UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

[ X ]Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the fiscal year ended December 31, 2017.

[    ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from _______________ to ________________

 

Commission file number 001-15955

 

COBIZ FINANCIAL INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:  (303) 312-3400

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

Securities Registered Pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its  corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ____

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transitions period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ____

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant at June 30, 2017, computed by reference to the closing price on the Nasdaq Global Select Market was $656,663,768.  Shares of voting stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

The number of shares outstanding of the registrant’s sole class of common stock as of February 9,  2018,  was 42,228,467.

 

Documents incorporated by reference: Portions of the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2018 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

 

 

TABLE OF CONTENTS

 

 

 

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements that describe CoBiz Financial’s future plans, strategies and expectations, including without limitation, discussions regarding our financial objectives for loan and deposit growth, noninterest income growth and limiting noninterest expense growth. All forward-looking statements are based on assumptions and involve risks and uncertainties, many of which are beyond our control and which may cause our actual results, performance or achievements to differ materially from the results, performance or achievements contemplated by the forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate" or words of similar meaning, or future or conditional verbs such as "would," "should," "could" or "may."    Forward-looking statements speak only at the date they are made. Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” and elsewhere in this report, including, without limitation, in conjunction with the forward-looking statements included in this report.

 

We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

The following are acronyms, abbreviations and definitions of terms used in this report:

 

 

PART I

Item 1. Business

 

 

Overview

 

The Company is a diversified financial services company headquartered in Denver, Colorado. Through our subsidiary companies, we combine elements of personalized service found in community banks with sophisticated financial products and services traditionally offered by larger regional banks that we market to our targeted customer base of professionals, high-net-worth individuals and small to mid-sized businesses. At December 31, 2017, we had total assets of $3.8 billion, net loans of $3.1 billion and deposits of $3.2 billion. We were incorporated in Colorado in 1980. 

 

Our wholly-owned subsidiary “the Bank” is a full-service business banking institution serving two markets, Colorado and Arizona. In Colorado, the Bank operates under the name Colorado Business Bank and has 11 locations, including seven in the Denver metropolitan area, and one each in Boulder, Colorado Springs, Fort Collins and Vail.  In Arizona, the Bank operates under the name Arizona Business Bank and has four locations serving the Phoenix metropolitan area and the surrounding area of Maricopa County. Each of the Bank’s locations is led by a local president with substantial decision-making authority. We support our bank and fee-based businesses with back-office services from our downtown Denver offices.

 

Our banking products are complemented by our fee-based business lines.  Through a combination of internal growth and acquisitions, our fee-based business lines have grown to include employee benefits brokerage and consulting, insurance brokerage, and wealth management services. We believe offering such complementary products allows us to both broaden our relationships with existing customers and attract new customers to our core business.

 

Segments

 

We operate three distinct segments, as follows:

 

The Company’s segments, excluding Corporate Support and Other, consist of various products and activities that are set forth in the following chart:

 

 

 

We ceased the operations of our investment banking division, GMB, during the first quarter of 2015 in order to focus on activities that provide more predictable, recurring revenue.  The operations of GMB have been reported as discontinued operations throughout this report (all within the Fee-Based Lines segment).

 

For a complete discussion of the segments included in our principal activities and certain financial information for each segment, see Note 19 – Segments.

 

Mission Statement

 

Our mission is to serve the complete financial needs of successful businesses, business owners, professionals and high-net-worth individuals.  We create thoughtful, integrated, comprehensive solutions tailored to each customer’s needs, thereby freeing them to succeed personally and professionally.  Our long-term goal is to be recognized as the premier financial services provider to the business community in the markets we serve, creating engaged employees, longer term customer relationships and superior shareholder value. 

 

Our core values are:

 

Business Strategy

 

Our primary strategy is to build long-term relationships that meet the needs of small to mid-sized businesses, business owners and professionals in high-growth Western markets. In all areas of our operations, we focus on attracting and retaining the highest-quality personnel by maintaining an environment which allows our employees to effectively respond to customer needs and manage those relationships.  In order to realize our strategic objectives, we are pursuing the following strategies:

 

Organic growth.  We believe the Colorado and Arizona markets provide us with significant long-term opportunities for organic growth. These markets continue to be dominated by a number of large regional and national financial institutions.  There are gaps in the banking industry’s ability to serve certain customers in these market areas because small and medium-sized businesses often are not large enough to warrant significant marketing focus and customer service from large banks. In addition, we believe these banks often do not satisfy the needs of professionals and high-net-worth individuals who desire personal attention from experienced bankers. Similarly, many of the remaining community banks in the region do not provide the sophisticated banking products and services such customers require. Through our ability to combine personalized service, experienced personnel who are established in their community, sophisticated technology and a broad product line, we believe we will continue to achieve strong organic growth by attracting customers currently banking at both larger and smaller financial institutions and by expanding our business with existing customers. 

 

The following table details the Company’s market share of deposits in Colorado and Arizona, as well as other banks headquartered in our market areas and out-of-state banks as reported by the FDIC and S&P Global Market Intelligence at June 30, 2017 and 2016, the most recent information available.

 

 

The following table details the Company’s deposit market share by MSA:

 

 

Loan portfolio growth and diversification.  We have emphasized expanding our overall loan products in order to diversify and grow the loan portfolio.  In recent years, we have had growth initiatives focused on the following lending areas: residential mortgage, public finance, structured finance and healthcare.  These products have enabled the Bank to continue to grow its loan portfolio in a competitive and challenging environment.

 

Establishing strong brand awareness.    We have developed a cohesive and comprehensive approach to our internal and external communications efforts to leverage the power of each subsidiary as part of the larger company.  Our brand platform has unified the look and feel of the CoBiz identity across the Company. With a

target market that is similar across subsidiaries, our strong brand awareness helps generate cross-sell opportunities while strengthening client relationships.

 

Expanding existing banking relationships. We are normally not a transactional lender.  Instead, we focus on a consultative approach, developing a specific suite of products and services to meet customer needs.  We believe the depth of our customer relationships provides us the opportunity to introduce the broader array of the products and services we offer and generate additional noninterest income. In addition, we believe this philosophy aids in customer retention.

 

Maintaining asset quality. We seek to maintain asset quality through a program that includes regular reviews of loans and ongoing monitoring of the loan portfolio by a loan review department that reports to an Executive Vice President of the Company but submits reports directly to the Audit Committee of our Board of Directors. At December 31, 2017, our ratio of nonperforming loans to total loans was 0.25%, compared to 0.11% at December 31, 2016. 

 

Controlling interest rate risk.  We seek to control our exposure to changing interest rates by maintaining a favorable match between the maturities or repricing dates of our interest-earning assets and interest-bearing liabilities.  We actively monitor our interest rate profile in regular meetings of our ALCO.

 

Focus on cost and process efficiencies.  We have heavily invested in our current infrastructure in order to position us for future growth across all of our business units.  In 2017, we invested resources in evaluating the entire lending process, including origination, customer onboarding, credit underwriting, recording and small business lending.  Based on those evaluations, we implemented various changes to increase efficiencies, reduce cost and enhance customer experiences.  We have also evaluated our facility plan and implemented changes to reduce the overall rentable square feet per employee without impacting customer service.  This evaluation resulted in the relocation of our principal executive offices in 2016, the closure of one bank location in 2016 and another in 2017.

 

Expansion.  Our approach to expansion is predicated on recruiting key personnel to lead new initiatives. While we normally consider an array of new locations and product lines as potential expansion initiatives, we will generally proceed only upon identifying quality management personnel with a loyal customer following in the community or experienced in the product line that is the target of the initiative. We believe focusing on individuals who are established in their communities and experienced in offering sophisticated financial products and services will enhance our market position and add growth opportunities.  As we continually evaluate our facility plan, we look to consolidate and close the locations that are able to be serviced by other offices.  However, we also evaluate the opening of new bank locations in markets that we are not currently serving.  In 2014, we opened bank locations in two new markets in Colorado, Fort Collins and Colorado Springs. 

 

Market Areas Served

 

We operate in two western markets in the United States – Colorado and Arizona. These markets are currently dominated by a number of large regional and national financial institutions. The Company’s success is dependent to a significant degree on the economic conditions of these two geographical markets. 

 

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

 

 

Competition

 

CoBiz and its subsidiaries face competition in all principal business activities, not only from other financial holding companies and commercial banks, but also from savings and loan associations, credit unions, asset-based lenders, financial technology companies, finance companies, mortgage companies, leasing companies, insurance companies, investment advisors, mutual funds, securities brokers and dealers, other domestic and foreign financial institutions, and various nonfinancial institutions. 

 

Please see “Risk Factors” below, as well as the market share information provided above for additional information.

 

Employees

 

We had 538 full time equivalent employees at December 31, 2017.  Employees of the Company are entitled to participate in a variety of employee benefit programs, including: equity plans; an employee stock purchase plan; a 401(k) plan; various comprehensive medical, accident and group life insurance plans; and paid vacations. No Company employee is covered by a collective bargaining agreement, and we believe our relationship with our employees to be excellent.

 

Supervision and Regulation

 

CoBiz and the Bank are extensively regulated under federal, Colorado and Arizona law. These laws and regulations are primarily intended to protect depositors, borrowers and federal deposit insurance funds, not

shareholders of CoBiz. The following information summarizes certain material statutes and regulations affecting CoBiz, the Bank and the Fee-Based Lines, and is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws, regulations or regulatory policies may have a material adverse effect on the business, financial condition, results of operations and cash flows of CoBiz and the Bank. We are unable to predict the nature or extent of the effects that fiscal or monetary policies, economic controls, or new federal or state legislation may have on our business and earnings in the future.

 

The Holding Company

 

General. CoBiz is a financial holding company registered under the BHCA, and is subject to regulation, supervision and examination by the Federal Reserve. CoBiz is required to file an annual report with the Federal Reserve and such other reports as may be required pursuant to the BHCA.

 

Securities Exchange Act of 1934. CoBiz has a class of securities registered with the SEC under the Exchange Act. The Exchange Act requires the Company to file periodic reports with the SEC, governs the Company’s disclosure in proxy solicitations and regulates insider trading transactions.  The Company is listed on the Nasdaq and is subject to the rules of the Nasdaq.

 

Dodd-Frank Act.  On July 21, 2010, President Obama signed into law the Dodd-Frank Act. The Dodd-Frank Act comprehensively reforms the regulation of financial institutions, products and services.  Many of the provisions of the Dodd-Frank Act have been the subject of proposed and final rules by the SEC, the FDIC and the Federal Reserve.  However, the full impact of the Dodd-Frank Act on our business and operations will not be known until all regulations on the statute are written and adopted or reforms proposed for the Dodd-Frank Act are implemented. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.  In October 2015, the Consumer Financial Protection Bureau, which was created pursuant to the Dodd-Frank Act, issued the TILA-RESPA Integrated Disclosure Rule which is effective for new consumer real estate loan applications. 

 

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

 

In June 2016, the banking regulators issued a notice of proposed rulemaking to implement Section 956 of the Dodd-Frank Act.  The proposed rule is intended to (1) prohibit incentive-based payment arrangements that encourage inappropriate risks by providing excessive compensation or that could lead to material financial loss, (2) require the board of directors to conduct oversight of the covered institution’s incentive-based compensation program, approve incentive-based compensation arrangements for senior executive officers and approve material exceptions or adjustments to incentive-based compensation policies or arrangements for senior executive officers, and (3) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate Federal regulator.  The proposed rule applies to any covered institution with average total consolidated assets greater than or equal to $1 billion that offers incentive-based compensation to covered persons.

 

Acquisitions. As a financial holding company, we are required to obtain the prior approval of the FRB before acquiring direct or indirect ownership or control of more than 5% of the voting shares of a bank or bank holding company. The FRB will not approve any acquisition, merger or consolidation that would result in substantial anti-competitive effects, unless the anti-competitive effects of the proposed transaction are outweighed by a greater public interest in meeting the needs and convenience of the public. In reviewing applications for such transactions, the FRB also considers managerial, financial, capital and other factors, including the record of performance of the applicant and the bank or banks to be acquired under the CRA. See “The Bank — Community Reinvestment Act” below.

 

Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 eliminates many of the restrictions placed on the activities of certain qualified financial or bank holding companies. A “financial holding company” such as CoBiz can expand into a wide variety of financial services, including securities activities, insurance and merchant banking without the prior approval of the FRB, provided that certain conditions are met, including a requirement that all subsidiary depository institutions be “well-capitalized.”

 

Dividend Restrictions.   Dividends on the Company’s capital stock (common and preferred stock) are prohibited under the terms of the junior subordinated debenture agreements (see Note 9 – Long-Term Debt) if the Company is in continuous default on its payment obligations to the capital trusts, has elected to defer interest payments on the debentures or extends the interest payment period.  At December 31, 2017, the Company was not in default, had not elected to defer interest payments and had not extended the interest payment period on any of the subordinated debt issuances. 

 

Support of Banks. As discussed below, the Bank is also subject to capital adequacy requirements. Under the FDICIA, CoBiz could be required to guarantee the capital restoration plan of the Bank if the Bank becomes “undercapitalized” as defined in the FDICIA and the regulations thereunder. See “Capital Adequacy at the Holding Company and Bank.”  Our maximum liability under any such guarantee would be the lesser of 5% of the Bank’s total assets at the time it became undercapitalized or the amount necessary to bring the Bank into compliance with the capital plan. The FRB also has stated that financial or bank holding companies are subject to the “source of strength doctrine,” which requires such holding companies to serve as a source of “financial and managerial” strength to their subsidiary banks and to not conduct operations in an unsafe or unsound manner.

 

The FDICIA requires the federal banking regulators to take “prompt corrective action” with respect to capital-deficient institutions. In addition to requiring the submission of a capital restoration plan, the FDICIA contains broad restrictions on certain activities of undercapitalized institutions involving asset growth, acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons, if the institution would be undercapitalized after any such distribution or payment.

 

Sarbanes-Oxley Act. The Sarbanes-Oxley Act is intended to address systemic and structural weaknesses of the capital markets in the United States that were perceived to have contributed to corporate scandals. The Sarbanes-Oxley Act also attempts to enhance the responsibility of corporate management by, among other things, (i) requiring the chief executive officer and chief financial officer of public companies to provide certain certifications in their periodic reports regarding the accuracy of the periodic reports filed with the SEC, (ii) prohibiting officers and directors of public companies from fraudulently influencing an accountant engaged in the audit of the company’s financial statements, (iii) requiring chief executive officers and chief financial officers to forfeit certain bonuses in the event of a restatement of financial results, (iv) prohibiting officers and directors found to be unfit from serving in a similar capacity with other public companies, (v) prohibiting officers and directors from trading in the company’s equity securities during pension blackout periods, and (vi) requiring the SEC to issue standards of professional conduct for attorneys representing public companies. In addition, public companies whose securities are listed on a national securities exchange or association must satisfy the following additional requirements: (a) the company’s audit committee must appoint and oversee the company’s auditors; (b) each member of the company’s audit committee must be independent;

(c) the company’s audit committee must establish procedures for receiving complaints regarding accounting, internal accounting controls and audit-related matters; (d) the company’s audit committee must have the authority to engage independent advisors; and (e) the company must provide appropriate funding to its audit committee, as determined by the audit committee. 

 

The Bank

 

General. The Bank is a state-chartered banking institution, the deposits of which are insured by the Deposit Insurance Fund of the FDIC, and is subject to supervision, regulation and examination by the Colorado Division of Banking, the FRB and the FDIC. Pursuant to such regulations, the Bank is subject to special restrictions, supervisory requirements and potential enforcement actions. The FRB’s supervisory authority over CoBiz can also affect the Bank.

 

Community Reinvestment Act. The CRA requires the Bank to adequately meet the credit needs of the communities in which it operates. The CRA allows regulators to reject an applicant seeking, among other things, to make an acquisition or establish a branch, unless it has performed satisfactorily under the CRA. Federal regulators regularly conduct examinations to assess the performance of financial institutions under the CRA. In its most recent CRA examination, the Bank received a satisfactory rating.

 

USA Patriot Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) is intended to allow the federal government to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money-laundering requirements.

 

Among its provisions, the USA Patriot Act requires each financial institution to: (i) establish an anti-money-laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, the USA Patriot Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. Financial institutions must comply with Section 326 of the Act which provides minimum procedures for identification verification of new customers.  In March 2006, the USA Patriot Improvement and Reauthorization Act of 2005 made permanent 14 of the original provisions of the USA Patriot Act that had been set to expire.

 

Transactions with Affiliates. The Bank is subject to Section 23A of the Federal Reserve Act, which limits the amount of loans to, investments in and certain other transactions with affiliates of the Bank; requires certain levels of collateral for such loans or transactions; and limits the amount of advances to third parties that are collateralized by the securities or obligations of affiliates, unless the affiliate is a bank and is at least 80% owned by the Company. If the affiliate is a bank and is at least 80% owned by the Company, such transactions are generally exempted from these restrictions except as to “low quality” assets as defined under the Federal Reserve Act, and transactions not consistent with safe and sound banking practices. In addition, Section 23A generally limits transactions with a single affiliate of the Bank to 10% of the Bank’s capital and surplus and generally limits all transactions with affiliates to 20% of the Bank’s capital and surplus.

 

Section 23B of the Federal Reserve Act requires that certain transactions between the Bank and any affiliate must be on substantially the same terms, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with, or involving, non-affiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, non-affiliated companies. The aggregate amount of the Bank’s loans to its officers, directors and principal shareholders (or their affiliates) is limited to the amount of its unimpaired capital and surplus, unless the FDIC determines that a lesser amount is appropriate.

 

A violation of the restrictions of Section 23A or Section 23B of the Federal Reserve Act may result in the assessment of civil monetary penalties against the Bank or a person participating in the conduct of the affairs of the Bank or the imposition of an order to cease and desist such violation.

 

Regulation W of the Federal Reserve Act addresses the application of Sections 23A and 23B to credit exposure arising out of derivative transactions between an insured institution and its affiliates and intra-day extensions of credit by an insured depository institution to its affiliates. The rule requires institutions to adopt policies and procedures reasonably designed to monitor, manage and control credit exposures arising out of transactions and to clarify that the transactions are subject to Section 23B of the Federal Reserve Act.

 

Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by a holding company or its affiliates.

 

Dividend Restrictions. Dividends paid by the Bank and management fees from the Bank and our Fee-Based Lines provide substantially all of the Company’s cash flow. The approval of the Colorado Division of Banking is required prior to the declaration of any dividend by the Bank if the total of all dividends declared by the Bank in any calendar year exceeds the total of its net profits of that year combined with the retained net profits for the preceding two years. In addition, the FDICIA provides that the Bank cannot pay a dividend if it will cause the Bank to be “undercapitalized.” 

 

Examinations. The FRB and the Colorado Division of Banking periodically examine and evaluate banks. Based upon such an evaluation, the examining regulator may revalue the assets of an insured institution and require that it establish specific reserves to compensate for the difference between the value determined by the regulator and the book value of such assets.

 

Restrictions on Loans to One Borrower. Under state law, the aggregate amount of loans that may be made to one borrower by the Bank is generally limited to 15% of its unimpaired capital, surplus, undivided profits and allowance for loan losses. The Bank has set an internal lending limit that is more stringent than the regulatory requirement.  The Bank seeks participations to accommodate borrowers whose financing needs exceed the Bank’s lending limits.

 

Brokered Deposits.  Well-capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are generally not permitted to accept brokered deposits.

 

Real Estate Lending Evaluations. Federal regulators have adopted uniform standards for the evaluation of loans secured by real estate or made to finance improvements to real estate. The Bank is required to establish and maintain written internal real estate lending policies consistent with safe and sound banking practices. The Company has established loan-to-value ratio limitations on real estate loans that are more stringent than the loan-to-value limitations established by regulatory guidelines.

 

Deposit Insurance Premiums. Under current regulations, FDIC-insured depository institutions that are members of the FDIC pay insurance premiums at rates based on their assessment risk classification, which is determined, in part, based on the institution’s capital ratios and factors that the FDIC deems relevant to determine the risk of loss to the FDIC. 

 

The assessment base is calculated on average daily consolidated assets less average monthly tangible equity, defined as Tier 1 Capital.  The FDIC has adopted a progressively lower assessment rate schedule based on the level of the reserve ratio (Deposit Insurance Fund divided by the total estimated insured deposits of the industry).  Assessment rates decline when the reserve ratio exceeds 1.15%, 2.0% and 2.5%.  In June 2016, the reserve ratio exceeded 1.15% which set the initial base assessment rate for an Established Small Instituion at 3 to 30 basis points depending on a deposit risk score.  The amount an institution is assessed is based upon statutory factors that includes the degree of risk the institution poses to the insurance

fund and may be reviewed semi-annually. A change in our risk category would negatively impact our assessment rates.

 

Additionally, all institutions insured by the FDIC Bank Insurance Fund are assessed fees to cover the debt of the Financing Corporation, the successor of the insolvent Federal Savings and Loan Insurance Corporation.  The assessment rate effective for the fourth quarter of 2017 was 0.135 basis points (0.54 basis points annually).  The assessment rate is adjusted quarterly.

 

Federal Home Loan Bank Membership.  The Bank is a member of the FHLB.  Each member of the FHLB is required to maintain a minimum investment in capital stock. The Board of Directors of the FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements.  Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Board.  Because the extent of any obligation to increase our investment in the FHLB depends entirely upon the occurrence of future events, potential future payments to the FHLB are not determinable.

 

Capital Adequacy at the Holding Company and Bank

 

The Federal Reserve monitors, on a consolidated basis, the capital adequacy of financial or bank holding companies by using a combination of risk-based and leverage ratios. Failure to meet the capital guidelines may result in supervisory or enforcement actions by the Federal Reserve. Under the risk-based capital guidelines, different categories of assets, including certain off-balance sheet items, such as loan commitments 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.

 

On January 1, 2015, the Basel III regulatory capital rules (Regulation Q, Capital Adequacy of Bank Holding Companies) became effective for the Company. Basel III increased most of the required minimum regulatory capital ratios, introduced a new Common Equity Tier 1 Capital ratio and the concept of a CCB that became effective in 2016.  The CCB is designed to establish a capital range above minimum requirements to insulate banks from periods of stress and impose constraints on dividends, share repurchases and discretionary bonus payments when capital levels fall below prescribed levels. The minimum CCB in 2017 is 1.25% and increases 0.625% annually through 2019 to 2.5%.  Basel III required certain regulatory capital deductions to be phased in over a period of time, with full implementation beginning in 2018.  On November 21, 2017, the Federal Banking Agencies adopted a final rule to extend the regulatory capital transition applicable during 2017 to future periods for banking organizations such as the Company that are not subject to the advanced approaches capital rule.  This will reduce the capital impact to the Company in 2018 from the fully phased-in implementation of Basel III that was originally required.

 

For purposes of the Basel III risk-based capital guidelines, total capital is defined as the sum of “Common Equity Tier 1,” “Additional Tier 1” (Common Equity Tier 1 combined with Additional Tier 1 gives total Tier 1 Capital) and “Tier 2” capital elements. Common Equity Tier 1 capital includes common shareholders’ equity reduced by certain regulatory deductions.  Additional Tier 1 capital includes noncumulative perpetual preferred stock and other capital instruments allowed by the institutions primary regulator (for the Company, this includes the previously issued junior subordinated debentures) and minority interests in consolidated subsidiaries, reduced by certain limitations and regulatory deductions. Tier 2 capital includes, with certain limitations, perpetual preferred stock, certain capital instruments not included in Additional Tier 1 and the allowance for loan losses (limited to 1.25% of risk-weighted assets). The regulatory guidelines require a minimum ratio of total capital to risk-weighted assets of 8% (of which at least 4.5% must be in the form of Common Equity Tier 1 capital and 6.0% in Tier 1 capital). The Federal Reserve has also implemented a leverage ratio, which is defined to be a company’s Tier 1 capital divided by its average total consolidated assets.

 

Pursuant to the FDICIA, there are five capital levels specific to depository institutions that apply to the Bank, that are dependent on the relevant capital ratios and other factors:

 

 

Increasingly severe restrictions are placed on a depository institution as its capital level classification declines.  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. 

 

In addition to the ratios in the table above, an institution is only well-capitalized if it is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. Under these regulations, at December 31, 2017, the Bank was well-capitalized, which places no significant restrictions on the Bank’s activities.  See Note 17 – Regulatory Matters for additional information on the Company’s and the Bank’s capital ratios.

 

Fee-Based Lines

 

CoBiz Wealth is registered with the SEC under the Investment Advisers Act of 1940. The Investment Advisers Act of 1940 imposes numerous obligations on registered investment advisers, including fiduciary duties, recordkeeping requirements, operational requirements and disclosure obligations. Many aspects of CoBiz Wealth’s business are subject to various federal and state laws and regulations. These laws and regulations generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict CoBiz Wealth from carrying on its investment management business in the event that they fail to comply with such laws and regulations. In such event, the possible sanctions which may be imposed include the suspension of individual employees, business limitations on engaging in the investment management business for specified periods of time, the revocation of any such company’s registration as an investment adviser, and other censures or fines.

 

CoBiz Insurance, acting as an insurance producer, must obtain and keep in force an insurance producer’s license with the State of Arizona and Colorado. In order to write insurance in other states, they are required to obtain non-resident insurance licenses. All premiums belonging to insurance carriers and all unearned premiums belonging to customers received by the agency must be treated in a fiduciary capacity.

 

Changing Regulatory Structure

 

Regulation of the activities of national and state banks and their holding companies imposes a heavy burden on the banking industry. The Federal Reserve, FDIC, OCC (national charters only) and State banking divisions all have extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and their holding companies. These agencies can assess civil monetary penalties, issue cease and desist or removal orders, seek injunctions, and publicly disclose such actions.

 

The laws and regulations affecting banks and financial or bank holding companies have changed significantly in recent years, and there is reason to expect changes will continue in the future, although it is difficult to predict the outcome of these changes. From time to time, various bills are introduced in the United States Congress with respect to the regulation of financial institutions. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial services industry.

Monetary Policy

 

The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the means available to the Federal Reserve 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. Federal Reserve monetary policies have materially affected the operations of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of the Company and its subsidiaries cannot be predicted.

 

Website Availability of Reports Filed with the SEC

 

The Company maintains a website located at www.cobizfinancial.com on which, among other things, the Company makes available, free of charge, various reports that it files with or furnishes to the SEC, including its annual reports, quarterly reports, current reports and proxy statements. These reports are made available as soon as reasonably practicable after they are filed with or furnished to the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Additional information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company has also made available on its website its Audit, Compensation and Governance and Nominating Committee charters and corporate governance guidelines. The content on any website referred to in this filing is not incorporated by reference into this filing unless expressly noted otherwise.

 

Item 1A.  Risk Factors

 

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

 

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

 

Our commercial real estate and construction loans are subject to various lending risks depending on the nature of the borrower’s business, its cash flow and our collateral.

 

Our commercial real estate loans may involve high principal amounts, and repayment of these loans may be dependent on factors outside our control or the control of our borrowers. Repayment of commercial real estate loans is generally dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Rental income may not rise sufficiently over time to meet increases in the loan rate at repricing or increases in operating expenses, such as utilities and taxes. As a result, impaired loans may be more difficult to identify without some seasoning. Because payments on loans secured by commercial real estate often depend upon the successful operation and management of the properties, repayment of such loans may be affected by factors outside the borrower's control, such as adverse conditions in the real estate market or the economy or changes in government regulation. If the cash flow from the property is reduced, the borrower's ability to repay the loan and the value of the security for the loan may be impaired.

 

Repayment of our commercial loans is often dependent on cash flow of the borrower, which may be unpredictable, and collateral securing these loans may fluctuate in value. Generally, this collateral is accounts receivable, inventory, equipment or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

 

Our construction loans are based upon estimates of costs to construct and the value associated with the completed project. These estimates may be inaccurate due to the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property making it relatively difficult to accurately evaluate the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. Delays in completing the project may arise from labor problems, material shortages and other unpredictable contingencies. If the estimate of construction costs is inaccurate, we may be required to advance additional funds to complete construction. If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project.

 

Our consumer loans generally have a higher risk of default than our other loans.

 

Consumer loans entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of damage, loss or depreciation. The remaining deficiency often does not warrant further collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

 

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

 

Softening in our real estate markets could hurt our business because a majority of our loans are secured by real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature.

 

Substantially all of our real property collateral is located in Arizona and Colorado.  Declines in real estate prices would reduce the value of real estate collateral securing our loans.  Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be further diminished, and we would be more likely to suffer losses on defaulted loans.

 

Weakness in the economy and real estate markets could have a material adverse effect on our business, financial condition, results of operations and cash flows and on the market for our common stock.

 

Our allowance for loan losses may not be adequate to cover actual loan losses.

 

As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment.  Credit losses are inherent in the lending business and could have a material adverse effect on our operating results.  We make various assumptions and judgments about the collectability of our loan

portfolio and provide an allowance for potential losses based on a number of factors.  If our assumptions are wrong, our allowance for loan losses may not be sufficient to cover our losses, thereby having an adverse effect on our operating results, and may cause us to increase the allowance in the future.  In addition, we intend to increase the number and amount of loans we originate, and we cannot guarantee that we will not experience an increase in delinquencies and losses as these loans continue to age, particularly if the economic conditions in Colorado and Arizona deteriorate.  The actual amount of future provisions for loan losses cannot be determined at any specific point in time and may exceed the amounts of past provisions.  Additions to our allowance for loan losses would decrease our net income. 

 

An interruption in or breach in security of our information systems, including the occurrence of a cyber incident or a deficiency in our cybersecurity may result in a loss of customer business or damage to our brand image.

 

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

 

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

 

Although we perform significant due diligence on third party vendors that host our data as part of the Company’s information security protocol, our process may not be sufficient.  As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents. Additionally, our insurance coverage for cyber incidents may not be sufficient to cover all the losses we may experience as a result of such cyber incidents. Any additional costs could materially adversely affect our results of operations.    

 

Our business may be adversely affected by the highly regulated environment in which we operate.

 

We are subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors' funds, the FDIC funds, customers and the banking system as a

whole, rather than stockholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things.

 

As a financial holding company, we are subject to regulation and supervision primarily by the FRB. The Bank, as a Colorado-chartered bank, is subject to regulation and supervision by the Colorado Division of Banking, the FRB and the FDIC. We undergo periodic examinations by these regulators, which have extensive discretion and authority to prevent or remedy unsafe or unsound practices or violations of law by banks and financial service holding companies.

 

The primary federal and state banking laws and regulations that affect us are described in this report under the section captioned “Supervision and Regulation.” These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time.  Such changes, including changes regarding interpretations and implementation, could affect us in substantial and unpredictable ways and could have a material adverse effect on our business, financial condition and results of operations. Further, such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with applicable laws, regulations or policies could result in sanctions by regulatory agencies, civil monetary penalties, and/or damage to our reputation, which could have a material adverse effect on our business, financial condition and results of operations.

 

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

 

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

 

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

 

The policies of the Federal Reserve have a significant impact on us. Among other things, the Federal Reserve's monetary policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold and the ability of borrowers to repay their loans, which could have a material adverse effect on our business, financial condition and results of operations. 

 

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

 

The ability of our borrowers to pay interest and repay principal, which affects our financial performance, is highly dependent on the business environment of the overall economy and the business markets in which we operate.  In prior years, the financial services industry has been adversely impacted by unfavorable economic and market conditions.  In previous economic downturns, many lenders and institutional investors reduced and, in some cases, ceased to provide funding to borrowers including other financial institutions. The Company has historically used federal funds purchased as a short-term liquidity source and, while the Company continues to actively use this source, credit tightening in the market could reduce funding lines available to the Company.  Market turmoil and tightening of credit may lead to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of general business activity.

 

 

 

 

We could experience an unexpected inability to obtain needed liquidity.  

 

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

 

We may not realize our deferred income tax assets, our built in losses could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code, and changes in the interpretation of tax matters may adversely affect our results of operations.

 

The Company may experience negative or unforeseen tax consequences.  We review the probability of the realization of our net deferred tax assets each period based on forecasts of taxable income.  This review uses historical results, projected future operating results based upon approved business plans, eligible carryforward and carryback periods, tax-planning opportunities and other relevant considerations.  Adverse changes in the profitability and financial outlook in the U.S. and our industry may require the creation of an additional valuation allowance to reduce our net deferred tax assets.  Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on the Company’s results of operations and financial condition.

 

The benefit of our built-in losses would be reduced if we experience an “ownership change,” as determined under Internal Revenue Code Section 382 (Section 382). A Section 382 ownership change occurs if a stockholder or a group of stockholders who are deemed to own at least 5% of our common stock increase their ownership by more than 50% over their lowest ownership percentage within a rolling three-year period. If an ownership change occurs, Section 382 would impose an annual limit on the amount of built-in losses we can use to reduce our taxable income equal to the product of the total value of our outstanding equity immediately prior to the ownership change (reduced by certain items specified in Section 382) and the federal long-term tax-exempt interest rate in effect for the month of the ownership change. A number of complex rules apply to calculating this annual limit.

 

While the complexity of Section 382’s provisions and the limited knowledge any public company has about the ownership of its publicly traded stock make it difficult to determine whether an ownership change has occurred, we currently believe that an ownership change has not occurred. However, if an ownership change were to occur, the annual limit Section 382 may impose could result in a limitation of the annual deductibility of our built-in losses.

 

We also need to comply with new, evolving or revised tax laws and regulations. Changes in the application or interpretation of the recently enacted TCJA may have an adverse effect on our customers and our business, which may have an adverse effect on our results of operations.

 

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

 

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

The Company may be adversely affected by the soundness of other financial institutions.

 

Financial service institutions are interrelated as a result of trading, clearing, counterparty and other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be realized or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse effect on the Company’s financial condition and results of operations.

 

Supervisory guidance on commercial real estate concentrations could restrict our activities and impose financial requirements or limitations on the conduct of our business.

 

The OCC, the FRB and the FDIC (commonly referred to as the Agencies) finalized joint supervisory guidance in 2006 on sound risk management practices for concentrations in commercial real estate (CRE) lending. The guidance is intended to help ensure that institutions pursuing a significant commercial real estate lending strategy remain healthy and profitable while continuing to serve the credit needs of their communities. The Agencies are concerned that rising CRE loan concentrations may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in CRE markets. The guidance reinforces and enhances existing regulations and guidelines for safe and sound real estate lending. The guidance provides supervisory criteria, including numerical indicators to assist in identifying institutions with potentially significant CRE loan concentrations that may warrant greater supervisory scrutiny. The guidance does not limit banks’ CRE lending, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their CRE concentrations. Lending and risk management practices of the Company will be taken into account in supervisory evaluation of capital adequacy.

 

In December 2015, the Agencies released a new statement on prudent risk management for CRE lending (2015 Statement).  The Agencies expressed concern in the 2015 Statement about an easing of CRE underwriting standards and an observation of troubling risk management practices at some financial institutions.  In light of these developments, the Agencies directed financial institutions to review their policies and practices related to CRE lending and to maintain risk management practices and capital levels commensurate with the level and nature of their CRE concentration risk.  The Agencies continued to pay “special attention to potential risks associated with CRE lending.” 

 

Our CRE portfolio at December 31, 2017 did not meet the definition of CRE concentration as set forth in the final guidelines. If the Company is considered to have a concentration in the future and our risk management practices are found to be deficient, it could result in increased reserves and capital costs.

 

To the extent that any of the real estate securing our loans becomes subject to environmental liabilities, the value of our collateral will be diminished.

 

In certain situations, under various federal, state and local environmental laws, ordinances and regulations as well as the common law, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on such property or damage to property or personal injury. Such laws may impose liability whether or not the owner or operator was responsible for the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which properties may be used or businesses may be operated, and these restrictions may require expenditures by one or more of our borrowers. Such laws may be amended so as to require compliance with stringent standards which could require one or more of our borrowers to make unexpected expenditures, some of which could be substantial. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. One or more of our borrowers may be responsible for such costs which would diminish the value of our collateral. The cost of defending against claims of liability, of compliance with environmental regulatory requirements or of

remediating any contaminated property could be substantial and require a material portion of the cash flow of one or more of our borrowers, which would diminish the ability of any such borrowers to repay our loans.

 

Changes in interest rates may affect our profitability.

 

Our profitability is, in part, a function of the spread between the interest rates earned on investments and loans, and the interest rates paid on deposits and other interest-bearing liabilities. Our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates. At any given time, our asset and liability structures are such that they are affected differently by a change in interest rates. As a result, an increase or decrease in interest rates, the length of loan terms or the mix of adjustable and fixed-rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We have traditionally managed our assets and liabilities in such a way that we have a positive interest rate gap. As a general rule, banks with positive interest rate gaps are more likely to be susceptible to declines in net interest income in periods of falling interest rates and are more likely to experience increases in net interest income in periods of rising interest rates.  In addition, an increase in interest rates may adversely affect the ability of some borrowers to pay the interest on and principal of their loans.

 

We rely heavily on our management, and the loss of any of our senior officers may adversely affect our operations.

 

Consistent with our policy of focusing growth initiatives on the recruitment of qualified personnel, we are highly dependent on the continued services of a small number of our executive officers and key employees. The loss of the services of any of these individuals could adversely affect our business, financial condition, results of operations and cash flows. The failure to recruit and retain key personnel could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our business and financial condition may be adversely affected by competition.

 

The banking business in Colorado and in the Phoenix metropolitan area is highly competitive and is currently dominated by a number of large regional and national financial institutions. In addition to these regional and national banks, there are a number of smaller commercial banks that operate in these areas. We compete for loans and deposits with banks, savings and loan associations, finance companies, credit unions, and mortgage bankers. In addition to traditional financial institutions, we also compete with financial technology, brokerage and investment banking companies, and governmental agencies that make available low-cost or guaranteed loans to certain borrowers. Particularly in times of high interest rates, we also face significant competition for deposits from sellers of short-term money market securities and other corporate and government securities. 

 

By virtue of their larger capital bases or affiliation with larger multibank holding companies, many of our competitors have substantially greater capital resources and lending limits than we have and perform other functions that we offer only through correspondents. Interstate banking and unlimited state-wide branch banking are permitted in Colorado and Arizona. As a result, we have experienced, and expect to continue to experience, greater competition in our primary service areas. Our business, financial condition, results of operations and cash flows may be adversely affected by competition, including any increase in competition.

 

We may be required to make capital contributions to the Bank if it becomes undercapitalized.

 

Under federal law, a financial holding company may be required to guarantee a capital plan filed by an undercapitalized bank subsidiary with its primary regulator. If the subsidiary defaults under the plan, the holding company may be required to contribute to the capital of the subsidiary bank in an amount equal to the lesser of 5% of the Bank's assets at the time it became undercapitalized or the amount necessary to bring the Bank into compliance with applicable capital standards. Therefore, it is possible that we will be required to

contribute capital to our subsidiary bank or any other bank that we may acquire in the event that such bank becomes undercapitalized. If we are required to make such capital contribution at a time when we have other significant capital needs, our business, financial condition, results of operations and cash flows could be adversely affected.

 

We continually encounter technological change, and we may have fewer resources than our competitors to continue to invest in technological improvements.

 

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We cannot assure that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

 

We rely on third-party service providers and could be adversely affected by the failure of a service provider to perform its contractual responsibilities.

 

We rely on certain external vendors to provide products and services necessary to maintain our day-to-day operations.  Our operations are exposed to risk that these service providers will not perform in accordance with the contractual arrangements.  Increasing changes driven by new products also place additional demands on our compliance risk management systems.  The failure of a third-party service provider and the internal need to maintain sufficient compliance expertise to manage the risks and complexities of these arrangements could disrupt our operations, which could adversely affect our financial condition and results of operations.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Our principal executive offices are located at 1401 Lawrence Street, Denver, CO, 80202.  We also have other facilities in our market areas within Colorado and Arizona.  We lease all of our facilities.  Through the end of 2016, we leased our executive offices from an entity partly owned by a director of the Company. See “Certain Relationships and Related Transactions and Director Independence” under Item 13 of Part III and Note 16 to the consolidated financial statements. All locations are in good operating condition and are believed adequate for our present and foreseeable future operations. We do not anticipate any difficulty in leasing additional suitable space upon expiration of any present lease terms.

 

Item 3. Legal Proceedings

 

Periodically and in the ordinary course of business, various claims and lawsuits, which are incidental to our business, are brought against or by us. We believe, based on the dollar amount of the claims outstanding at the end of the year, the ultimate liability, if any, resulting from such claims or lawsuits will not have a material adverse effect on the business, financial condition, results of operations or cash flows of the Company.

 

Item 4.  Mine Safety Disclosures

 

None.

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities

 

Market for Registrant’s Common Equity

 

The common stock of the Company is traded on the Nasdaq Global Select Market under the symbol “COBZ.”  At February 9, 2018, there were approximately 367 shareholders of record of CoBiz common stock.

 

The following table presents the range of high and low sale prices of our common stock for each quarter within the two most recent fiscal years as reported by the Nasdaq Global Select Market and the per-share dividends declared in each quarter during that period.

 

 

 

On January 18, 2018, the Board of Directors approved a quarterly dividend for the first quarter of 2018 of $0.055 per share.  The timing and amount of future dividends declared by the Board of Directors of the Company will depend upon the consolidated earnings, financial condition, liquidity and capital requirements of the Company and its subsidiaries, the amount of cash dividends paid to the Company by its subsidiaries, applicable government regulations and policies, and other factors considered relevant by the Board of Directors of the Company.  The Company is subject to certain covenants pursuant to the issuance of its junior subordinated debentures as described in Note 12 to the consolidated financial statements that could limit our ability to pay dividends. 

 

Capital distributions, including dividends, by institutions such as the Bank are subject to restrictions tied to the institution’s earnings. See “Supervision and Regulation — “The Bank” and “The Holding Company” — Dividend Restrictions” included under Item 1 of Part I.

 

The following table compares the cumulative total return on a hypothetical investment of $100 in CoBiz common stock on December 31, 2012 and the closing prices on each of the five years in the period ended

December 31, 2017, with the hypothetical cumulative total return on the SNL U.S. Bank Nasdaq Index and the Russell 2000 Index for the comparable period. 

 

 

 

 

The table below summarized shares acquired and amounts paid in net settlement of restricted stock awards during the quarter ended December 31, 2017: 

 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The Company has adopted the 2005 Plan, under which the Compensation Committee has the authority to determine the identity of the key employees, consultants, and directors who shall be granted options or restricted stock awards; the option price, which shall not be less than 85% the fair market value of the common stock on the date of grant; the vesting requirements; and the manner and times at which the options shall be exercisable. As of December 31, 2017, there were 2,311,829 shares available for grant under the 2005 Plan.  The Company also has an Employee Stock Purchase Plan, which had 167,099 shares available for issuance at December 31, 2017.

 

 

 

 

 

Item 6. Selected Financial Data

 

The following table sets forth selected financial data for the Company for the periods indicated.  Net income and earnings per share in 2017 were negatively impacted by a $7.2 million increase in tax expense from the enactment of the TCJA.  Discontinued operations have been reported retrospectively for all periods presented in the following table as discussed in Note 2 – Discontinued Operations. 

 

 

 

 

 

 

 

 

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Company Overview. The Company is a financial holding company that offers a broad array of financial service products to its target market of professionals, small and medium-sized businesses, and high-net-worth individuals. Our principal operating segments are Commercial Banking and Fee-Based Lines.

 

From December 31, 1995, the first complete fiscal year under the current management team, to December 31, 2017, our organization has grown from a bank holding company with two bank locations and total assets of $160.4 million to a diversified financial services holding company with 15 bank locations and total assets of $3.8 billion.  We have also expanded into wealth and insurance services.  The Company has a well-capitalized balance sheet that includes common equity, subordinated notes payable and subordinated debentures. 

 

Earnings are derived primarily from our net interest income, which is interest income less interest expense, and our noninterest income earned from Fee-Based Lines and banking service fees, offset by noninterest expense. As the majority of our assets are interest-earning and our liabilities are interest-bearing, changes in