10-K 1 cobz-20141231x10k.htm 10-K cobz_Current Folio_10K

 

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, 2014.

[    ]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

 

 

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

 

 

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

 

 

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

 

 

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. ____

 

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 ____

Accelerated filer     X   

Non-accelerated filer   ____ (Do not check if a smaller reporting company)

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

 

 

No

X

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant at June 30, 2014, computed by reference to the closing price on the NASDAQ Global Select Market was $298,127,321.  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 12, 2015, was 40,781,741.

 

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 2015 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

PART I 

 

 

 

Item 1. 

Business

 

Item 1A. 

Risk Factors

 

17 

Item 1B. 

Unresolved Staff Comments

 

24 

Item 2. 

Properties

 

24 

Item 3. 

Legal Proceedings

 

24 

Item 4. 

Mine Safety Disclosures

 

24 

 

 

 

 

 

 

 

 

PART II 

 

 

 

Item 5. 

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

 

24 

Item 6. 

Selected Financial Data

 

28 

Item 7. 

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

 

29 

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk

 

62 

Item 8. 

Financial Statements and Supplementary Data

 

66 

Item 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

66 

Item 9A. 

Controls and Procedures

 

66 

Item 9B. 

Other Information

 

66 

 

 

 

 

 

 

 

 

PART III 

 

 

 

Item 10. 

Directors, Executive Officers and Corporate Governance

 

66 

Item 11. 

Executive Compensation

 

67 

Item 12. 

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

 

67 

Item 13. 

Certain Relationships and Related Transactions and Director Independence

 

67 

Item 14. 

Principal Accounting Fees and Services

 

67 

 

 

 

 

 

 

 

 

PART IV 

 

 

 

Item 15. 

Exhibits and Financial Statement Schedules

 

68 

 

 

 

 

SIGNATURES 

 

 

73 

 

 

 

 

Index to Consolidated Financial Statements 

 

F-1

 

 

2


 

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.

 

3


 

PART I

Item 1. Business

 

Overview

 

CoBiz Financial Inc. (CoBiz or the Company) is a diversified financial services company headquartered in Denver, Colorado. 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, 2014, we had total assets of $3.1 billion, net loans of $2.4 billion and deposits of $2.5 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 13 locations, including nine in the Denver metropolitan area, and one each in Boulder, Colorado Springs, Fort Collins and Vail.  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 wealth 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.

 

Segments

 

In 2014, the Company re-evaluated the identification of its reportable segments and aggregated the segments previously reported as Investment Banking, Wealth Management and Insurance into a new segment titled Fee-Based Lines.  All prior period disclosures have been adjusted to conform to the new presentation.  In 2012, the Company closed its trust department and sold its wealth transfer business.  The operations of the trust department and the wealth transfer division have been reported as discontinued operations throughout this report (all within the Fee-Based Lines segment).

 

We operate three distinct segments, as follows:

 

·

Commercial Banking

·

Fee-Based Lines

·

Corporate Support and Other

4


 

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

Fee-Based Services through:

Investment Banking

Green Manning & Bunch, Ltd.

Merger and acquisition advisory services

CoBiz Investment Management, LLC

Institutional private placements of debt and equity

CoBiz Insurance, Inc.

Strategic financial advisory services

 

Wealth Management

 

Customized client investment policy

 

Proprietary bond and equity offerings

 

Tailored asset allocation strategies

 

Financial planning

 

Carefully vetted investment options utilizing external managers

 

Investment management

 

Insurance

 

Employee benefits and retirement planning

 

Individual benefits

 

Commercial lines

 

Professional lines

 

Private client

 

For a complete discussion of the segments included in our principal activities and certain financial information for each segment, see Note 19 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 be recognized as the premier financial services provider to the business community in the markets we serve, creating engaged employees, longer term customer relationships and superior shareholder value. 

 

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

 

Business Strategy

 

Our primary strategy is to differentiate ourselves from our competitors by providing our local presidents with substantial decision-making authority in developing their respective markets, and expanding our products and services to build long-term relationships that meet the needs of small to mid-sized businesses, business

5


 

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 environment which allows our employees to effectively respond to customer needs and manage those relationships.  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.  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 community 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, 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

June 30, 2013

 

Market share

    

Colorado %

    

Arizona %

    

Colorado %

    

Arizona %

    

CoBiz Bank

 

1.66 

%

0.52 

%

1.55 

%

0.47 

%

Other in-state banks

 

32.93 

%

9.94 

%

33.38 

%

9.56 

%

Out-of-state banks

 

65.41 

%

89.54 

%

65.07 

%

89.97 

%

Total

 

100.00 

%

100.00 

%

100.00 

%

100.00 

%

 

 

 

 

 

 

 

 

 

 

Deposit market share rank

 

12th

 

17th

 

12th

 

17th

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

June 30, 2013

 

 

 

Deposit Market

 

 

 

Deposit Market

 

 

 

MSA

    

Share Rank

    

Market Share %

    

Share Rank

    

Market Share %

    

Denver-Aurora-Lakewood, CO

 

8th

 

2.32 

%

9th

 

2.13 

%

Boulder, CO

 

9th

 

3.56 

%

10th

 

3.47 

%

Edwards, CO

 

8th

 

1.92 

%

8th

 

2.16 

%

Fort Collins, CO

 

29th

 

0.03 

%

NA(1)

 

NA(1)

 

Colorado Springs, CO

 

38th

 

0.01 

%

NA(1)

 

NA(1)

 

Phoenix-Mesa-Glendale, AZ

 

14th

 

0.70 

%

16th

 

0.65 

%

 

(1)

The Fort Collins and Colorado Springs locations opened during 2014.

 

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, public financing, Small Business Administration (SBA) lending, structured-finance lending and a niche focused on healthcare lending.  The addition of these products has enabled the Bank to continue to grow its loan portfolio in a competitive and challenging environment.

 

Establishing 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

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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.

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, 2014, our ratio of nonperforming loans to total loans was 0.38%, compared to 0.67% at December 31, 2013. 

 

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.  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.

Expansion.  We intend to continue to explore acquisitions of financial institutions or financial service entities within our market areas.  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.  In 2014 we opened bank locations in two new markets in Colorado, Fort Collins and Colorado Springs. 

 

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. The Company’s success is dependent to a significant degree on the economic conditions of these two geographical markets. 

 

Colorado. Denver’s economy is diversified with significant representation in various industries. Colorado was the fourth-fastest growing state in the United States in terms of percentage population growth from July 2013 to July 2014.  We have two locations in downtown Denver, two in Littleton, and one location each in Boulder, Colorado Springs, Commerce City, Cherry Creek, the Denver Technological Center (DTC), Fort Collins, Golden, Louisville and the Vail Valley.

 

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 seventh-fastest growing state from July 2013 to July 2014. Our banks are located in Maricopa County, one of the nation’s largest counties in terms of population size. 

 

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

 

 

 

 

 

 

 

 

 

Colorado Snapshot

 

 

Arizona Snapshot

 

 

 

 

 

 

 

 

Demographics

 

 

Demographics

 

Colorado population: 5.4 million

 

Arizona population: 6.7 million

 

Metropolitan Denver population: 2.7 million

 

Metropolitan Phoenix population: 4.4 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 2013: $63,371

 

Median household income 2013: $50,602

 

Projected household income change from 2011 to 2016: 19.06%

 

Projected household income change from 2011 to 2016: 16.28%

 

Median home price for Metropolitan Denver at September 30, 2013: $315,500

 

Median home price for Metropolitan Phoenix at September 30, 2013: $200,500

 

 

 

 

 

 

 

 

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 2014 was 4.0%, down from 6.2% in December 2013 (national average of 5.6%)

 

Preliminary unemployment rate at December 2014 was 6.7%, down from 7.6% in December 2013 (national average of 5.6%)

 

State with the 13th highest job growth between November 2013 and November 2014

 

State with the 8th highest job growth between November 2013 and November 2014

 

 

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.

 

Employees

 

We had 534 full time equivalent employees at December 31, 2014.  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.

8


 

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, the Bank and the Fee-Based Lines, 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.

 

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 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

9


 

Preferred Stock issued through the CPP.  The dividend rate varied from 1% to 5% until it was fixed at 1% on September 30, 2013. The dividend rate increases to 9% in 2016.   

 

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 until all regulations implementing the statute are written and adopted. In December 2013, a provision of the Dodd-Frank Act known as the Volcker Rule was finalized by the federal banking agencies.  The Volcker Rule prohibits banks and their affiliates from engaging in proprietary trading and prohibits investment in hedge funds and private equity funds.  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.

 

Sound Incentive Compensation Policies.  In 2010, the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and FDIC issued final guidance to help ensure that incentive compensation policies at banking organizations do not encourage imprudent risk-taking and are consistent with the safety and soundness of the organization.  The key principles within the guidance on incentive compensation arrangements are 1) they should appropriately balance risk and financial results to not encourage imprudent risk; 2) they should be compatible with effective controls and risk management; and 3) they should be supported by strong corporate governance, including active and effective oversight by the board of directors.  The guidance applies to all employees who individually, or as part of a group, have the ability to expose the organization to material amounts of risk.  At a minimum, these rules apply to named executive officers included within a public company’s executive compensation disclosures.  The Federal Reserve will review the Company’s policies and procedures for incentive compensation arrangements as part of the supervisory process.

 

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, 2014, 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

10


 

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. 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 C Preferred Stock is 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, 2014

 

 

 

 

 

 

 

Minimum

 

 

Ratio

    

Actual %

 

    

Required %

 

 

Total capital to risk-weighted assets

 

15.7

%

 

8.0

%

 

Tier I capital to risk-weighted assets

 

14.4

%

 

4.0

%

 

Tier I leverage ratio

 

12.4

%

 

4.0

%

 

 

On July 2, 2013, the Federal Reserve Board approved a final rule to implement the Basel III regulatory capital reforms and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The rule became effective for large banks subject to the “advanced approaches” risk-based capital rules on January 1, 2014.  “Non-advanced approaches” banks will implement the final rule beginning January 1, 2015, the implementation date for the Company.  The final rule minimizes the impact on smaller, less complex financial institutions.  Key highlights of the final rule for non-advanced approaches banks such as the Company include:

 

·

A provision of a one-time opt-out from the recognition of AOCI unrealized gains and losses in regulatory capital.  This will reduce potential volatility in regulatory capital ratios.  The Company intends to opt-out of including AOCI unrealized gains and losses in regulatory capital.

·

Institutions with less than $15 billion in assets will be allowed to include certain non-qualifying capital instruments in regulatory capital that were issued prior to May 19, 2010.  The Company’s $70.0 million of trust preferred securities issued by its wholly-owned trusts will continue to be included in regulatory capital.

·

Inclusion of a number of deductions and adjustments from regulatory capital.  These include, for example, deferred tax assets dependent upon future taxable income, and investments in equity

11


 

issued by nonconsolidated financial entities above certain thresholds.  The Company estimates that application of the new requirements would result in significant deductions from regulatory capital due to the Company’s investment in bank trust preferred and subordinated debt securities.  However, these deductions will be phased in over a three-year period beginning in 2015, which will allow the Company to mitigate the impact of the deduction through a reduction in the impacted securities portfolio through calls, maturities and sales.

·

An increase in the risk-weighting for certain assets and off-balance sheet items, which will result in a higher capital requirement.

·

Overall, minimum requirements will increase for both the quantity and quality of capital held by institutions.

 

Basel III not only increases most of the required minimum regulatory capital ratios, but also introduces a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer.  Basel III has maintained the general structure of the current prompt corrective action thresholds while incorporating the increased requirements, including the Common Equity Tier 1 Capital ratio.  The prompt corrective action thresholds for “well-capitalized” organizations imply a cushion of 2% over the minimum capital ratios, which is slightly lower than a 2.5% capital conservation buffer required under Basel III.  In order to be a "well-capitalized" financial holding company or depository institution under Basel III, an institution must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; a Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a leverage ratio of 5% or more. Institutions must also maintain a capital conservation buffer consisting of Common Equity Tier 1 Capital.

 

Future rulemaking and regulatory changes on capital requirements may impact the Company as it continues to grow and evaluate mergers and acquisitions 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 if the Bank becomes “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.

 

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

12


 

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. 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.

 

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

13


 

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 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, 2014

 

 

 

 

 

 

 

Minimum

 

 

Ratio

    

Actual %

 

 

Required %

 

 

Total capital to risk-weighted assets

 

13.6 

%

 

8.0 

%

 

Tier I capital to risk-weighted assets

 

12.4 

%

 

4.0 

%

 

Tier I leverage ratio

 

10.7 

%

 

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, 2014, the Bank was well-capitalized,

14


 

which places no significant restrictions on the Bank’s activities.  See “The Holding Company — Capital Adequacy” for a discussion of changes to the capital levels required under Basel III.

 

Examinations. The FRB and the Colorado Division of Banking periodically examine and evaluate 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.

 

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 has set an internal lending limit that is more stringent than the regulatory requirement.  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. 

 

The assessment base is calculated on average daily consolidated assets less average monthly tangible equity (which is defined as Tier 1 Capital).  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 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 2015 is 0.15 basis points (0.60 basis points annually).  The assessment rate is adjusted quarterly.

 

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.

 

15


 

Fee-Based 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 2014. 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.

 

16


 

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 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 a 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 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.

 

Our ability to grow is substantially dependent upon our ability to increase our deposits.

 

Our primary source of funding growth is through deposit accumulation.  Our ability to attract deposits is significantly influenced by general economic conditions, changes in money market rates, prevailing interest rates and competition.  If we are not successful in increasing our current deposit base to a level commensurate with our funding needs, we may have to seek alternative higher cost wholesale financing sources or curtail our growth.

 

17


 

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

 

The policies of the Federal Reserve 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 us.

 

Conditions in the financial services markets may adversely affect the business and results of operations of the Company.

 

The ability of our borrowers to pay interest and repay principal, which affects our financial performance, is highly dependent on the business environment of the overall economy and the business markets in which we operate.  In recent years, the financial services industry has been adversely impacted by unfavorable economic and market conditions.  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, credit tightening in the market could reduce funding lines available to the Company.  Market turmoil and tightening of credit may lead to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of general business activity.

 

Weakness in the economy and in the real estate market, including specific weakness within the markets where our banks do business, may 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 stabilized, 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.

 

Weakness in the economy and real estate markets 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.

 

Adverse economic factors affecting particular industries could have a negative effect on our customers and their ability to make payments to us.

 

In addition to the geographic concentration of our markets in Arizona and Colorado, certain industry-specific economic factors also affect us. For example, while we do not have a concentration in energy lending, the industry is cyclical and recently has experienced a significant drop in crude oil prices. A severe and prolonged decline in oil and gas commodity prices would adversely affect that industry and, consequently, may adversely affect our customers who are interdependent with that industry.

 

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

18


 

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 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 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

19


 

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.

 

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, information systems (both internal and provided by third parties) and the internet to conduct our business.  Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal, regulatory and internal standards and specifications.  In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and confidential information, such as the personal information of our customers and clients.  These risks may increase in the future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications.

 

While we have policies and procedures designed to prevent or limit the effect of a possible failure, interruption or breach of our information systems, there can be no assurance that such action will not occur or, if any does occur, that it will be adequately addressed.  For example, although we maintain commercially reasonable measures to ensure the cybersecurity of our information systems, other financial service institutions and companies have reported breaches in the security of their websites or other systems.  In addition, several U.S. financial institutions have recently experienced significant distributed denial-of-service attacks, some of which involved sophisticated and targeted attacks intended to disable or degrade service, or sabotage systems.  Other potential attacks have attempted to obtain unauthorized access to confidential information or destroy data, often through the introduction of computer viruses or malware, cyber-attacks and other means.  To date, none of these efforts has had a material effect on our business or operations.  Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments.  Those same parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients.  We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or proprietary information.  An interception , misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third party could result in legal liability, remediation costs, regulatory action and reputational harm. 

 

We could experience an unexpected inability to obtain needed liquidity.  

 

Liquidity measures the ability to meet current and future cash flow needs as they become due. Our liquidity position reflects our ability to meet loan requests, accommodate deposit outflows, service principal and interest repayments on debt and to fund our strategic initiatives. Our ability to meet current financial obligations is a function of our balance sheet structure, ability to liquidate assets and access to alternative sources of funds. We seek to ensure that our funding needs are met by maintaining an appropriate level of liquidity through asset and liability management. If we become unable to obtain funds when needed, it could have a material adverse effect on our business, financial condition and results of operations.

 

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

20


 

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 need to account for assets at market prices may adversely affect our results of operations. 

 

We report certain assets, including investments and securities, at fair value.  Generally, for assets that are reported at fair value we use quoted market prices or valuation models that utilize market data inputs to estimate fair value.  Because we carry these assets on our books at their fair value, we may incur losses even if the assets in question present minimal credit risk.  We may be required to recognize other-than-temporary impairments in future periods with respect to securities in our portfolio.  The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of the securities and our estimation of the anticipated recovery period. 

 

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 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 effect 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

21


 

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, 2014 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 Lines segment is subject to quarterly and annual volatility in their revenues and earnings.

 

Our Fee-Based Lines, which include investment banking, insurance and wealth management revenue, have historically experienced, and are likely to continue to experience, quarterly and annual volatility in revenue and earnings.  With respect to investment banking revenue, 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 revenue and earnings for a particular quarter or year.  With respect to insurance revenue, our revenue 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 wealth management, our revenue 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 revenue and earnings of the segment for a particular quarter or year. 

22


 

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.

23


 

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 Treasury were to adjust the qualified small business lending reported by the Company due to an audit, the dividend rate on the Series C Preferred Stock may increase prospectively and retrospectively.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

At December 31, 2014, we had 13 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 a branch location 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 16 to the consolidated financial statements. The Company leases all of its facilities with the exception of a single Colorado branch which the Company has owned since 2010. The terms of these leases expire between 2015 and 2024.

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.

 

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 12, 2015, there were approximately 476 shareholders of record of CoBiz common stock.

 

24


 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

Dividends

 

 

    

High

    

Low

    

Declared

 

2013:

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

8.65 

 

$

7.27 

 

$

0.03 

 

Second Quarter

 

 

9.34 

 

 

7.50 

 

 

0.03 

 

Third Quarter

 

 

11.00 

 

 

8.30 

 

 

0.03 

 

Fourth Quarter

 

 

12.24 

 

 

9.19 

 

 

0.03 

 

2014:

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

12.45 

 

$

10.07 

 

$

0.035 

 

Second Quarter

 

 

11.85 

 

 

9.84 

 

 

0.035 

 

Third Quarter

 

 

11.83 

 

 

10.61 

 

 

0.04 

 

Fourth Quarter

 

 

13.60 

 

 

11.05 

 

 

0.04 

 

 

On January 22, 2015, the Board of Directors approved a quarterly dividend for the first quarter of 2015 of $0.04 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 and Series C Preferred Stock as described in Note 12 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, 2014, 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, 2009 and the closing prices on each of the five years in the period ended

25


 

December 31, 2014, with the hypothetical cumulative total return on the Russell 2000 Index and the SNL U.S. Bank NASDAQ Index for the comparable period. 

 

Picture 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2009

    

2010

    

2011

    

2012

    

2013

    

2014

 

CoBiz Financial Inc.

 

100.00 

 

128.90 

 

123.13 

 

161.11 

 

261.39 

 

290.84 

 

SNL U.S. Bank NASDAQ

 

100.00 

 

117.98 

 

104.68 

 

124.77 

 

179.33 

 

185.73 

 

Russell 2000 Index

 

100.00 

 

126.86 

 

121.56 

 

141.43 

 

196.34 

 

205.95 

 

 

 

The table below summarizes shares acquired and amounts paid in net settlement of restricted stock awards during the quarter ended December 31, 2014:

 

 

 

 

 

 

 

 

 

 

Total number

 

Average price

 

Period

    

of shares

    

paid per share

 

November 1 - November 30, 2014

 

320 

 

$

11.97 

 

Securities Authorized for Issuance under Equity Compensation Plans

The Company has adopted the Amended and Restated 2005 Equity Incentive Plan (the “2005 Plan”).  Under the 2005 Plan, the Compensation Committee has the authority to determine the identity of the key employees, consultants, and directors who shall be granted options or restricted stock awards; the option price, which shall not be less than 85% the fair market value of the common stock on the date of grant; the vesting requirements; and the manner and times at which the options shall be exercisable. As of December

26


 

31, 2014, there were 2,508,115 shares available for grant under the 2005 Plan.  The Company also has an Employee Stock Purchase Plan which had 273,188 shares available for issuance at December 31, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Weighted-

 

Number of

 

 

 

securities to be

 

average

 

securities remaining

 

 

 

issued upon

 

exercise price

 

available for future

 

 

 

exercise of

 

of outstanding

 

issuance under equity

 

 

 

outstanding options,

 

options,

 

compensation

 

Plan Category

 

warrants and rights

 

warrants and rights

 

plans

 

Equity compensation plans approved by security holders

 

819,755 

 

$

9.66 

 

2,781,303 

 

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by security holders

 

 -

 

 

 -

 

 -

 

Total

 

819,755 

 

$

9.66 

 

2,781,303 

 

 

 

 

 

 

27


 

Item 6. Selected Financial Data

 

The following table sets forth selected financial data for the Company for the periods indicated.  Discontinued operations have been reported retrospectively for all periods presented in the following table as discussed in Note 2 to the consolidated financial statements. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At or for the year ended December 31, 

 

(in thousands, except per share data)

   

2014

   

2013

   

2012

   

2011

   

2010

 

Statement of income data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

114,317 

 

$

106,127 

 

$

106,128 

 

$

111,264 

 

$

115,979 

 

Interest expense

 

 

8,429 

 

 

10,426 

 

 

12,750 

 

 

14,863 

 

 

19,148 

 

Net interest income before provision for loan losses

 

 

105,888 

 

 

95,701 

 

 

93,378 

 

 

96,401 

 

 

96,831 

 

Provision for loan losses

 

 

(4,155)

 

 

(8,804)

 

 

(4,733)

 

 

4,002 

 

 

35,127 

 

Net interest income after provision for loan losses

 

 

110,043 

 

 

104,505 

 

 

98,111 

 

 

92,399 

 

 

61,704 

 

Noninterest income

 

 

32,075 

 

 

30,912 

 

 

30,559 

 

 

30,823 

 

 

29,517 

 

Noninterest expense

 

 

97,964 

 

 

94,628 

 

 

91,166 

 

 

95,821 

 

 

103,345 

 

Income (loss) before taxes

 

 

44,154 

 

 

40,789 

 

 

37,504 

 

 

27,401 

 

 

(12,124)

 

Provision (benefit) for income taxes

 

 

15,147 

 

 

13,351 

 

 

13,258 

 

 

(5,808)

 

 

10,158 

 

Net income (loss) before noncontrolling interest

 

$

29,007 

 

$

27,438 

 

$

24,246 

 

$

33,209 

 

$

(22,282)

 

Less: net income attributable to noncontrolling interest

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(209)

 

Net income (loss) from continuing operations

 

 

29,007 

 

 

27,438 

 

 

24,246 

 

 

33,209 

 

 

(22,491)

 

Discontinued operations, net of tax

 

 

 -

 

 

173 

 

 

324 

 

 

253 

 

 

(146)

 

Net income (loss)

 

$

29,007 

 

$

27,611 

 

$

24,570 

 

$

33,462 

 

$

(22,637)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share from continuing operations

 

$

0.70 

 

$

0.66 

 

$

0.54 

 

$

0.75 

 

$

(0.72)

 

Diluted earnings (loss) per common share from continuing operations

 

$

0.70 

 

$

0.66 

 

$

0.54 

 

$

0.75 

 

$

(0.72)

 

Basic earnings per common share from discontinued operations

 

$

 -

 

$

 -

 

$

0.01 

 

$

0.01 

 

$

 -

 

Diluted earnings per common share from discontinued operations

 

$

 -

 

$

 -

 

$

0.01 

 

$

0.01 

 

$

 -

 

Basic earnings (loss) per common share

 

$

0.70 

 

$

0.66 

 

$

0.55 

 

$

0.76 

 

$

(0.72)

 

Diluted earnings (loss) per common share

 

$

0.70 

 

$

0.66 

 

$

0.55 

 

$

0.76 

 

$

(0.72)

 

Cash dividends declared per common share

 

$

0.15 

 

$

0.12 

 

$

0.07 

 

$

0.04 

 

$

0.04 

 

Dividend payout ratio

 

 

21.43 

%

 

18.18 

%

 

12.73 

%

 

5.26 

%

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

3,062,166 

 

$

2,800,691 

 

$

2,653,641 

 

$

2,423,504 

 

$

2,395,088 

 

Total investments

 

 

484,621 

 

 

556,796 

 

 

571,665 

 

 

633,308 

 

 

644,668 

 

Loans

 

 

2,405,575 

 

 

2,084,359 

 

 

1,926,432 

 

 

1,637,424 

 

 

1,643,727 

 

Allowance for loan losses

 

 

32,765 

 

 

37,050 

 

 

46,866 

 

 

55,629 

 

 

65,892 

 

Deposits

 

 

2,492,291 

 

 

2,279,037 

 

 

2,129,260 

 

 

1,918,406 

 

 

1,889,368 

 

Junior subordinated debentures

 

 

72,166 

 

 

72,166 

 

 

72,166 

 

 

72,166 

 

 

72,166 

 

Subordinated notes payable

 

 

 -

 

 

 -

 

 

20,984 

 

 

20,984 

 

 

20,984 

 

Shareholders' equity

 

 

308,769 

 

 

281,085 

 

 

257,051 

 

 

220,082 

 

 

201,738 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average total assets

 

 

0.99 

%

 

1.02 

%

 

0.98 

%

 

1.39 

%

 

(0.93)

%

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

 

 

1.41 

%

 

1.32 

%

 

1.42 

%

 

1.53 

%

 

1.29 

%

Return on average shareholders' equity

 

 

9.82 

%

 

10.29 

%

 

10.15 

%

 

16.23 

%

 

(10.17)

%

Average shareholders' equity to average total assets

 

 

10.10 

%

 

9.93 

%

 

9.65 

%

 

8.58 

%

 

9.15 

%

Net interest margin

 

 

3.91 

%

 

3.81 

%

 

3.99 

%

 

4.23 

%

 

4.24 

%

Efficiency ratio(2)

 

 

70.95 

%

 

72.49 

%

 

72.89 

%

 

72.36 

%

 

76.20 

%

Nonperforming assets to total assets

 

 

0.49 

%

 

0.68 

%

 

1.14 

%

 

1.89 

%

 

2.83 

%

Nonperforming loans to total loans

 

 

0.38 

%

 

0.67 

%

 

1.02 

%

 

1.66 

%

 

2.60 

%

Allowance for loan and credit losses to total loans

 

 

1.36 

%

 

1.78 

%

 

2.43 

%

 

3.40 

%

 

4.01 

%

Allowance for loan and credit losses to nonperforming loans

 

 

357.89 

%

 

265.78 

%

 

237.75 

%

 

204.38 

%

 

154.33 

%

Net charge-offs to average loans

 

 

0.01 

%

 

0.05 

%

 

0.23 

%

 

0.86 

%

 

2.62 

%

 


(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

28


 

capital to cover credit losses and is a reflection of earnings generated by the core business.  The following is a reconciliation of PTPP earnings to its most comparable GAAP measure.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At and for the year ended December 31, 

 

(in thousands)

    

2014

    

2013

    

2012

    

2011

    

2010

 

Net income (loss) - GAAP

 

$

29,007 

 

$

27,611 

 

$

24,570 

 

$

33,462 

 

$

(22,637)

 

Adjusted for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable equivalent adjustment

 

 

3,807 

 

 

2,760 

 

 

1,907 

 

 

1,184 

 

 

501 

 

Provision (benefit) for income taxes

 

 

15,147 

 

 

13,437 

 

 

13,429 

 

 

(5,654)

 

 

10,028 

 

Provision for loan and credit losses

 

 

(4,155)

 

 

(8,804)

 

 

(4,768)

 

 

3,976 

 

 

35,033 

 

Net other than temporary impairment losses on securities recognized in earnings

 

 

 -

 

 

 -

 

 

297 

 

 

771 

 

 

451 

 

Loss on securities, other assets and other real estate owned

 

 

(2,618)

 

 

683 

 

 

65 

 

 

3,145 

 

 

7,977 

 

Pre-tax, pre-provision earnings (A)

 

$

41,188 

 

$

35,687 

 

$

35,500 

 

$

36,884 

 

$

31,353 

 

Average assets (B)

 

$

2,925,168 

 

$

2,702,211 

 

$

2,508,222 

 

$

2,403,960 

 

$

2,434,002 

 

PTPP ROA ((A)/(B))

 

 

1.41 

%

 

1.32 

%

 

1.42 

%

 

1.53 

%

 

1.29 

%

 

(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. During 2014, in conjunction with organizational changes and a re-evaluation of its segments, the Company aggregated those segments previously reported as Investment Banking, Wealth Management and Insurance into a new segment titled Fee-Based Lines.  Our operating segments include Commercial Banking and Fee-Based Lines and all disclosures in this report have been conformed to the current presentation.

 

Earnings are derived primarily from our net interest income, which is interest income less interest expense, and our noninterest income earned from Fee-Based 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.

 

We concentrate on developing an organization with personnel, management systems and products that will allow us to compete effectively and position us for growth. Although we strive to minimize costs that do not impact customer service, we continue to invest in systems and business production personnel to strengthen our future growth prospects. 

 

Industry Overview. At the October 2014 Federal Open Market Committee (FOMC) meeting, citing “sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment”, the Federal Reserve Bank ended its long running bond-buying program commonly known as quantitative easing (QE).  At the December 2014 meeting, the FOMC kept the target range for federal funds rate at 0‑25 basis points, noting that labor market conditions “have improved further with solid job gains and a lower unemployment rate”. With regard to the timing of rate increases, the FOMC believes it can act with patience especially if inflation continues to run below the 2% long-run goal, currently aided by lower energy prices.  Should inflation increase more rapidly than expected, the FOMC is prepared to act by raising rate targets sooner than anticipated.  Although new bond purchasing activities were halted, the FRB expects to reinvest

29


 

proceeds from the current portfolio with the aim of maintaining the portfolio size and letting it shrink only as short-term rates rise.

 

The actions by the FOMC have compressed net interest income and net interest margins for the banking industry by maintaining low rates on interest-earning assets.  Low interest rates, coupled with a competitive lending environment, continue to prove challenging for the profitability of the banking industry yet relative strength of the economy, employment gains, increased household spending and positive outlook for commercial fixed investment as well as rising rate expectations lean to optimism.

 

The banking industry continues to be impacted by new legislative and regulatory reform proposals.  In July 2013, the FRB, the FDIC, and the OCC approved the final U.S. version of the Basel III agreement.  Basel III replaces the federal banking agencies’ general risk-based capital rules, includes a narrower definition of capital and requires higher minimum capital levels.  Basel III will be effective for the Company in 2015.  In December 2013, the federal banking agencies also adopted final rules implementing a provision of the Dodd-Frank Act known as the Volcker Rule, a complex regulation that prohibits banks from engaging in proprietary trading and investments in certain asset classes.  Upon initial issuance, a significant unintended consequence emerged, as banks faced impairments on certain investments that were no longer allowed to be held.  While the federal banking agencies issued additional guidance in January 2014 allowing banks to retain certain investments that were originally prohibited by the Volcker Rule, it underscored the complexity of the Volcker Rule and the potential ramifications to the industry.

 

The national unemployment rate decreased from 6.7% in December 2013 to 5.6% at December 2014.  The unemployment rate has steadily decreased during 2014 and is at the lowest level since October 2008.  The unemployment rate has now fallen below the maximum target level of 6.5% set by the FOMC, supporting the notion higher rate targets are on the near horizon.

 

Bank failures continued to slow, with 18 in 2014 following 24 in 2013, the lowest levels since 2008.  From 2008 to 2012, 465 banks failed and went into receivership with the FDIC, causing estimated losses of $86.6 billion to the Depository Insurance Fund.  This compares to only 10 bank failures in the years from 2003 to 2007.  The FDIC’s “problem list” stood at 329 at September 30, 2014, down from 515 a year earlier, the lowest level since March 2009 and significantly down from 651 at the end of 2012.

 

In the third quarter of 2014, FDIC-insured commercial banks reported a combined net income of $39 billion with nearly 63% of all banks making year-over-year improvements.  Industry-wide, net operating revenues grew over the prior year quarter more than any other time since the fourth quarter of 2009.  Additionally, noninterest income grew on a year-over-year basis for the first time in five quarters.  Noninterest income increased on year-over-year basis with over half of reporting institutions participating in the advance.  Provision for loan losses reversed a five year decline by increasing in the third quarter over the prior year quarter and loan charge-offs fell to a seven-year low.

 

Company Overview. From December 31, 1995, the first complete fiscal year under the current management team, to December 31, 2014, 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 19 bank locations, three fee-based businesses and total assets of $3.1 billion.   

 

The Company has a well-capitalized balance sheet that includes common equity, preferred equity and subordinated debentures.  The Company currently has $57.4 million in preferred stock issued to the Treasury in September 2011 through the SBLF program.  The SBLF preferred stock has a fixed rate of 1% until 2016 at which time the rate will increase to 9%.  The Company expects to repay the preferred stock to the Treasury before the rate increases

 

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

30


 

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, 2014, 2013 and 2012 are as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Corporate 

 

 

 

 

 

 

 

 

 

 

 

 

Support

 

 

 

 

 

 

  Commercial  

 

Fee-Based

 

and

 

 

 

 

 

    

Banking

    

Lines

    

Other

    

Consolidated

 

(in thousands, except per share data)

 

2014

 

Operating revenue (1)

 

$

119,434 

 

$

21,017 

 

$

(2,488)

 

$

137,963 

 

Net income (loss)

 

$

32,264 

 

$

115 

 

$

(3,372)

 

$

29,007 

 

Diluted income (loss) per common share (2)

 

$

0.80 

 

$

 -

 

$

(0.10)

 

$

0.70 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

Operating revenue (1)

 

$

112,431 

 

$

18,528 

 

$

(4,346)

 

$

126,613 

 

Net income (loss)

 

$

32,134 

 

$

(693)

 

$

(3,830)

 

$

27,611 

 

Diluted income (loss) per common share (2)

 

$

0.81 

 

$

(0.02)

 

$

(0.13)

 

$

0.66 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

Operating revenue (1)

 

$

111,517 

 

$

17,685 

 

$

(5,265)

 

$

123,937 

 

Net income (loss)

 

$

31,210 

 

$

(1,347)

 

$

(5,293)

 

$

24,570 

 

Diluted income (loss) per common share (2)

 

$

0.81 

 

$

(0.04)

 

$

(0.22)

 

$

0.55 

 

 


(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 2014 and 2013:

 

2014

 

·

Commercial Banking earnings per share were $0.80 and $0.81 in 2014 and 2013, respectivelyImproved operating revenue was offset by higher noninterest expense and internal overhead allocations.  Decreases in nonperforming assets and classified loans resulted in a negative provision for loan losses of $3.3 million in 2014.

 

·

Earnings per share on the Fee-Based Lines broke-even in 2014, an improvement of $0.02 per share or $0.8 million in 2014 compared to 2013.  The improvement was due to higher noninterest income, offset in part by higher variable compensation and other operating costs.

 

·

Corporate Support and Other lost $0.10 per share and $0.13 per share in 2014 and 2013, respectively.  The improvement was attributed to lower interest expense from a 2013 debt retirement and reduced losses on Other Real Estate Owned (OREO) sold.

 

·

Total assets grew $261.5 million to $3.1 billion during 2014, primarily relating to 15% year-over-year loan growth of $321.2 million offset by a decrease in the investment portfolio.

 

·

The net interest margin on a tax-equivalent basis expanded 10 basis points to 3.91% driven primarily by lower funding costs.  Net interest income (taxable equivalent) increased $11.2 million to $109.7 million on higher average loan volumes.

 

31


 

·

Average deposits grew $218.2 million in 2014 and the Company maintained a favorable funding mix with noninterest bearing demand deposits comprising 43% of total average deposits.  Overall deposit costs for 2014 fell to 0.17% from 0.22% and 0.32% in 2013 and 2012, respectively.

 

·

Net income grew 5% to $29.0 million in 2014 compared to $27.6 million in 2013, driven by higher net interest income.  Partially offsetting the increase in net interest income was a decrease in the reversal of excess loan loss reserves in 2014 compared to 2013.  In 2014, the Company recorded a negative provision for loan losses of $4.2 million, compared to a negative provision for loan losses of $8.8 million in 2013.  The earnings benefit from the negative provision for loan losses is not expected to continue long-term.

 

·

The Company’s total risk-based capital ratio was 15.7% at the end of 2014 and 2013. 

 

2013

 

·

Commercial Banking earnings per share were $0.81 in both 2013 and 2012.  An improvement in operating revenue and a higher negative loan loss provision in 2013 were mostly offset by higher noninterest expense and higher internal overhead allocations.  A decrease in nonperforming assets and classified loans resulted in a negative provision for loan losses of $7.3 million in 2013.

 

·

The Fee-Based Lines lost $0.02 on a per share basis in 2013, an improvement from the $0.04 loss per share in 2012.  The improvement was primarily due to higher operating revenue from insurance income and wealth management fees, which were partially offset by a decline in investment banking income.  In addition, severance and contract termination costs of $0.5 million recognized during 2012 on discontinued operations did not impact 2013 results.

 

·

Corporate Support and Other lost $0.13 per diluted share in 2013, an improvement over the loss of $0.22 in 2012.  The improvement in earnings was due to a reduction in interest expense (as discussed below, the Company redeemed its 9% subordinated notes in 2013) and higher internal management fee allocations.

 

·

The net interest margin on a tax-equivalent basis declined to 3.81% in 2013 compared to 3.99% in 2012.  Although the net interest margin has declined, net interest income has increased due to growth in the loan portfolio.

 

·

The Company maintained a favorable funding mix, with total noninterest-bearing demand accounts representing 42.2% of total deposits at December 31, 2013.

 

·

The Company exceeded the small-business loan growth threshold of 10% required under the SBLF program to achieve the lowest dividend tier on its Series C Preferred Stock.  The dividend rate on the Series C Preferred Stock will be fixed at 1% through the end of 2015.

 

·

In August 2013, the Company redeemed $21.0 million of 9.0% subordinated notes payable.  This redemption increased the net interest margin by 0.03% during 2013 and will benefit future years by a larger amount.  After redemption, the Company maintained capital levels above the well-capitalized requirement.

 

·

On July 10, 2013, the Company announced its plans to enter two new markets in Colorado and the formation of a private banking division.  The Company received regulatory approval to open bank locations in Fort Collins and Colorado Springs in September 2013.  The bank locations opened in 2014.  Noninterest expense associated with these initiatives was $1.0 million in 2013. 

 

 

32


 

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 “Segments” discussed below and Note 19 to the consolidated financial statements.

 

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 impaired loans, 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 downgraded as classified at the same historical loss factor of existing classified loans, an additional $2.3 million of provision for loan losses would be required.  Conversely, a $25.0 million decrease in classified loans would result in a $2.3 million reversal of provision for loan losses.    

 

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

 

Fair Value

 

The Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), as it applies to financial assets and liabilities.  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

33


 

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, 2014, $464.7 million of total assets, consisting of $459.8 million in available for sale securities and $4.9 million in derivative instruments, represented assets recorded at fair value on a recurring basis.  At December 31, 2013, $543.4 million of total assets, consisting of $535.1 million in available for sale securities and $8.3 million in derivative instruments, represented assets recorded at fair value on a recurring basis.  The Company has  $6.8 million of single-issuer TPS classified as Level 3.  The fair value of these TPS is determined using broker-dealer quotes and trade data that may not be current.  These TPS are classified as Level 3 due to lack of current market data and their illiquid nature. At December 31, 2014 and 2013,  $10.3 million and $10.4  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 $15.7 million and $22.2 million at December 31, 2014 and 2013, respectively.  For additional information on the fair value of certain financial assets and liabilities see Note 18 to the consolidated financial statements.

 

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.  See Note 11 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 valuation allowance would be established through a charge to income tax expense that would adversely affect our operating results.

 

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 $3.1 billion and total liabilities of $2.8 billion at December 31, 2014 compared to total assets of $2.8 billion and total liabilities of $2.5 billion at December 31, 2013.  The following

34


 

sections address the specific components of the balance sheets and significant matters relating to those components at and for the years ended December 31, 2014 and 2013.

 

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, 2014, 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.