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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
[ X ] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998.
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
___________________________________
Commission file number 000-24445
___________________________________
COLORADO BUSINESS BANKSHARES, INC.
(Name of small business issuer in its charter)
COLORADO 84-0826324
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
821 l7th Street
Denver, CO. 80202
(Address of principal executive offices) (Zip Code)
(303) 293-2265
(Issuer's telephone number, including area code)
___________________________
Securities Registered Pursuant to Section 12(b) of the Act :
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
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 if disclosure of delinquent filers pursuant to item 405
of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. _____
The issuer's revenues for its most recent fiscal year: $28,145,000
The aggregate market value of the voting stock held by non-affiliates of the
issuer at March 15, 1999 computed by reference to the closing price on the
Nasdaq National Market was $44,292,910.
The number of shares outstanding of each of the issuer's classes of common
equity on March 15, 1999 was 6,673,468.
Documents incorporated by reference: Portions of the Issuer's proxy statement to
be filed with the Securities and Exchange Commission in connection with the
Issuer's 1999 annual meeting of shareholders are incorporated by reference into
Part III hereof.
Transitional Small Business Format. Yes No X
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PART I
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Page
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<S> <C> <C>
Item 1. Description of Business 3
Item 2. Description of Property 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
- ----------
Item 5. Market for Common Equity and Related Stockholder Matters 19
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation 20
Item 7. Financial Statements 28
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 28
PART III
- ----------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 28
Item 10. Executive Compensation 29
Item 11. Security Ownership of Certain Beneficial Owners and Management 29
Item 12. Certain Relationships and Related Transactions 29
Item 13. Exhibits and Reports on Form 8-K 29
</TABLE>
2
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PART I
Forward Looking Statements
The discussion in this report contains forward-looking statements,
including, without limitation, statements relating to Colorado Business
Bankshares, Inc.'s ("the Company") year 2000 compliance, which are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although the Company believes that the expectations reflected in the
forward looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. The forward-looking statements involve
risks and uncertainties that affect the Company's business, financial condition
and results of operations, including the impact of economic conditions and
interest rates, loan and lease losses, risks related to the execution of the
Company's growth strategy, the possible loss of key personnel, factors that
could affect the Company's ability to compete in its trade areas, changes in
regulations and government policies and other factors discussed in the Company's
filings with the Securities and Exchange Commission. In particular, risks
related to the Company's year 2000 compliance include those discussed under the
heading "Year 2000 Compliance" included under Item 6 of Part II in this report.
Item 1. Description of Business
BUSINESS
General
The Company is a bank holding company headquartered in Denver, Colorado
that owns Colorado Business Bank, N.A. (the "Bank"), a full-service, commercial
banking institution with six locations in the Denver metropolitan area. The
Company was incorporated in Colorado in 1980 as Equitable Bancorporation, Inc.
and changed its name to Colorado Business Bankshares, Inc. in September 1995.
As of December 31, 1998, the Company had total assets of $366.6 million, net
loans and leases of $223.3 million and deposits of $273.0 million. The Bank
provides a broad range of banking products and services, including credit, cash
management, investment, deposit and trust products, to its targeted customer
base of small- and medium-sized businesses and high net worth individuals. Each
of the Bank's locations operates as a separate community bank, with significant
local decision-making authority. Support functions, such as accounting, data
processing, bookkeeping, credit administration, loan operations and investment
and cash management services, are provided centrally from the Company's downtown
Denver office.
The Company was acquired by a group of private investors in September 1994
(the "Acquisition"). At that time, the Bank's operations were conducted through
two separate banks -- Equitable Bank of Littleton, located in Littleton,
Colorado, and The Women's Bank, located in downtown Denver. From December 31,
1994 to December 31, 1998, the Company's assets increased to $366.6 million from
$143.9 million, an increase of 154.8%, its net loan and lease portfolio
increased to $223.3 million from $70.6 million, an increase of 216.3%, and
deposits increased to $273.0 million (34.9% of which are noninterest-bearing
deposits) from $124.5 million, an increase of 119.3%. During that period, the
Company made several changes in operations, including, establishing new
locations in the Denver metropolitan area, expanding product and service
offerings, and consolidating its two bank charters into the Bank, which was
renamed Colorado Business Bank.
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Market Area Served
The Company's current market area is the Denver metropolitan area, which is
comprised of the counties of Denver, Boulder, Adams, Arapahoe, Douglas and
Jefferson. This area is the most densely populated in the Rocky Mountain region.
Total population is approximately 2.2 million, and the area has experienced an
increase of approximately 368,000 people since 1990. Employment in the Denver
metropolitan area has become increasingly diversified across the manufacturing,
financial services, tourism, transportation, technology, cable television,
retail trade, services and government sectors.
The Bank has one location each in downtown Denver, Boulder, West Metro, the
Denver Technological Center, and two locations in Littleton. Downtown Denver is
the business center of metropolitan Denver. Boulder has one of the highest
concentrations of small businesses and affluent individuals in the Rocky
Mountain region. West Metro contains a number of newer industrial and office
parks. The Denver Technological Center features a high concentration of office
parks and businesses with a large number of high net worth individuals who live
and work in this area. The Littleton locations serve a more residential area,
including Highlands Ranch, one of the fastest growing communities in the Denver
metropolitan area.
Lending Activities
General. The Company provides a broad range of commercial and retail
lending services, including commercial loans, commercial and residential real
estate construction loans, commercial and residential real estate mortgage
loans, consumer loans, revolving lines of credit and equipment lease financing.
The Company's primary lending focus is on commercial lending to small- and
medium-sized businesses that have annual sales of $2 million to $50 million and
businesses and individuals with borrowing requirements of $200,000 to $4
million. As of December 31, 1998, substantially all of the Bank's outstanding
loans and leases were to customers within the Denver metropolitan area.
Interest rates charged on loans vary with the degree of risk, maturity,
underwriting and servicing costs, principal amount and extent of other banking
relationships between the Bank and the customer, and are further subject to
competitive pressures, money market rates, availability of funds and government
regulations. As of December 31, 1998, approximately 50.0% of the loans in the
Bank's portfolio were at interest rates that float with the Bank's base rate or
some other reference rate.
Credit Procedures and Review. The Company addresses credit risk through
internal credit policies and procedures, including underwriting criteria,
officer and customer lending limits, a multi-layered loan approval process for
larger loans, periodic document examination, justification for any exceptions to
credit policies, loan review and concentration monitoring. In addition, the
Company provides ongoing loan officer training and review.
The Company's loan approval process varies depending upon the size of the
loan. Each of the Bank's senior loan officers has the authority to approve
loans of up to $250,000. Other loan officers have the authority to approve
loans of lower amounts up to limits set by the Bank's Board of Directors. The
Chief Executive Officer of the Bank or the President of Colorado Business Bank -
- - Denver, must approve loans of between $250,000 and $500,000. Loans in excess
of $500,000 must be approved by the Bank's loan committee, which consists of
most of the Bank's executive officers and certain other designated officers. In
cases requiring expedited treatment, approvals may be made by a subgroup of the
committee.
The Company has a continuous loan review process designed to promote early
identification of credit quality problems. All loan officers are charged with
the responsibility of reviewing, no less
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frequently than monthly, all past due loans in their respective portfolios. In
addition, each of the loan officers establishes a watch list of loans to be
reviewed monthly by the Bank's Board of Directors. The loan and lease portfolio
is also monitored regularly by a loan review officer who reports directly to the
Audit Committee of the Bank's Board of Directors.
Loan and Lease Portfolio Composition. The following table sets forth the
composition of the Bank's loan and lease portfolio by type of loan or lease at
the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------- ------------------- ------------------ --------------------
Amount % Amount % Amount % Amount % Amount %
------- ----- -------- ------ -------- ----- -------- ----- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial................. 104,745 46.9 $ 78,152 47.6 $ 58,727 53.0 $ 35,101 40.1 $ 29,151 41.3
Real estate - mortgage..... 56,941 25.5 40,262 24.6 24,491 22.1 31,407 36.0 21,982 31.2
Real estate - construction. 34,210 15.3 27,786 16.9 19,119 17.3 14,557 16.7 15,528 22.0
Consumer................... 16,913 7.6 11,732 7.2 8,266 7.5 6,356 7.3 3,538 5.0
Direct financing leases -
net....................... 13,741 6.2 8,407 5.1 1,805 1.6 1,282 1.5 1,538 2.2
------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Loans and leases...........$226,550 101.5 $ 166,339 101.4 $ 112,408 101.5 $ 88,703 101.6 $ 71,737 101.7
Less allowance for loan
and lease losses........... (3,271) (1.5) (2,248) (1.4) (1,660) (1.5) (1,393) (1.6) (1,181) (1.7)
------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Net loan and leases........$223,279 100.0 $ 164,091 100.0 $ 110,748 100.0 $ 87,310 100.0 $ 70,556 100.0
======== ===== ======== ====== ======== ===== ======= ===== ======= =====
</TABLE>
Under federal law, the aggregate amount of loans that may be made to one
borrower by the Bank is generally limited to 15% of the Bank's unimpaired
capital, surplus, undivided profits and allowance for loan and lease losses (the
"Individual Lending Limit"). See "Supervision and Regulation -- The Bank --
Restrictions on Loans to One Borrower" included under Item 1 of Part I. As of
December 31, 1998, the Bank's Individual Lending Limit was $5.2 million. To
accommodate customers whose financing needs exceed applicable lending limits,
and to address portfolio concentration concerns, the Company sells loan
participations to outside participants, including Hawthorne Colorado, Inc., an
entity controlled by Steve Bangert and Howard R. Ross, each a member of the
Company's Board of Directors. See "Certain Relationships and Related
Transactions" included under Item 12 of Part III. At December 31, 1998,
December 31, 1997 and December 31, 1996, the outstanding balances of loan
participations sold by the Company were $14.8 million, $10.1 million and $2.9
million, respectively. The Company has retained servicing rights on all loan
participations sold. In addition, the Company had loan participations purchased
from other banks totaling $1.2 million as of December 31, 1998. The Company
uses the same analysis in deciding whether or not to purchase a participation in
a loan as it would in deciding whether to originate the same loan.
In the ordinary course of business, the Company enters into various types
of transactions that include commitments to extend credit. The Company applies
the same credit standards to these commitments as it applies to its other
lending activities and has included these commitments in its lending risk
evaluations. The Company's exposure to credit loss under commitments to extend
credit is represented by the amount of these commitments.
Commercial Loans. Commercial lending, which is the primary focus of the
Company's lending activities, consists of loans to small- and medium-sized
businesses in a wide variety of industries. The Bank's areas of emphasis in
commercial lending include, but are not limited to, loans to wholesalers,
manufacturers and business services companies. The Company provides a broad
range of commercial loans, including lines of credit for working capital
purposes and term loans for the acquisition of equipment and other purposes.
Commercial loans are generally collateralized by inventory, accounts receivable,
equipment, real estate and other commercial assets and may be supported by other
credit
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enhancements such as personal guarantees. However, where warranted by the
overall financial condition of the borrower, loans may be made on an unsecured
basis. Terms of commercial loans generally range from one to five years, and the
majority of such loans have floating interest rates.
Real Estate Mortgage Loans. Real estate mortgage loans include various
types of loans for which the Company holds real property as collateral. The
Company generally restricts commercial real estate lending activity to owner-
occupied properties or to investor properties that are owned by customers with
which the Company has a current banking relationship. Commercial real estate
loans are made at both fixed and floating interest rates, with maturities
generally ranging from five to fifteen years. The Bank's underwriting standards
generally require that a commercial real estate loan not exceed 75% of the
appraised value of the property securing the loan. In addition, the Company
originates SBA loans on owner-occupied properties with maturities of up to 25
years in which the SBA allows for financing of up to 90% of the project cost and
takes a security position that is subordinated to that of the Company. The
Company also originates residential mortgage loans on a limited basis as a
service to preferred customers.
The primary risks of real estate mortgage loans include the borrower's
inability to pay, material decreases in the value of the real estate that is
being held as collateral and significant increases in interest rates, which may
make the real estate mortgage loan unprofitable. The Company does not actively
seek permanent mortgage loans for its own portfolio, but, rather, syndicates
such loans to other financial institutions. However, for those permanent
mortgage loans that are extended, the Company attempts to apply conservative
loan-to-value ratios and obtain personal guarantees, and generally requires a
strong history of debt servicing capability and fully amortized terms of 15
years or less.
Real Estate Construction Loans. The Company originates loans to finance
construction projects involving one- to four-family residences. It provides
financing to residential developers that the Company believes have demonstrated
a favorable record of accurately projecting completion dates and budgeting
expenses. The Company provides loans for the construction of both pre-sold
projects and projects built prior to the location of a specific buyer, although
loans for projects built prior to the identification of a specific buyer are
provided on a more selective basis. Residential construction loans are due upon
the sale of the completed project and are generally collateralized by first
liens on the real estate and have floating interest rates. In addition, these
loans are generally secured by personal guarantees to provide an additional
source of repayment. The Company generally requires that a permanent financing
commitment be in place before it makes a residential construction loan.
Moreover, the Company generally monitors construction draws monthly and inspects
property to ensure that construction is progressing as specified. The Company's
underwriting standards generally require that the principal amount of the loan
be no more than 75% of the appraised value of the completed construction
project. Values are determined only by approved, independent appraisers.
The Company also originates loans to finance the construction of multi-
family, office, industrial and tax credit projects. These projects are
predominantly owned by the user of the property or are sponsored by financially
strong developers who maintain an ongoing banking relationship with the Company.
The Company's underwriting standards generally require that the principal amount
of these loans be no more than 75% of appraised value.
The Company selectively provides loans for the acquisition and development
of land for residential building projects by financially strong developers who
maintain an ongoing banking relationship with the Company. The Company's
underwriting standards generally require that the principal amount of these
loans be no more than 65% of the appraised value.
Consumer Loans. The Company provides a broad range of consumer loans to
customers, including personal lines of credit, credit and debit cards, home
equity loans and automobile loans. In order to improve customer service,
continuity and customer retention, management of commercial
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banking customers often work with the same loan officer who handles their
commercial banking relationship.
Direct financing leases. The Company, through its equipment leasing
subsidiary, Colorado Business Leasing, Inc. ("CBL"), provides lease financing as
a complement to its other lending services. These leases are structured as
either operating or direct financing leases, with the Company retaining title to
the leased assets as security for payment. Only direct financing leases are
included in the Company's loan and lease portfolio. Operating leases are
reported as investment in operating leases. Although the leasing program acts
as a stand-alone product, it offers the opportunity to introduce leasing
customers to other products and services offered by the Bank.
Nonperforming Assets
The Company's nonperforming assets consist of nonaccrual loans and leases,
restructured loans and leases, past due loans and leases and other real estate
owned. The following table sets forth information with respect to these assets
at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Nonperforming loans and leases:
Loans and leases 90 days or more delinquent and still
accruing interest..................................... $ 4 $ - $ - $ - $ 21
Nonaccrual loans and leases.............................. 125 470 234 - 334
Restructured loans and leases............................ 338 341 348 616 521
------- ------- ------- ------- -------
Total nonperforming loans and leases............... 467 811 582 616 876
Real estate acquired by foreclosure............................. - - 109 310 384
------- ------- ------- ------- -------
Total nonperforming assets......................... $ 467 $ 811 $ 691 $ 926 $ 1,260
======= ======= ======= ======= =======
Allowance for loan and lease losses............................. $ 3,271 $ 2,248 $ 1,660 $ 1,392 $ 1,181
======= ======= ======= ======= =======
Ratio of nonperforming assets to total assets................... 0.13% 0.31% 0.36% 0.58% 0.87%
Ratio of nonperforming loans and leases to total loans and
leases................................................... 0.21 0.49 0.52 0.69 1.23
Ratio of allowance for loan and lease losses to total loans and
leases................................................... 1.44 1.35 1.48 1.57 1.65
Ratio of allowance for loan and lease losses to nonperforming
loans and leases......................................... 700.43 277.19 285.22 225.97 135.00
</TABLE>
Accrual of interest is discontinued on a loan or lease when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that the collection of
interest is doubtful. A delinquent loan or lease is generally placed on
nonaccrual status when it becomes 90 days past due. When a loan or lease is
placed on nonaccrual status, all accrued and unpaid interest on the loan or
lease is reversed and deducted from earnings as a reduction of reported interest
income. No additional interest is accrued on the loan or lease balance until
the collection of both principal and interest becomes reasonably certain. When
the issues relating to a nonaccrual loan or lease are finally resolved, there
may ultimately be an actual write down or charge-off of the principal balance of
the loan or lease, which may necessitate additional charges to earnings.
Restructured loans and leases are those for which concessions, including
the reduction of interest rates below a rate otherwise available to the
borrower, or the deferral of interest or principal, have been granted due to the
borrower's weakened financial condition. Interest on restructured loans and
leases is accrued at the restructured rates when it is anticipated that no loss
of original principal will occur.
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The additional interest income that would have been recognized for the
years ended December 31, 1998 and December 31, 1997 if the Company's nonaccrual
and restructured loans and leases had been current in accordance with their
original terms, and the interest income on nonaccrual and restructured loans and
leases actually included in the Company's net income for such periods, was not
material.
Real estate acquired by foreclosure includes deeds acquired under
agreements with delinquent borrowers. Real estate acquired by foreclosure is
appraised annually and is carried at the lesser of (i) fair market value less
anticipated closing costs or (ii) the balance of the related loan. As of
December 31, 1998, the Company did not own any real estate acquired in
foreclosure proceedings or under agreements with delinquent borrowers.
Potential Problem Loans and Leases. A potential problem loan or lease is
one where management has serious doubts about the borrower's future performance
under the terms of the loan or lease contract. These loans and leases are
current as to the principal and interest and, accordingly, are not included in
the nonperforming asset categories. Management monitors these loans and leases
closely to protect the Company. However, further deterioration may result in
the loan or lease being classified as nonperforming. At December 31, 1998, the
Company held 23 loans and leases considered by management to be potential
problem loans or leases with principal totaling approximately $5.0 million. The
level of potential problem loans and leases is factored into the determination
of the adequacy of the allowance for loan and lease losses.
Analysis of Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents management's recognition
of the risks of extending credit and its evaluation of the quality of the loan
and lease portfolio. The allowance for loan and lease losses is maintained at a
level considered adequate to provide for anticipated loan and lease losses,
based on various factors affecting the loan and lease portfolio, including a
review of problem loans and leases, business conditions, historical loss
experience, evaluation of the quality of the underlying collateral and holding
and disposal costs. The allowance is increased by additional charges to
operating income and reduced by loans and leases charged off, net of recoveries.
The following table sets forth information regarding changes in the
Company's allowance for loan and lease losses for the periods indicated.
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<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan and lease
losses at beginning of period..............$ 2,248 $ 1,660 $ 1,392 $ 1,181 $ 1,085
-------- --------- ------- ------- -------
Charge-offs:
Commercial.............................. 200 356 275 27 76
Real estate - mortgage.................. - - - - -
Real estate - construction.............. - - 47 - -
Consumer................................ 32 38 6 18 20
Direct financing leases................. 4 - - - -
-------- --------- ------- ------- -------
Total charge-offs.................. 236 394 328 45 96
-------- --------- ------- ------- -------
Recoveries:
Commercial.............................. 66 6 61 10 81
Real estate - mortgage.................. - - - - -
Real estate - construction.............. - - 39 - -
Consumer................................ 5 27 3 3 6
Direct financing leases................. - - - - -
-------- --------- ------- ------- -------
Total recoveries................... 71 33 103 13 87
-------- --------- ------- ------- -------
Net charge-offs................................ (165) (361) (225) (32) (9)
Provisions for loan and lease losses
charged to operations...................... 1,188 949 493 243 105
-------- --------- ------- ------- -------
Balance of allowance for loan and lease
losses at end of period....................$ 3,271 $ 2,248 $ 1,660 $ 1,392 $ 1,181
======== ========= ======= ======= =======
Ratio of net charge-offs to average
loans and leases........................... ( .08%) ( .26%) ( .23%) ( .04%) ( .01%)
Average loans and leases outstanding during
the period.................................$197,851 $138,787 $ 98,075 $ 77,194 $ 65,833
======== ========= ======= ======= =======
</TABLE>
The Company's lending personnel are responsible for continuous monitoring
of the quality of the loan and lease portfolio. The loan and lease portfolio is
monitored regularly by a loan review officer who reports directly to the Audit
Committee of the Bank's Board of Directors. In addition, the Bank's Board of
Directors reviews monthly reports of delinquent and potential problem loans.
These reviews assist in the identification of potential and probable losses and
also in the determination of the level of the allowance for loan and lease
losses. The allowance for loan and lease losses is based primarily on
management's estimates of possible loan and lease losses from the foregoing
processes and historical experience. These estimates involve ongoing judgments
and may be adjusted in the future, depending on economic conditions and changing
portfolio performance. At December 31, 1998, the allowance for loan and lease
losses equaled 1.44% of total loans and leases.
Federal regulatory agencies, as an integral part of their examination
process, review the Company's loans and allowance for loan and lease losses.
The Company believes that its allowance for loan and lease losses is adequate to
cover anticipated loan and lease losses. However, management may determine a
need to increase the allowance for loan and lease losses, or regulators, when
reviewing the Bank's loan and lease portfolios in the future, may request the
Bank to increase such allowance. Either of these events could adversely affect
the Company's earnings. Further, there can be no assurance that the Company's
actual loan and lease losses will not exceed its allowance for loan and lease
losses.
Additions to the allowance for loan and lease losses, which are charged as
expenses on the Company's income statement, are made periodically to maintain
the allowance at the appropriate level,
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based on management's analysis of the potential risk in the loan and lease
portfolio. The allowance for loan and lease losses is reduced by loans and
leases charged off, net of amounts recovered from such loans and leases. The
amount of the allowance is a function of the levels of loans and leases
outstanding, the level of non-performing loans and leases, historical loan and
lease loss experience, the amount of loan and lease losses actually charged
against the reserve during a given period and current and anticipated economic
conditions.
The following table sets forth the allowance for loan and lease losses by
category to the extent specific allocations have been determined relative to
particular loans or leases. The unallocated portion of the allowance is intended
to cover loss exposure related to potential problem loans or leases for which no
specific allocation has been estimated and for the possible risk in the
remainder of the loan and lease portfolio. Management believes that any
allocation of the allowance into categories lends an appearance of precision
that does not exist. The allocation table should not be interpreted as an
indication of the specific amounts, by loan or lease classification, to be
charged to the allowance. Management believes that the table is a useful device
for assessing the adequacy of the allowance as a whole. The table has been
derived in part by applying historical loan and lease loss ratios to both
internally classified loans and leases and the portfolio as a whole in
determining the allocation. The allowance is utilized as a single unallocated
allowance available for all loans and leases.
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------- ------------------------ ----------------------- ----------------------- -----------------------
% of total % of total % of total % of total % of total
Amount of gross loans Amount of gross loans Amount of gross loans Amount of gross loans Amount of gross loans
Allowance and leases Allowance and leases Allowance and leases Allowance and leases Allowance and leases
--------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial..$ 832 46.2% $ 811 47.0% $ 510 52.2% $ 527 39.6% $ 402 40.7%
Real
estate -
mortgage... 522 25.1% 296 24.2% 189 21.8% 151 35.4% 129 30.7%
Real
estate -
construct-
ion....... 508 15.1% 318 16.7% 237 17.0% 233 16.4% 398 21.6%
Consumer.... 99 7.5% 73 7.0% 51 7.4% 49 7.2% 36 4.9%
Direct
financing
leases..... 243 6.1% - 5.1% - 1.6% - 1.4% - 2.1%
Unallocated. 1,067 0.0% 750 0.0% 673 0.0% 433 0.0% 216 0.0%
----- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total..$3,271 100.0% $ 2,248 100.0% $ 1,660 100.0% $ 1,393 100.0% $ 1,181 100.0%
===== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Investments
The Company's investment portfolio is comprised of A-rated or better
securities, with the majority of the portfolio either maturing or repricing
within a one- to five-year period. The Company's practice is to purchase U.S.
Treasury and U.S. Government Agency securities exclusively. The primary factors
considered in the overall management of the securities portfolio are liquidity,
yield, volatility, asset/liability management and the ability to pledge
securities for public deposits. Since November 1994, the Company has selected
primarily mortgage-backed securities that reprice annually. The Company's
investment strategies are reviewed at the quarterly meetings of the Asset and
Liability Management Committee.
The Company's mortgage-backed securities are typically classified as
available for sale. The Company's goals with respect to its securities
portfolio are to (i) maximize safety and soundness, (ii) provide adequate
liquidity, (iii) maximize rate of return within the constraints of applicable
liquidity requirements and (iv) complement asset/liability management
strategies.
10
<PAGE>
The following table sets forth the book value of the securities in the
Company's investment portfolio by type at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------
1998 1997 1996
-------- ------- --------
(In thousands)
<S> <C> <C> <C>
U.S. Treasury and U.S. government agency securities....... $ 17,764 $ 7,009 $ 15,822
Mortgage-backed securities................................ 87,104 48,354 38,611
State and municipal bonds................................. 965 1,198 1,919
Federal Reserve and FHLB stock............................ 1,961 2,012 1,054
Other investments......................................... 143 211 165
-------- ------- -------
Total............................................... $ 107,937 $ 58,784 $ 57,571
======== ======= =======
</TABLE>
The following table sets forth the book value, maturity and approximate
yield of the securities in the Company's investment portfolio at December 31,
1998.
<TABLE>
<CAPTION>
Maturity
-----------------------------------------------------------------------------------
Within 1 year 1 - 5 years 5 - 10 years Over 10 years Total book value
-------------------- -------------------- ------------------ -------------------- ---------------------
Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1)
------- ---------- ------- --------- ------ --------- ------- --------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and U.S.
government agency
securities....... $ 4,006 5.47% $ 3,956 4.62% $ - - $ 9,802 6.28% $ 17,764 5.73%
Mortgage-backed
securities (2)... 81,188 5.89% 5,916 6.06% - - - - 87,104 5.90%
State and municipal
bonds............ 445 7.04% 520 7.06% - - - - 965 7.05%
Federal Reserve and
FHLB stock....... - - - - - - 1,961 7.00% 1,961 7.00%
Other investments...... - - - - - - 143 0.00% 143 0.00%
------- ------- --- ------- --------
Total....... $85,639 5.87% $10,392 5.56% $ - 0.00% $11,906 6.32% $107,937 5.89%
======= ======= === ======= ========
</TABLE>
(1) Yields do not include adjustments for tax-exempt interest, because the
amount of such
interest is not material.
(2) Mortgage-backed securities are generally one year or less adjustable rate
securities.
11
<PAGE>
Deposits
The Company's primary source of funds has historically been customer
deposits. The Company offers a variety of accounts for depositors, which are
designed to attract both short- and long-term deposits. These accounts include
certificates of deposit ("CDs"), savings accounts, money market accounts,
checking and negotiable order of withdrawal accounts and individual retirement
accounts. At December 31, 1998, $95.2 million, or 34.9%, of the Company's
deposits were noninterest-bearing deposits. The Company believes that it
receives a large amount of noninterest-bearing deposits because it provides
customers with the option of paying for services in cash or by maintaining
additional noninterest-bearing account balances. However, since proposed
changes in banking regulations would allow for the payment of interest on
commercial accounts, there can be no assurance that the Company will be able to
continue to maintain such a high level of noninterest-bearing deposits.
Interest-bearing accounts earn interest at rates established by management based
on competitive market factors and its desire to increase or decrease certain
types of maturities or deposits. The Company has not actively sought brokered
deposits and does not currently intend to do so. The following table presents
the average balances for each major category of deposits and the weighted
average interest rates paid for interest-bearing deposits for the periods
indicated.
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------ -------------------------
Weighted Weighted Weighted
Average average Average average Average average
Balance interest rate Balance interest rate Balance interest rate
-------- ------------- -------- ------------- -------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW and money market accounts.............. $ 85,558 3.31% $ 66,222 3.23% $ 63,037 3.09%
Savings.................................... 6,227 2.59% 5,780 2.63% 5,669 2.65%
Certificates of deposit under $100,000...... 21,507 5.42% 16,942 5.18% 9,872 4.51%
Certificates of deposit $100,000 and over... 47,453 5.60% 35,936 5.80% 26,227 5.53%
------- ------- -------
Total interest-bearing deposits...... 160,745 4.24% 124,880 4.21% 104,805 3.81%
Noninterest-bearing demand deposits......... 76,223 - 54,706 - 41,070 -
Total deposits.......................$236,968 2.87% $179,586 2.93% $145,875 2.74%
======= ======= =======
</TABLE>
The following table sets forth the amount and maturity of CDs that had
balances of more than $100,000 at December 31, 1998.
<TABLE>
<CAPTION>
At December 31,
1998
---------------------
Remaining Maturity (Dollars in Thousands)
<S> <C>
Less than three months...................... $ 20,190
Three months up to six months............... 10,981
Six months up to one year................... 4,750
One year and over........................... 6,241
------
Total............................... $ 42,162
======
</TABLE>
12
<PAGE>
Short-Term Borrowings
The Company's short-term borrowings include federal funds purchased and
securities sold under agreements to repurchase, which generally mature within 60
days. The following table sets forth information relating to the Company's
short-term borrowings.
<TABLE>
<CAPTION>
At or for the year
ended December 31,
---------------------------------------
1998 1997 1996
-------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Federal funds purchased...................................... $ 3,500 - $ 6,226
Weighted average interest rate at period end................. 5.06% - 5.87%
Securities sold under agreement to repurchase................ $ 24,956 $ 13,024 $ 3,422
Weighted average interest rate at period end................. 3.31% 4.58% 4.89%
Maximum borrowings outstanding at any month end during the
period................................................ $ 39,291 $ 25,251 $ 11,990
Average borrowings outstanding for the period................ $ 23,766 $ 17,602 $ 7,323
Weighted average interest rate for the period................ 4.90% 5.21% 5.92%
</TABLE>
Competition
The banking business in the Denver metropolitan area is highly competitive
and is currently dominated by a number of large regional financial institutions,
including Norwest Corporation, U.S. Bancorp, Inc. (formerly First Bank System),
Banc One Corporation, Zions Bancorporation, KeyCorp and Wells Fargo & Company.
In addition to these regional banks, there are a number of community banks that
operate in the area, including, Guaranty Bank and Trust Company, Colorado State
Bank & Trust, First Bank Holding Company of Colorado and Union Bank and Trust.
The Company competes for loans and deposits with other commercial banks
(including those listed above), savings and loan associations, finance
companies, credit unions and mortgage bankers. In addition to the traditional
financial institutions, the Company also competes for loans with brokerage and
investment banking companies, nonfinancial institutions, including retail stores
that maintain their own credit programs, and governmental agencies that make
available low cost or guaranteed loans to certain borrowers. Particularly in
times of high interest rates, the Company also faces significant competition for
deposits from sellers of short-term money market securities and other corporate
and government securities.
By virtue of their larger capital bases or affiliation with larger multi-
bank holding companies, many of the Company's competitors have substantially
greater capital resources and lending limits than the Company and perform other
functions that the Company offers only through correspondents. Interstate
banking is permitted in Colorado, and, since January 1, 1997, unlimited state-
wide branch banking is permitted. As a result, the Company may experience
greater competition in its primary service areas. The Company's business,
financial condition, results of operations and cash flows may be adversely
affected by an increase in competition. Moreover, recently enacted and proposed
legislation has focused on expanding the ability of participants in the banking
industry to engage in other lines of business. The enactment of such
legislation could put the Company at a competitive disadvantage because it may
not have the capital to participate in other lines of business to the same
extent as more highly capitalized bank holding companies.
13
<PAGE>
Employees
As of December 31, 1998, the Company had 136 employees, including 129 full-
time employees. No Company employee is covered by a collective bargaining
agreement, and the Company believes that its relationship with its employees is
good.
Supervision and Regulation
The Company and the Bank are extensively regulated under federal and
Colorado law. These laws and regulations are primarily intended to protect
depositors and federal deposit insurance funds, not shareholders of the Company.
The following information summarizes certain material statutes and regulations
affecting the Company and the Bank and is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws, regulations or regulatory policies may have a material adverse effect on
the business, financial condition, results of operations and cash flows of the
Company and the Bank. The Company is 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 its business and earnings in the future.
The Holding Company
General. The Company is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and is subject to
regulation, supervision and examination by the Board of Governors of the Federal
Reserve System (the "FRB"). The Company is required to file an annual report
with the FRB and such other reports as the FRB may require pursuant to the BHCA.
Acquisitions. As a bank holding company, the Company is required to obtain
the prior approval of the FRB before acquiring direct or indirect ownership or
control of more than 5% of the voting shares of a bank or bank holding company.
The FRB will not approve any acquisition, merger or consolidation that would
result in substantial anti-competitive effects, unless the anti-competitive
effects of the proposed transaction are outweighed by a greater public interest
in meeting the needs and convenience of the public. In reviewing applications
for such transactions, the FRB also considers managerial, financial, capital and
other factors, including the record of performance of the applicant and the bank
or banks to be acquired under the Community Reinvestment Act of 1977, as amended
(the "CRA"). See "-- The Bank -- Community Reinvestment Act" below.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as
amended (the "1994 Act"), which became effective September 29, 1995, displaces
state laws governing interstate bank acquisitions. Under the 1994 Act, a bank
holding company can acquire a bank outside of its home state without regard to
local law. Thus, an out-of-state holding company could acquire the Bank, and
the Company could acquire a bank outside of Colorado.
All acquisitions pursuant to the 1994 Act require regulatory approval. In
reviewing applications under the 1994 Act, an applicant's record under the CRA
must be considered, and a determination must be made that the transaction will
not result in any violations of federal or state antitrust laws. In addition,
there is a limit of 25% on the amount of deposits in insured depository
institutions in Colorado that can be controlled by any bank or bank holding
company.
The 1994 Act also permits bank subsidiaries of a bank holding company to
act as agents for affiliated institutions by receiving deposits, renewing time
deposits, closing loans, servicing loans and receiving payments on loans. As a
result, a relatively small Colorado bank owned by an out-of-state
14
<PAGE>
holding company could make available to customers in Colorado some of the
services of a larger affiliated institution located in another state.
Permissible Activities. A bank holding company may not engage in, or
acquire direct or indirect control of more than 5% of the voting shares of any
company engaged in, a non-banking activity, unless such activity has been
determined by the FRB to be closely related to banking or managing banks. The
FRB has identified certain non-banking activities in which a bank holding
company may engage without notice or prior approval of the FRB.
Capital Adequacy. The FRB monitors, on a consolidated basis, the capital
adequacy of bank holding companies that have total assets in excess of $150
million by using a combination of risk-based and leverage ratios. Failure to
meet the capital guidelines may result in the application by the FRB of
supervisory or enforcement actions. Under the risk-based capital guidelines,
different categories of assets, including certain off-balance sheet items, such
as loan commitments in excess of one year and letters of credit, are assigned
different risk weights, based generally on the perceived credit risk of the
asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. For purposes of the risk-based capital
guidelines, total capital is defined as the sum of "Tier 1" and "Tier 2" capital
elements, with Tier 2 capital being limited to 100% of Tier 1 capital. Tier 1
capital includes, with certain restrictions, common shareholders' equity,
perpetual preferred stock (no more than 25% of Tier 1 capital being comprised of
cumulative preferred stock or trust preferred stock) and minority interests in
consolidated subsidiaries. Tier 2 capital includes, with certain limitations,
perpetual preferred stock not included in Tier 1 capital, certain maturing
capital instruments and the allowance for loan and lease losses (limited to
1.25% of risk-weighted assets). The regulatory guidelines require a minimum
ratio of total capital to risk-weighted assets of 8% (of which at least 4% must
be in the form of Tier 1 capital). The FRB has also implemented a leverage
ratio, which is defined to be a company's Tier 1 capital divided by its average
total consolidated assets. The minimum required leverage ratio for top-rated
bank holding companies is 3%, but most companies are required to maintain an
additional cushion of at least 100 to 200 basis points.
The table below sets forth the Company's ratios at December 31, 1998 of (i)
total capital to risk-weighted assets, (ii) Tier 1 capital to risk-weighted
assets and (iii) Tier 1 leverage ratio.
<TABLE>
<CAPTION>
At December 31, 1998
----------------------
Minimum
Ratio Actual Required
----------------------
<S> <C> <C>
Total capital to risk-weighted assets....... 13.9% 8.0%
Tier I capital to risk-weighted assets...... 12.6% 4.0%
Tier I leverage ratio....................... 9.8% 4.0%
</TABLE>
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"), the Company could be required to
guarantee the capital restoration plan of the Bank, should the Bank become
"undercapitalized," as defined in the FDICIA and the regulations thereunder.
See "-- The Bank -- Capital Adequacy." The Company's 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 bank holding
companies are subject to the "source of strength doctrine," which requires bank
holding companies to serve as a source of "financial and managerial" strength to
their subsidiary banks.
15
<PAGE>
The FDICIA requires the federal banking regulators to take "prompt
corrective action" with respect to capital-deficient institutions. In addition
to requiring the submission of a capital restoration plan, the FDICIA contains
broad restrictions on certain activities of undercapitalized institutions
involving asset growth, acquisitions, branch establishment and expansion into
new lines of business. With certain exceptions, an insured depository
institution is prohibited from making capital distributions, including
dividends, and is prohibited from paying management fees to control persons, if
the institution would be undercapitalized after any such distribution or
payment.
The Bank
General. The Bank is a national banking association, the deposits of which
are insured by the Bank Insurance Fund of the FDIC (the "FDIC"), and is subject
to supervision, regulation and examination by the Office of the Comptroller of
the Currency (the "OCC") and by the FDIC. Pursuant to such regulation, the Bank
is subject to special restrictions, supervisory requirements and potential
enforcement actions. The FRB's supervisory authority over the Company can also
affect the Bank.
Branching. The Colorado Revised Statutes were amended in 1991 to phase in
open branching over a six-year period. Colorado law also provides a phase-in
schedule for the conversion of an affiliate bank into a branch bank. Banks
desiring to establish a de novo branch bank have been allowed to do so since
January 1, 1993, though only one branch bank could initially be created. Since
January 1, 1997, no limitations are placed on the number of branches a bank may
establish, and any bank which has had its charter approved or conditionally or
preliminarily approved on or after April 1, 1991, may, upon 30 days' written
notice to the Colorado banking board or banking commissioner, be converted to a
branch of any bank.
Community Reinvestment Act. The CRA requires the Bank to adequately meet
the credit needs of the communities in which it operates. The CRA allows
regulators to reject an applicant seeking, among other things, to make an
acquisition or establish a branch, unless it has performed satisfactorily under
the CRA. Federal regulators regularly conduct examinations to assess the
performance of financial institutions under the CRA. In its most recent CRA
examination, the Bank received a satisfactory rating.
Transactions with Affiliates. The Bank is subject to Section 23A of the
Federal Reserve Act, which limits the amount of loans to, investments in, and
certain other transactions with, affiliates of the Bank, requires certain levels
of collateral for such loans or transactions, and limits the amount of advances
to third parties that are collateralized by the securities or obligations of
affiliates, unless the affiliate is a bank and is at least 80% owned by the
Company. If the affiliate is a bank and is at least 80% owned by the Company,
such transactions are generally exempted from these restrictions, except as to
"low quality" assets, as defined under the Federal Reserve Act, and transactions
not consistent with safe and sound banking practices. In addition, Section 23A
generally limits transactions with affiliates of the Bank to 10% of the Bank's
capital and surplus and generally limits all transactions with affiliates to 20%
of the Bank's capital and surplus.
Section 23B of the Federal Reserve Act requires that certain transactions
between the Bank and any non-bank affiliate must be on substantially the same
terms, or at least as favorable to the Bank, as those prevailing at the time for
comparable transactions with, or involving, non-affiliated companies or, in the
absence of comparable transactions, on terms and under circumstances, including
credit standards, that in good faith would be offered to, or would apply to,
non-affiliated companies. The aggregate amount of the Bank's loans to its
officers, directors and principal shareholders (or their affiliates) is limited
to the amount of its unimpaired capital and surplus, unless the FDIC determines
that a lesser amount is appropriate.
16
<PAGE>
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.
Dividend Restrictions. Dividends paid by the Bank are expected to provide
substantially all of the Company's cash flow. The approval of the OCC is
required prior to the declaration of any dividend by the Bank if the total of
all dividends declared by the Bank in any calendar year exceeds the total of its
net profits of that year combined with the retained net profits for the
preceding two years. In addition, the FDICIA provides that the Bank cannot pay
a dividend if it will cause the Bank to be "undercapitalized." See "-- The Bank
- -- Capital Adequacy."
Examinations. The OCC periodically examines and evaluates national banks.
Based upon such an evaluation, the examining regulator may revalue the assets of
an insured institution and require that it establish specific reserves to
compensate for the difference between the value determined by the regulator and
the book value of such assets.
Capital Adequacy. Federal regulations establish minimum requirements for
the capital adequacy of depository institutions that are generally the same as
those established for bank holding companies. See "-- The Holding Company --
Capital Adequacy." Banks with capital ratios below the required minimum are
subject to certain administrative actions, including the termination of deposit
insurance and the appointment of a receiver, and may also be subject to
significant operating restrictions pursuant to regulations promulgated under the
FDICIA. See "-- The Holding Company -- Support of Banks."
The following table sets forth the capital ratios of the Bank at December
31, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
--------------------
Minimum
Ratio Actual Required
--------------------
<S> <C> <C>
Total capital to risk-weighted assets....... 13.6% 8.0%
Tier I capital to risk-weighted assets...... 12.3% 4.0%
Tier I leverage ratio....................... 9.1% 4.0%
</TABLE>
Pursuant to the FDICIA, regulations have been adopted defining five capital
levels: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Increasingly
severe restrictions are placed on a depository institution as its capital level
classification declines. An institution is critically undercapitalized if it
has a tangible equity to total assets ratio less than or equal to 2%. An
institution is adequately capitalized if it has a total risk-based capital ratio
less than 10%, but greater than or equal to 8%, or a Tier 1 risk-based capital
ratio less than 6%, but greater than or equal to 4% or a leverage ratio less
than 5%, but greater than or equal to 4% (3% in certain circumstances). An
institution is well capitalized if it has a total risk-based capital ratio of
10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a
leverage ratio of 5% or greater, and the institution is not subject to an order,
written agreement, capital directive or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure. Under these
regulations, as of December 31, 1998, the Bank was well capitalized, which
classification places no significant restrictions on the Bank's activities.
Internal Operating Requirements. Federal regulations promote the safety
and soundness of individual institutions by specifically addressing, among other
things: (1) internal controls, information systems and internal audit systems;
(2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5)
asset growth; and (6) compensation and benefit standards for management
officials.
17
<PAGE>
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 and appropriate for its size and the nature and scope of its
operations. The regulations establish loan to value ratio limitations on real
estate loans, which are equal to or higher than the loan to value limitations
established by the Company.
Deposit Insurance Premiums. Under current regulations, FDIC-insured
depository institutions that are members of the FDIC pay insurance premiums at
rates based on their assessment risk classification, which is determined, in
part, based on the institution's capital ratios and, in part, on factors that
the FDIC deems relevant to determine the risk of loss to the FDIC. Assessment
rates range from $0 to $0.27 per $100. The Bank currently does not pay an
assessment rate on insured deposits. This classification for determination of
assessment rate may be reviewed semi-annually.
Restrictions on Loans to One Borrower. Under federal law, the aggregate
amount of loans that may be made to one borrower by the Bank is generally
limited to 15% of its unimpaired capital, surplus, undivided profits and
allowance for loan and lease losses. The Bank seeks participations to
accommodate borrowers whose financing needs exceed the Bank's lending limits.
Changing Regulatory Structure
Regulation of the activities of national and state banks and their holding
companies imposes a heavy burden on the banking industry. The FRB, OCC and FDIC
all have extensive authority to police unsafe or unsound practices and
violations of applicable laws and regulations by depository institutions and
their holding companies. These agencies can assess civil monetary penalties,
issue cease and desist or removal orders, seek injunctions and publicly disclose
such actions. Moreover, the authority of these agencies has expanded in recent
years, and the agencies have not yet fully tested the limits of their powers.
The laws and regulations affecting banks and bank holding companies have
changed significantly in recent years, and there is reason to expect that
changes will continue in the future, although it is difficult to predict the
outcome of these changes. From time to time, various bills are introduced in
the United States Congress with respect to the regulation of financial
institutions. Certain of these proposals, if adopted, could significantly
change the regulation of banks and the financial services industry. In
particular, recently enacted and proposed legislation has focused on expanding
the ability of participants in the banking industry to engage in other lines of
business. The enactment of such legislation could put the Company at a
competitive disadvantage because it may not have the capital to participate in
other lines of business to the same extent as more highly capitalized bank
holding companies. The Company cannot predict whether any of these proposals
will be adopted or, if adopted, how these proposals would affect the Company.
Monetary Policy
The Monetary policy of the FRB has a significant effect on the operating
results of 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
18
<PAGE>
the business and earnings of the Company and its subsidiaries cannot be
predicted.
Item 2. Description of Property
The Company's executive offices are located at 821 Seventeenth Street,
Denver, Colorado 80202. The Company leases its executive offices from Kesef,
LLC ("Kesef"), an entity owned by certain directors of the Company and the Bank.
See "Certain Relationships and Related Transactions" under Item 12 of Part III.
The term of the lease is anticipated to expire in 2009. The Company also leases
facilities for each of its other banking locations. The address of the Boulder
location is 1900 Fifteenth Street, Boulder, Colorado 80302, and the lease term
expires in September 2000. The address of the West Metro location is 15710 West
Colfax Avenue, Golden, Colorado 80401, and the term of its lease expires in
November 2004. The address of the Denver Technological Center location is 8400
East Prentice Avenue, Englewood, Colorado 80111, and the lease term expires in
August 2004. The addresses of the two Littleton locations are 101 West Mineral
Avenue, Littleton, Colorado 80120 and 2409 West Main Street, Littleton, Colorado
80120, and their lease terms expire in December 2000 and January 2004,
respectively.
All leased properties are considered in good operating condition and are
believed adequate for the Company's present and foreseeable future operations.
The Company does 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 the Company's business are brought against, or
by, the Company. The Company believes that the ultimate liability, if any,
resulting from such claims or lawsuits will not have a material adverse effect
on the business, financial condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder's Matters
The Common Stock of the Company is traded on the Nasdaq Stock Market under
the ticker symbol "COBZ". At March 15, 1999, there were 133 stockholders of
record of the Company's Common Stock, and the Company estimates, based upon
information provided by brokers, that it has in excess of 1,730 beneficial
owners of its Common Stock. Prior to June 18, 1998, there was no public market
for the Company's Common Stock.
The Company's policy is to retain its earnings to support the growth of its
business. Since the Acquisition, the Board of Directors of the Company has not
declared cash dividends on the Common Stock and does not plan to do so in the
foreseeable future. The ability of the Company to pay cash dividends largely
depends on the amount of cash dividends paid to it by the Bank. Capital
distributions, including dividends, by institutions such as the Bank are subject
to restrictions tied to
19
<PAGE>
the institution's earnings. See "Supervision and Regulation -- The Bank --
Dividend Restrictions" included under Item 1 of Part I.
The following table presents the range of high and low closing sale prices
of the Company's Common Stock for each quarter since the Company's initial
public offering of its Common Stock in June 1998 (the "IPO") as reported by the
Nasdaq Stock Market.
<TABLE>
<CAPTION>
1998
---------------------------------
Fourth Third Second
Quarter Quarter Quarter
---------------------------------
<S> <C> <C> <C>
Common Stock sale price:
High.................... $ 13 $ 16 $ 16
Low..................... 10 3/16 12 3/8 12
</TABLE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company was acquired by a group of private investors in September 1994
for a purchase price of approximately $17.4 million. The purchase price was
financed, in part, by a loan obtained by the Company in the amount of $10.5
million from American National Bank and Trust Company ("ANB"). In connection
with the Acquisition, the Company recorded (i) a deposit intangible valued at
$352,000, which was amortized over a three-year period, and (ii) goodwill of
$6.4 million, which is being amortized over a 15-year period. The amortization
of these assets adversely affects the Company's net income, although it has no
effect on its cash flow.
In March 1997, the Company completed a private placement of shares of Common
Stock for an aggregate of approximately $4.0 million, which was used to fund the
Company's continuing growth. The capital raised in this transaction was
provided primarily by certain Colorado-based investors who have played a
significant role in the growth of the Company by providing deposits and loan
opportunities, both directly and indirectly through referrals. In April 1997,
the Company increased its regulatory capital by converting $1.5 million of its
outstanding indebtedness to ANB into Preferred Stock.
In June 1998, the Company completed the IPO of its Common Stock. A total of
1,610,000 shares of common stock were sold by the Company at $12.00 per share
yielding net proceeds of $17.5 million, after deducting underwriting and other
expenses. Portions of the proceeds from the offering were used to retire $7.25
million of outstanding indebtedness to ANB and $1.5 million of the Company's
cumulative preferred stock. The balance of the proceeds, $8.8 million, was
contributed to the capital of the bank. The IPO further bolstered the
Company's risk based capital position. See "Supervision and Regulation -- The
Holding Company -- Capital Adequacy" included under Item 1 of Part I.
From December 31, 1994 to December 31, 1998, the Company's shareholders'
equity (excluding preferred stock) increased 348.2%, from $8.3 million to $37.2
million (including $4.0 million of additional capital raised in the March 1997
private placement, and $17.5 raised in the IPO in June 1998). During that same
time period, the Company's outstanding loans and leases increased 210.6%, from
$71.9 million to $223.3 million. This increase has primarily been the result of
the Company's focus on local relationship banking and commercial lending to
small- and medium-sized businesses. In addition, the Company has emphasized
building and maintaining asset quality through its credit underwriting and
20
<PAGE>
monitoring process. See "Business -- Lending Activities" included under Item 1
of Part I. Nonperforming assets have ranged from 0.13% to 0.87% of total assets
during this period. While the Company has maintained asset quality, it has
continued to build its allowance for loan and lease losses. The Company's
allowance for loan and lease losses increased 175.0%, from $1.2 million as of
December 31, 1994 to $3.3 million as of December 31, 1998 to maintain strong
reserve coverage of the Company's growing loan and lease portfolio.
In March 1996, the Company formed CBL, an equipment leasing subsidiary. The
Company owns an 80% interest in CBL and CBL's management owns the remaining 20%.
Prior to April 1, 1998, the Bank purchased all leases originated by CBL and,
accordingly, assumed all credit risk associated with such leases. The Bank paid
a servicing fee to CBL for each lease, and customers sometimes paid additional
origination fees directly to CBL. As of April 1, 1998, the Company and CBL
restructured their relationship so that all leases are held by CBL, with the
Bank providing CBL a line of credit to fund the purchase of leased equipment.
The Company believes that the restructuring will not have a material effect on
its consolidated financial statements.
The Company's management has focused on developing an organization with
personnel, management systems and products that will allow it to compete
effectively and position it for growth. The cost of this process relative to
the Company's size has been high. In addition, the Company has operated with
excess capacity during the start-up phases of various projects. As a result,
relatively high levels of noninterest expense have adversely affected the
Company's earnings over the past several years. Salaries and employee benefits
comprised most of this overhead category, but the Company believes that its
compensation levels have allowed it to recruit and retain a highly qualified
management team capable of implementing its business strategies. The Company
believes that its compensation policies, which include the granting of options
to purchase Common Stock to many employees, have highly motivated its employees
and have enhanced its ability to maintain customer loyalty and generate
earnings. While the Company will continue to add personnel to lead new growth
initiatives, including middle management, it believes that its senior management
and systems infrastructure are adequate to support its anticipated growth
without incurring proportionate increases in general, administrative and other
noninterest expenses.
This discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included on pages 33 through
59 of this report. For a description of the Company's accounting policies, see
Note 1 of Notes to Consolidated Financial Statements.
Net Interest Income
The largest component of the Company's net income is its net interest
income. Net interest income is the difference between interest income,
principally from loans, leases and investment securities, and interest expense,
principally on customer deposits and borrowings. Changes in net interest income
result from changes in volume, net interest spread and net interest margin.
Volume refers to the average dollar levels of interest-earning assets and
interest-bearing liabilities. Net interest spread refers to the difference
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Net interest margin refers to net interest income
divided by average interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities.
The following table presents, for the periods indicated, certain
information related to the Company's average asset and liability structure and
it's average yields on assets and average costs of liabilities.
21
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average earned yield Average earned yield Average earned yield
balance or paid or cost balance or paid or cost balance or paid or cost
--------- ------- ------ -------- ------- ------ -------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Federal funds sold............. $ 2,588 $ 135 5.22% $ 5,204 $ 360 6.92% $ 2,633 $ 179 6.80%
Investment securities (1) ..... 70,525 4,124 5.85% 59,602 3,616 6.07% 54,397 3,415 6.28%
Loans and leases (2)........... 197,851 19,640 9.93% 138,787 14,171 10.21% 98,075 10,117 10.32%
Allowance for loan and lease
losses........................ (2,794) - - (1,933) - - (1,518) - -
--------- ------- -------- ------- -------- -------
Total interest-earning
assets.................... 268,170 23,899 8.91% 201,660 18,147 9.00% 153,587 13,711 8.93%
Noninterest-earning assets:
Cash and due from banks.... 15,224 12,810 9,997
Other...................... 15,346 9,758 9,580
--------- -------- --------
Total assets........ $ 298,740 $224,228 $173,164
========= ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Deposits:
NOW and money market
accounts.................. $ 85,558 $ 2,827 3.30% $ 66,222 $ 2,141 3.23% $ 63,037 $ 1,950 3.09%
Savings.................... 6,227 161 2.59% 5,780 152 2.63% 5,669 150 2.65%
Certificates of deposit:
Under $100,000.......... 21,507 1,166 5.42% 16,942 877 5.18% 9,872 445 4.51%
$100,000 and over....... 47,453 2,658 5.60% 35,936 2,083 5.80% 26,227 1,450 5.53%
--------- ------- -------- ------- -------- -------
Total interest-bearing
deposits.................. 160,745 6,812 4.24% 124,880 5,253 4.21% 104,805 3,995 3.81%
Short-term borrowings:
Securities and loans sold
under agreements to
repurchase and federal
funds purchased........... 23,767 1,183 4.98% 15,059 751 4.99% 5,287 377 7.13%
FHLB notes payable......... 4,626 281 6.07% 4,167 280 6.72% 1,073 68 6.34%
Long-term borrowings........... 3,678 301 8.18% 8,458 732 8.65% 10,417 883 8.48%
--------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............ 192,816 8,577 4.45% 152,564 7,016 4.60% 121,582 5,323 4.38%
Noninterest-bearing demand
accounts...................... 76,223 54,706 41,070
--------- -------- --------
Total deposits and
interest-bearing
liabilitities.......... 269,039 207,270 162,652
Other noninterest-bearing
liabilities................... 1,786 1,606 923
--------- -------- --------
Total liabilities... 270,825 208,876 163,575
Shareholders' equity........... 27,915 15,352 9,589
Total liabilities
and shareholders'
equity................. $ 298,740 $224,228 $173,164
========= ======== ========
Net interest income............ $15,322 $11,131 $ 8,388
======= ======= =======
Net interest spread............ 4.46% 4.40% 4.55%
==== ==== ====
Net interest margin............ 5.71% 5.52% 5.46%
==== ==== ====
Ratio of average interest-
bearing assets to average
interest-bearing liabilities.. 139.08% 132.18% 126.32%
========= ======== ========
</TABLE>
(1) Yields do not include adjustments for tax-exempt interest because the
amount of such interest is not material.
(2) Loan fees included in interest income are not material. Nonaccrual loans
and leases are included in average loans and leases outstanding.
22
<PAGE>
The following table illustrates, for the periods indicated, the changes in
the levels of interest income and interest expense attributable to changes in
volume or rate. Changes in net interest income due to both volume and rate have
been included in the changes due to rate.
<TABLE>
<CAPTION>
Increase (Decrease)
--------------------------- ---------------------------
1998 vs. 1997 1997 vs. 1996
--------------------------- ---------------------------
Volume Rate Total Volume Rate Total
------- ------ ------- ------- ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold................................... $ (181) $ (44) $ (225) $ 176 $ 5 $ 181
Investments.......................................... 663 (155) 508 326 (125) 201
Loans and leases..................................... 6,031 (562) 5,469 4,200 (146) 4,054
------- ------ ------- ------- ------ -------
Total interest-earning assets.................. 6,513 (761) 5,752 4,702 (266) 4,436
------- ------ ------- ------- ------ -------
Interest-bearing liabilities:
NOW and money market accounts........................ 624 62 686 99 92 191
Savings.............................................. 12 (3) 9 3 (1) 2
Certificates of deposits:
Under $100,000................................... 236 53 289 319 113 432
$100,000 and over................................ 668 (93) 575 537 96 633
Short-term borrowings:
Securities and loans sold under agreements to
repurchase and federal funds purchased.............. 435 (3) 432 696 (322) 374
FHLB notes payable................................... 31 (30) 1 197 15 212
Long-term borrowings....................................... (414) (17) (431) (166) 15 (151)
------- ------ ------- ------- ------ -------
Total interest-bearing liabilities............. 1,592 (31) 1,561 1,685 8 1,693
------- ------ ------- ------- ------ -------
Net increase (decrease) in net interest income. $ 4,921 $ (730) $ 4,191 $ 3,017 $ (274) $ 2,743
======= ====== ======= ======= ====== =======
</TABLE>
Asset/Liability Management
The Company's results of operations depend significantly on net interest
income. Like most financial institutions, the Company's interest income and
cost of funds are affected by general economic conditions and by competition in
the marketplace. Rising and falling interest rate environments can have various
impacts on net interest income, depending on the interest rate profile (i.e.,
the difference between the repricing of interest-earning assets and interest-
bearing liabilities), the relative changes in interest rates that occur when
various assets and liabilities reprice, unscheduled repayments of loans and
leases and investments, early withdrawals of deposits and other factors. As a
general rule, banks with positive interest rate gaps are more likely to be
susceptible to declines in net interest income in periods of falling interest
rates, while banks with negative interest rate gaps are more likely to
experience declines in net interest income in periods of rising interest rates.
As of December 31, 1998, the Company's cumulative interest rate gap for the
period of less than one year was a positive 6.46%. Therefore, assuming no
change in the Company's gap position, a rise in interest rates is likely to
result in increased net interest income, while a decline in interest rates is
likely to result in decreased net interest income.
The following table sets forth the estimated maturity or repricing, and the
resulting interest rate gap, of the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1998. All amounts in the table are
based on contractual pricing schedules. Actual prepayment and withdrawal
experience may vary significantly from the assumptions reflected in the table.
23
<PAGE>
<TABLE>
<CAPTION>
Estimated maturity or repricing at December 31, 1998
-----------------------------------------------------------------
Three months
Less than to less than One to Over
three months one year five years five years Total
------------- -------------- ---------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed rate loans............................ $ 5,491 $ 7,465 $ 64,013 $ 23,843 $ 100,812
Floating rate loans......................... 110,769 207 1,021 - 111,997
Lease financing............................. 1,059 3,417 9,265 - 13,741
Investment securities held to maturity
and available for sale................... 33,643 55,776 11,983 6,535 107,937
Federal funds sold.......................... - - - - -
------------- -------------- ---------- ------------ -----------
Total interest-earning assets.......... $ 150,962 $ 66,865 $ 86,282 $ 30,378 $ 334,487
============= ============== ========== ============ ===========
Interest-bearing liabilities:
NOW and money market accounts............... $ 20,662 $ 61,653 $ 7,807 $ 11,332 $ 101,454
Savings..................................... 347 485 2,356 3,743 6,931
Time deposits under $100,000................ 9,608 10,905 6,798 - 27,311
Time deposits $100,000 and over............. 20,190 15,731 6,241 - 42,162
Federal funds purchased..................... 3,500 - - - 3,500
Other interest-bearing liabilities.......... 51,076 - - - 51,076
------------- -------------- ---------- ------------ -----------
Total interest-bearing liabilities..... $ 105,383 $ 88,774 $ 23,202 $ 15,075 $ 232,434
============= ============== ========== ============ ===========
Interest rate gap............................... $ 45,579 $ (21,909) $ 63,080 $ 15,303 $ 102,053
============= ============== ========== ============ ===========
Cumulative interest rate gap.................... $ 45,579 $ 23,671 $ 86,750 $ 102,053
============= ============== ========== ============
Cumulative interest rate gap to total assets.... 12.43% 6.46% 23.67% 27.84%
============= ============== ========== ============
</TABLE>
To manage these relationships, the Company evaluates the following factors:
liquidity, equity, debt/capital ratio, anticipated prepayment rates, portfolio
maturities, maturing assets and maturing liabilities. The Company's Asset and
Liability Management Committee is responsible for establishing procedures that
enable the Company to achieve its goals while adhering to prudent banking
practices and existing loan and investment policies. The Company's policy is
intended to control the exposure of its operations to changing interest rates by
attempting to maintain a position within a narrow range around an "earnings
neutral position," which is defined as the mix of assets and liabilities that
generates the net interest margin that is least affected by interest rate
changes.
The Company has focused on maintaining balance between interest rate
sensitive assets and liabilities and repricing frequencies. An important
element of this focus has been to emphasize variable rate loans and investments
funded by deposits that also mature or reprice over periods of twelve months or
less.
The following table presents, at December 31, 1998, loans and leases by
maturity in each major category of the Company's portfolio. Actual maturities
may differ from the contractual maturities shown below as a result of renewals
and prepayments. Loan renewals are evaluated in the same manner as new credit
applications.
24
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------------------
Less than One to Over
one year five years five years Total
--------------- ------------ ------------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Commercial..................... $ 59,280 $ 37,275 $ 8,190 $104,745
Real estate - mortgage......... 8,017 31,713 17,211 56,941
Real estate - construction..... 29,420 4,537 253 34,210
Consumer....................... 6,922 8,706 1,285 16,913
Direct financing leases - net.. 4,476 9,265 - 13,741
--------------- ------------ ------------- -----------
Total loans and leases.... $108,115 $ 91,496 $ 26,939 $226,550
=============== ============ ============= ===========
</TABLE>
As of December 31, 1998, of the $118.4 million of loans and leases with
maturities of one year or more, approximately $97.1 million were fixed rate
loans and leases and $21.3 million were variable rate loans and leases.
Results of Operations
The following table presents condensed statements of income for the Company
for each of the years in the three-year period ended December 31, 1998.
<TABLE>
<CAPTION>
Increase (Decrease) Increase (Decrease)
------------------- -------------------
1998 Amount % 1997 Amount % 1996
------- ------- ---- ------- ------ ---- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income.................................$ 23,899 $ 5,752 31.7% $18,147 $ 4,436 32.4% $13,711
Interest expense................................ 8,577 1,561 22.2% 7,016 1,693 31.8% 5,323
------- ------- ------- -------- -------
Net interest income before provision
for loan and lease losses...................... 15,322 4,191 37.7% 11,131 2,743 32.7% 8,388
Provision for loan and lease losses............. 1,188 239 25.2% 949 456 92.5% 493
------- ------- ------- -------- -------
Net interest income after provision
for loan and lease losses...................... 14,134 3,952 38.8% 10,182 2,287 29.0% 7,895
Noninterest income.............................. 4,246 943 28.5% 3,303 1,509 84.1% 1,794
Noninterest expense............................. 13,133 2,746 26.4% 10,387 2,560 32.7% 7,827
------- ------- ------- -------- -------
Income before income taxes...................... 5,247 2,149 69.4% 3,098 1,236 66.4% 1,862
Provision for income taxes...................... 2,031 786 63.1% 1,245 483 63.4% 762
------- ------- ------- -------- -------
Net income...................................... $ 3,216 $ 1,363 73.6% $ 1,853 $ 753 68.5% $ 1,100
======= ======= ======= ======== =======
</TABLE>
Overview. Net income was a record $3.2 million in 1998, compared to $1.9
million in 1997 and $1.1 million in 1996. This increase was primarily due to a
$4.2 million increase in net interest income from 1997 to 1998. Return on
average assets and return on average common equity were 1.08% and 11.80%,
respectively, for 1998, compared with 0.83% and 12.21%, respectively, for 1997,
and 0.64% and 11.47%, respectively, for 1996. Total assets increased to $366.6
million at December 31, 1998, a 38.8% increase from $264.1 million at December
31, 1997. Total assets at December 31, 1996 were $190.6 million. Strong loan
production was responsible for much of this growth. Net loans and leases grew
$59.2 million from 1998 to 1997, and $53.3 million from 1997 to 1996.
Interest Income. Interest income increased 31.7%, to $23.9 million in 1998
from $18.1 million in 1997. Interest income for 1997 increased 32.4% from
1996. The 1998 interest income increase was due
25
<PAGE>
to an increase of $59.1 million in average loan and lease volume, which resulted
in $5.5 million of additional interest income. The yield on average interest-
earning assets was 8.91% for 1998, compared with 9.00% in 1997, and 8.93% in
1996. The drop in yield is attributed to a decreasing rate environment. On
average, yields on investment securities decreased to 5.85% from 6.07% in 1997
and 6.28% in 1996. Yields on average loans and leases decreased to 9.93%,
compared to 10.21% in 1997 and 10.32% in 1996.
Interest Expense. Interest expense increased 22.2%, to $8.6 million in
1998 from $7.0 million in 1997. 1997 interest expense was $1.6 million higher
than in 1996. The increases were primarily due to higher volumes of interest-
bearing liabilities. 1998 average interest-bearing deposits and average
interest-bearing liabilities grew by $35.9 million and $40.3 million,
respectively, from 1997, while the cost of interest-bearing liabilities dropped
to 4.45% from 4.60% during the same period. The volume increase resulted in
$1.6 million of additional interest expense in 1998. The cost of interest-
bearing liabilities was 4.38% in 1996.
Provision for Loan and Lease Losses. The provision for loan and lease
losses was $1,188,000 in 1998, compared to $949,000 in 1997 and $493,000 in
1996. This increase was due to the increase in total loans and leases
outstanding, and was not reflective of a deterioration of credit quality. In
1998, the level of non-performing loans and net charge-offs declined from the
previous two years. Net charge-offs were $165,000 in 1998, versus $361,000 in
1997 and $225,000 in 1996.
Noninterest Income. Noninterest income increased 28.5%, to $4.2 million in
1998 from $3.3 million in 1997. Noninterest income was $1.8 million in 1996.
Driving this increase was higher rental income associated with operating leases.
Operating lease income was $2.4 million, $1.3 million and $0.3 million in 1998,
1997, and 1996, respectively. The Company believes that noninterest income has
not grown at the same rate as loan and deposit volumes, in part because
customers are provided the option of paying for services in cash or by
maintaining additional noninterest-bearing account balances. Although the use
of compensating balances in lieu of fees decreases noninterest income, it
increases the percentage of noninterest-bearing deposits. At December 31, 1998,
34.9% of deposits at the Bank were noninterest-bearing deposits.
Noninterest Expense. Total operating expenses were $13.1 million in 1998,
$10.4 million in 1997, and $7.8 million in 1996. Overall, noninterest expenses
were up 26.4% from 1997. Of this increase, approximately $1.5 million was
additional personnel costs and $0.7 million related to increased occupancy
costs. The increases in expenses reflect the Company's on-going investment in
personnel, technology, and office space needed to accommodate growth. In
addition, $1.9 million of the noninterest expense incurred was related to
depreciation expense from operating leases.
Effects of Inflation and Changing Prices
The primary impact of inflation on the Company's operations is increased
operating costs. Unlike most retail or manufacturing companies, virtually all
of the assets and liabilities of a financial institution such as the Bank are
monetary in nature. As a result, the impact of interest rates on a financial
institution's performance is generally greater than the impact of inflation.
Although interest rates do not necessarily move in the same direction, or to the
same extent, as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates. Over short periods of
time, interest rates may not move in the same direction, or at the same
magnitude, as inflation.
Year 2000 Compliance
26
<PAGE>
General. The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
our computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. The failure to correct any such programs or hardware could result in
system failures or miscalculations causing disruptions of our operations,
including, among other things, a temporary inability to process transactions,
send statements or engage in similar normal business activities. We have
determined that we will have to modify or replace portions of our information
processing systems so that those systems will properly utilize dates beyond
December 31, 1999. We plan to complete the modifications and replacements
necessary to correct those systems prior to December 31, 1999. If such
modifications and replacements are not made, or are not completed on a timely
basis, the Year 2000 Issue could have a material impact on our future operating
performance.
State of Readiness. The Company is well underway with its "Year 2000
Program" efforts. The Company has a Year 2000 Committee that oversees issues
relating to its Year 2000 Program. In June 1998, the Company converted to the
Jack Henry System, a data processing system that provides the Company with the
ability to deliver upgraded P.C. banking, a voice response system and check and
document imaging. The Jack Henry System is designed to be year 2000 compliant.
The renovation phase for other mission critical components was completed by
December 31, 1998. Renovation for non-mission critical components is expected to
be completed during the first quarter of 1999. The validation phase for mission
critical components, including the Jack Henry System, will be completed in first
quarter 1999 and for non-critical components by the end of second quarter 1999.
The Company utilizes third party servicers for some of its information and data
processing needs, and it is monitoring the progress of these entities in
addressing the Year 2000 Issue. The Company expects, but cannot guarantee, that
all of these third party servicers will be compliant during the second quarter
of 1999. Validation of these third-party provided systems is expected to be
completed during the second quarter of 1999. The Company is also assessing the
operability of other devices after 1999, including vaults, fax machines, stand-
alone personal computers and security systems. Although the Company does not
believe that the failure of these systems would have a material adverse effect
on the financial condition of the enterprise, it is addressing deficiencies in
these systems in an effort to make them compliant during 1999.
Costs. In order to achieve and confirm year 2000 readiness,
significant costs are being incurred to test and modify or replace computer
software and hardware. The Company believes that its remediation costs have been
mitigated since it has replaced, in the ordinary course of business, a
substantial portion of its core banking systems during the past five years with
year 2000 compliant software. However, the considerable effort required to
implement new software and sufficiently test its compliance is consuming a
substantial portion of the Company's internal information technology resources.
This diversion of resources to the Year 2000 Program has resulted in delays in
implementing enhancements to a number of the Company's systems and products. The
Company does not believe, however, that these delays will have a significant
effect on its revenue or expense growth. The aggregate increase in operating
expense to achieve Year 2000 readiness is estimated to be $1.9 million, of which
$429,000 has been incurred through December 31, 1998, including approximately
$241,000 incurred in converting to the Jack Henry System. In addition, a
significant portion of the Company's personal computers have been replaced to
achieve Year 2000 compliance. The capital outlay to replace these assets is
estimated to have been $198,000, a portion of which would have been incurred in
the ordinary course of business without regard to Year 2000 issues.
Risks. If the Company's mission-critical applications are not
compliant by 2000, it may not be able to correctly process transactions in a
reasonable period of time. This scenario could result in a wide variety of
claims against the Company for improper handling of its assets and deposits and
other borrowings from its customers. The Company is also at risk if the credit
worthiness of a few of its large borrowers, or a significant number of its small
borrowers, were to deteriorate quickly and severely as a
27
<PAGE>
result of their inability to conduct business operations after December 31,
1999, due to Year 2000 issues or any other reason. Although the Company has
surveyed and is presently reviewing the Year 2000 plans of a number of its
credit customers to ascertain the sufficiency of their remediation efforts and
the implications of their actions on their credit worthiness, the Company cannot
control or predict whether such customers' remediation efforts will be
successful.
Contingency Plans. The Company is in the process of developing
business resumption plans for each significant business unit in the event that
its remediation plan is not completed in time or fails for reasons that are not
presently foreseen. In the event of such a failure, these plans will outline the
steps that will be taken to remediate the situation and minimize the effect on
customers and losses to the Company. These plans are expected to be complete
prior to the fourth quarter of 1999.
Recent Accounting Pronouncements
The Financial Accounting Standards Board recently issued Statement No. 133
("Statement No. 133") "Accounting for Derivative Instruments and Hedging
Activities." Statement No. 133, which becomes effective for periods beginning
after June 15, 1999, requires business enterprises to recognize all derivatives
as either assets or liabilities in their financial statements and to record such
instruments at fair value. Any change in fair value of such derivatives are
required to be recognized in the statement of income or comprehensive income in
the period of change. Management does not anticipate that Statement No. 133
will have a significant impact on the Company's financial statements.
Item 7. Financial Statements
Reference is made to the financial statements, the reports thereon, the
notes thereto included at pages 33 through 59 of this Form 10-KSB, which
financial statements, reports, notes and data are incorporated herein by
reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
Information concerning the Company's directors and officers called for by
this item will be included in the Company's definitive Proxy Statement prepared
in connection with the 1999 Annual Meeting of Shareholders and is incorporated
herein by reference.
28
<PAGE>
Item 10. Executive Compensation
Information concerning the compensation of the Company's executives called
for by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 1999 Annual Meeting of Shareholders and is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management called for by this item will be included in the Company's definitive
Proxy Statement prepared in connection with the 1999 Annual Meeting of
Shareholders and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions between the
Company and its affiliates called for by this item will be included in the
Company's definitive Proxy Statement prepared in connection with the 1999 Annual
Meeting of Shareholders and is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits and Index of Exhibits.
*3.1 Amended and restated Articles of Incorporation of the Registrant.
*3.2 Amended and restated Bylaws of the Registrant.
*4.1 Form of Underwriters' Warrant issued by the Registrant to Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, in connection
with the Registrant's initial public offering.
*10.1 Colorado Business Bankshares, Inc. 1998 Stock Incentive Plan.
*10.2 Amended and Restated Colorado Business Bankshares, Inc. 1997 Incentive
Stock Option Plan.
*10.3 Amended and Restated Colorado Business Bankshares, Inc. 1995 Incentive
Stock Option Plan.
*10.4 Shareholders Agreement of Colorado Business Leasing, Inc., dated as of
March 29, 1996, by and among The Women's Bank, N.A., Richard M. Hall, Jr.,
James F. Enssle, Andrea J. Johnson and Colorado Business Leasing, Inc.
+* 10.5 License Agreement, dated as of November 19, 1997, by and between
Jack Henry & Associates, Inc. and Colorado Business Bank, N.A.
+* 10.6 Contract Modification, dated as of November 19, 1997, by and
between Jack Henry & Associates, Inc. and Colorado Business Bank, N.A.
+* 10.7 Computer Software Maintenance Agreement, dated as of November 19,
1997, by and between Jack Henry & Associates, Inc. and Colorado Business
Bank, N.A.
*10.8 Employment Agreement, dated as of March 1, 1995, by and between
Equitable Bankshares of Colorado, Inc. and Jonathan C. Lorenz.
29
<PAGE>
*10.9 Employment Agreement, dated as of May 8, 1995, by and between
Equitable Bankshares of Colorado, Inc. and Virginia K. Berkeley.
*10.10 Employment Agreement, dated as of January 3, 1998, by and between
Colorado Business Bankshares, Inc. and Richard J. Dalton.
*10.11 Employment Agreement, dated as of February 29, 1996, by and between
Equitable Bankshares of Colorado, Inc. and Darrell J. Schulte.
*10.12 Employment Agreement, dated as of June 12, 1995, by and between
Colorado Business Bankshares, Inc. and Charles E. Holmes.
*10.13 Employment Agreement, dated as of November 16, 1997, by and between
Colorado Business Bankshares, Inc. and Andrew L. Bacon.
*10.14 Employment Agreement, dated as of October 1, 1997, by and between
Colorado Business Bankshares, Inc. and K. Denise Albrecht.
*10.15 Employment Agreement, dated as of March 29, 1996, by and between
Colorado Business Leasing, Inc. and Richard M. Hall, Jr.
*10.16 Employment Agreement, dated as of September 29, 1995, by and
between Equitable Bankshares of Colorado, Inc. and Katherine H. Kaley.
*10.17 Employment Agreement, dated as of January 8, 1996, by and between
Colorado Business Bankshares, Inc. and Robert J. Ostertag.
*10.18 Retail Lease, dated as of April 1, 1991, by and between Southbridge
Plaza, L.P. and Equitable Bank of Littleton, N.A.
*10.19 First Amendment to Retail Lease, dated as of January 4, 1996, by
and between Southbridge Plaza, L.P. and Colorado Business Bank, N.A.,
formerly known as Equitable Bank of Littleton, N.A.
*10.20 Office Lease, dated as of December 2, 1996, by and between Elliott
Kiowa, Inc. and Colorado Business Bank, N.A.
*10.21 Lease, dated as of December 1, 1997, by and between Spencer Enterprises
and Colorado Business Bank, N.A.
*10.22 Office Building Lease, dated as of July 19, 1995, by and between
Chrisman, Bynum & Johnson P.C. and Equitable Bank of Littleton.
*10.23 Office Lease, dated as of February 23, 1996, by and between
Colorado Business Leasing, Inc. and Denver Place Associates Limited
Partnership.
**10.24 Lease Agreement between Kesef, LLC and Colorado Business Bankshares,
Inc.
**10.25 Office Lease Between SFP Realty, Ltd., L.L.P. and Colorado Business
Bank of Boulder National Association
**10.26 Office Building Lease between Hanover Resources Inc. and Colorado
Business Bank, N.A.
30
<PAGE>
**10.27 Employment Agreement between Colorado Business Bankshares, Inc. and
Kevin G. Quinn
*21.1 List of subsidiaries.
27.1 Financial Data Schedule.
____________
* Incorporated herein by reference from the Registrant's Registration
Statement on Form SB-2 (File No. 333-50037).
** Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-QSB for the quarter September 30, 1998, as filed on November 13,
1998.
+ Confidential treatment has been granted by the Securities and Exchange
Commission as to certain portions of exhibit. Such portions have been
redacted.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
31
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 29, 1999
Colorado Business Bankshares, Inc.
By: /s/ Steven Bangert
--------------------------------
Steven Bangert
Chairman of the Board of Directors
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature: Title: Date:
/s/ Steven Bangert Chairman of the Board and
- ------------------------------- Chief Executive Officer March 29, 1999
Steven Bangert
/s/ Jonathan C. Lorenz Vice Chairman of the Board
- ------------------------------- and President March 29, 1999
Jonathan C. Lorenz
/s/ Richard J. Dalton Executive Vice President and
- ------------------------------- Chief Financial Officer March 29, 1999
Richard J. Dalton
/s/ Lyne B. Andrich Vice President and Controller March 29, 1999
- -------------------------------
Lyne B. Andrich
/s/ Mark S. Kipnis Director March 29, 1999
- -------------------------------
Mark S. Kipnis
/s/ Noel N. Rothman
- ------------------------------- Director March 29, 1999
Noel N. Rothman
/s/ Howard R. Ross
- ------------------------------- Director March 29, 1999
Howard R. Ross
/s/ Michael B. Burgamy Director March 29, 1999
- -------------------------------
Michael B. Burgamy
/s/ Timothy J. Travis Director March 29, 1999
- -------------------------------
Timothy J. Travis
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Colorado Business Bankshares, Inc.
Denver, Colorado
We have audited the accompanying consolidated statements of condition of
Colorado Business Bankshares, Inc. and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income and comprehensive
income, shareholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1998 and 1997 consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
February 26, 1999
Denver, Colorado
33
<PAGE>
<TABLE>
<CAPTION>
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1998 1997
Cash and due from banks $ 20,058,000 $ 15,075,000
Federal funds sold - 12,700,000
------------- ------------
Total cash and cash equivalents 20,058,000 27,775,000
------------- ------------
Investment securities available for sale (cost of $95,994,000
and $41,456,000, respectively) 96,463,000 41,630,000
Investment securities held to maturity (fair value of $9,481,000
and $15,189,000, respectively) 9,370,000 14,931,000
Other investments 2,104,000 2,223,000
------------- ------------
Total investments 107,937,000 58,784,000
------------- ------------
Loans and leases, net 223,279,000 164,091,000
Excess of cost over fair value of net assets acquired, net 4,682,000 5,116,000
Investment in operating leases 4,180,000 3,297,000
Premises and equipment, net 2,884,000 1,266,000
Accrued interest receivable 1,597,000 1,331,000
Deferred income taxes 934,000 777,000
Other 999,000 1,622,000
------------- ------------
TOTAL ASSETS $ 366,550,000 $264,059,000
============= ============
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
LIABILITIES:
Deposits:
Demand $ 95,169,000 $ 69,069,000
NOW and money market 101,455,000 75,164,000
Savings 6,931,000 5,971,000
Certificates of deposit 69,473,000 70,854,000
------------ ------------
Total deposits 273,028,000 221,058,000
Federal funds purchased 3,500,000 -
Securities sold under agreements to repurchase 24,956,000 13,024,000
Advances from the Federal Home Loan Bank 26,120,000 3,260,000
Note payable - 7,500,000
Accrued interest and other liabilities 1,774,000 1,792,000
------------ ------------
Total liabilities 329,378,000 246,634,000
MINORITY INTEREST
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Cumulative preferred, $.01 par value; 2,000,000 shares
authorized; None and 1,500 issued and outstanding, respectively,
$1,000 liquidation preference - 1,500,000
Common, $.01 par value; 25,000,000 shares authorized;
6,673,468 and 4,874,968 issued and outstanding, respectively 67,000 49,000
Additional paid-in capital 29,839,000 11,933,000
Retained earnings 6,972,000 3,833,000
Accumulated other comprehensive income,
net of income tax of $172,000 and $65,000, respectively 294,000 110,000
------------ ------------
Total shareholders' equity 37,172,000 17,425,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $366,550,000 $264,059,000
============ ============
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 1997
INTEREST INCOME:
Interest and fees on loans and leases $ 19,640,000 $ 14,171,000
Interest on investments 4,259,000 3,976,000
------------ ------------
Total interest income 23,899,000 18,147,000
INTEREST EXPENSE:
Interest on deposits 6,812,000 5,253,000
Interest on short-term borrowings 1,464,000 1,031,000
Interest on note payable 301,000 732,000
------------ ------------
Total interest expense 8,577,000 7,016,000
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN AND LEASE LOSSES 15,322,000 11,131,000
PROVISION FOR LOAN AND LEASE LOSSES 1,188,000 949,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 14,134,000 10,182,000
------------ ------------
OTHER INCOME:
Service charges 945,000 830,000
Operating lease income 2,370,000 1,334,000
Other income 931,000 1,139,000
------------ ------------
Total other income 4,246,000 3,303,000
------------ ------------
OTHER EXPENSE:
Salaries and employee benefits 6,836,000 5,339,000
Occupancy expenses, premises and equipment 1,868,000 1,202,000
Depreciation on leases 1,889,000 1,168,000
Amortization of intangibles 442,000 501,000
Other 2,098,000 2,177,000
------------ ------------
Total other expense 13,133,000 10,387,000
------------ ------------
(Continued)
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 1997
INCOME BEFORE INCOME TAXES 5,247,000 3,098,000
PROVISION FOR INCOME TAXES 2,031,000 1,245,000
------------ -----------
NET INCOME 3,216,000 1,853,000
------------ -----------
UNREALIZED APPRECIATION ON AVAILABLE
FOR SALE SECURITIES, net of tax 184,000 20,000
------------ -----------
COMPREHENSIVE INCOME $ 3,400,000 $ 1,873,000
============ ===========
EARNINGS PER SHARE:
Basic $ 0.53 $ 0.37
============ ===========
Diluted $ 0.51 $ 0.36
============ ===========
See notes to consolidated financial statements. (Concluded)
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Preferred Stock Other
Shares Paid-In Shares Retained Comprehensive
Issued Amount Capital Issued Amount Earnings Income Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 3,771,885 $38,000 $ 7,965,000 - $ - $2,096,000 $ 90,000 $10,189,000
ISSUANCE OF COMMON STOCK 1,102,725 11,000 3,967,000 - - - - 3,978,000
ISSUANCE OF PREFERRED STOCK - - - 1,500 1,500,000 - - 1,500,000
OPTIONS EXERCISED 358 - 1,000 - - - - 1,000
DIVIDENDS PAID-PREFERRED ($77.33 per share) - - - - - (116,000) - (116,000)
NET CHANGE IN UNREALIZED APPRECIATION
ON AVAILABLE FOR SALE SECURITIES, net of
income taxes of $12,000 - - - - - - 20,000 20,000
NET INCOME - - - - - 1,853,000 - 1,853,000
--------- ------- ----------- ------ --------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1997 4,874,968 49,000 11,933,000 1,500 1,500,000 3,833,000 110,000 17,425,000
ISSUANCE OF COMMON STOCK 1,610,000 16,000 17,508,000 - - - - 17,524,000
REDEMPTION OF PREFERRED STOCK - - - (1,500) (1,500,000) - - (1,500,000)
OPTIONS EXERCISED 188,500 2,000 398,000 - - - - 400,000
DIVIDENDS PAID - PREFERRED
($51.29) PER SHARE - - - - - (77,000) - (77,000)
NET CHANGE IN UNREALIZED APPRECIATION
ON AVAILABLE FOR SALE SECURITIES, net of
income taxes of $110,000 - - - - - - 184,000 184,000
NET INCOME - - - - - 3,216,000 - 3,216,000
--------- ------- ----------- ------ --------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1998 6,673,468 $67,000 $29,839,000 - $ - $6,972,000 $294,000 $37,172,000
========= ======= =========== ====== ========= ========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
<TABLE>
<CAPTION>
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,216,000 $ 1,853,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization (accretion) on securities 248,000 (988,000)
Depreciation and amortization 2,964,000 2,141,000
Provision for loan and lease losses 1,188,000 949,000
Deferred income taxes (264,000) (341,000)
Loss (gain) on sale of premises and equipment 30,000 -
Changes in:
Accrued interest receivable (266,000) (217,000)
Other assets 620,000 (1,962,000)
Accrued interest and other liabilities (18,000) 694,000
----------- -----------
Net cash provided by operating activities 7,718,000 2,129,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held to maturity securities - (2,024,000)
Net change in other investments 119,000 -
Purchase of available for sale securities (86,941,000) (25,809,000)
Proceeds from maturities of held to maturity
securities 5,503,000 13,966,000
Proceeds from maturities and sale of available
for sale securities 32,212,000 13,662,000
Loan and lease originations and repayments, net (63,431,000) (55,513,000)
Proceeds from sale of real estate acquired
through foreclosure - 109,000
Purchase of premises and equipment (2,579,000) (370,000)
Proceeds from sale of premises and equipment 573,000 106,000
----------- -----------
Net cash used in investing activities (114,544,000) (55,873,000)
(Continued)
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 1997
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market,
and savings account $ 53,351,000 $ 32,348,000
Net (decrease) increase in certificates of deposit (1,381,000) 33,400,000
Net increase (decrease)in federal funds purchased 3,500,000 (6,226,000)
Net increase in securities sold under agreements
to repurchase 11,932,000 9,602,000
Advances from the Federal Home Loan Bank 22,860,000 (1,140,000)
Payment on notes payable (7,500,000) (1,000,000)
Proceeds from issuance of common stock 17,524,000 3,978,000
Dividends paid on preferred stock (77,000) (116,000)
Proceeds from options exercised 400,000 1,000
Redemption of preferred stock (1,500,000) -
------------- -------------
Net cash provided by financing activities 99,109,000 70,847,000
------------- -------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (7,717,000) 17,103,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 27,775,000 10,672,000
------------- -------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 20,058,000 $ 27,775,000
============= =============
SUPPLEMENTAL DISCLOSURES OF
CASH INFORMATION:
Cash paid during the year for:
Interest $ 8,549,000 $ 6,910,000
============= =============
Income taxes $ 2,542,000 $ 1,455,000
============= =============
See notes to consolidated financial statements. (Concluded)
</TABLE>
40
<PAGE>
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting practices of Colorado Business Bankshares, Inc.
("Parent"), its wholly-owned subsidiary, the Colorado Business Bank, N.A.
("Bank"), and its 80% owned equipment leasing subsidiary, Colorado Business
Leasing, Inc. ("Leasing"), collectively referred to as the "Company," conform
to generally accepted accounting principles and prevailing practices within
the banking industry.
The Bank is a full-service, commercial banking institution with six locations
in the Denver metropolitan area. Leasing provides equipment leasing
primarily to middle-market companies. In preparing its financial statements,
management of the Company is required to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant changes in the
near-term relate to the determination of the allowance for loan and lease
losses, the valuation of real estate acquired through foreclosures or in
satisfaction of loans, lease residuals and valuation of property under
operating leases. The following is a summary of the Company's significant
accounting and reporting policies.
Consolidation - The consolidated financial statements include the accounts of
the Parent, the Bank and Leasing. All significant intercompany balances and
transactions have been eliminated. Losses attributable to minority
shareholders of Leasing have exceeded their share of equity of Leasing.
Cash and Cash Equivalents - The Company considers all liquid investments with
original maturities of three months or less to be cash equivalents. At
December 31, 1998 and 1997, cash equivalents consisted of federal funds sold.
Investments - The Company classifies its investment securities as held to
maturity, available for sale, or trading according to management's intent.
As of December 31, 1998 and 1997, the Company has no trading securities.
a. Investment Securities Held to Maturity - Bonds, notes and debentures for
which the Company has the positive intent and ability to hold to maturity
are reported at cost, adjusted for premiums and discounts.
b. Investment Securities Available for Sale - Available for sale securities
consist of bonds, notes, and debentures not classified as held-to-maturity
securities. Unrealized holding gains and losses, net of tax are reported
as a net amount in accumulated other comprehensive income until realized.
Premiums and discounts are recognized in interest income using the level-
yield method over the period to maturity. Declines in the fair value of
individual held to maturity and available for sale securities below their
cost that are other than temporary are recorded as write-downs of the
individual securities to their fair value and the related write-downs are
included in earnings as realized losses. Gains and losses on disposal of
securities are determined using the specific-identification method.
41
<PAGE>
Other investments, including primarily Federal Home Loan Bank and Federal
Reserve Bank stock, are accounted for under the cost method.
Loans and Leases - Loan and leases that management has the intent and ability
to hold for the foreseeable future or until maturity or pay-off are reported
at their outstanding principal balance adjusted for any charge-offs, the
allowance for loan and lease losses, deferred fees or costs on originated
loans and leases, and unamortized premiums or discounts on purchased loans.
Loan fees and certain costs of originating loans and leases are being
deferred and the net amount is amortized over the contractual life of the
related loans and leases. Interest is accrued and credited to income daily
based on the principal balance outstanding. The accrual of interest income
is generally discontinued when a loan or lease becomes 90 days past due as to
principal and interest. When a loan is designated as nonaccrual, the current
period's accrued interest receivable is charged against current earnings
while any portions applicable to prior periods are charged against the
allowance for loan and lease losses. Interest payments received on
nonaccrual loans are applied to the principal balance of the loan.
Management may elect to continue the accrual of interest when the loan is in
the process of collection and the realizable value of collateral is
sufficient to cover the principal balance and accrued interest.
Net Investment in Direct Financing Leases - The Company has entered into
various lease agreements which are accounted for as direct financing leases,
in accordance with Statement of Financial Accounting Standards No. 13.
Under this method, the present value of the future lease payments, the
present value of the unguaranteed residual and initial direct costs are
recorded as assets, which are equal to the fair value of the equipment
leased. In each period, initial direct costs are amortized and interest
income, which is included in income from direct financing leases, is
recognized as a constant percentage return on the net investment in the
lease.
Residual values are established at lease inception equal to the estimated
value, as determined by the Company, to be received from the equipment
following termination of the initial lease. In estimating such values, the
Company considers all relevant information and circumstances regarding the
equipment and the lessee. Any permanent reduction in the estimated residual
value of lease property is charged to operations in the period it occurs.
Allowance for Loan and Lease Losses - The allowance for loan and lease losses
is based primarily on management's estimate of probable losses, as determined
by analysis of the loan and lease portfolio and historical experience as
adjusted for other factors which, in management's judgment, deserve current
recognition in estimating probable loan and lease losses. Loans and leases
deemed uncollectible are charged to the allowance. Recoveries on loans and
leases previously charged-off are added to the allowance.
A loan is considered impaired when it is probable that the Company will not
receive all amounts due according to the contractual terms of the loan. This
includes loans that are nonaccrual loans and certain other loans classified
by management. Interest is recognized for nonaccrual loans only upon receipt
and only after all principal amounts are current according to the terms of
the contract.
Excess of Cost Over Fair Value of Net Assets Acquired - Excess of cost over
fair value of net assets acquired is amortized by the straight-line method
over 15 years. The Company reviews such asset for impairment at least
annually.
42
<PAGE>
Investment in Operating Leases - The Company has entered into various
equipment leases accounted for as operating leases in accordance with
Statement of Financial Accounting Standards No. 13. The equipment, which is
reported as investment in operating leases, is depreciated over the estimated
useful life or lease term, if shorter.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation and amortization, which is calculated by the
straight-line method over the estimated useful lives of the respective assets
as follows:
Office buildings 20 to 40 years
Furniture, fixtures and equipment 3 to 10 years
Leasehold improvements are capitalized and amortized using the straight-line
method over the terms of the respective leases or the estimated useful lives
of the improvements, whichever is shorter.
Real Estate Acquired through Foreclosure - Assets acquired by foreclosure or
in settlement of debt and held for sale are valued at estimated fair value as
of the date of foreclosure, and a related valuation allowance is provided for
estimated costs to sell the assets. Management periodically evaluates the
value of foreclosed assets held for sale and increases the valuation
allowance for any subsequent declines in fair value less selling costs.
Subsequent declines in value are charged to operations.
Income Taxes - A deferred income tax liability or asset is recognized for
temporary differences which exist in the recognition of certain income and
expense items for financial statement reporting purposes in periods different
than for tax reporting purposes. The provision for income taxes is based on
the amount of current and deferred income taxes payable or refundable at the
date of the financial statements as measured by the provisions of current tax
laws.
Earnings Per Share - Basic earnings per share is based on net income divided
by the weighted average number of common shares outstanding during the
period. The weighted average number of shares outstanding used to compute
diluted earnings per share include the number of additional common shares
that would be outstanding if the potential dilutive common shares and common
share equivalents had been issued at the beginning of the year.
Recent Accounting Pronouncements - SFAS No. 130, "Reporting Comprehensive
Income," was adopted in 1998. The statement requires additional reporting of
items that affect comprehensive income but not net income. The Company's
only component of comprehensive income is unrealized appreciation
(depreciation) on available for sale securities.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," was adopted in 1998. The statement requires financial
disclosures and descriptive information about reportable operating segments.
(see Note 13).
SFAS No. 133, "Accounts for Derivative Instruments and Hedging Activities,"
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires recognition of all derivatives as either
assets or liabilities measured at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. The statement is required for the year 2000.
The adoption of SFAS No. 133 is not expected to have a material effect on the
consolidated financial statements.
43
<PAGE>
2. INVESTMENTS
The amortized cost and estimated fair values of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
- -----------------
<S> <C> <C> <C> <C>
Available for sale securities:
Mortgage-backed securities $79,589,000 $532,000 $ 10,000 $80,111,000
U.S. treasury 4,551,000 11,000 12,000 4,550,000
U.S. government agencies 11,854,000 2,000 54,000 11,802,000
----------- ---------- ---------- -----------
$95,994,000 $545,000 $ 76,000 $96,463,000
=========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held to maturity securities:
U.S. government agencies $ 405,000 $ - $ 15,000 $ 390,000
Mortgage-backed securities 6,993,000 93,000 - 7,086,000
Obligations of states and
political subdivisions 965,000 29,000 - 994,000
U.S. treasury 1,007,000 4,000 - 1,011,000
----------- ---------- ---------- -----------
$ 9,370,000 $126,000 $ 15,000 $ 9,481,000
=========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- -----------------
<S> <C> <C> <C> <C>
Available for sale securities:
Mortgage-backed securities $36,957,000 $185,000 $ 1,000 $37,141,000
U.S. treasury 1,499,000 - 1,000 1,498,000
U.S. government agencies 3,000,000 - 9,000 2,991,000
----------- ---------- ---------- -----------
$41,456,000 $185,000 $ 11,000 $41,630,000
=========== ========== ========== ===========
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held to maturity securities:
U.S. government agencies $ 1,500,000 $ - $ 3,000 $ 1,497,000
Mortgage-backed securities 11,213,000 239,000 23,000 11,429,000
Obligations of states and
political subdivisions 1,198,000 50,000 - 1,248,000
U.S. treasury 1,020,000 - 5,000 1,015,000
----------- --------- -------- -----------
$14,931,000 $ 289,000 $ 31,000 $15,189,000
=========== ========= ======== ===========
</TABLE>
The amortized cost and estimated fair value of investments in debt securities
at December 31, 1998 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
--------------------------- ---------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 3,000,000 $ 3,010,000 $ 1,452,000 $ 1,464,000
Due after one year through five years 3,551,000 3,542,000 925,000 931,000
Due after five years 9,854,000 9,800,000 - -
Mortgage-backed securities 79,589,000 80,111,000 6,993,000 7,086,000
------------ ------------ ----------- -----------
$ 95,994,000 $ 96,463,000 $ 9,370,000 $ 9,481,000
============ ============ =========== ===========
</TABLE>
During the years ended December 31, 1998 and 1997, there were no sales of
held to maturity securities. Proceeds from sales of available for sale
securities totaled $14,716,000 and $9,155,000, respectively during the years
ended December 31, 1998 and 1997. The related gross realized gains were
$162,000 and $82,000, respectively.
Investment securities with an approximate fair value of $9,893,000 and
$10,793,000 were pledged to secure public deposits of $7,081,000 and
$8,976,000 at December 31, 1998 and 1997, respectively.
Obligations of states and political subdivisions at December 31, 1998 and
1997 do not include any single issuer for which the aggregate carrying amount
exceeds 10% of the Company's shareholders' equity.
Other investments at December 31, 1998 consists primarily of Federal Home
Loan Bank stock (carrying value $1,348,000) and Federal Reserve Bank stock
(carrying value $613,000). In addition, the Bank had $143,000 in an
investment partnership being accounted for on the cost method. The Bank has
committed to investing up to $500,000 in the partnership. Certain
shareholders and directors have also invested in and received consulting fees
from the partnership.
45
<PAGE>
3. LOANS AND LEASES
Categories of loans and leases, net of deferred fees at December 31, include:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commercial $104,745,000 $ 78,152,000
Real estate - mortgage 56,941,000 40,262,000
Real estate - construction 34,210,000 27,786,000
Consumer 16,913,000 11,732,000
Direct financing leases, net 13,741,000 8,407,000
------------ ------------
226,550,000 166,339,000
Less: Allowance for loan and lease losses 3,271,000 2,248,000
------------ ------------
$223,279,000 $164,091,000
============ ============
</TABLE>
The majority of the Company's lending and leasing activities are with
customers located in the Denver metropolitan area.
In the ordinary course of business, the Company makes various direct and
indirect loans to officers and directors of the Company and its subsidiaries
at competitive rates. Activity with respect to officer and director loans is
as follows for the years ended December 31, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance, beginning of period $ 2,139,000 $2,201,000
New loans 7,240,000 4,867,000
Principal paydowns and payoffs (6,465,000) (4,929,000)
------------ ------------
Balance, end of period $ 2,914,000 $2,139,000
============ ============
</TABLE>
The Company sells participations in loans to an entity controlled by the
Chairman of the Board of Directors and a member of the Board of Directors.
The amount of participations outstanding with the affiliate were $3,994,000
and $2,753,000 at December 31, 1998 and 1997, respectively.
Transactions in the allowance for loan and lease losses are summarized as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
<S> <C> <C>
Balance, beginning of year $2,248,000 $1,660,000
Provision for loan and lease losses 1,188,000 949,000
------------ ------------
3,436,000 2,609,000
Loans charged off, net of recoveries of $71,000
for 1998 and $33,000 for 1997 (165,000) (361,000)
------------ ------------
Balance, end of year $3,271,000 $2,248,000
============ ============
</TABLE>
46
<PAGE>
The recorded investment in loans that are considered to be impaired was
$467,000 and $811,000 at December 31, 1998 and 1997, respectively (all of
which have a related allowance for loan and lease loss). The related
allowance for loan and lease losses were $176,000 and $365,000 at December
31, 1998 and 1997, respectively. Interest of $43,000 and $33,000 was
recognized on average impaired loans of $639,000 and $697,000 during 1998 and
1997, respectively. The gross interest income that would have been recorded
if the loans had been current in accordance with the original terms is
insignificant for the years ended December 31, 1998 and 1997.
4. INVESTMENT IN LEASES
The Company is the lessor of equipment under agreements expiring in various
future years. Certain of the equipment leases provide for additional rents,
based on use in excess of a stipulated minimum number of hours, and allow the
lessees to purchase the equipment for fair value at the end of the lease
terms.
Property leased or held for lease to others under operating leases consists
of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Equipment $6,408,000 $4,290,000
Unamortized initial direct costs 77,000 64,000
---------- ----------
6,485,000 4,354,000
Less accumulated depreciation 2,305,000 1,057,000
---------- ----------
Total $4,180,000 $3,297,000
========== ==========
</TABLE>
The Company's net investment in direct financing leases consists of the
following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Minimum lease payments receivable $15,324,000 $9,819,000
Unamortized initial direct costs 216,000 150,000
Estimated unguaranteed residual values 148,000 17,000
Unearned income (1,947,000) (1,579,000)
----------- ----------
Total $13,741,000 $8,407,000
=========== ==========
</TABLE>
47
<PAGE>
At December 31, 1998, future minimum lease payments receivable under direct
financing leases and noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Direct Operating
Financing Leases Leases
<S> <C> <C>
1999 $ 5,526,000 $2,006,000
2000 4,759,000 1,181,000
2001 3,485,000 446,000
2002 1,424,000 134,000
2003 315,000 6,000
----------- ----------
Total $15,509,000 $3,773,000
=========== ==========
</TABLE>
5. premises and equipment
The major classes of premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Building $ - $ 355,000
Leasehold improvements 1,055,000 951,000
Furniture, fixtures, and equipment 4,465,000 2,049,000
----------- ----------
5,520,000 3,355,000
Accumulated depreciation 2,636,000 2,089,000
----------- ----------
$ 2,884,000 $1,266,000
=========== ==========
</TABLE>
6. CERTIFICATES OF Deposit
The composition of certificates of deposit is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Less than $100,000 $27,311,000 $18,724,000
$100,000 and more 42,162,000 52,130,000
----------- -----------
$69,473,000 $70,854,000
=========== ===========
</TABLE>
Related interest expense is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
<S> <C> <C>
Less than $100,000 $1,166,000 $ 877,000
$100,000 and more 2,658,000 2,083,000
---------- ----------
$3,824,000 $2,960,000
========== ==========
</TABLE>
48
<PAGE>
Maturities of certificates of deposit of $100,000 and more are as follows:
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Less than three months $20,190,000
Three months up to six months 10,981,000
Six months up to one year 4,750,000
One year and over 6,241,000
-----------
$42,162,000
===========
</TABLE>
7. BORROWED FUNDS
The Company has advances from the Federal Home Loan Bank of Topeka (FHLB)
with interest rates that range from 5.29% to 6.89%. Advances are
collateralized by qualifying loans and investment securities not otherwise
pledged as collateral.
Aggregate annual maturities of advances are as follows:
<TABLE>
<CAPTION>
Year
<S> <C>
1999 $ 25,140,000
2000 140,000
2001 140,000
2002 140,000
2003 140,000
Thereafter 420,000
------------
Total $ 26,120,000
============
</TABLE>
Securities sold under agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Securities with an estimated fair value of
$33,062,000 in 1998 and $13,152,000 in 1997 $24,956,000 $13,024,000
=========== ===========
</TABLE>
The Company enters into sales of securities under agreements to repurchase.
The amounts received under these agreements represent short-term borrowings
and are reflected as a liability in the consolidated statement of condition.
During the period, securities were pledged to the customers' and segregated
into a separate safekeeping account that explicitly recognizes the customers'
interest in the securities. Securities sold under agreements to repurchase
averaged $18,699,000 and $17,602,000 and the maximum amounts outstanding at
any month-end during 1998 and 1997 were $24,956,000 and $25,251,000,
respectively. At December 31, 1998, the weighted average interest rate was
3.31%.
Note payable at December 31, 1997, consisted of a $7,500,000 promissory note
due to a bank. Interest on the note was payable quarterly and was set at the
lending bank's prime rate. During 1998, the Company repaid the note with
proceeds received from its initial public offering.
49
<PAGE>
8. INCOME TAXES
The components of consolidated income tax expense are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
<S> <C> <C>
Current tax expense $2,295,000 $1,586,000
Deferred tax benefit (264,000) (341,000)
---------- ----------
Total $2,031,000 $1,245,000
========== ==========
</TABLE>
A deferred tax asset or liability is recognized for the tax consequences of
temporary differences in the recognition of revenue and expense for financial
and tax reporting purposes. The net change during the year in the deferred
tax asset or liability results in a deferred tax expense or benefit. The
temporary differences, tax effected, which give rise to the Company's net
deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $1,097,000 $688,000
Depreciation 23,000 43,000
Deferred loan fees 170,000 102,000
Vacation and other accrued liabilities 30,000 44,000
Other 53,000 104,000
---------- --------
Total deferred tax assets 1,373,000 981,000
---------- --------
Deferred tax liabilities:
Building leasehold improvements 95,000 97,000
Unrealized gain on available-for-sale securities 172,000 65,000
Deferred initial direct lease costs 110,000 42,000
Other 62,000 -
---------- --------
Total deferred tax liabilities 439,000 204,000
---------- --------
Net deferred tax assets $ 943,000 $777,000
========== ========
</TABLE>
50
<PAGE>
A reconciliation of income tax expense at the statutory rate to the Company's
actual income tax expense is shown below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Computed at the statutory rate (34%) $1,784,000 $1,053,000
Increase (decrease) resulting from:
Tax exempt interest income on loans and securities (24,000) (10,000)
Nondeductible goodwill amortization 148,000 148,000
State income taxes, net of federal income tax effect 71,000 65,000
Other 52,000 (11,000)
---------- ----------
Actual tax provision $2,031,000 $1,245,000
========== ==========
</TABLE>
9. SHAREHOLDERS' EQUITY
Preferred Stock - The Board of Directors is authorized, among other things,
to fix the designation and the powers, preferences and relative
participating, optional and other special rights for preferred shares. All
outstanding preferred stock was redeemed in 1998.
Stock Split - In May 1998, the shareholders approved a 4.7125 for 1 stock
split of the Company's common stock and increased authorized shares to
25,000,000. In addition, the shareholders approved an increase in the number
of preferred shares authorized to 2,000,000 shares. All references to
outstanding shares, options and earnings per share for all periods have been
adjusted for the stock split.
Stock Options - In May 1998, the Company approved the 1998 Stock Incentive
Plan (the "1998 Plan"). The maximum number of shares authorized to be issued
under the 1998 Plan is 225,000 shares of Common Stock, and the maximum number
of shares underlying awards that may be granted to an individual employee in
a calendar year is 22,500 shares of Common Stock. The exercise price for
options granted under the 1998 Plan must be at least equal to 100% of the
fair market value of the Common Stock on the date of grant. The 1998 Plan
permits the granting of Incentive Stock Options and non-qualified stock
options. Subsequent to December 31, 1998 the first grants were made totaling
122,694 shares with exercise prices ranging from $12.00 to $18.00. The 1997
Plan reserved 110,103 shares for issuance at not less than the market value
of the Company's stock at the date of grant. 13,708 shares remain available
for granting at December 31, 1998. Under the 1997 Plan, options are
exercisable commencing one year from the date of grant and vest 25% per year
thereafter becoming fully exercisable after four years. Options granted under
the 1998 plan are fully vested and exercisable three years from the grant
date. All options expire after ten years. The Company granted other stock
options ("Other Options") in 1994 to individuals for their contributions to
the Company which were immediately exercisable at $2.12 per share. An
aggregate of 188,500 shares of common stock were reserved for issuance under
these agreements. All of these options were exercised in February 1998.
51
<PAGE>
The following is a summary of changes in shares under option (excluding Other
Options discussed above):
<TABLE>
<CAPTION>
1998 1997
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding, beginning of year 245,051 $ 3.12 157,162 $ 2.54
Granted 39,844 8.60 102,733 4.00
Exercised - - 358 2.12
Forfeited 7,069 6.15 14,486 3.18
------- ------ ------- ------
Outstanding, end of year 277,826 $ 3.83 245,051 $ 3.12
======= ====== ======= ======
Options exercisable, end of year 127,827 $ 2.75 67,153 $ 2.43
======= ====== ======= ======
</TABLE>
The Company has elected to continue to account for its stock options using
the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25 and related interpretations. Accordingly, no compensation cost has
been recognized for its stock option plans. The Company estimated the fair
value of options granted in 1998 and 1997 to be $185,000 and $119,000,
respectively using an analysis similar to the Black-Scholes option pricing
model prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation."
The fair value of each stock option grant is estimated using the Black-
Scholes option pricing model with the following weighted average assumptions:
risk-free interest rate of 4.72%; expected dividend yield of 0%; expected
life of five years; and expected volatility of 36.16%. Had compensation cost
been determined based on fair value at the grant date for the Company's stock
options in accordance with SFAS No. 123, the proforma effect on net income in
1998 and 1997 would have been a decrease of $72,000 and $41,000,
respectively. The effect on earnings per share is not material.
Dividends - At December 31, 1998, the Company's ability to pay dividends on
its common stock, if it determines to do so, is largely dependent upon the
payment of dividends by the Bank. At December 31, 1998, the Bank could have
paid total dividends to the Company of approximately $3.3 million, without
prior regulatory approval.
52
<PAGE>
Earnings Per Share - Income available to common shareholders and the weighted
average shares outstanding used in the calculation of Basic and Diluted
Earnings Per Share are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net income $ 3,216,000 $ 1,853,000
Less: Preferred stock dividends 77,000 116,000
----------- -----------
Income available to common shareholders $ 3,139,000 $ 1,737,000
----------- -----------
Weighted average shares outstanding -
basic earnings per share 5,880,419 4,690,852
Effect of dilutive securities - stock options 214,488 111,926
----------- -----------
Weighted average shares outstanding -
diluted earnings per share 6,094,907 4,802,778
=========== ===========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Employee Profit Sharing Trust - The Company has a defined contribution
pension plan covering substantially all employees. Employees may contribute
up to 15% of their compensation with the Company's discretionary matching
within the limits defined for a 401(k) Plan. Employer contributions charged
to expense for 1998 and 1997 were $149,000 and $123,000, respectively.
Lease Commitments - The Company entered into various operating lease
agreements for office space. Total rental expense for the year ended
December 31, 1998 and 1997 was $686,000 and $533,000, respectively. The
Company's corporate office lease expires May 31, 2009. In 1998, certain
officers and directors acquired the building in which the corporate office is
located and certain banking operations are performed. Future minimum lease
payments at December 31, 1998 under all noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 870,000
2000 955,000
2001 809,000
2002 789,000
2003 796,000
Thereafter 3,167,000
----------
Total $7,386,000
==========
</TABLE>
In addition, the Company entered into a lease agreement for a new Boulder
facility in September 1998. The lease commencement date has not yet been
determined and is contingent upon the completion of tenant finishing. Upon
lease commencement, the minimum monthly lease payments will be $10,000.
53
<PAGE>
Financial Instruments with Off-Balance Sheet Risk - In the normal course of
business the Company has entered into financial instruments which are not
reflected in the accompanying consolidated financial statements. These
financial instruments include commitments to extend credit and stand-by
letters of credit. At December 31, 1998, the Company had the following
commitments:
<TABLE>
<CAPTION>
<S> <C>
Commitments to originate commercial or
real estate construction loans and unused
lines of credit granted to customers $ 106,692,000
=============
Commitments to fund consumer loans:
Personal lines of credit and equity lines $ 4,039,000
=============
Credit card loans $ 1,874,000
=============
Letters of credit $ 562,000
=============
</TABLE>
The Company makes contractual commitments to extend credit and provide
standby letters of credit, which are binding agreements to lend money to its
customers at predetermined interest rates for a specific period of time. The
credit risk involved in issuing these financial instruments is essentially
the same as that involved in granting on-balance sheet financial instruments.
As such, the Company's exposure to credit loss in the event of non-
performance by the counter-party to the financial instrument is represented
by the contractual amounts of those instruments. However, the Company
applies the same credit policies, standards and ongoing reassessments in
making commitments and conditional obligations as they do for loans. In
addition, the amount and type of collateral obtained, if deemed necessary
upon extension of a loan commitment or standby letter of credit, is
essentially the same as the collateral requirements provided for loans.
Additional risk associated with providing these commitments arise when they
are drawn upon, such as the demands on liquidity the Bank would experience if
a significant portion were drawn down at the same time. However, this is
considered unlikely, as many commitments expire without being drawn upon and
therefore do not necessarily represent future cash requirements.
Employment Contracts - Certain officers of the Company have entered into
employment agreements providing for salaries and fringe benefits. In
addition, severance is provided in the event of termination for other than
cause and under certain changes in control a lump sum payment is required.
Other Matters - The Company is involved in various lawsuits which have arisen
in the normal course of business. It is management's opinion, based upon
advice of legal counsel, that the ultimate outcome of these lawsuits will not
have a material impact upon the financial condition or results of operations
of the Company.
11. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company and the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company and
54
<PAGE>
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets, and of Tier I capital to average
assets. Management believes, as of December 31, 1998, that the Company and
Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events that management believes have changed the Bank's
categories.
The following table shows the Company and the Bank's actual capital amounts
and ratios and regulatory thresholds as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
To Be "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of -------------------------- ----------------------------- ----------------------------
December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Company
- -------
Total capital
(to risk weighted assets) $35,382,000 13.9 % $20,426,000 8.0 % N/A N/A
Tier I capital
(to risk weighted assets) 32,189,000 12.6 % 10,213,000 4.0 % N/A N/A
Tier I capital
(to average assets) 32,189,000 9.8 % 10,213,000 4.0 % N/A N/A
Colorado Business Bank, N.A.
- ----------------------------
Total capital
(to risk weighted assets) $34,596,000 13.6 % $20,406,000 8.0 % $25,508,000 10.0 %
Tier I capital
(to risk weighted assets) 31,406,000 12.3 % 10,203,000 4.0 % 15,305,000 6.0 %
Tier I capital
(to average assets) 31,406,000 9.1 % 10,203,000 4.0 % 15,305,000 5.0 %
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
To Be "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of -------------------------- ----------------------------- ----------------------------
December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Company
- -------
Total capital
(to risk weighted assets) $14,448,000 7.6 % $15,286,000 8.0 % N/A N/A
Tier I capital
(to risk weighted assets) 12,200,000 6.4 % 7,643,000 4.0 % N/A N/A
Tier I capital
(to average assets) 12,200,000 4.9 % 9,980,000 4.0 % N/A N/A
Colorado Business Bank, N.A.
- ----------------------------
Total capital
(to risk weighted assets) $21,179,000 11.6 % $14,652,000 8.0 % $18,315,000 10.0 %
Tier I capital
(to risk weighted assets) 18,931,000 10.3 % 7,326,000 4.0 % 10,989,000 6.0 %
Tier I capital
(to average assets) 18,931,000 7.6 % 9,964,000 4.0 % 12,455,000 5.0 %
</TABLE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of the Company's
financial instruments is made in accordance with the requirements of SFAS No.
107, "Disclosures about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data in order to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 20,258,000 $ 20,258,000 $ 27,775,000 $ 27,775,000
Investment securities available-for-sale 96,463,000 96,463,000 41,630,000 41,630,000
Investment securities held-to-maturity 9,370,000 9,481,000 14,931,000 15,189,000
Other investments 2,104,000 2,104,000 2,223,000 2,223,000
Accrued interest receivable 1,597,000 1,597,000 1,331,000 1,331,000
Loans and leases, net 223,279,000 223,015,000 164,091,000 164,020,000
Financial liabilities:
Deposits 273,028,000 258,240,000 221,058,000 220,972,000
Accrued interest payable 397,000 397,000 361,000 361,000
Note payable - - 7,500,000 7,500,000
Federal funds purchased 3,500,000 3,500,000 - -
Securities sold under agreement to repurchase 24,956,000 24,937,000 13,024,000 13,024,000
Advances from Federal Home Loan Bank 26,120,000 26,185,000 3,260,000 3,298,000
</TABLE>
56
<PAGE>
The estimation methodologies utilized by the Company are summarized as
follows:
Cash and Cash Equivalents - For cash and due from banks and federal funds
sold the carrying amount is a reasonable estimate of fair value.
Investment Securities - For investment securities, fair value equals the
quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
investment securities.
Loans and Leases - The fair value of fixed rate loans and leases is estimated
by discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. In computing the estimate of fair value for all loans
and leases, the estimated cash flows and/or carrying value have been reduced
by specific and general reserves for loan losses.
Accrued Interest Receivable/Payable - The carrying amount of accrued interest
receivable/payable is a reasonable estimate of fair value due to the short-
term nature of these amounts.
Deposits - The fair value of demand deposits, NOW and savings accounts, and
certain money market deposits is the amount payable on demand. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits with similar remaining maturities.
Note Payable and Federal Funds Purchased - The estimated fair value of
variable rate borrowed funds approximates their carrying value.
Advances from the Federal Home Loan Bank and Securities Sold under Repurchase
Agreement - Estimated fair value is based on discounting cash flows for
comparable instruments.
Commitments to Extend Credit and Standby Letters of Credit - The Company's
off-balance sheet commitments are funded at current market rates at the date
they are drawn upon. It is management's opinion that the fair value of these
commitments would approximate their carrying value, if drawn upon.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1998 and 1997. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
13. SEGMENTS
The Company's principal activities include Commercial Banking and Equipment
Leasing. Commercial banking offers a broad range of sophisticated banking
products and services, including credit, cash management, investment, deposit
and trust products. The Equipment Leasing segment offers leasing programs
for computers, telecommunications equipment, telephone systems, business
furniture, manufacturing equipment, materials handling equipment and other
capital equipment.
The financial information for each business segment reflect those which are
specifically identifiable or which are allocated based on an internal
allocation method. The allocation has been consistently applied for all
periods presented. Revenues from affiliated transactions, principally the
Commercial Banking division's funding of the Equipment Leasing activity, are
charged generally at rates available to and transacted with unaffiliated
customers.
57
<PAGE>
Results of operations and selected financial information by operating segment
are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
Dollars in thousands: 1998 1997
<S> <C> <C>
Total interest income:
Commercial Banking $24,022 $18,463
Equipment Leasing 932 580
Holding Company 89 -
Eliminations (1,144) (896)
------- -------
Consolidated $23,899 $18,147
======= =======
Total interest expense
Commercial Banking $ 8,335 $ 6,466
Equipment Leasing 1,085 -
Holding Company 301 732
Eliminations (1,144) (182)
------- -------
Consolidated $ 8,577 $ 7,016
======= =======
Provision for loan and lease losses:
Commercial Banking $ 1,114 $ 949
Equipment Leasing 74 -
------- -------
Consolidated $ 1,188 $ 949
======= =======
Other noninterest income:
Commercial Banking $ 1,769 $ 1,754
Equipment Leasing 2,521 1,561
Holding Company 4,033 2,945
Eliminations (4,077) (2,957)
------- -------
Consolidated $ 4,246 $ 3,303
======= =======
Depreciation and amortization:
Commercial Banking $ 1,032 $ 1,754
Equipment Leasing 1,914 1,561
Holding Company 18 2,945
Eliminations - (2,957)
------- -------
Consolidated $ 2,964 $ 3,303
======= =======
Income tax expense/(benefit):
Commercial Banking $ 2,341 $ 1,858
Equipment Leasing (36) (78)
Holding Company (274) (535)
------- -------
Consolidated $ 2,031 $ 1,245
======= =======
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
Dollars in thousands: 1998 1997
<S> <C> <C>
Net income (loss):
Commercial Banking $ 3,649 $ 2,723
Equipment Leasing (52) (139)
Holding Company (1) 3,216 1,853
Eliminations (3,597) (2,584)
-------- --------
Consolidated $ 3,216 $ 1,853
======== ========
Identifiable assets:
Commercial Banking $365,837 $276,556
Equipment Leasing 18,512 12,560
Holding Company (2) 37,279 25,332
Eliminations (55,078) (50,389)
-------- --------
Consolidated $366,550 $264,059
======== ========
Capital expenditures:
Commercial Banking $ 2,416 $ 345
Equipment Leasing 32 12
Holding Company 131 13
-------- --------
Consolidated $ 2,579 $ 370
======== ========
</TABLE>
(1) Excludes equity in earnings of subsidiaries.
(2) Excludes investment in subsidiaries.
* * * * * *
59
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 19,927,000 15,032,000
<INT-BEARING-DEPOSITS> 131,000 43,000
<FED-FUNDS-SOLD> 0 12,700,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 98,567,000 43,853,000
<INVESTMENTS-CARRYING> 9,370,000 14,931,000
<INVESTMENTS-MARKET> 469,000 174,000
<LOANS> 226,550,000 166,339,000
<ALLOWANCE> 3,271,000 2,248,000
<TOTAL-ASSETS> 366,550,000 264,059,000
<DEPOSITS> 273,028,000 221,058,000
<SHORT-TERM> 28,456,000 13,024,000
<LIABILITIES-OTHER> 1,774,000 1,792,000
<LONG-TERM> 26,120,000 10,760,000
0 0
0 1,500,000
<COMMON> 67,000 49,000
<OTHER-SE> 37,105,000 15,876,000
<TOTAL-LIABILITIES-AND-EQUITY> 366,550,000 264,059,000
<INTEREST-LOAN> 19,640,000 14,171,000
<INTEREST-INVEST> 4,259,000 3,976,000
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 23,899,000 18,147,000
<INTEREST-DEPOSIT> 6,812,000 5,253,000
<INTEREST-EXPENSE> 8,577,000 7,016,000
<INTEREST-INCOME-NET> 15,322,000 11,131,000
<LOAN-LOSSES> 1,188,000 949,000
<SECURITIES-GAINS> 162,000 82,000
<EXPENSE-OTHER> 13,133,000 10,387,000
<INCOME-PRETAX> 5,247,000 3,098,000
<INCOME-PRE-EXTRAORDINARY> 3,216,000 1,853,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,216,000 1,853,000
<EPS-PRIMARY> 0.53 0.37
<EPS-DILUTED> 0.51 0.36
<YIELD-ACTUAL> 5.71 5.52
<LOANS-NON> 125,000 470,000
<LOANS-PAST> 4,000 0
<LOANS-TROUBLED> 338,000 341,000
<LOANS-PROBLEM> 4,971,000 2,520,000
<ALLOWANCE-OPEN> 2,248,000 1,660,000
<CHARGE-OFFS> 236,000 394,000
<RECOVERIES> 71,000 33,000
<ALLOWANCE-CLOSE> 3,271,000 2,248,000
<ALLOWANCE-DOMESTIC> 3,271,000 2,248,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,067,000 750,000
</TABLE>
