Filed Pursuant to Rule 424(b)(4)
Registration Statement Nos. 333-37674
333-37674-01
PROSPECTUS
2,000,000 Capital Securities
COLORADO BUSINESS BANKSHARES CAPITAL TRUST I
10% Cumulative Capital Securities
fully, irrevocably and unconditionally guaranteed by
[LOGO OF COLORADO BUSINESS BANKSHARES, INC.]
--------------------
The capital securities represent undivided beneficial interests in the assets
of Colorado Business Bankshares Capital Trust I. The trust will invest the
proceeds of this offering of capital securities in the 10% junior subordinated
debentures of Colorado Business Bankshares, Inc.
For each of the capital securities that you own, you will receive cumulative
cash distributions at an annual rate of 10% on March 31, June 30, September 30
and December 31 of each year, beginning September 30, 2000, from payments on
the debentures. We may defer payments of distributions at any time for up to 20
consecutive quarters. The capital securities are effectively subordinated to
all our senior and subordinated indebtedness and that of our subsidiaries. The
debentures mature, and the capital securities must be redeemed by June 30,
2030. The trust may redeem the capital securities, at a redemption price of $10
per capital security, plus accrued and unpaid distributions, at any time on or
after June 30, 2005, or earlier under certain circumstances.
The capital securities will be listed on the American Stock Exchange under the
symbol "CXM.Pr" upon completion of this offering.
These securities are not savings accounts, deposits or obligations of any bank
and are not insured by the Federal Deposit Insurance Corporation or any other
governmental agency.
--------------------
Investing in the capital securities involves risks. See "Risk Factors"
beginning on page 8.
--------------------
Per Capital
Security Total
----------- -----------
Public offering price......................... $10.00 $20,000,000
Underwriting fees to be paid by Colorado
Business Bankshares, Inc..................... $ 0.40 $ 800,000
Proceeds to the trust......................... $10.00 $20,000,000
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
--------------------
Dain Rauscher Wessels
Howe Barnes Investments, Inc.
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June 19, 2000
TABLE OF CONTENTS
Page No.
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Summary.............................................................. 1
Summary Consolidated Financial Data.................................. 6
Risk Factors......................................................... 8
Cautionary Statements................................................ 16
Use of Proceeds...................................................... 17
Capitalization....................................................... 17
Accounting and Regulatory Treatment.................................. 18
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 19
Business............................................................. 33
Supervision and Regulation........................................... 47
Management........................................................... 52
Certain Relationships and Related Transactions....................... 58
Principal Shareholders............................................... 59
Description of the Trust............................................. 60
Description of the Capital Securities................................ 61
Description of the Debentures........................................ 73
Book-Entry Issuance.................................................. 82
Description of the Guarantee......................................... 83
Relationship Among the Capital Securities, the Debentures and the
Guarantee........................................................... 86
Federal Income Tax Consequences...................................... 87
ERISA Considerations................................................. 91
Underwriting......................................................... 92
Legal Matters........................................................ 93
Experts.............................................................. 93
Where You Can Find Information....................................... 93
Index to Consolidated Financial Statements........................... F-1
i
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
Because this is a summary, it may not contain all of the information that is
important to you. Therefore, you should also read the more detailed information
set forth in this prospectus and our financial statements, which begin on page
F-1 of this prospectus.
Colorado Business Bankshares, Inc.
Background
We are a bank holding company headquartered in Denver, Colorado. Our wholly-
owned subsidiary, Colorado Business Bank, N.A. (the "Bank"), is a full-service
business banking institution with nine Colorado locations, including six in the
Denver metropolitan area, two in Boulder and one in Edwards. As of March 31,
2000, we had total assets of $511.9 million, net loans and leases of $358.7
million and deposits of $419.3 million. We provide a broad range of banking
products and services, including credit, cash management, investment, deposit
and trust products, to our targeted customer base of small- and medium-sized
businesses and high net worth individuals. Each of our locations operates as a
separate business 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
conducted centrally from our downtown Denver office. As a result of this
operating approach, we believe we are well-positioned, combining the elements
of personalized service found in community banks with sophisticated banking
products and services traditionally offered by larger regional banks.
Over the past five years, our organization has grown significantly. From
December 31, 1995 to March 31, 2000, our total assets increased to $511.9
million from $160.4 million, an increase of 219%; our net loans and leases
increased to $358.7 million from $87.3 million, an increase of 311%; and our
deposits increased to $419.3 million from $137.5 million, an increase of 205%.
All of this growth has been achieved internally through:
. opening de novo branches in Boulder, Littleton, West Denver, the Denver
Tech Center and Edwards, each staffed with bankers experienced in their
respective markets;
. significantly expanding the capabilities and staffing of our commercial
lending department;
. introducing new products and services, such as: (i) internet banking,
(ii) new cash management and investment products, (iii) trust and
administrative services, and (iv) equipment leasing, in order to attract
new customers, expand our existing customer relationships and increase
non-interest income; and
. increasing our emphasis on private banking services for high net worth
individuals.
We intend to continue to build our business primarily through internal
growth initiatives, and we believe that our senior management and systems
infrastructure is adequate to support significant growth without incurring
proportionate increases in general, administrative and other non-interest
expenses. To this end, we have recently registered as a financial services
holding company under recently enacted federal legislation. Although we do not
presently intend to take advantage of all business opportunities available to
us as a financial services holding company, we intend to review opportunities
that are complementary to our market and business strategies. Our first
initiative as a financial services holding
1
company will be to provide employee benefits consulting and insurance brokerage
services to our customers. At the same time, we intend to continue to focus on
providing high quality customer service, improving efficiencies, maintaining
asset quality, controlling interest rate risk, and capitalizing on the use of
technology.
Our approach to expansion is predicated on recruiting key personnel to lead
new initiatives. While we normally consider an array of new locations and
product lines as potential expansion initiatives, we generally will proceed
only upon identifying quality management personnel with a loyal customer
following in the community or experience in the product line that is the target
of the initiative. We believe that, by focusing on individuals who are
established in their communities and are experienced in offering sophisticated
banking products and services, we enhance our market position and add growth
opportunities while managing credit risk. In addition, although we have no
current plans or agreements, we regularly explore acquisitions of all or part
of other financial institutions or financial services entities, including
opportunities in Colorado and other western states.
We were incorporated in Colorado in 1980 as Equitable Bancorporation, Inc.
After being acquired by an investor group in 1994, we changed our name to
Colorado Business Bankshares, Inc. in September 1995. Our principal executive
office is located at 821 17th Street, Denver, Colorado 80202, and our telephone
number is (303) 293-2265.
Colorado Business Bankshares Capital Trust I
Upon issuance of the capital securities offered by this prospectus, the
purchasers in this offering will own all of the issued and outstanding capital
securities of the trust. In exchange for our capital contribution to the trust,
we will own all of the common securities of the trust. The trust exists for the
following purposes:
. issuing the capital securities to the public for cash;
. issuing the common securities to us;
. investing the proceeds from the sale of the capital and common
securities in an equivalent amount of 10% junior subordinated debentures
due June 30, 2030 issued by us; and
. engaging in other activities that are incidental to those listed above.
The trust's address is 821 17th Street, Denver, Colorado 80202, and its
telephone number is (303) 293-2265.
2
The Offering
The issuer..................
Colorado Business Bankshares Capital Trust I
Securities being offered.... 2,000,000 capital securities, which represent
preferred undivided beneficial interests in the
assets of the trust. Those assets will consist
solely of the debentures and payments received
thereunder.
The trust will sell the capital securities to
the public for cash. The trust will use that
cash to buy the debentures from us.
Offering price.............. $10 per capital security.
Payment of distributions.... If you purchase the capital securities, you are
entitled to receive cumulative cash
distributions at a 10% annual rate.
Distributions will accumulate from the date the
trust issues the capital securities and will be
paid quarterly on March 31, June 30, September
30 and December 31 of each year, beginning
September 30, 2000. The record date for
distributions on the capital securities will be
the business day prior to the distribution
date. Please note that we may defer the payment
of cash distributions, as more fully described
below.
Maturity.................... The debentures will mature, and the capital
securities must be redeemed, on June 30, 2030.
We have the option, however, to shorten the
maturity date to a date not earlier than
June 30, 2005. We will not shorten the maturity
date unless we have received the prior approval
of the Board of Governors of the Federal
Reserve System, if required.
Redemption of the capital
securities is possible.....
The trust must redeem the capital securities
when the debentures are paid at maturity or
upon any earlier redemption of the debentures.
We may redeem all or part of the debentures at
any time on or after June 30, 2005. In
addition, we may redeem, at any time, all of
the debentures if:
. the interest we pay on the debentures is no
longer deductible by us for federal tax
purposes, or the trust becomes subject to
federal income tax;
. there is a change in the Investment Company
Act of 1940 that requires the trust to
register under that law; or
. there is a change in the capital adequacy
guidelines of the Federal Reserve that
results in the capital securities not being
counted as Tier 1 capital.
3
Redemption of the debentures prior to maturity
will be subject to the prior approval of the
Federal Reserve, if required. If the capital
securities are redeemed by the trust, you will
receive the liquidation amount of $10 per
capital security, plus any accrued and unpaid
distributions to the date of redemption.
We have the option to
extend the interest
payment period.............
The trust will rely solely on payments made by
us under the debentures to pay distirbutions on
the capital securities. As long as we are not
in default under the indenture relating to the
debentures, we may, at one or more times, defer
interest payments on the debentures for up to
20 consecutive quarters, but not beyond June
30, 2030. If we defer interest payments on the
debentures:
. the trust will also defer distributions on
the capital securities;
. the distributions you are entitled to will
accumulate; and
. these accumulated distributions will earn
additional interest at an annual rate of
10%, compounded quarterly.
At the end of any deferral period, we will pay
to the trust all accrued and unpaid interest
under the debentures. The trust will then pay
all accumulated and unpaid distributions to
you.
You will still be taxed if
distributions on the
capital securities are
deferred...................
If a deferral of payment occurs, you will still
be required to recognize the deferred amounts
as income for United States federal income tax
purposes in advance of receiving these amounts,
even if you are a cash basis taxpayer.
Our guarantee of payment.... We guarantee the trust will use its assets to
pay the distributions on the capital securities
and the liquidation amount upon liquidation of
the trust. However, the guarantee does not
apply when the trust does not have sufficient
funds to make the payments. If we do not make
payments on the debentures, the trust will not
have sufficient funds to make payments on the
capital securities. In this event, your remedy
is to institute a legal proceeding directly
against us for enforcement of payments under
the debentures.
We may distribute the
debentures directly to
you........................
We may, at any time, dissolve the trust and
distribute the debentures to you, subject to
the prior approval of the Federal Reserve, if
required. If we distribute the debentures, we
will
4
use our reasonable efforts to list them on a
national securities exchange or comparable
automated quotation system.
How the securities will
rank in right of payment...
Our obligations under the capital securities,
debentures and guarantee are unsecured and will
rank as follows with regard to right of
payment:
. the capital securities will rank equally
with the common securities of the trust. The
trust will pay distributions on the capital
securities and the common securities pro
rata. However, if we default with respect to
the debentures, then no distributions on the
common securities will be paid until all
accumulated and unpaid distributions on the
capital securities have been paid;
. our obligations under the debentures and the
guarantee are unsecured and generally will
rank junior in priority to our existing and
future senior and other subordinated
indebtedness; and
. because we are a holding company, the junior
subordinated debentures and the guarantee
will effectively be subordinated to all
existing and future liabilities of our
subsidiaries.
Voting rights of the
capital Securities.........
Except in limited circumstances, holders of the
capital securities will have no voting rights.
American Stock Exchange "CXM.Pr"
symbol.....................
Book-entry.................. The capital securities will be represented by a
global security that will be deposited with and
registered in the name of The Depository Trust
Company, New York, New York or its nominee.
This means that you will not receive a
certificate for the capital securities.
Use of proceeds.............
The trust will invest all of the proceeds from
the sale of the capital securities in the
debentures. We will use the net proceeds from
the sale of the debentures, which we estimate
to be approximately $18.8 million, to
contribute approximately $18.0 million to the
Bank and retain the balance for general
corporate purposes.
Before purchasing the capital securities offered by this prospectus, you
should carefully consider the "Risk Factors" beginning on page 8.
5
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data for, and
as of, the end of each of the years in the five-year period ended December 31,
1999 derived from our audited financial statements. The financial statements
for the years ended 1999, 1998 and 1997 have been audited by Deloitte & Touche,
LLP, independent auditors, and are included in this prospectus beginning on
page F-1. The financial statements for the years ended December 31, 1996 and
1995, were audited by other auditors and are not included in this prospectus.
The data set forth below, as of and for the three months ended March 31, 2000
and 1999 is unaudited and, in the opinion of management, reflects all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of the results for such interim periods. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes included in this prospectus. Results for
past periods are not necessarily indicative of results to be expected for any
future period, and the results for the three-month period ended March 31, 2000
are not necessarily indicative of the results for the entire year.
At or for the
three months
ended At or for the
March 31, year ended December 31,
----------------- --------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
Statement of Income
Data:
Interest income......... $ 10,127 $ 6,915 $ 32,409 $ 23,899 $ 18,147 $ 13,711 $ 11,231
Interest expense........ 4,106 2,396 11,879 8,577 7,016 5,323 4,400
-------- -------- -------- -------- -------- -------- --------
Net interest income
before provision for
loan and lease losses.. 6,021 4,519 20,530 15,322 11,131 8,388 6,831
Provision for loan and
lease losses........... 573 303 1,473 1,188 949 493 242
-------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for
loan and lease losses.. 5,448 4,216 19,057 14,134 10,182 7,895 6,589
Non-interest income..... 1,140 1,118 4,610 4,246 3,303 1,794 1,191
Non-interest expense.... 4,097 3,707 15,746 13,133 10,387 7,827 6,632
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 2,491 1,627 7,921 5,247 3,098 1,862 1,148
Provision for income
taxes.................. 997 620 3,002 2,031 1,245 762 432
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 1,494 $ 1,007 $ 4,919 $ 3,216 $ 1,853 $ 1,100 $ 716
======== ======== ======== ======== ======== ======== ========
Earnings per share--
basic.................. $ 0.22 $ 0.15 $ 0.74 $ 0.53 $ 0.37 $ 0.29 $ 0.19
======== ======== ======== ======== ======== ======== ========
Earnings per share--
diluted................ $ 0.22 $ 0.15 $ 0.72 $ 0.51 $ 0.36 $ 0.29 $ 0.19
======== ======== ======== ======== ======== ======== ========
Statement of Financial
Condition Data:
Total assets............ $511,926 $381,170 $492,009 $366,550 $264,059 $190,645 $160,421
Investments............. 104,898 96,566 109,921 107,937 58,784 57,571 50,991
Loans and leases........ 363,564 247,386 350,679 226,550 166,339 112,408 88,702
Allowance for loan and
lease losses........... 4,855 3,498 4,585 3,271 2,248 1,660 1,392
Deposits................ 419,308 287,194 383,329 273,028 221,058 155,310 137,513
Preferred shareholders'
equity................. -- -- -- -- 1,500 -- --
Common shareholders'
equity................. 41,658 38,091 40,351 37,172 15,925 10,189 9,066
6
At or for the
three months
ended At or for the
March 31, year ended December 31,
--------------- ------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
Key Ratios:
Return on average total
assets(1)............... 1.20% 1.09% 1.15% 1.08% 0.83% 0.64% 0.50%
Return on average common
shareholders'
equity(1)............... 14.67 10.82 12.67 11.80 12.21 11.47 8.24
Average common equity to
average assets.......... 8.15 10.11 9.11 9.10 6.35 5.54 6.01
Net interest
margin(1)(2)............ 5.23 5.35 5.27 5.71 5.52 5.46 5.44
Efficiency ratio(3)...... 57.24 66.62 62.91 67.78 72.32 76.87 82.67
Nonperforming assets to
total assets............ 0.16 0.13 0.14 0.13 0.31 0.36 0.58
Nonperforming loans and
leases to total loans
and leases.............. 0.19 0.21 0.19 0.21 0.49 0.52 0.69
Allowance for loan and
lease losses to total
loans and leases........ 1.34 1.41 1.31 1.44 1.35 1.48 1.57
Allowance for loan and
lease losses to
nonperforming loans and
leases.................. 699.57 680.54 671.30 700.40 277.19 285.22 225.97
Net charge-offs to
average loans and
leases(1)............... 0.32 0.12 0.06 0.08 0.26 0.23 0.04
Ratio of earnings to
fixed charges(4):
Excluding interest on
deposits............... 3.89 x 3.50 x 3.61 x 3.97 x 2.76 x 2.40 x 2.10 x
Including interest on
deposits............... 1.61 x 1.68 x 1.67 x 1.61 x 1.44 x 1.35 x 1.26 x
- -----------------
(1) The ratios for the three months ended March 31, 2000 and 1999 have been
annualized and are not necessarily indicative of results for the entire
year.
(2) Yields do not include adjustments for tax-exempt interest because the
amount of such interest is not material.
(3) Efficiency ratio is computed by dividing non-interest expense by the sum of
net interest income before provision for loan and lease losses and non-
interest income, excluding nonrecurring gains.
(4) For purposes of computing the ratio of earnings to fixed charges, earnings
represent income before income taxes and fixed charges. Fixed charges
represent interest expense.
7
RISK FACTORS
An investment in the capital securities involves a number of risks. We urge
you to read all of the information contained in this prospectus. In addition,
we urge you to consider carefully the following factors in evaluating us, our
business and the trust before you purchase the capital securities offered by
this prospectus.
Because the trust will rely on the payments it receives on the debentures to
fund all payments on the capital securities, and because the trust may
distribute the debentures in exchange for the capital securities, purchasers of
the capital securities are making an investment decision that relates to the
debentures, as well as the capital securities. Purchasers should carefully
review the information in this prospectus about the capital securities, the
debentures and the guarantee.
Risks Related to an Investment in Colorado Business Bankshares
Changes in economic conditions may cause us to incur loan and lease losses.
The inability of borrowers to repay loans and leases can erode our earnings
and capital. Our loan and lease portfolio is somewhat less diversified than
that of a traditional community bank because it includes a higher concentration
of larger commercial loans. Substantially all of our loans and leases are to
businesses and individuals in the Denver metropolitan area, and any decline in
the economy of this market area could impact us adversely. Recent economic
conditions in the Denver metropolitan area have been generally more favorable
than those in many other regions of the country, but there can be no assurance
that such favorable conditions will continue to prevail.
Our allowance for loan and lease losses may not be adequate to cover actual
loan losses.
As a lender, we are exposed to the risk that our customers will be unable to
repay their loans according to their terms and that any collateral securing the
payment of their loans may not be sufficient to assure repayment. Credit losses
are inherent in the lending business and could have a material adverse effect
on our operating results and our ability to make payments on the debentures. We
make various assumptions and judgments about the collectibility of our loan and
lease portfolio and provide an allowance for potential losses based on a number
of factors. If our assumptions are wrong, our allowance for loan and lease
losses may not be sufficient to cover our losses, thereby having an adverse
effect on our operating results, and may cause us to increase the allowance in
the future. In addition, although our level of delinquencies has been
historically low, due to the significant increase in loans originated over the
last few years, we cannot assure you that we will not experience an increase in
delinquencies and losses as these loans continue to age, particularly if the
favorable economic conditions in Colorado experienced during this time period
reverse. The actual amount of future provisions for loan and lease losses
cannot now be determined and may exceed the amounts of past provisions.
Additions to our allowance for loan and lease losses would decrease our net
income.
Our business is subject to various lending risks depending on the nature of the
borrower's business, its cash flow and our collateral.
Our commercial real estate loans involve higher principal amounts than other
loans, and repayment of these loans may be dependent on factors outside our
control or the control of our borrowers. At March 31, 2000, commercial real
estate loans totaled $141.5 million, or 38.9% of our total loan and lease
portfolio. Commercial real estate lending typically involves higher loan
principal amounts, and the
8
repayment of these loans generally is dependent, in large part, on sufficient
income from the properties securing the loans to cover operating expenses and
debt service. Rental income may not rise sufficiently over time to meet
increases in the loan rate at repricing or increases in operating expenses,
such as utilities and taxes. As a result, impaired loans may be more difficult
to identify without some seasoning. Because payments on loans secured by
commercial real estate often depend upon the successful operation and
management of the properties, repayment of such loans may be affected by
factors outside the borrower's control, such as adverse conditions in the real
estate market or the economy or changes in government regulation. If the cash
flow from the property is reduced, the borrower's ability to repay the loan and
the value of the security for the loan may be impaired.
Repayment of our commercial loans is often dependent on cash flow of the
borrower, which may be unpredictable, and collateral securing these loans may
fluctuate in value. Our commercial loans are primarily made based on the cash
flow of the borrower and secondarily on the underlying collateral provided by
the borrower. Most often, this collateral is accounts receivable, inventory,
equipment or real estate. In the case of loans secured by accounts receivable,
the availability of funds for the repayment of these loans may be substantially
dependent on the ability of the borrower to collect amounts due from its
customers. Other collateral securing loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the
business. Commercial loans and leases were $124.2 million, or 34.2% of our
total loan and lease portfolio, as of March 31, 2000.
Our construction loans are based upon estimates of costs to construct and
value associated with the completed project. These estimates may be
inaccurate. At March 31, 2000, total construction loans, including land
acquisition and development, totaled $54.8 million, or 15.1% of our total loan
and lease portfolio. Residential construction loans were $36.1 million, of
which approximately $23.7 million were for the construction of pre-sold houses
and $12.4 million were for houses for future sale to unidentified buyers.
Commercial construction loans comprised $18.8 million of the total portfolio,
of which approximately $13.2 million were for pre-leased buildings and $5.6
million were for commercial buildings available for lease to unidentified
tenants. Because of the uncertainties inherent in estimating construction
costs, as well as the market value of the completed project and the effects of
governmental regulation of real property, it is relatively difficult to
evaluate accurately the total funds required to complete a project and the
related loan-to-value ratio. As a result, construction loans often involve the
disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project and the ability of the borrower to sell or
lease the property, rather than the ability of the borrower or guarantor to
repay principal and interest. Delays in completing the project may arise from
labor problems, material shortages and other unpredictable contingencies. If
the estimate of construction costs is inaccurate, we may be required to advance
additional funds to complete construction. If our appraisal of the value of the
completed project proves to be overstated, we may have inadequate security for
the repayment of the loan upon completion of construction of the project.
Our consumer loans generally have a higher risk of default than our other
loans. Consumer installment loans were $20.4 million, or 5.6% of our loan
portfolio, as of March 31, 2000. Consumer loans entail greater risk than
residential mortgage loans, particularly in the case of consumer loans that are
unsecured or secured by rapidly depreciating assets. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
damage, loss or depreciation. The remaining deficiency often does not warrant
further collection efforts against the borrower beyond obtaining a deficiency
judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus, are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the
9
application of various Federal and state laws, including Federal and state
bankruptcy and insolvency laws, may limit the amount that can be recovered on
such loans.
Repayment of our direct finance leases is often dependent on cash flow of
the borrower, which may be unpredictable, and collateral securing these leases
may fluctuate in value. Leases are primarily made based on the identified cash
flow of the borrower and secondarily on the underlying collateral provided by
the borrower. Generally, leases finance 100% of the cost of the equipment,
which represents the underlying collateral. The collateral securing equipment
leases may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business. Leases were $22.7 million, or
6.2% of our total loan and lease portfolio, as of March 31, 2000.
We may experience difficulties in managing our growth.
As part of our strategy, we may expand into additional communities or
attempt to strengthen our position in our current markets by undertaking
additional de novo branch openings or new bank formations. We believe that it
may take up to eighteen months for new banking facilities to first achieve
operational profitability, due to the impact of overhead expenses and the
start-up phase of generating loans and deposits. To the extent that we
undertake growth initiatives, we are likely to continue to experience the
effects of higher operating expenses relative to operating income from the new
operations, which may have an adverse effect on our levels of reported net
income, return on average equity and return on average assets.
In addition, we may acquire banks and related businesses that we believe
provide a strategic fit with our business. To the extent that we grow through
acquisitions, we cannot assure you that we will be able to adequately and
profitably manage such growth. Acquiring other banks and businesses involves
risks commonly associated with acquisitions, including:
. potential exposure to unknown or contingent liabilities of banks and
businesses we acquire;
. exposure to potential asset quality issues of the acquired banks or
businesses;
. difficulty and expense of integrating the operations and personnel of
banks and businesses we acquire;
. potential disruption to our business;
. potential diversion of our management's time and attention;
. the possible loss of key employees and customers of the banks and
businesses we acquire; and
. incurrence of goodwill if we account for an acquisition as a purchase.
We rely heavily on our management, and the loss of any of our senior officers
may adversely affect our operations.
Consistent with our policy of focusing growth initiatives on the recruitment
of qualified personnel, we are highly dependent on the continued services of a
small number of our executive officers and key employees. The loss of the
services of any of these individuals could adversely affect our business,
financial condition, results of operations and cash flows. We do not have key
person life insurance on the life of any of these individuals. The failure to
recruit and retain key personnel could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
10
Changes in interest rates may affect our profitability.
Our profitability is in part a function of the spread between the interest
rates earned on investments and loans and the interest rates paid on deposits
and other interest-bearing liabilities. Our net interest spread and margin will
be affected by general economic conditions and other factors, including fiscal
and monetary policies of the federal government, that influence market interest
rates and our ability to respond to changes in such rates. At any given time,
our assets and liabilities will be such that they are affected differently by a
change in interest rates. As a result, an increase or decrease in rates, the
length of loan terms or the mix of adjustable and fixed rate loans in our
portfolio could have a positive or negative effect on our net income, capital
and liquidity. At March 31, 2000, our cumulative interest rate gap for the
period of less than one year was a positive 11.45%. As a general rule, banks
with positive interest rate gaps are generally more likely to be susceptible to
declines in net interest income in periods of falling interest rates and are
more likely to experience increases in net interest income in periods of rising
interest rates.
Our business and financial condition may be adversely affected by an increase
in 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 U.S. Bancorp, Inc., Banc One Corporation, Zions
Bancorporation, KeyCorp, Wells Fargo & Company and Compass Bancshares, Inc. In
addition to these regional banks, there are a number of smaller commercial
banks that operate in the area, including Guaranty Bank and Trust Company,
Colorado State Bank & Trust, First Bank Holding Company of Colorado, FirsTier
Financial, Inc., Union Bank and Trust and Citywide Banks, Inc. We compete for
loans and deposits with other banks (including those listed above), savings and
loan associations, finance companies, credit unions and mortgage bankers. In
addition to traditional financial institutions, we also compete for loans with
brokerage and investment banking companies and governmental agencies that make
available low cost or guaranteed loans to certain borrowers. Particularly in
times of high interest rates, we also face significant competition for deposits
from sellers of short-term money market securities and other corporate and
government securities.
By virtue of their larger capital bases or affiliation with larger multi-
bank holding companies, many of our competitors have substantially greater
capital resources and lending limits than we have and perform other functions
that we offer only through correspondents. Interstate banking is permitted in
Colorado, and, since January 1, 1997, unlimited state-wide branch banking has
been permitted. As a result, we have experienced, and expect to continue to
experience, greater competition in our primary service areas. Our business,
financial condition, results of operations and cash flows may be adversely
affected by 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 us at a competitive disadvantage because we may not
have the capital to participate in other lines of business to the same extent
as more highly capitalized financial service holding companies.
We continually encounter technological change, and we may have fewer resources
than our competitors to continue to invest in technological improvements.
The financial services industry is undergoing rapid technological changes,
with frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend, in part, upon our ability to address the needs of our
customers by using technology to provide products and services that will
satisfy customer demands for convenience, as well as to create additional
11
efficiencies in our operations. Many of our competitors have substantially
greater resources to invest in technological improvements. We cannot assure you
that we will be able to effectively implement new technology-driven products
and services or be successful in marketing these products and services to our
customers.
We may be required to make capital contributions to the Bank if it becomes
undercapitalized.
Under federal law, a bank holding company may be required to guarantee a
capital plan filed by an undercapitalized bank subsidiary with its primary
regulator. If the subsidiary defaults under the plan, the holding company may
be required to contribute to the capital of the subsidiary bank in an amount
equal to the lesser of 5% of the bank's assets at the time it became
undercapitalized or the amount necessary to bring the bank into compliance with
applicable capital standards. Therefore, it is possible that we will be
required to contribute capital to the Bank or any other bank that we may
acquire in the event that such bank becomes undercapitalized. If we are
required to make such capital contribution at a time when we have other
significant capital needs, our business, financial condition, results of
operations and cash flows could be adversely affected, including our ability to
make payments under the debentures to the trust.
We are subject to significant government regulation, and any regulatory changes
may adversely affect us.
The banking industry is heavily regulated under both federal and state law.
These regulations are primarily intended to protect customers, not our
creditors or stockholders. As a bank holding company, we are also subject to
extensive regulation by the Federal Reserve Board, in addition to other
regulatory and self-regulatory organizations. Regulations affecting banks and
financial services companies undergo continuous change, and we cannot predict
the ultimate effect of such changes, which could have a material adverse effect
on our profitability or financial condition.
A default in our revolving credit facility will prevent us from being able to
pay the debentures and consequently will result in non-payment of amounts due
under the capital securities.
We have a $20 million revolving credit line facility with American National
Bank and Trust Company of Chicago that is available to provide us with
liquidity, if needed, and it matures on March 9, 2001. The revolving line of
credit bears interest at a rate indexed to the London Interbank Offered Rate
and provides for a loan commitment fee on the average daily unused portion of
the facility. This credit facility is secured by 100% of the issued and
outstanding common shares of the Bank, which constitutes virtually all of the
net assets of the Company. If we fail to make timely payments under the credit
facility, or otherwise violate any provision of the related Stock Pledge and
Security Agreement, we will forfeit voting rights for shares of the Bank, and
we may ultimately lose our ownership interest in the Bank. In such event, we
will be unable to make interest payments under the debentures, and the trust
will be unable to pay distributions and liquidation amounts under the capital
securities. There is currently no outstanding balance on the note, but there
cannot be any assurances that we will not draw on the line in the future.
Risks Related to an Investment in the Capital Securities
If we do not make interest payments under the debentures, the trust will be
unable to pay distributions and liquidation amounts. The guarantee will not
apply because the guarantee covers payments only if the trust has funds
available.
The trust will depend solely on our payments on the debentures to pay
amounts due to you on the capital securities. If we default on our obligation
to pay the principal or interest on the debentures, the
12
trust will not have sufficient funds to pay distributions or the liquidation
amount on the capital securities. In that case, you will not be able to rely on
the guarantee for payment of these amounts because the guarantee only applies
if the trust has sufficient funds to make distributions on or to pay the
liquidation amount of the capital securities. Instead, you or the property
trustee will have to institute a direct action against us to enforce the
property trustee's rights under the indenture relating to the debentures.
To the extent we must rely on dividends from our subsidiaries to make interest
payments on the debentures to the trust, our available cash flow may be
restricted.
We are a holding company, and substantially all of our assets are held by
our subsidiaries. Our ability to make payments on the debentures when due will
depend primarily on available cash in the form of dividends from our
subsidiaries. Dividend payments or extensions of credit from the Bank are
subject to regulatory limitations, generally based on capital levels and
current and retained earnings, imposed by the Office of the Comptroller of the
Currency ("OCC"), the Bank's primary federal regulator. The ability of the Bank
to pay dividends is also subject to its profitability, financial condition,
capital expenditures and other cash flow requirements. We cannot assure you
that the Bank will be able to pay dividends in the future.
The debentures and the guarantee rank below our other indebtedness, and our
holding company structure effectively subordinates any claims against us to
those of our subsidiaries' creditors.
Our obligations under the debentures and the guarantee are unsecured and
will rank junior in priority of payment to our existing and future senior and
subordinated indebtedness. The issuance of the debentures and the capital
securities does not limit our ability, or the ability of our subsidiaries, to
incur additional indebtedness, guarantees or other liabilities. At March 31,
2000, there was no debt at the holding company level.
Because we are a holding company, the creditors of our subsidiaries also
will have priority over you in any distribution of our subsidiaries' assets in
liquidation, reorganization or otherwise. Accordingly, the debentures and the
guarantee will be effectively subordinated to all existing and future
liabilities of our subsidiaries, and you should look only to our assets for
payments on the capital securities and the debentures.
We have the option of deferring interest payments on the debentures for
substantial periods.
We may, at one or more times, defer interest payments on the debentures for
up to 20 consecutive quarters. If we defer interest payments on the debentures,
the trust will defer distributions on the capital securities during any
deferral period. During a deferral period, you will be required to recognize as
income for federal income tax purposes the amount approximately equal to the
interest that accrues on your proportionate share of the debentures held by the
trust in the tax year in which that interest accrues, even though you will not
receive these amounts until a later date.
You will also not receive the cash related to any accrued and unpaid
interest from the trust if you sell the capital securities before the end of
any deferral period. During a deferral period, accrued but unpaid distributions
will increase your tax basis in the capital securities. If you sell the capital
securities during a deferral period, your increased tax basis will decrease the
amount of any capital gain or increase the amount of any capital loss that you
may have otherwise realized on the sale. A capital loss, except in certain
limited circumstances, cannot be applied to offset ordinary income. As a
result, deferral of distributions could result in ordinary income, and a
related tax liability for the holder, and a capital loss that may only be used
to offset a capital gain.
13
We do not currently intend to exercise our right to defer interest payments
on the debentures. However, if we exercise our right in the future, the market
price of the capital securities would likely be adversely affected. The capital
securities may trade at a price that does not fully reflect the value of
accrued but unpaid interest on the debentures. If you sell the capital
securities during an interest deferral period, you may not receive the same
return on investment as someone who continues to hold the capital securities.
Due to our right to defer interest payments, the market price of the capital
securities may be more volatile than the market prices of other securities
without the deferral feature.
We have made only limited covenants in the indenture and the trust agreement.
The indenture governing the debentures and the trust agreement governing the
trust do not require us to maintain any financial ratios or specified levels of
net worth, revenues, income, cash flow or liquidity, and, therefore, do not
protect holders of the debentures or the capital securities in the event we
experience significant adverse changes in our financial condition or results of
operations. In addition, neither the indenture nor the trust agreement limits
our ability or the ability of any subsidiary to incur additional indebtedness.
Therefore, you should not consider the provisions of these governing
instruments as a significant factor in evaluating whether we will be able to
comply with our obligations under the debentures or the guarantee.
We may redeem the debentures before June 30, 2030.
Under the following circumstances, we may redeem the debentures before their
stated maturity, without penalty or premium:
. We may redeem the debentures, in whole or in part, at any time on or
after June 30, 2005.
. We may redeem the debentures in whole, but not in part, within 90 days
after certain occurrences at any time during the life of the trust.
These occurrences may include adverse tax, Investment Company Act or
bank regulatory developments.
You should assume that we will exercise our redemption option if we are able
to obtain capital at a lower cost than we pay on the debentures or if it is
otherwise in our interest to redeem the debentures. If the debentures are
redeemed, the trust must redeem capital securities having an aggregate
liquidation amount equal to the aggregate principal amount of debentures
redeemed, and you may be required to reinvest your principal at a time when you
may not be able to earn a return that is as high as you were earning on the
capital securities.
We can distribute the debentures to you, which may have adverse tax
consequences for you and which may adversely affect the market price of the
capital securities.
The trust may be dissolved at any time before maturity of the debentures on
June 30, 2030. As a result, and subject to the terms of the trust agreement,
the trustees may distribute the debentures to you.
We cannot predict the market prices for the debentures that may be
distributed in exchange for capital securities upon liquidation of the trust.
The capital securities, or the debentures that you may receive if the trust is
liquidated, may trade at a discount to the price that you paid to purchase the
capital securities. Because you may receive debentures, your investment
decision with regard to the capital securities will also be an investment
decision with regard to the debentures. You should carefully review all of the
information contained in this prospectus regarding the debentures.
Under current United States federal income tax laws, a distribution of the
debentures to you upon the dissolution of the trust would not be a taxable
event to you. Nevertheless, if the trust is classified for
14
United States income tax purposes as an association taxable as a corporation at
the time it is dissolved, the distribution of the debentures would be a taxable
event to you. In addition, if there is a change in law, a distribution of
debentures upon the dissolution of the trust could be a taxable event to you.
There is no current public market for the capital securities, and their market
price may be subject to significant fluctuations.
There is currently no public market for the capital securities. Although the
capital securities will be listed on the American Stock Exchange, there is no
guarantee that an active or liquid trading market will develop for the capital
securities or that listing of the capital securities will continue on the
American Stock Exchange. If an active trading market does not develop, the
market price and liquidity of the capital securities will be adversely
affected. Even if an active public market does develop, there is no guarantee
that the market price for the capital securities will equal or exceed the price
you pay for the capital securities.
Future trading prices of the capital securities may be subject to
significant fluctuations in response to prevailing interest rates, our future
operating results and financial condition, the market for similar securities
and general economic and market conditions. The initial public offering price
of the capital securities has been set at the liquidation amount of the capital
securities and may be greater than the market price following this offering.
The market price for the capital securities, or the debentures that you may
receive in a distribution, is also likely to decline during any period that we
are deferring interest payments on the debentures. If this were the case, the
capital securities or the debentures would not trade at a price that accurately
reflects the value of accumulated but unpaid interest on the debentures.
You must rely on the property trustee to enforce your rights if there is an
event of default under the indenture.
You may not be able to directly enforce your rights against us if an event
of default under the indenture occurs. If an event of default under the
indenture occurs and is continuing, this event will also be an event of default
under the trust agreement. In that case, you must rely on the enforcement by
the property trustee of its rights as holder of the debentures against us. The
holders of a majority in liquidation amount of the capital securities will have
the right to direct the property trustee to enforce its rights. If the property
trustee does not enforce its rights following an event of default and a request
by the record holders to do so, any record holder may, to the extent permitted
by applicable law, take action directly against us to enforce the property
trustee's rights. If an event of default occurs under the trust agreement that
is attributable to our failure to pay interest or principal on the debentures,
or if we default under the guarantee, you may proceed directly against us. You
will not be able to exercise directly any other remedies available to the
holders of the debentures unless the property trustee fails to do so.
As a holder of capital securities, you have limited voting rights.
Holders of capital securities have limited voting rights. Your voting rights
pertain primarily to amendments to the trust agreement. In general, only we can
replace or remove any of the trustees. However, if an event of default under
the trust agreement occurs and is continuing, the holders of at least a
majority in aggregate liquidation amount of the capital securities may replace
the property trustee and the Delaware trustee.
15
The capital securities are not FDIC insured.
Neither the Federal Deposit Insurance Corporation nor any other governmental
agency has insured the capital securities.
CAUTIONARY STATEMENTS
This prospectus contains forward-looking statements which describe our
future plans, strategies and expectations. All forward-looking statements are
based on assumptions and involve risks and uncertainties, many of which are
beyond our control and which may cause our actual results, performance or
achievements to differ materially from the results, performance or achievements
that we anticipate. Factors that might affect forward-looking statements
include, among other things:
. adverse changes in the economy or business conditions, either nationally
or in our market areas, that could increase credit-related losses and
expenses;
. increases in defaults by borrowers and other delinquencies resulting in
increases in our provision for losses on loans and leases and related
expenses;
. our ability to manage growth, including the successful expansion of the
customer support, administrative infrastructure and internal management
systems necessary to manage such growth;
. fluctuations in interest rates and market prices, which could reduce our
net interest margins, asset valuations and expense expectations;
. the consequences of continued bank acquisitions and mergers in our
market areas, resulting in fewer but much larger and financially
stronger competitors, and actions taken by our competitors which could
increase competition for financial services to our detriment;
. our inability to achieve the financial goals in our strategic plans;
. the timing, impact and other uncertainties of any future acquisitions
and our success or failure in the integration of their operations;
. our ability to enter new markets successfully and capitalize on growth
opportunities;
. changes in legislative or regulatory requirements applicable to us and
our subsidiaries;
. changes in tax requirements, including tax rate changes, new tax laws
and revised tax law interpretations; and
. other factors discussed in "Risk Factors."
We undertake no obligation to publicly update or otherwise revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions,
the events discussed in any forward-looking statements in this prospectus might
not occur.
You should rely on the information contained in this prospectus. We have
not, and our underwriters have not, authorized any person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not, and our underwriters are
not, making an offer to sell these securities in any jurisdiction where the
offer or sale is not permitted.
You should assume that the information appearing in this prospectus is
accurate as of the date on the front cover of this prospectus only.
16
USE OF PROCEEDS
The trust will invest all of the proceeds from the sale of the capital
securities in the debentures. We will use the net proceeds from the sale of the
debentures, which we estimate to be approximately $18.8 million, to contribute
approximately $18.0 million to the Bank and retain the balance for general
corporate purposes.
CAPITALIZATION
The following table sets forth our total deposits, indebtedness and
capitalization at March 31, 2000, as adjusted for this offering and the
application of the estimated net proceeds from the corresponding sale of the
debentures as if such sale had been consummated on March 31, 2000. These should
be read in conjunction with the Consolidated Financial Statements and notes
thereto contained in this prospectus.
March 31, 2000
------------------
As
Actual adjusted
-------- --------
(Dollars in
thousands)
Deposits:
Noninterest-bearing deposits........................... $115,983 $115,983
Interest-bearing deposits.............................. 303,325 303,325
-------- --------
Total deposits....................................... $419,308 $419,308
======== ========
Indebtedness:
Securities sold under agreements to repurchase......... $ 36,736 $ 36,736
Advances from the Federal Home Loan Bank............... 10,980 10,980
Company obligated mandatory redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures............................... -- 20,000
-------- --------
Total indebtedness................................... $ 47,716 $ 67,716
======== ========
Shareholders' equity:
Common, $.01 par value; 25,000,000 shares authorized;
6,705,290 issued and outstanding...................... $ 67 $ 67
Additional paid-in capital............................. 30,067 30,067
Retained earnings...................................... 12,382 12,382
Accumulated other comprehensive loss, net of income
tax................................................... (858) (858)
-------- --------
Total shareholders' equity........................... $ 41,658 $ 41,658
======== ========
Total deposits, indebtedness and shareholders' equity.. $508,682 $528,682
======== ========
Company regulatory capital ratios:
Total capital to risk-weighted assets.................. 10.7% 15.5%
Tier 1 capital to risk-weighted assets................. 9.5% 12.5%
Tier 1 leverage ratio.................................. 7.7% 9.9%
Bank regulatory capital ratios:
Total capital to risk-weighted assets.................. 10.4% 14.8%(1)
Tier 1 capital to risk-weighted assets................. 9.2% 13.6%(1)
Tier 1 leverage ratio.................................. 7.4% 10.7%(1)
- -----------------
(1) Assumes the contribution to the Bank of $18.0 million of the proceeds from
the sale of the capital securities.
17
ACCOUNTING AND REGULATORY TREATMENT
The trust will be treated, for financial reporting purposes, as our
subsidiary and, accordingly, the accounts of the trust will be included in our
consolidated financial statements. The capital securities will be presented as
a separate line item in our consolidated balance sheet under the caption
"Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely subordinated debentures," and appropriate disclosures
about the capital securities, the guarantee and the debentures will be included
in the notes to our consolidated financial statements. For financial reporting
purposes, we will record distributions payable on the capital securities in our
consolidated statements of income.
Our future reports filed under the Securities Exchange Act of 1934, as
amended, will include a footnote to the consolidated financial statements
stating that:
. the trust is wholly-owned;
. the sole assets of the trust are the debentures and specifying the
debentures' principal amount, interest rate and maturity date: and
. our obligations described in this prospectus, in the aggregate,
constitute a full, irrevocable and unconditional guarantee on a
subordinated basis by us of the obligations of the trust under the
capital securities.
The capital securities have been structured to qualify as Tier 1 capital.
However, the capital securities cannot be used to constitute, together with any
shares of our outstanding cumulative preferred stock, more than 25% of our
total Tier I capital. As adjusted for this offering, our Tier 1 capital as of
March 31, 2000 would have been approximately $51.2 million, of which $12.8
million would have been attributable to the capital securities.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We were acquired by a group of private investors in September 1994 for a
purchase price of approximately $17.4 million (the "Acquisition"). The purchase
price of the Acquisition was financed, in part, by a loan obtained by us in the
amount of $10.5 million from American National Bank and Trust Company ("ANB").
In connection with the Acquisition, we recorded (i) a deposit intangible valued
at $352,000 that was amortized over a three-year period, and (ii) goodwill of
$6.4 million that is being amortized over a 15-year period. The amortization of
these assets adversely affects our net income, although it has no effect on our
cash flow.
In March 1997, we completed a private placement of 1,102,725 shares of
common stock at a price of $3.61 per share, for net proceeds of approximately
$4.0 million, which we used to fund our continuing growth. The capital raised
in this transaction was provided primarily by certain Colorado-based investors
who have played a significant role in our growth by providing deposits and loan
opportunities, both directly and indirectly through referrals. In April 1997,
we increased our regulatory capital by converting $1.5 million of our
outstanding indebtedness to ANB into preferred stock.
In June 1998, we completed the initial public offering of our common stock.
We sold a total of 1,610,000 shares of common stock 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 preferred stock
referred to above. The balance of the proceeds, $8.8 million, was contributed
to the capital of the Bank.
From December 31, 1995 to March 31, 2000, our shareholders' equity increased
360%, from $9.1 million to $41.7 million. During that same time period, our
outstanding loans and leases (net) increased 311%, from $87.3 million to $358.7
million. This increase has primarily been the result of our focus on local
relationship banking and commercial lending to small- and medium-sized
businesses and high net worth individuals. In addition, we have emphasized
building and maintaining asset quality through our credit underwriting and
monitoring process. See "Business--Lending Activities." Nonperforming assets
have ranged from 0.13% to 0.58% of total assets during this period. We have
maintained asset quality, while continuing to build our allowance for loan and
lease losses. Our allowance for loan and lease losses increased 249%, from $1.4
million as of December 31, 1995 to $4.9 million as of March 31, 2000.
In March 1996, we formed an equipment leasing subsidiary, Colorado Business
Leasing, Inc. ("CBL"). The Bank 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, we have restructured our relationship with CBL so
that all leases are held by CBL, with the Bank providing CBL with a line of
credit to fund the purchase of leased equipment. We believe that the
restructuring did not have a material effect on our consolidated financial
statements.
Our management 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
19
phases of various projects. As a result, relatively high levels of non-interest
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 allowed us to recruit and
retain a highly qualified management team capable of implementing our business
strategies. We believe that our compensation policies, which include the
granting of options to purchase common stock to many employees, have highly
motivated our employees and have enhanced our ability to maintain customer
loyalty and generate earnings. While we will continue to add personnel to lead
new growth initiatives, including middle management, we believe that our senior
management and systems infrastructure are adequate to support our anticipated
growth without incurring proportionate increases in general, administrative and
other non-interest expenses.
This discussion should be read in conjunction with our consolidated
financial statements and notes thereto included in this prospectus beginning on
page F-1. For a description of our accounting policies, see Note 1 of Notes to
Consolidated Financial Statements.
Financial Condition
Our total assets increased by $19.9 million to $511.9 million as of March
31, 2000, from $492.0 million as of December 31, 1999. In the first three
months of 2000, our loan and lease portfolio (net) increased by $12.6 million,
from $346.1 million at December 31, 1999, to $358.7 million as of March 31,
2000. Total investments were $104.9 million as of March 31, 2000, compared to
$109.9 million as of December 31, 1999. The decrease in the investment
portfolio is the result of utilizing our funding resources to support loan
demand, rather than investment purchases.
The Company's total assets increased by $125.4 million to $492.0 million as
of December 31, 1999, from $366.6 million as of December 31, 1998. Our loan and
lease portfolio (net) increased by $122.8 million, from $223.3 million at
December 31, 1998, to $346.1 million as of December 31, 1999. The strong loan
growth was attributable to a robust Colorado economy. Total investments were
$109.9 million as of December 31, 1999, compared to $107.9 million as of
December 31, 1998. The nominal increase in the investment portfolio was the
result of utilizing our funding resources primarily to support loan demand,
rather than investment purchases.
Deposits increased by $36.0 million to $419.3 million as of March 31, 2000,
from $383.3 million as of December 31, 1999. Non-interest-bearing deposits
increased by $9.5 million, and interest-bearing deposits increased by $26.5
million. Low-cost demand deposits comprised 28% of total deposits as of March
31, 2000. Federal funds purchased and securities sold under agreements to
repurchase increased by $2.4 million in the first three months of 2000 to $36.7
million. The balance at March 31, 2000 represents repurchase agreements
transacted on behalf of the Company's customers and is not considered a
wholesale borrowing source.
Deposits were $383.3 million as of December 31, 1999, compared to $273.0
million as of December 31, 1998, a 40.4% increase. Non-interest-bearing
deposits increased by $11.3 million, and interest-bearing deposits increased by
$99.0 million. Low-cost demand deposits comprised 28% of total deposits as of
December 31, 1999, and 35% of total deposits as of December 31, 1998. Federal
funds purchased and securities sold under agreements to repurchase increased by
$5.9 million, to $34.4 million as of December 31, 1999 from $28.5 million as of
December 31, 1998. Repurchase agreements transacted on behalf of the Company's
customers were $33.1 million at December 31, 1999 and $25.0 million at December
31, 1998.
20
Advances from the Federal Home Loan Bank of Topeka were $11.0 million at
March 31, 2000, compared to $31.0 million at December 31, 1999. The significant
paydown was possible due to our increased focus on attracting deposit
relationships in the first quarter of 2000. Outstanding advances totaled $26.1
million as of December 31, 1998.
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, leases and investment securities, and interest expense, principally on
customer deposits and borrowings. Changes in net interest income result from
changes in volume, net interest spread and net interest margin. Volume refers
to the average dollar levels of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities.
21
The following tables present, for the periods indicated, certain information
related to our average asset and liability structure and our average yields on
assets and average costs of liabilities. Such yields are derived by dividing
income or expense by the average balance of the corresponding assets or
liabilities.
For the three months ended March 31,
-----------------------------------------------------------
2000 1999
----------------------------- -----------------------------
Interest Average Interest Average
Average earned yield Average earned yield
balance or paid or cost(1) balance or paid or cost(1)
-------- -------- ---------- -------- -------- ----------
(Dollars in thousands)
ASSETS:
Federal funds sold......... $ 1,658 $ 23 5.49% $ 3,631 $ 42 4.63%
Investment securities(2)......107,446 1,716 6.32% 104,275 1,489 5.71%
Loans and leases(3)........ 358,445 8,388 9.26% 237,830 5,384 9.06%
Allowance for loan and
lease losses.............. (4,703) -- 0.00% (3,350) -- 0.00%
-------- ------- -------- ------
Total interest-earning
assets.................. 462,846 10,127 8.66% 342,386 6,915 8.08%
Non-interest-earning
assets:
Cash and due from banks... 22,816 15,806
Other..................... 16,902 15,126
-------- --------
Total assets............. $502,564 $373,318
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Deposits:
NOW and money market
accounts................. $153,543 $ 1,503 3.94% $104,325 $ 766 2.98%
Savings................... 6,015 33 2.21% 7,026 38 2.19%
Certificates of deposit:
Under $100,000............ 24,454 326 5.36% 30,280 379 5.08%
$100,000 and over......... 100,431 1,383 5.54% 45,128 563 5.06%
-------- ------- -------- ------
Total interest-bearing
deposits................ 284,443 3,245 4.59% 186,759 1,746 3.79%
Short-term borrowings:
Securities and loans sold
under agreements to
repurchase and federal
funds purchased.......... 37,144 458 4.88% 39,825 420 4.22%
FHLB advances and notes
payable.................. 27,566 403 5.78% 17,471 230 5.27%
-------- ------- -------- ------
Total interest-bearing
liabilities............. 349,153 4,106 4.71% 244,055 2,396 3.97%
Non-interest-bearing demand
accounts.................. 110,516 89,721
-------- --------
Total deposits and
interest-bearing
liabilities............. 459,669 333,776
Other non-interest-bearing
liabilities............... 1,927 1,797
-------- --------
Total liabilities........ 461,596 335,573
Shareholders' equity....... 40,968 37,745
-------- --------
Total liabilities and
shareholders' equity.... $502,564 $373,318
======== ========
Net interest income........ $ 6,021 $4,519
======= ======
Net interest spread........ 3.94% 4.11%
Net interest margin........ 5.23% 5.35%
Ratio of average interest-
bearing assets to average
interest-bearing
liabilities............... 132.56% 140.29%
- -----------------
(1) Average yield or cost for the three months ended March 31, 2000 and 1999
has been annualized and is not necessarily indicative of results for the
entire year.
(2) Yields do not include adjustments for tax-exempt interest because the
amount of such interest is not material.
(3) Loan fees included in interest income are not material. Nonaccrual loans
and leases are included in average loans and leases outstanding.
22
For the year 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)
ASSETS:
Federal funds sold...... $ 3,150 $ 150 4.76% $ 2,588 $ 135 5.22% $ 5,204 $ 360 6.92%
Investment
securities(1).......... 108,121 6,325 5.85% 70,525 4,124 5.85% 59,602 3,616 6.07%
Loans and leases(2)..... 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%
Non-interest-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 and 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%
Non-interest-bearing
demand accounts........ 101,793 76,223 54,706
-------- -------- --------
Total deposits and
interest-bearing
liabilities.......... 385,580 269,039 207,270
Other non-interest-
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%
- -----------------
(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
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.
Three months ended Year ended
March 31, 2000, Year ended December 31, 1998,
compared with December 31, 1999, compared with
three months ended compared with year ended
March 31, 1999 year ended December 31, 1997
increase (decrease) December 31, 1998 increase (decrease)
in net interest increase (decrease) in net interest
income in net interest income income
due to changes in due to changes in due to changes in
--------------------- ------------------------ ---------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------ ----- ------ ------- ------- ------ ------ ----- ------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold..... $ (23) $ 3 $ (20) $ 29 $ (14) $ 15 $ (181) $ (44) $ (225)
Investments............ 46 182 228 2,199 2 2,201 663 (155) 508
Loans and leases....... 2,765 239 3,004 8,332 (2,038) 6,294 6,031 (562) 5,469
------ ----- ------ ------- ------- ------ ------ ----- ------
Total interest-earning
assets............... 2,788 424 3,212 10,560 (2,050) 8,510 6,513 (761) 5,752
------ ----- ------ ------- ------- ------ ------ ----- ------
Interest-bearing
liabilities:
NOW and money market
accounts.............. 366 371 737 1,227 (10) 1,217 624 62 686
Savings................ (6) 1 (5) 8 (24) (16) 12 (3) 9
Certificates of
deposits:
Under $100,000......... (74) 21 (53) 241 (87) 154 236 53 289
$100,000 and over...... 700 120 820 974 (295) 679 668 (93) 575
Short-term borrowings:
Securities and loans
sold under agreements
to repurchase and
federal funds
purchased............. (29) 67 38 1,048 (211) 837 435 (3) 432
FHLB notes payable..... 135 38 173 869 (137) 732 31 (30) 1
Long-term borrowings: -- -- -- (301) -- (301) (414) (17) (431)
------ ----- ------ ------- ------- ------ ------ ----- ------
Total interest-bearing
liabilities.......... 1,092 618 1,710 4,066 (764) 3,302 1,592 (31) 1,561
------ ----- ------ ------- ------- ------ ------ ----- ------
Net increase
(decrease) in net
interest income...... $1,696 $(194) $1,502 $ 6,494 $(1,286) $5,208 $4,921 $(730) $4,191
====== ===== ====== ======= ======= ====== ====== ===== ======
Quantitative And Qualitative Disclosure About Market Risk--Asset/Liability
Management
Asset and liability management is concerned with the timing and magnitude of
repricing assets compared to liabilities. It is our objective to generate
stable growth in net interest income and to attempt to control risks associated
with interest rate movements. In general, our strategy is to reduce the impact
of changes in interest rates on net interest income by maintaining a favorable
match between the maturities or repricing dates of our interest-earning assets
and interest-bearing liabilities. We adjust interest sensitivity during the
year through changes in the mix of assets and liabilities. We do not utilize
derivative financial instruments to manage our interest rate risk. Our asset
and liability management strategy is formulated and monitored by the asset
liability committee, in accordance with policies approved by the Bank's Board
of Directors. This committee meets regularly to review, among other things, the
sensitivity of the Bank's assets and liabilities to interest rate changes, the
book and market values of assets and liabilities, unrealized gains and losses,
purchase and sale activity, and maturities of investments and borrowings. The
asset liability committee also approves and establishes pricing and funding
decisions with respect to the Bank's overall asset and liability composition.
The committee reviews the Bank's liquidity, cash flow flexibility, maturities
of investments, deposits and borrowings, deposit activity, current market
conditions, and general levels of interest rates. To effectively measure and
manage interest rate risk, we use simulation analysis to determine the impact
on net interest income of changes in interest rates under
24
various interest rate scenarios. From these simulations, interest rate risk is
quantified and appropriate strategies are developed and implemented.
The following table presents an analysis of the sensitivity inherent in our
net interest income and market value of equity. The interest rate scenario
presented in the table includes interest rates at March 31, 2000 as adjusted by
instantaneous rate changes upward and downward of up to 200 basis points. Since
there are limitations inherent in any methodology used to estimate the exposure
to changes in market interest rates, this analysis is not intended to be a
forecast of the actual effect of a change in market interest rates. The market
value sensitivity analysis presented includes assumptions that (i) the
composition of our interest sensitive assets and liabilities existing at March
31, 2000 will remain constant over the twelve month measurement period; and
(ii) that changes in market rates are parallel and instantaneous across the
yield curve regardless of duration or repricing characteristics of specific
assets or liabilities. Further, the analysis does not contemplate any actions
that we might undertake in response to changes in market interest rates.
Accordingly, this analysis is not intended and does not provide a precise
forecast of the effect actual changes in market rates will have on us.
Change in Interest
Rates in Basis Points
---------------------------
-200 -100 0 +100 +200
---- ---- --- ---- ----
Impact on:
Net Interest Income........................ -6.3% -2.8% 0.0% 2.0% 3.9%
Market Value of Equity..................... 2.5% 1.4% 0.0% -1.4% -4.1%
Our results of operations depend significantly on net interest income. Like
most financial institutions, our 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 March 31,
2000, our cumulative interest rate gap for the period of less than one year was
a positive 11.45%. Therefore, assuming no change in our 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.
This is a one-day position that is continually changing and is not indicative
of our position at any other time. While the gap position is a useful tool in
measuring interest rate risk and contributes toward effective asset and
liability management, shortcomings are inherent in gap analysis since certain
assets and liabilities may not move proportionally as interest rates change.
Consequently, in addition to gap analysis, we use the simulation model
discussed above to test the interest rate sensitivity of net interest income
and the balance sheet.
25
The following table sets forth the estimated maturity or repricing, and the
resulting interest rate gap, of our interest-earning assets and interest-
bearing liabilities at March 31, 2000. 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.
Estimated maturity or repricing at March 31,
2000
------------------------------------------------
Three
Less months
than to less One to Over
three than one five five
months year years years Total
-------- -------- -------- -------- --------
(Dollars in thousands)
Interest-earning assets:
Fixed rate loans............. $ 5,426 $ 18,385 $111,079 $ 23,750 $158,640
Floating rate loans.......... 181,200 -- 720 322 182,242
Lease financing.............. 2,164 6,260 14,258 -- 22,682
Investments.................. 15,863 52,359 4,819 31,857 104,898
Federal funds sold........... 8,500 -- -- -- 8,500
-------- -------- -------- -------- --------
Total interest-earning
assets...................... $213,153 $ 77,004 $130,876 $ 55,929 $476,962
======== ======== ======== ======== ========
Interest-bearing liabilities:
NOW and money market
accounts.................... $ 932 $ 72,616 $ 83,173 $ 13,972 $170,693
Savings...................... 297 653 2,078 2,910 5,938
Time deposits under
$100,000.................... 8,664 11,118 3,897 -- 23,679
Time deposits $100,000 and
over........................ 64,860 25,501 12,654 -- 103,015
Other interest-bearing
liabilities................. 36,806 10,070 560 280 47,716
-------- -------- -------- -------- --------
Total interest-bearing
liabilities................. $111,559 $119,958 $102,362 $ 17,162 $351,041
======== ======== ======== ======== ========
Interest rate gap............. $101,594 $(42,954) $ 28,514 $ 38,767 $125,921
======== ======== ======== ======== ========
Cumulative interest rate gap.. $101,594 $ 58,640 $ 87,154 $125,921
======== ======== ======== ========
Cumulative interest rate gap
to total assets.............. 19.85% 11.45% 17.02% 24.60%
======== ======== ======== ========
To manage these relationships, we evaluate the following factors: liquidity,
equity, debt/capital ratio, anticipated prepayment rates, portfolio maturities,
maturing assets and maturing liabilities. Our asset and liability management
committee is responsible for establishing procedures that enable us to achieve
our goals while adhering to prudent banking practices and existing loan and
investment policies. Our policy is intended to control the exposure of our
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.
We have 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.
26
The following table presents, at March 31, 2000, loans and leases by
maturity in each major category of our 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.
At March 31, 2000
----------------------------------
Less One to Over
than one five five
year years years Total
-------- -------- ------- --------
(In thousands)
Commercial.................................. $ 73,258 $ 43,121 $ 7,800 $124,179
Real estate -- mortgage..................... 28,747 51,303 61,428 141,478
Real estate -- construction................. 45,847 8,658 328 54,833
Consumer.................................... 8,838 10,896 658 20,392
Direct financing leases -- net.............. 8,424 14,258 -- 22,682
-------- -------- ------- --------
Total loans and leases.................... $165,114 $128,236 $70,214 $363,564
======== ======== ======= ========
As of March 31, 2000, of the $198.5 million of loans and leases with
maturities of one year or more, approximately $150.7 million were fixed rate
loans and leases and $47.8 million were variable rate loans and leases.
Results of Operations
The following table sets forth selected statement of income data for the
periods indicated, as compared with the same periods in the years indicated.
For the three
months
ended March For the year ended
31, December 31,
-------------- -----------------------
2000 1999 1999 1998 1997
------- ------ ------- ------- -------
(In thousands)
Interest income......................... $10,127 $6,915 $32,409 $23,899 $18,147
Interest expense........................ 4,106 2,396 11,879 8,577 7,016
------- ------ ------- ------- -------
Net interest income before provision for
loan and
lease losses........................... 6,021 4,519 20,530 15,322 11,131
Provision for loan and lease losses..... 573 303 1,473 1,188 949
------- ------ ------- ------- -------
Net interest income after provision for
loan and
lease losses........................... 5,448 4,216 19,057 14,134 10,182
Non-interest income..................... 1,140 1,118 4,610 4,246 3,303
Non-interest expense.................... 4,097 3,707 15,746 13,133 10,387
------- ------ ------- ------- -------
Income before income taxes.............. 2,491 1,627 7,921 5,247 3,098
Provision for income taxes.............. 997 620 3,002 2,031 1,245
------- ------ ------- ------- -------
Net income.............................. $ 1,494 $1,007 $ 4,919 $ 3,216 $ 1,853
======= ====== ======= ======= =======
Three months ended March 31, 2000, compared to the three months ended March
31, 1999
Overview. Net earnings available to common shareholders was $1,494,000 for
the quarter ended March 31, 2000, compared with $1,007,000 for the quarter
ended March 31, 1999, an increase of 48%. Earnings per share on a fully diluted
basis for the first quarter was $0.22, versus $0.15 for the same period a year
ago, an increase of 47%. On an operating basis, before the amortization of
goodwill, consolidated net income available to common shareholders for the
three months ended March 31, 2000 and 1999, was $1,604,000 and $1,116,000, or
$0.23 and $0.16 per diluted share, respectively. Return on average tangible
27
assets was 1.29% in the first quarter of 2000, compared with 1.23% in the first
quarter of 1999. Return on average tangible common shareholders' equity was
17.54% for the quarter ended March 31, 2000, versus 13.67% for the quarter
ended March 31, 1999.
Net Interest Income. Net interest income before provision for loan and lease
losses was $6.0 million for the quarter ended March 31, 2000, an increase of
$1.5 million, or 33%, compared with the quarter ended March 31, 1999. Yields on
our interest-earning assets improved by 58 basis points to 8.66% for the three
months ended March 31, 2000, from 8.08% for the three months ended March 31,
1999. Yields paid on interest-bearing liabilities increased by 74 basis points
during this same period. The net interest margin was 5.23% for the quarter
ended March 31, 2000, down from 5.35% for the quarter ended March 31, 1999.
Contributing to the decrease in the net interest margin was heightened
competition for customer deposits, which resulted in higher yields on interest-
bearing deposits. Although the growth of our average earning assets helped
mitigate the margin compression, continued increases in interest rates could
adversely affect both our cost of funds and loan originations, resulting in
lower net interest margins in future operating periods. Average earning assets
increased by 35% to $462.8 million for the first quarter of 2000, from $342.4
million for the first quarter of 1999.
Provision and Allowance for Loan and Lease Losses. The provision for loan
and lease losses increased by $270,000 to $573,000 for the three months ended
March 31, 2000, up from $303,000 for the three months ended March 31, 1999.
This increase was due to the increase in total loans and leases outstanding and
is not reflective of a deterioration of credit quality. Key indicators of asset
quality have remained favorable, while average outstanding loan amounts have
increased to $358.4 million for the first three months of 2000, up from $237.8
million for the first three months of 1999. As of March 31, 2000, the allowance
for loan and lease losses amounted to $4.9 million, or 1.34% of total loans and
leases.
Non-interest Income. We reported a modest increase in non-interest income
for the first quarter of 2000. Total non-interest income was $1,140,000 for the
three months ended March 31, 2000, compared to $1,118,000 for the three months
ended March 31, 1999. The increase was primarily attributable to growth in
deposit service charges, trust fees, and other banking service related fees.
Historically, increases in deposit service charges have not corresponded with
the growth in deposit balances. This is due to our offering customers the
choice of either paying for services in cash or by maintaining additional non-
interest bearing account balances. Offsetting the increase in service charges
and trust revenues was a decrease in operating lease rentals. This was the
result of CBL concentrating its marketing efforts in 2000 on originating direct
finance leases, rather than operating leases. Net investment in operating
leases was $3.6 million at March 31, 2000, compared to $4.0 million at March
31, 1999. During the first quarter of 1999, we realized gains of $44,000 on the
sale on investment securities. There were no sales of investment securities
during the same period in 2000.
Non-interest Expense. Total non-interest expense increased by $390,000 to
$4,097,000 for the three months ended March 31, 2000, up from $3,707,000 for
the three months ended March 31, 1999. During this period, however, the
efficiency ratio before goodwill amortization improved to 56% for the quarter
ended March 31, 2000, down from 65% for the comparable period in 1999. The
improvement in the efficiency ratio is the result of revenues growing at a
faster rate than expenses. The increases in non-interest expenses reflect our
ongoing investment in personnel, technology and office space needed to
accommodate internal growth. In the second quarter of 1999, our Boulder bank
relocated to a larger leased facility. In addition, a second Boulder location
was added in May 1999, and the Vail Valley location opened in June 1999.
28
Year ended December 31, 1999, compared to year ended December 31, 1998
Overview. Net income was a record $4.9 million in 1999, compared to $3.2
million in 1998. This increase was primarily due to a $5.2 million increase in
net interest income from 1998 to 1999. 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 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 tangible common shareholders' equity was 15.59% for 1999, versus 16.39%
for 1998. Total assets increased to $492.0 million at December 31, 1999, a
34.2% increase from $366.6 million at December 31, 1998. Strong loan production
was responsible for much of this growth. Net loans and leases grew $122.8
million from 1998 to 1999.
Net Interest Income. Net interest income before provision for loan and lease
losses was $20.5 million for the year ended December 31, 1999, an increase of
$5.2 million, or 34%, compared with the year ended December 31, 1998. Interest
income increased 35.6%, to $32.4 million in 1999 from $23.9 million in 1998. 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 by $37.6 million.
The yield on average interest-earning assets was 8.33% for 1999, compared with
8.91% in 1998. 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. Yields on average loans and leases decreased to 9.20%, from
9.93% in 1998. Interest expense increased 38.5%, to $11.9 million in 1999, from
$8.6 million in 1998. 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.
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. 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.
Non-interest Income. Non-interest income increased 8.6%, to $4.6 million in
1999 from $4.2 million in 1998. 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. We believe
that other non-interest 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
non-interest-bearing account balances. Although the use of compensating
balances in lieu of fees decreases non-interest income, it positively impacts
the net interest margin by increasing the level of non-interest-bearing
deposits. At December 31, 1999, 27.8% of deposits at the Bank were non-
interest-bearing deposits.
Non-interest Expense. Total operating expenses were $15.7 million in 1999
and $13.1 million in 1998. Overall, non-interest 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 our ongoing investment in personnel, technology
and office space needed
29
to accommodate growth. In addition, $2.0 million of the non-interest expense
incurred in 1999 was related to depreciation expense from operating leases.
Although operating expenses have increased each year to accommodate our growth,
the efficiency ratio continues to improve. This is the result of us
consistently generating revenues at a faster rate than expenses. The efficiency
ratio before goodwill amortization was 61.16% for the year ended 1999 and
65.54% for 1998.
Year ended December 31, 1998, compared to year ended December 31, 1997
Overview. Net income was a record $3.2 million in 1998, compared to $1.9
million in 1997. This increase was primarily due to a $4.2 million increase in
net interest income from 1997 to 1998. On an operating basis, before the
amortization of goodwill, consolidated net income available to common
shareholders for the years ended 1998 and 1997, was $3.6 million and $2.2
million, or $0.59 and $0.45 per diluted share, respectively. Return on average
tangible assets was 1.24% in 1998, compared with 1.04% in 1997. Return on
average tangible common shareholders' equity was 16.39% for 1998, versus 25.68%
for 1997. Total assets increased to $366.6 million at December 31, 1998, a
38.8% increase from $264.1 million at December 31, 1997. Strong loan production
was responsible for much of this growth. Net loans and leases grew $59.2
million from 1998 to 1997.
Net Interest Income. Net interest income before provision for loan and lease
losses was $15.3 million for the year ended December 31, 1998, an increase of
$4.2 million, or 38%, compared with the year ended December 31, 1997. Interest
income increased 31.7%, to $23.9 million in 1998 from $18.1 million in 1997.
The 1998 interest income increase was due to an increase of $59.1 million in
average loan and lease volume, which resulted in $5.5 million of additional
interest income. The yield on average interest-earning assets was 8.91% for
1998, compared with 9.00% in 1997. The drop in yield is attributed to a
decreasing rate environment. On average, yields on investment securities
decreased to 5.85% from 6.07% in 1997. Yields on average loans and leases
decreased to 9.93% from 10.21% in 1997. Interest expense increased 22.2%, to
$8.6 million in 1998 from $7.0 million in 1997. The increases were primarily
due to higher volumes of interest-bearing liabilities. 1998 average interest-
bearing deposits and average interest-bearing liabilities grew by $35.9 million
and $40.3 million, respectively, from 1997, while the cost of interest-bearing
liabilities dropped to 4.45% from 4.60% during the same period. The net effect
was $1.6 million of additional interest expense in 1998.
Provision for Loan and Lease Losses. The provision for loan and lease losses
was $1,188,000 in 1998, compared to $949,000 in 1997. This increase was due to
the increase in total loans and leases outstanding and was not reflective of a
deterioration of credit quality. In 1998, the level of non-performing loans and
net charge-offs declined from the previous year. Net charge-offs were $165,000
in 1998, versus $361,000 in 1997.
Non-interest Income. Non-interest income increased 28.5%, to $4.2 million in
1998 from $3.3 million in 1997. Driving this increase was higher rental income
associated with operating leases. Operating lease income was $2.4 million and
$1.3 million in 1998 and 1997, respectively. We believe that non-interest
income has not grown at the same rate as loan and deposit volumes, in part
because customers are provided the option of paying for services in cash or by
maintaining additional non-interest-bearing account balances. Although the use
of compensating balances in lieu of fees decreases non-interest income, it
increases the percentage of non-interest-bearing deposits. At December 31,
1998, 34.9% of deposits at the Bank were non-interest-bearing deposits.
Non-interest Expense. Total operating expenses were $13.1 million in 1998
and $10.4 million in 1997. Overall, non-interest expenses were up 26.4% from
1997. Of this increase, approximately $1.5
30
million was additional personnel costs and $0.7 million related to increased
occupancy costs. The increases in expenses reflect our ongoing investment in
personnel, technology and office space needed to accommodate growth. In
addition, $1.9 million of the non-interest expense incurred was related to
depreciation expense from operating leases.
Liquidity and Capital Resources
Our liquidity management objective is to ensure our ability to satisfy the
cash flow requirements of depositors and borrowers and to allow us to sustain
our operations. Historically, our 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). 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.
We use 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. At March 31, 2000, the Company
had $62.2 million in unpledged securities and qualifying loans available to
collateralize FHLB borrowings and securities sold under agreements to
repurchase. We also have a $20 million revolving credit line facility with ANB
available for liquidity needs.
During the first three months of 2000, cash and cash equivalents increased
by $12.7 million. This increase was primarily the result of $18.1 million in
cash provided by financing activities (mainly customer deposits, net of
repayments of FHLB advances). Offsetting this increase was cash used in
investing activities of $8.1 million (mainly loan and lease originations) and
net cash of $2.7 million provided by operating activities.
During the first three months of 1999, cash and cash equivalents increased
by $5.5 million. This increase was primarily the result of $13.2 million in
cash provided by financing activities (mainly customer deposits and repurchase
agreements). Offsetting this increase was cash used in investing activities of
$10.3 million (mainly loan and lease originations) and net cash or $2.6 million
provided by operating activities.
Year 2000
No disruptions in our systems, service to customers or operations were
experienced as a result of the year 2000, referring to the date rollover from
December 31, 1999 to January 1, 2000. The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of our computer programs that have time-sensitive software
could have recognized a date using "00" as the year 1900 rather than the year
2000. This could have resulted in system failure or miscalculations, had
management not made the Year 2000 preparations disclosed previously in our
filings with the Securities and Exchange Commission.
31
Effects of Inflation and Changing Prices
The primary impact of inflation on our 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.
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 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 our financial
statements.
32
BUSINESS
General
We are a bank holding company headquartered in Denver, Colorado. Our wholly-
owned subsidiary Colorado Business Bank, N.A., is a full-service business
banking institution with nine Colorado locations, including six in the Denver
metropolitan area, two in Boulder and one in Edwards. As of March 31, 2000, we
had total assets of $511.9 million, net loans and leases of $358.7 million and
deposits of $419.3 million. We provide a broad range of banking products and
services, including credit, cash management, investment, deposit and trust
products, to our targeted customer base of small- and medium-sized businesses
and high net worth individuals. Each of our locations operates as a separate
business 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 conducted centrally from our downtown Denver office. As a result of this
operating approach, we believe that we are well positioned, combining the
elements of personalized service found in community banks with sophisticated
banking products and services traditionally offered by larger regional banks.
We were acquired by a group of private investors in September 1994. At that
time, our 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, 1995 to March 31, 2000, our
total assets increased to $511.9 million from $160.4 million, an increase of
219%; our net loans and leases increased to $358.7 million from $87.3 million,
an increase of 311%; and our deposits increased to $419.3 million from $137.5
million, an increase of 205%. During that period, we 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 our two bank charters into the Bank, which was renamed
Colorado Business Bank.
Business Strategy
Our primary strategy is to differentiate ourselves from our competitors by
providing our local bank presidents with substantial decision-making authority.
In all areas of our operations, we focus on attracting and retaining the
highest quality personnel by maintaining an entrepreneurial culture and
decentralized banking approach. In order to realize our strategic objectives,
we are pursuing the following strategies:
Internal growth. We believe that the Colorado banking market provides us
with significant opportunities for internal growth. The market is currently
dominated by a number of large regional and national financial institutions
that have acquired Colorado-based banks. We believe that this consolidation has
created gaps in the banking industry's ability to serve certain customers in
the Denver metropolitan area because small and medium-sized businesses often
are not large enough to warrant significant marketing focus and customer
service from these large banks. In addition, we believe that these banks often
do not satisfy the needs of high net worth individuals who desire personal
attention from experienced bankers. Similarly, we believe that many of the
remaining independent banks in the region do not provide the sophisticated
banking products and services that such customers require. Through our ability
to combine personalized service, experienced personnel who are established in
their community, sophisticated technology and a broad product line, we believe
that we will continue to achieve strong internal growth by attracting customers
currently banking at both larger and smaller financial institutions
33
and by expanding our business with existing customers. A significant amount of
our loan and lease growth to date has resulted from pre-existing customer
relationships established by our lending officers and senior management team.
De novo branching. We also intend to continue exploring growth opportunities
to expand through de novo branching in areas with high concentrations of our
target customers in Colorado and other western states. We intend to use
Colorado Business Bank -- Boulder as our model for further de novo branching.
Colorado Business Bank -- Boulder opened in November 1995 with a staff of three
experienced lending officers recruited from the Boulder branch of a large
national bank. We began our Boulder operations in a relatively small space in
an office building in downtown Boulder, rather than in a traditional, free-
standing bank building, thereby substantially decreasing overhead. As a result
of the market's acceptance of our business banking model, Colorado Business
Bank -- Boulder has grown significantly and recently relocated to a new larger
location. In addition, we recently added a second Boulder location. As of March
31, 2000, our Boulder locations had an aggregate of $73.8 million in loans and
$58.8 million in deposits.
New product lines. We also will seek to grow through the addition of new
product lines. Our product development efforts are focused on providing
enhanced credit, cash management, investment, deposit and trust products to our
target customer base. Within the past few years, we have greatly expanded our
commercial real estate lending department to allow for the origination of
larger and more complex real estate loans. In addition, we began to offer trust
and estate administration services in March 1998 and we will soon be
introducing employee benefits consulting and insurance brokerage services under
a newly organized subsidiary. We believe that offering such complementary
products allows us to both broaden our relationships with existing customers
and attract new customers to our core business. In addition, we believe that
the fees generated by these services will increase our non-interest income.
Expanding existing banking relationships. We are normally not a transaction
lender and typically require that borrowers enter into a multiple product
banking relationship with us, including deposits and cash management services,
in connection with the receipt of credit from the Bank. We believe that such
relationships provide us with the opportunity to introduce our customers to a
broader array of the products and services offered by us and generate
additional non-interest income. In addition, we believe that this philosophy
aids in customer retention.
Capitalizing on the use of technology. We believe that we have been able to
distinguish ourselves from traditional community banks operating in our market
through the use of technology. Our new data processing system allows us to
provide upgraded Internet banking, expanded cash management products and check
and document imaging, as well as a 24-hour voice response system. Other
services currently offered by the Bank include controlled disbursement, lock
box, repurchase agreements and sweep investment accounts. In addition to
providing sophisticated services for our customers, we utilize technology
extensively in our internal systems and operational support functions to
improve customer service, maximize efficiencies and provide management with the
information and analyses necessary to manage our growth effectively.
Emphasizing high quality customer service. We believe that our ability to
offer high quality customer service provides us with a competitive advantage
over many regional banks that operate in the Denver metropolitan area. We
emphasize customer service in all aspects of our operations and identify
customer service as an integral component of our employee training programs.
Moreover, we are constantly exploring methods to make banking an easier and
more convenient process for our customers. For example, we offer a courier
service to pick up deposits for customers who are not in close proximity to any
of the Bank's nine locations or simply do not have the time to go to the Bank.
34
Maintaining asset quality and controlling interest rate risk. We seek to
maintain asset quality through a program that includes regular reviews of loans
by responsible loan officers and ongoing monitoring of the loan and lease
portfolio by a loan review officer who reports directly to the audit committee
of our board of directors. As of March 31, 2000, our ratio of nonperforming
loans and leases to total loans and leases was 0.19%. In addition, we seek to
control our exposure to changing interest rates by attempting to maintain an
interest rate profile within a narrow range around an earnings neutral
position. An important element of this focus has been to emphasize variable
rate loans and investments funded by deposits which also mature or re-price
over periods of twelve months or less.
Achieving efficiencies and economies of scale through centralized
administrative and support operations. We seek to maximize operational and
support efficiencies in a manner consistent with maintaining high quality
customer service. We have consolidated various management and administrative
functions, including accounting, data processing, bookkeeping, credit
administration, loan operations and investment and cash management services, at
our downtown Denver office. We believe that this structure allows our bank
personnel to focus on customer service and sales strategies adapted to each
community that we serve.
Acquisitions. Although we have no current plans or agreements, we regularly
explore acquisitions of all or part of other financial institutions or
financial services entities, including opportunities in Colorado and other
western states.
Our approach to expansion is predicated on recruiting key personnel to lead
new initiatives. While we normally consider an array of new locations and
product lines as potential expansion initiatives, we will generally proceed
only upon identifying quality management personnel with a loyal customer
following in the community or experienced in the product line that is the
target of the initiative. We believe that, by focusing on individuals who are
established in their communities and are experienced in offering sophisticated
banking products and services, we enhance our market position and add growth
opportunities.
Market Area Served
Our 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 95,000 people since 1998. 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%.
In June 1999, we expanded beyond the Denver metropolitan area by
establishing an office, Colorado Business Bank of the Rockies ("Vail Valley"),
in Edwards, Colorado located in rapidly developing Vail Valley.
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 Vail Valley. The second downtown Denver location has received
regulatory approval to relocate to a new facility which is scheduled to open in
the second quarter of 2000. The following is selected additional market data
regarding the markets served by the Bank:
. Downtown Denver is the business center of metropolitan Denver.
35
. 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.
. The Vail Valley is anchored by Vail, a prime mountain resort area with a
vigorous high-end primary and second home construction market.
Construction activity in this area is fueling growth in other commercial
businesses supporting the expanding population base in the market.
Lending Activities
General. We provide 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. Our 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
March 31, 2000, 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 March 31, 2000, approximately 50% 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. We address credit risk through internal credit
policies and procedures, including underwriting criteria, officer and customer
lending limits, a multi-layered loan approval process for larger loans,
periodic document examination, justification for any exceptions to credit
policies, loan review and concentration monitoring. In addition, we provide
ongoing loan officer training and review.
Our 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.
We have 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.
36
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.
At December 31,
At March 31, ---------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ---------------- ---------------
Amount % Amount % Amount % Amount % Amount % Amount %
--------- ----- --------- ----- --------- ----- --------- ----- --------- ----- -------- -----
(Dollars in thousands)
Commercial............ $ 124,179 34.6 $ 130,428 37.7 $ 104,745 46.9 $ 78,152 47.6 $ 58,727 53.0 $ 35,101 40.1
Real estate --
mortgage............ 141,478 39.5 123,341 35.6 56,941 25.5 40,262 24.6 24,491 22.1 31,407 36.0
Real estate --
construction........ 54,833 15.3 53,552 15.5 34,210 15.3 27,786 16.9 19,119 17.3 14,557 16.7
Consumer.............. 20,392 5.7 21,873 6.3 16,913 7.6 11,732 7.2 8,266 7.5 6,356 7.3
Direct financing
leases -- net........ 22,682 6.3 21,485 6.2 13,741 6.2 8,407 5.1 1,805 1.6 1,282 1.5
--------- ----- --------- ----- --------- ----- --------- ----- --------- ----- -------- -----
Loans and leases...... $ 363,564 101.4 $ 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............... (4,855) (1.4) (4,585) (1.3) (3,271) (1.5) (2,248) (1.4) (1,660) (1.5) (1,393) (1.6)
--------- ----- --------- ----- --------- ----- --------- ----- --------- ----- -------- -----
Net loan and leases... $ 358,709 100.0 $ 346,094 100.0 $ 223,279 100.0 $ 164,091 100.0 $ 110,748 100.0 $ 87,310 100.0
========= ===== ========= ===== ========= ===== ========= ===== ========= ===== ======== =====
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"). As of March 31, 2000, the Bank's Individual
Lending Limit was $6.3 million. As of March 31, 2000, the Bank's Board of
Directors had established an internal lending limit of $4.4 million. To
accommodate customers whose financing needs exceed our internal lending limits,
and to address portfolio concentration concerns, we sell loan participations to
outside participants, including Hawthorne Colorado, Inc., an entity controlled
by Steven Bangert and Howard R. Ross, members of our Board of Directors. See
"Certain Relationships and Related Transactions." At March 31, 2000, December
31, 1999, December 31, 1998 and December 31, 1997, the outstanding balances of
loan participations sold by us were $15.8 million, $17.6 million, $14.8 million
and $10.1 million, respectively. We have retained servicing rights on all loan
participations sold. In addition, we had loan participations purchased from
other banks totaling $5.9 million as of March 31, 2000. We use the same
analysis in deciding whether or not to purchase a participation in a loan as we
would in deciding whether to originate the same loan.
In the ordinary course of business, we enter into various types of
transactions that include commitments to extend credit. We apply the same
credit standards to these commitments as we apply to our other lending
activities and have included these commitments in our lending risk evaluations.
Our exposure to credit loss under commitments to extend credit is represented
by the amount of these commitments.
Commercial Loans. Commercial lending 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. We provide a broad range of
commercial loans, including lines of credit for working capital purposes and
term loans for the acquisition of equipment and other purposes. Commercial
loans are generally collateralized by inventory, accounts receivable,
equipment, real estate and other commercial assets and may be supported by
other credit enhancements such as personal guarantees. However, where warranted
by the overall financial condition of the borrower, loans may be 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 we hold real property as collateral. We generally restrict
commercial real estate lending activity to owner-
37
occupied properties or to investor properties that are owned by customers with
which we have a current banking relationship. We make commercial real estate
loans at both fixed and floating interest rates, with maturities generally
ranging from five to 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, we originate 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 us. We also originate residential mortgage
loans on a limited basis as a service to our 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. We do not actively seek
permanent mortgage loans for our own portfolio, but, rather, syndicate such
loans to other financial institutions. However, for those permanent mortgage
loans that are extended, we attempt to apply conservative loan-to-value ratios
and obtain personal guarantees and generally require a strong history of debt
servicing capability and fully amortized terms of 15 years or less.
Real Estate Construction Loans. We originate loans to finance construction
projects involving one- to four-family residences. We provide financing to
residential developers that we believe have demonstrated a favorable record of
accurately projecting completion dates and budgeting expenses. We provide loans
for the construction of both pre-sold projects and projects built prior to the
location of a specific buyer, 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. We generally
require that a permanent financing commitment be in place before we make a
residential construction loan. Moreover, we generally monitor construction
draws monthly and inspect property to ensure that construction is progressing
as projected. Our underwriting standards generally require that the principal
amount of the loan be no more than 75% of the appraised value of the completed
construction project. Values are determined only by approved independent
appraisers.
We also originate 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 us. Our 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.
We selectively provide loans for the acquisition and development of land for
residential building projects by financially strong developers who maintain an
ongoing banking relationship with us. For this category of loans, our
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. We provide 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 business banking customers often work with the same
loan officer who handles their business banking relationships.
Direct financing leases. Through our equipment leasing subsidiary, CBL, we
provide lease financing as a complement to our other lending services. These
leases are structured as either operating or direct
38
financing leases, under which we retain title to the leased assets as security
for payment. Only direct financing leases are included in our loan and lease
portfolio. Operating leases are reported as investment in operating leases.
Although our 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
Our 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.
At At December 31,
March 31, --------------------------------------
2000 1999 1998 1997 1996 1995
--------- ------ ------ ------ ------ ------
(Dollars in thousands)
Nonperforming loans and
leases:
Loans and leases 90 days or
more delinquent and still
accruing interest.......... $ 2 $ 49 $ 4 $ -- $ -- $ --
Nonaccrual loans and
leases..................... 692 634 125 470 234 --
Restructured loans and
leases..................... -- -- 338 341 348 616
------ ------ ------ ------ ------ ------
Total nonperforming loans
and leases................ 694 683 467 811 582 616
Real estate acquired by
foreclosure................. -- -- -- -- 109 310
Repossessed assets........... 100 -- -- -- -- --
------ ------ ------ ------ ------ ------
Total nonperforming
assets.................... $ 794 $ 683 $ 467 $ 811 $ 691 $ 926
====== ====== ====== ====== ====== ======
Allowance for loan and lease
losses...................... $4,855 $4,585 $3,271 $2,248 $1,660 $1,392
====== ====== ====== ====== ====== ======
Ratio of nonperforming assets
to total assets............. 0.16% 0.14% 0.13% 0.31% 0.36% 0.58%
Ratio of nonperforming loans
and leases to total loans
and leases.................. 0.19 0.19 0.21 0.49 0.52 0.69
Ratio of allowance for loan
and lease losses to total
loans and leases............ 1.34 1.31 1.44 1.35 1.48 1.57
Ratio of allowance for loan
and lease losses to
nonperforming loans and
leases...................... 699.57 671.30 700.43 277.19 285.22 225.97
Accrual of interest is discontinued on a loan or lease when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that the collection of
interest is doubtful. A delinquent loan or lease is generally placed on
nonaccrual status when it becomes 90 days past due. When a loan or lease is
placed on nonaccrual status, all accrued and unpaid interest on the loan or
lease is reversed and deducted from earnings as a reduction of reported
interest income. No additional interest is accrued on the loan or lease balance
until the collection of both principal and interest becomes reasonably certain.
When the issues relating to a nonaccrual loan or lease are finally resolved,
there may ultimately be an actual write down or charge-off of the principal
balance of the loan or lease, which may necessitate additional charges to
earnings.
Restructured loans and leases are those for which concessions, including the
reduction of interest rates below a rate otherwise available to the borrower,
or the deferral of interest or principal, have been granted due to the
borrower's weakened financial condition. Interest on restructured loans and
leases is accrued at the restructured rates when it is anticipated that no loss
of original principal will occur.
39
The additional interest income that would have been recognized for the three
months ended March 31, 2000 and the years ended December 31, 1999 and December
31, 1998 if our 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 our 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 March 31, 2000, we
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. For our protection, management monitors
these loans and leases closely. However, further deterioration may result in
the loan or lease being classified as nonperforming. At March 31, 2000, we held
31 loans and leases considered by management to be potential problem loans or
leases, with outstanding principal totaling approximately $6.4 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.
40
The following table sets forth information regarding changes in our
allowance for loan and lease losses for the periods indicated.
For the
three months For the year ended December 31,
ended ----------------------------------------------
March 31, 2000 1999 1998 1997 1996 1995
-------------- -------- -------- -------- ------- -------
(Dollars in thousands)
Balance of allowance for
loan and lease losses
at beginning of
period................. $ 4,585 $ 3,271 $ 2,248 $ 1,660 $ 1,392 $ 1,181
-------- -------- -------- -------- ------- -------
Charge-offs:
Commercial............. 107 100 200 356 275 27
Real estate --
construction......... -- 5 -- -- 47 --
Real estate --
mortgage............. -- -- -- -- -- --
Consumer............... 2 80 32 38 6 18
Direct financing
leases................ 209 -- 4 -- -- --
-------- -------- -------- -------- ------- -------
Total charge-offs...... 318 185 236 394 328 45
-------- -------- -------- -------- ------- -------
Recoveries:
Commercial............. 14 24 66 6 61 10
Real estate --
construction......... -- -- -- -- 39 --
Real estate --
mortgage............. -- -- -- -- -- --
Consumer............... 1 2 5 27 3 3
Direct financing
leases................ -- -- -- -- -- --
-------- -------- -------- -------- ------- -------
Total recoveries....... 15 26 71 33 103 13
-------- -------- -------- -------- ------- -------
Net charge-offs......... (303) (159) (165) (361) (225) (32)
Provisions for loan and
lease losses charged to
operations............. 573 1,473 1,188 949 493 243
-------- -------- -------- -------- ------- -------
Balance of allowance for
loan and lease losses
at end of period....... $ 4,855 $ 4,585 $ 3,271 $ 2,248 $ 1,660 $ 1,392
======== ======== ======== ======== ======= =======
Ratio of net charge-offs
to average loans and
leases(1).............. .32% .06% .08% .26% .23% .04%
Average loans and leases
outstanding during the
period................. $358,445 $281,796 $197,851 $138,787 $98,075 $77,194
- -----------------
(1) The ratio for the three months ended March 31, 2000 has been annualized and
is not necessarily indicative of results for the entire year.
Our 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 March 31, 2000, the allowance for loan and
lease losses equaled 1.34% of total loans and leases.
Federal regulatory agencies, as an integral part of their examination
process, review our loans and allowance for loan and lease losses. We believe
that our 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 portfolio in the future, may request the Bank to increase such
allowance. Either of these events could adversely affect our earnings. Further,
there can be no assurance that our actual loan and lease losses will not exceed
the allowance for loan and lease losses.
41
Additions to the allowance for loan and lease losses, which are charged as
expenses on our income statement, are made periodically to maintain the
allowance at the appropriate level, based on our 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. We believe 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. We believe 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.
At December 31,
---------------------------------------------------------------------------------------
At March 31, 2000 1999 1998 1997 1996
--------------------- --------------------- --------------------- --------------------- ---------------------
Loans or Loans or Loans or Loans or Loans or
leases in leases in leases in leases in leases in
category category as category as category as category as
as a % of a % of a % of a % of a % of
total gross total gross total gross total gross total gross
Amount of loans and Amount of loans and Amount of loans and Amount of loans and Amount of loans and
Allowance leases Allowance leases Allowance leases Allowance leases Allowance leases
--------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
Commercial....... $ 812 34.2% $1,120 37.2% $ 832 46.2% $ 811 47.0% $ 510 52.2%
Real estate--
mortgage........ 1,104 38.9 728 35.2 522 25.1 296 24.2 189 21.8
Real estate--
construction.... 499 15.1 284 15.3 508 15.1 318 16.7 237 17.0
Consumer......... 223 5.6 233 6.2 99 7.5 73 7.0 51 7.4
Direct financing
leases.......... 150 6.2 183 6.1 243 6.1 -- 5.1 -- 1.6
Unallocated...... 2,067 0.0 2,037 0.0 1,067 0.0 750 0.0 673 0.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total........... $4,855 100.0% $4,585 100.0% $3,271 100.0% $2,248 100.0% $1,660 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
1995
---------------------
Loans or
leases in
category as
a % of
total gross
Amount of loans and
Allowance leases
--------- -----------
Commercial....... $ 527 39.6%
Real estate--
mortgage........ 151 35.4
Real estate--
construction.... 233 16.4
Consumer......... 49 7.2
Direct financing
leases.......... -- 1.4
Unallocated...... 433 0.0
--------- -----------
Total........... $1,393 100.0%
========= ===========
Investments
Our 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. Our
practice is to purchase primarily U.S. Treasury and U.S. Government Agency
securities. 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, we have invested primarily in
mortgage-backed securities that reprice annually. Our investment strategies are
reviewed at the meetings of the asset and liability management committee.
Our mortgage-backed securities are typically classified as available for
sale. Our goals with respect to our 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.
42
The following table sets forth the book value of the securities in our
investment portfolio by type at the dates indicated.
At At December 31,
March 31, -------------------------
2000 1999 1998 1997
--------- -------- -------- -------
(In thousands)
U.S. Treasury and U.S. government agency
securities............................... $ 11,617 $ 11,884 $ 17,764 $ 7,009
Mortgage-backed securities................ 89,132 94,393 87,104 48,354
State and municipal bonds................. 799 799 965 1,198
Federal Reserve and FHLB stock............ 2,960 2,455 1,961 2,012
Other investments......................... 390 390 143 211
-------- -------- -------- -------
Total................................... $104,898 $109,921 $107,937 $58,784
======== ======== ======== =======
The following table sets forth the book value, maturity or repricing
frequency, and approximate yield of the securities in our investment portfolio
at March 31, 2000.
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)
U.S. Treasury and U.S.
government agency
securities............. $ 2,315 4.25% $1,489 6.13% $ -- -- $ 7,813 6.38% $ 11,617 5.92%
Mortgage-backed
securities............. 65,417 6.74 2,940 6.50 20,775 5.50 -- -- 89,132 6.44
State and municipal
bonds.................. 490 6.91 -- 309 6.68 -- -- 799 6.82
Federal Reserve and FHLB
stock.................. -- -- -- -- -- -- 2,960 6.70 2,960 6.70
Other investments....... -- -- 390 16.62 -- -- -- 390 16.62
------- ------ ------- ------- --------
Total.................. $68,222 6.66% $4,819 7.20% $21,084 5.52% $10,773 6.47% $104,898 6.43%
======= ====== ======= ======= ========
- -----------------
(1) Yields do not include adjustments for tax-exempt interest because the
amount of such interest is not material.
Deposits
Our primary source of funds has historically been customer deposits. We
offer a variety of accounts for depositors, which are designed to attract both
short- and long-term deposits. These accounts include certificates of deposit,
savings accounts, money market accounts, checking and negotiable order of
withdrawal accounts and individual retirement accounts. At March 31, 2000,
$116.0 million, or 28%, of our deposits were non-interest-bearing deposits. We
believe that we receive a large amount of non-interest-bearing deposits because
we provide customers with the option of paying for services in cash or by
maintaining additional non-interest-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 we will be able to
continue to maintain such a high level of non-interest-bearing deposits.
Interest-bearing accounts earn interest at rates based on competitive market
factors and our desire to increase or decrease certain types of maturities or
deposits. We have not actively sought brokered deposits and do not currently
intend to do so.
43
The following tables present the average balances for each major category of
deposits and the weighted average interest rates paid for interest-bearing
deposits for the periods indicated.
For the three
months For the year ended December 31,
ended March 31, -----------------------------------------------------
2000 1999 1998 1997
----------------- ----------------- ----------------- -----------------
Weighted Weighted Weighted Weighted
average average average Average
Average interest Average interest Average interest Average interest
Balance rate Balance rate Balance rate Balance rate
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
NOW and money market
accounts............... $153,543 3.94% $122,688 3.30% $ 85,558 3.31% $ 66,222 3.23%
Savings................. 6,015 2.21 6,546 2.22 6,227 2.59 5,780 2.63
Certificates of deposit
under $100,000......... 24,454 5.36 25,950 5.09 21,507 5.42 16,942 5.18
Certificates of deposit
$100,000 and over...... 100,431 5.54 64,844 5.15 47,453 5.60 35,936 5.80
-------- -------- -------- --------
Total interest-bearing
deposits.............. 284,443 4.59 220,028 4.02 160,745 4.24 124,880 4.21
Non-interest-bearing
demand deposits........ 110,516 -- 101,793 -- 76,223 -- 54,706 --
-------- -------- -------- --------
Total deposits......... $394,959 3.30% $321,821 2.75% $236,968 2.87% $179,586 2.93%
======== ======== ======== ========
Maturities of certificates of deposit of $100,000 and more are as follows:
At March 31,
2000
--------------
(In thousands)
Remaining Maturity
Less than three months........................................... $ 64,860
Three months up to six months.................................... 13,150
Six months up to one year........................................ 12,351
One year and over................................................ 12,654
--------
Total.......................................................... $103,015
========
44
Short-Term Borrowings
Our 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 our short-term borrowings.
At or for
the three At or for the year
months ended ended December 31,
March 31, -------------------------
2000 1999 1998 1997
------------ ------- ------- -------
(Dollars in thousands)
Federal funds purchased:
Balance at end of period............. $ -- $ 1,300 $ 3,500 $ --
Average balance outstanding for
period.............................. 2,778 4,403 4,956 6,686
Maximum amount outstanding at any
month end during period............. 11,200 13,000 17,000 18,000
Weighted average interest rate for
period.............................. 5.98% 5.40% 5.54% 5.68%
Weighted average interest rate at
period end.......................... 0.00% 4.00% 5.06% 0.00%
Securities sold under agreements to
repurchase:
Balance at end of period............. $36,736 $33,053 $24,956 $13,024
Average balance outstanding for
period.............................. 34,366 40,421 18,811 10,916
Maximum amount outstanding at any
month end during period............. 36,736 51,982 24,956 17,625
Weighted average interest rate for
period.............................. 4.78% 4.41% 4.72% 4.92%
Weighted average interest rate at
period end.......................... 5.07% 4.53% 3.31% 4.58%
FHLB advances:
Balance at end of period............. $10,980 $30,980 $26,120 $ 3,260
Average balance outstanding for
period.............................. 26,834 18,041 4,626 4,167
Maximum amount outstanding at any
month end during period............. 36,680 32,050 26,120 4,400
Weighted average interest rate for
period.............................. 5.95% 5.48% 6.07% 6.72%
Weighted average interest rate at
period end.......................... 5.95% 5.88% 5.47% 6.46%
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 U.S. Bancorp, Inc., Banc One Corporation, Zions
Bancorporation, KeyCorp, Wells Fargo & Company and Compass Bancshares, Inc. In
addition to these regional banks, there are a number of smaller commercial
banks that operate in the area, including Guaranty Bank and Trust Company,
Colorado State Bank & Trust, First Bank Holding Company of Colorado, FirsTier
Financial, Inc., Union Bank and Trust and Citywide Banks, Inc. We compete for
loans and deposits with other banks (including those listed above), savings and
loan associations, finance companies, credit unions and mortgage bankers. In
addition to traditional financial institutions, we also compete for loans with
brokerage and investment banking companies and governmental agencies that make
available low cost or guaranteed loans to certain borrowers. Particularly in
times of high interest rates, we also face significant competition for deposits
from sellers of short-term money market securities and other corporate and
government securities.
By virtue of their larger capital bases or affiliation with larger multi-
bank holding companies, many of our competitors have substantially greater
capital resources and lending limits than us and perform other functions that
we offer only through correspondents. Interstate banking is permitted in
Colorado,
45
and, since January 1, 1997, unlimited state-wide branch banking is permitted.
As a result, we may experience greater competition in our primary service
areas. Our 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 us at a competitive
disadvantage because we may not have the capital to participate in other lines
of business to the same extent as more highly capitalized bank and financial
service companies.
Description of Property
We currently have nine banking locations and one leasing office. The ninth
banking location has received regulatory approval to move and is scheduled to
open in the second quarter of 2000. Our executive offices are located at 821
Seventeenth Street, Denver, Colorado, 80202. We lease our executive offices
from Kesef, LLC ("Kesef"), an entity owned by certain Bank directors and some
of our directors. The term of the lease expires in 2009. See "Certain
Relationships and Certain Transactions." We also lease all of our other
facilities. The following table sets forth specific information on each
location.
Lease
Location Address Expiration
- -------- ------- ----------
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
Vail Valley............. 439 Edwards Access Road, Edwards, Colorado, 81632 2004
Leasing Office.......... 999 Eighteenth Street, Suite 2400, Denver, Colorado, 80202 2001
All leased properties are considered in good operating condition and are
believed adequate for our present and foreseeable future operations. We do not
anticipate any difficulty in leasing additional suitable space upon expiration
of any present lease terms.
Legal Proceedings
Periodically and in the ordinary course of business, various claims and
lawsuits which are incidental to our business are brought against, or by, us.
We believe that the ultimate liability, if any, resulting from such claims or
lawsuits will not have a material adverse effect on our business, financial
condition or results of operations.
Employees
As of March 31, 2000, we had 146 employees, including 133 full-time
employees. None of our employees are covered by a collective bargaining
agreement, and we believe that our relationship with our employees is good.
46
SUPERVISION AND REGULATION
We, 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 our shareholders. The following
information summarizes certain material statutes and regulations affecting us
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 our and the Bank's
business, financial condition, results of operations and cash flows. We are
unable to predict the nature or extent of the effects that fiscal or monetary
policies, economic controls or new federal or state legislation may have on our
business and earnings in the future.
The Holding Company
General. We are a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), and are subject to regulation,
supervision and examination by the Board of Governors of the Federal Reserve
System (the "FRB"). We are 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, we are required to obtain the prior
approval of the FRB before acquiring direct or indirect ownership or control of
more than 5% of the voting shares of a bank or bank holding company. The FRB
will not approve any acquisition, merger or consolidation that would result in
substantial anti-competitive effects, unless the anti-competitive effects of
the proposed transaction are outweighed by a greater public interest in meeting
the needs and convenience of the public. In reviewing applications for such
transactions, the FRB also considers managerial, financial, capital and other
factors, including the record of performance of the applicant and the bank or
banks to be acquired under the Community Reinvestment Act of 1977, as amended
(the "CRA").
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 we
could acquire a bank outside of Colorado.
All acquisitions pursuant to the 1994 Act require regulatory approval. In
reviewing applications under the 1994 Act, an applicant's record under the CRA
must be considered, and a determination must be made that the transaction will
not result in any violations of federal or state antitrust laws. In addition,
there is a limit of 25% on the amount of deposits in insured depository
institutions in Colorado that can be controlled by any bank or bank holding
company.
The 1994 Act also permits bank subsidiaries of a bank holding company to act
as agents for affiliated institutions by receiving deposits, renewing time
deposits, closing loans, servicing loans and receiving payments on loans. As a
result, a relatively small Colorado bank owned by an out-of-state 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. We have registered as a financial holding company under
this new legislation.
47
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 our ratios at March 31, 2000 of (i) total capital
to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets and (iii)
Tier 1 leverage ratio.
At March 31, 2000
----------------------
Minimum
Ratio Actual Required Excess
----- ------ -------- ------
Total capital to risk-weighted assets................. 10.7% 8.0% 2.7%
Tier 1 capital to risk-weighted assets................ 9.5 4.0 5.5
Tier 1 leverage ratio................................. 7.7 4.0 3.7
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"), we 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.
Our maximum liability under any such guarantee would be the lesser of 5% of the
Bank's total assets at the time it became undercapitalized or the amount
necessary to bring the Bank into compliance with the capital plan. The FRB also
has stated that 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.
48
The Bank
General. The Bank is a national banking association, the deposits of which
are insured by the Bank Insurance Fund of the Federal Disposal Insurance
Corporation (the "FDIC"), and is subject to supervision, regulation and
examination by 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 us 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 us. If the affiliate is a bank and is at least 80% owned by us, such
transactions are generally exempted from these restrictions, except as to "low
quality" assets, as defined under the Federal Reserve Act, and transactions not
consistent with safe and sound banking practices. In addition, Section 23A
generally limits transactions with affiliates of the Bank to 10% of the Bank's
capital and surplus and generally limits all transactions with affiliates to
20% of the Bank's capital and surplus.
Section 23B of the Federal Reserve Act requires that certain transactions
between the Bank and any non-bank affiliate must be on substantially the same
terms, or at least as favorable to the Bank, as those prevailing at the time
for comparable transactions with, or involving, non-affiliated companies or, in
the absence of comparable transactions, on terms and under circumstances,
including credit standards, that in good faith would be offered to, or would
apply to, non-affiliated companies. The aggregate amount of the Bank's loans to
its officers, directors and principal shareholders (or their affiliates) is
limited to the amount of its unimpaired capital and surplus, unless the FDIC
determines that a lesser amount is appropriate.
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 our 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."
49
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. 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.
The following table sets forth the capital ratios of the Bank at March 31,
2000.
At March 31, 2000
----------------------
Minimum
Ratio Actual Required Excess
----- ------ -------- ------
Total capital to risk-weighted assets................. 10.4% 8.0% 2.4%
Tier 1 capital to risk-weighted assets................ 9.2 4.0 5.2
Tier 1 leverage ratio................................. 7.4 4.0 3.4
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.
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 us.
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.
50
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 us 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. We cannot predict whether any of these proposals will be adopted or,
if adopted, how these proposals would affect us.
Monetary Policy
The Monetary policy of the FRB has a significant effect on the operating
results of bank holding companies and their subsidiaries. Among the means
available to the FRB to affect the money supply are open market transactions in
U.S. government securities, changes in the discount rate on member bank
borrowings and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid on deposits. FRB monetary policies have
materially affected the operations of business 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 our and our
subsidiaries cannot be predicted.
51
MANAGEMENT
Directors, Executive Officers and Key Employees
The names and ages of the executive officers and key employees of Colorado
Business Bankshares, Inc. as of March 31, 2000, offices held by these officers
and key employees on that date and other positions held with Colorado Business
Bankshares, Inc. and its principal operating subsidiaries are set forth below.
Name Age Position
- ---- --- --------
Steven Bangert.......... 43 Chairman of the Board and Chief Executive Officer
Jonathan C. Lorenz...... 48 Vice Chairman of the Board and President
Richard J. Dalton....... 43 Executive Vice President and Chief Financial Officer
Kevin W. Ahern.......... 37 Senior Vice President
Lyne B. Andrich......... 33 Senior Vice President and Controller
Virginia K. Berkeley.... 47 President of Colorado Business Bank -- Denver and Director
Darrell J. Schulte...... 45 President of Colorado Business Bank -- Littleton
Charles E. Holmes....... 43 President of Colorado Business Bank -- Boulder
Andrew L. Bacon......... 44 President of Colorado Business Bank -- West
Kevin G. Quinn.......... 39 President of Colorado Business Bank -- DTC
Randal Garman........... 48 President of Colorado Business Bank of the Rockies
K. Denise Albrecht...... 47 President of Community Trust Division
Richard M. Hall, Jr..... 53 President of Colorado Business Leasing, Inc.
Mark S. Kipnis.......... 52 Director
Noel N. Rothman......... 70 Director
Howard R. Ross.......... 74 Director
Michael B. Burgamy...... 54 Director
Timothy J. Travis....... 55 Director
Steven Bangert has served as our Chairman of the Board of Directors and
Chief Executive Officer since September 1994. He also serves as Chairman of the
Board of Colorado Business Bank, N.A., our wholly-owned subsidiary and a
director of CBL. From August 1992 to present, Mr. Bangert has served as
President and a director of Western Capital Holdings, Inc. ("Western Capital"),
formerly the bank holding company for River Valley Bank -- Texas, located in
McAllen, Texas. From March 1992 to July 1998, Mr. Bangert also served as
Chairman of the Board of River Valley Bank -- Texas, and, from April 1988 to
July 1994, he served as Vice Chairman of the Board and Chief Executive Officer
of River Valley Savings Bank -- Illinois, a financial institution with
locations in Chicago and Peoria, Illinois. From February 1994 to July 1998, Mr.
Bangert served as a director and member of the executive committee of Lafayette
American Bank. He holds a B.S. degree in business administration from the
University of Nebraska -- Lincoln.
Jonathan C. Lorenz has served as our President and Vice Chairman of the
Board of Directors since March 1995. He also serves as Vice Chairman of the
Board and Chief Executive Officer of the Bank. From June 1993 to March 1995,
Mr. Lorenz pursued various business investment opportunities, including the
formation of First Western Growth Fund, a small business investment company.
Mr. Lorenz was employed by Colorado National Bank ("CNB") in various capacities
from September 1976 to June 1993. Mr. Lorenz' last position with CNB was Senior
Vice President and Manager of Corporate Banking. He holds a B.A. degree in
political science and an M.B.A. from the University of Colorado.
52
Richard J. Dalton has served as our Executive Vice President and Chief
Financial Officer since January 1997. From August 1992 to January 1998, Mr.
Dalton was the Vice President of Western Capital. From August 1992 to June
1998, Mr. Dalton served as the President and Chief Executive Officer of River
Valley Bank -- Texas. He holds a B.S. degree in business administration from
the University of Southern Colorado and an M.B.A. from the University of
Colorado.
Kevin W. Ahern has served as our Senior Vice President since May 2000. From
1999 to present, Mr. Ahern has served as President of Bighorn Partners, LLC, a
financial consulting and business investment firm. From 1997 to 1999, Mr. Ahern
was associated with Sterling Capital, Ltd., a Private Equity and Venture
Capital firm based in Chicago, Illinois. From 1991 to 1997, Mr. Ahern was a
Vice President and Senior Portfolio Manager for ING Investment Management in
Denver, Colorado. He holds a B.S. degree in business administration from the
University of Northern Colorado, an M.B.A. from the University of Connecticut,
and is a Chartered Financial Analyst (CFA).
Lyne B. Andrich has served as our Senior Vice President since July 1999 and
our Vice President and Controller since May 1997. From November 1995 to May
1997, Ms. Andrich was a regional reporting manager for Key Bank of the Rocky
Mountains. From June 1989 to November 1995, Ms. Andrich held several positions
and served as Assistant Controller and Reporting Manager and internal auditor
for Bank One, Colorado, N.A. She holds a B.S. degree in accounting from the
University of Florida and is licensed as a Certified Public Accountant in the
State of Colorado.
Virginia K. Berkeley has served as President of Colorado Business Bank --
Denver since May 1995 and as our director since October 1995. Ms. Berkeley
served as Senior Vice President and Manager of Business Banking of Bank One,
Denver from January 1994 to May 1995. From December 1986 to January 1994, Ms.
Berkeley held several positions with CNB, including President of CNB -- Tech
Center and CNB -- Northeast. Ms. Berkeley holds a B.S. degree in economics from
Purdue University and an M.B.A. from the University of Oklahoma.
Darrell J. Schulte has served as President of Colorado Business Bank --
Littleton since May 1985. Mr. Schulte has been employed in the banking
industry for 21 years. He holds a B.S. degree in finance from Colorado State
University.
Charles E. Holmes has served as President of Colorado Business Bank --
Boulder since June 1995. Mr. Holmes has been employed in the banking industry
for 20 years. Mr. Holmes served as Vice President and Manager of Commercial
Lending at Bank One -- Boulder from June 1992 to June 1995, where he was
responsible for a $300 million loan portfolio. He holds a B.S. degree in
business administration from Oklahoma State University.
Andrew L. Bacon has served as President of Colorado Business Bank -- West
since November 1997. From March 1997 to September 1997, Mr. Bacon served as
Senior Vice President of UMB Bank. From June 1988 to December 1996, Mr. Bacon
served as Senior Vice President in charge of the Commercial Banking Division at
Norwest Bank -- Golden. Mr. Bacon holds a B.S. degree in business
administration with a concentration in finance, from Colorado State University.
Kevin G. Quinn has served as President of Colorado Business Bank -- DTC
since May 1998. Prior to joining us, Mr. Quinn had been employed by Norwest
Bank of Colorado since June 1988. From June 1988 to May 1998, Mr. Quinn was a
Senior Vice President of Norwest, responsible for a private banking department
with assets in excess of $295 million. From October 1991 to June 1998, Mr.
Quinn was a Vice President and the Bank Manager of a Norwest Bank location in
downtown Denver. Mr. Quinn holds a Business Administration degree in general
business from the University of Northern Colorado and a graduate degree in
banking from the Stonier Graduate School of Banking of the University of
Delaware.
53
Randal Garman has served as President of Colorado Business Bank of the
Rockies since April 1999. From 1978 to present, Mr. Garman has been serving as
President of R. Garman, Inc. Mr. Garman has also served as Chairman of First
Bank of Vail Valley. He holds a B.S. degree from the University of Colorado.
K. Denise Albrecht has served as the President of our Community Trust
Division since October 1997. From May 1993 to October 1997, Ms. Albrecht served
as Senior Vice President and Denver Market Manager of the Trust Department of
Bank One, Colorado, N.A. Ms. Albrecht was employed, in several capacities, with
CNB from December 1988 to May 1993. From January 1993 to May 1993, Ms. Albrecht
served as President of Colorado Capital Advisors, a subsidiary of CNB, and,
from September 1988 to January 1993, she served as Vice President and
Institutional Services Division Manager for CNB. She holds a B.S. degree in
business administration and an M.B.A. from Northern Michigan University.
Richard M. Hall, Jr. has served as President of CBL, our equipment leasing
subsidiary, since January 1996 and has been employed in the banking and
financial services industry for 31 years. Prior to leading the formation of
CBL, Mr. Hall served as President of Evergreen Lifetime Income, Inc., a
development stage company in the reverse mortgage industry that he joined in
March 1995. From March 1989 to April 1995, Mr. Hall was employed by CNB, where
he served as the Commercial Banking Division Manager and as President of
Colorado National Leasing, Inc., a subsidiary of CNB. He holds B.S. and M.S.
degrees in business administration from Wichita State University and a graduate
degree in banking from the Southwestern Graduate School of Banking at Southern
Methodist University.
Mark S. Kipnis has served as a director of the Company since September 1994.
Since January 1998, he has also served as Vice President, Secretary and
Corporate Counsel for Hollinger International Inc., a newspaper publishing
company that is publicly traded on the New York Stock Exchange. From January
1979 to December 1997, Mr. Kipnis was a partner of the Chicago-based law firm
of Holleb & Coff. Prior to attending law school Mr. Kipnis was a Certified
Public Accountant with Price Waterhouse and Company. He holds a B.S. degree in
accounting from the University of Illinois and a J.D. degree from Northwestern
University School of Law.
Noel N. Rothman has served as a director of the Company since September
1994. Mr. Rothman is a private investor and has served as President of Namtor,
Inc. ("Namtor"), a closely held business services company in which he is a
principal shareholder, since September 1985. Mr. Rothman attended Wayne
University.
Howard R. Ross has served as a director of the Company since September 1994.
Mr. Ross is a private investor and has served as President of H.R. Financial,
Inc., a closely held investment company in which he is the principal
shareholder, since May 1994. From August 1992 to present, he has served as a
director of Western Capital, and, from August 1992 to July 1995, he served as
Vice Chairman of the Board of River Valley Bank -- Texas. He holds a B.S.
degree in mechanical engineering from the Illinois Institute of Technology.
Michael B. Burgamy has served as a director of the Company since May 1998.
From 1999 to present, Mr. Burgamy has served as the Chief Financial Officer of
Colibri Holding Corporation, a manufacturer of pet products and garden
supplies. From 1991 to 1999 he was President of Perky-Pet Products Co., a
manufacturer of pet products and supplies. From January 1976 to November 1994,
he was President of CGS Distributing, Inc., a wholesale distributor of lawn and
garden supplies. He holds a B.S. degree in engineering management from the
United States Air Force Academy.
Timothy J. Travis has served as a director of the Company since May 1998.
Since November 1981, Mr. Travis has been the President and Chief Executive
Officer of Eaton Metal Products Company, with which he has been employed since
1958.
54
Executive Compensation
The following table sets forth the cash and noncash compensation for fiscal
years 1997, 1998 and 1999 awarded to or earned by (i) the individual who served
as our Chief Executive Officer ("CEO") in fiscal year 1999; and (ii) our four
most highly compensated executive officers, other than the CEO (collectively,
with the CEO, the "Named Executive Officers,") who were serving as executive
officers for fiscal year 1999:
Summary Compensation Table
Annual Long Term All Other
Compensation Compensation Compensation
--------------- ------------ ------------
Securities
Fiscal Salary Bonus Underlying
Name and Principal Position Year ($)(1) ($)(2) Options(#) ($)
- --------------------------- ------ -------- ------ ------------ ------------
Steven Bangert............... 1999 $187,480 $ 0 28,867 $15,062(3)
Chairman and CEO 1998 149,725 37,700 0 17,739
1997 125,000 0 0 16,189
Jonathan C. Lorenz........... 1999 177,670 42,000 12,300 15,351(4)
Vice Chairman and President 1998 150,800 37,700 0 15,228
1997 145,000 39,000 0 15,086
Virginia K. Berkeley......... 1999 117,704 21,000 5,000 11,793(5)
President -- Colorado
Business Bank -- Denver 1998 110,240 21,200 0 12,364
1997 106,000 25,000 0 12,323
Richard J. Dalton............ 1999 116,404 21,000 8,000 12,401(6)
Executive Vice President and
CFO 1998 99,167 10,000 0 12,209
1997 45,000 0 16,500 6,256
Richard M. Hall, Jr.......... 1999 103,572 16,818 0 11,017(7)
President -- Colorado
Business Leasing, Inc. 1998 100,700 8,526 0 12,763
1997 99,837 26,236 0 12,883
- -----------------
(1) Actual salary paid in each respective fiscal year.
(2) Actual bonus paid in each respective fiscal year
(3) Includes $834 in club dues, $8,695 in 401(k) matching funds, $2,480 worth
of company automobile benefits, and $3,053 in insurance premiums.
(4) Includes $9,679 in 401(k) matching funds, $2,670 worth of company
automobile benefits, and $3,003 in insurance premiums.
(5) Includes $6,385 in 401(k) matching funds, $2,704 worth of company
automobile benefits, and $2,704 in insurance premiums.
(6) Includes $1,908 in club dues, $6,385 in 401(k) matching funds, $1,404 worth
of company automobile benefits, and $2,704 in insurance premiums.
(7) Includes $5,591 in 401(k) matching funds, $2,872 worth of company
automobile benefits, and $2,554 in insurance premiums.
55
The following table summarizes individual grants of stock options made
during the 1999 fiscal year to each of the Named Executive Officers:
Potential
realizable value
at assumed
annual rates of
stock price
appreciation for
Individual Grants option term
-------------------------------------------- ----------------
Percent of
Number of total options
securities granted to Exercise
underlying employees or base
Options in fiscal price Expiration
Name granted year ($/Sh) date 5% 10%
- ---- ---------- ------------- -------- ---------- ------- --------
Steven Bangert.......... 7,183 4.3% 18.00 1/12/04 -- $ 18,173
7,184 4.3 18.00 1/12/04 -- 18,176
14,500 8.7 16.00 1/12/04 3,915 65,685
------ ---- ------- --------
28,867 17.4% $ 3,915 $102,034
Jonathan C. Lorenz...... 2,300 1.4 18.00 1/12/09 $ 6,371 $ 34,661
10,000 6.0 16.00 1/12/09 47,700 170,700
------ ---- ------- --------
12,300 7.4% $54,071 $205,361
Virginia K. Berkeley.... 5,000 3.0% 16.00 1/12/09 $23,850 $ 85,350
Richard J. Dalton....... 3,000 1.8 18.00 1/12/09 $ 8,310 $ 45,210
5,000 3.0 16.00 1/12/09 23,850 85,350
------ ---- ------- --------
8,000 4.8% $32,160 $130,560
The following table summarizes, on an aggregate basis, each exercise of
stock options during the 1999 fiscal year by each of the Named Executive
Officers and the 1999 fiscal year-end value of their unexercised options.
Number of securities Value of unexercised in-
underlying unexercised the-money options at
Shares options at FY-end(#) FY-end($)
Acquired on Value ------------------------- -------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Steven Bangert.......... 0 0 7,183 21,684 0 0
Jonathan C. Lorenz...... 0 0 40,471 10,000 $405,758 0
Virginia K. Berkeley.... 0 0 25,919 7,356 $268,026 $22,547
Richard J. Dalton....... 0 0 11,247 13,247 $ 72,374 $72,374
Richard M. Hall, Jr..... 0 0 0 0 0 0
Employment Agreements
We have entered into employment agreements with each of Jonathan C. Lorenz,
Virginia K. Berkeley, Richard M. Hall, Jr. and Richard J. Dalton. Each such
agreement is terminable at will by us or the employee and provides for annual
salary, the use of a Company automobile, expenses related to membership at a
country, health or social club and eligibility for a bonus and stock option
grants. Each such agreement provides that, during the term of the agreement and
for one year thereafter, the employee is prohibited from soliciting any of our
or the Bank's employees or customers. In the event that we terminate the
employment agreement for reasons other than "for cause," or we constructively
discharge the employee (for example, by materially decreasing his or her
responsibilities or his or her compensation)
56
or the employee's employment is terminated because of disability or death, we
are required to pay the employee one full year of salary (including bonus) and
maintain all other benefits for one full year after termination. Moreover, each
such employment agreement requires us to make a lump sum payment to such
employee in an amount equal to a multiple of such employee's annual
compensation in the event that their employment is terminated within two years
of the occurrence of certain types of changes of control of us or the Bank. As
of March 24, 2000, the estimated payments that would be due to Mr. Lorenz, Ms.
Berkeley, Mr. Hall and Mr. Dalton upon a termination of employment after such a
change in control were $696,750, $349,000, $141,104 and $310,710, respectively.
Compensation of Directors
Each director who is not our employee is paid a director's fee of $1,000 for
each meeting of our Board of Directors, or any committee thereof, attended by
such director. In addition, in 1999, each director, who was not one of our
officers, received 1,725 options to purchase common stock with a strike price
of $18.00 per share, under the 1997 Option Plan. These options vested in full
immediately and have terms of five to ten years. Our directors who also serve
as officers do not receive additional compensation for their services as
directors or committee members. All directors are reimbursed for expenses
incurred in attending board and committee meetings.
Limitations of Liability and Indemnification Matters
Our charter provides indemnity to our directors and officers to the extent
permitted by Colorado and federal law. The charter also includes provisions to
eliminate the personal liability of our directors and officers to our
shareholders to the fullest extent permitted by Colorado and federal law. Under
current law, exculpation would cover an officer's or director's breaches of
fiduciary duty, except for:
. breaches of a person's duty of loyalty to us,
. those instances where a person is found not to have acted in good faith,
. those instances where a person received an improper personal benefit as
a result of the breach, and
. acts in violation of the Colorado Business Corporation Act.
Our bylaws provide that we will indemnify our directors, officers and
employees against judgments, fines, amounts paid in settlement and reasonable
expenses.
57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our executive officers, key employees, directors and principal shareholders,
members of their immediate families and businesses in which they hold
controlling interests are our customers, and it is anticipated that such
parties will continue to be our customers in the future. All outstanding loans
and extensions of credit by us to these parties were made in the ordinary
course of business in accordance with applicable laws and regulations and on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unaffiliated persons,
and, in our opinion, do not involve more than the normal risk of collectibility
or contain other features unfavorable to us. At December 31, 1999, the
aggregate balance of our loans and advances under existing lines of credit to
these parties was approximately $3.6 million, or 1.0% of our total loans and
leases.
From time to time, Hawthorne Colorado, Inc. ("Hawthorne,") an entity
controlled by Messrs. Bangert and Ross, purchases participations in loans
originated by us that we do not fund fully because of our legal lending limit
or in order to manage portfolio concentration. During 1999, Hawthorne
participated in 13 real estate loans, with an aggregate participation
commitment of $9.2 million, of which three loans, with an aggregate balance of
$1.2 million, were outstanding as of December 31, 1999. We believe that the
terms of such participations were commensurate with terms that would be
negotiated in similar transactions between unrelated third parties. Hawthorne
receives interest on the portion of such loans funded by it at the same rate as
the Bank does on the portion that it funds. In addition, Hawthorne receives a
share of origination fees for such loans.
We lease approximately 37,000 square feet of our downtown Denver facility
from Kesef, LLC ("Kesef,") an entity in which Evan Makovsky (director of the
Bank) owns 20% and Jack Stern (director of the Bank) and Messrs. Bangert,
Lorenz, Ross and Rothman (through Namtor-Denver Property LLC) each own a 16%
interest, for approximately $49,000 per month. Kesef purchased the building
from its previous owners in January 1998. The initial term of this lease is ten
years, with an option to renew for an additional ten-year term at current
market rates.
In July 1997, the Bank committed to purchase up to $500,000 of limited
partnership interests in Prairie Capital Mezzanine Fund, L.P. ("Prairie
Capital,") an investment fund having $24 million in total capital commitments,
that makes subordinated debt and preferred stock investments in a wide variety
of small businesses throughout the United States. Prairie Capital is licensed
as a Small Business Investment Company (an "SBIC.") We intend to refer
companies in our area requiring this type of investment capital to Prairie
Capital. As of March 31, 2000, the Bank's aggregate investment in Prairie
Capital was $390,000, and the Bank was subject to additional capital calls
pursuant to which it may be required to invest additional capital of $110,000
in Prairie Capital. Messrs. Bangert and Ross, Mr. Ross' wife and Namtor, an
entity controlled by Mr. Rothman, have made individual capital commitments to
Prairie Capital in amounts of $2 million, $2 million, $50,000 and $1.5 million,
respectively, and own interests in Prairie Capital proportionate to their
capital commitments. Messrs. Bangert and Ross are members of the advisory board
of Prairie Capital. The general partner of Prairie Capital has agreed to make
certain payments to the Bank, Messrs. Bangert and Ross, Mrs. Ross and Namtor
(pro rata, in proportion to their respective investments in Prairie Capital)
following the liquidation of Prairie Capital in the event that they do not
realize an internal rate of return of at least 25% on their respective
investments.
The Bank has committed $1,000,000 to a second fund, Prairie Capital
Mezzanine Fund II, L.P. ("Prairie Capital II,") but funding will not start
until later in the year 2000.
58
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of March 24, 2000, certain information
regarding beneficial ownership of our common stock by (i) each shareholder
known by us to be the beneficial owner of more than 5% of the outstanding
common stock, (ii) each of our directors, (iii) each Named Executive Officer
and (iv) all of our directors, executive officers and key employees as a group.
Unless otherwise indicated, we believe that the shareholders listed below have
sole investment and voting power with respect to their shares based on
information furnished to us by such owners.
Beneficial Ownership
-----------------------------
Number of shares Percent of
Name and Address of owner (1) beneficially owned class (%)
- ----------------------------- ------------------ ----------
Steven Bangert (2).............................. 1,166,378 17.36
Jonathan C. Lorenz (3).......................... 156,542 2.32
Virginia K. Berkeley (4)........................ 44,806 *
Richard M. Hall, Jr............................. 0 *
Richard J. Dalton (5)........................... 88,392 1.32
Mark S. Kipnis (6).............................. 48,303 *
Noel N. Rothman (7)............................. 748,444 11.16
Howard R. Ross (8).............................. 1,088,322 16.22
Michael B. Burgamy (9).......................... 91,000 1.36
Timothy J. Travis (10).......................... 38,575 *
All directors, executive officers and key em-
ployees as a group (17 persons) (11).............. 3,599,186 52.32
- -----------------
(*) Denotes less than 1%.
(1) Unless otherwise indicated, the address of each of the above-named
shareholders is c/o Colorado Business Bankshares, Inc., 821 Seventeenth
Street, Denver, Colorado 80202.
(2) Includes 4,927 shares held jointly by Mr. Bangert and his wife, 106,030
shares held by Mr. Bangert's minor children, 115,575 shares held by
Hawthorne Colorado, Inc. ("Hawthorne"), an entity of which Mr. Bangert is
a director and 50% shareholder, and 14,367 shares which may be issued upon
the exercise of options which with all options are currently exercisable
or which will become exercisable within 60 days after March 24, 2000.
(3) Includes 500 shares held by Mr. Lorenz' minor children and 40,471 shares
which may be issued upon the exercise of options which are currently
exercisable or which become exercisable within 60 days after March 24,
2000.
(4) Includes 1,678 shares held by Ms. Berkeley's minor child and 30,875 shares
which may be issued upon the exercise of options which are currently
exercisable or which become exercisable within 60 days after March 24,
2000.
(5) Includes 15,704 shares which may be issued upon the exercise of options
which are currently exercisable or which become exercisable within 60 days
after March 24, 2000.
(6) Includes 3,300 shares which may be issued upon the exercise of options
which are currently exercisable or which become exercisable within 60 days
after March 24, 2000.
(7) Includes 17,000 shares held by NaF Limited Partnership, an entity of which
Mr. Rothman is a general partner and 3,300 shares which may be issued upon
the exercise of options which are currently exercisable or which become
exercisable within 60 days after March 24, 2000.
(8) Includes 29,975 shares held by Mr. Ross' wife and 115,575 shares held by
Hawthorne, an entity of which Mr. Ross is a director and 50% shareholder,
and 4,400 shares which may be issued upon the exercise of options which
are currently exercisable or which become exercisable within 60 days after
March 24, 2000.
(9) Includes 4,400 shares which may be issued upon the exercise of options
which are currently exercisable or which become exercisable within 60 days
after March 24, 2000.
(10) Includes 3,300 shares which may be issued upon the exercise of options
which are currently exercisable or which become exercisable within 60 days
after March 24, 2000.
(11) Includes 174,000 shares which may be issued upon the exercise of options
which are currently exercisable or which become exercisable within 60 days
after March 24, 2000.
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DESCRIPTION OF THE TRUST
The trust is a statutory business trust formed pursuant to the Delaware
Business Trust Act under a trust agreement executed by us, as sponsor for the
trust, and the trustees, and a certificate of trust filed with the Delaware
Secretary of State. The trust agreement will be amended and restated in its
entirety in the form filed as an exhibit to the registration statement of which
this prospectus is a part, as of the date the capital securities are initially
issued. The trust agreement will be qualified under the Trust Indenture Act of
1939, as amended.
The holders of the capital securities issued pursuant to the offering
described in this prospectus will own all of the issued and outstanding capital
securities. We will not initially own any of the capital securities. We will
acquire common securities in an amount equal to at least 3% of the total
capital of the trust and will initially own, directly or indirectly, all of the
issued and outstanding common securities (together with the capital securities,
the "trust securities"). The trust exists for the purposes of:
. issuing the capital securities to the public for cash;
. issuing its common securities to us in exchange for our capitalization
of the trust;
. investing the proceeds from the sale of the trust securities in an
equivalent amount of debentures; and
. engaging in other activities that are incidental to those listed above.
The rights of the holders of the trust securities are as set forth in the
trust agreement, the Delaware Business Trust Act and the Trust Indenture Act.
The trust agreement does not permit the trust to borrow money or make any
investment other than in the debentures. Other than with respect to the trust
securities, we have agreed to pay for all debts and obligations and all costs
and expenses of the trust, including the fees and expenses of the trustees and
any income taxes, duties and other governmental charges, and all costs and
expenses related to these charges, to which the trust may become subject,
except for United States withholding taxes that are properly withheld.
The number of trustees of the trust will initially be five. Three of the
trustees will be persons who are employees or officers of or who are affiliated
with us (the "administrative trustees"). The fourth trustee will be an entity
that maintains its principal place of business in the State of Delaware (the
"Delaware trustee"). Initially, First Union Trust Company, National
Association, a national banking association ("First Union"), will act as
Delaware trustee. The fifth trustee will be a financial institution that is
unaffiliated with us and will serve as institutional trustee under the trust
agreement and as indenture trustee for the purposes of compliance with the
provisions of the Trust Indenture Act (the "property trustee"). Initially,
First Union will also be the property trustee. For the purpose of compliance
with the Trust Indenture Act, First Union will also act as guarantee trustee
and indenture trustee under the guarantee agreement and the indenture. See
"Description of the Debentures" and "Description of the Guarantee." We, as
holder of all of the common securities, will have the right to appoint or
remove any trustee unless an event of default under the indenture shall have
occurred and be continuing, in which case only the holders of the capital
securities may remove the indenture trustee or the property trustee. The trust
has a term of approximately 31 years, but may terminate earlier as provided in
the trust agreement.
The property trustee will hold the debentures for the benefit of the holders
of the trust securities and will have the power to exercise all rights, powers
and privileges under the indenture as the holder of the debentures. In
addition, the property trustee will maintain exclusive control of a segregated
non-interest-bearing "property account" to hold all payments made on the
debentures for the benefit of the holders of the trust securities. The property
trustee will make payments of distributions and payments on liquidation,
redemption and otherwise to the holders of the trust securities out of funds
from the property account. The guarantee trustee will hold the guarantee for
the benefit of the holders of the capital securities. We will pay all fees and
expenses related to the trust and the offering of the capital securities,
including the fees and expenses of the trustees.
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DESCRIPTION OF THE CAPITAL SECURITIES
The capital securities will be issued pursuant to the trust agreement, which
will be qualified as an indenture under the Trust Indenture Act. First Union
will act as property trustee for the capital securities under the trust
agreement for purposes of complying with the provisions of the Trust Indenture
Act. The terms of the capital securities will include those stated in the trust
agreement and those made part of the trust agreement by the Trust Indenture
Act. A form of the trust agreement has been filed as an exhibit to the
registration statement of which this prospectus forms a part.
General
The trust agreement authorizes the administrative trustees, on behalf of the
trust, to issue the trust securities, which consist of the capital securities
to be sold to the public and the common securities. We will own all of the
common securities issued by the trust. The capital securities will represent
preferred undivided beneficial interests in the assets of the trust, and the
holders of the capital securities will be entitled to a preference over the
common securities upon an event of default with respect to distributions and
amounts payable on redemption or liquidation. The trust is not permitted to
issue any securities other than the trust securities or to incur any other
indebtedness.
The capital securities will rank equally, and payments on the capital
securities will be made proportionally, with the common securities, except as
described under "-- Subordination of Common Securities" below.
The property trustee will hold legal title to the debentures in trust for
the benefit of the holders of the trust securities. We will guarantee the
payment of distributions out of money held by the trust, and payments upon
redemption of the capital securities or liquidation of the trust, to the extent
described under "Description of the Guarantee." The guarantee agreement does
not cover the payment of any distribution or the liquidation amount when the
trust does not have sufficient funds available to make these payments.
Distributions
Source of Distributions. The funds of the trust available for distribution
to holders of the capital securities will be limited to payments made under the
debentures, which the trust will purchase with the proceeds from the sale of
the trust securities. Distributions will be paid through the property trustee,
which will hold the amounts received from our interest payments on the
debentures in the property account for the benefit of the holders of the trust
securities. If we do not make interest payments on the debentures, the property
trustee will not have funds available to pay distributions on the capital
securities.
Payment of Distributions. Distributions on the capital securities will be
payable at the annual rate of 10% of the $10 stated liquidation amount, payable
quarterly on March 31, June 30, September 30 and December 31 of each year, to
the holders of the capital securities on the relevant record dates. The record
date will be the business day immediately preceding the relevant distribution
date. The first distribution date for the capital securities will be September
30, 2000.
Distributions will accumulate from the date of issuance, will be cumulative
and will be computed on the basis of a 360-day year of twelve 30-day months. If
the distribution date is not a business day, payment of the distributions will
be made on the next day that is a business day, without any additional interest
or other payment for the delay. However, if the next business day is in the
next calendar year, payment of the distribution will be made on the business
day immediately preceding the scheduled
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distribution date. "Business day" means any day other than a Saturday, a
Sunday, a day on which banking institutions in New York, New York or
Wilmington, Delaware are authorized or required by law or executive order to
remain closed or a day on which the corporate trust office of the property
trustee or the indenture trustee is closed for business.
Extension Period. As long as no event of default under the indenture has
occurred and is continuing, we have the right to defer the payment of interest
on the debentures at any time for a period not exceeding 20 consecutive
quarters. However, no extension period may extend beyond June 30, 2030 or end
on a date other than an interest payment date, which dates are the same as the
distribution dates. If we defer the payment of interest, quarterly
distributions on the capital securities will also be deferred during any such
extension period. Any deferred distributions under the capital securities will
accumulate additional amounts at the annual rate of 10%, compounded quarterly
from the relevant distribution date. The term "distributions" as used in this
prospectus includes those accumulated amounts.
During an extension period, we may not:
. declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of our
capital stock (other than the reclassification of any class of our
capital stock into another class of capital stock) or allow any of our
subsidiaries to do the same with respect to their capital stock (other
than the payment of dividends or distributions to us);
. make any payment of principal, interest or premium on or repay,
repurchase or redeem any debt securities that rank equally with or
junior in interest to the debentures or allow any of our subsidiaries to
do the same;
. make any guarantee payments with respect to any other guarantee by us of
any other debt securities of any of our subsidiaries if such other
guarantee ranks equally with or junior to the debentures (other than
payments under the guarantee); or
. redeem, purchase or acquire less than all of the debentures or any of
the capital securities.
After the termination of any extension period and the payment of all amounts
due, we may elect to begin a new extension period, subject to the above
requirements.
We do not currently intend to exercise our right to defer distributions on
the capital securities by extending the interest payment period on the
debentures.
Redemption or Exchange
General. Subject to the prior approval of the Federal Reserve, if required,
we will have the right to redeem the debentures:
. in whole at any time, or in part from time to time, on or after June 30,
2005; or
. at any time, in whole, within 90 days following the occurrence of a Tax
Event, an Investment Company Event or a Capital Treatment Event, as
defined below.
Mandatory Redemption. Upon our repayment or redemption, in whole or in part,
of any debentures, whether on June 30, 2030 or earlier, the property trustee
will apply the proceeds to redeem the same amount of the trust securities, upon
not less than 30 days' nor more than 60 days' notice, at the redemption price.
The redemption price will equal 100% of the aggregate liquidation amount of the
trust
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securities, plus accumulated but unpaid distributions and Additional Interest
(as defined below) to the date of redemption. If less than all of the
debentures are to be repaid or redeemed on a date of redemption, the proceeds
from such repayment or redemption will be allocated to redemption of the
capital securities and the common securities proportionately.
Additional Interest means the additional amounts as may be necessary to be
paid by us in order that the amount of distributions then due and payable by
the trust on the outstanding trust securities will not be reduced as a result
of any additional taxes, duties and other governmental charges to which the
trust has become subject.
Distribution of Debentures. Upon prior approval of the Federal Reserve, if
required, we will have the right at any time to dissolve, wind-up or terminate
the trust and, after satisfaction of the liabilities of creditors of the trust
as provided by applicable law, including, without limitation, amounts due and
owing the trustees of the trust, to cause the debentures to be distributed
directly to the holders of trust securities in liquidation of the trust. See
"-- Liquidation Distribution Upon Termination."
After the liquidation date fixed for any distribution of debentures in
exchange for capital securities:
. those capital securities will no longer be deemed to be outstanding;
. any certificates representing capital securities will be deemed to
represent debentures with a principal amount equal to the liquidation
amount of those capital securities and bearing accrued and unpaid
interest in an amount equal to the accumulated and unpaid distributions
on the capital securities until the certificates are surrendered to the
administrative trustees in exchange for certificates representing the
debentures.
There can be no assurance as to the market prices for the capital
securities or the debentures that may be distributed if a dissolution and
liquidation of the trust were to occur. The capital securities that an
investor may purchase, or the debentures that an investor may receive on
dissolution and liquidation of the trust, may trade at a discount to the price
that the investor paid to purchase the capital securities.
Redemption upon a Tax Event, Investment Company Event or Capital Treatment
Event. If a Tax Event, an Investment Company Event or a Capital Treatment
Event occurs, we will have the right to redeem the debentures in whole and
thereby cause a mandatory redemption of the trust securities subject to our
having received the prior approval of the Federal Reserve, if then required,
in whole at the redemption price. If one of these events occurs and we do not
elect to redeem the debentures, or to dissolve the trust and cause the
debentures to be distributed to holders of the trust securities, the capital
securities will remain outstanding and Additional Interest may be payable on
the debentures. See "Description of Debentures -- Redemption or Exchange"
above.
Tax Event means the receipt by the trust and us of an opinion of counsel
experienced in such matters stating that:
. interest payable by us on the debentures is not, or within 90 days after
the date of the opinion will not be, deductible by us, in whole or in
part, for federal income tax purposes;
. the trust is, or will be within 90 days after the date of the opinion,
subject to federal income tax with respect to income received or accrued
on the debentures; or
. the trust is, or will be within 90 days after the date of opinion,
subject to more than an immaterial amount of other taxes, duties,
assessments or other governmental charges as a result of any amendment
to any tax laws or regulations.
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Investment Company Event means the receipt by the trust and us of an opinion
of counsel experienced in such matters to the effect that the trust is or will
be considered an "investment company" that is required to be registered under
the Investment Company Act of 1940 as a result of a change in law or regulation
or a change in interpretation or application of laws or regulations.
Capital Treatment Event means the receipt by the trust and us of an opinion
of counsel experienced in such matters to the effect that there is more than an
insubstantial risk of impairment of our ability to treat the capital securities
as Tier 1 capital for purposes of the current capital adequacy guidelines of
the Federal Reserve as a result of any amendment to any laws or any
regulations.
For all of the events described above, we or the trust must request and
receive an opinion with regard to the event within a reasonable period of time
after we become aware of the possible occurrence of an event of such kind.
Redemption Procedures
Capital securities will be redeemed at the redemption price with the
applicable proceeds from our contemporaneous redemption of the debentures.
Redemptions of the capital securities will be made, and the redemption price
will be payable, on each redemption date only to the extent that the trust has
funds available for the payment of the redemption price. See "-- Subordination
of Common Securities" below.
Notice of any redemption will be mailed at least 30 days, but not more than
60 days, before the date of redemption to each holder of trust securities to be
redeemed at its registered address. Unless we default in payment of the
redemption price on the debentures, interest will cease to accumulate on the
debentures called for redemption on and after the date of redemption.
If the trust gives notice of redemption of its trust securities, the
property trustee, to the extent funds are available, will irrevocably deposit
with the depositary for the trust securities funds sufficient to pay the
aggregate redemption price and will give the depositary for the trust
securities irrevocable instructions and authority to pay the redemption price
to the holders upon surrender of their certificates evidencing the trust
securities. See "Book-Entry Issuance." If the capital securities are no longer
in book-entry form, the property trustee, to the extent funds are available,
will deposit with the designated paying agent for such capital securities funds
sufficient to pay the aggregate redemption price and will give the paying agent
irrevocable instructions and authority to pay the redemption price to the
holders upon surrender of their certificates evidencing the capital securities.
Notwithstanding the foregoing, distributions payable on or prior to the date of
redemption for any trust securities called for redemption will be payable to
the holders of the trust securities on the relevant record dates for the
related distribution dates.
If notice of redemption has been given and we have deposited funds as
required on the date of the deposit, all rights of the holders of the trust
securities called for redemption will cease, except the right to receive the
redemption price, but without interest on such redemption price after the date
of redemption. The trust securities will also cease to be outstanding on the
date of the deposit. If any date fixed for redemption of trust securities is
not a business day, payment of the redemption price payable on that date will
be made on the next day that is a business day without any additional interest
or other payment in respect of the delay. However, if the next business day is
in the next succeeding calendar year, payment of the interest will be made on
the immediately preceding business day.
If payment of the redemption price in respect of trust securities called for
redemption is improperly withheld or refused and not paid by the trust, or by
us pursuant to the guarantee, distributions on the trust
64
securities will continue to accumulate at the applicable rate from the date of
redemption originally established by the trust for the trust securities to the
date the redemption price is actually paid. In this case, the actual payment
date will be considered the date fixed for redemption for purposes of
calculating the redemption price. See "Description of the Guarantee."
Payment of the redemption price on the capital securities and any
distribution of debentures to holders of capital securities will be made to the
applicable recordholders as they appear on the register for the capital
securities on the relevant record date. In the case of redemption, the record
date will be the fifteenth business day immediately preceding the date of
redemption. In the case of a distribution of debentures, the record date will
be a date within 45 days of the liquidation of the trust, as determined by the
property trustee.
If less than all of the trust securities are to be redeemed, the aggregate
liquidation amount of the trust securities to be redeemed will be allocated
proportionately to those trust securities based upon the relative liquidation
amounts. The particular capital securities to be redeemed will be selected by
the property trustee from the outstanding capital securities not previously
called for redemption by a method the property trustee deems fair and
appropriate. This method may provide for the redemption of portions equal to
$10 or an integral multiple of $10 of the liquidation amount of the capital
securities. The property trustee will promptly notify the registrar for the
capital securities in writing of the capital securities selected for redemption
and, in the case of any capital securities selected for partial redemption, the
liquidation amount to be redeemed.
Subject to applicable law, and if we are not exercising our right to defer
interest payments on the debentures, we may, at any time, purchase outstanding
capital securities.
Subordination of Common Securities
Payment of distributions on, and the redemption price of, the capital
securities and common securities will be made based on the liquidation amount
of these securities. However, if an event of default under the indenture has
occurred and is continuing, no distributions on or redemption of the common
securities may be made. Further, no payments may be made on the common
securities unless payment in full in cash of all accumulated and unpaid
distributions (including additional interest on interest in arrears paid on the
debentures, if any) on all of the outstanding capital securities for all
distribution periods terminating on or before that time, or in the case of
payment of the redemption price, payment of the full amount of the redemption
price for all of the outstanding capital securities then called for redemption,
has been made or provided. All funds available to the property trustee will
first be applied to the payment in full in cash of all distributions (including
Additional Interest, if any is required) on, or the redemption price of, the
capital securities then due and payable.
In the case of the occurrence and continuance of any event of default under
the trust agreement resulting from an event of default under the indenture, we,
as holder of the common securities, will be deemed to have waived any right to
act with respect to that event of default under the trust agreement until the
effect of the event of default has been cured, waived or otherwise eliminated.
Until the event of default under the trust agreement has been so cured, waived
or otherwise eliminated, the property trustee will act solely on behalf of the
holders of the capital securities and not on our behalf, and only the holders
of the capital securities will have the right to direct the property trustee to
act on their behalf.
Liquidation Distribution Upon Termination
We will have the right at any time to dissolve, wind-up or terminate the
trust and cause the debentures to be distributed to the holders of the capital
securities. This right is subject, however, to us receiving approval of the
Federal Reserve, if required.
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In addition, the trust will automatically terminate upon expiration of its
term and will terminate earlier on the first to occur of:
. our bankruptcy, dissolution or liquidation;
. the distribution of a like amount of the debentures to the holders of
its trust securities, if we have given written direction to the property
trustee to terminate the trust;
. redemption of all of the capital securities as described under " --
Redemption or Exchange -- Mandatory Redemption;" or
. the entry of a court order for the dissolution of the trust.
With the exception of a redemption as described under "-- Redemption or
Exchange -- Mandatory Redemption," if an early termination of the trust occurs,
the trust will be liquidated by the trustees as expeditiously as they determine
to be possible. After satisfaction of liabilities to creditors of the trust as
provided by applicable law, the trustees will distribute to the holders of
trust securities debentures:
. in an aggregate stated principal amount equal to the aggregate stated
liquidation amount of the trust securities;
. with an interest rate identical to the distribution rate on the trust
securities; and
. with accrued and unpaid interest equal to accumulated and unpaid
distributions on the trust securities.
However, if the property trustee determines that the distribution is not
practical, the holders of trust securities will be entitled to receive, in lieu
of debentures, a proportionate amount of the liquidation distribution. The
liquidation distribution will be the amount equal to the aggregate of the
liquidation amount, plus accumulated and unpaid distributions to the date of
payment. If the liquidation distribution can be paid only in part because the
trust has insufficient assets available to pay in full the aggregate
liquidation distribution, the amounts payable directly by the trust on the
trust securities will be paid to us, as the holder of the common securities,
and the holders of the capital securities on a proportional basis based on
liquidation amounts. However, if an event of default under the indenture has
occurred and is continuing, the capital securities will have a priority over
the common securities. See "-- Subordination of Common Securities" above.
Under current United States federal income tax law and interpretations and
assuming that the trust is treated as a grantor trust, as is expected, a
distribution of the debentures should not be a taxable event to holders of the
capital securities. Should there be a change in law, a change in legal
interpretation, a Tax Event or another circumstance, however, the distribution
could be a taxable event to holders of the capital securities. See "Federal
Income Tax Consequences -- Receipt of Debentures or Cash Upon Liquidation of
the Trust." If we do not elect to redeem the debentures prior to maturity or to
liquidate the trust and distribute the debentures to holders of the capital
securities, the capital securities will remain outstanding until the repayment
of the debentures.
If we elect to dissolve the trust and thus cause the debentures to be
distributed to holders of the capital securities in liquidation of the trust,
we will continue to have the right to shorten the maturity of the debentures.
See "Description of Debentures -- General."
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Liquidation Value
The amount of the liquidation distribution payable on the capital securities
in the event of any liquidation of the trust is $10 per capital security, plus
accumulated and unpaid distributions to the date of payment, which may be in
the form of a distribution of debentures having a liquidation value and accrued
interest of an equal amount. See "-- Liquidation Distribution Upon
Termination."
Events of Default; Notice
Any one of the following events constitutes an event of default under the
trust agreement with respect to the capital securities:
. the occurrence of an event of default under the indenture (See
"Description of the Debentures --Debenture Events of Default");
. a default by the trust in the payment of any distribution when it
becomes due and payable, and continuation of the default for a period of
30 days;
. a default by the trust in the payment of any redemption price of any of
the trust securities when it becomes due and payable;
. a default in the performance, or breach, in any material respect, of any
covenant or warranty of the trustees in the trust agreement, other than
those defaults covered in the preceding two points, and continuation of
the default or breach for a period of 60 days after there has been
given, by registered or certified mail, to the trustee(s) by the holders
of at least 25% in aggregate liquidation amount of the outstanding
capital securities, a written notice specifying the default or breach
and requiring it to be remedied and stating that the notice is a "Notice
of Default" under the trust agreement; or
. the occurrence of events of bankruptcy or insolvency with respect to the
property trustee and our failure to appoint a successor property trustee
within 60 days.
Within ten business days after the occurrence of any event of default
actually known to the property trustee, the property trustee will transmit
notice of the event of default to the holders of the capital securities, the
administrative trustees and to us, unless the event of default has been cured
or waived. We and the administrative trustees are required to file annually
with the property trustee a certificate as to whether or not we and the
administrative trustees are in compliance with all the conditions and covenants
applicable to the administrative trustees and us under the trust agreement.
If an event of default under the indenture has occurred and is continuing,
the capital securities will have preference over the common securities upon
termination of the trust. See "-- Subordination of Common Securities" and "--
Liquidation Distribution Upon Termination" above. The existence of an event of
default under the trust agreement does not entitle the holders of capital
securities to accelerate the maturity thereof, unless the event of default is
caused by the occurrence of an event of default under the indenture and both
the indenture trustee and holders of at least 25% in principal amount of the
debentures fail to accelerate the maturity thereof.
Removal of the Trustees
Unless an event of default under the indenture has occurred and is
continuing, we may remove any trustee at any time. If an event of default under
the indenture has occurred and is continuing, only the holders of a majority in
liquidation amount of the outstanding capital securities may remove the
property trustee or the Delaware trustee. The holders of the capital securities
have no right to vote to appoint,
67
remove or replace the administrative trustees. These rights are vested
exclusively with us as the holder of the common securities. No resignation or
removal of a trustee and no appointment of a successor trustee will be
effective until the successor trustee accepts the appointment in accordance
with the trust agreement.
Co-Trustees and Separate Property Trustee
Unless an event of default under the trust agreement has occurred and is
continuing, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the trust property
may at the time be located, we will have the power to appoint at any time or
times, and upon written request of the property trustee, we will appoint, one
or more persons or entity either (1) to act as a co-trustee, jointly with the
property trustee, of all or any part of the trust property, or (2) to act as
separate trustee of any trust property. In either case, these trustees will
have the powers that may be provided in the instrument of appointment and will
have vested in them any property, title, right or power deemed necessary or
desirable, subject to the provisions of the trust agreement. In case an event
of default under the indenture has occurred and is continuing, the property
trustee alone will have power to make the appointment.
Merger or Consolidation of Trustees
Generally, any person or successor to any of the trustees may be a successor
trustee to any of the trustees, including a successor resulting from a merger
or consolidation. However, any successor trustee must meet all of the
qualifications and eligibility standards to act as a trustee.
Mergers, Consolidations, Amalgamations or Replacements of the Trust
The trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below. The trust may, at our request, with the consent of the
administrative trustees and without the consent of the holders of the capital
securities, the property trustee or the Delaware trustee, undertake a
transaction described in the preceding sentence if the following conditions are
met:
. the successor entity either (a) expressly assumes all of the obligations
of the trust with respect to the capital securities, or (b) substitutes
for the capital securities other securities having substantially the
same terms as the capital securities (referred to as "successor
securities") so long as the successor securities rank the same in
priority as the capital securities with respect to distributions and
payments upon liquidation, redemption and otherwise;
. we appoint a trustee of the successor entity possessing substantially
the same powers and duties as the property trustee in its capacity as
the holder of the debentures;
. the successor securities are listed or will be listed on any national
securities exchange or other organization on which the capital
securities are then listed;
. the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the capital securities (including any
successor securities) in any material respect;
. the successor entity has a purpose substantially identical to that of
the trust;
. prior to the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, we have received an opinion from
independent counsel that (a) any transaction of this kind does not
adversely affect the rights, preferences and privileges of the holders
of the capital securities
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(including any successor securities) in any material respect, and (b)
following the transaction, neither the trust nor the successor entity
will be required to register as an "investment company" under the
Investment Company Act; and
. we own all of the common securities of the successor entity and
guarantee the obligations of the successor entity under the successor
securities at least to the extent provided by the guarantee.
Notwithstanding the foregoing, the trust may not, except with the consent
of every holder of the capital securities, enter into any of the foregoing
transactions of this kind if such transaction would cause the trust or the
successor entity not to be classified as a grantor trust for United States
federal income tax purposes.
Voting Rights; Amendment of Trust Agreement
Except as described below and under "Description of the Guarantee-
Amendments and Assignment" and as otherwise required by the Trust Indenture
Act and the trust agreement, the holders of the capital securities will have
no voting rights.
The trust agreement may be amended from time to time by us and the
trustees, without the consent of the holders of the capital securities, in the
following circumstances:
. with respect to acceptance of appointment by a successor trustee;
. to cure any ambiguity, correct or supplement any provisions in the trust
agreement that may be inconsistent with any other provision, or to make
any other provisions with respect to matters or questions arising under
the trust agreement, as long as the amendment is not inconsistent with
the other provisions of the trust agreement and does not have a material
adverse effect on the interests of any holder of trust securities; or
. to modify, eliminate or add to any provisions of the trust agreement if
necessary to ensure that the trust will be classified for federal income
tax purposes as a grantor trust at all times that any trust securities
are outstanding or to ensure that the trust will not be required to
register as an "investment company" under the Investment Company Act.
With the consent of the holders of a majority of the aggregate liquidation
amount of the outstanding trust securities, we and the trustees may amend the
trust agreement if the trustees receive an opinion of counsel to the effect
that the amendment or the exercise of any power granted to the trustees in
accordance with the amendment will not affect the trust's status as a grantor
trust for federal income tax purposes or the trust's exemption from status as
an "investment company" under the Investment Company Act. Without the consent
of each holder of trust securities, however, the trust agreement may not be
amended to (a) change the amount or timing of any distribution on the trust
securities or otherwise adversely affect the amount of any distribution
required to be made in respect of the trust securities as of a specified date,
or (b) restrict the right of a holder of trust securities to institute suit
for the enforcement of the payment on or after that date.
As long as the property trustee holds any debentures, the trustees will
not:
. direct the time, method and place of conducting any proceeding for any
remedy available to the indenture trustee or executing any trust or
power conferred on the property trustee with respect to the debentures;
. waive any past default that is waivable under the indenture;
. exercise any right to rescind or annul a declaration that the principal
of all the debentures will be due and payable; or
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. consent to any amendment or termination of the indenture or the
debentures, where the consent is required, without obtaining the prior
approval of the holders of a majority in aggregate liquidation amount of
all outstanding trust securities. Where a consent under the indenture
requires the consent of each holder of the affected debentures, however,
no consent will be given by the property trustee without the prior
consent of each holder of the trust securities.
The trustees may not revoke any action previously authorized or approved by
a vote of the holders of the trust securities except by subsequent vote of the
holders of the trust securities. The property trustee will notify each holder
of trust securities of any notice of default with respect to the debentures. In
addition to obtaining the foregoing approvals of the holders of the trust
securities, prior to taking any of the foregoing actions, the trustees must
obtain an opinion of counsel experienced in these matters to the effect that
the trust will continue to be classified as a grantor trust and not as an
association taxable as a corporation for federal income tax purposes on account
of such action.
Any required approval of holders of trust securities may be given at a
meeting of holders of the trust securities convened for the purpose or pursuant
to written consent. The property trustee will cause a notice of any meeting at
which holders of the trust securities are entitled to vote, or of any matter
upon which action by written consent of the holders is to be taken, to be given
to each holder of record of trust securities.
No vote or consent of the holders of capital securities will be required for
the trust to redeem and cancel its capital securities in accordance with the
trust agreement.
Notwithstanding the fact that holders of capital securities are entitled to
vote or consent under any of the circumstances described above, any of the
capital securities that are owned by us, the trustees or any affiliate of ours
or any trustee, will, for purposes of the vote or consent, be treated as if
they were not outstanding.
Global Capital Securities
The capital securities will be represented by one or more global capital
securities registered in the name of The Depository Trust Company, New York,
New York ("DTC") or its nominee. A global capital security is a security
representing interests of more than one beneficial holder. Beneficial interests
in the global capital securities will be shown on, and transfers will be
effected only through, records maintained by participants. Participants are
brokers, dealers, or others with accounts with DTC. Except as described below,
capital securities in definitive form will not be issued in exchange for the
global capital securities. See "Book-Entry Issuance."
No global capital security may be exchanged for capital securities
registered in the names of persons other than DTC or its nominee unless:
. DTC notifies the indenture trustee that it is unwilling or unable to
continue as a depositary for the global capital security, and we are
unable to locate a qualified successor depositary;
. we execute and deliver to the indenture trustee a written order stating
that we elect to terminate the book-entry system through DTC; or
. there shall have occurred and be continuing an event of default under
the indenture.
Any global capital security that is exchangeable pursuant to the preceding
sentence will be exchangeable for definitive certificates registered in such
names as DTC shall direct. It is expected that the
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instructions will be based upon directions received by DTC with respect to
ownership of beneficial interests in the global capital security. If capital
securities are issued in definitive form, the capital securities will be in
denominations of $10 and integral multiples of $10 and may be transferred or
exchanged at the offices described below.
Unless and until it is exchanged in whole or in part for the individual
capital securities represented thereby, a global capital security may not be
transferred except as a whole by DTC to a nominee of DTC, by a nominee of DTC
to DTC or another nominee of DTC or by DTC or any nominee to a successor
depositary or any nominee of the successor.
Payments on global capital securities will be made to DTC, as the depositary
for the global capital securities. If the capital securities are issued in
definitive form, distributions will be payable, the transfer of the capital
securities will be registrable, and capital securities will be exchangeable,
for capital securities of other denominations of a like aggregate liquidation
amount, at the corporate office of the property trustee, or at the offices of
any paying agent or transfer agent appointed by the administrative trustees.
However, payment of any distribution may be made at the option of the
administrative trustees by check mailed to the address of record of the persons
entitled to the distribution or by wire transfer. In addition, if the capital
securities are issued in definitive form, the record dates for payment of
distributions will be the 15th day of the month in which the relevant
distribution date occurs. For a description of the terms of DTC arrangements
relating to payments, transfers, voting rights, redemptions and other notices
and other matters, see "Book-Entry Issuance."
Upon the issuance of one or more global capital securities, and the deposit
of the global capital security with or on behalf of DTC or its nominee, DTC or
its nominee will credit, on its book-entry registration and transfer system,
the respective aggregate liquidation amounts of the individual capital
securities represented by the global capital security to the accounts of
persons that have accounts with DTC. These accounts will be designated by the
dealers, underwriters or agents with respect to the capital securities.
Ownership of beneficial interests in a global capital security will be limited
to persons or entities with an account with DTC or who may hold interests
through any person or entity with an account that may hold interests through
participants. With respect to interests of any person or entity with an account
with DTC, ownership of beneficial interests in a global capital security will
be shown on, and the transfer of that ownership will be effected only through,
records maintained by the applicable depositary or its nominee. With respect to
persons or entities who hold interest in a global capital security through a
participant, the interest and any transfer of the interest will be shown on the
participant's records. The laws of some states require that certain purchasers
of securities take physical delivery of these securities in definitive form.
These laws may impair the ability to transfer beneficial interests in a global
capital security.
So long as DTC or another depositary, or its nominee, is the registered
owner of the global capital security, the depositary or the nominee, as the
case may be, will be considered the sole owner or holder of the capital
securities represented by the global capital security for all purposes under
the trust agreement. Except as described in this prospectus, owners of
beneficial interests in a global capital security will not be entitled to have
any of the individual capital securities represented by the global capital
security registered in their names, will not receive or be entitled to receive
physical delivery of any the capital securities in definitive form and will not
be considered the owners or holders of the capital securities under the trust
agreement.
None of us, the property trustee, any paying agent or the securities
registrar for the capital securities will have any responsibility or liability
for any aspect of the records relating to or payments made on
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account of beneficial ownership interests of the global capital security
representing the capital securities or for maintaining, supervising or
reviewing any records relating to the beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of the
liquidation amount or distributions in respect of a global capital security,
immediately will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the aggregate
liquidation amount of the global capital security as shown on the records of
DTC or its nominee. We also expect that payments by participants to owners of
beneficial interests in the global capital security held through the
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name." The payments will be the responsibility of
the participants. See "Book-Entry Issuance."
Payment and Paying Agency
Payments in respect of the capital securities shall be made to DTC, which
credits the relevant accounts of participants on the applicable distribution
dates, or, if any of the capital securities are not held by DTC, the payments
shall be made by check mailed to the address of the holder as listed on the
register of holders of the capital securities. The paying agent for the capital
securities will initially be the property trustee and any co-paying agent
chosen by the property trustee and acceptable to us and the administrative
trustees. The paying agent for the capital securities may resign as paying
agent upon 30 days' written notice to the administrative trustees, the property
trustee and us. If the property trustee no longer is the paying agent for the
capital securities, the administrative trustees will appoint a successor to act
as paying agent. The successor must be a bank or trust company acceptable to us
and the property trustee.
Registrar and Transfer Agent
The property trustee will act as the registrar and the transfer agent for
the capital securities. Registration of transfers of capital securities will be
effected without charge by or on behalf of the trust, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. The trust and its registrar and transfer agent will not
be required to register or cause to be registered the transfer of capital
securities after they have been called for redemption.
Information Concerning the Property Trustee
The property trustee, until the occurrence and continuance of an event of
default under the trust agreement, undertakes to perform only the duties set
forth in the trust agreement. After an event of default under the trust
agreement, the property trustee must exercise the same degree of care and skill
as a prudent person exercises or uses in the conduct of its own affairs. The
property trustee is under no obligation to exercise any of the powers vested in
it by the trust agreement at the request of any holder of capital securities
unless it is offered reasonable indemnity against the costs, expenses and
liabilities that might be incurred. If no event of default under the trust
agreement has occurred and is continuing and the property trustee is required
to decide between alternative causes of action, construe ambiguous provisions
in the trust agreement or is unsure of the application of any provision of the
trust agreement, and the matter is not one on which holders of capital
securities are entitled to vote upon, the property trustee will take the action
directed in writing by us. If the property trustee is not so directed, it will
take the action it deems advisable and in the best interests of the holders of
the trust securities and will have no liability except for its own bad faith,
negligence or willful misconduct.
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Miscellaneous
The administrative trustees are authorized and directed to conduct the
affairs of and to operate the trust in such a way that:
. the trust will not be deemed to be an "investment company" required to
be registered under the Investment Company Act;
. the trust will not be classified as an association taxable as a
corporation for federal income tax purposes; and
. the debentures will be treated as our indebtedness for federal income
tax purposes.
In this regard, we and the administrative trustees are authorized to take
any action not inconsistent with applicable law, the certificate of trust or
the trust agreement, that we and the administrative trustees determine to be
necessary or desirable for these purposes.
Holders of the capital securities have no preemptive or similar rights. The
trust agreement and the capital securities will be governed by Delaware law.
DESCRIPTION OF THE DEBENTURES
Concurrently with the issuance of the capital securities, the trust will
invest the proceeds from the sale of the trust securities in the debentures
issued by us. The debentures will be issued as unsecured debt under the
indenture between us and First Union, as trustee (the "indenture trustee"). The
indenture will be qualified under the Trust Indenture Act.
The following discussion is subject to, and is qualified in its entirety by
reference to, the indenture and to the Trust Indenture Act. We urge prospective
investors to read the form of the indenture, which is filed as an exhibit to
the registration statement of which this prospectus forms a part.
General
The debentures will be limited in aggregate principal amount to $20.6
million. This amount represents the sum of the aggregate stated liquidation
amounts of the trust securities. The debentures will bear interest at the
annual rate of 10% of the principal amount. The interest will be payable
quarterly on March 31, June 30, September 30 and December 31 of each year,
beginning September 30, 2000, to the person in whose name each debenture is
registered at the close of business on the business day immediately preceding
the day interest is due. It is anticipated that, until the liquidation, if any,
of the trust, the debentures will be held in the name of the property trustee
in trust for the benefit of the holders of the trust securities.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. If any date on which interest is
payable on the debentures is not a business day, payment of interest will be
made on the next day that is a business day without any additional interest or
other payment in respect of the delay. However, if the next business day is in
the next calendar year, payment of the interest will be made on the immediately
preceding business day. Accrued interest that is not paid on the applicable
interest payment date will bear additional interest on the amount due at the
annual rate of 10%, compounded quarterly. The term "interest," includes
quarterly interest payments, interest on quarterly interest payments not paid
on the applicable interest payment date and additional interest, as applicable.
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The debentures will mature on June 30, 2030, the stated maturity date. We
may shorten this date once at any time to any date not earlier than June 30,
2005, subject to the prior approval of the Federal Reserve, if required.
We will give notice to the indenture trustee and the holders of the
debentures, no more than 180 days, and no less than 90 days, prior to the
effectiveness of any change in the stated maturity date. We will not have the
right to redeem the debentures from the trust until after June 30, 2005, except
if a Tax Event, an Investment Company Event or a Capital Treatment Event has
occurred.
The debentures will be unsecured and will rank junior to all of our senior
and subordinated indebtedness. Because we are a holding company, our right to
participate in any distribution of assets of any of our subsidiaries, upon any
subsidiary's liquidation or reorganization or otherwise, and thus the ability
of holders of the debentures to benefit indirectly from any distribution by a
subsidiary, is subject to the prior claim of creditors of the subsidiary,
except to the extent that we may be recognized as a creditor of the subsidiary.
The debentures will, therefore, be effectively subordinated to all existing and
future liabilities of our subsidiaries, and holders of debentures should look
only to our assets for payment. The indenture does not limit our ability to
incur or issue secured or unsecured senior and junior debt. See " --
Subordination" below.
The indenture does not contain provisions that afford holders of the
debentures protection in the event of a highly leveraged transaction or other
similar transaction involving us, nor does it require us to maintain or achieve
any financial performance levels or to obtain or maintain any credit rating on
the debentures.
Option to Extend Interest Payment Period
As long as no event of default under the indenture has occurred and is
continuing, we have the right under the indenture to defer the payment of
interest on the debentures at any time for a period not exceeding 20
consecutive quarters. However, no extension period may extend beyond the stated
maturity of the debentures or end on a date other than a date interest is
normally due. At the end of an extension period, we must pay all interest then
accrued and unpaid, together with interest thereon at the annual rate of 10%,
compounded quarterly. During an extension period, interest will continue to
accrue and holders of debentures, or the holders of capital securities if they
are then outstanding, will be required to accrue and recognize as income for
federal income tax purposes the accrued but unpaid interest amounts in the year
in which such amounts accrued. See "Federal Income Tax Consequences -- Interest
Payment Period and Original Issue Discount."
During an extension period, we may not:
. declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of our
capital stock (other than the reclassification of any class of capital
stock into another class of capital stock) or allow any of our
subsidiaries to do the same with respect to their capital stock (other
than payment of dividends or distributions to us);
. make or allow any of our subsidiaries to make any payment of principal,
interest or premium on, or repay, repurchase or redeem any debt
securities issued by us that rank equally with or junior to the
debentures;
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. make or allow any of our subsidiaries to make any guarantee payments
with respect to any other guarantee by us of any other debt securities
of any of our subsidiaries if the guarantee ranks equally with or junior
to the debentures (other than payments under the guarantee); or
. redeem, purchase or acquire less than all of the debentures or any of
the capital securities.
Prior to the termination of any extension period, so long as no event of
default under the indenture is continuing, we may further defer the payment of
interest subject to the above stated requirements. Upon the termination of any
extension period and the payment of all amounts then due, we may elect to begin
a new extension period at any time. We do not currently intend to exercise our
right to defer payments of interest on the debentures.
We must give the property trustee, the administrative trustees and the
indenture trustee notice of our election of an extension period at least two
business days prior to the earlier of (a) the next date on which distributions
on the trust securities would have been payable except for the election to
begin an extension period, or (b) the date we are required to give notice of
the record date, or the date the distributions are payable, to the American
Stock Exchange, or other applicable self-regulatory organization, or to holders
of the capital securities, but in any event at least one business day prior to
the record date.
Other than as described above, there is no limitation on the number of times
that we may elect to begin an extension period.
Additional Sums to be Paid as a Result of Additional Taxes
If the trust is required to pay any additional taxes, duties or other
governmental charges of whatever nature (other than withholding taxes), we will
pay as additional amounts on the debentures any amounts which may be required
so that the net amounts received and retained by the trust after paying any
additional taxes, duties or other governmental charges will not be less than
the amounts the trust would have received had the additional taxes, duties or
other governmental charges not been imposed.
Redemption or Exchange
Subject to prior approval of the Federal Reserve, if required, we may redeem
the debentures prior to maturity:
. on or after June 30, 2005, in whole at any time or in part from time to
time; or
. in whole at any time within 90 days following the occurrence of a Tax
Event, an Investment Company Event or a Capital Treatment Event.
In each case, we will pay a redemption price equal to the accrued and unpaid
interest on the debentures so redeemed to the date fixed for redemption, plus
100% of the principal amount of the debentures.
Notice of any redemption will be mailed at least 30 days, but not more than
60 days, before the redemption date to each holder of debentures to be redeemed
at its registered address. Redemption of less than all outstanding debentures
must be effected proportionately, by lot or in any other manner deemed to be
fair by the indenture trustee. Unless we default in payment of the redemption
price for the debentures, on and after the redemption date, interest will no
longer accrue on the debentures or the portions of the debentures called for
redemption.
The debentures will not be subject to any sinking fund.
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Distribution Upon Liquidation
As described under "Description of the Capital Securities-Liquidation
Distribution Upon Termination," under certain circumstances and with the
Federal Reserve's approval, the debentures may be distributed to the holders of
the capital securities in liquidation of the trust after satisfaction of
liabilities to creditors of the trust. If this occurs, we will use our
reasonable efforts to list the debentures on the American Stock Exchange or
other stock exchange or national quotation system on which the capital
securities are then listed, if any. There can be no assurance as to the market
price of any debentures that may be distributed to the holders of capital
securities.
Restrictions on Payments
We are restricted from making certain payments (as described below) if we
have chosen to defer payment of interest on the debentures, an event of default
has occurred and is continuing under the indenture or we are in default with
respect to our obligations under the guarantee.
If either of these events shall have occurred, we will not:
. declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of our
capital stock (other than the reclassification of any class of our
capital stock into another class of capital stock) or allow any of our
subsidiaries to do the same with respect to their capital stock (other
than payment of dividends or distributions to us);
. make or allow any of our subsidiaries to make any payment of principal,
interest or premium on, or repay or repurchase or redeem any of our debt
securities that rank equally with or junior to the debentures;
. make or allow any of our subsidiaries to make any guarantee payments
with respect to any guarantee by us of the debt securities of any of our
subsidiaries if the guarantee ranks equally with or junior to the
debentures (other than payments under the guarantee); or
. redeem, purchase or acquire less than all of the debentures or any of
the capital securities.
Subordination
The debentures are subordinated and junior in right of payment to all of our
senior and subordinated debt (as defined below). Upon any payment or
distribution of assets to creditors upon any liquidation, dissolution, winding
up, reorganization, assignment for the benefit of creditors, marshaling of
assets or any bankruptcy, insolvency, debt restructuring or similar proceedings
in connection with any insolvency or bankruptcy proceedings of Colorado
Business Bankshares, the holders of our senior and subordinated debt will first
be entitled to receive payment in full of principal and interest before the
holders of debentures will be entitled to receive or retain any payment in
respect of the debentures.
If the maturity of any debentures is accelerated, the holders of all of our
senior and subordinated debt outstanding at the time of the acceleration will
also be entitled to first receive payment in full of all amounts due to such
holders, including any amounts due upon acceleration, before the holders of the
debentures will be entitled to receive or retain any payment in respect of the
principal of or interest on the debentures.
No payments of principal or interest on the debentures may be made if there
has occurred and is continuing a default in any payment with respect to any of
our senior or subordinated debt or an event of
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default with respect to any of our senior or subordinated debt resulting in the
acceleration of the maturity of the senior or subordinated debt.
The term "debt" means, with respect to any entity, whether recourse is to
all or a portion of the assets of the entity and whether or not contingent:
. every obligation of the entity for money borrowed;
. every obligation of the entity evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses;
. every reimbursement obligation of the entity with respect to letters of
credit, bankers' acceptances or similar facilities issued for the
account of the entity;
. every obligation of the entity issued or assumed as the deferred
purchase price of property or services, excluding trade accounts payable
or accrued liabilities arising in the ordinary course of business;
. every capital lease obligation of the entity; and
. every obligation of the type referred to in the first five points of
another entity and all dividends of another entity the payment of which,
in either case, the first entity has guaranteed or is responsible or
liable, directly or indirectly, as obligor or otherwise.
The term "senior debt" means the principal of and premium and interest,
including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to us, on debt, whether incurred on
or prior to the date of the indenture or incurred after the date. Senior debt
also includes all indebtedness, whether incurred on or prior to the date of the
indenture or thereafter incurred, for claims in respect of derivative products
such as interest and foreign exchange rate contracts, commodity contracts and
similar arrangements. However, senior debt will not be deemed to include:
. any debt where it is provided in the instrument creating the debt that
the obligations are not superior in right of payment to the debentures
or to other debt which is equal with, or subordinated to, the
debentures;
. any of our debt that, when incurred and without regard to any election
under the federal bankruptcy laws, was without recourse to us;
. any debt of ours to any of our subsidiaries;
. any debt of ours to any of our employees;
. any debt that by its terms is subordinated to trade accounts payable or
accrued liabilities arising in the ordinary course of business to the
extent that payments made to the holders of the debt by the holders of
the debentures as a result of the subordination provisions of the
indenture would be greater than they otherwise would have been as a
result of any obligation of the holders to pay amounts over to the
obligees on the trade accounts payable or accrued liabilities arising in
the ordinary course of business as a result of subordination provisions
to which the debt is subject; and
. debt which constitutes subordinated debt.
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The term "subordinated debt" means the principal of, premium and interest on
debt, including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to us, whether incurred on or prior
to the date of the indenture or thereafter incurred, which is by its terms
expressly provided to be junior and subordinate to other debt of ours, other
than the debentures. However, subordinated debt will not be deemed to include:
. any of our debt which, when incurred and without regard to any election
under the federal bankruptcy laws, was without recourse to us;
. any debt of ours to any of our subsidiaries;
. any debt of ours to any of our employees;
. any debt which by its terms is subordinated to trade accounts payable or
accrued liabilities arising in the ordinary course of business to the
extent that payments made to the holders of the debt by the holders of
the debentures as a result of the subordination provisions of the
indenture would be greater than they otherwise would have been as a
result of any obligation of the holders to pay amounts over to the
obligees on the trade accounts payable or accrued liabilities arising in
the ordinary course of business as a result of subordination provisions
to which the debt is subject;
. debt which constitutes senior debt; and
. any debt of ours under debt securities (and guarantees in respect of
these debt securities) initially issued to any trust, or a trustee of a
trust, partnership or other entity affiliated with us that is, directly
or indirectly, our financing vehicle in connection with the issuance by
that entity of preferred securities or other securities which are
intended to qualify for "Tier 1" capital treatment.
We expect from time to time to incur additional senior or subordinated debt
and there is no limitation under the indenture on the amount we may incur.
Payment and Paying Agents
Generally, payment of principal of and interest on the debentures will be
made at the office of the indenture trustee in Wilmington, Delaware. However,
we have the option to make payment of any interest by (a) check mailed to the
address of the person entitled to payment at the address listed in the register
of holders of the debentures, or (b) transfer to an account maintained by the
person entitled thereto as specified in the register of holders of the
debentures, provided that proper transfer instructions have been received by
the applicable record date. Payment of any interest on debentures will be made
to the person in whose name the debenture is registered at the close of
business on the regular record date for the interest payment, except in the
case of defaulted interest.
Any moneys deposited with the indenture trustee or any paying agent for the
debentures, or then held by us in trust, for the payment of the principal of or
interest on the debentures and remaining unclaimed for two years after the
principal or interest has become due and payable, will be repaid to us on May
31 of each year. If we hold any of this money in trust, then it will be
discharged from the trust to us and the holders of the debentures will
thereafter look, as a general unsecured creditor, only to us for payment.
Registrar and Transfer Agent
The indenture trustee will act as the registrar and the transfer agent for
the debentures. Debentures may be presented for registration of transfer, with
the form of transfer endorsed thereon, or a satisfactory
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written instrument of transfer, duly executed, at the office of the registrar.
Provided that we maintain a transfer agent in Wilmington, Delaware, we may
rescind the designation of any transfer agent or approve a change in the
location through which any transfer agent acts. We may at any time designate
additional transfer agents with respect to the debentures.
If we redeem any of the debentures, neither we nor the indenture trustee
will be required to (a) issue, register the transfer of or exchange debentures
during a period beginning at the opening of business 15 days before the day of
selection for redemption of debentures and ending at the close of business on
the day of mailing of the relevant notice of redemption, or (b) transfer or
exchange any debentures so selected for redemption, except, in the case of any
debentures being redeemed in part, any portion not to be redeemed.
Modification of Indenture
We and the indenture trustee may, from time to time without the consent of
the holders of the debentures, amend or waive our rights under or supplement
the indenture for purposes which do not materially adversely affect the rights
of the holders of the debentures. Other changes may be made by us and the
indenture trustee with the consent of the holders of a majority in principal
amount of the outstanding debentures. However, without the consent of the
holder of each outstanding debenture affected by the proposed modification, no
modification may:
. extend the maturity date of the debentures; or
. reduce the principal amount or the rate or extend the time of payment of
interest; or
. reduce the percentage of principal amount of debentures required to
amend the indenture.
As long as any of the capital securities remain outstanding, no modification
of the indenture may be made that requires the consent of the holders of the
debentures, and no waiver of any event of default under the indenture may be
effective, without the prior consent of the holders of a majority of the
aggregate liquidation amount of the capital securities or, if such modification
or waiver requires the consent of each holder of the outstanding debentures,
such modification or waiver may not occur without the prior consent of each
holder of the outstanding capital securities.
Debenture Events of Default
The indenture provides that any one or more of the following events with
respect to the debentures that has occurred and is continuing constitutes an
event of default under the indenture:
. our failure to pay any interest on the debentures for 30 days after the
due date, except where we have properly deferred the interest payment;
. our failure to pay any principal on the debentures when due, whether at
maturity, upon redemption or otherwise;
. our failure to observe or perform in any material respect other
covenants contained in the indenture for 90 days after written notice to
us from the indenture trustee or the holders of at least 25% in
aggregate outstanding principal amount of the debentures; or
. our bankruptcy, insolvency or reorganization or the dissolution of the
trust.
The holders of a majority of the aggregate outstanding principal amount of
the debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the indenture trustee.
The indenture trustee, or the holders of at least 25% in aggregate outstanding
principal amount of the debentures, may declare the principal due and payable
immediately upon an event of default
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under the indenture. For as long as any capital securities remain outstanding,
upon an event of default under the indenture and the failure by the indenture
trustee or the holder of 25% in aggregate principal amount of debentures to
declare the principal on the debentures immediately due and payable, the
holders of 25% in aggregate liquidation amount of the capital securities may
make such declaration.
The holders of a majority of the outstanding principal amount of the
debentures may annul the declaration and waive the default if that default has
been cured and any other defaults have been cured or properly waived and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration, has been deposited with the indenture trustee.
If the debentures are held by the trust or the property trustee, the holders of
a majority in liquidation amount of the capital securities must consent to the
waiver.
If an event of default under the indenture has occurred and is continuing,
the property trustee, as holder of the debentures, will have the right to
declare the principal of and the interest on the debentures, and any other
amounts payable under the indenture, to be immediately due and payable and to
enforce its other rights as a creditor with respect to the debentures.
We are required to file annually with the indenture trustee a certificate as
to whether or not we are in compliance with all of the conditions and covenants
applicable to us under the indenture.
Enforcement of Certain Rights by Holders of the Capital Securities
If an event of default under the indenture has occurred and is continuing
and the event is attributable to the failure by us to pay interest on or
principal of the debentures on the date on which the payment is due and
payable, a holder of capital securities may institute a direct action against
us to compel us to make the payment. We may not amend the indenture to remove
the foregoing right to bring a direct action without the prior written consent
of all of the holders of the capital securities. If the right to bring a direct
action is removed, the trust may become subject to the reporting obligations
under the Securities Exchange Act of 1934.
The holders of the capital securities will not be able to exercise directly
any remedies, other than those set forth in the preceding paragraph, available
to the holders of the debentures unless there has been an event of default
under the trust agreement. See "Description of the Capital Securities -- Events
of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
We may not consolidate with or merge into any other entity or convey or
transfer our properties and assets substantially as an entirety to any entity,
and no entity may be consolidated with or merged into us or sell, convey,
transfer or otherwise dispose of its properties and assets substantially as an
entirety to us, unless:
. if we consolidate with or merge into another person or convey or
transfer our properties and assets substantially as an entirety to any
person. the successor person is organized under the laws of the United
States or any State or the District of Columbia, and the successor
person expressly assumes by supplemental indenture our obligations under
the debentures;
. immediately after the transaction, no event of default under the
indenture, and no event which, after notice or lapse of time, or both,
would become an event of default under the indenture, has occurred and
is continuing; and
. other conditions as prescribed in the indenture are met.
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Satisfaction and Discharge
The indenture will cease to be of further effect, and we will be deemed to
have satisfied and discharged our obligations under the indenture, when all
debentures not previously delivered to the indenture trustee for cancellation:
. have become due and payable; and
. will become due and payable at their stated maturity within one year or
are to be called for redemption within one year, and we deposit or cause
to be deposited with the indenture trustee funds, in trust, for the
purpose and in an amount sufficient to pay and discharge the entire
indebtedness on the debentures not previously delivered to the indenture
trustee for cancellation, for the principal and interest due to the date
of the deposit or to the stated maturity or redemption date, as the case
may be.
We may still be required to provide officers' certificates, opinions of
counsel and pay fees and expenses due after these events occur.
Governing Law
The indenture and the debentures will be governed by and construed in
accordance with the internal laws of the State of Delaware.
Information Concerning the Indenture Trustee
The indenture trustee is subject to all the duties and responsibilities
specified with respect to an indenture trustee under the Trust Indenture Act.
Subject to these provisions, the indenture trustee is under no obligation to
exercise any of the powers vested in it by the indenture at the request of any
holder of debentures, unless offered reasonable indemnity by the holder against
the costs, expenses and liabilities which might be incurred. The indenture
trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if the indenture
trustee reasonably believes that repayment or adequate indemnity is not
reasonably assured to it.
Miscellaneous
We have agreed, pursuant to the indenture, for so long as capital securities
remain outstanding:
. to maintain directly or indirectly 100% ownership of the common
securities of the trust, except that certain successors that are
permitted pursuant to the indenture may succeed to our ownership of the
common securities;
. not to voluntarily terminate, wind up or liquidate the trust without
prior approval of the Federal Reserve, if required;
. to use our reasonable efforts to cause the trust (a) to remain a
business trust (and to avoid involuntary termination, winding up or
liquidation), except in connection with a distribution of debentures,
the redemption of all of the trust securities of the trust or mergers,
consolidations or amalgamations, each as permitted by the trust
agreement; and (b) to otherwise continue not to be treated as an
association taxable as a corporation or partnership for federal income
tax purposes; and
. to use our reasonable efforts to cause each holder of trust securities
to be treated as owning an individual beneficial interest in the
debentures.
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BOOK-ENTRY ISSUANCE
General
DTC will act as securities depositary for the capital securities and may act
as securities depositary for all of the debentures in the event of the
distribution of the debentures to the holders of capital securities. Except as
described, the capital securities will be issued only as registered securities
in the name of Cede & Co. (DTC's nominee). One or more global capital
securities will be issued for the capital securities and will be deposited with
DTC.
DTC is a limited purpose trust company organized under New York banking law,
a "banking organization" within the meaning of the New York banking law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to Section 17A of the Securities Exchange Act of 1934. DTC
holds securities that its participants deposit with DTC. DTC also facilitates
the settlement among participants of securities transactions, such as transfers
and pledges, in deposited securities through electronic computerized book-entry
changes in participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct participants in DTC include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. DTC is owned by a number of its direct
participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to indirect participants, such as
securities brokers and dealers, banks and trust companies that clear through or
maintain custodial relationships with direct participants, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the SEC.
Purchases of capital securities within the DTC system must be made by or
through direct participants, which receive a credit for the capital securities
on DTC's records. The ownership interest of each actual purchaser of each
capital security ("beneficial owner") is, in turn, recorded on the direct and
indirect participant's records. Beneficial owners will not receive written
confirmation from DTC of their purchases, but beneficial owners are expected to
receive written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the direct or indirect participants
in DTC through which the beneficial owners purchased capital securities.
Transfers of ownership interests in the capital securities are to be
accomplished by entries made on the books of participants acting on behalf of
beneficial owners. Beneficial owners will not receive certificates representing
their ownership interest in capital securities, except if use of the book-entry
system for the capital securities is discontinued.
DTC will have no knowledge of the actual beneficial owners of the capital
securities: DTC's records reflect only the identity of the direct participants
to whose accounts the capital securities are credited, which may or may not be
the beneficial owners. The participants remain responsible for keeping account
of their holdings on behalf of their customers.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that we believe to be accurate, but we and the
trust assume no responsibility for the accuracy thereof. Neither we nor the
trust have any responsibility for the performance by DTC or its participants of
their respective obligations as described in this prospectus or under the rules
and procedures governing their respective operations.
Notices and Voting
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
and indirect participants to beneficial owners will be governed by
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arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices will be sent to Cede & Co., as the registered holder of
the capital securities. If less than all of the capital securities are being
redeemed, the amount to be redeemed will be determined in accordance with the
trust agreement.
Although voting with respect to the capital securities is limited to the
holders of record of the capital securities, in those instances in which a vote
is required, neither DTC nor Cede & Co. will itself consent or vote with
respect to capital securities. Under its usual procedures, DTC will mail an
omnibus proxy to the property trustee as soon as possible after the record
date. The omnibus proxy assigns Cede & Co.'s consenting or voting rights to
those direct participants to whose accounts the capital securities are credited
on the record date.
Distribution of Funds
The property trustee will make distribution payments on the capital
securities to DTC. DTC's practice is to credit direct participants' accounts on
the relevant payment date in accordance with their respective holdings shown on
DTC's records unless DTC has reason to believe that it will not receive
payments on the payment date. Payments by participants to beneficial owners
will be governed by standing instructions and customary practices and will be
the responsibility of the participant and not of DTC, the property trustee, the
trust or us, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of distributions to DTC is the responsibility
of the property trustee, disbursement of the payments to direct participants is
the responsibility of DTC, and disbursements of the payments to the beneficial
owners is the responsibility of direct and indirect participants.
Successor Depositories and Termination of Book-Entry System
DTC may discontinue providing its services with respect to any of the
capital securities at any time by giving reasonable notice to the property
trustee and us. If no successor securities depositary is obtained, definitive
capital securities representing the capital securities are required to be
printed and delivered. We also have the option to discontinue use of the system
of book-entry transfers through DTC (or a successor depositary). After an event
of default under the indenture, the holders of a majority in liquidation amount
of capital securities may determine to discontinue the system of book-entry
transfers through DTC. In these events, definitive certificates for the capital
securities will be printed and delivered.
DESCRIPTION OF THE GUARANTEE
The capital securities guarantee agreement will be executed and delivered by
us concurrently with the issuance of the capital securities for the benefit of
the holders of the capital securities. The guarantee agreement will be
qualified as an indenture under the Trust Indenture Act. First Union, the
guarantee trustee, will act as trustee for purposes of complying with the
provisions of the Trust Indenture Act, and will also hold the guarantee for the
benefit of the holders of the capital securities. Prospective investors are
urged to read the form of the guarantee agreement, which has been filed as an
exhibit to the registration statement of which this prospectus forms a part.
General
We agree to pay in full on a subordinated basis, to the extent described in
the guarantee agreement, the guarantee payments (as defined below) to the
holders of the capital securities, as and when due,
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regardless of any defense or counterclaim that the trust may have or assert
other than the defense of payment.
The following payments with respect to the capital securities are called the
"guarantee payments" and, to the extent not paid or made by the trust and to
the extent that the trust has funds available for those distributions, will be
subject to the guarantee:
. any accumulated and unpaid distributions required to be paid on the
capital securities;
. with respect to any capital securities called for redemption, the
redemption price; and
. upon a voluntary or involuntary dissolution, winding up or liquidation
of the trust (other than in connection with the distribution of
debentures to the holders of capital securities or a redemption of all
of the capital securities), the lesser of:
(a) the aggregate of the liquidation amount and all accumulated and
unpaid distributions on the capital securities; and
(b) the amount of assets of the trust remaining available for
distribution to holders of capital securities in liquidation of the
trust.
We may satisfy our obligations to make a guarantee payment by making a
direct payment of the required amounts to the holders of the capital securities
or by causing the trust to pay the amounts to the holders.
The guarantee agreement is a guarantee, on a subordinated basis, of the
guarantee payments, but the guarantee only applies to the extent the trust has
funds available for those distributions. If we do not make interest payments on
the debentures purchased by the trust, the trust will not have funds available
to make the distributions and will not pay distributions on the capital
securities.
Status of the Guarantee
The guarantee constitutes our unsecured obligation that ranks junior in
right of payment to all of our senior and subordinated debt in the same manner
as the debentures and senior to our capital stock. We expect to incur
additional indebtedness in the future, although we have no specific plans in
this regard presently, and none of the indenture, the trust agreement and the
guarantee limit the amounts of the obligations that we may incur.
The guarantee constitutes a guarantee of payment and not of collection. If
we fail to make guarantee payments when required, holders of capital securities
may institute a legal proceeding directly against us to enforce their rights
under the guarantee without first instituting a legal proceeding against any
other person or entity.
The guarantee will not be discharged except by payment of the guarantee
payments in full to the extent not paid by the trust or upon distribution of
the debentures to the holders of the capital securities. Because we are a
holding company, our right to participate in any distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization or otherwise is
subject to the prior claims of creditors of that subsidiary, except to the
extent we may be recognized as a creditor of that subsidiary. Our obligations
under the guarantee, therefore, will be effectively subordinated to all
existing and future liabilities of our subsidiaries, and claimants should look
only to our assets for payments under the guarantee.
Amendments and Assignment
Except with respect to any changes that do not materially adversely affect
the rights of holders of the capital securities, in which case no vote will be
required, the guarantee may be amended only with the
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prior approval of the holders of a majority of the aggregate liquidation amount
of the outstanding capital securities. See "Description of the Capital
Securities -- Voting Rights; Amendment of Trust Agreement."
Events of Default; Remedies
An event of default under the guarantee will occur upon our failure to make
any required guarantee payments or to perform any other obligations under the
guarantee. The holders of a majority in aggregate liquidation amount of the
capital securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the guarantee trustee in
respect of the guarantee and may direct the exercise of any power conferred
upon the guarantee trustee under the guarantee.
Any holder of capital securities may institute and prosecute a legal
proceeding directly against us to enforce its rights under the guarantee
without first instituting a legal proceeding against the trust, the guarantee
trustee or any other person or entity.
We are required to provide to the guarantee trustee annually a certificate
as to whether or not we are in compliance with all of the conditions and
covenants applicable to us under the guarantee.
Termination of the Guarantee
The guarantee will terminate and be of no further force and effect upon:
. full payment of the redemption price of the capital securities;
. full payment of the amounts payable upon liquidation of the trust; or
. distribution of the debentures to the holders of the capital securities.
If at any time any holder of the capital securities must restore payment of
any sums paid under the capital securities or the guarantee, the guarantee will
continue to be effective or will be reinstated with respect to such amounts.
Information Concerning the Guarantee Trustee
The guarantee trustee, other than during the occurrence and continuance of
our default in performance of the guarantee, undertakes to perform only those
duties as are specifically set forth in the guarantee. When an event of default
has occurred and is continuing, the guarantee trustee must exercise the same
degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to those provisions, the guarantee
trustee is under no obligation to exercise any of the powers vested in it by
the guarantee at the request of any holder of any capital securities unless it
is offered reasonable indemnity against the costs, expenses and liabilities
that might be incurred thereby.
Expense Agreement
We will, pursuant to the Agreement as to Expenses and Liabilities entered
into by us and the trust under the trust agreement, irrevocably and
unconditionally guarantee to each person or entity to whom the trust becomes
indebted or liable, the full payment of any costs, expenses or liabilities of
the trust, other than obligations of the trust to pay to the holders of the
capital securities or other similar interests in the trust of the amounts due
to the holders pursuant to the terms of the capital securities or other similar
interests, as the case may be. Third-party creditors of the trust may proceed
directly against us under the expense agreement, regardless of whether they had
notice of the expense agreement.
Governing Law
The guarantee will be governed by the internal laws of the State of
Delaware.
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RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
We irrevocably guarantee, as and to the extent described in this prospectus,
payments of distributions and other amounts due on the capital securities, to
the extent the trust has funds available for the payment of these amounts. We
and the trust believe that, taken together, our obligations under the
debentures, the indenture, the trust agreement, the expense agreement and the
guarantee agreement provide, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of payment of distributions
and other amounts due on the capital securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes a guarantee. It is only the combined operation of these documents
that has the effect of providing a full, irrevocable and unconditional
guarantee of the obligations of the trust under the capital securities.
If and to the extent that we do not make payments on the debentures, the
trust will not pay distributions or other amounts due on the capital
securities. The guarantee does not cover payment of distributions when the
trust does not have sufficient funds to pay the distributions. In this event,
the remedy of a holder of capital securities is to institute a legal proceeding
directly against us for enforcement of payment of the distributions to the
holder. Our obligations under the guarantee are subordinated and junior in
right of payment to all of our other indebtedness.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on the
debentures, these payments will be sufficient to cover distributions and other
payments due on the capital securities, primarily because:
. the aggregate principal amount of the debentures will be equal to the
sum of the aggregate stated liquidation amount of the trust securities;
. the interest rate and interest and other payment dates on the debentures
will match the distribution rate and distribution and other payment
dates for the capital securities;
. we will pay for any and all costs, expenses and liabilities of the
trust, except the obligations of the trust to pay to holders of the
capital securities the amounts due to the holders pursuant to the terms
of the capital securities; and
. the trust will not engage in any activity that is not consistent with
the limited purposes of the trust.
Enforcement Rights of Holders of Capital Securities
A holder of any capital security may institute a legal proceeding directly
against us to enforce its rights under the guarantee without first instituting
a legal proceeding against the guarantee trustee, the trust or any other
person. A default or event of default under any of our senior or subordinated
debt would not constitute a default or event of default under the trust
agreement. In the event, however, of payment defaults under, or acceleration
of, our senior or subordinated debt, the subordination provisions of the
indenture provide that no payments may be made in respect of the debentures
until the obligations have been paid in full or any payment default has been
cured or waived. Failure to make required payments on the debentures would
constitute an event of default under the trust agreement.
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Limited Purpose of the Trust
The capital securities evidence preferred undivided beneficial interests in
the assets of the trust. The trust exists for the exclusive purposes of issuing
the trust securities, investing the proceeds thereof in debentures and engaging
in only those other activities necessary, advisable or incidental thereto. A
principal difference between the rights of a holder of a capital security and
the rights of a holder of a debenture is that a holder of a debenture is
entitled to receive from us the principal amount of and interest accrued on
debentures held, while a holder of capital securities is entitled to receive
distributions from the trust (or from us under the guarantee) if and to the
extent the trust has funds available for the payment of the distribution.
Rights Upon Termination
Upon any voluntary or involuntary termination, winding-up or liquidation of
the trust involving the liquidation of the debentures, the holders of the
capital securities will be entitled to receive, out of assets held by the
trust, the liquidation distribution in cash. See "Description of the Capital
Securities -- Liquidation Distribution Upon Termination."
Upon our voluntary or involuntary liquidation or bankruptcy, the property
trustee, as holder of the debentures, would be a subordinated creditor of ours,
Therefore, the property trustee would be subordinated in right of payment to
all of our senior and subordinated debt, but is entitled to receive payment in
full of principal and interest before any of our stockholders receive payments
or distributions. Since we are the guarantor under the guarantee and have
agreed to pay for all costs, expenses and liabilities of the trust other than
the obligations of the trust to pay to holders of the capital securities the
amounts due to the holders pursuant to the terms of the capital securities, the
positions of a holder of the capital securities and a holder of the debentures
relative to our other creditors and to our stockholders in the event of
liquidation or bankruptcy are expected to be substantially the same.
FEDERAL INCOME TAX CONSEQUENCES
General
The following summary of the material federal income tax considerations that
may be relevant to the purchasers of capital securities represents the opinion
of Arnold & Porter, counsel to us and the trust insofar as it relates to
matters of law and legal conclusions. The conclusions expressed herein are
based upon current provisions of the Internal Revenue Code of 1986, regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change at any time, with possible retroactive effect. Subsequent
changes may cause tax consequences to vary substantially from the consequences
described below. Furthermore, the authorities on which the following summary is
based are subject to various interpretations, and it is therefore possible that
the federal income tax treatment of the purchase, ownership and disposition of
capital securities may differ from the treatment described below.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting purchasers of capital securities.
Moreover, the discussion generally focuses on holders of capital securities who
are individual citizens or residents of the United States and who acquire
capital securities on their original issue at their offering price and hold
capital securities as capital assets. The discussion has only limited
application to corporations, estates, trusts or nonresident aliens and does not
address all the tax consequences that may be relevant to holders who may be
subject to special tax treatment, such as, for example, banks, thrifts, real
estate investment trusts, regulated investment companies, insurance companies,
dealers in securities or currencies, tax-exempt investors or persons that will
hold the capital
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securities as a position in a "straddle," as part of a "synthetic security" or
"hedge," as part of a "conversion transaction" or other integrated investment,
or as other than a capital asset. The following summary also does not address
the tax consequences to persons that have a functional currency other than the
U.S. dollar or the tax consequences to shareholders, partners or beneficiaries
of a holder of capital securities. Further, it does not include any description
of any alternative minimum tax consequences or the tax laws of any state or
local government or of any foreign government that may be applicable to the
capital securities. Accordingly, each prospective investor should consult, and
should rely exclusively on, the investor's own tax advisors in analyzing the
federal, state, local and foreign tax consequences of the purchase, ownership
or disposition of capital securities.
Classification of the Debentures
In the opinion of Arnold & Porter, the debentures will be classified for
federal income tax purposes as our indebtedness under current law, and, by
acceptance of a capital security, each holder covenants to treat the debentures
as indebtedness and the capital securities as evidence of an indirect
beneficial ownership interest in the debentures. No assurance can be given,
however, that this position will not be challenged by the Internal Revenue
Service or, if challenged, that it will be sustained. The remainder of this
discussion assumes that the debentures will be classified for federal income
tax purposes as our indebtedness.
Classification of the Trust
With respect to the capital securities, Arnold & Porter, tax counsel for us
and the trust, has rendered its opinion generally to the effect that, under
then current law and assuming full compliance with the terms of the trust
agreement and indenture, the trust will be classified for federal income tax
purposes as a grantor trust and not as an association taxable as a corporation.
Accordingly, for federal income tax purposes, each holder of capital securities
generally will be treated as owning an undivided beneficial interest in the
debentures and, except as described below with respect to any Original Issue
Discount ("OID") each holder will be required to include in its gross income
any interest with respect to the debentures at the time such interest is
accrued or is received, in accordance with the holder's method of accounting.
Interest Payment Period and Original Issue Discount
United States persons (including cash basis taxpayers) that hold debt
instruments issued with OID must generally include such OID in income as it
accrues on a constant yield method even if there is not a corresponding receipt
of cash attributable to such income. A debt instrument such as the debentures
will generally be treated as issued with OID if the stated interest on the
instrument does not constitute "qualified stated interest." Qualified stated
interest is generally any one of a series of stated interest payments on an
instrument that are unconditionally payable at least annually at a single fixed
rate. In determining whether stated interest on an instrument is
unconditionally payable and thus constitutes qualified stated interest, remote
contingencies as to the timely payment of stated interest are ignored. In the
case of the debentures, we have concluded that the likelihood of exercising our
option to defer payments of interest is remote. This is in part because we have
a history of declaring dividends on our common stock and we would be unable to
continue making these dividends if we deferred our payments under the
debentures.
If the possibility that we will exercise our option to defer any payment of
interest were determined not to be "remote" or if we actually exercised our
option to defer the payment of interest, the debentures
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would be treated as issued with OID at the time of issuance or at the time of
such exercise, as the case may be, and all stated interest would thereafter be
treated as OID as long as the debentures remained outstanding. In such event,
all of a United States person's taxable interest income in respect of the
debentures would constitute OID that would have to be included in income on a
constant yield method before the receipt of the cash attributable to such
income, regardless of such person's method of tax accounting, and actual
distributions of stated interest would not be reported as taxable income.
Consequently, a holder of capital securities would be required to include such
OID in gross income even though we would not make any actual cash payments
during an Extension Period.
Because income on the capital securities will constitute interest, corporate
holders of capital securities will not be entitled to a dividends-received
deduction with respect to any income recognized with respect to the capital
securities.
Market Discount and Acquisition Premium
Holders of capital securities other than a holder who purchased the capital
securities upon original issuance may be considered to have acquired their
undivided interests in the debentures with "market discount" or "acquisition
premium" as these phrases are defined for federal income tax purposes. Such
holders are advised to consult their tax advisors as to the income tax
consequences of the acquisition, ownership and disposition of the capital
securities.
Receipt of Debentures or Cash Upon Liquidation of the Trust
Under the circumstances described under "Description of the Capital
Securities-Redemption or Exchange" and "- Liquidation Distribution Upon
Termination," the debentures may be distributed to holders of capital
securities upon a liquidation of the trust. Under current federal income tax
law, such a distribution would be treated as a nontaxable event to the holder
and would result in the holder having an aggregate tax basis in the debentures
received in the liquidation equal to the holder's aggregate tax basis in the
capital securities immediately before the distribution. A holder's holding
period in debentures received in liquidation of the trust would include the
period for which the holder held the capital securities.
If, however, a Tax Event occurs which results in the trust being treated as
an association taxable as a corporation, the distribution would likely
constitute a taxable event to holders of the capital securities. Under certain
circumstances described herein, the debentures may be redeemed for cash and the
proceeds of the redemption distributed to holders in redemption of their
capital securities. Under current law, such a redemption should, to the extent
that it constitutes a complete redemption, constitute a taxable disposition of
the redeemed capital securities, and a holder for federal income tax purposes
should recognize gain or loss as if the holder sold the capital securities for
cash.
Disposition of Capital Securities
A holder that sells capital securities will recognize gain or loss equal to
the difference between the amount realized on the sale of the capital
securities and the holder's adjusted tax basis in the capital securities. A
holder's adjusted tax basis in the capital securities generally will be its
initial purchase price increased by OID, if any, previously includible in the
holder's gross income to the date of disposition and
89
decreased by payments other than qualified stated interest received on the
capital securities to the date of disposition. A gain or loss of this kind will
generally be a capital gain or loss and will be a long-term capital gain or
loss if the capital securities have been held for more than one year at the
time of sale.
The capital securities may trade at a price that does not accurately reflect
the value of accrued but unpaid interest with respect to the underlying
debentures. A holder that disposes of its capital securities between record
dates for payments of distributions thereon will be required to include accrued
but unpaid interest on the debentures through the date of disposition in income
as ordinary income and to add the amount to its adjusted tax basis in its
proportionate share of the underlying debentures deemed disposed of. To the
extent the selling price is less than the holder's adjusted tax basis, a holder
will recognize a capital loss. The adjusted basis would include, in the form of
OID, all accrued but unpaid interest. Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for federal income
tax purposes.
Backup Withholding and Information Reporting
The amount of qualified stated interest, or, if applicable, OID, accrued on
the capital securities held of record by individual citizens or residents of
the United States, or certain trusts, estates and partnerships, will be
reported to the Internal Revenue Service on Forms 1099-INT, or, where
applicable, Forms 1099-OID, which forms should be mailed to the holders by
January 31 following each calendar year. Payments made on, and proceeds from
the sale of, the capital securities may be subject to a "backup" withholding
tax (currently at 31%) unless the holder complies with certain identification
and other requirements. Any amounts withheld under the backup withholding rules
will be allowed as a credit against the holder's federal income tax liability,
provided the required information is provided to the Internal Revenue Service.
The federal income tax discussion set forth above is included for general
information only and may not be applicable depending upon the particular
situation of a holder of capital securities. Holders of capital securities
should consult their tax advisors with respect to the tax consequences to them
of the purchase, ownership and disposition of the capital securities, including
the tax consequences under state, local, foreign and other tax laws and the
possible effects of changes in federal or other tax laws.
90
ERISA CONSIDERATIONS
Employee benefit plans and individual retirement accounts (collectively,
"Plans") that are subject to the Employee Retirement Income Security Act of
1974, and/or Section 4975 of the Internal Revenue Code, generally may purchase
capital securities, subject to the investing fiduciary's determination that the
investment in capital securities satisfies applicable fiduciary standards and
other requirements applicable to investments by the Plan.
In any case, we and/or any of our affiliates may be considered a "party in
interest" (within the meaning of ERISA) or a "disqualified person" (within the
meaning of Section 4975 of the Internal Revenue Code) with respect to certain
Plans. These Plans generally include Plans maintained or sponsored by, or
contributed to by, any such persons with respect to which we or any of our
affiliates are a fiduciary or Plans for which we or any of our affiliates
provide services. The acquisition and ownership of capital securities by a Plan
with respect to which we or any of our affiliates are considered a party in
interest or a disqualified person may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Internal Revenue Code, unless
the capital securities are acquired pursuant to and in accordance with an
applicable exemption.
As a result, Plans with respect to which we or any of our affiliates is a
party in interest or a disqualified person should not acquire capital
securities unless the capital securities are acquired pursuant to and in
accordance with an applicable exemption. Any other Plans or other entities
whose assets include Plan assets subject to ERISA or Section 4975 of the
Internal Revenue Code proposing to acquire capital securities should consult
with their own counsel.
91
UNDERWRITING
We, the trust, and the underwriters named below, have entered into an
underwriting agreement with respect to the capital securities. The
underwriters, and the amount of capital securities that each of them has agreed
to purchase, are as follows:
Number of
Capital
Underwriter Securities
----------- ----------
Dain Rauscher Incorporated........................................ 1,500,000
Howe Barnes Investments, Inc. .................................... 500,000
---------
Total........................................................... 2,000,000
=========
The underwriters have agreed to purchase the capital securities on a firm
commitment basis. That means that they will purchase all of the capital
securities if they purchase any of them. If one underwriter defaults under the
underwriting agreement, the purchase commitment of the other underwriter may be
increased or the underwriting agreement may be terminated.
The underwriters have agreed to purchase the capital securities at the price
stated on the cover page of this prospectus. Because the trust will use the
proceeds from the sale of the capital securities to purchase the debentures
from us, we have agreed to pay the underwriters the following fees:
Underwriting
Fees
------------
Per Capital Security............................................ $ 0.40
--------
Total......................................................... $800,000
========
In addition to the underwriting fees, we estimate that we will spend
approximately $400,000 for printing, depository and trustees' fees, legal and
accounting fees, and other expenses of the offering.
The underwriters will initially offer the capital securities to the public
at the price stated on the cover page. The underwriters may offer capital
securities to selected dealers at the public-offering price less a concession
of up to $0.20 per capital security. Those dealers may re-allow a discount not
in excess of $0.15 per capital security to other brokers and dealers. After the
initial offering of the capital securities, the underwriters may change the
offering price, concession, discount and other selling terms. The underwriters
have agreed with us that up to 10% of the capital securities will be reserved
for sale to employees, officers or directors of, or other individuals or
entities affiliated with, us and our subsidiaries. Any reserved capital
securities which are not confirmed for purchase will be offered by the
underwriters to the general public on the same terms as the other capital
securities offered by this prospectus.
In connection with the offering, the underwriters and their affiliates may
engage in transactions, effected in accordance with Rule 104 of the SEC's
Regulation M, that are intended to stabilize, maintain or otherwise affect the
market price of the capital securities. These transactions may include
transactions in which the underwriters create a short position for their own
account by selling more capital securities than they are committed to purchase
from the trust. In such a case, to cover all or part of the short position, the
underwriters may purchase capital securities in the open market following
completion of the initial offering. The underwriters also may engage in
stabilizing transactions in which they bid for, and purchase, the capital
securities at a level above that which might otherwise prevail in the open
market for the purpose of preventing or retarding a decline in the market price
of the capital securities. Any of these transactions may result in the
maintenance of a price for the capital securities at a level above that which
92
might otherwise prevail in the open market. Neither we nor the underwriters
make any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the market price of
the capital securities. The underwriters are not required to engage in any of
these transactions. These transactions may be effected on the American Stock
Exchange, and, if commenced, may be discontinued at any time without notice.
We and the trust have agreed to indemnify the underwriters against
liabilities arising from the offering of the capital securities, including
civil liabilities under the Securities Act of 1933, or to contribute to
payments that the underwriters may be required to make in connection with those
liabilities.
The underwriters have advised us that they do not intend to confirm any
sales of capital securities to any discretionary accounts. The underwriters
will comply with Rule 2810 under the NASD Conduct Rules when they offer and
sell the capital securities because the National Association of Securities
Dealers, Inc. may view the capital securities as interests in a direct
participation. The underwriters and their affiliates may provide investment
banking services for us or our affiliates in the future for which they would
expect to receive customary fees and commissions. Dain Rauscher Wessels was the
managing underwriter for our initial public offering, and currently holds
warrants granted in connection with our initial public offering to purchase
100,000 shares of our common stock at $14.40 per share.
LEGAL MATTERS
Legal matters, including matters relating to federal income tax
considerations, for us and the trust will be passed upon by Arnold & Porter,
Denver, Colorado, counsel to us and the trust. Certain legal matters will be
passed upon for the underwriters by Silver, Freedman & Taff, L.L.P.,
Washington, D.C. Arnold & Porter and Silver, Freedman & Taff, L.L.P. may rely
on the opinion of Richards, Layton & Finger, P.A. as to matters of Delaware
law.
EXPERTS
The consolidated financial statements as of December 31, 1999 and 1998, and
the three years then ended included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND INFORMATION
This prospectus is a part of a Registration Statement on Form S-1 filed by
us and the trust with the Securities and Exchange Commission under the
Securities Act, with respect to the capital securities, the debentures and the
guarantee. This prospectus does not contain all the information set forth in
the registration statement, certain parts of which are omitted in accordance
with the rules and regulations of the SEC. For further information with respect
to us and the securities offered by this prospectus, reference is made to the
registration statement, including the exhibits to the registration statement.
Statements contained in this prospectus concerning the provisions of such
documents are necessarily summaries of such documents, and each such statement
is qualified in its entirety by reference to the copy of the applicable
document filed with the Securities and Exchange Commission.
93
We file periodic reports, proxy statements and other information with the
SEC. Our filings are available to the public over the Internet at the SEC's web
site. The address of that site is http://www.sec.gov. You may also inspect and
copy these materials at the public reference facilities of the SEC at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, as well as at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 75 Park Place, Room 1400, New
York, New York 10007. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information.
The trust is not currently subject to the information reporting requirements
of the Securities Exchange Act of 1934, and, although the trust will become
subject to such requirements upon the effectiveness of the Registration
Statement, it is not expected that the trust will be required to file separate
reports under the Securities Exchange Act of 1934.
We have not included separate financial statements of the trust in this
prospectus. We do not consider that separate financial statements would be
material to holders of capital securities because we will own all of the
trust's voting securities, the trust has no independent operations and we
guarantee the payments on the capital securities to the extent described in
this prospectus.
Each holder of the capital securities will receive a copy of our annual
report at the same time as we furnish the annual report to the holders of our
common stock.
94
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT................................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Statements of Condition................................................... F-3
Statements of Income and Comprehensive Income............................. F-4
Statements of Shareholders' Equity........................................ F-5
Statements of Cash Flows.................................................. F-7
Notes to Consolidated Financial Statements................................ F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders 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 three years 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, such 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 three years ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE, LLP
February 25, 2000
Denver, Colorado
F-2
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CONDITION AT
MARCH 31, 2000 (UNAUDITED), DECEMBER 31, 1999 AND 1998
December 31,
March 31, --------------------------
2000 1999 1998
------------ ------------ ------------
(unaudited)
ASSETS
Cash and due from banks............... $ 22,870,000 $ 18,687,000 $ 20,058,000
Federal funds sold.................... 8,500,000 -- --
------------ ------------ ------------
Total cash and cash equivalents..... 31,370,000 18,687,000 20,058,000
------------ ------------ ------------
Investment securities available for
sale (cost of $97,398,000
(unaudited), $102,949,000 and
$95,994,000, respectively)........... 96,029,000 101,456,000 96,463,000
Investment securities held to maturity
(fair value of $5,540,000
(unaudited), $5,648,000 and
$9,481,000, respectively)............ 5,519,000 5,620,000 9,370,000
Other investments..................... 3,350,000 2,845,000 2,104,000
------------ ------------ ------------
Total investments.................. 104,898,000 109,921,000 107,937,000
------------ ------------ ------------
Loans and leases, net................. 358,709,000 346,094,000 223,279,000
Excess of cost over fair value of net
assets acquired, net................. 4,133,000 4,243,000 4,682,000
Investment in operating leases........ 3,550,000 4,047,000 4,180,000
Premises and equipment, net........... 3,397,000 3,606,000 2,884,000
Accrued interest receivable........... 2,496,000 2,167,000 1,597,000
Deferred income taxes................. 2,222,000 2,192,000 934,000
Other................................. 1,151,000 1,052,000 999,000
------------ ------------ ------------
TOTAL ASSETS....................... $511,926,000 $492,009,000 $366,550,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand.............................. $115,983,000 $106,492,000 $ 95,169,000
NOW and money market................ 170,693,000 148,685,000 101,455,000
Savings............................. 5,938,000 5,896,000 6,931,000
Certificates of deposit............. 126,694,000 122,256,000 69,473,000
------------ ------------ ------------
Total deposits..................... 419,308,000 383,329,000 273,028,000
Federal funds purchased............... -- 1,300,000 3,500,000
Securities sold under agreements to
repurchase........................... 36,736,000 33,053,000 24,956,000
Advances from the Federal Home Loan
Bank................................. 10,980,000 30,980,000 26,120,000
Accrued interest and other
liabilities.......................... 3,244,000 2,996,000 1,774,000
------------ ------------ ------------
Total liabilities.................. 470,268,000 451,658,000 329,378,000
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; 6,705,290
(unaudited), 6,674,659 and 6,673,468
issued and outstanding,
respectively........................ 67,000 67,000 67,000
Additional paid-in capital........... 30,067,000 29,994,000 29,839,000
Retained earnings.................... 12,382,000 11,224,000 6,972,000
Accumulated other comprehensive
(loss) income, net of income tax of
($511,000) (unaudited), ($559,000)
and $172,000, respectively.......... (858,000) (934,000) 294,000
------------ ------------ ------------
Total Shareholders' Equity......... 41,658,000 40,351,000 37,172,000
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................ $511,926,000 $492,009,000 $366,550,000
============ ============ ============
See notes to consolidated financial statements.
F-3
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED) AND THE YEARS
ENDED DECEMBER 31, 1999, 1998 AND 1997
Three Months Ended
March 31, Years Ended December 31,
--------------------- ------------------------------------
2000 1999 1999 1998 1997
---------- ---------- ----------- ----------- -----------
(unaudited)
INTEREST INCOME:
Interest and fees on
loans and leases..... $8,388,000 $5,384,000 $25,934,000 $19,640,000 $14,171,000
Interest on
investments.......... 1,739,000 1,531,000 6,475,000 4,259,000 3,976,000
---------- ---------- ----------- ----------- -----------
Total interest
income............. 10,127,000 6,915,000 32,409,000 23,899,000 18,147,000
INTEREST EXPENSE:
Interest on deposits.. 3,245,000 1,746,000 8,846,000 6,812,000 5,253,000
Interest on short-term
borrowings........... 861,000 650,000 3,008,000 1,464,000 1,031,000
Interest on note
payable.............. -- -- 25,000 301,000 732,000
---------- ---------- ----------- ----------- -----------
Total interest
expense............ 4,106,000 2,396,000 11,879,000 8,577,000 7,016,000
NET INTEREST INCOME
BEFORE PROVISION FOR
LOAN AND LEASE LOSSES.. 6,021,000 4,519,000 20,530,000 15,322,000 11,131,000
PROVISION FOR LOAN AND
LEASE LOSSES........... 573,000 303,000 1,473,000 1,188,000 949,000
---------- ---------- ----------- ----------- -----------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN AND LEASE LOSSES.. 5,448,000 4,216,000 19,057,000 14,134,000 10,182,000
---------- ---------- ----------- ----------- -----------
OTHER INCOME:
Service charges....... 283,000 256,000 1,152,000 945,000 830,000
Operating lease
income............... 529,000 587,000 2,348,000 2,370,000 1,334,000
Other income.......... 328,000 275,000 1,110,000 931,000 1,139,000
---------- ---------- ----------- ----------- -----------
Total other income.. 1,140,000 1,118,000 4,610,000 4,246,000 3,303,000
---------- ---------- ----------- ----------- -----------
OTHER EXPENSE:
Salaries and employee
benefits............. 2,165,000 1,938,000 8,124,000 6,836,000 5,339,000
Occupancy expenses,
premises and
equipment............ 784,000 581,000 2,831,000 1,868,000 1,202,000
Depreciation on
leases............... 434,000 496,000 2,015,000 1,889,000 1,168,000
Amortization of
intangibles.......... 111,000 110,000 442,000 442,000 501,000
Other................. 603,000 582,000 2,334,000 2,098,000 2,177,000
---------- ---------- ----------- ----------- -----------
Total other
expense............ 4,097,000 3,707,000 15,746,000 13,133,000 10,387,000
---------- ---------- ----------- ----------- -----------
INCOME BEFORE INCOME
TAXES.................. 2,491,000 1,627,000 7,921,000 5,247,000 3,098,000
PROVISION FOR INCOME
TAXES.................. 997,000 620,000 3,002,000 2,031,000 1,245,000
---------- ---------- ----------- ----------- -----------
NET INCOME.............. 1,494,000 1,007,000 4,919,000 3,216,000 1,853,000
---------- ---------- ----------- ----------- -----------
UNREALIZED APPRECIATION
(DEPRECIATION) ON
AVAILABLE FOR SALE
SECURITIES, net of
tax.................... 76,000 (88,000) (1,228,000) 184,000 20,000
---------- ---------- ----------- ----------- -----------
COMPREHENSIVE INCOME.... $1,570,000 $ 919,000 $ 3,691,000 $ 3,400,000 $ 1,873,000
========== ========== =========== =========== ===========
EARNINGS PER SHARE:
Basic................. $ 0.22 $ 0.15 $ 0.74 $ 0.53 $ 0.37
========== ========== =========== =========== ===========
Diluted............... $ 0.22 $ 0.15 $ 0.72 $ 0.51 $ 0.36
========== ========== =========== =========== ===========
See notes to consolidated financial statements.
F-4
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) AND THE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Common Stock Preferred Stock Accumulated
----------------- Additional ------------------- Other
Shares Paid-In Shares Retained Comprehensive
Issued Amount Capital Issued Amount Earnings Income Total
--------- ------- ---------- ------ ----------- ---------- ------------- -----------
BALANCE, JANUARY 1,
1997................... 3,771,885 $38,000 $7,965,000 -- $ -- $2,096,000 $90,000 $10,189,000
ISSUANCE OF COMMON
STOCK.................. 1,102,725 11,000 3,967,000 -- -- -- -- 3,978,000
ISSUANCE OF PREFERRED
STOCK.................. -- -- -- 1,500 1,500,000 -- -- 1,500,000
OPTIONS EXERCISED....... 358 -- 1,000 -- -- -- -- 1,000
DIVIDENDS PAID--
PREFERRED ($77.33 per
share)................. -- -- -- -- -- (116,000) -- (116,000)
NET CHANGE IN UNREALIZED
APPRECIATION ON
AVAILABLE FOR SIZE
SECURITIES, net of
income taxes of
$12,000................ -- -- -- -- -- -- 20,000 20,000
NET INCOME.............. -- -- -- -- -- 1,853,000 -- 1,853,000
--------- ------- ---------- ------ ----------- ---------- ------- -----------
BALANCE, DECEMBER 31,
1997................... 4,874,968 49,000 11,933,000 1,500 1,500,000 3,833,000 110,000 17,425,000
ISSUANCE OF COMMON
STOCK.................. 1,610,000 16,000 17,508,000 -- -- -- -- 17,524,000
REDEMPTION OF PREFERRED
STOCK.................. -- -- -- (1,500) (1,500,000) -- -- (1,500,000)
OPTIONS EXERCISED....... 188,500 2,000 398,000 -- -- -- -- 400,000
DIVIDENDS PAID--
PREFERRED ($51.29 per
share)................. -- -- -- -- -- (77,000) -- (77,000)
NET CHANGE IN UNREALIZED
APPRECIATION ON
AVAILABLE FOR SALE
SECURITIES, net of
income taxes of
$110,000............... -- -- -- -- -- -- 184,000 184,000
NET INCOME.............. -- -- -- -- -- 3,216,000 -- 3,216,000
--------- ------- ---------- ------ ----------- ---------- ------- -----------
BALANCE, DECEMBER 31,
1998................... 6,673,468 67,000 29,839,000 -- -- 6,972,000 294,000 37,172,000
(Continued)
F-5
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) AND THE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Preferred
Common Stock Stock Accumulated
----------------- Additional ------------- Other
Shares Paid-In Shares Retained Comprehensive
Issued Amount Capital Issued Amount Earnings Income Total
--------- ------- ----------- ------ ------ ----------- ------------- -----------
TAX EFFECT ON EXERCISE
OF NON- QUALIFIED STOCK
OPTIONS................ -- $ -- $ 146,000 -- $-- $ -- $ -- $ 146,000
OPTIONS EXERCISED....... 1,191 -- 9,000 -- -- -- -- 9,000
DIVIDENDS PAID-- COMMON
($0.10) 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
OPTIONS EXERCISED
(UNAUDITED)............ 30,631 -- 73,000 -- -- -- -- 73,000
DIVIDENDS PAID-- COMMON
($0.05 per share) (un-
audited)............... -- -- -- -- -- (336,000) (336,000)
NET CHANGE IN UNREALIZED
APPRECIATION ON
AVAILABLE FOR SALE
SECURITIES, net of
income taxes of $45,000
(unaudited)............ -- -- -- -- -- 76,000 76,000
NET INCOME (unaudited).. -- -- -- -- -- 1,494,000 1,494,000
--------- ------- ----------- --- --- ----------- ----------- -----------
BALANCE, MARCH 31, 2000
(unaudited)............ 6,705,290 $67,000 $30,067,000 -- $-- $12,382,000 $ (858,000) $41,658,000
========= ======= =========== === === =========== =========== ===========
(Concluded)
F-6
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Three Months Ended
March 31, Years Ended December 31,
-------------------------- ------------------------------------------
2000 1999 1999 1998 1997
------------ ------------ ------------- ------------- ------------
(unaudited)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income.............. $ 1,494,000 $ 1,007,000 $ 4,919,000 $ 3,216,000 $ 1,853,000
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Net amortization
(accretion) on
securities........... 19,000 77,000 195,000 248,000 (988,000)
Depreciation and
amortization......... 826,000 833,000 3,447,000 2,964,000 2,141,000
Provision for loan and
lease losses......... 573,000 303,000 1,473,000 1,188,000 949,000
Deferred income
taxes................ (75,000) 18,000 (527,000) (264,000) (341,000)
Gain on sale of
securities........... -- (44,000) (44,000) (162,000) --
(Gain) loss on sale of
premises and
equipment............ (3,000) (28,000) (4,000) 30,000 --
Changes in:
Accrued interest
receivable............. (329,000) (181,000) (570,000) (266,000) (217,000)
Other assets.......... (99,000) 48,000 (53,000) 620,000 (1,962,000)
Accrued interest and
other liabilities...... 248,000 537,000 1,368,000 (18,000) 694,000
------------ ------------ ------------- ------------- ------------
Net cash provided by
operating
activities......... 2,654,000 2,570,000 10,204,000 7,556,000 2,129,000
CASH FLOWS FROM
INVESTING ACTIVITIES:
Net change in other
investments.......... (505,000) (31,000) (741,000) 119,000 --
Purchase of available
for sale securities.. -- (10,000,000) (48,851,000) (86,941,000) (25,809,000)
Purchase of held to
maturity securities.. 97,000 1,071,000 -- -- (2,024,000)
Maturities of held to
maturity securities.. 5,531,000 20,156,000 3,740,000 5,503,000 13,966,000
Proceeds from
maturities and sale
of available for sale
securities........... -- -- 41,759,000 32,374,000 13,662,000
Loan and lease
originations and
repayments, net...... (13,209,000) (21,249,000) (126,409,000) (63,431,000) (55,513,000)
Proceeds from sale of
real estate acquired
through foreclosure.. -- -- -- -- 109,000
Purchase of premises
and equipment........ (104,000) (317,000) (1,724,000) (2,579,000) (370,000)
Proceeds from sale of
premises and
equipment............ 120,000 98,000 251,000 573,000 106,000
------------ ------------ ------------- ------------- ------------
Net cash used in
investing
activities......... (8,070,000) (10,272,000) (131,975,000) (114,382,000) (55,873,000)
(Continued)
F-7
COLORADO BUSINESS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Three Months Ended
March 31, Years Ended December 31,
------------------------- ---------------------------------------
2000 1999 1999 1998 1997
------------ ----------- ------------- ----------- -----------
(unaudited)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net increase in
demand, NOW, money
market, and savings
accounts............. $ 31,541,000 $ 2,533,000 $ 57,518,000 $53,351,000 $32,348,000
Net increase
(decrease) in
certificates of
deposit.............. 4,438,000 11,633,000 52,783,000 (1,381,000) 33,400,000
Net (decrease)
increase in federal
funds purchased...... (1,300,000) (3,500,000) (2,200,000) 3,500,000 (6,226,000)
Net increase in
securities sold under
agreements to
repurchase........... 3,683,000 11,498,000 8,097,000 11,932,000 9,602,000
Advances from the
Federal Home Loan
Bank................. 30,800,000 -- 110,400,000 24,000,000 (1,140,000)
Repayment of Federal
Home Loan Bank
advances............. (50,800,000) (9,000,000) (105,540,000) (1,140,000) --
Payment on notes
payable.............. -- -- -- (7,500,000) (1,000,000)
Proceeds from issuance
of common stock...... -- -- -- 17,524,000 3,978,000
Dividends paid on
common stock......... (336,000) -- (667,000) -- --
Dividends paid on
preferred stock...... -- -- -- (77,000) (116,000)
Proceeds from options
exercised............ 73,000 -- 9,000 400,000 1,000
Redemption of
preferred stock...... -- -- -- (1,500,000) --
------------ ----------- ------------- ----------- -----------
Net cash provided by
financing
activities........... 18,099,000 13,164,000 120,400,000 99,109,000 70,847,000
------------ ----------- ------------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 12,683,000 5,462,000 (1,371,000) (7,717,000) 17,103,000
CASH AND CASH
EQUIVALENTS, BEGINNING
OF YEAR................ 18,687,000 20,058,000 20,058,000 27,775,000 10,672,000
------------ ----------- ------------- ----------- -----------
CASH AND CASH
EQUIVALENTS, END OF
YEAR................... $ 31,370,000 $25,520,000 $ 18,687,000 $20,058,000 27,775,000
============ =========== ============= =========== ===========
SUPPLEMENTAL DISCLOSURES
OF CASH INFORMATION:
Cash paid during the
year for:
Interest............ $ 4,062,000 $ 2,242,000 $ 11,446,000 $ 8,549,000 $ 6,910,000
============ =========== ============= =========== ===========
Income taxes........ $ 571,000 $ -- $ 2,889,000 $ 2,542,000 $ 1,455,000
============ =========== ============= =========== ===========
(Concluded)
See notes to consolidated financial statements.
F-8
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED) AND THE YEARS
ENDED DECEMBER 31, 1999, 1998 AND 1997
Insofar as these consolidated financial statements and notes relate to March
31, 2000 and for the three months periods ended March 31, 2000 and 1999, they
are unaudited. In the opinion of management, such unaudited consolidated
financial statements and notes thereto reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of
consolidated financial position, results of operations and cash flows for such
periods. The consolidated results of operations for the three months ended
March 31, 2000 are not necessarily indicative of the consolidated results of
operations that may be expected for the year ending December 31, 2000.
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 eight 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. Intercompany balances and transactions are
eliminated in consolidation. 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 had 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.
F-9
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Premiums and discounts are recognized in interest income using the level-
yield method over the period to maturity. Declines in the fair value of
individual held to maturity and available for sale securities below their cost
that are other than temporary are recorded as write-downs of the individual
securities to their fair value and the related write-downs are included in
earnings as realized losses. Gains and losses on disposal of securities are
determined using the specific-identification method.
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.
F-10
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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.
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.
F-11
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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.
Reclassifications -- Certain reclassifications have been made to the 1998
and 1997 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.
F-12
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Investments
The amortized cost and estimated fair values of investment securities are
summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- ------------
March 31, 2000 (unaudited):
- ---------------------------
Available for sale securities:
Mortgage-backed securities.... $ 85,182,000 $594,000 $1,332,000 $ 84,444,000
U.S. treasury................. 3,537,000 -- 74,000 3,463,000
Obligations of states and
political subdivisions....... 275,000 34,000 -- 309,000
U.S. government agencies...... 8,404,000 -- 591,000 7,813,000
------------ -------- ---------- ------------
$ 97,398,000 $628,000 $1,997,000 $ 96,029,000
============ ======== ========== ============
Held to maturity securities:
Mortgage-backed securities.... $ 4,688,000 $ 37,000 $ 3,000 $ 4,722,000
Obligations of states and
political subdivisions....... 490,000 3,000 -- 493,000
U.S. government agencies...... 341,000 -- 16,000 325,000
------------ -------- ---------- ------------
$ 5,519,000 $ 40,000 $ 19,000 $ 5,540,000
============ ======== ========== ============
December 31, 1999:
- ------------------
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
============ ======== ========== ============
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 4,000 -- 494,000
U.S. government agencies...... 342,000 -- 13,000 329,000
------------ -------- ---------- ------------
$ 5,620,000 $ 44,000 $ 16,000 $ 5,648,000
============ ======== ========== ============
December 31, 1998:
- ------------------
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
============ ======== ========== ============
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
============ ======== ========== ============
F-13
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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.
Available for Sale Held to Maturity
------------------------- ---------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ---------- ----------
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
============ ============ ========== ==========
During the years ended December 31, 1999, 1998 and 1997, there were no sales
of held to maturity securities. Proceeds from sales of available for sale
securities totaled $9,858,000, $14,716,000 and $9,155,000, respectively during
the years ended December 31, 1999, 1998 and 1997. The related gross realized
gains were $48,000, $162,000 and $82,000, 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.
F-14
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. Loans and Leases
Categories of loans and leases, net of deferred fees include:
December 31,
March 31, -------------------------
2000 1999 1998
------------ ------------ ------------
(unaudited)
Commercial............................. $124,282,000 $130,633,000 $104,900,000
Real estate -- mortgage................ 141,917,000 123,668,000 57,081,000
Real estate -- construction............ 55,093,000 53,802,000 34,372,000
Consumer............................... 20,392,000 21,880,000 16,913,000
Direct financing leases................ 24,829,000 23,381,000 15,472,000
------------ ------------ ------------
366,513,000 353,364,000 228,738,000
Less: Allowance for loan and lease
losses................................ 4,855,000 4,585,000 3,271,000
Unearned net loan and lease fees.. 2,949,000 2,685,000 2,188,000
------------ ------------ ------------
$358,709,000 $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
=========== ===========
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.
F-15
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Transactions in the allowance for loan and lease losses are summarized as
follows:
Three Months Ended Years Ended
March 31, December 31,
---------------------- ----------------------------------
2000 1999 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(unaudited)
Balance, beginning of period...... $4,585,000 $3,271,000 $3,271,000 $2,248,000 $1,660,000
Provision for loan and lease
losses........................... 573,000 303,000 1,473,000 1,188,000 949,000
---------- ---------- ---------- ---------- ----------
5,158,000 3,574,000 4,744,000 3,436,000 2,609,000
Loans charged off, net of
recoveries of $15,000 (unaudited),
$3,000 (unaudited), $26,000,
$71,000, and $33,000,
respectively..................... (303,000) (76,000) (159,000) (165,000) (361,000)
---------- ---------- ---------- ---------- ----------
Balance, end of period............ $4,855,000 $3,498,000 $4,585,000 $3,271,000 $2,248,000
========== ========== ========== ========== ==========
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,
$43,000 and $33,000 was recognized on average impaired loans of $550,000,
$639,000 and $697,000 during 1999, 1998 and 1997, 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, 1998 and 1997.
4. Investment In Leases
The Company is the lessor of equipment under agreements expiring in various
future years. Certain of the equipment leases provide for additional rents,
based on use in excess of a stipulated minimum number of hours, and allow the
lessees to purchase the equipment for fair value at the end of the lease terms.
Property leased or held for lease to others under operating leases consists
of the following:
December 31,
March 31, ---------------------
2000 1999 1998
----------- ---------- ----------
(unaudited)
Equipment................................. $6,500,000 $6,862,000 $6,408,000
Unamortized initial direct costs.......... 62,000 73,000 77,000
---------- ---------- ----------
6,562,000 6,935,000 6,485,000
Less accumulated depreciation............. 3,012,000 2,888,000 2,305,000
---------- ---------- ----------
Total................................... $3,550,000 $4,047,000 $4,180,000
========== ========== ==========
F-16
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The Company's net investment in direct financing leases consists of the
following:
December 31,
March 31, ------------------------
2000 1999 1998
----------- ----------- -----------
(unaudited)
Minimum lease payments receivable... $24,403,000 $22,968,000 $15,324,000
Unamortized initial direct costs.... 391,000 354,000 216,000
Estimated unguaranteed residual
values............................. 508,000 503,000 148,000
Unearned income..................... (2,620,000) (2,340,000) (1,947,000)
----------- ----------- -----------
Total............................. $22,682,000 $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 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
========== ==========
6. Certificates of Deposit
The composition of certificates of deposit is as follows:
December 31,
March 31, ------------------------
2000 1999 1998
------------ ------------ -----------
(unaudited)
Less than $100,000..................... $ 23,679,000 $ 23,870,000 $27,311,000
$100,000 and more...................... 103,015,000 98,386,000 42,162,000
------------ ------------ -----------
$126,694,000 $122,256,000 $69,473,000
============ ============ ===========
F-17
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Related interest expense is as follows:
Three Months Ended
March 31, Years Ended December 31
------------------- --------------------------------
2000 1999 1999 1998 1997
---------- -------- ---------- ---------- ----------
(unaudited)
Less than $100,000....... $ 326,000 $379,000 $1,320,000 $1,166,000 $ 877,000
$100,000 and more........ 1,383,000 563,000 3,337,000 2,658,000 2,083,000
---------- -------- ---------- ---------- ----------
$1,709,000 $942,000 $4,657,000 $3,824,000 $2,960,000
========== ======== ========== ========== ==========
Maturities of certificates of deposit of $100,000 and more are as follows:
March 31, December 31,
2000 1999
------------ ------------
(unaudited)
Less than three months............................. $ 64,860,000 $57,975,000
Three months up to six months...................... 13,150,000 28,338,000
Six months up to one year.......................... 12,351,000 6,250,000
One year and over.................................. 12,654,000 5,823,000
------------ -----------
$103,015,000 $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.
Aggregate annual maturities of advances are as follows at December 31, 1999:
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
=========== ===========
F-18
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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:
Three Months Ended
March 31, Years Ended December 31,
-------------------- ----------------------------------
2000 1999 1999 1998 1997
---------- -------- ---------- ---------- ----------
(unaudited)
Current tax expense..... $1,072,000 $655,000 $3,529,000 $2,295,000 $1,586,000
Deferred tax benefit.... (75,000) (35,000) (527,000) (264,000) (341,000)
---------- -------- ---------- ---------- ----------
Total................. $ 997,000 $620,000 $3,002,000 $2,031,000 $1,245,000
========== ======== ========== ========== ==========
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:
December 31,
March 31, ---------------------
2000 1999 1998
----------- ---------- ----------
(unaudited)
Deferred tax assets:
Allowance for loan losses................ $1,672,000 $1,594,000 $1,097,000
Unrealized loss on available-for-sale
securities.............................. 511,000 559,000 --
True lease adjustment.................... 549,000 438,000 --
Depreciation............................. -- -- 23,000
Deferred loan fees....................... 346,000 309,000 170,000
Vacation and other accrued liabilities... 54,000 49,000 30,000
Other.................................... 70,000 84,000 53,000
---------- ---------- ----------
Total deferred tax assets............ 3,202,000 3,033,000 1,373,000
========== ========== ==========
Deferred tax liabilities:
Depreciation............................. 310,000 227,000 --
Sale of assets........................... 317,000 288,000 --
Building leasehold improvements.......... -- -- 95,000
Unrealized gain on available-for-sale
securities.............................. -- -- 172,000
Deferred initial direct lease costs...... 222,000 179,000 110,000
Prepaid assets........................... 131,000 147,000 62,000
---------- ---------- ----------
Total deferred tax liabilities....... 980,000 841,000 439,000
---------- ---------- ----------
Net deferred tax assets.................. $2,222,000 $2,192,000 $ 934,000
========== ========== ==========
F-19
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
Three Months
Ended
March 31, Years Ended December 31,
------------------ ----------------------------------
2000 1999 1999 1998 1997
-------- -------- ---------- ---------- ----------
(unaudited)
Computed at the
statutory rate
(35% in 2000, 34% in
1999).................. $872,000 $553,000 $2,693,000 $1,784,000 $1,053,000
Increase (decrease)
resulting from:
Tax exempt interest
income on loans and
securities........... (3,000) (6,000) (22,000) (24,000) (10,000)
Nondeductible goodwill
amortization......... 38,000 37,000 149,000 148,000 148,000
State income taxes,
net of federal income
tax effect........... 81,000 65,000 256,000 71,000 65,000
Meals and
entertainment........ 6,000 -- 26,000 -- --
Other................. 3,000 (29,000) (100,000) 52,000 (11,000)
-------- -------- ---------- ---------- ----------
Actual tax provision.... $997,000 $620,000 $3,002,000 $2,031,000 $1,245,000
======== ======== ========== ========== ==========
9. Shareholders' Equity
Preferred Stock -- The Board of Directors is authorized, among other things,
to fix the designation and the powers, preferences and relative participating,
optional and other special rights for preferred shares. All outstanding
preferred stock was redeemed in 1998.
Stock Split -- In May 1998, the shareholders approved a 4.7125 for 1 stock
split of the Company's common stock and increased authorized shares to
25,000,000. In addition, the shareholders approved an increase in the number of
preferred shares authorized to 2,000,000 shares. All references to outstanding
shares, options and earnings per share for all periods have been adjusted for
the stock split.
Stock Options -- 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
F-20
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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.
The following is a summary of changes in shares under option (excluding
Other Options discussed above):
1999 1998 1997
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding, beginning of
year...................... 277,826 $ 3.83 245,051 $3.12 157,162 $2.54
Granted.................. 166,110 15.94 39,844 8.60 102,733 4.00
Exercised................ 1,191 7.43 -- -- 358 2.12
Forfeited................ 4,022 8.49 7,069 6.15 14,486 3.18
------- ------ ------- ----- ------- -----
Outstanding, end of year... 438,723 $ 8.10 277,826 $3.83 245,051 $3.12
======= ====== ======= ===== ======= =====
Options exercisable, end of
year...................... 234,264 $ 5.46 127,827 $2.75 67,153 $2.43
======= ====== ======= ===== ======= =====
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
F-21
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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.
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:
Three Months Ended
March 31, Years Ended December 31,
--------------------- --------------------------------
2000 1999 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(unaudited)
Net income.............. $1,494,000 $1,007,000 $4,919,000 $3,216,000 $1,853,000
Less: Preferred stock
dividends.............. -- -- -- 77,000 116,000
---------- ---------- ---------- ---------- ----------
Income available to
common shareholders.... $1,494,000 $1,007,000 $4,919,000 $3,139,000 $1,737,000
---------- ---------- ---------- ---------- ----------
Weighted average shares
outstanding -- basic
earnings per share..... 6,698,118 6,673,481 6,673,484 5,880,419 4,690,852
Effect of dilutive
securities -- stock
options................ 177,625 190,822 191,509 214,488 111,926
---------- ---------- ---------- ---------- ----------
Weighted average shares
outstanding -- diluted
earnings per share..... 6,875,743 6,864,303 6,864,993 6,094,907 4,802,778
========== ========== ========== ========== ==========
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
F-22
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Company's discretionary matching within the limits defined for a 401(k) Plan.
Employer contributions charged to expense for 1999, 1998 and 1997 were
$277,000, $149,000 and $123,000, 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 years ended December 31,
1999, 1998 and 1997 was $1,034,000, $686,000 and $533,000, 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:
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
==========
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. The Company had the following commitments:
March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited)
Commitments to originate commercial or real
estate construction loans and unused lines
of credit granted to customers............ $141,942,000 $160,717,000
============ ============
Commitments to fund consumer loans:
Personal lines of credit and equity
lines................................... $ 9,281,000 $ 8,486,000
============ ============
Overdraft protection plans............... $ 5,724,000 $ 4,831,000
============ ============
Letters of credit.......................... $ 4,537,000 $ 4,811,000
============ ============
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
F-23
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
by the contractual amounts of those instruments. However, the Company applies
the same credit policies, standards and ongoing reassessments in making
commitments and conditional obligations as they do for loans. In addition, the
amount and type of collateral obtained, if deemed necessary upon extension of a
loan commitment or standby letter of credit, is essentially the same as the
collateral requirements provided for loans. Additional risk associated with
providing these commitments arise when they are drawn upon, such as the demands
on liquidity the Bank would experience if a significant portion were drawn down
at the same time. However, this is considered unlikely, as many commitments
expire without being drawn upon and therefore do not necessarily represent
future cash requirements.
Employment Contracts -- Certain officers of the Company have entered into
employment agreements providing for salaries and fringe benefits. In addition,
severance is provided in the event of termination for other than cause and
under certain changes in control a lump sum payment is required.
Other Matters -- The Company is involved in various lawsuits which have
arisen in the normal course of business. It is management's opinion, based upon
advice of legal counsel, that the ultimate outcome of these lawsuits will not
have a material impact upon the financial condition or results of operations of
the Company.
11. Regulatory Matters
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the Company and the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company and 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.
F-24
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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:
To Be "Well
Capitalized"
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
----------------- ----------------- -----------------
As of December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
- ----------------------- ----------- ----- ----------- ----- ----------- -----
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%
To Be "Well
Capitalized"
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
----------------- ----------------- -----------------
As of December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
- ----------------------- ----------- ----- ----------- ----- ----------- -----
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%
F-25
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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.
1999 1998
----------- ---------
Other comprehensive income (loss), before tax:
Unrealized (loss) gain on available for sale
securities arising during the period................ $(1,959,000) $ 455,000
Reclassification adjustment for gains arising during
the period.......................................... -- (161,000)
----------- ---------
Other comprehensive (loss) income, before tax.......... (1,959,000) 294,000
Tax benefit (expense) related to items of other
comprehensive (loss) income........................... 731,000 (110,000)
----------- ---------
Other comprehensive (loss) income, net of tax.......... $(1,228,000) $ 184,000
=========== =========
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.
March 31, 2000 December 31, 1999 December 31, 1998
------------------------- ------------------------- -------------------------
Estimated Estimated Estimated
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
------------ ------------ ------------ ------------ ------------ ------------
(unaudited)
Financial assets:
Cash and cash
equivalents........... $ 31,370,000 $ 31,370,000 $ 18,687,000 $ 18,687,000 $ 20,258,000 $ 20,258,000
Investment securities
available for sale.... 96,029,000 96,029,000 101,456,000 101,456,000 96,463,000 96,463,000
Investment securities
held to maturity...... 5,519,000 5,540,000 5,620,000 5,648,000 9,370,000 9,481,000
Other investments...... 3,350,000 3,350,000 2,845,000 2,845,000 2,104,000 2,104,000
Loans and leases, net.. 358,709,000 352,005,000 346,094,000 340,028,000 223,279,000 223,015,000
Accrued interest
receivable............ 2,496,000 2,496,000 2,167,000 2,167,000 1,597,000 1,597,000
Financial liabilities:
Deposits............... 419,308,000 382,259,000 383,329,000 348,011,000 273,028,000 258,240,000
Federal funds
purchased............. -- -- 1,300,000 1,300,000 3,500,000 3,500,000
Securities sold under
agreements to
repurchase............ 36,736,000 36,735,000 33,053,000 33,050,000 24,956,000 24,937,000
Advances from Federal
Home Loan Bank........ 10,980,000 10,931,000 30,980,000 30,926,000 26,120,000 26,185,000
Accrued interest
payable............... 873,000 873,000 829,000 829,000 397,000 397,000
F-26
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The estimation methodologies utilized by the Company are summarized as
follows:
Cash and Cash Equivalents -- 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.
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
F-27
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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:
Years Ended December
31,
-------------------------
1999 1998 1997
------- ------- -------
(Dollars in thousands)
Total interest income:
Commercial Banking................................. $32,201 $24,022 $18,463
Equipment Leasing.................................. 1,435 932 580
Holding Company.................................... 25 89 --
Eliminations....................................... (1,252) (1,144) (896)
------- ------- -------
Consolidated......................................... $32,409 $23,899 $18,147
======= ======= =======
Total interest expense
Commercial Banking................................. $11,843 $ 8,335 $ 6,466
Equipment Leasing.................................. 1,287 1,085 --
Holding Company.................................... -- 301 732
Eliminations....................................... (1,251) (1,144) (182)
------- ------- -------
Consolidated......................................... $11,879 $ 8,577 $ 7,016
======= ======= =======
Provision for loan and lease losses:
Commercial Banking................................. $ 1,425 $ 1,114 $ 949
Equipment Leasing.................................. 48 74 --
------- ------- -------
Consolidated......................................... $ 1,473 $ 1,188 $ 949
======= ======= =======
Other noninterest income:
Commercial Banking................................. $ 2,243 $ 1,769 $ 1,754
Equipment Leasing.................................. 2,538 2,521 1,561
Holding Company.................................... 5,896 4,033 2,945
Eliminations....................................... (6,067) (4,077) (2,957)
------- ------- -------
Consolidated......................................... $ 4,610 $ 4,246 $ 3,303
======= ======= =======
F-28
COLORADO BUSINESS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Depreciation and amortization:
Commercial Banking.............................. $ 1,366 $ 1,032 $ 926
Equipment Leasing............................... 2,053 1,914 1,191
Holding Company................................. 28 18 24
Eliminations.................................... -- -- --
-------- -------- --------
Consolidated...................................... $ 3,447 $ 2,964 $ 2,141
======== ======== ========
Income tax expense (benefit):
Commercial Banking.............................. $ 3,043 $ 2,341 $ 1,858
Equipment Leasing............................... 69 (36) (78)
Holding Company................................. (110) (274) (535)
-------- -------- --------
Consolidated...................................... $ 3,002 $ 2,031 $ 1,245
======== ======== ========
Net income (loss):
Commercial Banking.............................. $ 5,140 $ 3,649 $ 2,723
Equipment Leasing............................... 146 (52) (139)
Holding Company................................. 4,919 3,216 1,853
Eliminations.................................... (5,286) (3,597) (2,584)
-------- -------- --------
Consolidated...................................... $ 4,919 $ 3,216 $ 1,853
======== ======== ========
Identifiable assets:
Commercial Banking.............................. $491,376 $365,837 $276,556
Equipment Leasing............................... 26,137 18,512 12,560
Holding Company................................. 41,015 37,279 25,332
Eliminations.................................... (66,519) (55,078) (50,389)
-------- -------- --------
Consolidated...................................... $492,009 $366,550 $264,059
======== ======== ========
Capital expenditures:
Commercial Banking.............................. $ 1,469 $ 2,416 $ 345
Equipment Leasing............................... 77 32 12
Holding Company................................. 178 131 13
-------- -------- --------
Consolidated...................................... $ 1,724 $ 2,579 $ 370
======== ======== ========
F-29
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2,000,000 Capital Securities
COLORADO BUSINESS BANKSHARES CAPITAL TRUST I
10% Cumulative Capital Securities
fully, irrevocably and unconditionally guaranteed by
[LOGO OF COLORADO BUSINESS BANKSHARES, INC.]
--------------------
Dain Rauscher Wessels
Howe Barnes Investments, Inc.
--------------------
June 19, 2000
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