effectively and position us for growth. Many of our competitors have drastically cut costs by closing locations and reducing employee bases during this time.  Although  we have also focused on reducing costs that do not impact customer service, we have also continued to invest in systems and business production personnel to strengthen our future growth prospects.  The economic downturn has also negatively impacted our customer base and our levels of nonperforming assets have increased as a result.  The combination of the increased levels of nonperforming assets and continued investment in the business has caused relatively high levels of noninterest expense that has adversely affected our earnings over the past several years. Salaries and employee benefits, loan workout costs and losses on Other Real Estate Owned (OREO) have comprised most of this overhead category.

 

Industry Overview. At the December 2012 meeting, the Federal Open Market Committee (FOMC) kept the target range for federal funds rate at 0-25 basis points noting that a highly accommodative stance of monetary policy will remain appropriate after the economy strengthens to support maximum employment and price stability.  The FOMC expects to maintain the target federal funds rate at 0-25 basis points for at least as long as the unemployment rate remains above 6.5%, inflation projections are no more than 0.5% above the FOMCs 2% long-run goal and longer-term inflation expectations continue to be well-anchored.  The FOMC also announced that it will continue to purchase agency mortgage-backed securities at a pace of $40 billion per month.  The FOMC will also purchase longer-term Treasury securities after the expiration of “Operation Twist” at an initial pace of $45 billion per month.  These actions are intended to pressure longer-term interest rate and support the mortgage market, among other things.

 

The actions by the FOMC have pressured net interest income and net interest margins for the banking industry by maintaining low rates on interest-earning assets.  Throughout 2012, margins in the banking industry were pressured downward as higher-yielding legacy assets rolled off and were reinvested in the current low rate environment.  Low

 

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interest rates, coupled with a competitive lending environment, have proven challenging for the profitability of the banking industry.  It is expected that these challenges will continue until interest rates rise.

 

The political landscape has also negatively impacted the industry.  Small businesses are reluctant to commit to capital expenditures due to concerns over the unknown impact from potential tax and policy.  Businesses expecting to increase capital spending over the next 12 months was at its lowest level in over two years at December 2012, according to the Wells Fargo Small Business Index.  Reluctance to increase capital spending has resulted in record levels of deposits and tempered small businesses demand for loans.  The high level of liquidity from the amount of deposits has exacerbated the pressure on net interest margins in the banking industry.  It has been a challenge for the industry to deploy the excess liquidity at attractive rates.

 

The banking industry and SEC-registered companies continue to be impacted by new legislative and regulatory reform proposals.  In June 2012, the Board of Governors of the Federal Reserve Bank, the FDIC, and the Office of the Comptroller of the Currency (OCC) approved three notices of proposed rulemaking (NPRs) designed to improve the resiliency of the U.S. banking system; increase the quantity and quality of regulatory capital; enhance risk sensitivity; address weaknesses identified over the past several years; and address certain requirements of the Dodd-Frank Act.  The NPRs would replace the federal banking agencies’ general risk-based capital rules; establish regulatory capital requirements for savings and holding companies; and restructure the capital rules into an integrated regulatory capital framework.  The first two NPRs apply to all US depository institutions, bank holding companies (except those with less than $500 million in consolidated assets) and savings and loan holding companies.  The third NPR applies only to banking organizations that are subject to either the advanced approaches risk-based capital rule or the Market Risk Rule.

 

The national unemployment rate decreased from 8.5% in December 2011 to 7.8% at December 2012.  The unemployment rate has steadily decreased during 2012 and is at the lowest level since January 2009.  In 2012, 42 states and the District of Columbia registered a decrease in their unemployment rate, six states experienced increases and two states were unchanged.  While decreasing, the high unemployment rate is a driving factor that could prolong a weak economy.

 

There were 51 bank failures in 2012, the lowest level since 2008.  During 2008-2011, 414 banks failed and went into receivership with the FDIC, causing estimated losses of $87.5 billion to the Depository Insurance Fund.  This compares to only 10 bank failures in the years 2003 to 2007.  The FDIC’s “problem list” stood at 694 at September 30, 2012, down from 813 at the end of 2011.

 

In the third quarter of 2012, FDIC-insured commercial banks reported a combined net income of $37.6 billion, the highest level since the third quarter of 2006.  The increase in net income was driven by reduced expenses for loan losses and rising noninterest income.  More than half of all institutions reported higher earnings than a year ago.  The industry also reported the lowest level of unprofitable institutions in more than five years.  The average net interest margin fell year-over-year in two out of every three institutions, as average asset yields declined faster than average funding costs.

 

Company Overview. From December 31, 1995, the first complete fiscal year under the current management team, to December 31, 2012, our organization has grown from a bank holding company with two bank locations and total assets of $160.4 million to a diversified financial services holding company with 18 bank locations, three fee-based businesses and total assets of $2.7 billion.  During 2008-2010, economic conditions deteriorated within the markets the Company operates.  As a result, the Company’s net earnings were negatively impacted due to increased levels of non-performing assets, higher credit costs and impairment charges on goodwill and real estate assets.  Economic conditions improved in 2011-2012 and the Company returned to profitability in those years as credit costs stabilized.  However, the effects of the financial crisis continue to impact the Company due to elevated OREO and loan workout costs and a reduced net interest income due to the low interest rate environment.

 

The Company has a well-capitalized balance sheet that includes common equity, preferred equity, subordinated debentures and subordinated notes payable.  The Company currently has $21.0 million in subordinated notes payable and $57.4 million in preferred stock issued to the Treasury in September 2011 through the SBLF program.  The subordinated notes payable have a 9% coupon rate and become callable in the third quarter of 2013.  The Company is evaluating calling the subordinated notes payable.  The SBLF preferred stock has a variable rate dependent on the Company’s small business lending until September 30, 2013, when the rate will become fixed until March 2016.  Based on the current level of small business lending, the Company expects the rate to fix at 1%.  After March 2016, the rate on the preferred stock will increase to 9%.  The Company expects to repay the preferred stock to the Treasury when the rate increases to 9%.

 

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As discussed in “Item 1. Business” and Note 2 to the consolidated financial statements, the Company sold its wealth transfer division that focused on high-end life insurance and closed its trust department during the fourth quarter of 2012.  The results of operations related to these areas have been reported as discontinued operations.  The prior period disclosures in the following table have been adjusted to conform to the new presentation.  Certain key metrics of our operating segments at or for the years ended December 31, 2012, 2011 and 2010 are as follows:

 

 

 

Commercial
Banking

 

Investment
Banking

 

Wealth
Management

 

Insurance

 

Corporate
Support
and Other

 

Consolidated

 

(in thousands, except per share data)

 

2012

 

Operating revenue (1)

 

$

111,517

 

$

3,839

 

$

4,164

 

$

9,682

 

$

(5,265

)

$

123,937

 

Net income (loss)

 

$

31,210

 

$

(318

)

$

(717

)

$

(312

)

$

(5,293

)

$

24,570

 

Diluted income (loss) per common share (2)

 

$

0.81

 

$

(0.01

)

$

(0.02

)

$

(0.01

)

$

(0.22

)

$

0.55

 

 

 

 

2011

 

Operating revenue (1)

 

$

111,907

 

$

7,245

 

$

4,263

 

$

9,270

 

$

(5,461

)

$

127,224

 

Net income (loss)

 

$

31,393

 

$

686

 

$

(293

)

$

(33

)

$

1,709

 

$

33,462

 

Diluted income (loss) per common share (2)

 

$

0.86

 

$

0.02

 

$

(0.01

)

$

 

$

(0.11

)

$

0.76

 

 

 

 

2010

 

Operating revenue (1)

 

$

111,422

 

$

5,658

 

$

4,223

 

$

8,692

 

$

(3,647

)

$

126,348

 

Net income (loss)

 

$

(86

)

$

(91

)

$

(1,295

)

$

(818

)

$

(20,347

)

$

(22,637

)

Diluted income (loss) per common share (2)

 

$

 

$

 

$

(0.04

)

$

(0.02

)

$

(0.66

)

$

(0.72

)

 


(1) Net interest income plus noninterest income.

(2) The per share impact of preferred stock dividends and earnings allocated to participating securities are included in Corporate Support and Other.

 

Noted below are some of the significant financial performance measures and operational results for 2012 and 2011:

 

2012

 

·                  Commercial Banking earnings per share fell $0.05 to $0.81 in 2012 from 2011, primarily due to the increase in average shares outstanding.  Nonperforming assets decreased to $30.3 million at the end of 2012, from $45.7 million at the end of 2011.  The decrease in nonperforming assets resulted in a provision for loan loss reversal of $3.5 million in 2012.

 

·                  Investment Banking lost $0.01 on a per share basis in 2012, a decrease from the $0.02 earnings per share in 2011.  The number of transactions closed by the segment fell in 2012, while Investment Banking revenue in 2011 was at the highest level for the segment since 2004.

 

·                  Wealth Management lost $0.02 per diluted share in 2012, an increased loss over the loss of $0.01 in 2011.  As discussed above, the segment sold its wealth planning division and discontinued its trust department.  As part of these transactions, the segment incurred severance and contract termination costs of $0.5 million.

 

·                  Insurance lost $0.01 on a per share basis in 2012 after breaking even in 2011.  In 2012, the segment purchased two small books of business to enhance the employee benefits consulting division and to expand its medical malpractice offering.

 

·                  Corporate Support and Other lost $0.22 per diluted share in 2012, an increased loss over the loss of $0.11 in 2011.  The increase in the loss in 2012 is due to the reversal of a deferred tax valuation allowance of $11.0 million that benefited the segment in 2011, but had no impact in 2012.

 

·                  During the first quarter of 2012, the Company completed a common stock offering of 2,100,000 shares at a $6.00 per share price that generated net proceeds of $11.8 million.

 

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·                  At December 31, 2012, the Company grew small business lending sufficient to reduce its future dividend rate on the Series C Preferred Stock issued to Treasury under the SBLF to 1% effective for the second quarter of 2013.

 

·                  The net interest margin on a tax-equivalent basis declined to 4.08% in 2012 compared to 4.35% in 2011.  The Company’s net interest margin has declined due to the low rate environment.

 

·                  Total noninterest-bearing demand accounts represented 40.4% of total deposits at December 31, 2012.

 

·                  The Company’s total risk-based capital ratio was 16.5% at the end of 2012, up from 16.3% at the end of 2011.

 

2011

 

·                  Commercial Banking earned $0.86 on a per share basis in 2011 compared to break-even in 2010.  Earnings per share in 2011 significantly improved from breakeven in 2010.  The primary driver of the earnings increase was a reduction in the provision for loan losses, which totaled $0.6 million in 2011 and $30.2 million in 2010. Nonperforming assets decreased to $45.7 million at the end of 2011, from $67.8 million at the end of 2010.  The Bank’s ratio of allowance for loan and credit losses to total loans ended the year at 3.4% and the allowance exceeded 204% of nonperforming loans.  During the fourth quarter of 2011, the segment benefited from the reversal of a deferred tax valuation allowance of $4.1 million that was originally recorded at the end of 2010.

 

·                  Investment Banking earned $0.02 on a per share basis in 2011 compared to break-even in 2010.  Investment Banking revenue in 2011 was at the highest level for the segment since 2004.

 

·                  Wealth Management lost $0.01 per diluted share in 2011, an improvement over the loss of $0.04 in 2010.  A reduction in operating expenses exceeded the loss in revenue for the segment.  During the fourth quarter of 2011, the segment benefited from the reversal of a deferred tax valuation allowance of $0.2 million that was originally recorded at the end of 2010.

 

·                  Insurance broke even in 2011, an improvement over the $0.02 loss per diluted share in 2010.  Revenue earned by the segment increased in 2011 due to a 27% increase in income from employee benefit brokerage.  During the fourth quarter of 2011, the segment benefited from the reversal of a deferred tax valuation allowance of $0.3 million that was originally recorded at the end of 2010.

 

·                  Corporate Support and Other lost $0.11 per diluted share in 2011, an improvement from a loss of $0.66 in 2010.  During the fourth quarter of 2011, the segment benefited from the reversal of a deferred tax valuation allowance of $11.0 million that was originally recorded at the end of 2010.

 

·                  The Series B Preferred Stock issued under the CPP was redeemed in full during September 2011 for $64.5 million plus accrued dividends.  Concurrent with the redemption, Series C Preferred Stock was issued to Treasury under the SBLF for $57.4 million with an initial dividend rate of 5%.  Together, the transactions resulted in a $7.0 million decline in shareholder equity.

 

·                  During the fourth quarter of 2011, the Company reversed a deferred tax asset valuation allowance in the amount of $15.6 million that was originally recorded in the fourth quarter of 2010.

 

·                  The Company recognized losses of $3.9 million in 2011 on valuation adjustments of other real estate owned, other-than-temporary impairments on investments and the closure of a branch location.

 

·                  The net interest margin on a tax-equivalent basis declined slightly to 4.35% in 2011 compared to 4.37% in 2010.

 

·                  Total noninterest-bearing demand accounts represented 37.6% of total deposits at December 31, 2011.

 

·                  The Company’s total risk-based capital ratio was 16.3% at the end of 2011, up from 15.5% at the end of 2010.

 

This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this Form 10-K beginning on page F-1. For a discussion of the segments included in our principal activities and for certain financial information for each segment, see “Segment Results” discussed below and Note 18 to the consolidated financial statements.

 

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Table of Contents

 

Critical Accounting Policies

 

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

 

Allowance for Loan Losses

 

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

 

In determining the appropriate level of the allowance for loan losses, we analyze the various components of the loan portfolio, including all significant credits, on an individual basis. When analyzing the adequacy, we segment the loan portfolio into components with similar characteristics, such as risk classification, past due status, type of loan, industry or collateral.  We have a systematic process to evaluate individual loans and pools of loans within our loan portfolio. We maintain a loan grading system whereby each loan is assigned a grade between 1 and 8, with 1 representing the highest quality credit, 7 representing a loan where collection or liquidation in full is highly questionable and improbable, and 8 representing a loss that has been or will be charged-off.  Loans that are graded 5 or lower are categorized as non-classified credits, while loans graded 6 and higher are categorized as classified credits that have a higher risk of loss. Grades are assigned based upon the degree of risk associated with repayment of a loan in the normal course of business pursuant to the original terms.

 

Differences between the actual credit outcome of a loan and the risk assessment made by the Company could negatively impact the Company’s earnings by requiring additional provision for loan losses.  As a hypothetical example, if $25.0 million of grade 3, non-classified loans were transferred into classified loans at the same percentage level of existing classified loans, an additional $2.2 million of provision for loan losses would be required.

 

See Note 4 to the consolidated financial statements for further discussion on management’s methodology.

 

Other Real Estate Owned

 

Other Real Estate Owned (OREO) represents properties acquired through foreclosure or physical possession.  Write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses.  Subsequent to foreclosure, we periodically evaluate the value of OREO held for sale and record a valuation allowance for any subsequent declines in fair value less selling costs.  Subsequent declines in value are charged to operations.  Fair value is based on our assessment of information available to us at the end of a reporting period and depends upon a number of factors, including our historical experience, economic conditions, and issues specific to individual properties.  Our evaluation of these factors involves subjective estimates and judgments that may change.

 

Deferred Taxes

 

The Company uses the asset and liability method of accounting for income taxes.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance may be established.  We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income.  These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.  At December 31, 2011, the Company reversed the valuation allowance of $15.6 million it established during the fourth quarter of 2010.  See Note 11

 

29



Table of Contents

 

to the consolidated financial statements for additional information.  A valuation allowance for deferred tax assets may be required in the future if the amounts of taxes recoverable through loss carry backs decline, if we project lower levels of future taxable income, or we project lower levels of tax planning strategies.  Such additional valuation allowance would be established through a charge to income tax expense that would adversely affect our operating results.

 

Share-based Payments

 

Under ASC Topic 718, Compensation — Stock Compensation (ASC 718), we use the Black-Scholes option valuation model to determine the fair value of our stock options as discussed in Note 14 to the consolidated financial statements. The Black-Scholes fair value model includes various assumptions, including the expected volatility, expected life and expected dividend rate of the options. In addition, the Company is required to estimate the amount of options issued that are expected to be forfeited. These assumptions reflect our best estimates, but they involve inherent uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used, share-based compensation expense, as calculated and recorded under ASC 718, could have been materially impacted. Furthermore, if we use different assumptions in future periods, share-based compensation expense could be materially impacted in future periods.

 

ASC 718 requires that cash retained as a result of the tax deductibility of employee share-based awards be presented as a component of cash flows from financing activities in the consolidated statement of cash flows.

 

Fair Value

 

The Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), as it applies to financial assets and liabilities effective January 1, 2008.  ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Fair value may be used on a recurring basis for certain assets and liabilities such as available for sale securities and derivatives in which fair value is the primary basis of accounting.  Similarly, fair value may be used on a nonrecurring basis to evaluate certain assets or liabilities such as impaired loans.  Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions in accordance with ASC 820 to determine the instrument’s fair value.  At December 31, 2012, $567.2 million of total assets, consisting of $558.2 million in available for sale securities and $9.0 million in derivative instruments, represented assets recorded at fair value on a recurring basis.  At December 31, 2011, $631.4 million of total assets, consisting of $623.5 million in available for sale securities and $7.9 million in derivative instruments, represented assets recorded at fair value on a recurring basis.  Certain Private-Label MBS (PLMBS) were valued using broker-dealer quotes based on proprietary broker models, which are considered by the Company an unobservable input (Level 3).  The Company sold all PLMBS during the fourth quarter of 2012.  At December 31, 2011, the Company had $2.0 million in PLMBS.  The Company recognized $0.3 million and $0.8 million in other-than-temporary impairments on the PLMBS for the years ended December 31, 2012 and 2011, respectively. In 2012, the Company purchased a $1.0 million single-issuer TPS classified as Level 3.  The fair value of this TPS is determined using broker-dealer quotes and was classified as a Level 3 due to its illiquid nature. At December 31, 2012 and 2011, $18.4 million and $17.2 million, respectively, of total liabilities represented derivative instruments recorded at fair value on a recurring basis.  Assets recorded at fair value on a nonrecurring basis consisted of impaired loans totaling $16.1 million and $50.9 million at December 31, 2012 and 2011, respectively.  For additional information on the fair value of certain financial assets and liabilities see Note 17 to the consolidated financial statements.

 

We also have other policies that we consider to be significant accounting policies; however, these policies, which are disclosed in Note 1 of the consolidated financial statements, do not meet the definition of critical accounting policies because they do not generally require us to make estimates or judgments that are difficult or subjective.

 

Financial Condition

 

The Company had total assets of $2.7 billion and total liabilities of $2.4 billion at December 31, 2012 compared to total assets of $2.4 billion and total liabilities of $2.2 billion at December 31, 2011.  The following sections address the specific

 

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components of the balance sheets and significant matters relating to those components at and for the years ended December 31, 2012 and 2011.

 

Lending Activities

 

General. We provide a broad range of 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 tax-exempt financing. Our primary lending focus is commercial and real estate lending to small- and medium-sized businesses with annual sales of $5.0 million to $75.0 million, and businesses and individuals with borrowing requirements of $250,000 to $15.0 million. At December 31, 2012, substantially all of our outstanding loans were to customers within Colorado and Arizona. 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.  Interest rates are further subject to competitive pressures, money market rates, availability of funds, and government regulations. See “Net Interest Income” 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 response to current conditions and heightened default risk due to depressed real estate and collateral values, the Company expanded the resources of the credit and loan review departments to provide for a more proactive identification and management of problem credits.  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, assisted by a dedicated Senior Credit Officer in each geographic market. All loan officers are charged with the responsibility of reviewing, at least on a monthly basis, all past due loans in their respective portfolios. In addition, the credit administration department establishes a watch list of loans to be reviewed by the board of directors of the Bank. The loan portfolio is also monitored regularly by a loan review department that reports to the Chief Operations Officer of the Company and submits reports directly to the audit committee of the board of directors and the credit administration department.

 

In order to effectively respond to the current credit cycle, declining asset quality and increasing foreclosures, the Company made a significant investment in 2009 to establish a Special Assets Group comprised of experienced professionals to efficiently manage nonperforming assets.  Management believes having the specialized function will allow our bankers to focus on seeking new lending and deposit relationships while troubled asset levels are effectively managed.  In the latter part of 2011 and into 2012, the Company began redeploying certain officers from the Special Assets Group into production roles due to the improvement in asset quality.

 

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Composition of Loan Portfolio. The following table sets forth the composition of our loan portfolio at the dates indicated.

 

 

 

At December 31,

 

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

(in thousands)

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Commercial

 

$

729,442

 

38.8

%

$

568,962

 

36.0

%

$

565,145

 

35.8

%

$

559,612

 

32.8

%

$

648,968

 

32.6

%

Real estate - mortgage

 

880,377

 

46.8

 

784,491

 

49.5

 

783,675

 

49.7

 

832,509

 

48.8

 

870,262

 

43.8

 

Land acquisition & development

 

53,562

 

2.8

 

61,977

 

3.9

 

83,871

 

5.3

 

152,667

 

8.9

 

221,946

 

11.2

 

Real estate - construction

 

67,022

 

3.6

 

63,141

 

4.0

 

86,862

 

5.5

 

144,069

 

8.4

 

192,164

 

9.7

 

Consumer

 

149,638

 

8.0

 

116,676

 

7.4

 

94,607

 

6.0

 

76,103

 

4.5

 

86,701

 

4.4

 

Other

 

46,391

 

2.5

 

42,177

 

2.7

 

29,567

 

1.9

 

15,906

 

0.9

 

11,212

 

0.6

 

Total loans

 

$

1,926,432

 

102.5

 

$

1,637,424

 

103.5

 

$

1,643,727

 

104.2

 

$

1,780,866

 

104.3

 

$

2,031,253

 

102.2

 

Less allowance for loan losses

 

(46,866

)

(2.5

)

(55,629

)

(3.5

)

(65,892

)

(4.2

)

(75,116

)

(4.4

)

(42,851

)

(2.2

)

Net loans held for investment

 

$

1,879,566

 

100.0

 

$

1,581,795

 

100.0

 

$

1,577,835

 

100.0

 

$

1,705,750

 

99.9

 

$

1,988,402

 

100.0

 

Loans held for sale

 

 

 

 

 

 

 

1,820

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans

 

$

1,879,566

 

100.0

%

$

1,581,795

 

100.0

%

$

1,577,835

 

100.0

%

$

1,707,570

 

100.0

%

$

1,988,402

 

100.0

%

 

Gross loans increased $289.0 million in 2012 compared to a $6.3 million decrease in 2011.  Loan growth was primarily driven by the Commercial ($160.4 million) and Real estate — mortgage ($95.9 million) loan segments.  The Company’s focus on growing its Commercial loan segment in 2012 was successful, resulting in the Company achieving the lowest dividend rate available for preferred stock issued under the SBLF program.  The growth in the Commercial loan segment is partially attributed to asset-based loans generated by a new Structured Finance department formed in 2012.  Asset-based loans totaled $36.3 million at December 31, 2012.  The growth in the Real estate — mortgage loan segment was driven primarily by an $82.9 million increase in investor real-estate loans.  The $32.9 million increase in consumer loans resulted primarily from growth of $41.2 million in the jumbo mortgage product offset by a decline of $12.5 million in home equity lines.  The loan portfolio’s downward trend in prior years is primarily attributable to a decrease in the land acquisition and development loan portfolio.  Due to overall market illiquidity and the significant value declines on raw land during that time, the Company ceased lending activities for the acquisition and future development of land.  The land acquisition and development loan portfolio contributed to 41% of the total decrease of $393.8 million in our loan portfolio during the years 2008-2011.  The recent adverse economic conditions contributed to a challenging operating environment and a downward trend in loan demand.  However, the shift in loan concentration is primarily attributed to successful efforts to further diversify the Company’s loan portfolio.  The Company has been successful in reducing high risk loan concentration levels and growing other loan categories mainly by exploring new niche lending opportunities such as tax exempt financing, jumbo mortgages, asset-based lending, and an expansion of its medical lending practice.

 

Under state law, the aggregate amount of loans we can make to one borrower is generally limited to 15% of our unimpaired capital, surplus, undivided profits and allowance for loan losses. At December 31, 2012, our individual legal lending limit was $46.2 million. The Bank’s Board of Directors has established an internal lending limit of $15.0 million for normal credit extensions and $20.0 million for the highest rated credit types. To accommodate customers whose financing needs exceed our internal lending limits and to address portfolio concentration concerns, we sell loan participations to outside participants. At December 31, 2012 and 2011, the outstanding balance of loan participations sold by us was $9.4 million and $17.2 million, respectively. At December 31, 2012 and 2011, we had loan participations purchased from other banks totaling $18.8 million and $12.3 million, respectively. 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.

 

Due to the nature of our business as a commercial banking institution, our lending relationships are typically larger than those of a retail bank. The following table describes the number of relationships and the percentage of the dollar value of the loan portfolio by the size of the credit relationship.

 

32



Table of Contents

 

 

 

At December 31,

 

 

 

2012

 

2011

 

2010

 

Credit Relationships

 

Number of
relationships

 

% of loan
portfolio

 

Number of
relationships

 

% of loan
portfolio

 

Number of
relationships

 

% of loan
portfolio

 

Greater than $6.0 million

 

49

 

22.0

%

33

 

16.3

%

29

 

14.6

%

$3.0 million to $6.0 million

 

92

 

19.7

 

69

 

17.0

 

71

 

17.6

 

$1.0 million to $3.0 million

 

334

 

29.1

 

305

 

31.7

 

311

 

32.5

 

$0.5 million to $1.0 million

 

352

 

13.1

 

354

 

15.5

 

359

 

15.9

 

Less than $0.5 million

 

4,115

 

16.1

 

4,231

 

19.5

 

4,397

 

19.4

 

 

 

4,942

 

100.0

%

4,992

 

100.0

%

5,167

 

100.0

%

 

The majority of the loan relationships exceeding $3.0 million are in our real estate and commercial portfolios.  At December 31, 2012, 2011, and 2010, there were no concentrations of loans related to any single industry in excess of 10% of total loans. The Company may be subject to additional regulatory supervisory oversight if its concentration in commercial real estate lending exceeds regulatory parameters.  Pursuant to interagency guidance issued by the Federal Reserve and other federal banking agencies, supervisory criteria were put in place to define commercial real estate concentrations as:

 

·                  Construction, land development and other land loans that represent 100% or more of total risk-based capital; or

·                  Commercial real estate loans (as defined in the guidance) that represent 300% or more of total risk-based capital and the real estate portfolio has increased more than 50% or more during the prior 36 months.

 

At December 31, 2012 and 2011, the Company’s exposure to commercial real estate lending was below the parameters discussed above.

 

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. See Note 15 to the consolidated financial statements for additional discussion on our commitments.

 

Commercial Loans. Commercial loans increased $160.4 million, or 28.2%, from $569.0 million at December 31, 2011 to $729.4 million at December 31, 2012. Commercial lending consists of loans to small and medium-sized businesses in a wide variety of industries. 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 unsecured and based on the cash flow of the business. Terms of commercial loans generally range from one to five years, and the majority of such loans have floating interest rates.  Asset-based loans generated by the Company’s new Structured Finance department are included in the All other Commercial loans category in the table below and are the primary driver of the year-over-year increase in this category.

 

The following table summarizes the Company’s commercial loan portfolio, segregated by the North American Industry Classification System (NAICS).

 

 

 

At December 31,

 

 

 

2012

 

2011

 

2010

 

(in thousands)

 

Balance

 

% of
Commercial
loan portfolio

 

Balance

 

% of
Commercial
loan portfolio

 

Balance

 

% of
Commercial
loan portfolio

 

Manufacturing

 

$

88,333

 

12.1

%

$

79,816

 

14.0

%

$

86,692

 

15.3

%

Finance and insurance

 

77,779

 

10.7

 

78,922

 

13.9

 

77,198

 

13.7

 

Health care

 

96,561

 

13.2

 

56,448

 

9.9

 

70,685

 

12.5

 

Real estate services

 

75,487

 

10.3

 

74,359

 

13.1

 

79,143

 

14.0

 

Construction

 

55,289

 

7.6

 

46,508

 

8.2

 

51,404

 

9.1

 

Wholesale and retail trade

 

83,156

 

11.4

 

89,689

 

15.8

 

80,389

 

14.3

 

All other

 

252,837

 

34.7

 

143,220

 

25.1

 

119,634

 

21.2

 

 

 

$

729,442

 

100.0

%

$

568,962

 

100.0

%

$

565,145

 

100.0

%

 

33



Table of Contents

 

Real Estate - Mortgage Loans. Real estate mortgage loans increased $95.9 million, or 12.2%, from $784.5 million at December 31, 2011 to $880.4 million at December 31, 2012.  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 20 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 Small Business Administration 504 loans (SBA) 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, as well as U.S. Department of Agriculture (USDA) Rural Development loans.

 

The properties securing the Company’s real estate mortgage loan portfolio are located primarily in the states of Colorado and Arizona.  At December 31, 2012 and 2011, 64% and 61%, respectively, of the Company’s outstanding real estate mortgage loans were in the Colorado market.

 

The following table summarizes the Company’s real estate mortgage portfolio, segregated by property type.

 

 

 

At December 31,

 

 

 

2012

 

2011

 

2010

 

(in thousands)

 

Balance

 

%

 

Balance

 

%

 

Balance

 

%

 

Residential & commercial owner-occupied

 

$

434,384

 

49.3

%

$

421,350

 

53.7

%

$

431,935

 

55.1

%

Residential & commercial investor

 

445,993

 

50.7

 

363,141

 

46.3

 

351,740

 

44.9

 

 

 

$

880,377

 

100.0

%

$

784,491

 

100.0

%

$

783,675

 

100.0

%

 

Land Acquisition and Development Loans.  Land acquisition and development loans decreased $8.4 million, or 13.6%, from $62.0 million at December 31, 2011 to $53.6 million at December 31, 2012. We have a portfolio of loans for the acquisition and development of land for residential building projects. Due to overall market illiquidity and the significant value declines on raw land, the Company has ceased lending activities for the acquisition and future development of land. However, the Company may still pursue loans secured by finished lots that are prepared to enter the construction phase. Land acquisition and development loans may be more adversely affected by conditions in the real estate markets or in the general economy.  The properties securing the land acquisition and development portfolio are generally located in the states of Colorado and Arizona.  At December 31, 2012 and 2011, the majority (over 60%) of the loans were generated in the Colorado market.

 

Real Estate - Construction Loans. Real estate construction loans increased $3.9 million, or 6.1%, from $63.1 million at December 31, 2011 to $67.0 million at December 31, 2012. 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 (speculative loan), although speculative loans 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 a permanent financing commitment or prequalification 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 a speculative loan be no more than 75% of the appraised value of the completed construction project or 80% of pre-sold projects. Values are determined primarily by approved independent appraisers.  With the deep valuation declines in the real estate markets during recent years, the Company has become very selective in the extension of credit for new construction projects.

 

We also originate loans to finance the construction of multi-family, office, industrial, retail 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 75% of the appraised value. Values are determined primarily by approved independent appraisers. The properties securing the Company’s real estate loan portfolio are generally located in the states of Colorado and Arizona.  At December 31, 2012 and 2011, the majority (96% and 66%, respectively) of the Company’s real estate construction loans outstanding were generated in the Colorado market.

 

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Table of Contents

 

Consumer Loans. Consumer loans increased $32.9 million, or 28%, from $116.7 million at December 31, 2011 to $149.6 million at December 31, 2012.  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, the same loan officer often services the banking relationships of both the business and business owners or management. In 2010, the Company introduced a new product line, jumbo mortgage loans.  This residential mortgage financing program offers competitive pricing and terms for the purchase, refinance or permanent financing for non-conforming mortgage loans, which generally exceed $417,000.  For primary residences, the standard loan-to-value is 75% for loans up to $2.0 million.  The loan-to-value decreases as the size of the loan increases, with a standard loan-to-value of 50% on loans in excess of $3.0 million. In addition, we generally only finance 3/1, 5/1, and 7/1 adjustable-rate mortgage loans as well as 15 year fixed rate loans.  In addition we broker 15- and 30-year fixed rate conforming mortgages.  Jumbo mortgage loans at December 31, 2012 and 2011, totaled $96.5 million or 64% and $55.3 million or 47%, respectively, of the consumer loan portfolio.

 

Nonperforming Assets

 

Our nonperforming assets consist of nonaccrual loans, restructured loans, loans past due 90 days or more, OREO and other repossessed assets. Nonaccrual loans are those loans for which the accrual of interest has been discontinued. Impaired loans are defined as loans for which, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement (all of which were on a nonaccrual basis). The following table sets forth information with respect to these assets at the dates indicated.

 

 

 

At December 31,

 

(in thousands)

 

2012

 

2011

 

2010

 

2009

 

2008

 

Nonperforming loans:

 

 

 

 

 

 

 

 

 

 

 

Loans 90 days or more past due and still accruing interest

 

$

35

 

$

212

 

$

202

 

$

509

 

$

1,292

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

3,324

 

3,105

 

8,722

 

12,696

 

9,312

 

Real estate - mortgage

 

10,779

 

9,295

 

8,446

 

18,832

 

3,481

 

Land acquisition & development

 

4,655

 

5,112

 

9,690

 

34,033

 

16,097

 

Real estate - construction

 

271

 

6,985

 

12,614

 

9,632

 

9,595

 

Consumer and other

 

648

 

2,527

 

3,060

 

3,496

 

1,301

 

Total nonaccrual loans

 

19,677

 

27,024

 

42,532

 

78,689

 

39,786

 

Total nonperforming loans

 

19,712

 

27,236

 

42,734

 

79,198

 

41,078

 

OREO and repossessed assets

 

10,577

 

18,502

 

25,095

 

25,318

 

5,941

 

Total nonperforming assets

 

$

30,289

 

$

45,738

 

$

67,829

 

$

104,516

 

$

47,019

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing renegotiated loans

 

$

43,321

 

$

20,633

 

$

16,488

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

$

46,866

 

$

55,629

 

$

65,892

 

$

75,116

 

$

42,851

 

Allowance for credit losses

 

 

35

 

61

 

155

 

259

 

Allowance for loan and credit losses

 

$

46,866

 

$

55,664

 

$

65,953

 

$

75,271

 

$

43,110

 

Nonperforming assets to total assets

 

1.14

%

1.89

%

2.83

%

4.24

%

1.75

%

Nonperforming loans to total loans

 

1.02

%

1.66

%

2.60

%

4.44

%

2.02

%

Nonperforming loans and OREO to total loans and OREO

 

1.56

%

2.76

%

4.06

%

5.78

%

2.31

%

Allowance for loan and credit losses to total loans (excluding loans held for sale)

 

2.43

%

3.40

%

4.01

%

4.23

%

2.12

%

Allowance for loan and credit losses to nonperforming loans

 

237.75

%

204.38

%

154.33

%

97.28

%

104.95

%

 

Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed on nonaccrual status when it becomes 90 days past due. When a loan is placed on

 

35



Table of Contents

 

nonaccrual status, all accrued and unpaid interest on the loan is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. When the issues relating to a nonaccrual loan are finally resolved, there may ultimately be an actual write-down or charge-off of the principal balance of the loan, which may necessitate additional charges to earnings. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to the borrower, or the reduction of interest or principal, have been granted due to the borrower’s weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. Interest income that would have been recorded had nonaccrual loans performed in accordance with their original contract terms during 2012, 2011 and 2010, was $0.7 million, $0.8 million and $1.6 million, respectively.  OREO represents real property taken by the Company either through foreclosure or through a deed in lieu thereof from the borrower. Repossessed assets include vehicles and other commercial assets acquired under agreements with delinquent borrowers.  Subsequent to acquisition at fair value, repossessed assets and OREO are carried at the lesser of cost or fair market value, less selling costs.  See Note 17 to the consolidated financial statements for additional discussion on the valuation of OREO assets.

 

Nonperforming assets decreased $15.4 million to $30.3 million at December 31, 2012, from $45.7 million at December 31, 2011.  The following table summarizes nonperforming assets by type and market.

 

 

 

2012

 

2011

 

(in thousands)

 

Colorado

 

Arizona

 

Total

 

Total in
category

 

NPAs
as a %

 

Colorado

 

Arizona

 

Total

 

Total in
category

 

NPAs
as a %

 

Commercial

 

$

1,460

 

$

1,899

 

$

3,359

 

$

729,442

 

0.46

%

$

1,101

 

$

2,004

 

$

3,105

 

$

568,962

 

0.55

%

Real estate - mortgage

 

3,105

 

7,674

 

10,779

 

880,377

 

1.22

 

1,412

 

7,883

 

9,295

 

784,491

 

1.18

 

Land acquisition & development

 

1,697

 

2,958

 

4,655

 

53,562

 

8.69

 

2,964

 

2,148

 

5,112

 

61,977

 

8.25

 

Real estate - construction

 

271

 

 

271

 

67,022

 

0.40

 

6,085

 

900

 

6,985

 

63,141

 

11.06

 

Consumer

 

202

 

446

 

648

 

149,638

 

0.43

 

345

 

2,394

 

2,739

 

116,676

 

2.35

 

Other loans

 

 

 

 

46,391

 

0.00

 

 

 

 

42,177

 

0.00

 

OREO and repossessed assets

 

8,912

 

1,665

 

10,577

 

10,577

 

NA

 

10,887

 

7,615

 

18,502

 

18,502

 

NA

 

Nonperforming assets

 

$

15,647

 

$

14,642

 

$

30,289

 

$

1,937,009

 

1.56

%

$

22,794

 

$

22,944

 

$

45,738

 

$

1,655,926

 

2.76

%

 

Nonperforming assets have decreased steadily since peaking in the fourth quarter of 2009 primarily as a result of overall asset quality improvement.  At December 31, 2012, approximately 52% or $15.7 million and 48% or $14.6 million of nonperforming assets were concentrated in Colorado and Arizona, respectively.  At December 31, 2012, nonperforming loans represent 65% or $19.7 million of nonperforming assets, with the remaining 35% or $10.6 million comprised of OREO and repossessed assets.  Nonperforming loans are concentrated primarily within the Real Estate — mortgage (55%), Land A&D (24%), and Commercial (17%) loan segments.  OREO decreased $7.9 million to $10.6 million at December 31, 2012, from $18.5 million at December 31, 2011 primarily as a result of the overall improvement in asset quality and OREO sales during 2012.  The Company foreclosed on two properties and sold 18 properties during 2012.  The Company has dedicated significant resources to the workout and resolution of nonaccrual loans and OREO and continues to closely monitor the financial condition of its clients.

 

In addition to the nonperforming assets described above, the Company had 51 customer relationships considered by management to be potential problem loans with outstanding principal of approximately $19.0 million.  A potential problem loan is one as to which management has concerns about the borrower’s future performance under the terms of the loan contract. For our protection, management monitors these loans closely. These loans 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 being classified as nonperforming. The level of potential problem loans is factored into the determination of the adequacy of the allowance for loan losses.

 

Analysis of Allowance for Loan and Credit Losses. The allowance for loan losses represents management’s recognition of the risks of extending credit and its evaluation of the quality of the loan portfolio. The allowance is

 

36



Table of Contents

 

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

 

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

 

 

 

For the year ended December 31,

 

(in thousands)

 

2012

 

2011

 

2010

 

2009

 

2008

 

Balance of allowance for loan losses at beginning of period

 

$

55,629

 

$

65,892

 

$

75,116

 

$

42,851

 

$

20,043

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

(1,122

)

(4,559

)

(8,357

)

(14,991

)

(2,194

)

Real estate - mortgage

 

(2,789

)

(7,064

)

(11,490

)

(8,118

)

 

Land acquisition & development

 

(3,135

)

(1,635

)

(23,077

)

(44,569