<PAGE>
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, 1999.
[ ] 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.
(Exact name of small business issuer as specified 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 issuer (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 issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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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: $37,019,000
The aggregate market value of the voting stock held by non-affiliates of the
issuer at March 24, 2000 computed by reference to the closing price on the
Nasdaq National Market was $42,688,152.
The number of shares outstanding of each of the issuer's classes of common
equity on March 24, 2000 was 6,705,290.
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 2000 annual meeting of shareholders are incorporated by reference into
Part III hereof.
Transitional Small Business Disclosure Format
Yes No X
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TABLE OF CONTENTS
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<TABLE>
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PART I
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Page
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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
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Item 5. Market for Common Equity and Related Stockholder Matters 20
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation 20
Item 7. Financial Statements 30
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 30
PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 30
Item 10. Executive Compensation 30
Item 11. Security Ownership of Certain Beneficial Owners and Management 30
Item 12. Certain Relationships and Related Transactions 30
Item 13. Exhibits and Reports on Form 8-K 31
</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. ("Parent"), its wholly-owned subsidiary, Colorado Business
Bank, N.A. ("Bank"), and its 80% owned equipment leasing subsidiary, Colorado
Business Leasing, Inc. ("CBL"), collectively referred to as the "Company," and
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 nine locations in Colorado: six in the Denver
metropolitan area, two in Boulder and one in Edwards. 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, 1999, the Company had total assets of $492.0 million, net loans and
leases of $346.1 million and deposits of $383.3 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, 1999, the Company's assets increased to $492.0 million from
$143.9 million, an increase of 241.9%, its net loan and lease portfolio
increased to $346.1 million from $70.6 million, an increase of 390.2%, and
deposits increased to $383.3 million (27.8% of which are noninterest-bearing
deposits) from $124.5 million, an increase of 207.9%. During that period, the
Company made several changes in operations, including establishing new locations
in the Denver metropolitan area, the Boulder market, and Edwards, expanding
product and service offerings, and consolidating its two bank charters into the
Bank, which was renamed Colorado Business Bank.
3
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Market Area Served
The Company's primary 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 4.1 million, and the area has experienced an
increase of approximately 445,000 people since 1990. Employment in the Denver
metropolitan area has become increasingly diversified across the manufacturing,
financial services, tourism, transportation, technology, telecommunications,
retail trade, services and government sectors. Unemployment in the area is low,
with the June 1999 rate at only 3.1%.
In June 1999, the Company expanded beyond the Denver metropolitan area by
establishing an office, Colorado Business Bank of the Rockies ("Rockies"), in
Edwards, Colorado located in rapidly developing Eagle County.
The Bank has two locations each in downtown Denver, Boulder and Littleton,
and one location each in Golden ("West Metro"), the Denver Technological Center
("DTC") and Eagle County. The second downtown Denver location has received
regulatory approval to move to a new facility and is scheduled to relocate in
the second quarter of 2000.
. 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.
. The Littleton locations serve a more residential area, including Highlands
Ranch, one of the fastest growing communities in the Denver metropolitan
area.
. West Metro contains a number of newer industrial and office parks.
. The DTC area 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.
. Eagle County is anchored by Vail, a prime mountain resort area with a
vigorous high-end primary and second home construction market. Construction
activity in the Vail Valley is fueling growth in other commercial
businesses supporting the expanding population base in the market.
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 commercial and real estate lending to
small- and medium-sized businesses that have annual sales of $2 million to $50
million and businesses and individuals with borrowing requirements of $200,000
to $4 million. As of December 31, 1999, substantially all of the Bank's
outstanding loans and leases were to customers within Colorado.
Interest rates charged on loans vary with the degree of risk, maturity,
underwriting and servicing costs, principal amount and extent of other banking
relationships 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, 1999, approximately 54.0% 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.
4
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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 $750,000. Loans in excess
of $750,000 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 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,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial 130,428 37.7 104,745 46.9 $ 78,152 47.6 $ 58,727 53.0 $ 35,101 40.1
Real estate -- mortgage 123,341 35.6 56,941 25.5 40,262 24.6 24,491 22.1 31,407 36.0
Real estate -- construction 53,552 15.5 34,210 15.3 27,786 16.9 19,119 17.3 14,557 16.7
Consumer 21,873 6.3 16,913 7.6 11,732 7.2 8,266 7.5 6,356 7.3
Direct financing leases -- net 21,485 6.2 13,741 6.2 8,407 5.1 1,805 1.6 1,282 1.5
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans and leases $350,679 101.3 $226,550 101.5 $166,339 101.4 $112,408 101.5 $ 88,703 101.6
Less allowance for loan
and lease losses (4,585) (1.3) (3,271) (1.5) (2,248) (1.4) (1,660) (1.5) (1,393) (1.6)
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loan and leases $346,094 100.0 $223,279 100.0 $164,091 100.0 $110,748 100.0 $ 87,310 100.0
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
The Bank's largest combined credit extension to any group of related
borrowers was $4.2 million at December 31, 1999. At December 31, 1999, the Bank
had a total of 225 extensions of credit, with a combined outstanding principal
balance of $120.1 million, that were over $1.0 million to a single borrower or
related borrowers. All of these combined extensions of credit over $1.0 million
were performing in accordance with their repayment terms, with the exception of
one credit in the amount of $211,000 that was more that 30 days past due. At
December 31, 1999, the Bank had 1,379 commercial loans outstanding, with an
average balance per loan of approximately $93,000; 452 secured real estate
mortgage loans outstanding, with an average balance per loan of approximately
$274,000; 215 construction loans outstanding, with an average balance per loan
of approximately $250,000; 2,129 consumer loans outstanding, with an average
balance per loan of approximately $10,000; and 552 direct financing leases
outstanding, with an average balance per lease of approximately $37,000.
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, 1999, the Bank's Individual Lending Limit was $6.0 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, members of the Company's
Board of Directors. See "Certain Relationships and Related Transactions"
included under Item 12 of Part III. At December 31, 1999, December 31, 1998 and
December 31, 1997, the outstanding balances of loan participations sold by the
Company were $17.6 million, $14.8 million and $10.1 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 $5.4 million as of December 31, 1999. 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.
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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 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.
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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. Values are determined
only by approved independent appraisers.
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. Values are determined only by
approved independent appraisers.
Consumer Loans. The Company provides a broad range of consumer loans to
customers, including personal lines of credit, debit cards, home equity loans
and automobile loans. In order to improve customer service, continuity and
customer retention, management of commercial banking customers often work with
the same loan officer who handles their commercial banking relationships.
Direct financing leases. The Company, through its equipment leasing
subsidiary, Colorado Business Leasing, Inc., 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,
---------------------------------------------------------------
1999 1998 1997 1996 1995
--------- ---------- ---------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming loans and leases:
Loans and leases 90 days or more delinquent and still
accruing interest $ 49 $ 4 $ - $ - $ -
Nonaccrual loans and leases 634 125 470 234 -
Restructured loans and leases - 338 341 348 616
Total nonperforming loans and leases 683 467 811 582 616
Real estate acquired by foreclosure - - - 109 310
Total nonperforming assets $ 683 $ 467 $ 811 $ 691 $ 926
Allowance for loan and lease losses $ 4,585 $ 3,271 $ 2,248 $ 1,660 $ 1,392
========= ========== ========== ========= =========
Ratio of nonperforming assets to total assets 0.14% 0.13% 0.31% 0.36% 0.58%
========= ========== ========== ========= =========
Ratio of nonperforming loans and leases to total loans and leases 0.19 0.21 0.49 0.52 0.69
Ratio of allowance for loan and lease losses to total loans and
leases 1.31 1.44 1.35 1.48 1.57
Ratio of allowance for loan and lease losses to nonperforming loans
and leases 671.30 700.43 277.19 285.22 225.97
</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
7
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on nonaccrual status when it becomes 90 days past due. When a loan or lease is
placed on nonaccrual status, all accrued and unpaid interest on the loan or
lease is reversed and deducted from earnings as a reduction of reported interest
income. No additional interest is accrued on the loan or lease balance until the
collection of both principal and interest becomes reasonably certain. When the
issues relating to a nonaccrual loan or lease are finally resolved, there may
ultimately be an actual write down or charge-off of the principal balance of the
loan or lease, which may necessitate additional charges to earnings.
Restructured loans and leases are those for which concessions, including
the reduction of interest rates below a rate otherwise available to the
borrower, or the deferral of interest or principal, have been granted due to the
borrower's weakened financial condition. Interest on restructured loans and
leases is accrued at the restructured rates when it is anticipated that no loss
of original principal will occur.
The additional interest income that would have been recognized for the
years ended December 31, 1999 and December 31, 1998 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, 1999, 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, 1999, the
Company held 25 loans and leases considered by management to be potential
problem loans or leases, with principal totaling approximately $3.9 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.
8
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<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan and lease
losses at beginning of period $ 3,271 $ 2,248 $ 1,660 $ 1,392 $ 1,181
----------- ----------- ----------- ----------- -----------
Charge-offs:
Commercial 100 200 356 275 27
Real estate -- mortgage - - - - -
Real estate -- construction 5 - - 47 -
Consumer 80 32 38 6 18
Direct financing leases - 4 - - -
----------- ----------- ----------- ----------- -----------
Total charge-offs 185 236 394 328 45
Recoveries:
Commercial 24 66 6 61 10
Real estate -- mortgage - - - - -
Real estate -- construction - - - 39 -
Consumer 2 5 27 3 3
Direct financing leases - - - - -
----------- ----------- ----------- ----------- -----------
Total recoveries 26 71 33 103 13
----------- ----------- ----------- ----------- -----------
Net charge-offs (159) (165) (361) (225) (32)
Provisions for loan and lease losses
charged to operations 1,473 1,188 949 493 243
----------- ----------- ----------- ----------- -----------
Balance of allowance for loan and lease
losses at end of period $ 4,585 $ 3,271 $ 2,248 $ 1,660 $ 1,392
=========== =========== =========== =========== ===========
Ratio of net charge-offs to average
loans and leases ( .06%) ( .08%) ( .26%) ( .23%) ( .04%)
Average loans and leases outstanding during
the period $ 281,796 $ 197,851 $ 138,787 $ 98,075 $ 77,194
=========== =========== =========== =========== ===========
</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, 1999, the allowance for loan and lease
losses equaled 1.3% 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. Loans and leases charged off, net of amounts recovered from such
loans and leases, reduce the allowance for loan and lease losses. The amount of
the allowance is a function of the levels of loans and leases outstanding, the
level of non-performing loans and leases, historical loan and lease loss
experience, the amount of loan and lease losses actually charged against the
reserve during a given period and current and anticipated economic conditions.
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,
-------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- -------------------
Loans in Loans in Loans in Loans in Loans in
category category category category category
as a % as a % as a % as a % as a %
of total of total of total of total of total
Amount of gross Amount of gross Amount of gross Amount of gross Amount of gross
allowance loans allowance loans allowance loans allowance loans allowance loans
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 1,120 37.2% $ 832 46.2% $ 811 47.0% $ 510 52.2% $ 527 39.6%
Real estate -- mortgage 728 35.2% 522 25.1% 296 24.2% 189 21.8% 151 35.4%
Real estate -- construction 284 15.3% 508 15.1% 318 16.7% 237 17.0% 233 16.4%
Consumer 233 6.2% 99 7.5% 73 7.0% 51 7.4% 49 7.2%
Direct financing leases 183 6.1% 243 6.1% - 5.1% - 1.6% - 1.4%
Unallocated 2,037 0.0% 1,067 0.0% 750 0.0% 673 0.0% 433 0.0%
------- ------- ------- -------- ------- -------- ------- -------- ------- --------
Total $ 4,585 100.0% $ 3,271 100.0% $ 2,248 100.0% $ 1,660 100.0% $ 1,393 100.0%
======= ======= ======= ======== ======= ======== ======= ======== ======= ========
</TABLE>
Investments
The Company's investment portfolio is comprised of securities rated "A" or
better by various nationally recognized rating agencies, with the majority of
the portfolio either maturing or repricing within a one- to seven-year period.
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 and wholesale borrowings. Since November 1994, the Company has
selected primarily mortgage-backed securities that reprice annually. The
Company's investment strategies are reviewed at the monthly 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,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
U.S. Treasury and U.S. government agency securities $ 11,884 $ 17,764 $ 7,009
Mortgage-backed securities 94,393 87,104 48,354
State and municipal bonds 799 965 1,198
Federal Reserve and FHLB stock 2,455 1,961 2,012
Other investments 390 143 211
------------ ------------ ------------
Total $ 109,921 $ 107,937 $ 58,784
============ ============ ============
</TABLE>
The following table sets forth the book value, maturity or repricing
frequency, and approximate yield of the securities in the Company's investment
portfolio at December 31, 1999.
<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 $ 2,310 4.22% $ 1,499 6.13% $ - - $ 8,075 6.38% $ 11,884 5.93%
Mortgage-backed
securities (2) 69,061 6.35% 3,155 6.50% 22,177 5.50% - - 94,393 6.16%
State and municipal
bonds 490 6.91% - 0.00% 309 6.68% - - 799 6.82%
Federal Reserve and
FHLB stock - - - - - - 2,455 6.96% 2,455 6.96%
Other investments - - - - - - 390 16.62% 390 16.62%
------- ------- ------- ------- --------
Total $71,861 6.29% $ 4,654 6.38% $22,486 5.52% $10,920 6.88% $109,921 6.19%
======= ======= ======= ======= ========
</TABLE>
(1) Yields do not include adjustments for tax-exempt interest, because the
amount of such interest is not material.
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, 1999, $106.5 million, or 27.8%, 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,
------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
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 $ 122,688 3.30% $ 85,558 3.31% $ 66,222 3.23%
Savings 6,546 2.22% 6,227 2.59% 5,780 2.63%
Certificates of deposit under $100,000 25,950 5.09% 21,507 5.42% 16,942 5.18%
Certificates of deposit $100,000 and over 64,844 5.15% 47,453 5.60% 35,936 5.80%
--------- --------- ---------
Total interest-bearing deposits 220,028 4.02% 160,745 4.24% 124,880 4.21%
Noninterest-bearing demand deposits 101,793 - 76,223 - 54,706 -
--------- --------- ---------
Total deposits $ 321,821 2.75% $ 236,968 2.87% $ 179,586 2.93%
========= ========= =========
</TABLE>
The following table sets forth the amount and maturity of CDs that had
balances of more than $100,000 at December 31, 1999.
At December 31,
1999
--------------------
Remaining Maturity (in thousands)
Less than three months $ 57,975
Three months up to six months 28,338
Six months up to one year 6,250
One year and over 5,823
---------
Total $ 98,386
=========
12
<PAGE>
Short-Term Borrowings
The Company's short-term borrowings include federal funds purchased,
securities sold under agreements to repurchase, which generally mature within 60
days, and advances from the Federal Home Loan Bank of Topeka. The following
table sets forth information relating to the Company's short-term borrowings.
<TABLE>
<CAPTION>
At or for the year
ended December 31,
---------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Federal funds purchased
Balance at end of year $ 1,300 $ 3,500 $ -
Average balance outstanding for the period 4,403 4,956 6,686
Maximum amount outstanding at any month end during the year 13,000 17,000 18,000
Weighted average interest rate for the period 5.40% 5.54% 5.68%
Weighted average interest rate at period end 4.00% 5.06% 0.00%
Securities sold under agreement to repurchase
Balance at end of year $ 33,053 $ 24,956 $ 13,024
Average balance outstanding for the period 40,421 18,811 10,916
Maximum amount outstanding at any month end during the year 51,982 24,956 17,625
Weighted average interest rate for the period 4.41% 4.72% 4.92%
Weighted average interest rate at period end 4.53% 3.31% 4.58%
FHLB advances
Balance at end of year $ 30,980 $ 26,120 $ 3,260
Average balance outstanding for the period 18,041 4,626 4,167
Maximum amount outstanding at any month end during the year 32,050 26,120 4,400
Weighted average interest rate for the period 5.48% 6.07% 6.72%
Weighted average interest rate at period end 5.88% 5.47% 6.46%
</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
13
<PAGE>
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 and thrift
industries 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 and thrift holding companies.
Employees
As of December 31, 1999, the Company had 145 employees, including 137 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,
14
<PAGE>
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 holding
company could make available to customers in Colorado some of the services of a
larger affiliated institution located in another state.
The Gramm-Leach-Bliley Act of 1999 eliminates many of the restrictions
placed on the activities of certain qualified bank holding companies. Effective
March 11, 2000, a bank holding company can qualify as a "financial holding
company" and expand into a wide variety of financial services, including
securities activities, insurance and merchant banking without the prior approval
of the FRB. The Company expects to qualify as a financial holding company as
soon as possible.
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, 1999 of (i)
total capital to risk-weighted assets, (ii) Tier 1 capital to risk-weighted
assets and (iii) Tier 1 leverage ratio.
At December 31, 1999
------------------------
Minimum
Ratio Actual Required
------------------------
Total capital to risk-weighted assets 10.7% 8.0%
Tier I capital to risk-weighted assets 9.5% 4.0%
Tier I leverage ratio 7.8% 4.0%
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
15
<PAGE>
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.
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
16
<PAGE>
amount of the Bank's loans to its officers, directors and principal shareholders
(or their affiliates) is limited to the amount of its unimpaired capital and
surplus, unless the FDIC determines that a lesser amount is appropriate.
A violation of the restrictions of Section 23A or Section 23B of the
Federal Reserve Act may result in the assessment of civil monetary penalties
against the Bank or a person participating in the conduct of the affairs of the
Bank or the imposition of an order to cease and desist such violation.
Dividend Restrictions. Dividends paid by the Bank are expected to provide
substantially all of 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, 1999.
At December 31, 1999
------------------------
Minimum
Ratio Actual Required
------------------------
Total capital to risk-weighted assets 10.3% 8.0%
Tier I capital to risk-weighted assets 9.1% 4.0%
Tier I leverage ratio 7.6% 4.0%
Pursuant to the FDICIA, regulations have been adopted defining five capital
levels: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Increasingly
severe restrictions are placed on a depository institution as its capital level
classification declines. An institution is critically undercapitalized if it
has a tangible equity to total assets ratio less than or equal to 2%. An
institution is adequately capitalized if it has a total risk-based capital ratio
less than 10%, but greater than or equal to 8%, or a Tier 1 risk-based capital
ratio less than 6%, but greater than or equal to 4%, or a leverage ratio less
than 5%, but greater than or equal to 4% (3% in certain circumstances). An
institution is well capitalized if it has a total risk-based capital ratio of
10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a
leverage ratio of 5% or greater, and the institution is not subject to an order,
written agreement, capital directive or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure. Under these
regulations, as of December 31, 1999, the Bank was well capitalized, which
classification places no significant restrictions on the Bank's activities.
17
<PAGE>
Internal Operating Requirements. Federal regulations promote the safety
and soundness of individual institutions by specifically addressing, among other
things: (1) internal controls, information systems and internal audit systems;
(2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5)
asset growth; and (6) compensation and benefit standards for management
officials.
Real Estate Lending Evaluations. Federal regulators have adopted uniform
standards for the evaluation of loans secured by real estate or made to finance
improvements to real estate. The Bank is required to establish and maintain
written internal real estate lending policies consistent with safe and sound
banking practices. The 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
18
<PAGE>
deposits, and their use may affect interest rates charged on loans or paid on
deposits. FRB monetary policies have materially affected the operations of
commercial banks in the past and are expected to continue to do so in the
future. The nature of future monetary policies and the effect of such policies
on the business and earnings of the Company and its subsidiaries cannot be
predicted.
Item 2. Description of Property
The Company currently has nine banking locations and one leasing office
(CBL). The ninth banking location has received regulatory approval to move and
is scheduled to open in the second quarter of 2000. 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
expires in 2009. The Company leases all of its facilities. The following table
sets forth specific information on each location.
<TABLE>
<CAPTION>
Lease
Location Address Expiration
- --------------- ---------------------------------------------------------- ----------
<S> <C> <C>
Denver 821 Seventeenth Street, Denver, Colorado, 80202 2009
Tremont 1275 Tremont, Denver, Colorado, 80202 2014
Littleton 101 West Mineral Avenue, Littleton, Colorado, 80120 2000
Prince 2409 West Main Street, Littleton, Colorado, 80120 2004
Boulder 2025 Pearl Street, Boulder, Colorado 80302 2009
Boulder North 2550 North Broadway, Boulder, Colorado 80302 2004
West Metro 15710 West Colfax Avenue, Golden, Colorado 80401 2004
DTC 8400 East Prentice Avenue, Englewood, Colorado 80111 2003
Rockies 439 Edwards Access Road, Edwards, Colorado, 81632 2004
CBL 999 Eighteenth Street, Suite 2400, Denver, Colorado, 80202 2001
</TABLE>
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 1999.
19
<PAGE>
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 24, 2000, there were xxx 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
x,xxx beneficial owners of its Common Stock. Prior to June 18, 1998, there was
no public market for the Company's Common Stock.
In the third quarter of 1999, the Company instituted a quarterly dividend
return to its shareholders. However, 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 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>
1999 1998
-------------------------------------------- -----------------------------------
Fourth Third Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock sale price:
High $ 14.875 $ 13.438 $ 12.375 $ 13.063 $ 13.000 $ 16.000 $ 16.000
Low 11.125 10.750 10.500 11.000 10.188 12.375 12.000
Cash dividends declared 0.050 0.050 --- --- --- --- ---
</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 net proceeds 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
20
<PAGE>
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, 1999, the Company's shareholders'
equity (excluding preferred stock) increased 386.7%, from $8.3 million to $40.4
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 (net) increased 390.2%,
from $70.6 million to $346.1 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 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 283.3%,
from $1.2 million as of December 31, 1994 to $4.6 million as of December 31,
1999 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 did 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 35 through
63 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
21
<PAGE>
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.
22
<PAGE>
<TABLE>
<CAPTION>
Twelve months ended December 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
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 $ 3,150 $ 150 4.76% $ 2,588 $ 135 5.22% $ 5,204 $ 360 6.92%
Investment securities 108,121 6,325 5.85% 70,525 4,124 5.85% 59,602 3,616 6.07%
Loans and leases 281,796 25,934 9.20% 197,851 19,640 9.93% 138,787 14,171 10.21%
Allowance for loan and lease losses (3,810) - 0.00% (2,794) - 0.00% (1,933) - 0.00%
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 389,257 32,409 8.33% 268,170 23,899 8.91% 201,660 18,147 9.00%
Noninterest-earning assets:
Cash and due from banks 20,925 15,224 12,810
Other 15,837 15,346 9,758
--------- --------- ---------
Total assets $ 426,019 $ 298,740 $ 224,228
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW and money market accounts $ 122,688 $ 4,044 3.30% $ 85,558 $ 2,827 3.30% $ 66,222 $ 2,141 3.23%
Savings 6,546 145 2.22% 6,227 161 2.59% 5,780 152 2.63%
Certificates of deposit:
Under $100,000 25,950 1,320 5.09% 21,507 1,166 5.42% 16,942 877 5.18%
$100,000 and over 64,844 3,337 5.15% 47,453 2,658 5.60% 35,936 2,083 5.80%
--------- --------- --------- --------- --------- ---------
Total interest-bearing deposits 220,028 8,846 4.02% 160,745 6,812 4.24% 124,880 5,253 4.21%
Short-term borrowings:
Securities and loans sold under
agreements to repurchase
and federal funds purchased 44,824 2,020 4.51% 23,767 1,183 4.98% 15,059 751 4.99%
FHLB advances & notes payable 18,935 1,013 5.35% 4,626 281 6.07% 4,167 280 6.72%
Long-term borrowings - - 0.00% 3,678 301 8.18% 8,458 732 8.65%
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities 283,787 11,879 4.19% 192,816 8,577 4.45% 152,564 7,016 4.60%
Noninterest-bearing demand accounts 101,793 76,223 54,706
--------- --------- ---------
Total deposits and interest-
bearing liabilities 385,580 269,039 207,270
Other noninterest-bearing liabilities 1,610 1,786 1,606
--------- --------- ---------
Total liabilities 387,190 270,825 208,876
Shareholders' equity 38,829 27,915 15,352
--------- --------- ---------
Total liabilities and
shareholders' equity $ 426,019 $ 298,740 $ 224,228
========= ========= =========
Net interest income $ 20,530 $ 15,322 $ 11,131
========= ========= =========
Net interest spread 4.14% 4.46% 4.40%
========= ========= =========
Net interest margin 5.27% 5.71% 5.52%
========= ========= =========
Ratio of average interest-bearing assets to
average interest-bearing liabilities 137.17% 139.08% 132.18%
========= ========= =========
</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.
23
<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)
------------------------------- -------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------- -------------------------------
Volume Rate Total Volume Rate Total
--------- --------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 29 $ (14) $ 15 $ (181) $ (44) $ (225)
Investments 2,199 2 2,201 663 (155) 508
Loans and leases 8,332 (2,038) 6,294 6,031 (562) 5,469
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 10,560 (2,050) 8,510 6,513 (761) 5,752
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
NOW and money market accounts 1,227 (10) 1,217 624 62 686
Savings 8 (24) (16) 12 (3) 9
Certificates of deposits:
Under $100,000 241 (87) 154 236 53 289
$100,000 and over 974 (295) 679 668 (93) 575
Short-term borrowings:
Securities and loans sold under agreements to
repurchase and federal funds purchased 1,048 (211) 837 435 (3) 432
FHLB notes payable 869 (137) 732 31 (30) 1
Long-term borrowings (301) - (301) (414) (17) (431)
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 4,066 (764) 3,302 1,592 (31) 1,561
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in net interest income $ 6,494 $(1,286) $ 5,208 $ 4,921 $ (730) $ 4,191
========= ========= ========= ========= ========= =========
</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, 1999, the Company's cumulative interest rate gap for the
period of less than one year was a positive 8.44%. 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, 1999. 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.
24
<PAGE>
<TABLE>
<CAPTION>
Estimated maturity or repricing at December 31, 1999
-----------------------------------------------------------------
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 $ 6,092 $ 13,327 $ 107,586 $ 24,672 $ 151,677
Floating rate loans 176,165 291 733 328 177,517
Lease financing 1,973 5,672 13,840 - 21,485
Investment securities held to maturity
and available for sale 16,565 55,296 4,654 33,406 109,921
Federal funds sold - - - - -
------------ ------------ ---------- ---------- ---------
Total interest-earning assets $ 200,795 $ 74,586 $ 126,813 $ 58,406 $ 460,600
============ ============ ========== ========== =========
Interest-bearing liabilities:
NOW and money market accounts $ 867 $ 62,492 $ 72,319 $ 13,007 $ 148,685
Savings 295 649 2,063 2,889 5,896
Time deposits under $100,000 13,041 10,027 802 - 23,870
Time deposits $100,000 and over 57,975 34,588 5,823 - 98,386
Federal funds purchased 1,300 - - - 1,300
Other interest-bearing liabilities 53,053 10,140 560 280 64,033
------------ ------------ ---------- ---------- ---------
Total interest-bearing liabilities $ 126,531 $ 117,896 $ 81,567 $ 16,176 $ 342,170
============ ============ ========== ========== =========
Interest rate gap $ 74,264 $ (43,310) $ 45,246 $ 42,230 $ 118,430
============ ============ ========== ========== =========
Cumulative interest rate gap $ 74,264 $ 30,954 $ 76,200 $ 118,430
============ ============ ========== ==========
Cumulative interest rate gap to total assets 20.26% 8.44% 20.79% 32.31%
============ ============ ========== ==========
</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, 1999, 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.
25
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1999
---------------------------------------------------------
Less than One to Over
one year five years five years Total
------------ ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Commercial $ 73,939 $ 48,323 $ 8,166 $ 130,428
Real estate -- mortgage 16,104 48,357 58,880 123,341
Real estate -- construction 46,482 6,756 314 53,552
Consumer 8,914 12,204 755 21,873
Direct financing leases -- net 7,645 13,840 - 21,485
--------- --------- -------- ---------
Total loans and leases $ 153,084 $ 129,480 $ 68,115 $ 350,679
========= ========= ======== =========
</TABLE>
As of December 31, 1999, of the $197.6 million of loans and leases with
maturities of one year or more, approximately $146.4 million were fixed rate
loans and leases and $51.2 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, 1999.
<TABLE>
<CAPTION>
The Twelve Months Ended December 31,
--------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
------------------- -------------------
1999 Amount % 1998 Amount % 1997
-------- ---------- ------ -------- ---------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 32,409 $ 8,510 35.6% $ 23,899 $ 5,752 31.7% $ 18,147
Interest expense 11,879 3,302 38.5% 8,577 1,561 22.2% 7,016
-------- ---------- -------- ---------- --------
Net interest income before provision for loan and
lease losses 20,530 5,208 34.0% 15,322 4,191 37.7% 11,131
Provision for loan and lease losses 1,473 285 24.0% 1,188 239 25.2% 949
-------- ---------- -------- ---------- --------
Net interest income after provision for loan and
lease losses 19,057 4,923 34.8% 14,134 3,952 38.8% 10,182
Noninterest income 4,610 364 8.6% 4,246 943 28.5% 3,303
Noninterest expense 15,746 2,613 19.9% 13,133 2,746 26.4% 10,387
-------- ---------- -------- ---------- --------
Income before income taxes 7,921 2,674 51.0% 5,247 2,149 69.4% 3,098
Provision for income taxes 3,002 971 47.8% 2,031 786 63.1% 1,245
Net income $ 4,919 $ 1,703 53.0% $ 3,216 $ 1,363 73.6% $ 1,853
======== ========== ======== ========== ========
</TABLE>
Overview. Net income was a record $4.9 million in 1999, compared to $3.2
million in 1998 and $1.9 million in 1997. This increase was primarily due to a
$5.2 million increase in net interest income from 1998 to 1999. Return on
average assets and return on average common equity were 1.15% and 12.67%,
respectively, for 1999, compared with 1.08% and 11.80%, respectively, for 1998,
and 0.83% and 12.21%, respectively, for 1997. Total assets increased to $492.0
million at December 31, 1999, a 34.2% increase from $366.6 million at December
31, 1998. Total assets at December 31, 1997 were $264.1 million. Strong loan
production was responsible for much of this growth. Net loans and leases grew
$122.8 million from 1998 to 1999, and $59.2 million from 1997 to 1998.
On an operating basis, before the amortization of goodwill, consolidated
net income available to common shareholders for the years ended 1999 and 1998,
was $5.4 million and $3.6 million, or $0.78
26
<PAGE>
and $0.59 per diluted share, respectively. Return on average tangible assets was
1.27% in 1999 compared with 1.24% in 1998. Return on average common
shareholders' equity was 15.59% for 1999, versus 15.86% for 1998.
Interest Income. Interest income increased 35.6%, to $32.4 million in 1999
from $23.9 million in 1998. Interest income for 1998 increased 31.7% from
1997. In 1999, interest on loans and leases increased by $6.3 million and
interest on investments increased by $2.2 million. Of the $8.5 million increase
in 1999, $10.6 million was due to volume increases which were partially offset
by a negative rate variance of $2.1 million. Average loan and lease volumes
were up by $83.9 million from 1998, and average investments were up $37.6
million. The yield on average interest-earning assets was 8.33% for 1999,
compared with 8.91% in 1998, and 9.00% in 1997. The drop in yield is attributed
to a decreasing rate environment. On average, yields on investment securities
remained flat at 5.85% in 1999 and 1998, down from 6.07% reported in 1997.
Yields on average loans and leases decreased to 9.20%, compared to 9.93% in 1998
and 10.21% in 1997.
Interest Expense. Interest expense increased 38.5%, to $11.9 million in
1999 from $8.6 million in 1998. 1998 interest expense was $1.6 million higher
than in 1997. The increases were primarily due to higher volumes of interest-
bearing liabilities. 1999 average interest-bearing deposits and average
interest-bearing liabilities grew by $59.3 million and $91.0 million,
respectively, from 1998, while the cost of interest-bearing liabilities dropped
to 4.19% from 4.45% during the same period. The result was an increase of $3.3
million of additional interest expense in 1999. The cost of interest-bearing
liabilities was 4.60% in 1997.
Provision for Loan and Lease Losses. The provision for loan and lease
losses was $1,473,000 in 1999, compared to $1,188,000 in 1998 and $949,000 in
1997. This increase was due to the increase in total loans and leases
outstanding, and was not reflective of a deterioration of credit quality. In
1999, both the ratio of non-performing loans to total loans, and ratio of net
charge-offs to average loans declined from the previous two years. Net charge-
offs were $159,000 in 1999, versus $165,000 in 1998 and $361,000 in 1997.
Noninterest Income. Noninterest income increased 8.6%, to $4.6 million in
1999 from $4.2 million in 1998. Noninterest income was $3.3 million in 1997.
The moderate increase from 1998 relates to rental income associated with
operating leases. Operating lease income was $2.3 million in 1999 compared to
$2.4 million in 1998. During 1999, CBL focused on originating direct finance
type leases rather than operating leases.
The Company believes that other noninterest income, such as deposit service
charges, have not grown at the same rate as loan and deposit volumes, in part
because customers are provided the option of paying for services in cash or by
maintaining additional noninterest-bearing account balances. Although the use
of compensating balances in lieu of fees decreases noninterest income, it
positively impacts the net interest margin by increasing the level of
noninterest-bearing deposits. At December 31, 1999, 27.8% of deposits at the
Bank were noninterest-bearing deposits.
Noninterest Expense. Total operating expenses were $15.7 million in 1999,
$13.1 million in 1998, and $10.4 million in 1997. Overall, noninterest expenses
were up 19.9% from 1998. Of this increase, approximately $1.3 million
represented additional personnel costs and $1.0 million represented increased
occupancy costs. The increases in expenses reflect the Company's on-going
investment in personnel, technology, and office space needed to accommodate
growth. In addition, $2.0 million of the noninterest expense incurred in 1999
was related to depreciation expense from operating leases.
Although operating expenses have increased each year to accommodate the
Company's growth, the efficiency ratio continues to improve. This is the result
of the Company consistently generating
27
<PAGE>
revenues at a faster rate than expenses. The efficiency ratio was 62.91% for the
year ended 1999, 67.78% for 1998, and 72.32% for 1997.
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Salaries and employee benefits $ 8,124 $ 6,836 $ 5,339
Occupancy expenses, premises and equipment 2,831 1,868 1,202
Depreciation on leases 2,015 1,889 1,168
Amortization of intangibles 442 442 501
Other operating expenses 2,334 2,098 2,177
---------- ---------- ----------
Total other expense $ 15,746 $ 13,133 $ 10,387
---------- ---------- ----------
Efficiency ratio 62.91% 67.78% 72.32%
</TABLE>
Liquidity and Capital Resources
The Company's liquidity management objective is to ensure its ability to
satisfy the cash flow requirements of depositors and borrowers and to allow the
Company to sustain its operations. Historically, the Company's primary source of
funds has been customer deposits. Scheduled loan and lease repayments are a
relatively stable source of funds, while deposit inflows and unscheduled loan
and lease prepayments, which are influenced by fluctuations in general level of
interest rates, returns available on other investments, competition, economic
conditions and other factors, are relatively unstable. Borrowings may be used on
a short-term basis to compensate for reductions in other sources of funds (such
as deposit inflows at less than projected levels). Company borrowings may also
be used on a longer term basis to support expanded lending activities and to
match the maturity or repricing intervals of assets.
The Company uses various forms of short-term borrowings for cash management
and liquidity purposes on a limited basis. These forms of borrowings include
federal funds purchases, securities sold under agreements to repurchase, the
State of Colorado Treasury's Time Deposit program, and borrowings from the
Federal Home Loan Bank of Topeka ("FHLB"). The Bank has approved federal funds
purchase lines with six other banks with an aggregate credit line of $49
million. In addition, the Bank may apply for up to $16 million of State of
Colorado time deposits. The Bank also has available a $153 million line of
credit from the FHLB. Borrowings under the FHLB line are required to be secured
by unpledged securities and qualifying loans. Unpledged securities available to
collateralize FHLB borrowing's and securities sold under agreements to
repurchase totaled $54.7 million at December 31, 1999.
For the year ended December 31, 1999, cash and cash equivalents decreased
by $1.4 million. This decrease was primarily the result of $132.0 million in
net cash used by investing activities (mainly loan and lease originations).
Offsetting this decrease were net cash inflows from financing activities
(primarily increases in customer deposits) of $120.4 million and net cash
provided by operating activities of $10.2 million.
For the year ended December 31, 1998, cash and cash equivalents decreased
by $7.7 million. Contributing to the decline in cash and cash equivalents was
cash used in investing activities of $114.4 million (mainly loan and lease
originations and security purchases) which were not entirely offset by cash
generated by financing activities (primarily increased customer deposits, short
term borrowings, and proceeds from the issuance of common stock) of $99.1
million. Net cash provided by operating activities was $7.6 million.
28
<PAGE>
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
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. We have
successfully modified or replaced our information processing systems so that
those systems will properly utilize dates beyond December 31, 1999.
The Company completed its "Year 2000 Program" efforts prior to December 31,
1999. The Company utilizes third party servicers for some of its information and
data processing needs. Validation of these third-party provided systems was
completed during the third quarter of 1999. No major issues were reported
related to third-party servicers over the year 2000 transition. The Company
expects, but cannot guarantee, that all of these third party servicers will
continue to be compliant. The Company continues to monitor its systems,
servicers and products for any unanticipated issues that may not have
manifested.
In order to achieve and confirm year 2000 readiness, significant costs
were incurred to test, 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.
The aggregate increase in operating expense to achieve Year 2000 readiness is
estimated to be $1.9 million, of which $973,000 has been incurred through
December 31, 1999, including approximately $649,000 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.
The Company developed business resumption plans for each significant
business unit in the event that its remediation plan was not completed in time
or failed for reasons that were not foreseen. In the event of such a failure,
these plans outlined the steps that would be taken to remediate the situation
and minimize the effect on customers and losses to the Company. These plans were
tested in the third quarter of 1999.
The Company has not experienced any significant Y2K issues subsequent
to 1999 year end. Although the Company believes it has taken appropriate steps
to address Y2K readiness, there is no guarantee that the Company's efforts will
prevent a material adverse impact on the results of operations and financial
condition.
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 January 1, 2001, requires business enterprises to
29
<PAGE>
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 35 through 63 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 2000 Annual Meeting of Shareholders and is incorporated
herein by reference.
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 2000 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 2000 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 2000 Annual
Meeting of Shareholders and is incorporated herein by reference.
30
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits and Index of Exhibits.
(1) 3.1 Amended and restated Articles of Incorporation of the Registrant.
(1) 3.2 Amended and restated Bylaws of the Registrant.
(1) 10.1 Colorado Business Bankshares, Inc. 1998 Stock Incentive Plan.
(1) 10.2 Amended and Restated Colorado Business Bankshares, Inc. 1997
Incentive Stock Option Plan.
(1) 10.3 Amended and Restated Colorado Business Bankshares, Inc. 1995
Incentive Stock Option Plan.
(1) 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.
+(1) 10.5 License Agreement, dated as of November 19, 1997, by and between Jack
Henry & Associates, Inc. and Colorado Business Bank, N.A.
+(1) 10.6 Contract Modification, dated as of November 19, 1997, by and between
Jack Henry & Associates, Inc. and Colorado Business Bank, N.A.
+(1) 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.
(1) 10.8 Employment Agreement, dated as of March 1, 1995, by and between
Equitable Bankshares of Colorado, Inc. and Jonathan C. Lorenz.
(1) 10.9 Employment Agreement, dated as of May 8, 1995, by and between
Equitable Bankshares of Colorado, Inc. and Virginia K. Berkeley.
(1) 10.10 Employment Agreement, dated as of January 3, 1998, by and between
Colorado Business Bankshares, Inc. and Richard J. Dalton.
(1) 10.11 Employment Agreement, dated as of February 29, 1996, by and between
Equitable Bankshares of Colorado, Inc. and Darrell J. Schulte.
(1) 10.12 Employment Agreement, dated as of June 12, 1995, by and between
Colorado Business Bankshares, Inc. and Charles E. Holmes.
(1) 10.13 Employment Agreement, dated as of November 16, 1997, by and
between Colorado Business Bankshares, Inc. and Andrew L. Bacon.
(1) 10.14 Employment Agreement, dated as of October 1, 1997, by and
between Colorado Business Bankshares, Inc. and K. Denise Albrecht.
(1) 10.15 Employment Agreement, dated as of March 29, 1996, by and between
Colorado Business Leasing, Inc. and Richard M. Hall, Jr.
31
<PAGE>
(1) 10.16 Employment Agreement, dated as of September 29, 1995, by and between
Equitable Bankshares of Colorado, Inc. and Katherine H. Kaley.
(1) 10.17 Employment Agreement, dated as of January 8, 1996, by and
between Colorado Business Bankshares, Inc. and Robert J. Ostertag.
(1) 10.18 Retail Lease, dated as of April 1, 1991, by and between
Southbridge Plaza, L.P. and Equitable Bank of Littleton, N.A.
(1) 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.
(1) 10.20 Office Lease, dated as of December 2, 1996, by and between Elliott
Kiowa, Inc. and Colorado Business Bank, N.A.
(1) 10.21 Lease, dated as of December 1, 1997, by and between Spencer
Enterprises and Colorado Business Bank, N.A.
(1) 10.22 Office Building Lease, dated as of July 19, 1995, by and between
Chrisman, Bynum & Johnson P.C. and Equitable Bank of Littleton.
(1) 10.23 Office Lease, dated as of February 23, 1996, by and between
Colorado Business Leasing, Inc. and Denver Place Associates Limited
Partnership.
(2) 10.24 Lease Agreement between Kesef, LLC and Colorado Business Bankshares,
Inc.
(2) 10.25 Office Lease Between SFP Realty, Ltd., L.L.P. and Colorado Business
Bank of Boulder National Association
(2) 10.26 Office Building Lease between Hanover Resources Inc. and Colorado
Business Bank, N.A.
(2) 10.27 Employment Agreement between Colorado Business Bankshares, Inc. and
Kevin G. Quinn
(3) 10.28 Lease Agreement between Edwards Interchange II, LLC and Colorado
Business Bank, National Association
(3) 10.29 Office Lease between Bank One, Colorado, N.A., as Trustee for the
Frank G. Jamison Trust, dated September 2, 1956 and Colorado Business
Bank, N.A.
(4) 10.30 Lease, dated July 27, 1999, between Joan H. Travis and Colorado
Business Bank, N.A.
(4) 10.31 Employment Agreement, dated April 12, 1999, by and between Colorado
Business Bankshares, Inc. and Randal Garman.
10.32 Employment Agreement, dated May 20, 1998, by and between Colorado
Business Bankshares, Inc. and J. Henry Schonewise.
(1) 21.1 List of subsidiaries.
32
<PAGE>
27.1 Financial Data Schedule.
____________
(1) Incorporated herein by reference from the Registrant's Registration
Statement on Form SB-2 (File No. 333-50037).
(2) Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1998, as filed on November
13, 1998.
(3) Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1999, as filed on May 17,
1999.
(4) Incorporated herein by reference from the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1999, as filed on November
12, 1999.
+ 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,
1999.
33
<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, 2000
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
- ---------------------------
Steven Bangert Chief Executive Officer March 29, 2000
/s/ Jonathan C. Lorenz Vice Chairman of the Board
- --------------------------- and President March 29, 2000
Jonathan C. Lorenz
/s/ Richard J. Dalton Executive Vice President and
- --------------------------- Chief Financial Officer March 29, 2000
Richard J. Dalton
/s/ Lyne B. Andrich Senior Vice President and
- --------------------------- Controller March 29, 2000
Lyne B. Andrich
/s/ Virginia K. Berkeley Director March 29, 2000
- ---------------------------
Virginia K. Berkeley
/s/ Mark S. Kipnis Director March 29, 2000
- ---------------------------
Mark S. Kipnis
/s/ Noel N. Rothman Director March 29, 2000
- ---------------------------
Noel N. Rothman
/s/ Howard R. Ross Director March 29, 2000
- ---------------------------
Howard R. Ross
/s/ Michael B. Burgamy Director March 29, 2000
- ---------------------------
Michael B. Burgamy
/s/ Timothy J. Travis Director March 29, 2000
- ---------------------------
Timothy J. Travis
34
<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, 1999 and
1998, 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 1999 and 1998 consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1999 and 1998, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE, LLP
February 25, 2000
Denver, Colorado
35
<PAGE>
<TABLE>
<CAPTION>
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 18,687,000 $ 20,058,000
Investment securities available for sale (cost of $102,949,000
and $95,994,000, respectively) 101,456,000 96,463,000
Investment securities held to maturity (fair value of $5,648,000
and $9,481,000, respectively) 5,620,000 9,370,000
Other investments 2,845,000 2,104,000
Total investments 109,921,000 107,937,000
Loans and leases, net 346,094,000 223,279,000
Excess of cost over fair value of net assets acquired, net 4,243,000 4,682,000
Investment in operating leases 4,047,000 4,180,000
Premises and equipment, net 3,606,000 2,884,000
Accrued interest receivable 2,167,000 1,597,000
Deferred income taxes 2,192,000 934,000
Other 1,052,000 999,000
------------- -------------
TOTAL ASSETS $ 492,009,000 $ 366,550,000
============= =============
</TABLE>
See notes to consolidated financial statements.
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
LIABILITIES:
Deposits:
Demand $106,492,000 $ 95,169,000
NOW and money market 148,685,000 101,455,000
Savings 5,896,000 6,931,000
Certificates of deposit 122,256,000 69,473,000
------------ ------------
Total deposits 383,329,000 273,028,000
Federal funds purchased 1,300,000 3,500,000
Securities sold under agreements to repurchase 33,053,000 24,956,000
Advances from the Federal Home Loan Bank 30,980,000 26,120,000
Accrued interest and other liabilities 2,996,000 1,774,000
------------ ------------
Total liabilities 451,658,000 329,378,000
MINORITY INTEREST
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Cumulative preferred, $.01 par value; 2,000,000 shares
authorized; None outstanding
Common, $.01 par value; 25,000,000 shares authorized;
6,674,659 and 6,673,468 issued and outstanding, respectively 67,000 67,000
Additional paid-in capital 29,994,000 29,839,000
Retained earnings 11,224,000 6,972,000
Accumulated other comprehensive (loss) income,
net of income tax of ($559,000) and $172,000, respectively (934,000) 294,000
------------ ------------
Total shareholders' equity 40,351,000 37,172,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $492,009,000 $366,550,000
============ ============
</TABLE>
<PAGE>
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
INTEREST INCOME:
Interest and fees on loans and leases $ 25,934,000 $ 19,640,000
Interest on investments 6,475,000 4,259,000
------------ ------------
Total interest income 32,409,000 23,899,000
INTEREST EXPENSE:
Interest on deposits 8,846,000 6,812,000
Interest on short-term borrowings 3,008,000 1,464,000
Interest on note payable 25,000 301,000
------------ ------------
Total interest expense 11,879,000 8,577,000
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN AND LEASE LOSSES 20,530,000 15,322,000
PROVISION FOR LOAN AND LEASE LOSSES 1,473,000 1,188,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 19,057,000 14,134,000
------------ ------------
OTHER INCOME:
Service charges 1,152,000 945,000
Operating lease income 2,348,000 2,370,000
Other income 1,110,000 931,000
------------ ------------
Total other income 4,610,000 4,246,000
OTHER EXPENSE:
Salaries and employee benefits 8,124,000 6,836,000
Occupancy expenses, premises and equipment 2,831,000 1,868,000
Depreciation on leases 2,015,000 1,889,000
Amortization of intangibles 442,000 442,000
Other 2,334,000 2,098,000
------------ ------------
Total other expense 15,746,000 13,133,000
(Continued)
38
<PAGE>
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
INCOME BEFORE INCOME TAXES 7,921,000 5,247,000
PROVISION FOR INCOME TAXES 3,002,000 2,031,000
----------- -----------
NET INCOME 4,919,000 3,216,000
----------- -----------
UNREALIZED (DEPRECIATION) APPRECIATION ON AVAILABLE
FOR SALE SECURITIES, net of tax (1,228,000) 184,000
----------- -----------
COMPREHENSIVE INCOME $ 3,691,000 $ 3,400,000
=========== ===========
EARNINGS PER SHARE:
Basic $ 0.74 $ 0.53
=========== ===========
Diluted $ 0.72 $ 0.51
=========== ===========
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
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, 1998 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 $110,000 - - - - - 184,000 184,000
NET INCOME - - - - 3,216,000 - 3,216,000
--------- -------- ----------- ------- ----------- ----------- ------------- -----------
BALANCE, DECEMBER 31, 1998 6,673,468 67,000 29,839,000 - - 6,972,000 294,000 37,172,000
TAX EFFECT ON EXERCISE OF NON-
QUALIFIED STOCK OPTIONS - - 146,000 - - - - 146,000
OPTIONS EXERCISED 1,191 - 9,000 - - - - 9,000
DIVIDENDS PAID - COMMON
($ .10) PER SHARE - - - - - (667,000) - (667,000)
NET CHANGE IN UNREALIZED DEPRECIATION
ON AVAILABLE FOR SALE SECURITIES,
net of income taxes of ($731,000) - - - - - - (1,228,000) (1,228,000)
NET INCOME - - - - - 4,919,000 - 4,919,000
--------- -------- ----------- ------- ----------- ----------- ------------- -----------
BALANCE, DECEMBER 31, 1999 6,674,659 $ 67,000 $29,994,000 - $ - $11,224,000 $ (934,000) $40,351,000
========= ======== =========== ======= =========== =========== ============= ===========
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,919,000 $ 3,216,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization on securities 195,000 248,000
Depreciation and amortization 3,447,000 2,964,000
Provision for loan and lease losses 1,473,000 1,188,000
Deferred income taxes (527,000) (264,000)
Gain on sale of securities (44,000) (162,000)
(Gain) loss on sale of premises and equipment (4,000) 30,000
Changes in:
Accrued interest receivable (570,000) (266,000)
Other assets (53,000) 620,000
Accrued interest and other liabilities 1,368,000 (18,000)
----------- -----------
Net cash provided by operating activities 10,204,000 7,556,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in other investments (741,000) 119,000
Purchase of available for sale securities (48,851,000) (86,941,000)
Proceeds from maturities of held to maturity
securities 3,740,000 5,503,000
Proceeds from maturities and sale of available
for sale securities 41,759,000 32,374,000
Loan and lease originations and repayments, net (126,409,000) (63,431,000)
Purchase of premises and equipment (1,724,000) (2,579,000)
Proceeds from sale of premises and equipment 251,000 573,000
----------- -----------
Net cash used in investing activities (131,975,000) (114,382,000)
(Continued)
41
<PAGE>
<TABLE>
<CAPTION>
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 1998
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market,
and savings accounts $ 57,518,000 $ 53,351,000
Net increase (decrease) in certificates of deposit 52,783,000 (1,381,000)
Net (decrease) increase in federal funds purchased (2,200,000) 3,500,000
Net increase in securities sold under agreements
to repurchase 8,097,000 11,932,000
Advances from the Federal Home Loan Bank 110,400,000 24,000,000
Repayment of Federal Home Loan Bank advances (105,540,000) (1,140,000)
Payment on notes payable - (7,500,000)
Proceeds from issuance of common stock - 17,524,000
Dividends paid on common stock (667,000) -
Dividends paid on preferred stock - (77,000)
Proceeds from options exercised 9,000 400,000
Redemption of preferred stock - (1,500,000)
Net cash provided by financing activities 120,400,000 99,109,000
------------- ------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (1,371,000) (7,717,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 20,058,000 27,775,000
------------- ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 18,687,000 $ 20,058,000
============= ============
SUPPLEMENTAL DISCLOSURES OF
CASH INFORMATION:
Cash paid during the year for:
Interest $ 11,446,000 $ 8,549,000
============= ============
Income taxes $ 2,889,000 $ 2,542,000
============= ============
See notes to consolidated financial statements. (Concluded)
</TABLE>
42
<PAGE>
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
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 commercial banking institution with nine locations in the
Denver metropolitan area, and one in Edwards, Colorado. Leasing provides
equipment leasing primarily to middle-market companies. In preparing its
financial statements, management of the Company is required to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant changes in the near-term relate to the determination of the
allowance for loan and lease losses, the valuation of real estate acquired
through foreclosures or in satisfaction of loans, lease residuals and
valuation of property under operating leases. The following is a summary of
the Company's significant accounting and reporting policies.
Consolidation - The consolidated financial statements include the accounts of
the Parent, the Bank 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 Due From Banks - The Company considers all liquid investments with
original maturities of three months or less to be cash equivalents.
Investments - The Company classifies its investment securities as held to
maturity, available for sale, or trading according to management's intent.
As of December 31, 1999 and 1998, 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 and are reported at fair market value as determined
by quoted market prices. Unrealized holding gains and losses, net of tax,
are reported as a net amount in accumulated other comprehensive income
(loss) until realized.
Premiums and discounts are recognized in interest income using the level-
yield method over the period to maturity. Declines in the fair value of
individual 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
43
<PAGE>
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.
Other investments, including primarily Federal Home Loan Bank and Federal
Reserve Bank stock, are accounted for under the cost method.
Loans and Leases - Loans and leases that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off are
reported at their outstanding principal balance adjusted for any charge-offs,
the allowance for loan and lease losses, deferred fees or costs on originated
loans and leases, and unamortized premiums or discounts on purchased loans.
Loan fees and certain costs of originating loans and leases are deferred and
the net amount is amortized over the contractual life of the related loans
and leases. Interest is accrued and credited to income daily based on the
principal balance outstanding. The accrual of interest income is generally
discontinued when a loan or lease becomes 90 days past due as to principal
and interest. When a loan is designated as nonaccrual, the current period's
accrued interest receivable is charged against current earnings while any
portions applicable to prior periods are charged against the allowance for
loan and lease losses. Interest payments received on nonaccrual loans are
applied to the principal balance of the loan. Management may elect to
continue the accrual of interest when the loan is in the process of
collection and the realizable value of collateral is sufficient to cover the
principal balance and accrued interest.
Net Investment in Direct Financing Leases - The Company has entered into
various lease agreements which are accounted for as direct financing leases,
in accordance with Statement of Financial Accounting Standards No. 13.
Under this method, the present value of the future lease payments, the
present value of the unguaranteed residual and initial direct costs are
recorded as assets, which are equal to the fair value of the equipment
leased. In each period, initial direct costs are amortized and interest
income, which is included in income from direct financing leases, is
recognized as a constant percentage return on the net investment in the
lease.
Residual values are established at lease inception equal to the estimated
value, as determined by the Company, to be received from the equipment
following termination of the initial lease. In estimating such values, the
Company considers all relevant information and circumstances regarding the
equipment and the lessee. Any permanent reduction in the estimated residual
value of lease property is charged to operations in the period it occurs.
Allowance for Loan and Lease Losses - The allowance for loan and lease losses
is established as losses are estimated to have occurred through a provision
for loan and lease losses charged to earnings. Loan losses are charged
against the allowance when management believes the uncollectibilty of a loan
balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibilty of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
44
<PAGE>
A loan is considered impaired when, based on current information and events,
it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis
by either the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Excess of Cost Over Fair Value of Net Assets Acquired - Excess of cost over
fair value of net assets acquired is amortized by the straight-line method
over 15 years. The Company reviews such assets for impairment at least
annually.
Investment in Operating Leases - The Company has entered into various
equipment leases accounted for as operating leases in accordance with
Statement of Financial Accounting Standards No. 13. The equipment, which is
reported as investment in operating leases, is depreciated over the estimated
useful life or lease term, if shorter.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation and amortization, which is calculated by the
straight-line method over the estimated useful lives of the respective assets
as follows:
Furniture, fixtures and equipment 3 to 10 years
Leasehold improvements are capitalized and amortized using the straight-line
method over the terms of the respective leases or the estimated useful lives
of the improvements, whichever is shorter.
Real Estate Acquired through Foreclosure - Assets acquired by foreclosure or
in settlement of debt and held for sale are valued at estimated fair value as
of the date of foreclosure, and a related valuation allowance is provided for
estimated costs to sell the assets. Management periodically evaluates the
value of foreclosed assets held for sale and increases the valuation
allowance for any subsequent declines in fair value less selling costs.
Subsequent declines in value are charged to operations.
Income Taxes - A deferred income tax liability or asset is recognized for
temporary differences which exist in the recognition of certain income and
expense items for financial statement reporting purposes in periods different
than for tax reporting purposes. The provision for income taxes is based on
the amount of current and deferred income taxes payable or refundable at the
date of the financial statements as measured by the provisions of current tax
laws.
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.
45
<PAGE>
Reclassifications - Certain reclassifications have been made to the 1998
financial statements to conform with the 1999 presentation.
Recent Accounting Pronouncements - SFAS No. 133, "Accounting 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 2001. The adoption of SFAS No. 133 is
not expected to have a material effect on the consolidated financial
statements.
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, 1999 Cost Gains Losses Value
-----------------
<S> <C> <C> <C> <C>
Available for sale securities:
Mortgage-backed securities $ 90,467,000 $ 464,000 $ 1,326,000 $ 89,605,000
U.S. treasury 3,540,000 - 73,000 3,467,000
Obligations of states and
political subdivisions 275,000 34,000 - 309,000
U.S. government agencies 8,667,000 - 592,000 8,075,000
------------ ---------- ----------- ------------
$102,949,000 $ 498,000 $ 1,991,000 $101,456,000
============ ========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held to maturity securities
Mortgage-backed securities $ 4,788,000 $ 40,000 $ 3,000 $ 4,825,000
Obligations of states and
political subdivisions 490,000 40,000 - 494,000
U.S. government agencies 342,000 - 13,000 329,000
------------ ---------- ----------- ------------
$ 5,620,000 $ 40,000 $ 16,000 $ 5.749.000
============ ========== =========== ============
</TABLE>
46
<PAGE>
<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:
Mortgage-backed securities $ 6,993,000 $ 93,000 $ - $ 7,086,000
U. S. treasury 1,007,000 4,000 - $ 1,011,000
Obligations of states and
political subdivisions 965,000 29,000 - 994,000
U.S. government agencies 405,000 - 15,000 390,000
------------ ---------- ----------- ------------
$ 9,370,000 $ 126,000 $ 15,000 $ 9,481,000
============ ========== =========== ============
</TABLE>
The amortized cost and estimated fair value of investments in debt securities
at December 31, 1999 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 $ 1,989,000 $ 1,968,000 $ 490,000 $ 494,000
Due after one year through five years 1,551,000 1,499,000 - -
Due after five years through ten years 275,000 309,000 342,000 329,000
Due after ten years 8,667,000 8,075,000 - -
Mortgage-backed securities 90,467,000 89,605,000 4,788,000 4,825,000
------------- ------------- ----------- ----------
$ 102,949,000 $ 101,456,000 $ 5,620,000 $5,648,000
============= ============= =========== ==========
</TABLE>
47
<PAGE>
During the years ended December 31, 1999 and 1998, there were no sales of
held to maturity securities. Proceeds from sales of available for sale
securities totaled $9,858,000 and $14,716,000, respectively during the years
ended December 31, 1999 and 1998. The related gross realized gains were
$48,000 and $162,000, respectively.
Investment securities with an approximate fair value of $15,897,000 and
$9,893,000 were pledged to secure public deposits of $12,146,000 and
$7,081,000 at December 31, 1999 and 1998, respectively.
Obligations of states and political subdivisions at December 31, 1999 and
1998 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, 1999 consists primarily of Federal Home
Loan Bank stock (carrying value $1,579,000) and Federal Reserve Bank stock
(carrying value $876,000). In addition, the Bank had $390,000 in an
investment partnership being accounted for under 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.
3. LOANS AND LEASES
Categories of loans and leases, net of deferred fees at December 31, include:
1999 1998
Commercial $130,428,000 $104,745,000
Real estate - mortgage 123,341,000 56,941,000
Real estate - construction 53,552,000 34,210,000
Consumer 21,873,000 16,913,000
Direct financing leases, net 21,485,000 13,741,000
------------ ------------
350,679,000 226,550,000
Less: Allowance for loan and lease losses 4,585,000 3,271,000
------------ ------------
$346,094,000 $223,279,000
============ ============
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, 1999 and 1998, respectively:
1999 1998
Balance, beginning of period $ 2,914,000 $2,139,000
New loans 9,653,000 7,240,000
Principal paydowns and payoffs (8,871,000) (6,465,000)
------------ ----------
Balance, end of period $ 3,696,000 $2,914,000
============ ==========
48
<PAGE>
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 $1,304,000
and $3,994,000 at December 31, 1999 and 1998, respectively.
Transactions in the allowance for loan and lease losses are summarized as
follows:
Years Ended December 31,
1999 1998
Balance, beginning of year $3,271,000 $2,248,000
Provision for loan and lease losses 1,473,000 1,188,000
---------- ----------
4,744,000 3,436,000
Loans charged off, net of recoveries of $26,000
for 1999 and $71,000 for 1998 (159,000) (165,000)
---------- ----------
Balance, end of year $4,585,000 $3,271,000
========== ==========
The recorded investment in loans that are considered to be impaired under
SFAS No. 114 as amended by SFAS No. 118 (all of which were on a non-accrual
basis) was $683,000 and $467,000 at December 31, 1999 and 1998, respectively
(all of which have a related allowance for loan and lease loss). The
allowance for loan and lease losses applicable to impaired loans was $160,000
and $176,000 at December 31, 1999 and 1998, respectively. Interest of
$61,000 and $43,000 was recognized on average impaired loans of $550,000 and
$639,000 during 1999 and 1998, respectively. The amount of additional
interest income that would have been recorded if the loans had been current
in accordance with the original terms is insignificant for the years ended
December 31, 1999 and 1998.
4. INVESTMENT IN LEASES
The Company is the lessor of equipment under agreements expiring in various
future years. Certain of the equipment leases provide for additional rents,
based on use in excess of a stipulated minimum number of hours, and allow the
lessees to purchase the equipment for fair value at the end of the lease
terms.
Property leased or held for lease to others under operating leases consists
of the following at December 31, 1999 and 1998:
1999 1998
Equipment $6,862,000 $6,408,000
Unamortized initial direct costs 73,000 77,000
---------- ----------
6,935,000 6,485,000
Less accumulated depreciation 2,888,000 2,305,000
---------- ----------
Total $4,047,000 $4,180,000
========== ==========
49
<PAGE>
The Company's net investment in direct financing leases consists of the
following at December 31, 1999 and 1998:
1999 1998
Minimum lease payments receivable $22,968,000 $ 15,324,000
Unamortized initial direct costs 354,000 216,000
Estimated unguaranteed residual values 503,000 148,000
Unearned income (2,340,000) (1,947,000)
----------- ------------
Total $21,485,000 $ 13,741,000
=========== ============
At December 31, 1999, future minimum lease payments receivable under direct
financing leases and noncancelable operating leases are as follows:
Direct Operating
Financing Leases Operating Leases
2000 $ 9,057,000 $ 2,269,000
2001 7,418,000 1,518,000
2002 4,334,000 915,000
2003 1,727,000 72,000
2004 432,000 -
----------- -----------
Total $22,968,000 $ 4,774,000
=========== ===========
5. PREMISES AND EQUIPMENT
The major classes of premises and equipment are summarized as follows:
December 31,
1999 1998
Leasehold improvements $ 1,807,000 $ 1,055,000
Furniture, fixtures, and equipment 5,393,000 4,465,000
7,200,000 5,520,000
Accumulated depreciation 3,594,000 2,636,000
----------- -----------
$ 3,606,000 $ 2,884,000
=========== ===========
50
<PAGE>
6. CERTIFICATES OF DEPOSIT
The composition of certificates of deposit is as follows:
December 31,
1999 1998
Less than $100,000
$100,000 and more $ 23,870,000 $ 27,311,000
98,386,000 42,162,000
------------ ------------
$122,256,000 $ 69,473,000
============ ============
Related interest expense is as follows:
Years Ended December 31,
1999 1998
Less than $100,000 $ 1,320,000 $ 1,166,000
$100,000 and more 3,337,000 2,658,000
------------ ------------
$ 4,657,000 $ 3,824,000
============ ============
Maturities of certificates of deposit of $100,000 and more are as follows:
December 31,
1999
Less than three months $ 57,975,000
Three months up to six months 28,338,000
Six months up to one year 6,250,000
One year and over 5,823,000
------------
$ 98,386,000
============
7. BORROWED FUNDS
The Company has advances from the Federal Home Loan Bank of Topeka (FHLB)
with interest rates that range from 5.18% to 6.89%. Advances are
collateralized by qualifying loans and investment securities not otherwise
pledged as collateral.
51
<PAGE>
Aggregate annual maturities of advances are as follows:
Year
2000 $ 30,140,000
2001 140,000
2002 140,000
2003 140,000
2004 140,000
Thereafter 280,000
------------
Total $ 30,980,000
============
Securities sold under agreements to repurchase are summarized as follows:
December 31,
1999 1998
Securities with an estimated fair value of
$53,827,000 in 1999 and $33,062,000 in 1998 $ 33,053,000 $ 24,956,000
============ ============
The Company enters into sales of securities under agreements to repurchase.
The amounts received under these agreements represent short-term borrowings
and are reflected as a liability in the consolidated statements of condition.
Securities sold under agreements to repurchase averaged $40,421,000 and
$18,811,000 and the maximum amounts outstanding at any month-end during 1999
and 1998 were $51,982,000 and $24,956,000, respectively. At December 31,
1999, the weighted average interest rate was 4.53%.
8. INCOME TAXES
The components of consolidated income tax expense are as follows:
Years Ended December 31,
1999 1998
Current tax expense $ 3,529,000 $ 2,295,000
Deferred tax benefit (527,000) (264,000)
----------- -----------
Total $ 3,002,000 $ 2,031,000
=========== ===========
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:
52
<PAGE>
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 1,594,000 $ 1,097,000
Unrealized loss on available-for-sale securities 559,000 -
True lease adjustment 438,000 -
Depreciation - 23,000
Deferred loan fees 309,000 170,000
Vacation and other accrued liabilities 49,000 30,000
Other 84,000 53,000
----------- -----------
Total deferred tax assets 3,033,000 1,373,000
----------- -----------
Deferred tax liabilities:
Depreciation 227,000 -
Sale of assets 288,000 -
Building leasehold improvements - 95,000
Unrealized gain on available-for-sale securities - 172,000
Deferred initial direct lease costs 179,000 110,000
Prepaid assets 147,000 62,000
----------- -----------
Total deferred tax liabilities 841,000 439,000
----------- -----------
Net deferred tax assets $ 2,192,000 $ 934,000
=========== ===========
</TABLE>
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Computed at the statutory rate (34%) $ 2,693,000 $ 1,784,000
Increase (decrease) resulting from:
Tax exempt interest income on loans and securities (22,000) (24,000)
Nondeductible goodwill amortization 149,000 148,000
State income taxes, net of federal income tax effect 256,000 71,000
Meals and entertainment 26,000 -
Other (100,000) 52,000
----------- -----------
Actual tax provision $ 3,002,000 $ 2,031,000
=========== ===========
</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
53
<PAGE>
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 - The Company has adopted several incentive stock option plans
to reward and provide long-term incentives for directors and key employees
of the Company. The term of all options issued may not exceed ten years.
The 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.
The 1995 Incentive Stock Option Plan (the "1995 Plan") authorizes the
issuance of 197,925 shares of Common Stock. One-fourth of the options
included under the 1995 Plan vest on each of the first four anniversaries of
the grant. Under the 1995 Plan, Incentive Stock Options may not be granted
at an exercise price of less than the fair market value of the Common Stock
on the date of grant. Shares available for grant at December 31, 1999
totaled 3,412.
The 1997 Incentive Stock Option Plan (the "1997 Plan") reserves 101,036
shares for issuance at not less than the market value of the Company's stock
at the date of grant. The majority of the options issued under the 1997 Plan
are exercisable commencing one year from the date of grant and vest 25% per
year thereafter becoming fully exercisable after four years. Shares
available for grant at December 31, 1999 totaled 14,534.
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. Options granted under the 1998 plan have vesting schedules ranging
from immediately exercisable to being exercisable four years from the grant
date. Shares available for grant at December 31, 1999 totaled 65,756. In
January 2000, the Company's Board of Directors approved, subject to
shareholder approval, an amendment to the 1998 plan that will increase the
number of shares eligible to be granted to 425,000.
54
<PAGE>
The following is a summary of changes in shares under option (excluding
Other Options discussed above):
<TABLE>
<CAPTION>
1999 1998
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding, beginning of year 277,826 $ 3.83 245,051 $ 3.12
Granted 166,110 15.94 39,844 8.60
Exercised 1,191 7.43 - -
Forfeited 4,022 8.49 7,069 6.15
------- ------ ------- ------
Outstanding, end of year 438,723 $ 8.10 277,826 $ 3.83
======= ====== ======= ======
Options exercisable, end of year 234,264 $ 5.46 127,827 $ 2.75
======= ====== ======= ======
</TABLE>
The outstanding options at December 31, 1999 were exercisable at prices
ranging from $2.12 to $18.00 per share. The weighted-average remaining
contractual life of options outstanding at December 31, 1999 was 7.57 years.
The Company has elected to continue to account for its stock options using
the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25 and related interpretations. Accordingly, no compensation cost has
been recognized for its stock option plans. The Company estimated the fair
value of options granted in 1999 and 1998 to be $538,000 and $41,000,
respectively using the Black-Scholes option pricing model prescribed by SFAS
No. 123, "Accounting for Stock-Based Compensation." The fair value of each
stock option grant is estimated using the Black-Scholes option pricing model
with the following weighted average assumptions for 1999 and 1998,
respectively: risk-free interest rate of 6.56% and 4.72%; expected dividend
yield of 1.64% and 0%; expected life of five years; and expected volatility
of 38.09% and 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 1999 and 1998 would have
been a decrease of $131,000 and $48,000, respectively. The effect on
earnings per share is not material.
Dividends - At December 31, 1999, 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, 1999, the Bank could have
paid total dividends to the Company of approximately $8.6 million, without
prior regulatory approval.
55
<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>
1999 1998
<S> <C> <C>
Net income $ 4,919,000 $ 3,216,000
Less: Preferred stock dividends - 77,000
----------- -----------
Income available to common shareholders $ 4,919,000 $ 3,139,000
Weighted average shares outstanding -
basic earnings per share 6,673,484 5,880,419
Effect of dilutive securities - stock options 191,509 214,488
----------- -----------
Weighted average shares outstanding -
diluted earnings per share 6,864,993 6,094,907
=========== ===========
</TABLE>
In January 2000, the Company's Board of Directors approved the adoption of
an Employee Stock Purchase Plan ("ESPP"), subject to shareholder approval,
which provides that all employees may elect to have a percentage of their
payroll deducted and applied to the purchase of Common Stock at a discount.
In addition, the Company may contribute up to 50% of an employee's deduction
toward the purchase of additional Common Stock. The ESPP will be
administered by a committee of two or more directors of the Company
appointed by the Board of Directors that are not employees or officers of
the Company.
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 1999 and 1998 were $277,000 and $149,000, respectively.
Lease Commitments - The Company entered into various operating lease
agreements for office space. Most of the leases are subject to rent
escalation provisions in subsequent years, and have renewal options at the
end of the initial lease terms. Total rental expense for the year ended
December 31, 1999 and 1998 was $1,034,000 and $686,000, respectively. The
Company's corporate office lease expires June 30, 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, 1999 under all noncancelable operating leases
are as follows:
<TABLE>
<S> <C>
2000 $ 1,249,000
2001 1,133,000
2002 1,103,000
2003 1,069,000
2004 878,000
Thereafter 3,625,000
-----------
Total $ 9,057,000
===========
</TABLE>
56
<PAGE>
Minimum payments have not been reduced by minimum sublease rentals of
$69,000 due in the future under a non-cancelable sublease.
Financial Instruments with Off-Balance Sheet Risk - In the normal course of
business the Company has entered into financial instruments which are not
reflected in the accompanying consolidated financial statements. These
financial instruments include commitments to extend credit and stand-by
letters of credit. At December 31, 1999, the Company had the following
commitments:
<TABLE>
<S> <C>
Commitments to originate commercial or
real estate construction loans and unused
lines of credit granted to customers $ 160,717,000
=============
Commitments to fund consumer loans:
Personal lines of credit and equity lines $ 8,486,000
=============
Overdraft protection plans $ 4,831,000
=============
Letters of credit $ 4,811,000
=============
</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
57
<PAGE>
regulatory framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines that involve quantitative measures of
the Company and the Bank's assets, liabilities, and certain off-balance-
sheet items as calculated under regulatory accounting practices. The Company
and the Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets, and of Tier I capital to average
assets. Management believes, as of December 31, 1999 and 1998, that the
Company and Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 1999, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following table.
There are no conditions or events that management believes have changed the
Bank's categories.
The following table shows the Company and the Bank's actual capital amounts
and ratios and regulatory thresholds as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
To Be "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of --------------------------- ------------------------------ ----------------------------
December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Company
Total capital
(to risk weighted assets $ 41,622,000 10.7 % $ 31,265,000 8.0 % N/A N/A
Tier I capital
(to risk weighted assets) 37,037,000 9.5 % 15,632,000 4.0 % N/A N/A
Tier I capital
(to average assets) 37,037,000 7.8 % 18,893,000 4.0 % N/A N/A
Colorado Business Bank, N.A.
Total capital
(to risk weighted assets) $ 40,297,000 10.3 % $ 31,242,000 8.0 % $39,052,000 10.0 %
Tier I capital
(to risk weighted assets) 35,712,000 9.1 % 15,621,000 4.0 % 23,431,000 6.0 %
Tier I capital
(to average assets) 35,712,000 7.6 % 18,872,000 4.0 % 23,591,000 5.0 %
</TABLE>
58
<PAGE>
<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 % 13,205,000 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 % 13,764,000 4.0 % 15,305,000 5.0 %
</TABLE>
12. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the total of (1) net income plus (2) all
other changes in net assets arising from non-owner sources, which are
referred to as other comprehensive income (loss). Presented below are the
changes in other comprehensive income (loss) for the periods indicated.
<TABLE>
<S> <C> <C>
1999 1998
Other Comprehensive income (loss), before tax>:
Unrelaized (loss) gain on available for sale
securities arising during the period $ (1,959,000) $ 455,000
Reclassificationj adjustment for gains
arising during the period - (161,000)
------------ ---------
Other comprehensive (loss) income, before tax (1,959,000) 294,000
Tax benefit (expense (loss) related to items of
other comprehensive (loss) income 731,000 (110,000)
------------ ---------
Other comprehensive (loss) income, net of tax $ (1,228,000) $ 184,000
============ =========
</TABLE>
59
<PAGE>
13. 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, 1999 December 31, 1998
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 18,687,000 $ 18,687,000 $ 20,258,000 $ 20,258,000
Investment securities available-for-sale 101,456,000 101,456,000 96,463,000 96,463,000
Investment securities held-to-maturity 5,620,000 5,648,000 9,370,000 9,481,000
Other investments 2,845,000 2,845,000 2,104,000 2,104,000
Loans and leases, net 346,094,000 340,028,000 223,279,000 223,015,000
Accrued interest receivable 2,167,000 2,167,000 1,597,000 1,597,000
Financial liabilities:
Deposits 383,329,000 348,011,000 273,028,000 258,240,000
Federal funds purchased 1,300,000 1,300,000 3,500,000 3,500,000
Securities sold under agreements to repurchase 33,053,000 33,050,000 24,956,000 24,937,000
Advances from Federal Home Loan Bank 30,980,000 30,926,000 26,120,000 26,185,000
Accrued interest payable 829,000 829,000 397,000 397,000
</TABLE>
The estimation methodologies utilized by the Company are summarized as
follows:
Cash and Due From Banks - For cash and due from banks the carrying amount is
a reasonable estimate of fair value.
Investment Securities - For investment securities, fair value equals the
quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
investment securities.
Other Investments - The estimated fair value of other investments
approximates their carrying value.
Loans and Leases - The fair value of fixed rate loans and leases is
estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. In computing the estimate of fair
value for all loans and leases, the estimated cash flows and/or carrying
value have been reduced by specific and general reserves for loan losses.
Accrued Interest Receivable/Payable - The carrying amount of accrued
interest receivable/payable is a reasonable estimate of fair value due to
the short-term nature of these amounts.
60
<PAGE>
Deposits - The fair value of demand deposits, NOW, savings accounts, and
money market deposits is estimated by discounting the expected life of each
deposit category at an index of the Federal Home Loan Bank advance rate
curve. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits with similar remaining
maturities.
Federal Funds Purchased - The estimated fair value of variable rate borrowed
funds approximates their carrying value.
Securities Sold under Agreements to Repurchase and Advances from the Federal
Home Loan Bank - Estimated fair value is based on discounting cash flows for
comparable instruments.
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, 1999 and 1998. 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.
14. SEGMENTS
The Company's principal activities include Commercial Banking and Equipment
Leasing. Commercial banking offers a broad range of sophisticated banking
products and services, including credit, cash management, investment,
deposit and trust products. The Equipment Leasing segment offers leasing
programs for computers, telecommunications equipment, telephone systems,
business furniture, manufacturing equipment, materials handling equipment
and other capital equipment.
The financial information for each business segment reflect those which are
specifically identifiable or which are allocated based on an internal
allocation method. The allocation has been consistently applied for all
periods presented. Revenues from affiliated transactions, principally the
Commercial Banking division's funding of the Equipment Leasing activity, are
charged generally at rates available to and transacted with unaffiliated
customers.
Results of operations and selected financial information by operating
segment are as follows:
61
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
Dollars in thousands: 1999 1998
<S> <C> <C>
Total interest income:
Commercial Banking $ 32,201 $ 24,022
Equipment Leasing 1,435 932
Holding Company 25 89
Eliminations (1,252) (1,144)
-------- --------
Consolidated $ 32,409 $ 23,899
======== ========
Total interest expense
Commercial Banking $ 11,843 $ 8,335
Equipment Leasing 1,287 1,085
Holding Company - 301
Eliminations (1,251) (1,144)
-------- --------
Consolidated $ 11,879 $ 8,577
======== ========
Provision for loan and lease losses:
Commercial Banking $ 1,425 $ 1,114
Equipment Leasing 48 74
-------- --------
Consolidated $ 1,473 $ 1,188
======== ========
Other noninterest income:
Commercial Banking $ 2,243 $ 1,769
Equipment Leasing 2,538 2,521
Holding Company 5,896 4,033
Eliminations (6,067) (4,077)
-------- --------
Consolidated $ 4,610 $ 4,246
======== ========
Depreciation and amortization:
Commercial Banking $ 1,366 $ 1,032
Equipment Leasing 2,053 1,914
Holding Company 28 18
Eliminations - -
-------- --------
Consolidated $ 3,447 $ 2,964
-------- --------
Income tax expense (benefit):
Commercial Banking $ 3,043 $ 2,341
Equipment Leasing 69 (36)
Holding Company (110) (274)
-------- --------
Consolidated $ 3,002 $ 2,031
======== ========
</TABLE>
62
<PAGE>
Years Ended December 31,
Dollars in thousands: 1999 1998
Net income (loss):
Commercial Banking $ 5,140 $ 3,649
Equipment Leasing 146 (52)
Holding Company 4,919 3,216
Eliminations (5,286) (3,597)
-------- --------
Consolidated $ 4,919 $ 3,216
======== ========
Identifiable assets:
Commercial Banking $491,376 $365,837
Equipment Leasing 26,137 18,512
Holding Company 41,015 37,279
Eliminations (66,519) (55,078)
-------- --------
Consolidated $492,009 $366,550
======== ========
Capital expenditures:
Commercial Banking $ 1,469 $ 2,416
Equipment Leasing 77 32
Holding Company 178 131
-------- --------
Consolidated $ 1,724 $ 2,579
======== ========
<PAGE>
EXHIBIT 10.32
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 20th
day of May, 1998 , by and between Colorado Business Bankshares, Inc., a
Colorado corporation ("Company"), and J. Henry Schonewise ("Employee'').
WITNESSETH:
WHEREAS, Employee desires to be employed by Company or one of its
subsidiaries and the parties desire to set forth certain conditions of
Employee's employment as hereinafter set forth.
NOW, THEREFORE, the parties agree as follows:
1. EMPLOYMENT. Company hereby agrees to employ Employee, and
----------
Employee hereby agrees to be employed by Company, as (a) Senior Vice President
of Company's subsidiary Colorado Business Bank ("CBB"), and (b) such other
different executive capacities with the Company, CBB or any other Company
subsidiary as may be determined from time to time by the Boards of Directors of
Company, CBB or such other subsidiary.
2. RESPONSIBILITIES OF EMPLOYMENT. During the term of Employee's
------------------------------
employment, Employee:
(a) shall diligently and faithfully serve Company and its subsidiaries
in such executive capacities as may be determined from time to time by the
Boards of Directors of Company and its subsidiaries, and Employee shall
devote Employee's best efforts and entire business time, services and
attention to the advancement of Company's interests;
(b) shall not, without the prior written consent of the Board of
Directors of Company, engage in any other employment or business, directly
or indirectly, as a sole proprietor, a member of a partnership or limited
liability company, as a director, officer, employee or shareholder of a
corporation not affiliated with Company, or as a consultant or otherwise,
whether for compensation or otherwise, which could reasonably be expected
to or does interfere with Employee's performance of Employee's duties
hereunder or which business is in competition in any way with the business
then being conducted by Company and its subsidiaries; provided, however,
that the provisions of this subparagraph (b) shall not be deemed to
prohibit Employee's ownership of stock in any publicly owned corporation so
long as Employee's ownership, directly and indirectly, when aggregated with
the direct and indirect ownership of all members of Employee's family, does
not exceed one percent (1%.) of the total outstanding stock of such
publicly owned corporation, measured by reference to either market value or
voting power;
<PAGE>
(c) shall diligently and faithfully carry out the policies, programs
and directions of the Boards of Directors of Company and its subsidiaries;
(d) shall fully cooperate with such other officers of Company and its
subsidiaries as may be elected or appointed by the Boards of Directors of
Company and its subsidiaries; and
(e) shall report to the appropriate executive officer of Company.
3. COMPENSATION. Company will compensate Employee for Employee's services
------------
during the term of this Agreement and Employee's employment hereunder as
follows:
(a) Basic Compensation. Company shall pay to Employee as a minimum
------------------
basic compensation the sum of Eighty Thousand Dollars ($ 80,000.00) per
year, payable in equal semi-monthly installments. Employee's basic
compensation may be increased from time to time in the sole discretion of
Company's Board of Directors.
(b) Benefits. Employee shall be entitled to participate in any and
--------
all other benefits from time to time afforded executive employees of
Company, including, without limitation, health, accident, hospitalization
and life insurance programs. Company shall additionally pay the monthly
(not initial or initiation) dues for Employee at community or business
related clubs or activities to be agreed upon by Employee and Company.
(c) Reimbursement of Expenses. Employee shall be entitled to
-------------------------
reimbursement of ordinary and necessary out-of-pocket expenses reasonably
incurred by Employee on behalf of Company in the course of performing
Employee's duties hereunder, subject to Employee furnishing appropriate
documentation relative to such expenses in form and substance satisfactory
to Company.
(d) Vacations. Employee shall be entitled to four ( 4 ) weeks paid
---------
vacation each year, subject to Company's general vacation policy.
(e) Discretionary Bonus Plan. Company is in the process of
------------------------
developing a discretionary bonus plan for key executives. Employee shall be
entitled to participate in such discretionary bonus plan.
(f) Allocations. As Company and Employee intend that Employee may
-----------
be a dual employee of Company and one or more of its subsidiaries, Company
may allocate to one or more of its subsidiaries any portion of Employee's
basic and other compensation that Company and one or more of its
subsidiaries deem to be a lawful and appropriate allocation, but no such
allocation will relieve Company of any of its obligations to Employee under
this Agreement.
<PAGE>
4. TERM AND TERMINATION.
--------------------
(a) Term. The term of Employee's employment shall be a one (1) year term
-----
beginning on the date hereof. Upon expiration of the stated term of this
Agreement, Employee's employment with Company shall revert to the status of
employment at will and shall thereafter be subject to termination by either
party and at any time regardless of cause.
(b) Termination. Upon termination of this Agreement by Company, by
-----------
Employee or upon the death or disability of Employee, the rights and obligations
of Employee shall be as follows:
(i) Termination by Employee. In the event Employee elects to
-----------------------
terminate Employee's employment hereunder, this Agreement shall immediately
terminate without any further obligation on the part of Company, except
that Company shall pay to Employee such compensation pursuant to Paragraph
3 hereof as may be accrued and unpaid on the date of termination of
employment.
(ii) Termination by Company for Cause. If Employee's employment
--------------------------------
hereunder is terminated by Company for cause, this Agreement shall
immediately terminate without any further obligation on the part of
Company, except that Company shall pay to Employee such compensation
pursuant to Paragraph 3 hereof as may be accrued and unpaid on the date of
such termination of employment. For purposes of this Agreement, "cause"
shall mean willful failure or neglect of Employee to perform Employee's
duties as prescribed herein, the conviction of a felony, theft,
embezzlement or improper use of corporate funds by Employee, self dealing
detrimental to Company, any attempt to obtain any personal profit from any
transaction in which Company has an interest or any breach of the terms of
Paragraphs 6 or 7 of this Agreement by Employee.
(ii) Termination by Company for Other Reasons. Company shall have the
----------------------------------------
right at any time to terminate Employee' s employment hereunder for any reason
by giving Employee written notice (which notice shall fix the date as of which
Employee's employment is to terminate) of its intention to do so. If Employee's
employment hereunder is terminated by Company other than for cause, Company
shall be obligated to pay Employee the severance benefits set forth in Paragraph
4(c) hereof.
(iii) Constructive Discharge. If Employee is ever constructively
----------------------
discharged, Employee may terminate this Agreement and Employee's employment
hereunder by delivering written notice to Company no later than thirty (30) days
before the effective date of termination. If Employee is constructively
discharged, Company shall be obligated to pay Employee the severance benefits
set forth in Paragraph 4(c) hereof. For purposes of the foregoing,
"constructive discharge" means the occurrence of any one or more of the
following: (i) Employee is removed from all of the offices described in
--------
Paragraph 1 hereof; (ii) Company fails to vest with or removes from Employee the
duties, responsibilities, authority or resources that Employee reasonably needs
to competently perform the duties of Employee's office; (iii) Company decreases
Employee's basic compensation or arbitrarily and capriciously decreases
Employee's bonus; or (iv) Company transfers Employee to a location outside the
Denver metropolitan area;
<PAGE>
and in any of such events, Company fails to cure any of the above within thirty
(30) days after Employee gives Company written notice of such breach.
(v) Termination Upon Change of Control. If a Change of Control occurs,
----------------------------------
Employee may terminate this Agreement and Employee's employment hereunder for
any reason within two (2) years after a Change of Control occurs by delivering
written notice of termination to Company or its successor no less than thirty
(30) days before the effective date of termination (any such notice by Employee
which can be construed as a notice under either Paragraph 4 (b) (iv) or this
Paragraph 4 (b) (v) shall be deemed a notice under this Paragraph 4 (b) (v). If
Employee so terminates, Company shall be obligated to pay Employee two (2) times
the severance benefits set forth in Paragraph 4 (c) hereof, with the exception
that the Paragraph 4(c)(ii) bonus component shall be based upon a full year and
not prorated to the date of Employee's termination.
(A) A "Change of Control" will be deemed to have occurred if: a) any person (as
such term is defined in Section 13 (d) or 14 (d) of the Securities Exchange Act
of 1934, as amended (the 111934 Act") other than a person who is a shareholder
of Company as of the date of this Agreement acquires beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the 1934 Act) of fifty
percent (50%) or more of the combined voting power of the then outstanding
voting securities of Company; or b) the individuals who were members of
Company's Board of Directors as of the date of this Agreement (the "Current
Board Members") cease for any reason to constitute a majority of the Board of
Directors of Company or its successor; however, if the election or the
nomination for election of any new director of Company or its successor is
approved by a vote of a majority of the individuals who are Current Board
Members, such new director shall, for the purposes of this paragraph, be
considered a Current Board Member; or c) Company's stockholders approve (1) a
merger or consolidation of Company or CBB and the stockholders of Company
immediately before such merger or consolidation do not, as a result of such
merger or consolidation, own, directly or indirectly, more than fifty percent
(50%) of the combined voting power of the then outstanding voting securities of
the entity resulting from such merger or consolidation in substantially the same
proportion as their ownership of the combined voting power of the outstanding
securities of Company immediately before such merger or consolidation; or (2) a
complete liquidation or dissolution or an agreement for the sale or other
disposition of all or substantially all of the assets or stock of Company or CBB
(provided that a complete liquidation or dissolution or the sale or other
disposition of all or substantially all the assets or stock of just CBB will be
deemed a "Change of Control", only if Employee is not offered a position with
Company or one of its subsidiaries with responsibilities, although not
necessarily the same title, and reporting requirements consistent with those
responsibilities and reporting requirements set forth in Paragraph 2 hereof).
(B) Notwithstanding and in lieu of Paragraph 4(b)(v)(A), a Change of
Control will not be deemed to have occurred: a) solely because fifty percent
(50%) or more of the combined voting power of the then outstanding voting
securities of Company are acquired by (1) a trustee or other fiduciary holding
securities under one or more employee benefit plans maintained for employees of
Company and its subsidiaries, or (2) any person pursuant to the will or trust of
any existing stockholder of Company, or who is a member of the immediate family
of such stockholder, or (3) any corporation which, immediately prior to such
acquisition, is owned
<PAGE>
directly or indirectly by the stockholders in the same proportion as their
ownership of stock immediately prior to such acquisition; or b) if Employee
agrees in writing to waive a particular Change of Control for the purposes of
this Agreement.
(vi) Termination Upon Employee's Disability. In the event
--------------------------------------
Employee's employment is terminated by Company due to Employee's
disability, Company shall be obligated to pay Employee the severance
benefits set forth in Paragraph 4(c) hereof. For purposes of the foregoing,
"disability" shall mean Employee's inability due to illness or other
physical or mental disability to substantially perform Employee's duties as
prescribed herein for a period of sixty (60) days within any consecutive
six (6) month period, and any action to be taken hereunder based on
disability shall not be effective until the expiration of such sixty (60)
day period.
(vii) Termination Upon Employee's Death. In the event that Employee
---------------------------------
dies while employed by Company, then Company shall be obligated to pay
Employee's estate the severance benefits set forth in Paragraph 4(c)
hereof.
(viii) Continuing Obligations of Employee. Notwithstanding anything
-----------------------------------
to the contrary contained herein, termination of this Agreement or
Employee's employment hereunder, for whatsoever reason or for no reason at
all, by Employee or otherwise, shall not be deemed in any way to affect
Employee's obligations under Paragraphs 6 and 7 of this Agreement, with
respect to which Employee shall remain bound.
(c) Severance Benefits. Provided Employee is in compliance with
------------------
Paragraph 4(b)(viii) hereof, Company will pay or provide the following severance
benefits to Employee in lieu of any separation payments otherwise provided upon
termination of employment under any other severance pay or similar plan or
policy of Company:
(i) Twelve (12) consecutive monthly payments each equal to one-
twelfth (1/12th) of Employee's annual basic compensation in effect
immediately prior to Employee's termination;
(ii) Twelve (12) consecutive monthly payments each equal to one-
twelfth (1/12th) of the higher of (a) Employee's discretionary bonus for the
previous calendar year, or (b) the average of Employee's discretionary bonus
for the previous three (3) calendar years (or such fewer calendar years as
Employee has been employed), in each case prorated to the date of Employee
termination.
iii) For the twelve (12) month period following the date of
termination of Employee' s employment, Company will maintain in full force and
effect for the continued benefit of Employee each employee benefit plan in which
Employee was a participant immediately prior to the date of Employee's
termination, unless an essentially equivalent and no less favorable benefit is
provided by a subsequent employer at no additional cost to Employee. If the
terms of any employee benefit plan of Company do not permit continued
participation by Employee, then Company will arrange to provide to Employee (at
Company' s cost) a benefit substantially similar to and no less favorable than
the benefit Employee was entitled to receive
<PAGE>
under such plan at the end of the period of coverage. (This provision
specifically is not applicable to any car, car phone, parking and club dues,
which benefits, if any, end upon Employee's date of termination of employment.)
(iv) For the twelve (12) month period following the date of termination of
Employee's employment, Company will treat Employee for all purposes as an
Employee under all of Company's retirement plans in which Employee was a
participant on the date of termination of Employee's employment or under which
Employee would become eligible during such twelve (12) month period (hereinafter
referred to collectively as the "Plan"). Benefits due to Employee under the Plan
shall be computed as if Employee had continued to be an Employee of Company for
the twelve (12) month period following termination of employment. If under the
terms of the Plan such continued coverage is not permitted, Company will pay to
Employee or Employee's estate a supplemental benefit in an amount which, when
added to the benefits that Employee is entitled to receive under the Plan, shall
equal the amount that Employee would have received under the Plan had Employee
remained an employee of Company during such twelve (12) month period.
(v) If any excise tax imposed under Internal Revenue Code Section 4999 or
any successor provision, as amended after the date hereof, is due and owing by
Employee as a result of any amount paid or payable pursuant to this Paragraph 4
(c), Company shall indemnify and hold Employee harmless against all such excise
taxes and any interest, penalties or costs with respect thereto.
(vi) Company will be obligated to make all payments that become due to
Employee under this Paragraph 4 (c) whether or not Employee obtains other
employment following termination. The payments and other benefits provided for
in this Paragraph 4 (c) are intended to supplement any compensation or other
benefits that have accrued or vested with respect to Employee or Employee's
account as of the effective date of termination.
(vii) Company may elect to defer any payments that may become due to
Employee under this Paragraph 4(c) if, at the time the payments become due,
Company, CBB or any of Company's other subsidiaries is not in compliance with
any regulatory-mandated minimum capital requirements or if making the payments
would cause Company's, CBB's or any of Company's other subsidiaries' capital to
fall below such minimum capital requirements. In this event, Company will
resume making the payments as soon as it can do so without violating such
minimum capital requirements.
5. SALE OR REORGANIZATION OF COMPANY. This Agreement shall not restrict
---------------------------------
the sale, transfer, consolidation, liquidation, reorganization or disposition of
the assets of Company and to the extent that the business of Company is
conducted in another form or through another entity or entities, such entity or
entities shall be obligated to fulfill Company's obligations hereunder.
6. RESTRICTIVE COVENANT. It is mutually recognized and agreed that the
--------------------
services to be rendered pursuant to this Agreement by Employee are special,
unique and of extraordinary character. Therefore, as a condition to Company's
obligations hereunder,
<PAGE>
Employee agrees that without Company's prior written consent, during the term of
this Agreement and for a period ending on the first anniversary of the date of
termination of Employee's employment hereunder, regardless of cause, Employee
will not engage in any manner, directly or indirectly, to solicit or induce any
employee or agent of Company or any of its subsidiaries to terminate employment
with Company or any of its subsidiaries, as the case may be, or solicit or
induce any customer of Company or any of its subsidiaries to become a customer
of any person, firm, partnership, corporation, trust or other entity that owns,
controls or is a bank, savings and loan association, credit union or similar
financial institution. Furthermore, Employee will at no time during or
subsequent to the term of Employee's employment by Company make any statements
or take any actions which could reasonably be expected to damage the reputation
or business of Company. It is further recognized and agreed that irreparable
injury will result to Company, its businesses and property in the event of a
breach of this covenant by Employee, that such injury would be difficult if not
impossible to ascertain, and therefore, any remedy at law for any breach by
Employee of this covenant will be inadequate and Company shall be entitled to
temporary and permanent injunctive relief without the necessity of proving
actual damage to Company by reason of any such breach. In addition, in the event
of a breach of this covenant by Employee, Company shall also be entitled to
recover reasonable costs and attorneys' fees incurred in connection with the
enforcement of its rights hereunder. Whenever used herein, Company shall be
deemed to include any successors or any other person or entity which may
hereafter acquire the business of Company or any of its subsidiaries. The
foregoing notwithstanding, should the assets of Company be disposed of in such a
manner that no purchaser thereof has acquired a going business, then Employee
shall not be bound by the covenants expressed in this paragraph.
7. TRADE SECRETS AND CONFIDENTIAL INFORMATION. Employee hereby covenants
------------------------------------------
and agrees that Employee will not, except as may be required in connection with
Employee's employment under this Agreement or compelled by any judicial or
administrative order, directly or indirectly, use or disclose to any other
person, firm or corporation, whether during or subsequent to the term of
Employee's employment by Company, irrespective of the time, manner or cause of
the termination of Employee's employment, any information of a proprietary
nature belonging to Company, or which could be reasonably expected to have an
adverse effect on Company, its businesses, property or financial condition,
including but not limited to records, data, documents, processes,
specifications, methods of operation, techniques and know-how, plans, policies,
customer lists, the names and addresses of suppliers or representatives,
investigations or other matters of any kind or description relating to the
products, services, suppliers, customers, sales or businesses of Company. All
records, files, documents, equipment and the like relating to Company's
businesses which Employee shall prepare, use or observe shall be and remain the
sole property of Company, and upon termination of this Agreement or Employee's
employment hereunder for any reason, Employee shall return to the possession of
Company any items of that nature and any copies thereof which Employee may have
in Employee's possession.
8. INDEMNITY.
---------
(a) Indemnification. Company will indemnify Employee (and, upon
---------------
Employee's death, Employees heirs, executors and administrators) to the
fullest extent
<PAGE>
permitted by law against all expenses, including reasonable attorneys'
fees, court and investigative costs, judgments, fines and amounts paid in
settlement (collectively, "Expenses") reasonably incurred by Employee in
connection with or arising out of any pending, threatened or completed
action, suit or proceeding in which Employee may become involved by reason
of Employee having been an officer or director of Company or any of its
subsidiaries. The indemnification rights provided for herein are not
exclusive and will supplement any rights to indemnification that Employee
may have under any applicable bylaw or charter provision of Company or any
of its subsidiaries, or any resolution of Company or any of its
subsidiaries, or any applicable statute.
(b) Advancement of Expenses. In the event that Employee becomes a
-----------------------
party, or is threatened to be made a party, to any pending, threatened or
completed action, suit or proceeding for which Company or any of its
subsidiaries is permitted or required to indemnify Employee under this
Agreement, any applicable bylaw or charter provision of Company or any of
its subsidiaries, any resolution of Company or any of its subsidiaries, or
any applicable statute, Company will, to the fullest extent permitted by
law, advance all Expenses incurred by Employee in connection with the
investigation, defense, settlement or appeal of any threatened, pending or
completed action, suit or proceeding, subject to receipt by Company of a
written undertaking from Employee to reimburse Company for all Expenses
actually paid by Company to or on behalf of Employee in the event it shall
be ultimately determined that Company or any of its subsidiaries cannot
lawfully indemnify Employee for such Expenses, and to assign to Company all
rights of Employee to indemnification under any policy of directors' and
officers' liability insurance to the extent of the amount of Expenses
actually paid by Company to or on behalf of Employee.
(c) Litigation. Unless precluded by an actual or potential conflict
----------
of interest, Company will have the right to recommend counsel to Employee
to represent Employee in connection with any claim covered by this Section
8. Further, Employee's choice of counsel, Employee's decision to contest or
settle any such claim, and the terms and amount of the settlement of any
such claim will be subject to Company's prior reasonable approval in
writing.
9. ARBITRATION. Any disputes arising out of this Agreement or connected
-----------
with Employee's employment shall be submitted by Employee and Company to
arbitration by the American Arbitration Association or its successor, and the
determination of the American Arbitration Association or its successor shall be
final and absolute. The arbitrator shall be governed by the duly promulgated
rules and regulations of the American Arbitration Association or its successor,
and the pertinent provisions of the laws of the State of Colorado relating to
arbitration. The decision of the arbitrator may be entered as a judgment in any
court in the State of Colorado or elsewhere. The prevailing party shall be
entitled to receive reasonable attorneys' fees incurred in connection with such
arbitration in addition to such other costs and expenses as the arbitrators may
award.
10. INTERPRETATION. This Agreement shall be construed in accordance with
--------------
the internal laws of the State of Colorado. The titles of the paragraphs have
been inserted as a matter
<PAGE>
of convenience of reference only and shall not be construed to control or affect
the meaning or construction of this Agreement.
11. SEVERABILITY. In the event that any portion of this Agreement is found
------------
to be in violation of or conflict with any federal or state law, the parties
agree that said portion shall be modified only to the extent necessary to enable
it to comply with such law.
12. ASSIGNMENT. This Agreement shall not be assignable by Employee, but
shall be binding upon and inure to the benefit of the heirs, successors and
assigns of Employee and Company.
13. NOTICES. All notices or other communications in connection with this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered, sent by professional courier or mailed first class, postage prepaid
and addressed as follows:
(i) If to Company, addressed to:
Colorado Business Bankshares, Inc.
821 - 17th Street
Denver, Colorado 80202
Attn: Steven Bangert
(ii) If to Employee, addressed to:
J. Henry Schonewise
3565 S. Oneida Way
Denver, CO 80237
or such other address or addressed to the attention of such other person or
persons as either of the parties may notify the other in accordance with the
provisions of this paragraph.
14. ENTIRE AGREEMENT. This Agreement is the entire agreement and understanding
---------
of the parties hereto with respect to the subject matter hereof and supersedes
any and all prior and contemporaneous negotiations, understandings and
agreements with regard to the subject matter hereof, whether oral or written.
No representation, inducement, agreement, promise or understanding altering,
modifying, taking from or adding to the terms and conditions hereof shall have
any force or effect unless the same is in writing and validly executed by the
parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
COLORADOBUSINESS
BANKSHARES,
INC.
/s/ J. Henry Schonewise By: /s/ Steven Bangert
- ------------------------------ -----------------------------
J. Henry Schonewise Steven Bangert,
Chief Executive Officer
516-7632.01
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 18,599,000 19,927,000
<INT-BEARING-DEPOSITS> 88,000 131,000
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 104,301,000 98,567,000
<INVESTMENTS-CARRYING> 5,620,000 9,730,000
<INVESTMENTS-MARKET> (1,493,000) 469,000
<LOANS> 350,679,000 226,550,000
<ALLOWANCE> 4,585,000 3,271,000
<TOTAL-ASSETS> 492,009,000 366,550,000
<DEPOSITS> 383,329,000 273,028,000
<SHORT-TERM> 65,333,000 54,576,000
<LIABILITIES-OTHER> 2,996,000 1,774,000
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 67,000 67,000
<OTHER-SE> 40,284,000 37,105,000
<TOTAL-LIABILITIES-AND-EQUITY> 492,009,000 366,550,000
<INTEREST-LOAN> 25,934,000 19,640,000
<INTEREST-INVEST> 6,475,000 4,259,000
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 32,409,000 23,889,000
<INTEREST-DEPOSIT> 8,846,000 6,812,000
<INTEREST-EXPENSE> 11,879,000 8,577,000
<INTEREST-INCOME-NET> 20,530,000 15,322,000
<LOAN-LOSSES> 1,473,000 1,188,000
<SECURITIES-GAINS> 44,000 162,000
<EXPENSE-OTHER> 15,746,000 13,133,000
<INCOME-PRETAX> 7,921,000 5,247,000
<INCOME-PRE-EXTRAORDINARY> 4,919,000 3,216,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,919,000 3,216,000
<EPS-BASIC> 0.74 0.53
<EPS-DILUTED> 0.72 0.51
<YIELD-ACTUAL> 5.27 5.71
<LOANS-NON> 634,000 125,000
<LOANS-PAST> 49,000 4,000
<LOANS-TROUBLED> 0 338,000
<LOANS-PROBLEM> 3,852,000 4,971,000
<ALLOWANCE-OPEN> 3,271,000 2,248,000
<CHARGE-OFFS> 185,000 236,000
<RECOVERIES> 26,000 71,000
<ALLOWANCE-CLOSE> 4,585,000 3,271,000
<ALLOWANCE-DOMESTIC> 4,585,000 3,271,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 2,037,000 1,067,000
</TABLE>
