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| COBZ > SEC Filings for COBZ > Form 10-Q on 11-Aug-2008 | All Recent SEC Filings |
11-Aug-2008
Quarterly Report
This discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Form 10-Q. Certain terms used in this discussion are defined in the notes to these financial statements. For a description of our accounting policies, see Note 1 of Notes to Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2007. For a discussion of the segments included in our principal activities, see Note 10 to these financial statements.
Executive Summary
The Company is a financial holding company that offers a broad array of financial service products to its target market of small and medium-sized businesses and high-net-worth individuals. Our operating segments include commercial banking; investment banking; investment advisory and trust; and insurance.
Earnings are derived primarily from our net interest income, which is interest income less interest expense, and noninterest income earned from our fee-based business lines and banking service fees, offset by noninterest expense. As the majority of our assets are interest-earning and our liabilities are interest-bearing, changes in interest rates impact our net interest margin, the largest component of our operating revenue (which is defined as net interest income plus noninterest income). We manage our interest-earning assets and interest-bearing liabilities to reduce the impact of interest rate changes on our operating results. We have also focused on reducing our dependency on our net interest margin by increasing noninterest income.
Our Company has focused on developing an organization with personnel, management systems and products that will allow us to compete effectively and position us for growth. The cost of this process relative to our size has been high. In addition, we have operated with excess capacity during the start-up phases of various projects. As a result, relatively high levels of noninterest expense have adversely affected our earnings over the past several years. Salaries and employee benefits comprised most of this overhead category. However, we believe that our compensation levels have allowed us to recruit and retain a highly qualified management team capable of implementing our business strategies. We believe our compensation policies, which include the granting of options to purchase common stock to many employees and the offering of an employee stock purchase plan, have highly motivated our employees and enhanced our ability to maintain customer loyalty and generate earnings.
Financial and Operational Highlights
† Net income for the three and six months ended June 30, 2008 was $4.2 million and $5.8 million respectively, compared to $5.7 million and $11.5 million for the same periods in 2007.
† Diluted earnings per share for the three and six months ended June 30, 2008 were $0.18 and $0.25, compared to $0.23 and $0.47 for the same periods in 2007.
† Net interest income on a tax-equivalent basis for the three and six months ended June 30, 2008 increased to $23.7 million and $45.8 million respectively, compared to $21.8 million and $43.0 million for the same periods in 2007.
† The net interest margin on a tax-equivalent basis was 4.11% and 4.06% for the three and six months ended June 30, 2008, respectively, compared to 4.32% and 4.35% for the same periods in 2007.
† Gross loans increased $114.9 million from December 31, 2007, or 12.5% on an annualized basis.
† Provision for loan and credit losses for the three and six months ended June 30, 2008, were $5.6 million and $10.7 million compared to $0.8 million and $1.0 million for the comparable periods in 2007.
† Net loan charge-offs totaled $5.3 million for the six months ended June, 2008, or 0.57% of average loans during the period (annualized), compared to 0.01% for the same period in 2007.
† Nonperforming assets increased to $22.8 million or 0.89% of total assets at June 30, 2008, compared to $3.5 million or 0.15% of total assets at December 31, 2007.
† Investment Banking income for the three and six months ended June 30, 2008 totaled $3.2 million and $3.5 million respectively, compared to $1.0 million and $2.4 million for the same periods in 2007.
† Allowance for loan and credit losses increased to 1.32% of total loans at June 30, 2008, compared to 1.16% for the same period in 2007.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In making those critical accounting estimates, we are required to make assumptions about matters that are highly uncertain at the time of the estimate. Different estimates we could reasonably have used, or changes in the assumptions that could occur, could have a material effect on our financial condition or results of operations. A description of our critical accounting policies was provided in the Management's Discussion and Analysis of Financial Condition and Results of Operation section of our Annual Report on Form 10-K for the year ended December 31, 2007. With the exception of the adoption of SFAS 157 (see discussion at Note 11 to the Condensed Consolidated Financial Statements), there have been no changes in our critical accounting policies and no other significant changes to the assumptions and estimates related to them.
Financial Condition
Total assets were $2.5 billion at June 30, 2008, an increase of $157.2 million since December 31, 2007, relating primarily to growth in the loan and investment portfolios.
Investments. Investments increased $22.4 million from $395.7 million at December 31, 2007 to $418.0 million at June 30, 2008, primarily the result of purchases (net of paydowns) of $58.8 million of high-grade government-backed mortgage backed securities offset by $36.5 million of maturities of short-term government agency bonds. The Company manages its investment portfolio to provide interest income and to meet the collateral requirements for public deposits, our customer repurchase program and wholesale borrowings. Investments comprised 16.4% of total assets at June 30, 2008 and 16.5% at December 31, 2007.
Loans. Gross loans increased by $114.9 million to $1.96 billion as of June 30, 2008, from $1.85 billion at December 31, 2007. The increase in loans is primarily due to growth of $69.7 million in the real estate portfolio and growth of $41.7 million growth in the commercial portfolio. Approximately 88% of the year-to-date loan growth has come from the Colorado market.
June 30, 2008 December 31, 2007 June 30, 2007
% of % of % of
(in thousands) Amount Portfolio Amount Portfolio Amount Portfolio
LOANS
Commercial $ 618,677 32.0 % $ 576,959 31.6 % $ 513,817 30.9 %
Real Estate - mortgage 929,949 48.0 % 874,226 47.9 % 788,212 47.5 %
Real Estate -
construction 323,554 16.7 % 309,568 17.0 % 305,525 18.4 %
Consumer 76,457 4.0 % 71,422 3.9 % 58,749 3.5 %
Other 12,540 0.6 % 14,151 0.8 % 13,462 0.8 %
Gross loans 1,961,177 101.3 % 1,846,326 101.1 % 1,679,765 101.1 %
Less allowance for
loan losses (25,727 ) (1.3 )% (20,043 ) (1.1 )% (18,858 ) (1.1 )%
Net loans $ 1,935,450 100.0 % $ 1,826,283 100.0 % $ 1,660,907 100.0 %
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Goodwill. Goodwill increased by $2.4 million to $45.8 million at June 30, 2008, from $43.4 million at December 31, 2007. Goodwill was increased by $3.5 million related to the BDA asset acquisition and offset by a decrease of $1.1 million in adjustments related to the reclassification of intangible assets on the Wagner acquisition. Goodwill is subject to purchase price allocation adjustments for one year following an acquisition.
Accrued Interest Receivable. Accrued interest receivable decreased by $1.3 million to $8.9 million at June 30, 2008, from $10.2 million at December 31, 2007. The decrease is related to the collection of accrued interest on matured agency debentures and a decrease in the yield on the loan portfolio.
Deferred Income Taxes. Deferred income taxes increased $3.2 million to $10.9 million at June 30, 2008, from $7.7 million at December 31, 2007. The increase was primarily related to the $2.1 million tax effect of the provision for loan and credit losses (net of charge-offs and recoveries), the $0.6 million tax effect of unrealized gains recognized in other comprehensive income and $0.3 million tax effect of share-based compensation expense.
Other Assets. Other Assets increased $4.2 million to $21.9 million at June 30, 2008, from $17.7 million at December 31, 2007. Contributing to the increase was the foreclosure on $2.6 million real property (OREO), $1.0
million in accounts receivable (primarily due to the acquisitions of BDA and Wagner) and a $0.5 million increase in the fair value of interest rate swaps.
Deposits. Total deposits decreased by $90.8 million during the six months ending June 30, 2008 to $1.65 billion compared to $1.74 billion at December 31, 2007. The decrease is primarily due to a $115.4 million net decline in the CD portfolio of which $124.4 related to brokered CDs as the Company shifted to other wholesale borrowing sources. The Eurodollar deposits continue to draw new funds with growth of $23.3 to $100.8 million at June 30, 2008. Demand deposit, money market and savings accounts at June 30, 2008 were relatively stable compared to December 31, 2007. Core-deposit growth continues to be a challenge due to competition from other banks and financial service providers as well as current economic conditions.
June 30, 2008 December 31, 2007 June 30, 2007
% of % of % of
(in thousands) Amount Portfolio Amount Portfolio Amount Portfolio
DEPOSITS AND CUSTOMER
REPURCHASE AGREEMENTS
NOW and money market $ 626,500 35.1 % $ 631,391 33.0 % $ 587,272 32.3 %
Savings 10,726 0.6 % 11,546 0.6 % 11,290 0.6 %
Eurodollar 100,771 5.6 % 77,444 4.1 % 0 0.0 %
Certificates of
deposits under
$100,000 105,400 5.9 % 126,478 6.6 % 127,882 7.0 %
Certificates of
deposits $100,000 and
over 362,391 20.3 % 456,754 23.9 % 387,497 21.3 %
Total interest-bearing
deposits 1,205,788 67.6 % 1,303,613 68.2 % 1,113,941 61.3 %
Noninterest-bearing
demand deposits 446,145 25.0 % 439,076 23.0 % 459,743 25.3 %
Customer repurchase
agreements 131,717 7.4 % 168,336 8.8 % 244,257 13.4 %
Total deposits and
customer repurchase
agreements $ 1,783,650 100.0 % $ 1,911,025 100.0 % $ 1,817,941 100.0 %
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Securities Sold Under Agreements to Repurchase. Securities sold under agreement to repurchase are transacted with customers as a way to enhance our customers' interest-earning ability. Management does not consider customer repurchase agreements to be a wholesale funding source, but rather an additional treasury management service provided to our customer base. Our customer repurchase agreements are based on an overnight investment sweep that can fluctuate based on our customers' operating account balances. Securities sold under agreements to repurchase decreased $36.6 million, partially due to the migration of funds to the Eurodollar sweep product that offers a higher interest rate.
Other Short-Term Borrowings. Other short-term borrowings increased $282.4 million to $479.8 million at June 30, 2008, from $197.4 million at December 31, 2007. Other short-term borrowings consist of federal funds purchased, overnight and term borrowings from the Federal Home Loan Bank (FHLB), advances on a revolving line-of-credit and short-term borrowings from the U.S. Treasury. The increase in other short-term borrowings is primarily due to a shift from brokered CDs to federal funds purchased and FHLB advances and growth in the loan portfolio. Other short-term borrowings are used as part of our liquidity management strategy and fluctuate based on the Company's cash position. The Company's wholesale funding needs are largely dependent on core deposit levels, which have proven to be more volatile due to increased competition and slowing economic conditions. If we are unable to maintain deposit balances at a level sufficient to fund our asset growth, our composition of interest-bearing liabilities will shift toward additional wholesale funds, which typically have a higher interest cost than our core deposits.
Accrued Interest and Other Liabilities. Accrued interest and other liabilities decreased $1.1 million to $20.0 million at June 30, 2008, from $21.1 million at December 31, 2007. The decrease relates primarily to a $1.0 million decrease in accrued interest on brokered deposits as well as normal and recurring fluctuations in bonus and commissions payable.
Results of Operations
Overview
The following table presents the condensed statements of income for the three and six months ended June 30, 2008 and 2007.
Three months Ended June 30, Six Months Ended June 30,
Increase/(decrease) Increase/(decrease)
(in thousands, except per share amounts) 2008 2007 Amount % 2008 2007 Amount %
INCOME STATEMENT DATA
Interest income $ 35,639 $ 38,286 $ (2,647 ) -6.9 % $ 73,036 $ 74,643 $ (1,607 ) -2.2 %
Interest expense 12,143 16,581 (4,438 ) -26.8 % 27,562 31,923 (4,361 ) -13.7 %
NET INTEREST INCOME BEFORE PROVISION 23,496 21,705 1,791 8.3 % 45,474 42,720 2,754 6.4 %
Provision for loan losses 5,986 1,037 4,949 477.2 % 11,017 1,037 9,980 962.4 %
NET INTEREST INCOME AFTER PROVISION 17,510 20,668 (3,158 ) -15.3 % 34,457 41,683 (7,226 ) -17.3 %
Noninterest income 11,570 6,325 5,245 82.9 % 18,993 12,957 6,036 46.6 %
Noninterest expense 22,477 18,005 4,472 24.8 % 44,382 36,390 7,992 22.0 %
INCOME BEFORE INCOME TAXES 6,603 8,988 (2,385 ) -26.5 % 9,068 18,250 (9,182 ) -50.3 %
Provision for income taxes 2,420 3,328 (908 ) -27.3 % 3,290 6,707 (3,417 ) -50.9 %
NET INCOME $ 4,183 $ 5,660 $ (1,477 ) -26.1 % $ 5,778 $ 11,543 $ (5,765 ) -49.9 %
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Annualized return on average assets for the three and six months ended June 30, 2008 was 0.67% and 0.47%, respectively, compared to 1.04% and 1.08% for the same periods in 2007. Annualized return on average common shareholders' equity for the three and six months ended June 30, 2008 was 8.64% and 5.97%, respectively, compared to 11.74% and 12.43% for the same periods in 2007. The decrease in our return on average assets and common shareholders' equity is primarily attributable to the provision for loan and credit losses of $5.6 million and $10.7 million for the three and six months ended June 30, 2008, respectively. The provision for loan and credit losses totaled $0.8 million and $1.0 million for the three and six months ended June 30, 2007, respectively.
For the three and six months ended June 30, 2008, the efficiency ratio increased to 64.07% and 68.75%, respectively, from 63.47% and 64.90% for the same periods in 2007. The fee-based business lines run at a higher efficiency ratio than the Bank, although the Bank is more capital intensive. The year-to-date ratio was negatively impacted by the first quarter results that were marked by seasonally low insurance revenues, a lack of Investment Banking transactions and the recent acquisitions of BDA and Wagner. Although our efficiency ratio will continue to be under pressure due to interest margin contraction, management expects it to improve over the year as the contribution from the fee-based businesses increases and the Company's cost containment initiatives take place.
Net Interest Income. The largest component of our net income is our net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.
As the majority of our assets are interest-earning and our liabilities are interest-bearing, changes in interest rates may impact our net interest margin. The Federal Open Markets Committee ("FOMC") uses the fed funds rate, which is the interest rate used by banks to lend to each other, to influence interest rates and the economy. Changes in the fed funds rate have a direct correlation to changes in the prime rate, the underlying index for most of the variable rate loans issued by the Company. Since June 2007, the FOMC has lowered its target for the federal funds rate by 325 basis points. Although the Company maintains a relatively balanced interest rate sensitivity position, the magnitude of the rate cuts, combined with an increased shift to wholesale funding, caused our net interest margin to decrease by 21 basis points and 29 basis points for the three and six months ended June 30, 2008 respectively, from the same periods in 2007.
The following tables set forth the average amounts outstanding for each category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rate earned or paid for the three and six months ended June 30, 2008 and 2007.
For the Three Months Ended June 30,
2008 2007
Interest Average Interest Average
Average earned yield Average earned yield
(in thousands) Balance or paid or cost (1) Balance or paid or cost (1)
Assets
Federal funds sold and
other $ 7,492 $ 59 3.15 % $ 5,946 $ 122 8.21 %
Investment securities (2) 420,826 5,431 5.16 % 425,068 5,420 5.10 %
Loans (2),(3) 1,911,062 30,311 6.34 % 1,617,030 32,883 8.13 %
Allowance for loan losses (24,020 ) (18,255 )
Total interest earning
assets $ 2,315,360 $ 35,801 6.18 % $ 2,029,789 $ 38,425 7.49 %
Noninterest-earning assets
Cash and due from banks 42,674 47,872
Other 144,866 106,587
Total assets $ 2,502,900 $ 2,184,248
Liabilities and
Shareholders' Equity
Deposits
NOW and money market $ 676,456 $ 3,227 1.92 % $ 561,376 $ 4,546 3.25 %
Savings 10,969 34 1.25 % 11,320 50 1.77 %
Eurodollar 108,345 553 2.02 % - - 0.00 %
Certificates of deposit
Under $100,000 109,089 1,035 3.82 % 119,583 1,448 4.86 %
$100,000 and over 407,912 3,764 3.71 % 371,179 4,637 5.01 %
Total interest-bearing
deposits $ 1,312,771 $ 8,613 2.64 % $ 1,063,458 $ 10,681 4.03 %
Other borrowings
Securities sold under
agreements to repurchase 155,267 715 1.82 % 250,787 2,390 3.77 %
Other short-term borrowings 310,217 1,849 2.36 % 155,238 2,101 5.41 %
Junior subordinated
debentures 72,166 966 5.30 % 72,166 1,409 7.81 %
Total interest-bearing
liabilities $ 1,850,421 $ 12,143 2.62 % $ 1,541,649 $ 16,581 4.30 %
Noninterest-bearing demand
accounts 439,986 431,562
Total deposits and
interest-bearing
liabilities 2,290,407 1,973,211
Other noninterest-bearing
liabilities 17,699 17,599
Total liabilities 2,308,106 1,990,810
Shareholders' equity 194,794 193,438
Total liabilities and
shareholders' equity $ 2,502,900 $ 2,184,248
Net interest income
(taxable equivalent) $ 23,658 $ 21,844
Net interest spread 3.56 % 3.19 %
Net interest margin 4.11 % 4.32 %
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 125.13 % 131.66 %
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For the Six Months Ended June 30,
2008 2007
Interest Average Interest Average
Average earned yield Average earned yield
(in thousands) Balance or paid or cost (1) Balance or paid or cost (1)
Assets
Federal funds sold and
other $ 9,036 $ 166 3.67 % $ 6,118 $ 238 7.78 %
Investment securities (2) 403,708 10,473 5.19 % 419,689 10,745 5.12 %
Loans (2),(3) 1,877,421 62,708 6.68 % 1,587,569 63,951 8.06 %
Allowance for loan losses (22,635 ) (18,119 )
Total interest earning
assets $ 2,267,530 $ 73,347 6.47 % $ 1,995,257 $ 74,934 7.57 %
Noninterest-earning assets
Cash and due from banks 42,152 47,327
Other 140,587 107,691
Total assets $ 2,450,269 $ 2,150,275
Liabilities and
Shareholders' Equity
Deposits
NOW and money market
deposits $ 676,255 $ 7,597 2.26 % $ 558,537 $ 8,765 3.16 %
Savings 11,105 83 1.50 % 11,211 93 1.67 %
Eurodollar 100,507 1,165 2.29 % - - 0.00 %
Certificates of deposits
Under $100,000 113,965 2,391 4.22 % 106,911 2,524 4.76 %
$100,000 and over 430,718 8,916 4.16 % 353,696 8,724 4.97 %
Total interest-bearing
deposits $ 1,332,550 $ 20,152 3.04 % $ 1,030,355 $ 20,106 3.94 %
Other borrowings
Securities sold under
agreements to repurchase 152,510 1,622 2.10 % 243,873 4,580 3.74 %
Other short-term borrowings 250,357 3,572 2.82 % 165,238 4,433 5.34 %
Junior subordinated
debentures 72,166 2,217 6.08 % 72,166 2,804 7.73 %
Total interest-bearing
liabilities $ 1,807,583 $ 27,563 3.05 % $ 1,511,632 $ 31,923 4.24 %
Noninterest-bearing demand
accounts 430,497 433,447
Total deposits and
interest-bearing
liabilities 2,238,080 1,945,079
Other noninterest-bearing
liabilities 17,417 17,997
Total liabilities and
preferred securities 2,255,497 1,963,076
Shareholders' equity 194,772 187,199
Total liabilities and
shareholders' equity $ 2,450,269 $ 2,150,275
Net interest income
(taxable equivalent) $ 45,784 $ 43,011
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