Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

* *

**(Mark one)**

**x  AnnualReport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934.**

**For the fiscal year ended December 31, 2008.**

**                                                                      OR**

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

**For thetransition period from                                          to**

 

### **Commission file number 001-15955**

### ** **

**COBIZFINANCIAL INC.**

(Exact name of registrant as specified in its charter)

 

| **COLORADO**                     | ** ** | **84-0826324**      |
|----------------------------------|------------|---------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer    |
| incorporation or  organization)  |       | Identification No.) |

 

| **821 17th St.**                         |       |       |
|------------------------------------------|------------|------------|
| **Denver, CO**                           | ** ** | **80202**  |
| (Address of principal executive offices) |       | (Zip Code) |

 

Registrant’s telephone number, including areacode:  **(303)293-2265**

 

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

######  

| **Title of  each class**       | ** ** | **Name of  each exchange on which registered** |
|--------------------------------|------------|------------------------------------------------|
| Common Stock, $0.01 par  value |       | The NASDAQ Stock Market LLC                    |

 

SecuritiesRegistered Pursuant to Section 12(g) of the Act:  **None**

 

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

Yes    o          No    x

 

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

Yes    o          No    x

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes    x          No    o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of the registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.    o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany (as defined in Rule 12b-2 of the Exchange Act).

| Large accelerated  filer  o                                                               |   | Accelerated  filer  x         |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------------------|
| Non-accelerated  filer    o (Do not  check if a smaller reporting company) |   | Smaller  reporting company  o |

 

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

Yes    o          No    x

 

The aggregate market value of the voting common equity held bynon-affiliates of the registrant at June 30, 2008, computed by referenceto the closing price on the NASDAQ Global Select Market was $124,021,906.  Shares of voting stock held by each officerand director and by each person who owns 5% or more of the outstanding votingstock (as publicly reported by such persons pursuant to Section 13 and Section 16of the Securities Exchange Act of 1934) have been excluded in that such personsmay be deemed to be affiliates. This determination of affiliate status is notnecessarily a conclusive determination for other purposes.

 

The number of shares outstanding of the registrant’s sole class ofcommon stock March 10, 2009, was 23,403,587.

 

Documents incorporated by reference: Portions of the registrant’s proxystatement to be filed with the Securities and Exchange Commission in connectionwith the registrant’s 2009 annual meeting of shareholders are incorporated byreference into Part III of this Form 10-K.

 

 

 

----

Table ofContents

 

TABLE OF CONTENTS

 
| **PART I**                             | ** **                                                                                                          | ** ** | ** ** |
|---------------------------------------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|
| Item 1.                                     | Business                                                                                                            |       |       |
|                                        |                                                                                                                |       |       |
| Item 1A.                                    | Risk  Factors                                                                                                       |       |       |
|                                        |                                                                                                                |       |       |
| Item 1B.                                    | Unresolved Staff  Comments                                                                                          |       |       |
|                                        |                                                                                                                |       |       |
| Item 2.                                     | Properties                                                                                                          |       |       |
|                                        |                                                                                                                |       |       |
| Item 3.                                     | Legal Proceedings                                                                                                   |       |       |
|                                        |                                                                                                                |       |       |
| Item 4.                                     | Submission of  Matters to a Vote of Security Holders                                                                |       |       |
|                                        |                                                                                                                |       |       |
|                                        |                                                                                                                |       |       |
| PART II                                |                                                                                                                |       |       |
| Item 5.                                     | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       |       |
|                                        |                                                                                                                |       |       |
| Item 6.                                     | Selected Financial  Data                                                                                            |       |       |
|                                        |                                                                                                                |       |       |
| Item 7.                                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                          |       |       |
|                                        |                                                                                                                |       |       |
| Item 7A.                                    | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       |       |
|                                        |                                                                                                                |       |       |
| Item 8.                                     | Financial  Statements and Supplementary Data                                                                        |       |       |
|                                        |                                                                                                                |       |       |
| Item 9.                                     | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               |       |       |
|                                        |                                                                                                                |       |       |
| Item 9A.                                    | Controls and  Procedures                                                                                            |       |       |
|                                        |                                                                                                                |       |       |
| Item 9B.                                    | Other Information                                                                                                   |       |       |
|                                        |                                                                                                                |       |       |
|                                        |                                                                                                                |       |       |
| PART III                               |                                                                                                                |       |       |
| Item 10.                                    | Directors,  Executive Officers and Corporate Governance                                                             |       |       |
|                                        |                                                                                                                |       |       |
| Item 11.                                    | Executive  Compensation                                                                                             |       |       |
|                                        |                                                                                                                |       |       |
| Item 12.                                    | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       |       |
|                                        |                                                                                                                |       |       |
| Item 13.                                    | Certain Relationships  and Related Transactions and Director Independence                                           |       |       |
|                                        |                                                                                                                |       |       |
| Item 14.                                    | Principal  Accountant Fees and Services                                                                             |       |       |
|                                        |                                                                                                                |       |       |
|                                        |                                                                                                                |       |       |
| PART IV                                |                                                                                                                |       |       |
| Item 15.                                    | Exhibits and  Financial Statement Schedules                                                                         |       |       |
|                                        |                                                                                                                |       |       |
| SIGNATURES                                  |                                                                                                                |       |
|                                        |                                                                                                                |       |       |
| Index to Consolidated Financial Statements. |                                                                                                                |       |

 

2

----

Table of Contents

 

A WARNING ABOUTFORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements that describe CoBizFinancial’s future plans, strategies and expectations. All forward-lookingstatements are based on assumptions and involve risks and uncertainties, manyof which are beyond our control and which may cause our actual results,performance or achievements to differ materially from the results, performance orachievements contemplated by the forward-looking statements. Forward-lookingstatements can be identified by the fact that they do not relate strictly tohistorical or current facts. They often include words such as “believe,” “expect,”“anticipate,” “intend,” “plan,” “estimate” or words of similar meaning, orfuture or conditional verbs such as “would,” “should,” “could” or “may.”Forward-looking statements speak only at the date they are made. Importantfactors that could cause actual results to differ materially from ourexpectations are disclosed under “Risk Factors” and elsewhere in this report,including, without limitation, in conjunction with the forward-lookingstatements included in this report.

 

*Weundertake no obligation to publicly update or otherwise revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.*

* *

PART I

 

**Item 1. Business**

 

**Overview**

 

CoBiz Financial Inc. (CoBiz or the Company) is a diversified financialholding company headquartered in Denver, CO. Through our subsidiary companies,we combine elements of personalized service found in community banks withsophisticated financial products and services traditionally offered by largerregional banks that we market to our targeted customer base of professionals,high-net-worth individuals and small to mid-sized businesses. At December 31,2008, we had total assets of $2.7 billion, net loans of $2.0 billion anddeposits of $1.6 billion. We were incorporated in Colorado on February 19,1980, as Equitable Bancorporation, Inc. Prior to its initial publicoffering in June 1998, the Company was acquired by a group of privateinvestors in September 1994.

 

*Ourwholly owned subsidiary CoBiz Bank (the Bank) is a full-service businessbanking institution serving two markets, Colorado and Arizona. In Colorado, theBank operates under the name Colorado Business Bank and has 13 locations,including nine in the Denver metropolitan area, two in Boulder and two in theVail area. In Arizona, the Bank operates under the name Arizona Business Bankand has eight locations serving the Phoenix metropolitan area and thesurrounding area of Maricopa County. Each of the Bank’s locations is headed upby a local president with substantial decision-making authority. We focus onattracting and retaining high quality personnel by maintaining anentrepreneurial culture and a decentralized business approach. We centrallysupport our bank and fee-based businesses with back-office services from ourdowntown Denver office.*

 

*Ourbanking products are complemented by our fee-based business lines, which wefirst introduced in 1998 when we began offering trust and estate administrationservices. Through a combination of internal growth and acquisitions, ourfee-based business lines have grown to include employee benefits brokerage andconsulting, insurance brokerage, wealth transfer planning, investment bankingand investment management services. We believe offering such complementaryproducts allows us to both broaden our relationships with existing customersand attract new customers to our core business. In addition, we believe thefees generated by these services will increase our noninterest income anddecrease our dependency on net interest income.*

* *

**2007 Acquisition**

 

On December 31, 2007, we acquired WagnerInvestment Management, Inc. (Wagner), a Denver-based SEC-registeredinvestment advisory firm providing investment management services forhigh-net-worth individuals and families, foundations and non-profitorganizations. The acquisition was accounted for

 

3

----

Table of Contents

 

using the purchase method of accounting, andaccordingly, the results of Wagner have been included in the consolidatedfinancial statements since the date of purchase.

 

**2008 Acquisition**

 

On January 2, 2008, we acquired all the assetsand employees of Bernard Dietrich & Associates (BDA), a Phoenix-basedproperty & casualty (P&C) insurance broker, through oursubsidiary, CoBiz Insurance, Inc. Founded in 1993, BDA (which is nowoperated by CoBiz Insurance, Inc. under the name CoBiz Insurance-AZ)provides commercial and personal property and casualty insurance brokerage, aswell risk management consulting services to individuals and businesses.  The asset purchase was accounted for usingthe purchase method of accounting, and accordingly, the results of BDA havebeen included in the consolidated financial statements in periods subsequent toJanuary 2, 2008.

 

**OperatingSegments**

 

*Weoperate five distinct segments, as follows:*

* *

·                  Commercial Banking

·                  Investment Banking

·                  Investment Advisory and Trust

·                  Insurance

·                  Corporate Support and Other

 

These segments, excluding Corporate Support and Other,consist of various products and activities that are set forth in the followingchart:

 
| **Commercial  Banking through:**               |   | ·    Commercial banking                                  |
|------------------------------------------------|--------|------------------------------------------------------------------------------|
| Colorado Business Bank                         |   | ·    Real estate banking                                 |
| Arizona Business Bank                          |   | ·    Private banking                                     |
| ** **                                     |   | ·    Treasury management                                 |
| **Investment  Banking through:**               |   | ·    Merger and acquisition advisory services            |
| Green  Manning & Bunch, Ltd.          |   | ·    Institutional private placements of debt and equity |
|                                           |   | ·    Strategic financial services                        |
| **Investment  Advisory and Trust through:**    |   | ·    Customized client investment policy                 |
| Alexander Capital  Management Group, Inc. |   | ·    Proprietary bond and equity offerings               |
| Wagner Investment  Management, Inc.       |   | ·    Tailored asset allocation strategies                |
| CoBiz Trust                                    |   | ·    Trust administration                                |
|                                           |   | ·    Investment management                               |
|                                           |   | ·    Estate settlements                                  |
|                                           |   | ·    Family office services                              |
| **Insurance  through:**                        |   | ·    Estate and business succession planning             |
| CoBiz  Insurance, Inc.                    |   | ·    Employee benefits and retirement planning           |
| Financial Designs, Ltd.                        |   | ·    Executive compensation and benefits planning        |
|                                           |   | ·    Commercial lines                                    |
|                                           |   | ·    Private client                                      |
|                                           |   | ·    Risk management services                            |

 

For a complete discussion of the segments included inour principal activities and for certain financial information for eachsegment, see Note 19 to the Consolidated Financial Statements.

 

**Business Strategy**

 

Our primary strategy isto differentiate ourselves from our competitors by providing our localpresidents with substantial decision-making authority, and expanding ourproducts and services to build long-term

 

4

----

Table of Contents

 

relationships that meetthe needs of professionals, small to medium-sized businesses and high-net-worthindividuals. In all areas of our operations, we focus on attracting andretaining the highest quality personnel by maintaining an entrepreneurialculture and decentralized business approach. In order to realize our strategicobjectives, we are pursuing the following strategies:

 

**Organic Growth***.*We believe the Colorado and Arizona markets provide uswith significant long-term opportunities for internal growth. These marketscontinue to be dominated by a number of large regional and national financialinstitutions that have acquired locally based banks. We believe thisconsolidation has created gaps in the banking industry’s ability to servecertain customers in these market areas because small and medium-sizedbusinesses often are not large enough to warrant significant marketing focusand customer service from large banks. In addition, we believe these banksoften do not satisfy the needs of professionals and high-net-worth individualswho desire personal attention from experienced bankers. Similarly, we believemany of the remaining independent banks in the region do not provide thesophisticated banking products and services such customers require. Through ourability to combine personalized service, experienced personnel who areestablished in their community, sophisticated technology and a broad productline, we believe we will continue to achieve strong internal growth byattracting customers currently banking at both larger and smaller financialinstitutions and by expanding our business with existing customers.

 

The following tabledetails the percentage of deposits held by the Company in Arizona and Colorado,as well as other banks headquartered in our market areas and out-of-state banksas reported by the Federal Deposit Insurance Corporation (FDIC) at June 30,2008.

 
| **(percentage of deposits)** | ** ** | **Arizona** | ** ** | **Colorado** | ** ** |
|------------------------------|------------|-------------|------------|--------------|------------|
| CoBiz Bank                   |       | 0.37        | %          | 1.52         | %          |
| Other in-state  banks        |       | 5.91        | %          | 39.24        | %          |
| Out-of-state  banks          |       | 93.72       | %          | 59.24        | %          |
| Total                        |       | 100.00      | %          | 100.00       | %          |

 

Our core bankingfranchise and six fee-based businesses have a large customer base of commercialand high-net-worth individuals with very similar profiles. To facilitateorganic growth and cross-referrals between our business lines, we created CoBizAdvisors to focus on bringing a concentration of knowledge about each businessline to a designated function. The mission of CoBiz Advisors is to unify ourcompany for the benefit of clients and shareholders by serving as an additionalresource for internal and external customers in delivering the full suite ofthe Company’s products and services.

 

**De novo branching***.*We also intend to continue exploring growthopportunities to expand through de novo branching in areas with highconcentrations of our target customers in Colorado, Arizona and other westernstates. This strategy has been successful in Colorado and is being implementedin the Arizona market. Since the acquisition of the Company by privateinvestors in 1994, we have introduced nine Colorado and six Arizona de novolocations. Management continues to monitor opportunities for expansion in thewestern United States.

 

**Fee-based business lines**. We began offering trust and estateadministration services in 1998; employee benefits brokerage and consulting in2000; P&C insurance brokerage and investment banking services in 2001; andhigh-end life insurance, wealth transfer planning and investment managementservices in 2003. The 2007 addition of Wagner to CoBiz’s investment managementofferings increased our reach in the Colorado market.  The 2008 acquisition of the assets andemployees of BDA expanded the P&C business in the Arizona market.  We believe offering such complementaryproducts allows us to both broaden our relationships with existing customersand attract new customers to our core business. In addition, we believe thefees generated by these services will increase our noninterest income anddecrease our dependency on net interest income.

 

***Establish strong brandawareness. ****In 2007, we completed aproject to clarify and strengthen the CoBiz brand, by focusing on therelationship between each of our business lines, our unique breadth of*

* *

*5*

----

Table of Contents

* *

*services and our exceptional reputation in the markets weserve. The project analysis included extensive customer and market research tohelp develop a cohesive and comprehensive approach to our internal and externalcommunications efforts while leveraging the power of each subsidiary as part ofthe larger company. The branding initiative was executed across all ourcompanies throughout 2007. The initiative has refined the brand platform andunified the look and feel of the CoBiz identity across the Company.*

 

**New product lines**. We also will seek to grow through theaddition of new product lines. Our product development efforts are focused onproviding enhanced credit, treasury management, investment, insurance, depositand trust products to our target customer base. In the past few years, we have:

 

·                  Greatly expanded our lending capabilitiesto allow for the origination of larger and more complex real estate loans,leveraged financings and cash flow lending;

 

·                  Introduced a non-collateralizedEurodollar sweep product as an alternative to the collateralized customerrepurchase product we have traditionally offered;

 

·                  Begun offering remote deposit capture,which allows our customers to make deposits electronically from their officeutilizing our software solution;

 

·                  Introduced a teller capture system whichallows us to electronically capture, balance and archive all transactionsdelivered through our teller lines; and

 

·                  Introduced an interest-rate hedge programto our customers. The interest-rate hedge program allows us to offer derivativeproducts such as swaps, caps, floors and collars to assist our customers inmanaging their interest-rate risk profile. In order to eliminate theinterest-rate risk associated with offering these products, the Company entersinto derivative contracts with third parties that are a near perfect offset tothe customer contracts.

 

**Expanding existing bankingrelationships**. Weare normally not a transactional lender and typically require that borrowersenter into a multiple-product banking relationship with us, including depositsand treasury management services, in connection with the receipt of credit fromthe Bank. We believe that such relationships provide us with the opportunity tointroduce our customers to a broader array of the products and services offeredby us and generate additional noninterest income. In addition, we believe thisphilosophy aids in customer retention.

 

**Capitalizing on the use oftechnology***.*We believe we have been able todistinguish ourselves from traditional community banks operating in our marketthrough the use of technology. Our data-processing system allows us to provideupgraded Internet banking, expanded treasury management products, check anddocument imaging, as well as a 24-hour voice response system. Other servicescurrently offered by the Bank include retail and wholesale lockbox, positivepay, controlled disbursement, repurchase agreements and sweep investmentaccounts. In addition to providing sophisticated services for our customers, weutilize technology extensively in our internal systems and operational supportfunctions to improve customer service, maximize efficiencies, and providemanagement with the information and analysis necessary to manage our growtheffectively.

 

**Emphasizing high-quality customerservice***.*We believe our ability to offerhigh-quality customer service provides us with a competitive advantage overmany regional banks that operate in our market areas. We emphasize customerservice in all aspects of our operations and identify customer service as anintegral component of our employee training programs. Moreover, we areconstantly exploring methods to make banking an easier and more convenientprocess for our customers. For example, we offer a courier service to pick updeposits for customers who are not in close proximity to any of the Bank’s 21locations, are not using our remote deposit capture product or simply do nothave the time to go to the Bank.

 

**Maintaining asset quality andcontrolling interest rate risk***.*We seek to maintain asset quality through a programthat includes regular reviews of loans by responsible loan officers and ongoingmonitoring of

 

6

----

Table of Contents

 

the loan portfolio by aloan review department that reports to the Chief Operations Officer of the Bankbut submits reports directly to the audit committee of our Board of Directors.At December 31, 2008, our ratio of nonperforming loans to total loans was2.02%, compared to 0.18% at December 31, 2007.  The slowdown in the overall economy hasnegatively impacted our asset quality, particularly in the Arizona market.  While our ratio of nonperforming loans tototal loans has increased, it remains more favorable than our peer group asreported and defined by the Federal Financial Institutions Examination Council(FFIEC).

 

We seek to control ourexposure to changing interest rates by attempting to maintain an interest rateprofile within a narrow range around an earnings neutral position. An importantelement of this focus has been to emphasize variable-rate loans and investmentsfunded by deposits that also mature or reprice over periods of 12 months orless.  We have also implemented interestrate floors in many of our variable rate loans in order to preserve our netinterest income in the event of interest rate decreases.  We actively monitor our interest rate profilein regular meetings of our Asset-Liability Management Committee.

 

**Achieving efficiencies andeconomies of scale through centralized administrative and support operations***.*We seek to maximize operational and supportefficiencies in a manner consistent with maintaining high-quality customerservice. We have consolidated various management and administrative functions,including accounting, data processing, bookkeeping, credit administration, loanoperations, and investment and treasury management services at our downtownDenver office. Most recently, new positions within the Company including aChief Operations Officer, Director of Deposit Services and a Director of WealthManagement were created to coordinate the growing operational departments,guide deposit gathering efforts of the Bank and enhance our wealth managementproducts. We believe this structure allows our business developmentprofessionals to focus on customer service and sales strategies directed ateach community that we serve.

 

**Acquisitions***.*We intend to continue to explore acquisitions offinancial institutions or financial service entities, including opportunitiesin Colorado, Arizona and other western states. Our approach to expansion is predicated on recruiting key personnel tolead new initiatives. While we normally consider an array of new locations and productlines as potential expansion initiatives, we will generally proceed only uponidentifying quality management personnel with a loyal customer following in thecommunity or experienced in the product line that is the target of theinitiative. We believe focusing on individuals who are established in theircommunities and experienced in offering sophisticated financial products andservices will enhance our market position and add growth opportunities.  We believe the downturn in the financialservices market during 2008 will increase acquisition opportunities as entitiesthat are undercapitalized look to partner with a stronger financial entity atrelatively low deposit premiums.  TheCompany has received support from the Board of Governors of the Federal ReserveSystem (FRB) and the Colorado Department of Banking to bid on institutionsplaced into receivership by the FDIC.

 

**Market Areas Served**

 

*Weoperate in two of the fastest-growing western markets in the United States —Colorado and Arizona. These markets are currently dominated by a number oflarge regional and national financial institutions that have acquired locallybased banks. The Company’s success is dependent to a significant degree on theeconomic conditions of these two geographical markets. Our market areas includethe Denver metropolitan area, which is comprised of the counties of Denver,Boulder, Adams, Arapahoe, Douglas, Broomfield and Jefferson; the Vail Valley,in Eagle County; and the Phoenix metropolitan area, which is locatedprincipally in Maricopa County.*

* *

***Colorado.***  *Denver’s economy hasdiversified over the years with significant representation in technology,communications, manufacturing, tourism, transportation, aerospace, biomedicaland financial services. The Denver metropolitan area is one of thefastest-growing regions in the nation, helping to make Colorado theseventh-fastest growing state in the United States in terms of percentagepopulation growth from April 2000 to July 2008. The population of theDenver and Boulder metropolitan regions have grown to include a workforce ofmore than 1.4 million at December 2008. The state’s preliminaryunemployment*

* *

*7*

----

Table of Contents

* *

*rate at December 2008 was 6.1%, the highest rate since2003, but below the 2008 national average of 7.2%.*

 

We have two locations each in downtown Denver,Boulder, Littleton and the Vail Valley, and one location each in Commerce City,Cherry Creek, the Denver Technological Center (DTC), Golden and Louisville. Thefollowing is selected additional market data regarding the Colorado markets weserve:

 

·      Downtown Denver and the DTC are the main businesscenters of metropolitan Denver. The area around the DTC features a highconcentration of office parks and businesses. A large number of high-net-worthindividuals live and work in the area.

 

·      Boulder has one of the highest concentrations of smallbusinesses and affluent individuals in the Rocky Mountain region.

 

·      The Commerce City location is uniquely situated toserve Denver’s growing northeast communities due to its position adjacent tothe Denver International Airport and Interstate 70, eight miles from downtownDenver.

 

·      The Littleton locations serve a more residential area,including Highlands Ranch, one of the fastest growing communities in the Denvermetropolitan area.

 

·      The western metropolitan area served by the Goldenlocation contains a number of newer industrial and office parks.

 

·      The Louisville location serves the growing areabetween Denver and Boulder, with an estimated 1.5 million people within a20-mile radius.

 

·      The Vail Valley location is anchored by Vail, a primemountain resort with a construction market for high-end primary and secondaryhomes.

 

***Arizona***. *Arizona’s primary economic sectors include trade,manufacturing, mining, agriculture, construction, tourism and services, which isthe largest economic sector. Arizona consistently had one of the highestpopulation growth rates in the nation during the latter half of the twentiethcentury, including being one of the fastest-growing states in terms ofpercentage population growth from April 2000 to July 2008, secondonly to Nevada. This population growth has been the primary driver behind theArizona economy. Our banks are located in Maricopa County, one of the nation’slargest counties in terms of population size. Approximately 60% of Arizona’spopulation, or 3.1 million, reside in Maricopa County. Through December 2008,the Phoenix metropolitan area saw a 4.5% decline in its nonfarm employment basefrom December 2007, the first annual decline since 2001. The preliminary December 2008unemployment rate for Arizona was 6.9%, significantly higher than the 4.2% rateat December 2007. The following is selected additional market dataregarding the Arizona markets we serve*:

 

·      Our Arizona banks are located in Maricopa County. Morethan half of Arizona’s population resides in Maricopa County, which includesthe cities of Phoenix, Mesa, Scottsdale, Surprise, Sun City, Glendale,Chandler, Tempe and Peoria.

 

·      The East Valley office serves the areas of Mesa andGilbert. The East Valley has more than 1.5 million residents and accounts fornearly half of the Metro Phoenix population.

 

·      Chandler, a suburb of Phoenix, serves a community thathas become home to businesses and industries of all sizes. Chandler is known asthe “Silicon Desert” due to its concentration of high-technology jobs.

 

·      The office in Surprise is strategically located toserve the large population of retired persons living in the suburbs of Phoenix.The customers in this demographic group usually prefer the personal service ofa community bank to the more impersonal service of a large financialinstitution.

 

8

----

Table of Contents

 

·      The offices in Scottsdale are located in one of themost desirable areas within metropolitan Phoenix, from both a residential andemployment perspective. The Scottsdale area continues to experience faster jobgrowth than population growth.

 

·      The office in Tempe is located in the center of thePhoenix metropolitan area. Tempe has the highest concentration of businesses inArizona, with more than 15% of all Arizona high-tech firms located in the area.

 

**Competition**

 

CoBiz and itssubsidiaries face competition in all of our principal business activities, notonly from other financial holding companies and commercial banks, but also fromsavings and loan associations, credit unions, finance companies, mortgagecompanies, leasing companies, insurance companies, investment advisors, mutualfunds, securities brokers and dealers, investment banks, other domestic andforeign financial institutions, and various nonfinancial institutions.  In addition, during 2008 a number oftraditional investment banks converted into bank holding companies, which mayincrease competition for deposits.

 

By virtue of their largercapital bases or affiliation with larger multi-bank holding companies, many ofour competitors have substantially greater capital resources and lending limitsthan we do and perform functions we offer only through correspondents. Ourbusiness, financial condition, results of operations, and cash flows may beadversely affected by an increase in competition. Moreover, theGramm-Leach-Bliley Act has expanded the ability of participants in the bankingand thrift industries to engage in other lines of business. This Act could putus at a competitive disadvantage because we may not have the capital toparticipate in other lines of business to the same extent as more highlycapitalized banks and thrift holding companies.

 

Please see “Risk Factors —Our business and financial condition may be adversely affected by competition,”below for additional information.

 

**Employees**

 

At December 31,2008, we had 554 employees, including 535 full-time equivalent employees.Employees of the Company enjoy a variety of employee benefit programs,including: stock option plans; an employee stock purchase plan; a 401(k) plan;various comprehensive medical, accident and group life insurance plans; andpaid vacations. No Company employee is covered by a collective bargainingagreement and we believe our relationship with our employees to be excellent.

 

**Supervision and Regulation**

** **

CoBiz and the Bankare extensively regulated under federal, Colorado and Arizona law. These lawsand regulations are primarily intended to protect depositors and federaldeposit insurance funds, not shareholders of CoBiz. The following informationsummarizes certain material statutes and regulations affecting CoBiz and theBank, and is qualified in its entirety by reference to the particular statutoryand regulatory provisions. Any change in applicable laws, regulations orregulatory policies may have a material adverse effect on the business,financial condition, results of operations and cash flows of CoBiz and theBank. We are unable to predict the nature or extent of the effects that fiscalor monetary policies, economic controls, or new federal or state legislationmay have on our business and earnings in the future.

 

**TheHolding Company**

 

*General*. CoBiz is a financial holding companyregistered under the Bank Holding Company Act of 1956, as amended (the BHCA),and is subject to regulation, supervision and examination by the FRB. CoBiz is

 

9

----

Table of Contents

 

required to filean annual report with the FRB and such other reports as may be requiredpursuant to the BHCA.

 

*SecuritiesExchange Act of 1934.*CoBiz has a class of securities registered with the SEC under theSecurities Exchange Act of 1934 (the Exchange Act). The Exchange Act requiresthe Company to file periodic reports with the SEC, governs the Company’sdisclosure in proxy solicitations and regulates insider tradingtransactions.  The Company is listed onThe NASDAQ Global Select Market (NASDAQ) and is subject to the rules ofthe NASDAQ.

 

*Emergency Economic Stabilization Act of 2008*(EESA). Deteriorating market conditions in 2008 led to the issuance of the EESAthat was signed into law on October 3, 2008.  The EESA authorized the Troubled Asset ReliefPlan (TARP) with an objective to ease the downturn in the credit cycle.  The TARP provides up to $700 billion to theDepartment of the Treasury (Treasury) to buy mortgages and other troubledassets, to provide guarantees and to inject capital into financialinstitutions.  As part of the $700billion TARP, the Department of the Treasury established a Capital PurchaseProgram (CPP), which allows the Treasury to purchase up to $250 billion ofsenior preferred shares issued by U.S. financial institutions.  The EESA also temporarily raised the basiclimit on federal deposit insurance coverage from $100,000 to $250,000 perdepositor until December 31, 2009 and accelerated the date on which theFRB will begin paying interest on required and excess reserve balances.

 

On December 19, 2008, the Company entered into anagreement with the Treasury pursuant to the CPP to issue shares of the Company’sFixed Rate Cumulative Perpetual Preferred Stock, Series B, par value $0.01per share, having a liquidation preference of $1,000 per share (the Series BPreferred Stock) for an aggregate purchase price of $64,450,000.  The Company also issued a warrant with a10-year term to acquire 895,968 shares of its common stock at an exercise priceof $10.79.  Participation in the CPPlimits the amount of executive compensation that is deductible for tax purposesto $500,000; requires Treasury approval prior to any increase in common stockdividends; and requires Treasury approval prior to any common stockrepurchases.  In addition, if dividendson the Series B Preferred Stock are not paid in full for six dividendperiods, the Treasury will have the right to elect two directors to the Company’sBoard of Directors.  The right to electdirectors will end when full dividends have been paid for four consecutivedividend periods.

 

*American Recovery and Reinvestment Act of 2009 (ARRA).*  To further stimulate the lagging economy,President Barack Obama signed the ARRA into law on February 17, 2009.  Title VII of the ARRA contains limits onexecutive compensation for senior executive officers of participants in the CPPfor as long as any financial assistance provided under the TARP remainoutstanding.  The limitations include aprohibition on incentives that may encourage unsafe behavior; a provision forthe recovery of bonuses in the event of materially inaccurate financialstatements; a prohibition on the payment of golden parachutes; and theprohibition of the accrual or payment of any bonus, retention award orincentive compensation.  The prohibitionon retention awards does not include the issuance of restricted stock as longas the restricted stock does not fully vest during the period in which the Series BPreferred Stock is outstanding and the fair value of the award does not exceed1/3 of the receiving officers annual compensation.  These limitations will apply to the five mosthighly compensated employees of the Company, or such number of employees as theTreasury may deem necessary.  The ARRAalso removed restrictions under the CPP plan that restricted the redemption ofthe Series B Preferred Stock by the Company unless certain conditions weremet.  The Series B Preferred Stockmay be redeemed by the Company subject to approval from the FRB.

 

*Acquisitions*. As a financial holding company, we arerequired to obtain the prior approval of the FRB before acquiring direct orindirect ownership or control of more than 5% of the voting shares of a bank orbank holding company. The FRB will not approve any acquisition, merger orconsolidation that would result in substantial anti-competitive effects, unlessthe anti-competitive effects of the proposed transaction are outweighed by agreater public interest in meeting the needs and convenience of the public. Inreviewing applications for such transactions, the FRB also considersmanagerial, financial, capital and other factors, including the record ofperformance of the applicant and the bank or banks to be

 

10

----

Table of Contents

 

acquired under theCommunity Reinvestment Act of 1977, as amended (the CRA). See “— The Bank —Community Reinvestment Act” below.

 

*Riegle-NealInterstate Banking and Branching Efficiency Act of 1994, as amended (the 1994Act)*. The 1994Act displaces state laws governing interstate bank acquisitions. Under the 1994Act, a financial or bank holding company may, subject to some limitations,acquire a bank outside of its home state without regard to local law. Thus, anout-of-state holding company could acquire the Bank, and we can acquire banksoutside of Colorado.

 

All acquisitionspursuant to the 1994 Act require regulatory approval. In reviewing applicationsunder the 1994 Act, an applicant’s record under the CRA must be considered, anda determination must be made that the transaction will not result in anyviolations of federal or state antitrust laws. In addition, there is a limit of25% on the amount of deposits in insured depository institutions in bothColorado and Arizona that can be controlled by any bank or bank holdingcompany.

 

The 1994 Act alsopermits bank subsidiaries of a financial or bank holding company to act asagents for affiliated institutions by receiving deposits, renewing timedeposits, closing loans, servicing loans and receiving payments on loans. As aresult, a relatively small Colorado or Arizona bank owned by an out-of-stateholding company could make available to customers in Colorado and Arizona someof the services of a larger affiliated institution located in another state.

 

*Gramm-Leach-BlileyAct of 1999 (the GLB Act)*. The GLB Act eliminates many of the restrictions placed on theactivities of certain qualified financial or bank holding companies. A “financialholding company” such as CoBiz can expand into a wide variety of financialservices, including securities activities, insurance and merchant bankingwithout the prior approval of the FRB, provided that certain conditions aremet, including a requirement that all subsidiary depository institutions be “wellcapitalized.”

 

*Dividend Restrictions.*  Dividends on theCompany’s capital stock (common and preferred stock) are prohibited under theterms of the junior subordinated debenture agreements (see Note 9 to theConsolidated Financial Statements) if the Company is in continuous default onits payment obligations to the capital trusts, has elected to defer interestpayments on the debentures or extends the interest payment period.  At December 31,2008, the Company was not in default on any of the junior subordinated debtissuances.

* *

*Pursuantto the terms of the agreement executed in the issuance of the Series BPreferred Stock, the ability of the Company to declare or pay dividends ordistributions on, or purchase, redeem or otherwise acquire for consideration,shares of its common stock will be subject to restrictions in the event thatthe Company fails to declare and pay full dividends on the Series BPreferred Stock.  In addition, theCompany may not increase its dividend prior to the earlier of 1) three yearsfrom the date of the issuance or 2) the date on which the Series BPreferred Stock is redeemed in whole.*

* *

*CapitalAdequacy*. The FRBmonitors, on a consolidated basis, the capital adequacy of financial or bankholding companies that have total assets in excess of $150 million by using acombination of risk-based and leverage ratios. Failure to meet the capitalguidelines may result in the application by the FRB of supervisory orenforcement actions. Under the risk-based capital guidelines, differentcategories of assets, including certain off-balance sheet items, such as loancommitments in excess of one year and letters of credit, are assigned differentrisk weights, based generally on the perceived credit risk of the asset. Theserisk weights are multiplied by corresponding asset balances to determine a “risk-weighted”asset base. For purposes of the risk-based capital guidelines, total capital isdefined as the sum of “Tier 1” and “Tier 2” capital elements, with Tier 2capital being limited to 100% of Tier 1 capital. Tier 1 capital includes, withcertain restrictions, common shareholders’ equity, perpetual preferred stock(no more than 25% of Tier 1 capital being comprised of cumulative preferredstock or trust preferred stock) and minority interests in consolidatedsubsidiaries. Tier 2 capital includes, with certain limitations, perpetualpreferred stock not included in Tier 1 capital, certain maturing capitalinstruments and the allowance for loan losses (limited to 1.25% ofrisk-weighted assets). The regulatory guidelines require a minimum ratio oftotal capital to risk-weighted assets of 8% (of which at least 4% must be inthe form of Tier 1 capital). The FRB

 

11

----

Table of Contents

 

has alsoimplemented a leverage ratio, which is defined to be a company’s Tier 1 capitaldivided by its average total consolidated assets. The FRB has established aminimum ratio of 3% for “strong holding companies” as defined by the FRB. Formost other holding companies, the minimum required leverage ratio is 4%, butmay be higher based on particular circumstances or risk profile.

 

For regulatorycapital purposes, the Series B Preferred Stock is treated the same asnoncumulative perpetual preferred stock as an unrestricted core capital elementincluded in Tier 1 Capital.

 

The table belowsets forth the capital ratios of the Company:

 
| ** **                              | ** ** | **At December 31, 2008** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | ** **                    | ** ** | **Minimum** | ** ** |
| **Ratio**                               | ** ** | **Actual**                    | ** ** | **Required** | ** ** |
| Total capital to  risk-weighted assets  |       | 14.5                          | %          | 8.0 | % |
| Tier I capital  to risk-weighted assets |       | 12.3                          | %          | 4.0 | % |
| Tier I leverage  ratio                  |       | 10.4                          | %          | 4.0 | % |

 

*Supportof Banks*. Asdiscussed below, the Bank is also subject to capital adequacy requirements.Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (theFDICIA), CoBiz could be required to guarantee the capital restoration plan ofthe Bank, should the Bank become “undercapitalized” as defined in the FDICIAand the regulations thereunder. See “— The Bank — Capital Adequacy.”  Our maximum liability under any suchguarantee would be the lesser of 5% of the Bank’s total assets at the time itbecame undercapitalized or the amount necessary to bring the Bank intocompliance with the capital plan. The FRB also has stated that financial orbank holding companies are subject to the “source of strength doctrine.”   The “source of strength doctrine” requiressuch holding companies to serve as a source of “financial and managerial”strength to their subsidiary banks and to not conduct operations in an unsafeor unsound manner.

 

The FDICIArequires the federal banking regulators to take “prompt corrective action” withrespect to capital-deficient institutions. In addition to requiring thesubmission of a capital restoration plan, the FDICIA contains broad restrictionson 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 frommaking capital distributions, including dividends, and is prohibited frompaying management fees to control persons, if the institution would beundercapitalized after any such distribution or payment.

 

*Sarbanes-OxleyAct of 2002 (the Sarbanes-Oxley Act)*. The Sarbanes-Oxley Act is intended to addresssystemic and structural weaknesses of the capital markets in the United Statesthat were perceived to have contributed to corporate scandals. TheSarbanes-Oxley Act also attempts to enhance the responsibility of corporate managementby, among other things, (i) requiring the chief executive officer andchief financial officer of public companies to provide certain certificationsin their periodic reports regarding the accuracy of the periodic reports filedwith the SEC, (ii) prohibiting officers and directors of public companiesfrom fraudulently influencing an accountant engaged in the audit of the company’sfinancial statements, (iii) requiring chief executive officers and chieffinancial officers to forfeit certain bonuses in the event of a restatement offinancial results, (iv) prohibiting officers and directors found to beunfit from serving in a similar capacity with other public companies, (v) prohibitingofficers and directors from trading in the company’s equity securities duringpension blackout periods, and (vi) requiring the SEC to issue standards ofprofessional conduct for attorneys representing public companies. In addition,public companies whose securities are listed on a national securities exchangeor association must satisfy the following additional requirements: (a) thecompany’s audit committee must appoint and oversee the company’s auditors; (b) eachmember of the company’s audit committee must be independent; (c) thecompany’s audit committee must establish procedures for receiving complaintsregarding accounting, internal accounting controls and audit-related matters; (d) thecompany’s audit committee must have the authority to engage independentadvisors; and (e) the company must provide appropriate funding to itsaudit committee, as determined by the audit committee.

 

12

----

Table of Contents

 

**The Bank**

 

*General*. The Bank is a state-chartered bankinginstitution, the deposits of which are insured by the Bank Insurance Fund ofthe FDIC, and is subject to supervision, regulation and examination by theColorado Division of Banking, the FRB and the FDIC. Prior to 2007, the Bank wasa nationally chartered institution and also subject to the supervision of theOffice of the Comptroller of the Currency (OCC). Pursuant to such regulations,the Bank is subject to special restrictions, supervisory requirements andpotential enforcement actions. The FRB’s supervisory authority over CoBiz canalso affect the Bank.

 

*CommunityReinvestment Act*.The CRA requires the Bank to adequately meet the credit needs of thecommunities in which it operates. The CRA allows regulators to reject anapplicant seeking, among other things, to make an acquisition or establish abranch, unless it has performed satisfactorily under the CRA. Federalregulators regularly conduct examinations to assess the performance offinancial institutions under the CRA. In its most recent CRA examination, theBank received a satisfactory rating.

 

*USAPatriot Act of 2001*.The Uniting and Strengthening America by Providing Appropriate Tools Requiredto Intercept and Obstruct Terrorism Act of 2001 (the USA Patriot Act) isintended to allow the federal government to address terrorist threats throughenhanced domestic security measures, expanded surveillance powers, increasedinformation sharing and broadened anti-money-laundering requirements. Among itsprovisions, the USA Patriot Act requires each financial institution to: (i) establishan anti-money-laundering program; (ii) establish due diligence policies,procedures and controls with respect to its private banking accounts andcorrespondent banking accounts involving foreign individuals and certainforeign banks; and (iii) avoid establishing, maintaining, administering ormanaging correspondent accounts in the United States for, or on behalf of, aforeign bank that does not have a physical presence in any country. Inaddition, the USA Patriot Act contains a provision encouraging cooperationamong financial institutions, regulatory authorities and law enforcementauthorities with respect to individuals, entities and organizations engaged in,or reasonably suspected of engaging in, terrorist acts or money launderingactivities. Financial institutions must comply with Section 326 of the Actwhich provides minimum procedures for identification verification of newcustomers.  On March 9, 2006, theUSA Patriot Improvement and Reauthorization Act of 2005 (Reauthorization Act of2005 ) was signed by the President to extend and modify the original Act.  The Reauthorization Act of 2005 makespermanent 14 of the original provisions of the USA Patriot Act that had beenset to expire.

 

*Transactionswith Affiliates*.The Bank is subject to Section 23A of the Federal Reserve Act, whichlimits the amount of loans to, investments in and certain other transactionswith affiliates of the Bank; requires certain levels of collateral for suchloans or transactions; and limits the amount of advances to third parties thatare collateralized by the securities or obligations of affiliates, unless theaffiliate is a bank and is at least 80% owned by the Company. If the affiliateis a bank and is at least 80% owned by the Company, such transactions aregenerally exempted from these restrictions except as to “low quality” assets asdefined under the Federal Reserve Act, and transactions not consistent withsafe and sound banking practices. In addition, Section 23A generallylimits transactions with a single affiliate of the Bank to 10% of the Bank’scapital and surplus and generally limits all transactions with affiliates to20% of the Bank’s capital and surplus.

 

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

 

A violation of therestrictions of Section 23A or Section 23B of the Federal Reserve Actmay result in the assessment of civil monetary penalties against the Bank or aperson participating in the conduct of the affairs of the Bank or theimposition of an order to cease and desist such violation.

 

13

----

Table of Contents

 

Regulation W ofthe Federal Reserve Act, which became effective on April 1, 2003,addresses the application of Sections 23A and 23B to credit exposure arisingout of derivative transactions between an insured institution and itsaffiliates and intra-day extensions of credit by an insured depositoryinstitution to its affiliates. The rule requires institutions to adoptpolicies and procedures reasonably designed to monitor, manage and controlcredit exposures arising out of transactions and to clarify that thetransactions are subject to Section 23B of the Federal Reserve Act.

 

*DividendRestrictions*.Dividends paid by the Bank and management fees from the Bank and our fee-basedbusiness lines provide substantially all of our cash flow. The approval of theColorado Division of Banking is required prior to the declaration of anydividend by the Bank if the total of all dividends declared by the Bank in anycalendar year exceeds the total of its net profits of that year combined withthe retained net profits for the preceding two years. In addition, the FDICIAprovides that the Bank cannot pay a dividend if it will cause the Bank to be “undercapitalized.”  See “— The Bank — Capital Adequacy.”

 

*Examinations*. The FRB periodically examines andevaluates banks. Based upon such an evaluation, the examining regulator mayrevalue the assets of an insured institution and require that it establishspecific reserves to compensate for the difference between the value determinedby the regulator and the book value of such assets.

 

*CapitalAdequacy*. Federalregulations establish minimum requirements for the capital adequacy ofdepository institutions that are generally the same as those established forbank holding companies. See “— The Holding Company — Capital Adequacy.”  Banks with capital ratios below the requiredminimum are subject to certain administrative actions, including thetermination of deposit insurance and the appointment of a receiver, and mayalso be subject to significant operating restrictions pursuant to regulationspromulgated under the FDICIA. See “— The Holding Company — Support of Banks.”

 

The followingtable sets forth the capital ratios of the Bank:

 
| ** **                              | ** ** | **At December 31, 2008** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| **Ratio**                               | ** ** | **Actual**                    | ** ** | **Minimum  Required** | ** ** |
|                                    |       |                          |       |   |   |
| Total capital to  risk-weighted assets  |       | 11.5                          | %          | 8.0 | % |
| Tier I capital to  risk-weighted assets |       | 10.2                          | %          | 4.0 | % |
| Tier I leverage  ratio                  |       | 8.6                           | %          | 4.0 | % |

 

Pursuant to theFDICIA, regulations have been adopted defining five capital levels: wellcapitalized, adequately capitalized, undercapitalized, significantlyundercapitalized and critically undercapitalized. Increasingly severerestrictions are placed on a depository institution as its capital levelclassification declines. An institution is critically undercapitalized if ithas a tangible equity to total assets ratio less than or equal to 2%. Aninstitution is adequately capitalized if it has a total risk-based capitalratio less than 10%, but greater than or equal to 8%; or a Tier 1 risk-basedcapital ratio less than 6%, but greater than or equal to 4%; or a leverageratio less than 5%, but greater than or equal to 4% (3% in certaincircumstances). An institution is well capitalized if it has a total risk-basedcapital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% orgreater, and a leverage ratio of 5% or greater; and the institution is notsubject to an order, written agreement, capital directive or prompt correctiveaction directive to meet and maintain a specific capital level for any capitalmeasure. Under these regulations, at December 31, 2008, the Bank was wellcapitalized, which places no significant restrictions on the Bank’s activities.

 

On November 2,2007, the FRB approved final rules to implement new risk-based capitalrequirements for banking organizations with total assets of $250 billion ormore or with consolidated total on-balance-sheet foreign exposure of $10billion or more. The new risk-based regulatory capital framework, known asBasel II, consists of three pillars that address (1) risk-based capitalrequirements for credit risk, market risk and operational risk; (2) supervisoryreview of capital adequacy, which relates to an organization’s

 

14

----

Table of Contents

 

capital adequacyand internal assessment processes; and (3) market discipline. The final rules becameeffective in April 2008.

 

*InternalOperating Requirements*. Federal regulations promote the safety and soundness of individualinstitutions by specifically addressing, among other things: (1) internalcontrols, information systems and internal audit systems; (2) loandocumentation; (3) credit underwriting; (4) interest rate exposure; (5) assetgrowth; and (6) compensation and benefit standards for managementofficials.

 

*RealEstate Lending Evaluations*. Federal regulators have adopted uniform standardsfor the evaluation of loans secured by real estate or made to financeimprovements to real estate. The Bank is required to establish and maintainwritten internal real estate lending policies consistent with safe and soundbanking practices. The Company has established loan-to-value ratio limitationson real estate loans, which are more stringent than the loan-to-valuelimitations established by regulatory guidelines.

 

*DepositInsurance Premiums*.Under current regulations, FDIC-insured depository institutions that aremembers of the FDIC pay insurance premiums at rates based on their assessmentrisk classification, which is determined, in part, based on the institution’scapital ratios and on factors that the FDIC deems relevant to determine therisk of loss to the FDIC.  In 2007, theannual assessment rates changed to a range of 5-43 basis points, an increasefrom the 0-27 basis point range that had been in effect since 1996.  For the first quarter of 2009, the assessmentrate range for Risk Category 1 institutions will increase to 12-14 basis pointsas part of the FDICs Restoration Plan for the Deposit Insurance Fund (DIF).  This increase is necessary to replenish theDIF due to the number of recent failures of FDIC-insured institutions.  The FDIC has proposed assessment rates forthe remainder of 2009 ranging from 8-21 basis points for Risk Category 1institutions.  As part of the proposedassessments beginning April 1, 2009, the FDIC will introduce three newadjustments that may impact the assessment base.  These adjustments are for 1) a potentialdecrease for long-term unsecured debt, 2) a potential increase for securedliabilities above a threshold amount and 3) for non-risk category 1institutions, a potential increase for brokered deposits above a thresholdamount.  The assessment rates for RiskCategories II — IV range from 18-78 basis points.  A change in our risk category wouldnegatively impact our assessment rates.

 

The amount aninstitution is assessed is based upon statutory factors that include thebalance of insured deposits as well as the degree of risk the institution posesto the insurance fund and may be reviewed semi-annually. Additionally, allinstitutions insured by the FDIC Bank Insurance Fund are assessed fees to coverthe debt of the Financing Corporation, the successor of the insolvent FederalSavings and Loan Insurance Corporation. The current assessment rate effective for the first quarter of 2009 is28.5 basis points (114 basis points annually). The assessment rate is adjusted quarterly.

 

*Temporary Liquidity Guarantee Program (TLGP)*. On October 14, 2008, the FDIC announced the enactment of theTemporary Liquidity Guarantee Program to strengthen confidence and encourageliquidity in the banking system. Pursuant to the program, the FDIC will guarantee certain seniorunsecured debt issued by participating financial institutions issued on orafter October 14, 2008 and before June 30, 2009; and provide fullFDIC deposit insurance coverage for non-interest bearing transaction accountsat participating FDIC-insured institutions through December 31, 2009.  All FDIC insured institutions were coveredunder the program until December 5, 2008, at no cost.  After December 5, 2008, the cost forinstitutions electing to participate is a 10-basis-point surcharge applied tobalances covered by the noninterest-bearing deposit transaction accountguarantee and 75 basis points of the eligible senior unsecured debt guaranteedunder the program.  The Company electedto participate in both the unlimited coverage for noninterest-bearingtransaction accounts and the debt guarantee program.

 

*Restrictionson Loans to One Borrower*. Under federal law, the aggregate amount of loans that may be made toone borrower by the Bank is generally limited to 15% of its unimpaired capital,surplus, undivided profits and allowance for loan losses. The Bank seeksparticipations to accommodate borrowers whose financing needs exceed the Bank’slending limits.

 

15

----

Table of Contents

 

**Fee-BasedBusiness Lines**

 

Alexander CapitalManagement Group, LLC (ACMG) and Wagner are registered with the SEC under theInvestment Advisers Act of 1940. The Investment Advisers Act of 1940 imposesnumerous obligations on registered investment advisers, including fiduciaryduties, recordkeeping requirements, operational requirements and disclosure obligations.Virtually all aspects of ACMG’s and Wagner’s investment management business aresubject to various federal and state laws and regulations. These laws andregulations generally grant supervisory agencies and bodies broadadministrative powers, including the power to limit or restrict them fromcarrying on its investment management business in the event that it fails tocomply with such laws and regulations. In such event, the possible sanctionswhich may be imposed include the suspension of individual employees, businesslimitations on engaging in the investment management business for specifiedperiods of time, the revocation of any such company’s registration as aninvestment adviser, and other censures or fines.

 

Green Manning &Bunch, Ltd. (GMB), our investment banking subsidiary, is registered as abroker-dealer under the Exchange Act and is subject to regulation by the SECand the Financial Industry Regulatory Authority (FINRA). GMB is subject to theSEC’s net capital rule designed to enforce minimum standards regarding thegeneral financial condition and liquidity of a broker-dealer. Under certaincircumstances, this rule limits the ability of the Company to makewithdrawals of capital and receive dividends from GMB. GMB’s regulatory netcapital consistently exceeded such minimum net capital requirements in fiscal2008. The securities industry is one of the most highly regulated in the UnitedStates, and failure to comply with related laws and regulations can result inthe revocation of broker-dealer licenses, the imposition of censures or fines,and the suspension or expulsion from the securities business of a firm, itsofficers or employees.

 

Financial DesignsLtd. (FDL) provides wealth transfer planning through the use of life insuranceproducts. State governments extensively regulate our life insurance activities.We sell our insurance products throughout the United States and the District ofColumbia through licensed insurance producers. Insurance laws vary from stateto state. Each state has broad powers over licensing, payment of commissions,business practices, policy forms and premium rates. While the federalgovernment does not directly regulate the marketing of most insurance products,securities, including variable life insurance, are subject to federalsecurities laws. We market these financial products through M HoldingsSecurities, Inc., a registered broker-dealer and a member of the FINRA andSecurities Investor Protection Corporation.

 

CoBiz InsuranceInc, acting as an insurance producer, must obtain and keep in force aninsurance producer’s license with the State of Arizona and Colorado. In orderto write insurance in other states, they are required to obtain non-residentinsurance licenses. All premiums belonging to insurance carriers and allunearned premiums belonging to customers received by the agency must be treatedin a fiduciary capacity. Insurance producers in Colorado are required tocomplete 24 hours biennially of continuing education and insurance producers inArizona are required to complete 20 hours annually.

 

**ChangingRegulatory Structure**

 

Regulation of theactivities of national and state banks and their holding companies imposes aheavy burden on the banking industry. The FRB, FDIC, OCC (national chartersonly) and State banking divisions all have extensive authority to police unsafeor unsound practices and violations of applicable laws and regulations bydepository institutions and their holding companies. These agencies can assesscivil monetary penalties, issue cease and desist or removal orders, seekinjunctions, and publicly disclose such actions.

 

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

 

16

----

Table of Contents

 

**MonetaryPolicy**

 

The monetarypolicy of the FRB has a significant effect on the operating results offinancial or bank holding companies and their subsidiaries. Among the meansavailable to the FRB to affect the money supply are open market transactions inU.S. government securities, changes in the discount rate on member bankborrowings and changes in reserve requirements against member bank deposits.These means are used in varying combinations to influence overall growth anddistribution of bank loans, investments and deposits, and their use may affectinterest rates charged on loans or paid on deposits. FRB monetary policies havematerially affected the operations of commercial banks in the past and areexpected to continue to do so in the future. The nature of future monetarypolicies and the effect of such policies on the business and earnings of theCompany and its subsidiaries cannot be predicted.

 

**WebsiteAvailability of Reports Filed with the SEC**

 

The Company maintains anInternet 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 itsannual reports, quarterly reports, current reports and proxy statements. Thesereports are made available as soon as reasonably practicable after they arefiled with or furnished to the SEC. The public may read and copy any materialswe 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 PublicReference Room may be obtained by calling the SEC at 1-800-SEC-0330. TheSEC also maintains a website at *www.sec.gov*that contains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC. The Company has alsomade available on its website its Audit, Compensation and Nominating Committeecharters and corporate governance guidelines. The content on any websitereferred to in this filing is not incorporated by reference into this filingunless expressly noted otherwise.

 

**Item 1A. Risk Factors**

 

***Recent legislative and regulatory initiatives toaddress difficult market and economic conditions may not stabilize the U.S.economy or the U.S. banking system.***

* *

*On October 3,2008, President Bush signed into law the EESA, which, among other measures,authorizes Treasury to purchase from financial institutions and their holdingcompanies up to $700 billion in mortgage loans, mortgage-relatedsecurities and certain other financial instruments, including debt and equitysecurities issued by financial institutions and their holding companies, underTARP.  The purpose of TARP is to restoreconfidence and stability to the U.S. banking system and to encourage financialinstitutions to increase their lending to customers and to each other.  Under the CPP authorized by TARP (as well asthe Capital Assistance Program announced on February 25, 2009), Treasuryis purchasing equity securities from participating institutions.  The series B preferred stock and warrantoffered by this prospectus were issued by us to Treasury pursuant to theCPP.  The EESA also increased federaldeposit insurance on most deposit accounts from $100,000 to $250,000.  This increase is in place until the end of2009 and is not covered by deposit insurance premiums paid by the bankingindustry.*

* *

*TheEESA followed, and has been followed by, numerous actions by the FRB, the U.S.Congress, Treasury, the FDIC, the SEC and others to address the currentliquidity and credit crisis that has followed the sub-prime meltdown thatcommenced in 2007.  These measuresinclude homeowner relief that encourage loan restructuring and modification;the establishment of significant liquidity and credit facilities for financialinstitutions and investment banks; the lowering of the federal funds rate;emergency action against short selling practices; a temporary guaranty programfor money market funds; the establishment of a commercial paper fundingfacility to provide back-stop liquidity to commercial paper issuers; andcoordinated international efforts to address illiquidity and other weaknessesin the banking sector.  Most recently, onFebruary 17, 2009, the ARRA was signed into law.  ARRA, more commonly known as the economicstimulus bill or economic recovery package, is intended to stimulate theeconomy and provides for broad infrastructure, education and health spending.*

* *

*17*

----

*Table ofContents*

* *

*Inaddition, the Internal Revenue Service, or IRS, has issued an unprecedentedwave of guidance in response to the credit crisis, including a relaxation oflimits on the ability of financial institutions that undergo an “ownershipchange” to utilize their pre-change net operating losses and netunrealized built-in losses. The relaxation of these limits may makesignificantly more attractive the acquisition of financial institutions whosetax basis in their loan portfolios significantly exceeds the fair market valueof those portfolios.*

* *

*On October 14,2008, the FDIC announced the establishment of a temporary liquidity guaranteeprogram to provide full deposit insurance for all non-interest bearingtransaction accounts and guarantees of certain newly issued senior unsecureddebt issued by FDIC-insured institutions and their holding companies.Insured institutions were automatically covered by this program from October 14,2008 until December 5, 2008, unless they opted out prior to that date.*

* *

*Thepurpose of these legislative and regulatory actions is to stabilize the U.S.banking system. The EESA, the ARRA and the other regulatory initiativesdescribed above may not have their desired effects. If the volatility in themarkets continues and economic conditions fail to improve or worsen, ourbusiness, financial condition, results of operations and cash flows could bematerially and adversely affected.*

* *

***Difficultconditions in the financial services markets have adversely affected thebusiness and results of operations of the Company, and we do not expect theseconditions to improve in the near future.***

 

Dramatic declines in thehousing market during the prior year, with falling home prices and increasingforeclosures and unemployment, have resulted in significant write-downs ofasset values by financial institutions, including government-sponsored entitiesand major commercial and investment banks. These write-downs, initially ofmortgage-backed securities but spreading to credit default swaps and otherderivative securities, have caused many financial institutions to seekadditional capital, to merge with larger and stronger institutions and, in somecases, to fail. Many lenders and institutional investors have reduced and, insome cases, ceased to provide funding to borrowers including other financialinstitutions. The Company has historically used federal funds purchased as ashort-term liquidity source and, while the Company continues to actively usethis source, further credit tightening in the market could reduce funding linesavailable to the Company.  This marketturmoil and tightening of credit have led to an increased level of commercialand consumer delinquencies, lack of consumer confidence, increased marketvolatility and widespread reduction of business activity generally.

 

***Our allowance for loan losses maynot be adequate to cover actual loan losses.***

 

As a lender, we are exposed to the risk that ourcustomers will be unable to repay their loans according to their terms and thatany collateral securing the payment of their loans may not be sufficient toassure repayment.  Credit losses areinherent in the lending business and could have a material adverse effect onour operating results.  We make variousassumptions and judgments about the collectibility of our loan portfolio andprovide an allowance for potential losses based on a number of factors.  If our assumptions are wrong, our allowancefor loan losses may not be sufficient to cover our losses, thereby having anadverse effect on our operating results, and may cause us to increase theallowance in the future.  In addition,although our level of delinquencies historically has been low, we have beenincreasing and expect to continue to increase the number and amount of loans weoriginate, and we cannot guarantee that we will not experience an increase indelinquencies and losses as these loans continue to age, particularly if theeconomic conditions in Colorado and Arizona further deteriorate.  The actual amount of future provisions forloan losses cannot be determined at any specific point in time and may exceedthe amounts of past provisions.  Additionsto our allowance for loan losses would decrease our net income.

 

18

----

Table of Contents

 

***Amajority of our loans are secured by real estate. This concentration,coinciding with a downturn in our real estate markets, could affect ourbusiness.***

 

There has been a downturnin the real estate market, a slow-down in construction and an oversupply ofreal estate for sale in both 2007 and 2008. This downturn, and any additional softening, in our real estate marketscould hurt our business because a majority of our loans are secured by realestate. Real estate values and real estate markets are generally affected bychanges in national, regional or local economic conditions, fluctuations ininterest rates and the availability of loans to potential purchasers, changesin tax laws and other governmental statutes, regulations and policies and actsof nature.  If real estate pricesdecline, the value of real estate collateral securing our loans could bereduced.  Our ability to recover ondefaulted loans by foreclosing and selling the real estate collateral wouldthen be diminished, and we would be more likely to suffer losses on defaultedloans. At December 31, 2008, approximately 70% of the book value of ourloan portfolio consisted of loans collateralized by various types of realestate. Substantially all of our real property collateral is located in Arizonaand Colorado. Any such downturn could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows.

 

***Our commercial and construction loansare subject to various lending risks depending on the nature of the borrower’sbusiness, its cash flow and our collateral.***

* *

Our commercial real estate loans involve higherprincipal amounts than other loans, and repayment of these loans may bedependent on factors outside our control or the control of our borrowers.Repayment of commercial real estate loans is generally dependent, in largepart, on sufficient income from the properties securing the loans to coveroperating expenses and debt service. Rental income may not rise sufficientlyover time to meet increases in the loan rate at repricing or increases inoperating expenses, such as utilities and taxes. As a result, impaired loansmay be more difficult to identify without some seasoning. Because payments onloans secured by commercial real estate often depend upon the successfuloperation and management of the properties, repayment of such loans may beaffected by factors outside the borrower’s control, such as adverse conditionsin 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 repaythe loan and the value of the security for the loan may be impaired.

 

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

 

Our construction loans are based upon estimates ofcosts to construct and the value associated with the completed project. Theseestimates may be inaccurate due to the uncertainties inherent in estimatingconstruction costs, as well as the market value of the completed project andthe effects of governmental regulation of real property making it relativelydifficult to accurately evaluate the total funds required to complete a projectand the related loan-to-value ratio. As a result, construction loans ofteninvolve the disbursement of substantial funds with repayment dependent, inpart, on the success of the ultimate project and the ability of the borrower tosell or lease the property, rather than the ability of the borrower orguarantor to repay principal and interest. Delays in completing the project mayarise from labor problems, material shortages and other unpredictable contingencies.If the estimate of construction costs is inaccurate, we may be required toadvance additional funds to complete construction. If our appraisal of thevalue of the completed project proves to be overstated, we may have inadequatesecurity for the repayment of the loan upon completion of construction of theproject.

 

***Changes in economic conditionsmay cause us to incur loan losses.***

 

The inability of borrowers to repay loans can erodeour earnings and capital.  Our loanportfolio is somewhat less diversified than that of a traditional communitybank because it includes a higher concentration of larger commercial and realestate loans.  Substantially all of ourloans are to businesses and individuals in the Denver and Phoenix metropolitanareas, and any further economic decline in these

 

19

----

Table of Contents

 

market areas could result in increased delinquencies,problem assets and foreclosures, reduced collateral value and reduced demandfor loans and other products and services and, accordingly, could impact usadversely.

 

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

 

Consumer loans entailgreater risk than residential mortgage loans, particularly in the case ofconsumer loans that are unsecured or secured by rapidly depreciating assets. Insuch cases, any repossessed collateral for a defaulted consumer loan may notprovide an adequate source of repayment of the outstanding loan balance as aresult of damage, loss or depreciation. The remaining deficiency often does notwarrant further collection efforts against the borrower beyond obtaining adeficiency judgment. In addition, consumer loan collections are dependent onthe borrower’s continuing financial stability, and thus, are more likely to beadversely affected by job loss, divorce, illness or personal bankruptcy.Furthermore, the application of various Federal and state laws, includingFederal and state bankruptcy and insolvency laws, may limit the amount that canbe recovered on such loans.

 

***TheCompany may be adversely affected by the soundness of other financialinstitutions.***

 

Financial servicesinstitutions are interrelated as a result of trading, clearing, counterparty orother relationships. The Company has exposure to many different industries andcounterparties, and routinely executes transactions with counterparties in thefinancial services industry including commercial banks, brokers and dealers,investment banks, and other institutional clients. Many of these transactionsexpose the Company to credit risk in the event of a default by a counterpartyor client. In addition, the Company’s credit risk may be exacerbated when thecollateral held by the Company cannot be realized upon or is liquidated atprices not sufficient to recover the full amount of the credit or derivativeexposure due to the Company. Any such losses could have a material adverseaffect on the Company’s financial condition and results of operations.

 

***The securities purchase agreement between us andTreasury permits Treasury to impose additional restrictions on usretroactively.***

* *

*Thesecurities purchase agreement we entered into with Treasury permits Treasury tounilaterally amend the terms of the securities purchase agreement to complywith any changes in federal statutes after the date of its execution.  ARRA imposed additional executivecompensation and expenditure limits on all current and future TARP recipients,including us, until we have repaid Treasury. These additional restrictions may impede our ability to attract andretain qualified executive officers. ARRA also permits TARP recipients to repay the Treasury without penaltyor requirement that additional capital be raised, subject to Treasury’sconsultation with our primary federal regulator while the securities purchaseagreement required that, for a period of three years, the series B preferredstock could generally only be repaid if we raised additional capital to repaythe securities and such capital qualified as Tier 1 capital.  Additional unilateral changes in thesecurities purchase agreement could have a negative impact on our financialcondition and results of operations.*

* *

***Recentsupervisory guidance on commercial real estate concentrations could restrictour activities and impose financial requirements or limitations on the conductof our business.***

 

The OCC, the FRB and theFDIC recently finalized joint supervisory guidance on sound risk management practicesfor concentrations in commercial real estate lending. The guidance is intendedto help ensure that institutions pursuing a significant commercial real estatelending strategy remain healthy and profitable while continuing to serve thecredit needs of their communities. The agencies are concerned that risingcommercial real estate loan concentrations may expose institutions tounanticipated earnings and capital volatility in the event of adverse changesin commercial real estate markets. The guidance reinforces and enhancesexisting regulations and guidelines for safe and sound real estate lending. Theguidance provides supervisory criteria, including numerical indicators toassist in identifying institutions with potentially significant commercial realestate loan concentrations that may warrant greater supervisory scrutiny. Theguidance does not limit banks’ commercial real estate lending, but ratherguides

 

20

----

Table of Contents

 

institutions indeveloping risk management practices and levels of capital that arecommensurate with the level and nature of their commercial real estateconcentrations. Lending and risk management practices of the Company will betaken into account in supervisory evaluation of capital adequacy. Ourcommercial real estate portfolio at December 31, 2008 meets the definitionof commercial real estate concentration as set forth in the final guidelines.If our risk management practices are found to be deficient, it could result inincreased reserves and capital costs.

 

***To the extent that any of thereal 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 andregulations as well as the common law, a current or previous owner or operatorof real property may be liable for the cost of removal or remediation ofhazardous or toxic substances on such property or damage to property orpersonal injury. Such laws may impose liability whether or not the owner oroperator was responsible for the presence of such hazardous or toxicsubstances. Environmental laws also may impose restrictions on the manner inwhich properties may be used or businesses may be operated, and theserestrictions may require expenditures by one or more of our borrowers. Suchlaws may be amended so as to require compliance with stringent standards whichcould require one or more of our borrowers to make unexpected expenditures,some of which could be substantial. Environmental laws provide for sanctions inthe event of noncompliance and may be enforced by governmental agencies or, incertain circumstances, by private parties. One or more of our borrowers may beresponsible for such costs which would diminish the value of our collateral.The cost of defending against claims of liability, of compliance withenvironmental regulatory requirements or of remediating any contaminatedproperty could be substantial and require a material portion of the cash flowof one or more of our borrowers, which would diminish the ability of any suchborrowers to repay our loans.

 

***Changes in interest rates mayaffect our profitability.***

 

Our profitability is, in part, a function of thespread between the interest rates earned on investments and loans, and theinterest rates paid on deposits and other interest-bearing liabilities. Our netinterest spread and margin will be affected by general economic conditions andother factors, including fiscal and monetary policies of the federalgovernment, that influence market interest rates and our ability to respond tochanges in such rates. At any given time, our assets and liabilities structuresare such that they are affected differently by a change in interest rates. As aresult, an increase or decrease in interest rates, the length of loan terms orthe mix of adjustable and fixed-rate loans in our portfolio could have a positiveor negative effect on our net income, capital and liquidity. We havetraditionally managed our assets and liabilities in such a way that we have apositive interest rate gap. As a general rule, banks with positive interestrate gaps are more likely to be susceptible to declines in net interest incomein periods of falling interest rates and are more likely to experienceincreases in net interest income in periods of rising interest rates.  In addition, an increase in interest ratesmay adversely affect the ability of some borrowers to pay the interest on andprincipal of their loans.

 

***Our ability to grow issubstantially dependent upon our ability to increase our deposits.***

 

Our primary source offunding growth is through deposit accumulation. Our ability to attract depositsis significantly influenced by general economic conditions, changes in moneymarket rates, prevailing interest rates and competition. If we are notsuccessful in increasing our current deposit base to a level commensurate withour funding needs, we may have to seek alternative higher cost wholesalefinancing sources or curtail our growth.

 

***Ourfee-based businesses are subject to quarterly and annual volatility in theirrevenues and earnings.***

 

Our fee-based businesseshave historically experienced, and are likely to continue to experience,quarterly and annual volatility in revenues and earnings.  With respect to our investment bankingservices

 

21

----

Table of Contents

 

segment, GMB, the delayin the initiation or the termination of a major new client engagement, or anychanges in the anticipated closing date of client transactions can directlyaffect revenues and earnings for a particular quarter or year.  With respect to our insurance segment, CoBizInsurance Inc. and FDL., our revenues and earnings also can experiencequarterly and annual volatility, depending on the timing of the initiation ortermination of a major new client engagement. In addition, a substantial portion of the revenues and earnings of ourinsurance segment are often generated during our fourth quarter as many oftheir clients seek to finalize their wealth transfer and estate plans by yearend.  With respect to our investmentadvisory businesses, ACMG and Wagner, our revenues and earnings are dependenton the value of our assets under management, which in turn are heavilydependent upon general conditions in debt and equity markets.  Any significant volatility in debt or equitymarkets are likely to directly affect revenues and earnings of ACMG and Wagnerfor a particular quarter or year.

 

***Wemust evaluate whether any portion of our recorded goodwill is impaired.  Impairment testing may result in a material,non-cash write-down of our goodwill assets and could have a material adverseimpact on our results of operations.***

 

At December 31,2008, goodwill represented approximately 1.7% of our total assets. We haverecorded goodwill because we paid more for some of our businesses than the fairmarket value of the tangible and separately measurable intangible net assets ofthose businesses. Under Statement of Financial Accounting Standard No. 142,*Goodwill and Other Intangible Assets*, wemust test our goodwill and other intangible assets with indefinite lives forimpairment at least annually (or whenever events occur which may indicatepossible impairment).  Goodwillimpairment is determined by comparing the fair value of a reporting unit to itscarrying amount, including goodwill.  Ifthe fair value of the reporting unit exceeds its carrying amount, goodwill ofthe reporting unit is not considered impaired. If the fair value of the reporting unit is less than the carryingamount, goodwill is considered impaired. We estimate the fair value of our reporting units using market multiplesof comparable entities, including recent transactions, or a combination ofmarket multiples and a discounted cash flow methodology.  Determining the fair value of a reporting unitrequires a high degree of subjective management assumption.  Discounted cash flow valuation models areutilized that incorporate such variables as revenue growth rates, expensetrends, discount rates and terminal values. Based upon an evaluation of key data and market factors, managementselects from a range the specific variables to be incorporated into thevaluation model.  Any changes in keyassumptions about our business and its prospects, changes in market conditionsor other externalities, for impairment testing purposes could result in anon-cash impairment charge and such a charge could have a material adverseeffect on our consolidated results of operations.

 

***We rely heavily on ourmanagement, and the loss of any of our senior officers may adversely affect ouroperations.***

 

Consistent with our policy of focusing growthinitiatives on the recruitment of qualified personnel, we are highly dependenton the continued services of a small number of our executive officers and keyemployees. The loss of the services of any of these individuals could adverselyaffect our business, financial condition, results of operations and cash flows.The failure to recruit and retain key personnel could have a material adverseeffect on our business, financial condition, results of operations and cashflows.

 

***We may experience difficulties inmanaging our growth.***

 

As part of our strategy, we may expand into additionalcommunities or attempt to strengthen our position in our current markets byundertaking additional de novo branch openings or new bank formations. Webelieve that it may take up to 18 months for new banking facilities tofirst achieve operational profitability due to the impact of overhead expenses,and the start-up phase of generating loans and deposits. To the extent that weundertake growth initiatives, we are likely to continue to experience theeffects of higher operating expenses relative to operating income from the newoperations, which may have an adverse effect on our levels of reported netincome, return on average equity and return on average assets.

 

22

----

 

Table of Contents

 

In addition, we may acquire financial institutions andrelated businesses that we believe provide a strategic fit with our business.To the extent that we grow through acquisitions, we may not be able toadequately and profitably manage such growth. Acquiring other financialinstitutions and businesses involves risks commonly associated withacquisitions, including:

 

·                  potential exposure to unknown or contingentliabilities of financial institutions and other businesses we acquire;

·                  exposure to potential asset qualityissues of the acquired banks or businesses;

·                  difficulty and expense of integrating the operationsand personnel of banks and businesses we acquire;

·                  potential disruption to our business;

·                  potential diversion of our management’s time andattention; and

·                  the possible loss of key employees and customers ofthe banks and businesses we acquire.

 

***Our business and financialcondition may be adversely affected by competition.***

 

The banking business in the Denver and Phoenixmetropolitan areas is highly competitive and is currently dominated by a numberof large regional and national financial institutions. In addition to theseregional and national banks, there are a number of smaller commercial banksthat operate in these areas. We compete for loans and deposits with banks,savings and loan associations, finance companies, credit unions, and mortgagebankers. In addition to traditional financial institutions, we also compete forloans with brokerage and investment banking companies, and governmentalagencies that make available low-cost or guaranteed loans to certain borrowers.Particularly in times of high interest rates, we also face significantcompetition for deposits from sellers of short-term money market securities andother corporate and government securities. In addition, during 2008 a number of traditional investment banksconverted into bank holding companies, which may increase competition fordeposits.

 

By virtue of their larger capital bases or affiliationwith larger multibank holding companies, many of our competitors havesubstantially greater capital resources and lending limits than we have andperform other functions that we offer only through correspondents. Interstatebanking and unlimited state-wide branch banking are permitted in Colorado andArizona. As a result, we have experienced, and expect to continue toexperience, greater competition in our primary service areas. Our business,financial condition, results of operations and cash flows may be adverselyaffected by competition, including any increase in competition. Moreover,recently enacted and proposed legislation has focused on expanding the abilityof participants in the banking and thrift industries to engage in other linesof business. The enactment of such legislation could put us at a competitivedisadvantage because we may not have the capital to participate in other linesof business to the same extent as more highly capitalized financial serviceholding companies.

 

***We may be required to makecapital contributions to the Bank******if it becomes undercapitalized.***

 

Under federal law, a bank holding company may berequired to guarantee a capital plan filed by an undercapitalized banksubsidiary with its primary regulator. If the subsidiary defaults under theplan, the holding company may be required to contribute to the capital of thesubsidiary bank in an amount equal to the lesser of 5% of the Bank’s assets atthe time it became undercapitalized or the amount necessary to bring the Bankinto compliance with applicable capital standards. Therefore, it is possiblethat we will be required to contribute capital to our subsidiary bank or anyother bank that we may acquire in the event that such bank becomesundercapitalized. If we are required to make such capital contribution at atime when we have other significant capital needs, our business, financialcondition, results of operations and cash flows could be adversely affected.

 

***We continually encountertechnological change, and we may have fewer resources than our competitors tocontinue to invest in technological improvements.***

* *

The financial services industry is undergoing rapidtechnological changes, with frequent introductions of new technology-drivenproducts and services. In addition to better serving customers, the effectiveuse of 

 

23

----

Table of Contents

 

technology increases efficiency and enables financialinstitutions to reduce costs. Our future success will depend, in part, upon ourability to address the needs of our customers by using technology to provideproducts and services that will satisfy customer demands for convenience, aswell as to create additional efficiencies in our operations. Many of ourcompetitors have substantially greater resources to invest in technologicalimprovements. We cannot assure you that we will be able to effectivelyimplement new technology-driven products and services or be successful inmarketing these products and services to our customers.

 

***Aninterruption in or breach in security of our information systems may result ina loss of customer business.***

 

We rely heavily oncommunications and information systems to conduct our business. Any failure,interruption or breach in security of these systems could result in failures ordisruptions in our customer relationship management, general ledger, deposits,servicing or loan origination systems. The occurrence of any failures or interruptions could result in a lossof customer business and have a material adverse effect on our business, financialcondition, results of operations and cash flows.

 

***We are subject to significantgovernment regulation, and any regulatory changes may adversely affect us.***

 

The banking industry isheavily regulated under both federal and state law. These regulations areprimarily intended to protect customers, not our creditors or shareholders. Asa financial holding company, we are also subject to extensive regulation by theFRB, in addition to other regulatory and self-regulatory organizations.Regulations affecting banks and financial services companies undergo continuouschange, and we cannot predict the ultimate effect of such changes, which couldhave a material adverse effect on our business, financial condition, results ofoperations and cash flows.

 

***Ifour internal controls over financial reporting do not comply with therequirements of the Sarbanes-Oxley Act, our business could be adverselyaffected.***

* *

Section 404 of theSarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of ourinternal controls over financial reporting at the end of each year, and toinclude a management report assessing the effectiveness of our internalcontrols over financial reporting in all annual reports.

 

Management, including ourChief Executive Officer (CEO) and Chief Financial Officer****(CFO),does not expect that our internal controls over financial reporting willprevent all error and all fraud.  Acontrol system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objectives willbe met.  Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs.  Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, have been or will bedetected.  These inherent limitationsinclude the realities that judgments in decision making can be faulty and thatbreakdowns can occur because of simple errors or mistakes.  Controls can also be circumvented by theindividual acts of some persons, by collusion of two or more people, or bymanagement override of the controls.  Thedesign of any system of controls is based in part on certain assumptions aboutthe likelihood of future events, and we cannot assure you that any design willsucceed in achieving its stated goals under all potential futureconditions.  Over time, controls maybecome inadequate because of changes in conditions or deterioration in thedegree of compliance with policies or procedures.  Misstatements due to error or fraud may occurand not be detected, because of the inherent limitations in a cost-effectivecontrol system.

 

Although management hasdetermined that our internal controls over financial reporting were effectiveat December 31, 2008, we cannot assure you that we will not identify amaterial weakness in our internal controls in the future.  A material weakness in our internal controlsover financial reporting would require management and our independentregistered public accounting firm to evaluate our internal controls asineffective.  If our internal controlsover financial reporting are not considered adequate, we may

 

24

----

Table of Contents

 

experience a loss ofpublic confidence, which could have an adverse effect on our business and ourstock price.

 

**Item 1B. Unresolved Staff Comments**

 

None.

 

**Item 2. Properties**

 

At December 31, 2008, we had 13 bank locations,five fee-based locations and an operations center in Colorado and eight banklocations and one fee-based location in Arizona. Our executive offices arelocated at 821 17th Street, Denver, Colorado, 80202. We lease our executiveoffices, our Northeast office and our Surprise office locations from entitiespartly owned or controlled by a director of the Company. See “CertainRelationships and Related Transactions and Director Independence” under Item 13of Part III and Note 15 to the Consolidated Financial Statements. Theterms of these leases expire between 2013 and 2016. The Company leases all ofits facilities. The following table sets forth specific information on eachlocation.

 

 

25

----

Table ofContents

 
| ** **                 | ** ** | ** **                                                         | ** ** | **Lease**      | ** ** |
|----------------------------|------------|--------------------------------------------------------------------|------------|----------------|------------|
| **Bank Locations**         | ** ** | **Address**                                                        | ** ** | **Expiration** | ** ** |
| DTC                        |       | 8400 E. Prentice Ave., Ste. 150, Greenwood Village,  CO 80111      |       | 2009           |       |
| Boulder North              |       | 2550 N. Broadway, Boulder, CO 80302                                |       | 2009           |       |
| Northwest                  |       | 400 Centennial Pkway., Ste. 100, Louisville, CO  80027             |       | 2009           |       |
| Vail Valley                |       | 56 Edwards Village Blvd., Ste. 130, Edwards, CO  81632             |       | 2009           |       |
| Denver -  Operations       |       | 717 17th St., Ste. 400, Denver, CO 80202                           |       | 2010           |       |
| West Metro                 |       | 15710 W. Colfax Ave., Golden, CO 80401                             |       | 2011           |       |
| Cherry Creek               |       | 301 University Blvd., Suites 100 & 200,  Denver, CO 80206 |       | 2012           |       |
| Eagle                      |       | 212 Chambers Ave., Unit 3, Eagle, CO 81631                         |       | 2012           |       |
| Littleton                  |       | 101 W. Mineral Ave., Littleton, CO 80120                           |       | 2012           |       |
| Northeast                  |       | 4695 Quebec St., Denver, CO 80216                                  |       | 2013           |       |
| Boulder                    |       | 2025 Pearl St., Boulder, CO 80302                                  |       | 2014           |       |
| Prince                     |       | 2409 W. Main St., Littleton, CO 80120                              |       | 2014           |       |
| Tremont                    |       | 1275 Tremont Pl., Denver, CO 80204                                 |       | 2014           |       |
| Denver                     |       | 821 17th St., Denver, CO 80202                                     |       | 2016           |       |
| Chandler                   |       | 2727 W. Frye Rd., Ste. 100, Chandler, AZ 85224                     |       | 2010           |       |
| Scottsdale                 |       | 6929 E. Greenway Pkwy., Ste. 150, Scottsdale, AZ  85254            |       | 2011           |       |
| Camelback                  |       | 3200 E. Camelback Rd., Ste. 129, Phoenix, AZ 85018                 |       | 2012           |       |
| East Valley                |       | 1757 E. Baseline Rd., Ste. 101, Gilbert, AZ 85233                  |       | 2012           |       |
| Tempe                      |       | 1620 W. Fountainhead Pkwy., Ste. 119, Tempe, AZ  85282             |       | 2012           |       |
| Surprise                   |       | 12775 W. Bell Rd., Surprise, AZ 85374                              |       | 2016           |       |
| Phoenix                    |       | 2600 N. Central Ave., Ste. 2000, Phoenix, AZ 85004                 |       | 2017           |       |
| Scottsdale  Fashion Square |       | 7150 E. Camelback Rd., Ste. 100, Scottsdale, AZ  85251             |       | 2018           |       |

 
| ** **                            | ** ** | **Lease**                                                | ** ** | ** **     | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|----------------|------------|
| **Fee-Based Locations**               | ** ** | **Address**                                              | ** ** | **Expiration** | ** ** |
| CoBiz Insurance  Inc. - CO            |       | 10901 W. Toller Dr., Littleton, CO 80127                 |       | 2009           |       |
| Wagner  Investment Management, Inc    |       | 3200 Cherry Creek South Dr., Ste. 240, Denver, CO  80209 |       | 2009           |       |
| CoBiz Insurance  Inc. - AZ            |       | 3300 N. Central Ave., Ste. 2220, Phoenix, AZ 85012       |       | 2010           |       |
| Green  Manning & Bunch, Ltd. |       | 370 17th St., Ste. 3600, Denver, CO 80202                |       | 2010           |       |
| Alexander  Capital Management Group   |       | 1099 18th St., Ste. 2810, Denver, CO 80202               |       | 2012           |       |
| Financial  Designs Ltd.               |       | 1775 Sherman St., Ste. 1800, Denver, CO 80203            |       | 2013           |       |

 

All leased properties areconsidered in good operating condition and are believed adequate for ourpresent and foreseeable future operations. We do not anticipate any difficultyin leasing additional suitable space upon expiration of any present leaseterms.

 

**Item 3. Legal Proceedings**

 

Periodically and in theordinary course of business, various claims and lawsuits which are incidentalto our business are brought against or by us. We believe, based on the dollaramount of the claims outstanding at the end of the year, the ultimateliability, if any, resulting from such claims or lawsuits will not have amaterial adverse effect on the business, financial condition, results ofoperations or cash flows of the Company.

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders**

 

 

26

----

Table of Contents

 

*Nomatter was submitted to a vote of security holders during the fourth quarter offiscal 2008.*

* *

**PART II**

** **

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

 

**Market for Registrant’s Common Equity**

 

*Thecommon stock of the Company is traded on the NASDAQ Global Select Market underthe symbol “COBZ.”  At February 20,2009, there were approximately 519 shareholders of record of CoBiz commonstock.*

* *

*Thefollowing table presents the range of high and low sale prices of our commonstock for each quarter within the two most recent fiscal years as reported bythe NASDAQ Global Select Market and the per-share dividends declared in eachquarter during that period.*

** **
| ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | **Cash**      | ** ** |
|----------------|------------|------------|------------|------------|------------|---------------|------------|
| ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | **Dividends** | ** ** |
| ** **     | ** ** | **High**   | ** ** | **Low**    | ** ** | **Declared**  | ** ** |
| **2007:**      | ** ** | ** ** | ** ** | ** ** | ** ** | ** **    | ** ** |
| First Quarter  |       | $          | 22.00      |       | $          | 18.84         |       | $ | 0.06 |   |
| Second Quarter |       | 20.09      |       | 17.81      |       | 0.06          |       |
| Third Quarter  |       | 19.25      |       | 14.75      |       | 0.07          |       |
| Fourth Quarter |       | 18.08      |       | 14.19      |       | 0.07          |       |
| 2008:          |       |       |       |       |       |          |       |
| First Quarter  |       | $          | 16.03      |       | $          | 11.17         |       | $ | 0.07 |   |
| Second Quarter |       | 13.86      |       | 6.58       |       | 0.07          |       |
| Third Quarter  |       | 15.20      |       | 5.13       |       | 0.07          |       |
| Fourth Quarter |       | 12.30      |       | 8.14       |       | 0.07          |       |

** **

*Thetiming and amount of future dividends are at the discretion of the Board ofDirectors of the Company and will depend upon the consolidated earnings,financial condition, liquidity and capital requirements of the Company and itssubsidiaries, the amount of cash dividends paid to the Company by itssubsidiaries, applicable government regulations and policies, and other factorsconsidered relevant by the Board of Directors of the Company.  The Company is subject to certain covenantspursuant to the issuance of its junior subordinated debentures as described inNote 9 to the Consolidated Financial Statements, that could limit our abilityto pay dividends.  The Company’sparticipation in the Treasury’s CPP will place additional restrictions onfuture dividends, however, the Board of Directors of the Company anticipates itwill continue to pay quarterly dividends in amounts determined based on thefactors discussed above. Capital distributions, including dividends, byinstitutions such as the Bank are subject to restrictions tied to theinstitution’s earnings. See “Supervision and Regulation — “The Bank”  and “The Holding Company” — DividendRestrictions” included under Item 1 of Part I.*

* *

*Thefollowing table compares the cumulative total return on a hypotheticalinvestment of $100 in CoBiz common stock on December 31, 2003 and theclosing prices on December 31, 2004, 2005, 2006, 2007 and 2008, with thehypothetical cumulative total return on the Russell 2000 Index and the NASDAQBank Index for the comparable period.*

* *

 

27

Table of Contents

 

 

**Sale of Unregistered Equity Securities**

 

On December 19, 2008, the Company issued and soldto Treasury 64,450 shares of Series B Preferred Stock and a ten-yearwarrant to purchase 895,968 shares of common stock for a capital contributionof $64,450,000.  The sale was inconjunction with the Treasury’s CPP under the EESA.  Additional information concerning the CPP ispresented under “Business — Supervision and Regulation — The Holding Company”above.  There was no underwriter associatedwith this transaction.  The sale of the Series BPreferred Stock and the warrant in connection with the transaction was exemptfrom registration pursuant, among other things, to Section 4(2) ofthe Securities Act of 1933, as amended. Except for such shares, during 2008 the Company sold no equitysecurities without registration under the Securities Act of 1933, as amended.

 

**Item 6. Selected Financial Data**

 

The following table setsforth selected financial data for the Company for the periods indicated. Duringthe periods reported, the Company has completed two acquisitions of companiesas described in Part I, Item 1.

 

28

----

Table of Contents

 
| **At or for the year ended  December 31,**              | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **(In thousands, except per share data)**                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Statement  of income data:                                   |       |       |       |       |       |       |       |       |       |       |       |
| Interest  income                                             |       | $          | 144,908    |       | $          | 154,510    |       | $          | 136,444    |       | $          | 103,456 |   | $ | 77,267 |   |
| Interest  expense                                            |       | 49,557     |       | 66,611     |       | 57,015     |       | 32,481     |       | 17,387     |       |
| Net  interest income before provision for loan losses        |       | 95,351     |       | 87,899     |       | 79,429     |       | 70,975     |       | 59,880     |       |
| Provision  for loan losses                                   |       | 39,796     |       | 3,936      |       | 1,342      |       | 2,465      |       | 3,015      |       |
| Net  interest income after provision for loan losses         |       | 55,555     |       | 83,963     |       | 78,087     |       | 68,510     |       | 56,865     |       |
| Noninterest  income                                          |       | 35,399     |       | 28,289     |       | 29,965     |       | 25,153     |       | 27,801     |       |
| Noninterest  expense                                         |       | 89,717     |       | 75,515     |       | 71,927     |       | 62,480     |       | 56,809     |       |
| Income  before taxes                                         |       | 1,237      |       | 36,737     |       | 36,125     |       | 31,183     |       | 27,857     |       |
| Provision  (benefit) for income taxes                        |       | (91        | )          | 13,713     |       | 13,299     |       | 11,177     |       | 10,231     |       |
| Net  income                                                  |       | $          | 1,328      |       | $          | 23,024     |       | $          | 22,826     |       | $          | 20,006 |   | $ | 17,626 |   |
|                                                         |       |       |       |       |       |       |       |       |       |       |       |
| Earnings  per common share - basic                           |       | $          | 0.05       |       | $          | 0.98       |       | $          | 1.01       |       | $          | 0.90 |   | $ | 0.81 |   |
| Earnings  per common share - diluted                         |       | $          | 0.05       |       | $          | 0.96       |       | $          | 0.98       |       | $          | 0.87 |   | $ | 0.78 |   |
| Cash  dividends declared per common share                    |       | $          | 0.28       |       | $          | 0.26       |       | $          | 0.22       |       | $          | 0.19 |   | $ | 0.17 |   |
| Dividend  payout ratio                                       |       | 560.00     | %          | 26.53      | %          | 21.78      | %          | 21.05      | %          | 20.95      | %          |
|                                                         |       |       |       |       |       |       |       |       |       |       |       |
| **Balance sheet data:**                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total  assets                                                |       | $          | 2,684,275  |       | $          | 2,391,012  |       | $          | 2,112,423  |       | $          | 1,933,056 |   | $ | 1,699,561 |   |
| Total  investments                                           |       | 500,448    |       | 395,663    |       | 438,894    |       | 466,150    |       | 485,234    |       |
| Loans                                                        |       | 2,031,253  |       | 1,846,326  |       | 1,544,460  |       | 1,332,668  |       | 1,114,307  |       |
| Allowance  for loan losses                                   |       | 42,851     |       | 20,043     |       | 17,871     |       | 16,906     |       | 14,674     |       |
| Deposits                                                     |       | 1,639,031  |       | 1,742,689  |       | 1,476,337  |       | 1,326,952  |       | 1,147,010  |       |
| Junior  subordinated debentures                              |       | 72,166     |       | 72,166     |       | 72,166     |       | 72,166     |       | 71,637     |       |
| Subordinated  notes payable                                  |       | 20,984     |       | —     |       | —     |       | —     |       | —     |       |
| Shareholders’  equity                                   |       | 252,099    |       | 189,270    |       | 162,675    |       | 136,544    |       | 122,085    |       |
|                                                         |       |       |       |       |       |       |       |       |       |       |       |
| **Key ratios:**                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Return  on average total assets                              |       | 0.05       | %          | 1.04       | %          | 1.11       | %          | 1.10       | %          | 1.13       | %          |
| Return  on average shareholders’ equity                 |       | 0.67       | %          | 12.15      | %          | 15.45      | %          | 15.42      | %          | 15.84      | %          |
| Average  equity to average total assets                      |       | 7.80       | %          | 8.54       | %          | 7.19       | %          | 7.16       | %          | 7.16       | %          |
| Net  interest margin                                         |       | 4.08       | %          | 4.28       | %          | 4.20       | %          | 4.27       | %          | 4.18       | %          |
| Efficiency  ratio (1)                                        |       | 65.10      | %          | 64.10      | %          | 64.12      | %          | 64.83      | %          | 65.09      | %          |
| Nonperforming  assets to total assets                        |       | 1.75       | %          | 0.15       | %          | 0.06       | %          | 0.05       | %          | 0.08       | %          |
| Nonperforming  loans to total loans                          |       | 2.02       | %          | 0.18       | %          | 0.09       | %          | 0.07       | %          | 0.12       | %          |
| Allowance  for loan and credit losses to total loans         |       | 2.12       | %          | 1.12       | %          | 1.19       | %          | 1.27       | %          | 1.32       | %          |
| Allowance  for loan and credit losses to nonperforming loans |       | 104.95     | %          | 604.69     | %          | 1392.30    | %          | 1863.95    | %          | 1056.44    | %          |
| Net  charge-offs (recoveries) to average loans               |       | 0.87       | %          | 0.11       | %          | (0.01      | )%         | 0.02       | %          | 0.07       | %          |

----

(1)   Efficiency ratio is computed by dividingnoninterest expense by the sum of net interest income before provision for loanlosses and noninterest income, excluding gains and losses on asset sales andvaluation adjustments.

 

**Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operation**

 

**Executive Summary**

 

The Company is afinancial holding company that offers a broad array of financial serviceproducts to its target market of professionals, small and medium-sizedbusinesses, and high-net-worth individuals. Our operating segments include:commercial banking, investment banking, investment advisory and trust andinsurance.

 

Earnings are derived primarily from our net interestincome, which is interest income less interest expense, and our noninterestincome earned from fee-based business lines and banking service fees, offset bynoninterest expense. As the majority of our assets are interest-earning and ourliabilities are interest-bearing, changes in interest rates impact our netinterest margin, the largest component of our operating revenue (which isdefined as net interest income plus noninterest income). We manage our 

 

29

----

Tableof Contents

 

interest-earning assets and interest-bearingliabilities to reduce the impact of interest rate changes on our operatingresults. We also have focused on reducing our dependency on our net interestmargin by increasing our noninterest income.

 

Our Company has focused on developing an organizationwith personnel, management systems and products that will allow us to competeeffectively and position us for growth. The cost of this process relative toour size has been high. In addition, we have operated with excess capacityduring the start-up phases of various projects due to our commitment totechnology and expansion of our fee-based businesses. As a result, relativelyhigh levels of noninterest expense have adversely affected our earnings overthe past several years. Salaries and employee benefits comprised most of thisoverhead category. However, we believe that our compensation levels haveallowed us to recruit and retain a highly qualified management team capable ofimplementing our business strategies. We believe our compensation policies,which include the granting of stock-based compensation to many employees andthe offering of an employee stock purchase plan, have highly motivated ouremployees and enhanced our ability to maintain customer loyalty and generateearnings. For additional discussion on stock-based compensation, see Notes 1and 14 to the Consolidated Financial Statements.

 

**Industry Overview.**The U.S. commercial banking industry has beensignificantly impacted in 2008 by decreased values in real estate relatedassets, a downturn in the financial markets and a significant tightening in thecredit market.  The weakened U.S. housingmarket has caused the industry to realize significant losses on write-downs ofinvestment securities securitized by real estate and higher credit costs forwrite-downs of loans issued for investment. During 2008, 25 banks failed and went into receivership with the FDICcompared to 10 bank failures in the previous five years.  Through February 2009, 16 banks havealready gone into receivership.  In September 2008,the Federal Housing Finance Authority placed Fannie Mae and Freddie Mac, whocollectively guarantee more than half of the outstanding mortgages in the U.S.,into conservatorship.  The FDIC reportedthat nearly one out of three FDIC-insured institutions reported a net loss in thefourth quarter of 2008 and that the industry as a whole reported its first netloss since 1990.  The Senior Loan OfficerOpinion Survey on Bank Lending Practices conducted by the FRB found that 85% ofdomestic banks responding to the survey had tightened their lending standardson medium-to-large commercial and industrial (C&I) loans during the fourthquarter of 2008 compared to 19% in the fourth quarter of 2007.  The survey also found that 98% of domesticrespondents had increased the spread on loan rates over their cost of funds formedium-to-large loans in the fourth quarter of 2008 compared to 35% in the sameperiod of 2007.  During this period, loanloss provisions at FDIC-insured institutions reached a 20-year high andabsorbed one-third of the industry’s operating revenue, while quarterlyearnings for the industry fell below $30 billion for the first time since 2003.The overall market conditions led the Federal Open Markets Committee (FOMC) toreduce the target federal funds rate by 100 basis points in the last fourmonths of 2007, the first decrease since 2003. The FOMC continued this strategy throughout 2008, when the targetfederal funds rate was decreased an additional 400 basis points until thetarget reached its floor of 0 to 25 basis points in December.  While the Company does not originate orpurchase subprime loans, nearly all financial service organizations have beenimpacted by the current environment.

 

**Company Overview.**From December 31, 1995, the first complete fiscalyear under the current management team, to December 31, 2008, ourorganization has grown from a bank holding company with two bank locations andtotal assets of $160.4 million to a diversified financial services holdingcompany with 21 bank locations, six fee-based businesses and total assets of$2.7 billion. Certain key metrics of our operating segments at December 31,2008 and 2007 are as follows:

 

30

----

Tableof Contents

 
| ** **                                | ** ** | ** **     | ** ** | ** **     | ** ** | **Investment**          | ** ** | ** **    | ** ** | **Corporate**   | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|----------------|------------|----------------|------------|-------------------------|------------|---------------|------------|-----------------|------------|------------------|------------|
| ** **                                | ** ** | **Commercial** | ** ** | **Investment** | ** ** | **Advisory &** | ** ** | ** **    | ** ** | **Support and** | ** ** | ** **       | ** ** |
| ** **                                | ** ** | **Banking**    | ** ** | **Banking**    | ** ** | **Trust**               | ** ** | **Insurance** | ** ** | **Other**       | ** ** | **Consolidated** | ** ** |
| **(In thousands, except per share data)** | ** ** | **2008**       | ** ** |
| Net income  (loss)                        |       | $              | 6,675      |           | $          | (190                    | )          | $             | (288       | )               | $          | 177              |       | $ | (5,046 | ) | $ | 1,328 |   |
| Diluted earnings  (loss) per common share |       | $              | 0.28       |           | $          | (0.01                   | )          | $             | (0.01      | )               | $          | 0.01             |       | $ | (0.22 | ) | $ | 0.05 |   |
| Total assets                              |       | $              | 2,629,082  |           | $          | 6,670                   |       | $             | 9,025      |            | $          | 28,706           |       | $ | 10,792 |   | $ | 2,684,275 |   |
|                                      |       |           |       |           |       |                    |       |          |       |            |       |             |       |
| ** **                                | ** ** | **2007**       | ** ** |
| Net income  (loss)                        |       | $              | 28,689     |           | $          | 322                     |       | $             | (17        | )               | $          | (542             | )          | $ | (5,428 | ) | $ | 23,024 |   |
| Diluted earnings  (loss) per common share |       | $              | 1.20       |           | $          | 0.01                    |       | $             | —     |            | $          | (0.02            | )          | $ | (0.23 | ) | $ | 0.96 |   |
| Total assets                              |       | $              | 2,348,520  |           | $          | 7,636                   |       | $             | 9,661      |            | $          | 19,810           |       | $ | 5,385 |   | $ | 2,391,012 |   |

 

Noted below are some of the significant financialperformance measures and operational results for 2008:

 

·                  Our commercial banking franchise recognized provisionfor loan losses of $39.8 million in 2008, compared to $3.9 million in2007.  Net charge-offs for 2008 totaled$17.0 million, compared to $1.8 million for 2007.  Nonperforming assets also increased to $47.0million at the end of 2008, from $3.5 million at the end of 2007.

 

·                  The increase in provision for loan loss expense wasthe primary driver in the decrease in net income for both the commercialbanking segment and the Company.  Amigration of loans to a more adversely graded credit category in 2008,including charge-off, caused the increase in the provision for loan losses.

 

·                  Investment Banking lost $0.01 per diluted share in 2008, down from a$0.01 contribution in 2007. Investment banking revenues are transactional innature and, as a result, the segment’s earnings can be more volatile. While nota significant source of the Company’s earnings, the segment has been a positivecontributor over the last several years.

 

·                  Investment Advisory and Trust lost $0.01 per diluted share in 2008,down from a neutral contribution in 2007. On December 31, 2007, the Company acquired Wagner, an investmentadvisor providing investment management services for high-net-worth individualsand families, foundations and non-profit organizations.  Top line revenue for the segment waspositively impacted by the acquisition of Wagner in 2008.  Offsetting the increase in revenue from theWagner acquisition was a decrease in revenue due to market attrition of assetsunder management.  With all major marketindices falling in 2008, this negatively impacted the segment since revenue isgenerated based on a percentage of assets under management.

 

·                  Insurance contributed $0.01 per diluted share in 2008, an increase froma $0.02 loss per diluted share in 2007. On January 2, 2008, the Company completed the acquisition of BDA, aprovider of commercial and personal P&C insurance brokerage and riskmanagement consulting services to individuals and businesses in the AZmarket.  The acquisition of BDA at thebeginning of 2008 positively impacted both top line revenue and net income forthe segment.  The wealth transferbusiness is transactional by nature and fluctuates based on the number of lifeinsurance policies closed during a year. During 2008, the segment nearlydoubled the revenue on wealth transfer cases from the amount recognized in2007.  The wealth transfer business wasnegatively impacted in 2007, when a higher-than-normal number of cases wererejected in underwriting due to unforeseen medical issues. To a lesser extent,the segment was also impacted by the overall reduction in insurance premiumsbeing realized throughout the commercial insurance industry.

 

·                  Corporate Support and Other had a decrease in its net loss and loss pershare, primarily due to a decrease in interest rates that reduced our interestexpense on our variable-rate junior subordinated debentures.  This was partially offset by additional interestexpense on the new issuance of subordinated notes payable, discussed below.

 

31

----

Tableof Contents

 

·                  The Company recognized losses of $4.6 million in 2008 on valuationadjustments of other real-estate owned and other-than-temporary impairments oninvestments.

 

·                  In the third and fourth quarter, the Companysuccessfully raised $20.9 million through a privately placed issuance ofsubordinated notes payable.  Thesubordinated notes payable qualify as Tier 2 capital and helped strengthen theCompany’s capital position.

 

·                  Further strengthening the Company’s capital position, on December 19,2008, the Company became the first Colorado based financial institution toreceive a capital investment from the Treasury under the CPP.  The Company received $64.5 million from theissuance of Series B Preferred Stock that pays a cumulative dividend of 5%for the first five years and 9% thereafter.

 

·                  The Company’s total risk-based capital ratio increasedto 14.5% at the end of 2008 from 10.7% at the end of 2007.

 

This discussion should be read in conjunction with theConsolidated Financial Statements and notes thereto included in this Form 10-Kbeginning on page F-1. For a discussion of the segments included in ourprincipal activities and for certain financial information for each segment,see Note 19 to the Consolidated Financial Statements.

 

**Bank.**The commercial bank segment, the cornerstone of ourfranchise, had continued success in 2008 growing the loan portfolio andnoninterest-bearing demand deposits. Loans grew by 10% and noninterest-bearing demand deposits grew by3%.  However, earnings were down 77% as theBank was not immune to the slowdown in the overall economy and reinforced theallowance for loan losses with a significant increase in the provision for loanlosses.

 

**Fee-Based Business Lines.**The company’s fee-based business lines —investment banking, insurance, and investment advisory and trust — operated ata slight loss for 2008 on a combined basis. However, before parent companymanagement fees, central service allocations and amortization, the fee basedcompanies generated positive cash flow. Our ratio of noninterest income to total operating revenues was 27% for2008 compared to 25% in 2007.

 

We believe that throughthe combination of our commercial banking franchise and our fee-basedbusinesses, we are uniquely situated to service our commercial clientsthroughout their business lifecycle. We are able to help our customers grow byproviding banking services from our bank franchise, capital planning from GMB,and employee and executive benefits packages from FDL. We can assist inplanning for the future with wealth transfer and business succession planningfrom FDL. We are able to protect assets with P&C insurance from CoBizInsurance. We can facilitate exit and retirement strategies with merger andacquisition services from GMB, and investment management services with ACMG andWagner. We are also able to preserve our customers’ wealth with trust andfiduciary services from CoBiz Trust, investment management services from ACMGand Wagner, and wealth transfer services from FDL.

 

**Critical Accounting Policies**

 

The Company’s discussion and analysis of itsconsolidated financial condition and results of operations are based upon theCompany’s consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements requires the Companyto make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses. In making those critical accountingestimates, we are required to make assumptions about matters that are highly uncertainat the time of the estimate. Different estimates we could reasonably have used,or changes in the assumptions that could occur, could have a material effect onour consolidated financial condition or consolidated results of operations.

 

32

----

Table ofContents

 

**Allowance for Loan Losses**

 

The allowance for loanlosses is a critical accounting policy that requires subjective estimates inthe preparation of the consolidated financial statements. The allowance forloan losses is evaluated on a regular basis by management and is based uponmanagement’s periodic review of the collectibilty of loans in light ofhistorical experience, the nature and volume of the loan portfolio, adversesituations that may affect the borrower’s ability to repay, estimated value ofany underlying collateral and prevailing economic conditions. This evaluationis inherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available.

 

We maintain a loan reviewprogram independent of the lending function that is designed to reduce andcontrol risk in the lending function. It includes the monitoring of lendingactivities with respect to underwriting and processing new loans, preventinginsider abuse, and timely follow-up and corrective action for loans showingsigns of deterioration in quality. We also have a systematic process toevaluate individual loans and pools of loans within our loan portfolio. Wemaintain a loan grading system whereby each loan is assigned a grade between 1and 8, with 1 representing the highest quality credit, 7 representing anon-accrual loan where collection or liquidation in full is highly questionableand improbable, and 8 representing a loss that has been or will be charged-off.Grades are assigned based upon the degree of risk associated with repayment ofa loan in the normal course of business pursuant to the original terms. Loansabove a certain dollar amount that are adversely graded are reported to theLoan Committee and the Chief Credit Officer along with current financialinformation, a collateral analysis and an action plan. Individual loans thatare deemed to be impaired are evaluated in accordance with Statement ofFinancial Accounting Standards (SFAS) No. 114, *Accountingby Creditors for Impairment of a Loan*.

 

In determining theappropriate level of the allowance for loan losses, we analyze the variouscomponents of the loan portfolio, including all significant credits, on anindividual basis. When analyzing the adequacy, we segment the loan portfoliointo components with similar characteristics, such as risk classification, pastdue status, type of loan, industry or collateral. Possible factors that may impactthe allowance for loan losses include, but are not limited to:

 

·                  Changes inlending policies and procedures, including underwriting standards as well ascollection, charge-off and recovery practices;

·                  Changes innational and local economic and business conditions and developments, includingthe condition of various market segments;

·                  Changes in thenature and volume of the portfolio;

·                  Changes in theexperience, ability, and depth of lending management and staff;

·                  Changes in thetrend of the volume and severity of past-due and classified loans; and trendsin the volume of non-accrual loans, troubled debt restructurings, and otherloan modifications;

·                  The existenceand effect of any concentrations of credit, and changes in the level of suchconcentrations; and

·                  The effect ofexternal factors such as competition and legal and regulatory requirements onthe level of estimated credit losses in the current portfolio.

 

Refer to the Provision andAllowance for Loan and Credit Losses section under Results of Operations belowfor further discussion on management’s methodology.

 

**Recoverability of Goodwill**

 

SFAS No. 142, *Goodwill and Other Intangible Assets*, requires that weevaluate on an annual basis (or whenever events occur which may indicatepossible impairment) whether any portion of our recorded goodwill is impaired.The recoverability of goodwill is a critical accounting policy that requiressubjective estimates in the preparation of the consolidated financialstatements. Goodwill impairment is determined using a two-step process.  In the first step, the fair value of areporting unit is compared to its carrying amount, including goodwill.  If the fair value of the reporting unit exceedsits carrying amount, goodwill of 

 

 

33

----

Table of Contents

 

the reporting unit is notconsidered impaired and it is not necessary to continue to step two of theimpairment process. If the fair value of the reporting unit is less than thecarrying amount, step two is performed, where the implied fair value ofgoodwill is compared to the carrying value of the reporting units’goodwill.  Implied goodwill is computedas a residual value after allocating the fair value of the reporting unit toits assets and liabilities  We estimatethe fair value of our reporting units using market multiples of comparableentities, including recent transactions, or a combination of market multiplesand a discounted cash flow methodology.

 

Determining the fair valueof a reporting unit requires a high degree of subjective management assumption.Discounted cash flow valuation models utilize variables such as revenue growthrates, expense trends, discount rates and terminal values. Based upon anevaluation of key data and market factors, management selects from a range thespecific variables to be incorporated into the valuation model.

 

Weconducted our annual evaluation of our reporting units at December 31,2008.  As discussed in Note 6 to theConsolidated Financial Statements, at December 31, 2008 the estimated fairvalue of all reporting units exceeded their carrying values and goodwillimpairment was not deemed to exist.  Thefair value calculations were also tested for sensitivity to reflect reasonablevariations, including adjusting the discount rate and keeping all othervariables constant and reducing projected revenue growth and projected costsavings. Using this sensitivity approach, there was no impairment identified inany reporting unit.  However, during2008, the financial services industry, including the Company, realized asignificant decrease in market value.  Acontinuation of this trend may indicate that the individual reporting units ofan entity may also be impaired.  If theCompany’s market value continues to decrease and the Company is unable toreconcile the combined fair value of its reporting units to its market value,the Company may need to move to step two of the impairment process.  Step two of the evaluation could result inthe determination that the carrying value of the reporting unit exceeds itsfair value and that goodwill relating to the reporting units has beenimpaired.  In January and February of2009, the Company’s market capitalization decreased approximately 50% from itsvalue at the end of 2008.  Due to thedecrease, it is likely that the Company will need to further evaluate itsgoodwill impairment in the first quarter of 2009.  If we were to conclude that goodwill has beenimpaired, that conclusion could result in a non-cash goodwill impairmentcharge, which would adversely affect our results of operations.

 

**Share-based Payments**

 

OnJanuary 1, 2006, we adopted SFAS No. 123(R), *Share-BasedPayment* (SFAS 123(R)), using the modified prospective method. Underthis method, compensation cost is recognized for (1) all awards grantedafter the required effective date and to awards modified, cancelled orrepurchased after that date and (2) the portion of prior awards for whichthe requisite service has not yet been rendered, based on the grant-date fairvalue of those awards calculated for pro forma disclosures under SFAS No. 123,*Accounting for Stock Based Compensation*(SFAS123). Prior to the adoption of SFAS 123(R), we applied the intrinsic-value methodfor our stock-based compensation plans in accordance with Accounting PrinciplesBoard Opinion No. 25 (APB 25) *Accounting for StockIssued to Employees*, which was allowed by SFAS 123 as an alternativeto the fair value method recommended by SFAS 123.

 

SFAS123(R) requires that the cash retained as a result of the taxdeductibility of employee share-based awards be presented as a component ofcash flows from financing activities in the consolidated statement of cashflows. In prior periods, this amount was reported as a component of cash flowsfrom operating activities.

 

UnderSFAS 123(R), we use the Black-Scholes option valuation model to determine thefair value of our stock options as discussed in Note 14 to the ConsolidatedFinancial Statements. The Black-Scholes fair value model includes variousassumptions, including the expected volatility, expected life and expecteddividend rate of the options. In addition, the Company is required to estimatethe amount of options issued that are expected to be forfeited. Theseassumptions reflect our best estimates, but they involve inherent uncertaintiesbased on market conditions generally outside of our control. As a result, ifother assumptions had been used, stock-based compensation expense, ascalculated and recorded under 

 

34

----

Table ofContents

 

SFAS123(R), could have been materially impacted. Furthermore, if we use differentassumptions in future periods, stock-based compensation expense could bematerially impacted in future periods.

 

**Fair Value**

 

TheCompany has adopted SFAS No. 157, *Fair Value Measurements*(SFAS 157), as it applies to financial assets and liabilities effective January 1,2008.  SFAS 157 defines fair value, establishes a framework formeasuring fair value under generally accepted accounting principles andenhances disclosures about fair value measurements. Fair value is defined underSFAS 157 as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. Pursuant to  SFAS 157, the Companymeasures investments, derivative instruments and impaired loans.

 

As a basis for considering market participantassumptions in fair value measurements, SFAS 157 establishes a fair valuehierarchy that distinguishes between market participant assumptions based onmarket data obtained from sources independent of the reporting entity(observable inputs that are classified within Levels 1 and 2 of the hierarchy)and the reporting entity’s own assumptions about market participant assumptions(unobservable inputs classified within Level 3 of the hierarchy). Fair valuemay be used on a recurring basis for certain assets and liabilities such asavailable for sale securities and derivatives in which fair value is theprimary basis of accounting.  Similarly, fairvalue may be used on a nonrecurring basis to evaluate certain assets orliabilities such as impaired loans. Depending on the nature of the asset or liability, the Company usesvarious valuation techniques and assumptions in accordance with SFAS 157 todetermine the instrument’s fair value. At December 31, 2008, 18.1% or $486.8 million of total assets,consisting of $476.5 million in available for sale securities and $10.3 millionin derivative instruments, represented assets recorded at fair value on arecurring basis.  At December 31,2008, 0.3% or $7.1 million of total liabilities represented derivativeinstruments recorded at fair value on a recurring basis.  Assets recorded at fair value on anonrecurring basis consisting of impaired loans represented 1.3% or $35.7million of total assets.  Certain privatelabel MBS valued using broker-dealer quotes based on proprietary broker models,which are considered by the Company an unobservable input (Level 3), totaled$3.7 million or 0.1% of total assets at December 31, 2008.  The Company recognized no gains or losses inrelation to the private label MBS for the year-ended December 31,2008.  For additional information on thefair value of certain financial assets and liabilities see Note 18 to theConsolidated Financial Statements.

 

We also have other policies that we consider to be significantaccounting policies; however, these policies, which are disclosed in Note 1 ofNotes to Consolidated Financial Statements, do not meet the definition ofcritical accounting policies because they do not generally require us to makeestimates or judgments that are difficult or subjective.

 

**Recent Accounting Pronouncements**

 

*On January 1, 2007, the Company adopted Emerging IssuesTask Force (EITF) 06-5,**Accounting for Purchases of Life Insurance —Determining the Amount That Could be Realized in Accordance with FASB TechnicalBulletin No. 85-4**,**Accounting for Purchases of Life Insurance**(EITF 06-5). EITF 06-5, addresses various issues in determining the amountthat could be realized under an insurance contract. Upon adoption, the Companyrecorded a cumulative effect adjustment of approximately $134,000 that wascharged to retained earnings to reduce the amount that can be realized oninsurance contracts.*

 

*On January 1, 2008, the Company adopted SFAS No. 157,**Fair ValueMeasurements**(SFAS 157). SFAS 157 definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles and expands disclosures about fair valuemeasurements. In October 2008, FASB Staff Position (FSP) FAS 157-3,**Determining the Fair Value of a Financial AssetWhen the Market for That Asset Is Not Active,**wasissued, effective immediately for all prior periods for which financialstatements have not been issued.  This FSP provides clarification on theapplication of FASB 157 and issues to be considered when*

* *

*35*

----

Tableof Contents

* *

*observable valuation inputs do not exist or observableinputs are from an inactive market. See Note 18 for additional discussion onfair value measurements.*

 

*On January 1,2008, the Company adopted SFAS No. 159,*The Fair Value Optionfor Financial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115(SFAS 159). SFAS 159 permits entities to choose to measurecertain financial assets and liabilities at fair value at specified electiondates. For financial instruments elected to be accounted for at fair value, anentity will report the unrealized gains and losses in earnings. The effect ofthe first remeasurement to fair value is to be recognized as acumulative-effect adjustment to the opening balance of retained earnings.  The Company has not elected the fair valueoption for any financial instruments since the adoption on January 1, 2008and there was no impact on the consolidated financial statements relating tothe adoption of SFAS 159.

* *

*On January 1,2008, the Company adopted EITF 06-4,*Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements *(*EITF 06-4). The ratified final consensus on this issuerequires companies to recognize an obligation for the future post-retirement benefitsprovided to employees in the form of death benefits to be paid to theirbeneficiaries through endorsement split-dollar policies carried in Bank-OwnedLife Insurance (BOLI), the effects of which are to be recognized through either(a) a change in accounting principle through a cumulative effectadjustment to retained earnings as of the beginning of the year of adoption, or(b) a change in accounting principle through retrospective application toall prior periods. Upon adoption, the Company recorded a cumulative effectadjustment of approximately $16,000 that was charged to retained earnings whenit established the obligation for future post-retirement benefits relating tothe Company’s applicable endorsement split-dollar life insurance arrangements.

* *

*In December 2007, the FASB issued SFAS No. 160,**Noncontrolling Interests in Consolidated FinancialStatements — An Amendment of ARB No. 51**(SFAS160).**This Statement amends ARB 51to establish accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary. It clarifies thata noncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity and should be reported as equity on the financialstatements. SFAS 160 requires consolidated net income to be reported at amountsthat include the amounts attributable to both the parent and the noncontrollinginterest. Furthermore, disclosure of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest is required onthe face of the financial statements. SFAS 160 is effective as of the beginningof an entity’s first fiscal year that begins after December 15, 2008. TheCompany is evaluating the impact, if any, SFAS 160 will have on its consolidatedfinancial statements.*

 

*In March 2008, the FASB issued SFAS No. 161,**Disclosures about Derivative Instruments andHedging Activities — an amendment of FASB Statement No. 133**(SFAS161). SFAS 161 enhances the required disclosures under SFAS 133 in order toprovide the investing community additional transparency in an entity’sfinancial statements and to more adequately disclose the impact investments inderivative instruments and use of hedging have on financial position, operatingresults and cash flows. SFAS 161 is effective for fiscal years and interimperiods beginning after November 15, 2008, with early applicationallowed.  The Company is currentlyevaluating the impact SFAS 161 will have on its disclosures as the Banksubsidiary utilizes a hedging strategy to manage its exposure to interest ratechanges as well as offering certain derivative products to its customers.*

 

*In June 2008, the FASB issued FSP EITF 03-6-1,**Determining Whether Instruments Granted inShare-Based Payment Transactions Are Participating Securities**.**ThisFSP gives guidance on the computation of earnings per share and the impact ofshare-based instruments that contain certain nonforfeitable rights to dividendsor dividend equivalents.  The FSP iseffective for fiscal years beginning after December 31, 2008 and earlyapplication is prohibited. The Company is evaluating the impact, if any, theFSP will have on its consolidated financial statements.*

 

36

----

Table of Contents

 

**Financial Condition**

 

Thefinancial condition of the Company was impacted in 2008 by the acquisition ofBDA.  The acquisition was accounted foras a purchase and the assets and liabilities and results of operations of theacquired entity are included in the Company’s consolidated balance sheet andconsolidated statement of income and comprehensive income at and for the yearended December 31, 2008.

 

***Lending Activities***

 

**General**. We provide abroad range of commercial and retail lending services, including commercialloans, commercial and residential real estate construction loans, commercialand residential real estate mortgage loans, consumer loans, revolving lines ofcredit, and equipment lease financing. Our primary lending focus is commercialand real estate lending to small and medium-sized businesses with annual salesof $5.0 million to $75.0 million, and businesses and individuals with borrowingrequirements of $250,000 to $10.0 million. At December 31, 2008,substantially all of our outstanding loans were to customers within Coloradoand Arizona. Interest rates charged on loans vary with the degree of risk,maturity, underwriting and servicing costs, principal amount, and extent ofother banking relationships with the customer. Interest rates are further subject to competitive pressures, moneymarket rates, availability of funds, and government regulations. See “NetInterest Income” for an analysis of the interest rates on our loans.

 

**Credit Procedures and Review**. We addresscredit risk through internal credit policies and procedures, includingunderwriting criteria, officer and customer lending limits, a multi-layeredloan approval process for larger loans, periodic document examination, justificationfor any exceptions to credit policies, loan review and concentrationmonitoring. In addition, we provide ongoing loan officer training and review.We have a continuous loan review process designed to promote earlyidentification of credit quality problems, assisted by a dedicated Chief CreditOfficer. All loan officers are charged with the responsibility of reviewing, atleast on a monthly basis, all past due loans in their respective portfolios. Inaddition, each of the loan officers establishes a watch list of loans to bereviewed by the boards****of directorsof the Bank and CoBiz. The loan portfolio is also monitored regularly by a loanreview officer who reports to the Chief Operations Officer of the Company butsubmits reports directly to the audit committee of the board of directors.

 

**Composition of Loan Portfolio***.*The followingtable sets forth the composition of our loan portfolio at the dates indicated.

 
| ** **                       | ** ** | **At  December 31,** | ** ** |
|----------------------------------|------------|---------------------------|------------|
| ** **                       | ** ** | **2008**                  | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **(In  thousands)**              | ** ** | **Amount**                | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Commercial                       |       | $                         | 648,968    |   | 32.6 |   | $ | 576,959 |   | 31.6 |   | $ | 482,309 |   | 31.6 |   | $ | 421,497 |   | 32.0 |   | $ | 386,954 |   | 35.2 |   |
| Real estate —  mortgage     |       | 1,017,444                 |       | 51.2 |   | 874,226 |   | 47.9 |   | 698,951 |   | 45.8 |   | 682,503 |   | 51.9 |   | 527,266 |   | 47.9 |   |
| Real estate —  construction |       | 266,928                   |       | 13.4 |   | 309,568 |   | 17.0 |   | 292,952 |   | 19.2 |   | 150,680 |   | 11.5 |   | 121,138 |   | 11.0 |   |
| Consumer                         |       | 86,701                    |       | 4.4 |   | 71,422 |   | 3.9 |   | 57,990 |   | 3.8 |   | 65,932 |   | 5.0 |   | 65,792 |   | 6.0 |   |
| Other                            |       | 11,212                    |       | 0.6 |   | 14,151 |   | 0.7 |   | 12,258 |   | 0.8 |   | 12,056 |   | 0.9 |   | 13,157 |   | 1.2 |   |
| Total loans                      |       | $                         | 2,031,253  |   | 102.2 |   | $ | 1,846,326 |   | 101.1 |   | $ | 1,544,460 |   | 101.2 |   | $ | 1,332,668 |   | 101.3 |   | $ | 1,114,307 |   | 101.3 |   |
| Less: allowance  for loan losses |       | (42,851                   | )          | (2.2 | ) | (20,043 | ) | (1.1 | ) | (17,871 | ) | (1.2 | ) | (16,906 | ) | (1.3 | ) | (14,674 | ) | (1.3 | ) |
| Net loans                        |       | $                         | 1,988,402  |   | 100.0 |   | $ | 1,826,283 |   | 100.0 |   | $ | 1,526,589 |   | 100.0 |   | $ | 1,315,762 |   | 100.0 |   | $ | 1,099,633 |   | 100.0 |   |

 

Gross loans increased by$184.9 million in 2008.  Growth in theloan portfolio consisted of approximately $128.7 million and $56.2 millionloans generated in our Colorado and Arizona markets, respectively.  The increase in the loan portfolio in 2008was primarily due to growth of our Commercial and Industrial Loans (C&I)and Term Commercial Mortgages.  The increaseof $301.9 million in 2007 was comprised primarily of $286.5 million in real estateand commercial loans.

 

Under federal law, theaggregate amount of loans we can make to one borrower is generally limited to15% of our unimpaired capital, surplus, undivided profits and allowance forloan losses. At December 31, 2008, our individual legal lending limit was$37.7 million. Our Board of Directors has established an internal lending limitof $15.0 million for normal credit extensions and $20.0 million for the highestrated credit types. To accommodate customers whose financing needs exceed ourinternal lending limits and to 

 

37

----

Table of Contents

 

address portfolioconcentration concerns, we sell loan participations to outside participants. AtDecember 31, 2008 and 2007, the outstanding balances of loanparticipations sold by us were $53.7 million and $49.2 million, respectively.At December 31, 2008 and 2007, we had loan participations purchased fromother banks totaling $38.9 million and $31.3 million, respectively. We use thesame analysis in deciding whether or not to purchase a participation in a loanas we would in deciding whether to originate the same loan.

 

Due to the nature of ourbusiness as a commercial banking institution, our lending relationships aretypically larger than those of a retail bank. The following table describes thenumber of relationships and the percentage of the dollar value of the loanportfolio by the size of the credit relationship. The majority of the loanrelationships exceeding $3.0 million are in our real estate and commercialportfolios.  At December 31, 2008,2007, and 2006, there were no concentrations of loans related to any singleindustry in excess of 10% of total loans.

 
| ** **                   | ** ** | **2008**          | ** ** | **2007**           | ** ** | **2006**          | ** ** |
|------------------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|
| ** **                   | ** ** | **Number of**     | ** ** | **% of**           | ** ** | **Number of**     | ** ** | **% of** | ** ** | **Number of** | ** ** | **% of** | ** ** |
| **Credit Relationships**     | ** ** | **Relationships** | ** ** | **Loan Portfolio** | ** ** | **Relationships** | ** ** | **Loan Portfolio** | ** ** | **Relationships** | ** ** | **Loan Portfolio** | ** ** |
| Greater than $6.0 million    |       | 32                |       | 13.7               | %          | 26                |       | 11.3 | % | 14 |   | 7.3 | % |
| $3.0 million to $6.0 million |       | 101               |       | 20.7               | %          | 95                |       | 21.0 | % | 78 |   | 20.3 | % |
| $1.0 million to $3.0 million |       | 385               |       | 33.2               | %          | 377               |       | 34.1 | % | 320 |   | 34.4 | % |
| $0.5 million to $1.0 million |       | 427               |       | 14.8               | %          | 422               |       | 15.8 | % | 378 |   | 17.4 | % |
| Less than $0.5 million       |       | 4,701             |       | 17.6               | %          | 4,889             |       | 17.8 | % | 4,900 |   | 20.5 | % |
|                         | ** ** | **5,646**         | ** ** | **100.0**          | **%**      | **5,809**         | ** ** | **100.0** | **%** | **5,690** | ** ** | **100.0** | **%** |

 

In the ordinary course ofbusiness, we enter into various types of transactions that include commitmentsto extend credit. We apply the same credit standards to these commitments as weapply to our other lending activities and have included these commitments inour lending risk evaluations. Our exposure to credit loss under commitments toextend credit is represented by the amount of these commitments. See Note 15 tothe Consolidated Financial Statements for additional discussion on ourcommitments.

 

**CommercialLoans**. Commercial lending consists of loans to small and medium-sizedbusinesses in a wide variety of industries. The Bank’s areas of emphasis incommercial lending include, but are not limited to, loans to wholesalers,manufacturers, construction and business services companies. We provide a broadrange of commercial loans, including lines of credit for working capitalpurposes and term loans for the acquisition of equipment and other purposes.Commercial loans are generally collateralized by inventory, accountsreceivable, equipment, real estate and other commercial assets, and may besupported by other credit enhancements such as personal guarantees. However,where warranted by the overall financial condition of the borrower, loans maybe unsecured and based on the cash flow of the business. Terms of commercialloans generally range from one to five years, and the majority of such loanshave floating interest rates.

 

Thefollowing table summarizes the Company’s commercial loan portfolio, segregatedby the North American Industry Classification System (NAICS).

 
| ** **                                         | ** ** | **2008**    | ** ** | **2007**             | ** ** | **2006**    | ** ** |
|----------------------------------------------------|------------|-------------|------------|----------------------|------------|-------------|------------|
| ** **                                         | ** ** | ** **  | ** ** | **% of  Commercial** | ** ** | ** **  | ** ** | **% of  Commercial** | ** ** | ** ** | ** ** | **% of  Commercial** | ** ** |
| **Commercial  Loans by NAICS Code (In thousands)** | ** ** | **Balance** | ** ** | **Loan  Portfolio**  | ** ** | **Balance** | ** ** | **Loan  Portfolio** | ** ** | **Balance** | ** ** | **Loan  Portfolio** | ** ** |
| Manufacturing                                      |       | $           | 98,486     |                 | 15.2       | %           | $          | 73,627 |   | 12.8 | % | $ | 43,832 |   | 9.1 | % |
| Real estate                                        |       | 85,917      |       | 13.3                 | %          | 87,849      |       | 15.2 | % | 53,602 |   | 11.1 | % |
| Finance and  Insurance                             |       | 84,028      |       | 13.0                 | %          | 65,537      |       | 11.4 | % | 38,742 |   | 8.0 | % |
| Wholesale trade                                    |       | 73,600      |       | 11.3                 | %          | 64,916      |       | 11.3 | % | 58,601 |   | 12.2 | % |
| Health Care                                        |       | 69,060      |       | 10.6                 | %          | 64,385      |       | 11.2 | % | 56,762 |   | 11.8 | % |
| Construction                                       |       | 60,500      |       | 9.3                  | %          | 50,830      |       | 8.8 | % | 76,101 |   | 15.8 | % |
| Services                                           |       | 33,933      |       | 5.2                  | %          | 34,102      |       | 5.9 | % | 32,813 |   | 6.8 | % |
| All other                                          |       | 143,444     |       | 22.1                 | %          | 135,713     |       | 23.5 | % | 121,856 |   | 25.3 | % |
|                                               |       | $           | 648,968    |                 | 100.0      | %           | $          | 576,959 |   | 100.0 | % | $ | 482,309 |   | 100.0 | % |

 

38

----

Table ofContents

 

**RealEstate Mortgage Loans**. Real estate mortgage loans include varioustypes of loans for which we hold real property as collateral. We generallyrestrict commercial real estate lending activity to owner-occupied propertiesor to investor properties that are owned by customers with which we have acurrent banking relationship. We make commercial real estate loans at bothfixed and floating interest rates, with maturities generally ranging from fiveto 20 years. The Bank’s underwriting standards generally require that a commercialreal estate loan not exceed 75% of the appraised value of the property securingthe loan. In addition, we originate Small Business Administration 504 loans(SBA) on owner-occupied properties with maturities of up to 25 years in whichthe SBA allows for financing of up to 90% of the project cost and takes asecurity position that is subordinated to us, as well as U.S. Department ofAgriculture (USDA) Rural Development loans. At December 31, 2008, lessthan 1% of our outstanding loans were guaranteed by the SBA and approximately1% were guaranteed by the USDA. We also originate residential mortgage loans ona limited basis as an accommodation to our preferred customers.

 

Theprimary risks of real estate mortgage loans include the borrower’s inability topay, material decreases in the value of the real estate that is being held ascollateral and significant increases in interest rates, which may make the realestate mortgage loan unprofitable. We do not actively seek residential mortgageloans for our own portfolio, but rather refer such loans to other financialinstitutions. However, for those residential mortgage loans that are extended,we attempt to apply conservative loan-to-value ratios and obtain personalguarantees and generally require a strong history of debt servicing capabilityand fully amortized terms of 20 years or less.  Real estate loans may be more adversely affected by conditions in thereal estate markets or in the general economy. The properties securing the Company’s real estate mortgage loanportfolio are located primarily in the states of Colorado and Arizona.  At December 31, 2008, the majority (57%)of the Company’s real estate mortgage loans were generated in the Coloradomarket, which continues to outperform the majority of other metropolitan areasnationally.

 

Thefollowing tables summarize the Company’s real estate mortgage portfolio,segregated by property type and the geographical regions in which we operate.

 

39

----

Table of Contents

 
| ** **              | ** ** | **2008**          | ** ** | **2007**             | ** ** | **2006**          | ** ** |
|-------------------------|------------|-------------------|------------|----------------------|------------|-------------------|------------|
| **Real Estate by Type** | ** ** | ** **        | ** ** | **% of Real Estate** | ** ** | ** **        | ** ** | **% of Real Estate** | ** ** | ** ** | ** ** | **% of Real Estate** | ** ** |
| **(In thousands)**      | ** ** | **Balance**       | ** ** | **Loan Portfolio**   | ** ** | **Balance**       | ** ** | **Loan Portfolio** | ** ** | **Balance** | ** ** | **Loan Portfolio** | ** ** |
| Commercial owner        |       | $                 | 439,489    |                 | 43.2       | %                 | $          | 383,126 |   | 43.8 | % | $ | 284,695 |   | 40.7 | % |
| Commercial  investor    |       | 286,977           |       | 28.2                 | %          | 230,111           |       | 26.3 | % | 206,467 |   | 29.5 | % |
| Residential  owner      |       | 43,224            |       | 4.2                  | %          | 35,453            |       | 4.1 | % | 31,943 |   | 4.6 | % |
| Residential  investor   |       | 100,572           |       | 9.9                  | %          | 79,386            |       | 9.1 | % | 46,700 |   | 6.7 | % |
| Land acquisition        |       | 147,182           |       | 14.5                 | %          | 146,150           |       | 16.7 | % | 129,146 |   | 18.5 | % |
|                    |       | $                 | 1,017,444  |                 | 100.0      | %                 | $          | 874,226 |   | 100.0 | % | $ | 698,951 |   | 100.0 | % |
|                    |       |              |       |                 |       |              |       |   |   |   |   |   |   |
|                    |       |              |       |                 |       |              |       |   |   |   |   |   |   |
| ** **              | ** ** | **2008**          | ** ** | **2007**             | ** ** | **2006**          | ** ** |
| ** **              | ** ** | **Number of**     | ** ** | **% of Real Estate** | ** ** | **Number of**     | ** ** | **% of Real Estate** | ** ** | **Number of** | ** ** | **% of Real Estate** | ** ** |
| **Geographic Area**     | ** ** | **Relationships** | ** ** | **Loan Portfolio**   | ** ** | **Relationships** | ** ** | **Loan Portfolio** | ** ** | **Relationships** | ** ** | **Loan Portfolio** | ** ** |
| *COLORADO*              | * *   | * *          | * *   | * *             | * *   | * *          | * *   | * * | * * | * * | * * | * * | * * |
| Denver                  |       | 150               |       | 8.8                  | %          | 142               |       | 9.9 | % | 136 |   | 10.1 | % |
| Boulder                 |       | 152               |       | 10.9                 | %          | 140               |       | 11.2 | % | 146 |   | 10.8 | % |
| Eagle                   |       | 102               |       | 5.4                  | %          | 105               |       | 4.2 | % | 102 |   | 5.0 | % |
| Arapahoe                |       | 139               |       | 8.2                  | %          | 133               |       | 8.0 | % | 128 |   | 7.3 | % |
| Jefferson               |       | 113               |       | 5.3                  | %          | 115               |       | 5.2 | % | 113 |   | 6.0 | % |
| Adams                   |       | 80                |       | 5.7                  | %          | 74                |       | 5.8 | % | 79 |   | 5.8 | % |
| Douglas                 |       | 46                |       | 3.6                  | %          | 42                |       | 2.6 | % | 42 |   | 2.7 | % |
| Larimer                 |       | 20                |       | 1.0                  | %          | 23                |       | 1.2 | % | 22 |   | 1.4 | % |
| Weld                    |       | 31                |       | 1.8                  | %          | 23                |       | 1.5 | % | 19 |   | 1.8 | % |
| All others              |       | 68                |       | 6.1                  | %          | 86                |       | 7.4 | % | 81 |   | 6.0 | % |
| Subtotal  Colorado      |       | 901               |       | 56.8                 | %          | 883               |       | 56.8 | % | 868 |   | 56.9 | % |
| *ARIZONA*               | * *   | * *          | * *   | * *             | * *   | * *          | * *   | * * | * * | * * | * * | * * | * * |
| Maricopa                |       | 427               |       | 36.9                 | %          | 431               |       | 38.4 | % | 409 |   | 35.6 | % |
| Pinal                   |       | 17                |       | 1.7                  | %          | 14                |       | 1.4 | % | 15 |   | 1.6 | % |
| Navajo                  |       | 8                 |       | 1.2                  | %          | 9                 |       | 0.5 | % | 9 |   | 0.6 | % |
| Coconino                |       | 6                 |       | 0.6                  | %          | 7                 |       | 0.6 | % | 38 |   | 1.6 | % |
| All others              |       | 40                |       | 2.8                  | %          | 35                |       | 2.3 | % | 36 |   | 3.7 | % |
| Subtotal Arizona        |       | 498               |       | 43.2                 | %          | 496               |       | 43.2 | % | 507 |   | 43.1 | % |
| Total                   |       | 1,399             |       | 100.0                | %          | 1,379             |       | 100.0 | % | 1,375 |   | 100.0 | % |

 

**RealEstate Construction Loans***.*Weoriginate loans to finance construction projects involving one- to four-familyresidences. We provide financing to residential developers that we believe havedemonstrated a favorable record of accurately projecting completion dates andbudgeting expenses. We provide loans for the construction of both pre-soldprojects and projects built prior to the location of a specific buyer, althoughloans for projects built prior to the identification of a specific buyer areprovided on a more selective basis. Residential construction loans are due uponthe sale of the completed project and are generally collateralized by firstliens on the real estate and have floating interest rates. In addition, theseloans are generally secured by personal guarantees to provide an additionalsource of repayment. We generally require a permanent financing commitment orprequalification be in place before we make a residential construction loan.Moreover, we generally monitor construction draws monthly and inspect propertyto ensure that construction is progressing as projected. Our underwritingstandards generally require that the principal amount of a speculative loan beno more than 75% of the appraised value of the completed construction projector 80% of pre-sold projects. Values are determined primarily by approvedindependent appraisers.  With the declinein the real estate market in 2008, the Company has become more selective in theextension of credit for new construction projects.  The Company has intentionally managed theconstruction portfolio down 14% in 2008 when compared to 2007.

 

40

----

Tableof Contents

 

We also originate loansto finance the construction of multi-family, office, industrial, retail and taxcredit projects. These projects are predominantly owned by the user of theproperty, or are sponsored by financially strong developers who maintain anongoing banking relationship with us. Our underwriting standards generallyrequire that the principal amount of these loans be no more than 75% of theappraised value. Values are determined primarily by approved independentappraisers.

 

We selectively provideloans for the acquisition and development of land for residential buildingprojects by financially strong developers who maintain an ongoing bankingrelationship with us. For this category of loans, our underwriting standardsgenerally require that the principal amount of these loans be no more than 65%of the appraised value. Values are determined primarily by approved independentappraisers.  Real estate loans may bemore adversely affected by conditions in the real estate markets or in thegeneral economy.  The properties securingthe Company’s real estate loan portfolio are located in the states of Coloradoand Arizona.  At December 31, 2008,the majority (62%) of the Company’s real estate construction loans weregenerated in the Colorado market, which continues to outperform the majority ofother metropolitan areas nationally.

 

The table belowsummarizes the Company’s Construction loan portfolio by loan type:

 
| **(In thousands)**       | ** ** | **2008** | ** **    | **% of Total** | ** ** | **2007** | ** ** | **% of Total** | ** ** | **2006** | ** ** | **% of Total** | ** **    |
|--------------------------|------------|----------|---------------|----------------|------------|----------|------------|----------------|------------|----------|------------|----------------|---------------|
| Commercial  speculative  |       | $        |  41,789  |           | 15.7       | %        | $          |  29,518   |       | 9.5      | %          | $              |  25,298  |   | 8.6 | % |
| Commercial  pre-leased   |       | 62,960   |          | 23.6           | %          | 58,419   |       | 18.9           | %          | 38,815   |       | 13.3           | %             |
| Residential  speculative |       | 73,947   |          | 27.7           | %          | 87,104   |       | 28.2           | %          | 80,086   |       | 27.4           | %             |
| Residential  pre-sold    |       | 13,468   |          | 5.0            | %          | 44,040   |       | 14.2           | %          | 59,302   |       | 20.2           | %             |
| Land development         |       | 74,764   |          | 28.0           | %          | 90,487   |       | 29.2           | %          | 89,451   |       | 30.5           | %             |
|                     |       | $        |  266,928 |           | 100.0      | %        | $          |  309,568  |       | 100.0    | %          | $              |  292,952 |   | 100.0 | % |

 

**ConsumerLoans***.*We provide a broad range of consumerloans to customers, including personal lines of credit, home equity loans andautomobile loans. In order to improve customer service, continuity and customerretention, the same loan officer often services the banking relationships ofboth the business and business owners or management.

 

***Nonperforming Assets***

 

Our nonperforming assetsconsist of nonaccrual loans, restructured loans, past due loans more than 90days and OREO . Nonaccrual loans are those loans for which the accrual ofinterest has been discontinued. Impaired loans are defined as loans for which,based on current information and events, it is probable that the Company willbe unable to collect the scheduled payments of principal or interest when dueaccording to the contractual terms of the loan agreement (all of which were ona non-accrual basis). The following table sets forth information with respectto these assets at the dates indicated.

 

41

----

Tableof Contents

 
| ** **                                                            | ** ** | **At December 31,** | ** **   |
|-----------------------------------------------------------------------|------------|--------------------------|--------------|
| **(In thousands)**                                                    | ** ** | **2008**                 | ** **   | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Nonperforming  loans:                                                 |       |                     |         |   |   |   |   |   |   |   |   |
| Loans 90 days or  more delinquent and still accruing interest         |       | $                        |  1,292  |   | $ |  2,208 |   | $ |  990 |   | $ |  — |   | $ |  76 |   |
| Nonaccrual loans                                                      |       |                     |         |   |   |   |   |   |   |   |   |
| Commercial                                                            |       | 9,312                    |         | 758 |   | 147 |   | 786 |   | 710 |   |
| Real estate -  construction                                           |       | 15,557                   |         | 360 |   | 85 |   | — |   | — |   |
| Real estate -  mortgage                                               |       | 13,616                   |         | 84 |   | 103 |   | 121 |   | 426 |   |
| Consumer                                                              |       | 1,301                    |         | — |   | — |   | — |   | 177 |   |
| Total Nonaccrual  loans                                               |       | 39,786                   |         | 1,202 |   | 335 |   | 907 |   | 1,313 |   |
| Total  nonperforming loans                                            |       | 41,078                   |         | 3,410 |   | 1,325 |   | 907 |   | 1,389 |   |
| OREO and  Repossessed Assets                                          |       | 5,941                    |         | 90 |   | — |   | — |   | 38 |   |
| Total  nonperforming assets                                           |       | $                        |  47,019 |   | $ |  3,500 |   | $ |  1,325 |   | $ |  907 |   | $ |  1,427 |   |
| Allowance for  loan losses                                            |       | $                        |  42,851 |   | $ |  20,043 |   | $ |  17,871 |   | $ |  16,906 |   | $ |  14,674 |   |
| Allowance for  credit losses                                          |       | 259                      |         | 576 |   | 576 |   | — |   | — |   |
| Allowance for  loan and credit losses                                 |       | $                        |  43,110 |   | $ |  20,619 |   | $ |  18,447 |   | $ |  16,906 |   | $ |  14,674 |   |
| Ratio of  nonperforming assets to total assets                        |       | 1.75                     | %            | 0.15 | % | 0.06 | % | 0.05 | % | 0.08 | % |
| Ratio of  nonperforming loans to total loans                          |       | 2.02                     | %            | 0.18 | % | 0.09 | % | 0.07 | % | 0.12 | % |
| Ratio of  nonperforming Loans and OREO to Total Loans and OREO        |       | 2.31                     | %            | 0.19 | % | 0.09 | % | 0.07 | % | 0.13 | % |
| Ratio of  allowance for loan and credit losses to total loans         |       | 2.12                     | %            | 1.12 | % | 1.19 | % | 1.27 | % | 1.32 | % |
| Ratio of  allowance for loan and credit losses to nonperforming loans |       | 104.95                   | %            | 604.69 | % | 1392.30 | % | 1863.95 | % | 1056.44 | % |
| Ratio of net  charge-offs (recoveries) to average loans               |       | 0.87                     | %            | 0.11 | % | (0.01 | )% | 0.02 | % | 0.07 | % |

 

Accrual of interest is discontinued on a loan whenmanagement believes, after considering economic and business conditions andcollection efforts, the borrower’s financial condition is such that thecollection of interest is doubtful. A delinquent loan is generally placed onnonaccrual status when it becomes 90 days past due. When a loan is placed onnonaccrual status, all accrued and unpaid interest on the loan is reversed anddeducted from earnings as a reduction of reported interest income. Noadditional interest is accrued on the loan balance until the collection of bothprincipal and interest becomes reasonably certain. When the issues relating toa nonaccrual loan are finally resolved, there may ultimately be an actualwrite-down or charge-off of the principal balance of the loan, which maynecessitate additional charges to earnings. Restructured loans are those forwhich concessions, including the reduction of interest rates below a rateotherwise available to the borrower, or the reduction of interest or principal,have been granted due to the borrower’s weakened financial condition. Intereston restructured loans is accrued at the restructured rates when it isanticipated that no loss of original principal will occur. Interest income thatwould have been recorded had nonaccrual loans performed in accordance with theiroriginal contract terms during 2008 was $1.0 million.  Interest income that would have been recordedhad nonaccrual loans performed in accordance with their original contract termsand interest income recognized on nonaccrual loans during 2007 and 2006 was notmaterial.  OREO represents real propertytaken by the Bank either through foreclosure or through a deed in lieu thereoffrom the borrower. Repossessed assets include vehicles and other commercialassets acquired under agreements with delinquent borrowers.  Repossessed assets and OREO are carried atthe lesser of cost or fair market value, less selling costs.

 

Nonperforming assets increased by $43.5 million in2008.  Total nonperforming assetsincreased by $21.0 million in Colorado and $22.5 million in Arizona.  Included in nonperforming assets at December 31,2008 was $5.9 million in OREO.  OREO wascomprised of seven properties of which six were located in Arizona and one inColorado.  In addition to thenonperforming assets described above, at December 31, 2008, we had 80 loanrelationships considered by management to be potential problem loans, withoutstanding principal totaling approximately $85.4 million. A potential problemloan is one as to which management has concerns about the borrower’s futureperformance under the terms of the loan contract. For our protection,management monitors these loans closely. These loans are current as to theprincipal and interest and, accordingly, are not included in the nonperformingasset categories. However, further deterioration may result in the loan beingclassified as nonperforming. The level of potential problem loans is factoredinto the determination of the adequacy of the allowance for loan losses.

 

42

----

Tableof Contents

 

**Analysis of Allowance for Loan Losses**. The allowance for loan lossesrepresents management’s recognition of the risks of extending credit and itsevaluation of the quality of the loan portfolio. The allowance is maintained toprovide for probable credit losses related to specifically identified loans andfor losses inherent in the loan portfolio that have been incurred at thebalance sheet date. The allowance is based on various factors affecting theloan portfolio, including a review of problem loans, business conditions,historical loss experience, evaluation of the quality of the underlyingcollateral, and holding and disposal costs. The allowance is increased by additionalcharges to operating income and reduced by loans charged off, net ofrecoveries.

 

*The allowance for credit losses represents management’srecognition of a separate reserve for off-balance sheet loan commitments andletters of credit. While the allowance for loan losses is recorded as acontra-asset to the loan portfolio on the consolidated balance sheets, theallowance for credit losses is recorded in Accrued Interest and OtherLiabilities in the accompanying consolidated balance sheets. Although theallowances are presented separately on the consolidated balance sheets, anylosses incurred from credit losses would be reported as a charge-off in theallowance for loan losses, since any loss would be recorded after theoff-balance sheet commitment had been funded. Due to the relationship of theseallowances, as extensions of credit underwritten through a comprehensive riskanalysis, information on both the allowance for loan and credit lossespositions is presented in the following table.*

 

43

----

Tableof Contents

 
| ** **                                                        | ** ** | **For the year ended December 31,** | ** **      |
|-------------------------------------------------------------------|------------|------------------------------------------|-----------------|
| **(In thousands)**                                                | ** ** | **2008**                                 | ** **      | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance of  allowance for loan losses at beginning of period      |       | $                                        |  20,043    |   | $ |  17,871 |   | $ |  16,906 |   | $ |  14,674 |   | $ |  12,403 |   |
| Charge-offs:                                                      |       |                                     |            |   |   |   |   |   |   |   |   |
| Commercial                                                        |       | 2,194                                    |            | 1,803 |   | 278 |   | 363 |   | 414 |   |
| Real estate —  mortgage                                      |       | 427                                      |            | — |   | — |   | 246 |   | 410 |   |
| Real estate —  construction                                  |       | 14,122                                   |            | — |   | — |   | — |   | — |   |
| Consumer                                                          |       | 364                                      |            | 30 |   | 34 |   | 99 |   | 88 |   |
| Other                                                             |       | 37                                       |            | 5 |   | 8 |   | — |   | 55 |   |
| Total  charge-offs                                                |       | 17,144                                   |            | 1,838 |   | 320 |   | 708 |   | 967 |   |
| Recoveries:                                                       |       |                                     |            |   |   |   |   |   |   |   |   |
| Commercial                                                        |       | 42                                       |            | 56 |   | 487 |   | 104 |   | 83 |   |
| Real estate —  mortgage                                      |       | 7                                        |            | — |   | 25 |   | 277 |   | 15 |   |
| Consumer                                                          |       | 103                                      |            | 18 |   | 7 |   | 90 |   | 34 |   |
| Other                                                             |       | 4                                        |            | — |   | — |   | 4 |   | 91 |   |
| Total recoveries                                                  |       | 156                                      |            | 74 |   | 519 |   | 475 |   | 223 |   |
| Net  (charge-offs) recoveries                                     |       | (16,988                                  | )               | (1,764 | ) | 199 |   | (233 | ) | (744 | ) |
| Provision for  loan losses charged to operations                  |       | 39,796                                   |            | 3,936 |   | 766 |   | 2,465 |   | 3,015 |   |
| Balance of  allowance for loan losses at end of period            |       | $                                        |  42,851    |   | $ |  20,043 |   | $ |  17,871 |   | $ |  16,906 |   | $ |  14,674 |   |
|                                                              |       |                                     |            |   |   |   |   |   |   |   |   |
| Balance of  allowance for credit losses at beginning of period    |       | $                                        |  576       |   | $ |  576 |   | $ |  — |   | $ |  — |   | $ |  — |   |
| Provision  (credit) for credit losses charged to operations       |       | (317                                     | )               | — |   | 576 |   | — |   | — |   |
| Balance of  allowance for credit losses at end of period          |       | $                                        |  259       |   | $ |  576 |   | $ |  576 |   | $ |  — |   | $ |  — |   |
|                                                              |       |                                     |            |   |   |   |   |   |   |   |   |
| Total provision  for loan and credit losses charged to operations |       | $                                        |  39,479    |   | $ |  3,936 |   | $ |  1,342 |   | $ |  2,465 |   | $ |  3,015 |   |
|                                                              |       |                                     |            |   |   |   |   |   |   |   |   |
| Ratio of net  charge-offs (recoveries) to average loans           |       | 0.87                                     | %               | 0.11 | % | (0.01 | )% | 0.02 | % | 0.07 | % |
|                                                              |       |                                     |            |   |   |   |   |   |   |   |   |
| Average loans  outstanding during the period                      |       | $                                        |  1,944,728 |   | $ |  1,665,379 |   | $ |  1,446,964 |   | $ |  1,209,377 |   | $ |  1,029,538 |   |

* *

Additions to the allowances for loan and creditlosses, which are charged as expenses on our consolidated statements of incomeand comprehensive income, are made periodically to maintain the allowances atthe appropriate level, based on our analysis of the potential risk in the loanand commitment portfolios. Loans charged off, net of amounts recovered fromsuch loans, reduce the allowance for loan losses. The amount of the allowanceis a function of the levels of loans outstanding, the level of nonperformingloans, historical loan loss experience, the amount of loan losses actuallycharged against the reserve during a given period and current economicconditions. Federal regulatory agencies, as part of their examination process,review our loans and allowance for loan and credit losses. We believe that ourallowance for loan and credit losses is adequate to cover anticipated loan andcredit losses. However, management may determine a need to increase theallowances for loan and credit losses, or regulators, when reviewing the Bank’sloan and commitment portfolio in the future, may request the Bank increase suchallowances. Either of these events could adversely affect our earnings.Further, there can be no assurance that our actual loan and credit losses willnot exceed the allowances for loan and credit losses.

 

44

----

Table of Contents

 

Theallowance for loan losses consists of three elements: (i) specificreserves determined in accordance with SFAS No. 114, *Accounting by Creditors for Impairment of a Loan*(SFAS 114),based on probable losses on specific loans; (ii) general reservesdetermined in accordance with SFAS No. 5, *Accountingfor Contingencies,* based on historical loan loss experience adjustedfor other qualitative risk factors both internal and external to the Company;and (iii) unallocated reserves.

 

***Specific Reserves***. The Company continuously evaluatesits reserve for loan losses to maintain an adequate level to absorb loan lossesinherent in the loan portfolio. Reserves on loans identified as impaired arebased on discounted expected cash flows using the loan’s initial effectiveinterest rate, the observable market value of the loan or the fair value of thecollateral for certain collateral-dependent loans. The fair value of thecollateral is determined in accordance with SFAS 157. Loans are considered to be impairedin accordance with the provisions of SFAS 114, when it is probable that allamounts due in accordance with the contractual terms will not be collected.Factors contributing to the determination of specific reserves include thefinancial condition of the borrower, changes in the value of pledged collateraland general economic conditions.

 

***GeneralReserves***.General reserves are considered part of the allocated portion of the allowance.We use a comprehensive loan grading process for our loan portfolios. Based onthis process, we assign a loss factor to each pool of graded loans. We use acombination of our long-term average loss experience and external loss data indetermining the appropriate loss factor. This estimate represents the potentialunconfirmed losses within the portfolio. The historical estimation for eachloan pool is then adjusted to account for factors, which may cause futurelosses to deviate from historical levels.

 

Factors consideredby management that are likely to cause estimated credit losses associated withour current portfolio to differ from historical loss experience include:

 

·                  Changes in national and local economicand business conditions and developments;

·                  Changes in lending policies andprocedures, including underwriting standards and collection, charge-off, andrecovery practices;

·                  Changes in the nature and volume of theportfolio;

·                  Changes in the experience, ability, anddepth of lending management and staff;

·                  Changes in thetrend of the volume and severity of past due loans; and trends in the volume ofnon-accrual loans, troubled debt restructurings, and other loan modifications;

·                  Changes in thequality of the Bank’s loan review system and the degree of oversight by theBank’s Board of Directors;

·                  The existence and effect of anyconcentrations of credit, and changes in the level of such concentrations;

·                  The impact of competition on loanstructuring and pricing; and

·                  The effect of external factors, such aslegal and regulatory requirements, on the level of estimated credit losses inthe Bank’s current portfolio.

 

The Company has aninternal loan review department that is independent of the lending function tochallenge and corroborate the loan grading system, and provide additionalanalysis in determining the adequacy of the allowance for loan losses.

 

Inaddition to the allocated reserve for graded loans, a portion of the allowanceis determined by segmenting the portfolio into product groupings with similarrisk characteristics. This supplemental portion of the allowance includes ourjudgmental consideration of any additional amounts necessary for subjectivefactors such as economic uncertainties and excess concentration risks.Concentration risk limits have been established for, among other things,certain industry concentrations, large balance and highly leveraged creditrelationships that exceed specified risk grades, and loans originated withpolicy exceptions. Management evaluates the degree of risk that each one ofthese components has on the quality of the loan portfolio on a quarterly basis.While management utilizes its best judgment and information available, theultimate adequacy of the allowance is dependent upon a variety of factors 

 

45

----

Tableof Contents

 

beyondthe Company’s control, including the performance of our loan portfolio, theeconomy, changes in interest rates and the view of the regulatory authoritiestoward loan classifications.

 

***Unallocated Reserves***. The unallocated reserve, which is judgmentallydetermined, is maintained to recognize the imprecision in estimating andmeasuring loss when evaluating reserves for individual loans or pools of loans.

 

Themethodology used in the periodic review of reserve adequacy, which is performedat least quarterly, is designed to be dynamic and responsive to changes inactual and expected credit losses. These changes are reflected in both thegeneral and unallocated reserves. The historical loss ratios and estimated riskfactors related to segmenting our loan portfolio, which are key considerationsin this analysis, are updated quarterly and are weighted more heavily forrecent economic conditions. The review of reserve adequacy is performed byexecutive management and presented to the Audit Committee quarterly for itsreview and consideration.

 

Thetable below provides an allocation of the year-end allowance for loan andcredit losses by loan and commitment type; however, allocation of a portion ofthe allowance to one category of loans does not preclude its availability toabsorb losses in other categories:

 
| ** **                       | ** **         | **At December 31,**      | ** ** |
|----------------------------------|--------------------|-------------------------------|------------|
| ** **                       | ** **         | **2008**                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **(In thousands)**          | ** **         | **Amount of  allowance** | ** ** | **Loans in  category as a  % of total  gross loans** | ** ** | **Amount of  allowance** | ** ** | **Loans in  category as a  % of total  gross loans** | ** ** | **Amount of  allowance** | ** ** | **Loans in  category as a  % of total  gross loans** | ** ** | **Amount of  allowance** | ** ** | **Loans in  category as a  % of total  gross loans** | ** ** | **Amount of  allowance** | ** ** | **Loans in  category as a  % of total  gross loans** | ** ** |
| Commercial                       |     | $                             | 13,190     |     | 31.9 | %  | $ | 8,015 |     | 31.2 | %  | $ | 7,162 |     | 31.2 | %  | $ | 8,517 |     | 31.6 | %  | $ | 4,725 |     | 34.7 | % |
| Real estate —  mortgage     |               | 16,899                        |       | 50.1 | % | 5,888 |   | 47.3 | % | 4,656 |   | 45.3 | % | 4,382 |   | 51.2 | % | 3,987 |   | 47.3 | % |
| Real estate —  construction |               | 10,122                        |       | 13.1 | % | 4,826 |   | 16.8 | % | 3,819 |   | 19.0 | % | 1,802 |   | 11.3 | % | 758 |   | 10.9 | % |
| Consumer                         |               | 1,404                         |       | 4.3 | % | 710 |   | 3.9 | % | 652 |   | 3.7 | % | 801 |   | 5.0 | % | 599 |   | 5.9 | % |
| Other                            |               | —                        |       | 0.6 | % | — |   | 0.8 | % | 35 |   | 0.8 | % | 44 |   | 0.9 | % | 76 |   | 1.2 | % |
| Unallocated                      |               | 1,236                         |       | 0.0 | % | 604 |   | — |   | 1,547 |   | — |   | 1,360 |   | — |   | 4,529 |   | — |   |
| Off-balance sheet  commitments   |               | 259                           |       | 0.0 | % | 576 |   | — |   | 576 |   | — |   | — |   | — |   | — |   | — |   |
| Total                            |               | $                             | 43,110     |   | 100.0 | % | $ | 20,619 |   | 100.0 | % | $ | 18,447 |   | 100.0 | % | $ | 16,906 |   | 100.0 | % | $ | 14,674 |   | 100.0 | % |

 

We believe that any allocation of the allowance intocategories creates an appearance of precision that does not exist. Theallocation table should not be interpreted as an indication of the specificamounts, by loan classification, to be charged to the allowance. We believethat the table is a useful device for assessing the adequacy of the allowanceas a whole. The allowance is utilized as a single unallocated allowanceavailable for all loans.

 

In 2005, the Companyadopted a more refined segmentation system that resulted in a majority of theprior unallocated reserve being reallocated into the allowance for commercialloans. Part of the refinement in our segmentation involved assigningincreased reserve factors to higher-risk lending activities, such as leverage-financings,certain loans lacking personal guarantees, land acquisition and developmentloans, or speculative real-estate loans.

 

Overall during 2008, economic conditions continued todeteriorate.  While the Colorado economyoutperformed the majority of other metropolitan areas nationally over the lastyear, it began to show increasing signs of weakness during the fourth quarterof 2008.  These broader economic trendsimpacted the Company’s Colorado loan portfolio, which saw an increase inadversely graded credits in 2008.  TheArizona market continued to work through the issues related to a severelydepressed residential housing market during 2008. The provision for loan andcredit losses increased by $35.5 million and $2.6 million to $39.5 million and$3.9 million for the year ended December 31, 2008 and December 31,2007, respectively.  As a result, theCompany provided $22.5 million and $2.2 million more in provision for loan andcredit losses than it charged-off during 2008 and 2007, respectively.  The Company’s allowance for loan and creditlosses to total loans increased to 2.12% and 1.12% at December 31, 2008and December 31, 2007, respectively. The allowance for loan and credit losses to nonperforming loansdecreased from 604.69% at December 31, 2007, to 104.95% at December 31,2008.  We believe that our allowance forloan and credit losses is adequate to cover anticipated loan and creditlosses.  However, due to changes in thefactors considered by management in evaluating the adequacy of the allowancefor loan and credit losses, management may determine a need to increase the 

 

46

----

Tableof Contents

 

allowance for loan and credit losses.  Such determination could have an adverseeffect in the level of future loan and credit loss provisions and the Company’searnings.

 

***Investments***

 

Our investment portfolio is comprised primarily ofsecurities rated “AAA” or better by various nationally recognized ratingagencies, with the majority of the portfolio either maturing or repricingwithin a one-to five-year period. Our practice is to purchase primarily U.S.Treasury and U.S. government agency-backed securities. Our investment strategiesare reviewed in bi-monthly meetings of the Asset-Liability ManagementCommittee.

 

Our mortgage-backed securities are typicallyclassified as available for sale. Our goals with respect to our securitiesportfolio are to:

 

·      Maximize safety and soundness;

·      Provide adequate liquidity;

·      Maximize rate of return within the constraints ofapplicable liquidity requirements; and

·      Complement asset/liability management strategies.

 

The following table sets forth the book value of thesecurities in our investment portfolio by type at the dates indicated.  See Note 3 to the Consolidated FinancialStatements for additional information.

 
| ** **                                        | ** ** | **At December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|
| **(In thousands)**                                | ** ** | **2008**                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Mortgage-backed  securities                       |       | $                        | 438,188    |   | $ | 326,191 |   | $ | 321,415 |   |
| U.S. Government  agencies                         |       | —                   |       | 36,509 |   | 74,365 |   |
| Trust preferred  securities                       |       | 22,750                   |       | 12,885 |   | 22,564 |   |
| Corporate debt  securities                        |       | 13,429                   |       | — |   | — |   |
| Obligations of  states and political subdivisions |       | 2,515                    |       | 3,450 |   | 4,951 |   |
| Other  investments                                |       | 23,566                   |       | 16,628 |   | 15,599 |   |
| Total                                             |       | $                        | 500,448    |   | $ | 395,663 |   | $ | 438,894 |   |

 

During 2008, the Company purchased $210.9 million ofsecurities.  The purchases includedmortgage-backed securities, trust preferred securities and corporate bondsecurities.  The increase from securitypurchases was offset by $109.1 million in maturities and principal pay downs;there were no sales of available-for-sale securities in 2008.  In 2007, the Company identified andsubsequently sold approximately $1.1 million in securities that were not inline with the current asset/liability model.

 

During 2008, the net unrealized loss onavailable-for-sale securities increased by $1.6 million.  The increase in our unrealized loss resultedfrom market changes in interest rates and overall market illiquidity. During2007, net unrealized loss on the available-for-sale securities decreased by$1.3 million.  Partially contributing tothe decrease was $0.5 million related to the realization of losses onsecurities sold and called during 2007. At December 31, 2008, the Company’s securities in a temporaryunrealized loss position consisted primarily of mortgage-backed and trustpreferred securities.  Themortgage-backed securities consist primarily of securities issued bygovernment-sponsored entities. The fair value of these securities is expectedto recover as the securities approach their stated maturity or repricingdate.  The trust preferred securities areall single-entity issues that have been impacted by the overall decrease in thefinancial services market.

 

For the year ended December 31, 2008, the Companyrecorded an other than temporary impairment (OTTI) of $1.7 million on twosecurities.  The OTTI included a $1.3million write down resulting from an increase in the credit risk associatedwith a single entity issued trust preferred security and a write down of $0.4million on a FNMA perpetual preferred security. The OTTI is included as a component of “Loss on 

 

47

----

Tableof Contents

 

securities, other assets and other real estate owned”in the consolidated statements of income and comprehensive income.  The Company did not recognize an OTTI in2007.

 

During 2008, other investments increased by $6.9million mainly due to Federal Home Loan Bank (FHLB) stock purchases of $6.4million and FHLB stock dividends of $0.5 million. The Company purchasedadditional FHLB stock in 2008 to increase its borrowing base with the FHLB thatis calculated on FHLB stock holdings and available collateral.  During 2007 other investments increased by$1.0 million due to FHLB stock purchases of $0.4 million and FHLB stockdividends of $0.6 million.

 

The following table sets forth the book value,maturity or repricing frequency and approximate yield of the securities in ourinvestment portfolio at December 31, 2008.

 
| ** **                                        | ** **         | **Maturity  or Repricing** | ** ** | ** **         | ** ** | ** **        | ** ** |
|---------------------------------------------------|--------------------|----------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                        | ** **         | **Within 1  year**         | ** ** | **1 - 5  years**   | ** ** | **5 - 10  years** | ** ** | **Over 10  years** | ** ** | **Total  book value** | ** ** |
| **(In thousands)**                           | ** **         | **Amount**                 | ** ** | **Yield (1)** | ** ** | **Amount**        | ** ** | **Yield (1)** | ** ** | **Amount** | ** ** | **Yield (1)** | ** ** | **Amount** | ** ** | **Yield (1)** | ** ** | **Amount** | ** ** | **Yield (1)** | ** ** |
| Mortgage-backed  securities                       |     | $                          | 13,547     |     | 4.87       | %            | $          | 307,301 |     | 5.33 | %  | $ | 48,818 |     | 5.23 | %  | $ | 68,522 |     | 5.27 | %  | $ | 438,188 |     | 5.30 | % |
| U.S. Government  agencies                         |               | —                     |       | 0.00               | %          | —            |       | 0.00 | % | — |   | — |   | — |   | — |   | — |   | 0.00 | % |
| Trust Preferred  securities                       |               | —                     |       | 0.00               | %          | —            |       | 0.00 | % | — |   | — |   | 22,750 |   | 7.51 | % | 22,750 |   | 7.51 | % |
| Corporate debt  securities                        |               | —                     |       | 0.00               | %          | 13,429            |       | 5.85 | % | — |   | — |   | — |   | 0.00 | % | 13,429 |   | 5.85 | % |
| Obligations of  states and political subdivisions |               | 10                         |       | 4.19               | %          | 1,244             |       | 5.69 | % | 817 |   | 5.90 | % | 444 |   | 8.87 | % | 2,515 |   | 6.32 | % |
| Other investments                                 |               | 21,387                     |       | 4.32               | %          | —            |       | 0.00 | % | — |   | 0.00 | % | 2,179 |   | 5.63 | % | 23,566 |   | 4.44 | % |
| Total                                             |               | $                          | 34,944     |               | 4.53       | %                 | $          | 321,974 |   | 5.35 | % | $ | 49,635 |   | 5.24 | % | $ | 93,895 |   | 5.84 | % | $ | 500,448 |   | 5.38 | % |

----

(1)  Yields have been adjusted to reflect atax-equivalent basis where applicable.

 

Excluding securities issued by government-sponsoredentities, the investment portfolio at December 31, 2008, does not includeany single issuer for which the aggregate carrying amount exceeds 10% of theCompany’s shareholders’ equity.

 

***OtherAssets***

 

The following table sets forth the values of our othermiscellaneous assets at the dates indicated.

 
| ** **                   | ** ** | **At December 31,** | ** ** |
|------------------------------|------------|--------------------------|------------|
| **(In thousands)**           | ** ** | **2008**                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Goodwill                     |       | $                        | 46,160     |   | $ | 43,386 |   | $ | 39,557 |   |
| Intangible  assets, net      |       | 5,704                    |       | 2,112 |   | 2,583 |   |
| Bank-owned life  insurance   |       | 30,718                   |       | 29,546 |   | 25,581 |   |
| Premises and  equipment, net |       | 9,154                    |       | 8,811 |   | 9,033 |   |
| Accrued interest  receivable |       | 8,617                    |       | 10,201 |   | 9,747 |   |
| Deferred income  taxes       |       | 16,933                   |       | 7,723 |   | 7,654 |   |
| Other                        |       | 32,650                   |       | 17,661 |   | 13,809 |   |
| Total                        |       | $                        | 149,936    |   | $ | 119,440 |   | $ | 107,964 |   |

 

The increase in goodwill during 2008 and 2007 of $2.8million and $3.8 million is primarily attributed to the purchase priceallocation from the Wagner and BDA acquisitions, respectively.  The acquisitions took place on December 31,2007 and January 2, 2008, respectively.

 

The increase in intangible assets of $3.6 million in2008 is due to the acquisition of intangibles from the BDA and Wagneracquisitions, offset by $0.7 million in amortization.  The decrease of $0.5 million in intangiblesin 2007 was due to amortization.

 

Bank-Owned Life Insurance (BOLI) increased by $1.2million to $30.7 million at December 31, 2008 as a result of growth in thecash surrender value of the policies. BOLI increased $3.9 million to $29.5 million at 

 

48

----

Tableof Contents

 

December 31, 2007. The 2007 increase wasattributed to new BOLI policies of $3.1 million and $0.8 million from thegrowth in the cash surrender value of the policies.

 

Deferred income taxes increased by $9.2 million to$16.9 million at December 31, 2008. The increase was primarily due to the $8.5 million tax effect of theprovision for loan and credit losses.

 

Other assets increased $15.0 million to $32.6 millionat December 31, 2008.  Contributingto the increase was the addition of $5.9 million of OREO, a $5.4 millionincrease in the fair value of derivatives, and a $2.4 million receivable forestimated tax payments made in excess of the tax liability.  The $3.9 million increase in 2007 over 2006was comprised primarily of a $2.7 million increase in the value of equitymethod investments.

 

***Deposits***

 

Our primary source offunds has historically been customer deposits. We offer a variety of accountsfor depositors, which are designed to attract both short- and long-termdeposits. These accounts include certificates of deposit, savings accounts,money market accounts, checking and NOW accounts, and individual retirementaccounts. During the third quarter of 2007, the Company introduced anon-collateralized Eurodollar sweep product as an alternative to thecollateralized customer repurchase product. Eurodollar sweep balances at December 31,2008 and December 31, 2007 were $88.0 million and $77.4 million,respectively.  At December 31, 2008,noninterest-bearing deposits increased $14.7 million to $453.7 million or 3%from 2007.  We believe we receive a large amount of noninterest-bearingdeposits because we provide customers with the option of paying for treasurymanagement services in cash or by maintaining additional noninterest-bearingaccount balances.  Additionally, the Company is currently participating inthe TLGP created by the FDIC, which provides full coverage fornoninterest-bearing deposit accounts regardless of the dollar amount. Interest-bearing accounts earn interest at rates based on competitive marketfactors and our desire to increase or decrease certain types of maturities ordeposits. The Company had $66.6 million and $148.1 million in brokered depositsat December 31, 2008 and 2007, respectively (excluding reciprocalCertificate of Deposit Account Registry Service ® (CDARS) accounts, which weview as customer related deposits). Brokered deposits are considered awholesale financing source and are used as an alternative to other short-termborrowings. The following tables present the average balances for each majorcategory of deposits and the weighted average interest rates paid forinterest-bearing deposits for the periods indicated.

 
| ** **                           | ** ** | **For the year ended December 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | ** **                               | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                           | ** ** | **Average**                              | ** ** | **average** | ** ** | **Average** | ** ** | **average** | ** ** | **Average** | ** ** | **average** | ** ** |
| **(In thousands)**                   | ** ** | **balance**                              | ** ** | **interest rate** | ** ** | **balance** | ** ** | **interest rate** | ** ** | **balance** | ** ** | **interest rate** | ** ** |
| NOW and money  market                |       | $                                        | 622,295    |   | 1.97 | % | $ | 584,677 |   | 3.19 | % | $ | 512,007 |   | 2.71 | % |
| Savings                              |       | 10,217                                   |       | 1.19 | % | 11,184 |   | 1.73 | % | 9,475 |   | 1.09 | % |
| Eurodollar                           |       | 108,154                                  |       | 2.02 | % | 26,326 |   | 3.74 | % | 0 |   | 0.00 | % |
| Certificates of  deposits            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Brokered under  $100,000             |       | 104,421                                  |       | 3.75 | % | 114,867 |   | 5.28 | % | 65,927 |   | 5.13 | % |
| Under $100,000                       |       | 147,314                                  |       | 3.23 | % | 117,331 |   | 4.85 | % | 77,748 |   | 4.09 | % |
| $100,000 and  over                   |       | 316,385                                  |       | 3.61 | % | 270,980 |   | 4.89 | % | 288,102 |   | 4.32 | % |
| Total  interest-bearing deposits     |       | $                                        | 1,308,786  |   | 2.65 | % | $ | 1,125,365 |   | 3.99 | % | $ | 953,259 |   | 3.46 | % |
| Noninterest-bearing  demand accounts |       | 434,926                                  |       |   |   | 439,285 |   |   |   | 430,083 |   |   |   |
| Total deposits                       |       | $                                        | 1,743,712  |   | 1.99 | % | $ | 1,564,650 |   | 2.87 | % | $ | 1,383,342 |   | 2.38 | % |

 

49

----

Tableof Contents

 

Maturities of certificates of deposit of $100,000 andmore are as follows:

 
| **(In thousands)**             | ** ** | **At December 31, 2008** | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| Remaining  maturity:           |       |                          |       |
| Less than three  months        |       | $                             | 186,104    |   |
| Three months up  to six months |       | 67,308                        |       |
| Six months up to  one year     |       | 53,271                        |       |
| One year and  over             |       | 7,806                         |       |
|                           |       |                          |       |
| Total                          |       | $                             | 314,489    |   |

 

Deposits decreased by $103.7 million to $1.6 billionat December 31, 2008.  The decreasein deposits is mainly due to an decrease of $81.5 million in brokered depositsand $65.4 million in NOW and money market deposits offset by an increase of$77.7 million in reciprocal CDARS. Although the EESA temporarily raised the basic limit on federal depositinsurance coverage until December 31, 2009, the past year was challengingin terms of deposit generation.   As abusiness bank, the vast majority of our depositors typically maintain balancesin excess of the FDIC insurance limits. As a result, the Bank has migrated asignificant portion of its core deposits from Money Market and NOW accountsinto certificates of deposits offered through the CDARS program.

 

Deposits increased by $266.4 million to $1.7 billionat December 31, 2007.  During 2007,the Company saw a migration from lower cost deposits into higher costcategories.  Proceeds from depositorigination were primarily used for loan originations.

 

Noninterest-bearing demand deposits comprised 27.7%and 25.2% of total deposits at December 31, 2008 and 2007, respectively.

 

***Short-TermBorrowings***

 

Our short-term borrowings include federal fundspurchased, term investment option and term auction facility funds offeredthrough the FRB, securities sold under agreements to repurchase which generallymature within 90 days or less, advances from the FHLB with original maturitiesof one year or less and advances under a revolving credit facility. Thefollowing table sets forth information relating to our short-termborrowings.  See Note 8 to theConsolidated Financial Statements and the Liquidity and Capital Resourcesdiscussion below for further detail.

 

50

----

Table of Contents

 
| ** **                                                     | ** ** | **At or for the year**      | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                     | ** ** | **ended December 31,** | ** ** |
| **(In thousands)**                                             | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Federal funds  purchased                                       |       |                        |       |   |   |   |   |
| Balance at end  of period                                      |       | $                           | 38,763     |   | $ | 150,374 |   | $ | 8,400 |   |
| Average balance  outstanding for the period                    |       | 62,836                      |       | 20,983 |   | 14,640 |   |
| Maximum amount  outstanding at any month end during the period |       | 157,683                     |       | 150,374 |   | 50,004 |   |
| Weighted average  interest rate for the period                 |       | 2.03                        | %          | 5.03 | % | 5.39 | % |
| Weighted average  interest rate at period end                  |       | 0.59                        | %          | 4.23 | % | 5.25 | % |
| Term investment  option / Term auction facility funds          |       |                        |       |   |   |   |   |
| Balance at end  of period                                      |       | $                           | 445,000    |   | $ | — |   | $ | 10,000 |   |
| Average balance  outstanding for the period                    |       | 82,503                      |       | 5,699 |   | 5,762 |   |
| Maximum amount  outstanding at any month end during the period |       | 445,000                     |       | 10,000 |   | 13,000 |   |
| Weighted average  interest rate for the period                 |       | 1.20                        | %          | 5.11 | % | 5.00 | % |
| Weighted average  interest rate at period end                  |       | 0.84                        | %          | 0.00 | % | 5.18 | % |
| FHLB overnight  advances                                       |       |                        |       |   |   |   |   |
| Balance at end  of period                                      |       | $                           | 59,300     |   | $ | 30,000 |   | $ | 33,800 |   |
| Average balance  outstanding for the period                    |       | 70,858                      |       | 47,404 |   | 64,992 |   |
| Maximum amount  outstanding at any month end during the period |       | 270,000                     |       | 99,800 |   | 102,000 |   |
| Weighted average  interest rate for the period                 |       | 2.16                        | %          | 5.38 | % | 5.21 | % |
| Weighted average  interest rate at period end                  |       | 0.65                        | %          | 4.67 | % | 5.47 | % |
| FHLB term  advances                                            |       |                        |       |   |   |   |   |
| Balance at end  of period                                      |       | $                           | —     |   | $ | — |   | $ | 100,000 |   |
| Average balance  outstanding for the period                    |       | 108,877                     |       | 68,524 |   | 106,992 |   |
| Maximum amount  outstanding at any month end during the period |       | 300,000                     |       | 110,000 |   | 150,000 |   |
| Weighted average  interest rate for the period                 |       | 2.61                        | %          | 5.26 | % | 5.10 | % |
| Weighted average  interest rate at period end                  |       | 0.00                        | %          | 0.00 | % | 5.31 | % |
| Securities sold  under agreement to repurchase                 |       |                        |       |   |   |   |   |
| Balance at end  of period                                      |       | $                           | 133,478    |   | $ | 168,336 |   | $ | 227,617 |   |
| Average balance  outstanding for the period                    |       | 147,230                     |       | 228,342 |   | 241,945 |   |
| Maximum amount  outstanding at any month end during the period |       | 180,008                     |       | 259,421 |   | 250,146 |   |
| Weighted average  interest rate for the period                 |       | 1.81                        | %          | 3.67 | % | 3.58 | % |
| Weighted average  interest rate at period end                  |       | 0.90                        | %          | 3.00 | % | 3.59 | % |
| Revolving line  of credit                                      |       |                        |       |   |   |   |   |
| Balance at end  of period                                      |       | $                           | —     |   | $ | 17,070 |   | $ | — |   |
| Average balance  outstanding for the period                    |       | 18,456                      |       | 3,307 |   | — |   |
| Maximum amount  outstanding at any month end during the period |       | 28,358                      |       | 17,070 |   | — |   |
| Weighted average  interest rate for the period                 |       | 3.71                        | %          | 6.42 | % | 0.00 | % |
| Weighted average  interest rate at period end                  |       | 0.00                        | %          | 5.16 | % | 0.00 | % |

 

***Long-termDebt***

 

The following table sets forth information relating toour subordinated debentures and notes payable.

 

51

----

Tableof Contents

 
| ** **                            | ** ** | **At December 31,** | ** ** |
|---------------------------------------|------------|--------------------------|------------|
| **(In thousands)**                    | ** ** | **2008**                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Junior  subordinated debentures:      |       |                     |       |   |   |   |   |
| CoBiz Statutory  Trust I              |       | $                        | 20,619     |   | $ | 20,619 |   | $ | 20,619 |   |
| CoBiz Capital  Trust II               |       | 30,928                   |       | 30,928 |   | 30,928 |   |
| CoBiz Capital  Trust III              |       | 20,619                   |       | 20,619 |   | 20,619 |   |
| Total Junior  Subordinated Debentures |       | $                        | 72,166     |   | $ | 72,166 |   | $ | 72,166 |   |
|                                  |       |                     |       |   |   |   |   |
| Other long-term  debt:                |       |                     |       |   |   |   |   |
| Subordinated  notes payable           |       | $                        | 20,984     |   | $ | — |   | $ | — |   |

 

For a discussion of long-term debt and for certainfinancial information for each issuance, see Note 9 to the ConsolidatedFinancial Statements.

 

**Results of Operations**

 

The following tablepresents, for the periods indicated, certain information related to our resultsof operations.

 
| **At or for the year ended December 31,**        | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(In thousands, except per share data)**             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Statement of income  data:                            |       |       |       |       |       |       |       |
| Interest income                                       |       | $          | 144,908    |       | $          | 154,510    |       | $ | 136,444 |   |
| Interest expense                                      |       | 49,557     |       | 66,611     |       | 57,015     |       |
| Net interest  income before provision for loan losses |       | 95,351     |       | 87,899     |       | 79,429     |       |
| Provision for  loan losses                            |       | 39,796     |       | 3,936      |       | 1,342      |       |
| Net interest income  after provision for loan losses  |       | 55,555     |       | 83,963     |       | 78,087     |       |
| Noninterest  income                                   |       | 35,399     |       | 28,289     |       | 29,965     |       |
| Noninterest  expense                                  |       | 89,717     |       | 75,515     |       | 71,927     |       |
| Income before  taxes                                  |       | 1,237      |       | 36,737     |       | 36,125     |       |
| Provision  (benefit) for income taxes                 |       | (91        | )          | 13,713     |       | 13,299     |       |
| Net income                                            |       | $          | 1,328      |       | $          | 23,024     |       | $ | 22,826 |   |
|                                                  |       |       |       |       |       |       |       |
| Earnings per  common share - basic                    |       | $          | 0.05       |       | $          | 0.98       |       | $ | 1.01 |   |
| Earnings per  common share - diluted                  |       | $          | 0.05       |       | $          | 0.96       |       | $ | 0.98 |   |
| Cash dividends  declared per common share             |       | $          | 0.28       |       | $          | 0.26       |       | $ | 0.22 |   |

 

***Earnings Performance***. Net income was****$1.3 million for the year ended December 31,2008, compared with $23.0 million for 2007, and $22.8 million for 2006.  Net income declined by $21.7 million in 2008from the prior year, primarily relating to an increase in provision for loanlosses of $35.9 million over the $3.9 million provision reported for 2007.  Respective increases of $7.5 million and $7.1million in net interest income before provision and noninterest income wereoffset by a $14.2 million increase in noninterest expense compared to2007.  Net income was relatively stablefrom 2006 to 2007 when increases in net interest income after provision of $5.9million were largely offset by increases in noninterest expense of $3.6 millionand a decrease in noninterest income of $1.7 million.  Reported earnings per common share for theyear ended December 31, 2008, on a fully diluted basis was $0.05, asignificant decline from 2007, primarily the result of the 2008 provision forloan losses.  Net income and earnings percommon share declined slightly during 2007 compared to 2006, a decrease largelyattributed to a 726,000 share increase in the weighted average sharesoutstanding during 2007.  The increase inshares during 2007 was caused by a secondary offering whereby the Company sold975,000 shares of common stock.

 

***Net Interest Income***. The largest component of our net incomeis our net interest income. Net interest income is the difference betweeninterest income, principally from loans and investment securities, and 

 

52

----

Tableof Contents

 

interest expense, principally on customer deposits andborrowings. Changes in net interest income result from changes in volume, netinterest spread and net interest margin. Volume refers to the average dollarlevels of interest-earning assets and interest-bearing liabilities. Netinterest spread refers to the difference between the average yield oninterest-earning assets and the average cost of interest-bearing liabilities.Net interest margin refers to net interest income divided by averageinterest-earning assets and is influenced by the level and relative mix ofinterest-earning assets and interest-bearing liabilities.

 

Throughout 2008 the Federal government unveiled manynew tools and approaches to deal with the credit and liquidity problemsassociated with the failure or near-failure of several large financial servicescompanies.  However, the FOMC has longused and continues to use the target federal funds rate to influence interestrates and the economy.  The targetfederal funds rate, the interest rate used by banks lending to each other,significantly affects the Company’s interest rate environment and earnings.  Changes in the federal funds rate have adirect correlation to changes in the prime rate, the underlying index  for most of the variable rate loans issued bythe Company.  The target federal fundsrate was 4.25% at the beginning of 2006, the result of eight consecutive rateincreases totaling 200 basis points during 2005.  The FOMC raised rates another 100 basispoints during the first half of 2006, ending the year at 5.25%.  In late 2007, rates were lowered by 100 basispoints in response to rising loan losses and falling property values.  Declines in the target federal funds ratecontinued in 2008, with the target federal funds rate ending the year with arange of 0.00% to 0.25%.

 

The followingtable presents, for the periods indicated, certain information related to ouraverage asset and liability structure and our average yields on assets andaverage costs of liabilities. Such yields are derived by dividing income orexpense by the average balance of the corresponding assets or liabilities.

 
| ** **                                                                        | ** **               | **For the  year ended December 31,** | ** **               |
|-----------------------------------------------------------------------------------|--------------------------|-------------------------------------------|--------------------------|
| ** **                                                                        | ** **               | **2008**                                  | ** **               | **2007** | ** ** | **2006** | ** ** |
| **(In  thousands)**                                                               | ** **               | **Average  balance**                      | ** **               | **Interest  earned  or paid** | ** ** | **Average  yield or  cost (3)** | ** ** | **Average  balance** | ** ** | **Interest  earned  or paid** | ** ** | **Average  yield or  cost (3)** | ** ** | **Average  balance** | ** ** | **Interest  earned  or paid** | ** ** | **Average  yield or  cost (3)** | ** ** |
| ***Assets***                                                                      |      |                                      |      |   |      |   |      |   |      |   |      |   |      |   |      |   |      |   |   |
| Federal funds  sold and other                                                     |                     | $                                         | 7,958                    |   | $ | 274 |   | 3.44 | % | $ | 8,557 |   | $ | 456 |   | 5.33 | % | $ | 6,677 |   | $ | 423 |   | 5.33 | % |
| Investment  securities (1)                                                        |                     | 427,902                                   |                     | 22,298 |   | 5.21 | % | 410,361 |   | 21,207 |   | 5.17 | % | 468,343 |   | 21,590 |   | 4.61 | % |
| Loans (1)(2)                                                                      |                     | 1,944,728                                 |                     | 123,055 |   | 6.33 | % | 1,665,379 |   | 133,446 |   | 8.01 | % | 1,446,964 |   | 114,942 |   | 7.94 | % |
| Allowance for  loan losses                                                        |                     | (25,750                                   | )                        |   |   |   |   | (18,559 | ) |   |   |   |   | (17,356 | ) | — |   |   |   |
| Total interest  earning-assets                                                    |                     | $                                         | 2,354,838                |   | $ | 145,627 |   | 6.11 | % | $ | 2,065,738 |   | $ | 155,109 |   | 7.51 | % | $ | 1,904,628 |   | $ | 136,955 |   | 7.19 | % |
| Noninterest-earning  assets                                                       |                     |                                      |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from  banks                                                          |                     | 44,846                                    |                     |   |   |   |   | 45,097 |   |   |   |   |   | 46,187 |   |   |   |   |   |
| Other                                                                             |                     | 130,217                                   |                     |   |   |   |   | 107,790 |   |   |   |   |   | 103,622 |   |   |   |   |   |
| Total assets                                                                      |                     | $                                         | 2,529,901                |   |   |   |   |   | $ | 2,218,625 |   |   |   |   |   | $ | 2,054,437 |   |   |   |   |   |
|                                                                              |                     |                                      |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ***Liabilities  and Shareholders’ Equity***                                  | *** ***             | *** ***                              | *** ***             | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Deposits                                                                          |                     |                                      |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW and money  market                                                             |                     | $                                         | 622,295                  |   | $ | 12,280 |   | 1.97 | % | $ | 584,677 |   | $ | 18,673 |   | 3.19 | % | $ | 512,007 |   | $ | 13,857 |   | 2.71 | % |
| Savings                                                                           |                     | 10,217                                    |                     | 122 |   | 1.19 | % | 11,184 |   | 194 |   | 1.73 | % | 9,475 |   | 103 |   | 1.09 | % |
| Eurodollar                                                                        |                     | 108,154                                   |                     | 2,180 |   | 2.02 | % | 26,326 |   | 985 |   | 3.74 | % | — |   | — |   | 0.00 | % |
| Certificates of  deposits                                                         |                     | 568,120                                   |                     | 20,089 |   | 3.54 | % | 503,178 |   | 25,012 |   | 4.97 | % | 431,777 |   | 19,016 |   | 4.40 | % |
| Total  interest-bearing deposits                                                  |                     | $                                         | 1,308,786                |   | $ | 34,671 |   | 2.65 | % | $ | 1,125,365 |   | $ | 44,864 |   | 3.99 | % | $ | 953,259 |   | $ | 32,976 |   | 3.46 | % |
| Other borrowings                                                                  |                     |                                      |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities sold  under agreements to repurchase                                   |                     | 147,230                                   |                     | 2,669 |   | 1.81 | % | 228,342 |   | 8,379 |   | 3.67 | % | 241,945 |   | 8,669 |   | 3.58 | % |
| Other short-term  borrowings                                                      |                     | 343,530                                   |                     | 7,327 |   | 2.13 | % | 145,916 |   | 7,717 |   | 5.29 | % | 192,386 |   | 9,916 |   | 5.15 | % |
| Subordinated  debentures                                                          |                     | 79,306                                    |                     | 4,890 |   | 6.17 | % | 72,166 |   | 5,651 |   | 7.83 | % | 72,166 |   | 5,454 |   | 7.56 | % |
| Total  interest-bearing liabilities                                               |                     | $                                         | 1,878,852                |   | $ | 49,557 |   | 2.64 | % | $ | 1,571,789 |   | $ | 66,611 |   | 4.24 | % | $ | 1,459,756 |   | $ | 57,015 |   | 3.91 | % |
| Noninterest-bearing  demand accounts                                              |                     | 434,926                                   |                     |   |   |   |   | 439,285 |   |   |   |   |   | 430,083 |   |   |   |   |   |
| Total deposits  and interest-bearing liabilities                                  |                     | 2,313,778                                 |                     |   |   |   |   | 2,011,074 |   |   |   |   |   | 1,889,839 |   |   |   |   |   |
| Other  noninterest-bearing liabilities                                            |                     | 18,888                                    |                     |   |   |   |   | 18,049 |   |   |   |   |   | 16,848 |   |   |   |   |   |
| Total liabilities  and subordinated debentures                                    |                     | 2,332,666                                 |                     |   |   |   |   | 2,029,123 |   |   |   |   |   | 1,906,687 |   |   |   |   |   |
| Shareholders’  equity                                                        |                     | 197,235                                   |                     |   |   |   |   | 189,502 |   |   |   |   |   | 147,750 |   |   |   |   |   |
| Total liabilities  and shareholders’ equity                                  |                     | $                                         | 2,529,901                |   |   |   |   |   | $ | 2,218,625 |   |   |   |   |   | $ | 2,054,437 |   |   |   |   |   |
| Net interest  income (taxable equivalent)                                         |                     |                                      |                     | $ | 96,070 |   |   |   |   |   | $ | 88,498 |   |   |   |   |   | $ | 79,940 |   |   |   |
| Net interest  spread                                                              |                     |                                      |                     |   |   | 3.47 | % |   |   |   |   | 3.27 | % |   |   |   |   | 3.28 | % |
| Net interest  margin                                                              |                     |                                      |                     |   |   | 4.08 | % |   |   |   |   | 4.28 | % |   |   |   |   | 4.20 | % |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |                     | 125.33                                    | %                        |   |   |   |   | 131.43 | % |   |   |   |   | 130.48 | % |   |   |   |   |

----

(1)  Interest earned has been adjusted to reflecttax exempt assets on a fully tax-equivalent basis.

 

(2)  *Loan fees included in interest income are not material.Nonaccrual loans are included in average loans outstanding*.

 

(3)  Yields have been adjusted to reflect atax-equivalent basis where applicable.

 

53

----

Table of Contents

 

The following tableillustrates, for the periods indicated, the changes in the levels of interestincome and interest expense attributable to changes in volume or rate. Changesin net interest income due to both volume and rate have been included in thechanges due to rate column.

 
| ** **                                                                            | ** ** | **Year ended December 31, 2008** | ** ** | **Year ended December 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                            | ** ** | **compared with**                     | ** ** | **compared with**                     | ** ** |
| ** **                                                                            | ** ** | **year ended December 31, 2007** | ** ** | **year ended December 31, 2006** | ** ** |
| ** **                                                                            | ** ** | **Increase (decrease)**               | ** ** | ** **                            | ** ** | **Increase (decrease)** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **in net interest income**            | ** ** | ** **                            | ** ** | **in net interest income** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **due to changes in:**                | ** ** | ** **                            | ** ** | **due to changes in:** | ** ** | ** ** | ** ** |
| **(In thousands)**                                                                    | ** ** | **Volume**                            | ** ** | **Rate**                              | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Total** | ** ** |
| *Interest-earning  assets*                                                            | * *   | * *                              | * *   | * *                              | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Federal funds  sold and other                                                         |       | $                                     | (32        | )                                     | $          | (150 | ) | $ | (182 | ) | $ | 100 |   | $ | (67 | ) | $ | 33 |   |
| Investment  securities                                                                |       | 906                                   |       | 185                                   |       | 1,091 |   | (2,996 | ) | 2,613 |   | (383 | ) |
| Loans                                                                                 |       | 22,384                                |       | (32,775                               | )          | (10,391 | ) | 17,501 |   | 1,003 |   | 18,504 |   |
| Total interest  earning assets                                                        |       | 23,258                                |       | (32,740                               | )          | (9,482 | ) | 14,605 |   | 3,549 |   | 18,154 |   |
|                                                                                  |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| *Interest-bearing  liabilities*                                                       | * *   | * *                              | * *   | * *                              | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| NOW and money  market                                                                 |       | 1,201                                 |       | (7,594                                | )          | (6,393 | ) | 2,321 |   | 2,495 |   | 4,816 |   |
| Savings                                                                               |       | (17                                   | )          | (55                                   | )          | (72 | ) | 30 |   | 61 |   | 91 |   |
| Eurodollar                                                                            |       | 3,061                                 |       | (1,866                                | )          | 1,195 |   | 985 |   | 0 |   | 985 |   |
| Certificates of  deposits                                                             |       | 3,228                                 |       | (8,151                                | )          | (4,923 | ) | 3,514 |   | 2,481 |   | 5,996 |   |
| *Short-term  borrowings*                                                              | * *   | * *                              | * *   | * *                              | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Securities and  loans sold under agreements to repurchase and federal funds purchased |       | 7,475                                 |       | (13,575                               | )          | (6,100 | ) | (2,584 | ) | 95 |   | (2,489 | ) |
| Subordinated  debentures                                                              |       | 559                                   |       | (1,320                                | )          | (761 | ) | 0 |   | 197 |   | 197 |   |
| Total  interest-bearing liabilities                                                   |       | 15,507                                |       | (32,561                               | )          | (17,054 | ) | 4,266 |   | 5,329 |   | 9,596 |   |
| Net increase  (decrease) in net interest income                                       |       | $                                     | 7,751      |                                  | $          | (179 | ) | $ | 7,572 |   | $ | 10,339 |   | $ | (1,781 | ) | $ | 8,558 |   |

----

(1)  Interest earned has been adjusted to reflecttax exempt assets on a fully tax-equivalent basis.

 

(2)  Loan fees included in interest income arenot material. Nonaccrual loans are included in average loans outstanding.

 

Net interest income on a tax equivalent basis was$96.1 million for the year ended December 31, 2008, an increase of $7.6million or 8.6% from $88.5 million at December 31, 2007.  The net interest margin contracted by 20basis points during 2008, ending at 4.08%. Average interest-earning assets grew by $289.1 million or an increase of14.0% during 2008 compared to 2007, largely related to growth of $279.3 millionin the average loan portfolio.  However,due to falling rates throughout 2008 the yield on the interest-earning assetbase fell sharply, overshadowing the asset growth.  The impact to the net interest margin ofchanges in interest-earning assets was a decrease of 132 basis points.  Loan growth was funded by averageinterest-bearing deposit growth of $183.4 million and increases in other borrowingsof $123.6 million.  The impact of changesin interest-bearing deposits on the net interest margin was an increase of 70basis points and changes in interest-bearing borrowings increased the netinterest margin was an additional 42 basis points.  The increasing margin on interest-bearingliabilities was largely due to falling interest rates offset by volumeincreases.  The Company’s utilization ofthe Federal Reserve’s TAF program positively impacted the net interest marginin 2008.  This is a temporary program andthere is no assurance that it will be available in the long term.  If this program becomes unavailable, our netinterest margin may be adversely impacted by shifting to other wholesalesources.

 

Net interest income on a tax equivalent basis was$88.5 million for the year ended December 31, 2007, an increase of $8.6million or 10.7% over the prior year. The net interest margin increased by 8basis points from the prior year to 4.28%. Average interest-earning assetsincreased by $161.1 million or 8.5% from the prior year. The increase waslargely related to average loan growth of $218.4 million, offset by a decreasein the average investment portfolio of $58.0 million. The yield oninterest-earning assets increased by 32 basis points, primarily contributed byloan volume growth (43 basis points), offset by a volume decrease (11 basispoints) in the investments portfolio. Introduction of the Eurodollar depositproduct in 2007 allowed the Company to reduce its investment portfolio assecurities matured or were called. Contributions to net interest marginrelating to rate changes in the investment portfolio nearly offset the effectsof the reduced volume. Average interest-earning liabilities also increasedduring 2007 by 

 

54

----

Tableof Contents

 

$112.0 million or 7.7% from the prior year. Theincrease was largely related to deposit growth of $172.1 million, offset by adecrease in short-term borrowing and securities sold under agreement torepurchase of $60.1 million. The impact of these changes in interest-earningliabilities on net interest margin was a decrease of 23 basis points, a changeprimarily relating to a 44-basis-point increase in the cost of deposits offsetby a decrease of 21 basis points relating to other borrowings and securitiessold under agreement to repurchase.

 

In order to reduce our asset sensitivity, the Companyexecutes an asset-liability strategy using interest-rate swaps to fix theinterest rate on a portion of our variable-rate loans indexed to prime. During2008 the Company entered into two new swap agreements with a total notionalvalue of $40.0 million, amortizing over a period of three years.  During 2007, the Company entered into fiveinterest-rate swaps with a total notional value of $75.0 million, amortizingover three years.  The Company receives afixed rate and pays a variable rate based on the notional amounts. The Companyhad $90.0 million and $135.0 million in notional values outstanding at December 31,2008 and 2007, respectively. The weighted-average interest rate paid was 3.6%versus a weighted-average interest rate received of 6.9% at December 31,2008.  The weighted-average interest ratepaid was 7.3% versus a weighted-average rate received of 7.2% at December, 31,2007.  During 2008 and 2007, the Companyrecognized a 9-basis-point increase and a 7-basis-point decrease in its netinterest margin, respectively, due to the interest-rate swaps.

 

***Provision and Allowance for Loanand Credit Losses***. Theprovision for loan and credit losses increased by $35.5 million to $39.5million for the year ended December 31, 2008.  The provision for loan losses increased by$2.6 million to $3.9 million for the year ended December 31, 2007.  The increase in 2008 was made in recognitionof the continued decline in property values, particularly in the Arizonamarket, and the impact to the portfolio of generally negative trends in thelocal economies the Company operates in. The overall quality of the loan portfolio deteriorated in 2008 asnonperforming loans to total loans increased from 0.18% to 2.02%.  Nonperforming loans totaled $41.1 million at December 31,2008 compared to $3.4 million at December 31, 2007.  Net charge-offs during 2008 were $17.0million compared to $1.8 million in the prior year.  Charge-offs of $16.3 million came from theArizona portfolio primarily due to five customer relationships.  Nonperforming assets have consistently beenbelow industry and peer averages (as defined by the FFIEC), and managementbelieves the allowance is at a sufficient level to absorb potential losses inthe portfolio.  At December 31,2008, the allowance for loan and credit losses amounted to $43.1 million, or 105.0%of nonperforming loans compared to $20.6 million and 604.7% of nonperformingloans at December, 31, 2007.

* *

***Noninterest Income***. The following table presents noninterest income for theyears ended December 31, 2008, 2007 and 2006.

* *
| ** **                            | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|
| **(In thousands)**                    | ** ** | **2008**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| *NONINTEREST  INCOME*                 | * *   | * *                                 | * *   | * * | * * | * * | * * |
| Service charges                       |       | $                                        | 4,067      |   | $ | 3,154 |   | $ | 2,778 |   |
| Other loan fees                       |       | 1,017                                    |       | 1,023 |   | 758 |   |
| Investment  advisory and trust income |       | 6,345                                    |       | 4,763 |   | 4,141 |   |
| Insurance income                      |       | 15,113                                   |       | 9,397 |   | 13,094 |   |
| Investment  banking income            |       | 5,055                                    |       | 6,681 |   | 6,214 |   |
| Other income                          |       | 3,802                                    |       | 3,271 |   | 2,980 |   |
| Total  noninterest income             |       | $                                        | 35,399     |   | $ | 28,289 |   | $ | 29,965 |   |

* *

*ServiceCharges*.  Deposit service charges primarily consist offees earned from our treasury management services. Customers are given theoption to pay for these services in cash or by offsetting the fees for theseservices against an earnings credit that is given for maintainingnoninterest-bearing deposits. Fees earned from treasury management serviceswill fluctuate based on the number of customers using the services and fromchanges in U.S. Treasury rates which are used as a benchmark for the earningscredit rate. Other miscellaneous deposit charges are transactional by natureand may not 

 

55

----

Tableof Contents

 

be consistentperiod-over-period.   The increase in2008 is attributed to a decrease in the earnings credit rate that has fallen dueto a decrease in the U.S. Treasury rate. As the earnings credit rate decreases, the amount of cash fees paid forservice charges increases.  The increasein 2007 over 2006 was due to higher customer utilization of our treasurymanagement services.

 

*InvestmentAdvisory and Trust Income*.  Investmentadvisory and trust income for 2008 increased by $1.6 million or 33.2% over theprior year.  Investment advisory andtrust income for 2007 increased $0.6 million, or 15%, to $4.8 million.  At December 31, 2007, the Companyacquired Wagner whose results are included in 2008 but not any earlierperiod.  The acquisition of Wagnerrepresented $1.9 million of the total increase, which was offset by a decreasein revenue from the Company’s existing investment management portfolio.

 

Revenues from thissource are generally a function of the value of assets under management. Marketchanges will have a positive or negative impact on the earnings of thecompanies operating in this business line. Revenues from the segment were adversely impacted by market events in2008, when the S&P 500 was down 37% and the DOW Jones Industrial averagewas down 32%.  Discretionary assets undermanagement at December 31, 2008 were $709.2 million, a 26.4% decrease from2007.  Total assets under management,custodial assets and assets under advisement at December 31, 2008 were$1.4 billion.  To the extent that thedebt and equity markets continue to fall, revenue maintenance and generation inthis segment will be challenging.

 

*InsuranceIncome*.  Insurance income is derived from three mainareas, wealth transfer, benefits consulting and P&C.  The majority of fees earned on wealthtransfer transactions are earned at the inception of the product offering inthe form of commissions.  As the fees onthese products are transactional by nature, fee income can fluctuate fromperiod to period based on the number of transactions that have beenclosed.  Revenue from benefits consultingand P&C are more recurring revenue sources.

 

Insurance incomefor 2008 increased $5.7 million from 2007 to $15.1 million for the year ended December 31,2008.  The change largely relates to theacquisition of CoBiz Insurance — Arizona which contributed $4.0 million in itsfirst year of operating as a CoBiz Financial company.  Insurance income derived from wealth transfercases increased $1.8 million in 2008 over 2007. As noted below, in 2007 there were a number of cases that were adverselyimpacted in the medical underwriting stages.

 

*Insurance income for 2007 decreased by $3.7 million, or 28%,from $13.1 million in 2006.  The decreasein the period is largely attributable to a decline in revenues from the WealthManagement unit which saw a number of large cases fail to close during the yeardue to medical underwriting issues. Income from the segment was also negativelyimpacted by continued softening of P&C premiums directly affectingcommissions earned by CoBiz Insurance.*

* *

*InvestmentBanking Income*.  Investment banking income includes retainer fees which arerecognized over the expected term of the engagement and success fees which arerecognized when the transaction is completed and collectibility of fees isreasonably assured.  Investment bankingincome is transactional by nature and will fluctuate based on the number of clientsengaged and transactions successfully closed. The Company believes it has a significant pipeline of potentialtransactions though marketing and closing transactions could be challenging forthe foreseeable future until credit loosens and merger and acquisition activitygains momentum.

* *

*Revenues for the InvestmentBanking unit fell by $1.6 million to $5.1 million for the year ended December 31,2008.  Credit tightening throughout 2008had an impact on the segment’s results as its clients’ acquisition and salestransactions are highly dependent on financing arrangements.  Scarce financing coupled with decliningvaluations caused a number of engagements to be put on hold until conditionsimprove.*

 

*Investment banking income for 2007 grew slightly from 2006,up $0.5 million or 8%.*

 

56

----

Tableof Contents

 

*OtherIncome*.  *Other income is comprised of changes in the cash surrendervalue of BOLI, earnings on equity method investments, merchant charges,bankcard fees, wire transfer fees, foreign exchange fees and safe depositincome.  Other income for 2008 grew by$0.5 million for the year ended December 31, 2008, or 16.2% over2007.  Other income for 2007 showedmodest growth of $0.3 million, or 9.8%, from 2006.*

 

*The 2008 growth stems from a $0.2 million increase inearnings in income from equity method investments, a $0.2 million increase inincome from the increase in cash surrender value in BOLI and a $0.1 millionincrease in transaction fees earned on the sale of customer interest-rateswaps.  Equity method investments arecomprised of interests in mezzanine partnerships. Earnings on our equity methodinvestments are primarily impacted by the mezzanine funds’ sale of portfoliocompanies they own an interest in, which are not regular, recurringevents.  Other sources of income wererelatively stable compared to 2007.*

* *

*The increase in other income for 2007 was largely due toearnings on equity method investments, which contributed approximately $1.0million to income, an increase of $0.2 million compared to 2006.*

* *

***Noninterest Expense***.The following table presentsnoninterest expense for the years ended December 31, 2008, 2007 and 2006.

* *
| ** **                                  | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|
| **(In thousands)**                          | ** ** | **2008**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| *NONINTEREST  EXPENSES*                     | * *   | * *                                 | * *   | * * | * * | * * | * * |
| Salaries and  employee benefits             |       | $                                        | 55,606     |   | $ | 48,648 |   | $ | 46,487 |   |
| Stock based  compensation expense           |       | 1,762                                    |       | 1,524 |   | 1,140 |   |
| Occupancy  expenses, premises and equipment |       | 13,075                                   |       | 11,541 |   | 11,360 |   |
| Amortization of  intangibles                |       | 724                                      |       | 471 |   | 475 |   |
| Loss on  securities, other assets and OREO  |       | 4,592                                    |       | 1,039 |   | 1,782 |   |
| Other operating  expenses                   |       | 13,958                                   |       | 12,292 |   | 10,683 |   |
| Total  noninterest expenses                 |       | $                                        | 89,717     |   | $ | 75,515 |   | $ | 71,927 |   |

* *

Our efficiency ratio was 65.1% for the year ended December 31,2008 and 64.1% for both 2007 and 2006. The efficiency ratio is a measure of the Company’s overhead, measuringthe percentage of each dollar of income that is paid in operating expenses. Ourefficiency ratio increased slightly during the current year as growth inoperating expenses outpaced growth in operating revenues.  The Company maintains its goal of reducingthe ratio over the next few years and is committed to exploring cost-reductionstrategies as they are identified.

 

*Salaries and Employee Benefits*. Salaries and employee benefits,excluding share-based compensation, increased by $7.0 million, or 14.3%, to$55.6 million during the year ended December 31, 2008.  The increase includes expenses related toCoBiz Insurance — Arizona of $2.9 million and Wagner of $1.4 million, businessunits not included in any prior period presented.  Commission-based compensation from theinsurance segment (excluding CoBiz Insurance — Arizona) also increased by $1.1million during 2008 due to the increase in revenue.  Annual merit increases effective January 1,2008 averaged 3.9% or $1.4 million of incremental costs.  Other significant changes include an increasein insurance benefit expense of $0.9 million to $3.0 million, a 401(k) expenseincrease of $0.2 million to $2.0 million and growth in total employees.  Our employee base totaled 504 full-timeequivalent employees at the end of 2008 (excluding employees of Wagner andCoBiz Insurance — Arizona) compared to 490 at the end of 2007.  Offsetting the increases was a decrease inbonus and incentive expense of $2.3 million to $4.2 million.

 

Salaries and employee benefits for 2007 increased $2.2million, or 5%, to $48.6 million compared to 2006.  The increase in 2007 was primarily due to theaddition of new bankers and annual merit increases. During 2007 and the latterpart of 2006, the Bank added a total of 34 additional bankers in Colorado andArizona at an incremental cost of $2.4 million. Annual merit increases wereeffective on January 1, 2007 

 

57

----

Tableof Contents

 

and averaged 4.37% or $1.3 million. The Company alsohad a $0.8 million increase in incentive compensation during 2007. Theseincreases were offset by a $1.7 million decrease in compensation paid tocommissionable employees, a $0.5 million decrease in health/medical costs and anet decrease of $0.1 million in other salary and benefit expenses. The decreasein compensation paid to commissionable employees is consistent with thedecrease in revenue in our insurance segment. The decrease in health/medicalcosts during 2007 was due to a low level of claims experience that passesthrough to the Company since we are partially self-insured.

 

*Stock-Based Compensation*. The Company adopted SFAS 123(R) onJanuary 1, 2006, which requires recognition of compensation costsassociated with the grant-date fair value of awards issued after the adoptiondate and for the portion of awards for which the requisite service period hadnot previously been rendered.  Costsincreased $0.2 million during the year as a result of new awards.  The increase in expense of $0.4 million in2007 over 2006 was also due to additional stock option grants awarded duringthe year.  The weighted average fairvalue of awards issued in 2007 was $4.57 per share and the weighted averagefair value of the 2008 awards was $2.57 per share.  The Company uses stock-based compensation toretain existing employees, recruit new employees and is considered an importantpart of overall compensation. The Company expects to continue using stock-basedcompensation in the future.

 

*Occupancy Costs*. Occupancy costs for the year ended December 31,2008 increased by $1.5 million versus increases of $0.2 million and $0.4million in 2007 and 2006.  Theacquisitions of CoBiz Insurance — Arizona and Wagner contributed approximately$0.4 million to the 2008 occupancy cost increase.  Two de novo locations that were not fullyoperational in 2007 also increased 2008 expense by $0.2 million. Maintenancecosts, primarily related to computer systems, increased $0.3 million anddepreciation on computer hardware and software deployed in 2007-2008 increased$0.2 million.  The Company also expandedits leased premises at the Company headquarters at  821 17th St., Denver, CO, which increasedoccupancy costs by $0.2 million.

 

The increase in 2007 related to an increase in rentexpense on newly leased facilities and leases that adjust annually andmaintenance contracts, offset by decreases in depreciation on software andhardware that had reached the end of their depreciable lives.

 

*Loss on Securities, Other Assets and OREO*. Loss on securities, other assets andOREO increased $3.6 million during the year ended December 31, 2008 to$4.6 million.  Losses in the current yearinclude $2.9 million related to the sale and valuation adjustment of OREO, OTTIcharges on a single-issuer trust preferred security of $1.3 million and a writedown of the remaining value of a FNMA perpetual preferred security of $0.4million.  The $1.0 million loss in 2007was due to a $0.5 million loss on the sale of repossessed assets and $0.5million related to the loss on sale and call of investment securities. The $1.8million loss in 2006 was related to a rebalancing of our investment portfoliowhere we sold certain securities and purchased other shorter-term securitiesand reduced our wholesale funding.

 

*Other Operating Expenses*. Other operating expenses for the yearended December 31, 2008 increased by $1.7 million or 13.6% over the prioryear.  Other operating expenses for 2007increased $1.6 million, or 15.1%, to $12.3 million compared to 2006.  Other operating expense is comprised ofmarketing, office supplies, professional services, correspondent bankingcharges, regulatory assessments and operational losses.  The 2008 increase was primarily due toworkout expenses on problem loans and repossessed property of $0.7 million andincreases in service contracts and courier expense of $0.8 million.  Regulatory fees and deposit insurance costsare expected to rise significantly in 2009 due to the additional coveragelimits obtained through the FDIC.

 

The increase in 2007 was primarily due to an increasein professional services of $0.4 million, marketing and branding initiatives of$0.6 million and regulatory assessments of $0.4 million. Professional servicesincreased primarily due to third-party referral fees paid on investment bankingtransactions, expenses for investment advisory back-office support, andaccounting and legal costs. Marketing increased as a result of initiatives toincrease our loan and deposit bases and grow our fee-based business lines.Costs for the branding initiative related to the unification of the CoBiz nameacross all of the Company’s subsidiaries.

 

58

----

Table of Contents

 

The increase in regulatory assessments was primarilycaused by the FDIC’s increase in assessment rates.

 

*Federal Income Taxes*. The net income tax benefit for the year ended December 31,2008 was $(0.1) million.  The provisionfor income taxes totaled $13.7 million during 2007, compared to $13.3 millionin 2006.  The effective tax rates for2008, 2007 and 2006 were (7.4)%, 37.3% and 36.8%, respectively.  The tax benefit in 2008 is due to the effectof tax-exempt income that reduced our taxable income to a net tax loss.  The effect of permanent tax differences, suchas tax-exempt income, was amplified in 2008 due to the decrease in reportedpre-tax income.

 

**Liquidity and Capital Resources**

 

Liquidity refers to theCompany’s ability to generate adequate amounts of cash to meet financialobligations to its customers and shareholders in order to fund loans, torespond to deposit outflows and to cover operating expenses.  Maintaininga level of liquid funds through asset/liability management seeks to ensure thatthese needs are met at a reasonable cost.  Liquidity is essential tocompensate for fluctuations in the balance sheet and provide funds for growthand normal operating expenditures.  Sources of funds include customerdeposits, scheduled amortization of loans, loan prepayments, scheduledmaturities of investments and cash flows from mortgage-backedsecurities.  Liquidity needs may also be met by deposit growth,converting assets into cash, raising funds in the brokered certificate ofdeposit market or borrowing using lines of credit with correspondent banks, theFHLB, the FRB or the Treasury. Longer-term liquidity needs may be met by selling securities availablefor sale or raising additional capital.

 

Liquidity management isthe process by which the Company manages the continuing flow of funds necessaryto meet its financial commitments on a timely basis and at a reasonable cost.Our liquidity management objective is to ensure our ability to satisfy the cashflow requirements of depositors and borrowers and to allow us to sustain ouroperations. These funding commitments include withdrawals by depositors, creditcommitments to borrowers, shareholder dividends, expenses of its operations andcapital expenditures. Liquidity is monitored and closely managed by the Company’sAsset and Liability Committee (ALCO), a group of senior officers from thelending, deposit gathering, finance and treasury areas. ALCO’s primary responsibilitiesare to ensure the necessary level of funds are available for normal operationsas well as maintain a contingency funding policy to ensure that liquiditystress events are quickly identified and management plans are in place torespond. This is accomplished through the use of policies which establishlimits and require measurements to monitor liquidity trends, includingmanagement reporting that identifies the amounts and costs of all availablefunding sources.

 

The Company’s currentliquidity position is expected to be more than adequate to fund expected assetgrowth. Historically, our primary source of funds has been customerdeposits.  Scheduled loan repayments area relatively stable source of funds, while deposit inflows and unscheduled loanprepayments — which are influenced by fluctuations in the general level ofinterest rates, returns available on other investments, competition, economicconditions, and other factors — are less predictable.

 

Available funding throughcorrespondent lines at December 31, 2008, totaled $466.2 million, whichrepresents 18.8% of the Company’s earning assets.  Total available funding of $466.2 million iscomprised of $211.2 million in available federal funds purchased lines and$255.0 million in FHLB borrowing capacity. In addition, the Company had $219.1million in securities available to be pledged for collateral for additionalFHLB borrowings and TAF borrowings at December 31, 2008.

 

Liquidity from assetcategories is provided through cash and interest-bearing deposits with otherbanks, which totaled $45.5 million at December 31, 2008, compared to $49.6million at December 31, 2007.  Additional asset liquiditysources include principal and interest payments from securities in the Company’sinvestment portfolio and cash flows from its amortizing loan portfolio.

 

Liability liquiditysources include attracting deposits at competitive rates.  Coredeposits represented 96% and 92%, respectively, of our total deposits balanceof $1.6 billion and $1.7 billion at December 31, 2008

 

59

----

Table of Contents

 

and December 31,2007, respectively.  Despite governmentefforts to bolster consumer confidence in the banking system and themarketplace through the implementation of programs such as the EESA, whichtemporarily raised the limit on federal deposit insurance and the TLGP, whichprovides full coverage for noninterest-bearing transaction deposit accounts,last year proved to be challenging in terms of deposit generation.  Growth in average core deposits was notsufficient to fund loan growth of $184.9 million or 10.0% during 2008.  Thus, the Company has turned to the use ofalternative funding sources.  The Companyuses various forms of short-term borrowings for cash management and liquiditypurposes. These forms of borrowings include federal funds purchased, securitiessold under agreements to repurchase, borrowings from the FHLB and revolvinglines-of-credit. At December 31, 2008, the Bank has approved unsecuredfederal funds purchase lines with 10 correspondent banks with an aggregatecredit line of $250.0 million. The Company regularly uses its federal fundspurchase lines to manage its daily cash position.  However, availability to access funds throughthose lines is dependent upon the cash position of the correspondent banks andthere may be times when certain lines are not available.  In addition, certain lines require a one dayrest period after a specified number of consecutive days of accessing thelines.  With the overall tightening inthe credit markets, certain correspondent lines have been reduced or may not beavailable due to liquidity issues specific to our correspondents.  During 2008, the Company’s aggregatecorrespondent credit lines decreased by $15.0 million.  As a result, the Company has shiftedadditional loans and investments as collateral to the FHLB to increase theCompany’s borrowing capacity.  The Bankalso has a line of credit from the FHLB that is limited by the amount ofeligible collateral available to secure it. Borrowings under the FHLB line are required to be secured by unpledgedsecurities and qualifying loans. Borrowings may also be used on a longer-termbasis to support expanded lending activities and to match the maturity orrepricing intervals of assets.

 

The Company participatedin the U.S. Treasury’s Term Investment Option (TIO) program for Treasury Taxand Loan participants. The TIO program allowed us to obtain additionalshort-term funds at a rate determined through an auction process that islimited by the amount of eligible collateral available to secure it.  However, the Treasury Department suspendedthe TIO program for the foreseeable future. The Company also was approved to participate in the Federal Reserve’sTerm Auction Facility (TAF) to provide additional liquidity.  Under the TAF, the Federal Reserve auctionsterm funds to depository institutions. Advances are for a fixed amount, with the rate determined by an auctionprocess, and must be fully collateralized. At December 31, 2008, the Company had $445.0 million outstandingunder the TAF at a weighted average interest rate of 0.84% with a term of lessthan 90 days.  The Company hadapproximately $265.0 million available in loans to pledge as collateral foradditional funding under the TAF. The Company intends to continue pursuingfunding via the TAF.

 

At the holding company level, our primary sources offunds are dividends paid from the Bank and fee-based subsidiaries, managementfees assessed to the Bank and the fee-based business lines, proceeds from theissuance of common stock, and other capital markets activity.  The main use of this liquidity is thequarterly payment of dividends on our common stock, quarterly interest paymentson the subordinated debentures and notes payable, payments for mergers andacquisitions activity (including potential earn-out payments), and payments forthe salaries and benefits for the employees of the holding company.  The approval of the Colorado State BankingBoard is required prior to the declaration of any dividend by the Bank if thetotal of all dividends declared by the Bank in any calendar year exceeds thetotal of its net profits for that year combined with the retained net profitsfor the preceding two years. In addition, the Federal Deposit InsuranceCorporation Improvement Act of 1991 provides that the Bank cannot pay adividend if it will cause the Bank to be “undercapitalized.” The Company’sability to pay dividends on its common stock depends upon the availability ofdividends from the Bank, earnings from its fee-based businesses, and upon theCompany’s compliance with the capital adequacy guidelines of the FRB. See Item1 “Business — Supervision and Regulation” and Note 16 to the ConsolidatedFinancial Statements for an analysis of the compliance of the Bank and CoBizwith applicable capital adequacy guidelines.

 

The Company also has a $30.0 million revolving line ofcredit agreement that matures on July 30, 2009 that is subject to certainfinancial covenants.  At December 31,2008, the Company was in default on two covenants, the minimum return on assetratio and the maximum non-performing asset to total loans ratio.  Pursuant to the terms of the creditagreement, these events of default provide the lender the right to

 

60

----

Table of Contents

 

declare all amounts under the agreement as immediatelydue and payable.  In addition, the lender’sobligation to advance amounts available pursuant to the agreement isterminated.  At December 31, 2008,the revolving line of credit’s outstanding balance was $0.  Although, the Company has not been notifiedby the lender that the revolving line of credit agreement has been terminateddue to the events of default, the Company is not relying on the line of creditfor its liquidity management purposes.

 

Our primary source ofshareholders’ equity is the retention of our net after-tax earnings andproceeds from the issuance of common stock. At December 31, 2008shareholders’ equity totaled $252.1 million, a $62.8 million increase from December 31,2007.  The increase was primarily due tothe issuance and sale of 64,450 shares of preferred stock and a warrant topurchase 895,968 shares of the Company’s common stock to the U.S. TreasuryDepartment as part of the Capital Purchase Program for $64.5 million.  Also contributing to the increase in equitywas $1.3 million in net income; $3.1 million of stock options, excess taxbenefits on option exercises and employee stock purchase plan activity; and anincrease of $0.5 million in accumulated other comprehensive income due mainlyto net unrealized gains in the derivatives portfolio.  The increases in equity were offset bydividend payments of $6.6 million in 2008.

 

The Company successfullycompleted a private placement of $21.0 million of Subordinated UnsecuredPromissory Notes during the third and fourth quarters of 2008.  Proceeds from the offering will be used forgeneral corporate purposes.  The notesqualify as Tier 2 capital for regulatory capital purposes.

 

Management believes the Company continues to have goodinternal capital generation to support its operations.  We currently anticipate that our cash andcash equivalents, expected cash flows from operations together with alternativesources of funding (i.e. TAF) are sufficient to meet our anticipated cashrequirements for working capital, loan originations, capital expenditures andother obligations for at least the next 12 months.  We continually monitor existing andalternative financing sources to support our capital and liquidity needs,including but not limited to, debt issuance, common stock issuance and deposit fundingsources.  Based on our current financialcondition and our results of operations, we believe that the Company will beable to sustain its ability to raise adequate capital through one of thesefinancing sources.

 

On November 2, 2005, the Company filed auniversal shelf registration that allows the Company to issue any combinationof debt securities, preferred stock, depositary shares, common stock andsecurities warrants from time to time in one or more offerings up to a totaldollar amount of $100.0 million. A new universal shelf registration was filedon January 5, 2007 to allow for the sale of common stock by affiliates ofthe Company and the original universal shelf registration was withdrawn. On January 24,2007, pursuant to the universal shelf registration, we sold 975,000 shares ofcommon stock at a public offering price of $20.90. In conjunction with theoffering, our CEO, one member of our Board of Directors and the estate of oneformer member of our Board of Directors (Selling Shareholders) sold 2,425,262shares of common stock. We did not receive any proceeds from the sale of commonstock by the Selling Shareholders.

 

On July 19, 2007,the Company’s Board of Directors authorized a share repurchase program for therepurchase of up to 5% of its outstanding stock. Share repurchases under thisprogram were to made through open market purchases, block trades or inprivately negotiated transactions from time to time and in compliance with Rule 10b-18under the Exchange Act. The program concluded on November 19, 2007, whenall authorized shares had been repurchased. The shares were repurchased at aweighted average price of $16.72 and a total cost of $20.1 million.

 

We are subject to minimumrisk-based capital limitations as set forth by federal banking regulations atboth the consolidated Company level and the Bank level. Under the risk-basedcapital guidelines, different categories of assets, including certainoff-balance sheet items, such as loan commitments in excess of one year andletters of credit, are assigned different risk weights, based generally on theperceived credit risk of the asset. These risk weights are multiplied bycorresponding asset balances to determine a “risk-weighted” asset base. Forpurposes of the risk-based capital guidelines, total capital is defined as thesum of “Tier 1” and “Tier 2” capital elements, with Tier 2 capital beinglimited to 100% of Tier 1 capital. Tier 1 capital includes, with certainrestrictions, common shareholders’ equity, perpetual

 

61

----

Table of Contents

 

preferred stock andminority interests in consolidated subsidiaries. Tier 2 capital includes, withcertain limitations, perpetual preferred stock not included in Tier 1 capital,certain maturing capital instruments, and the allowance for loan and creditlosses. At December 31, 2008, the Bank was well-capitalized with a Tier 1Capital ratio of 10.2%, and Total Capital ratio of 11.5%. The minimum ratios tobe considered well-capitalized under the risk-based capital standards are 6%and 10%, respectively. At the holding company level, the Company’s Tier 1Capital ratio at December 31, 2008, was 12.3%, and its Total Capital ratio14.5%. Total Risk-Based Capital for the consolidated company increased by $84.0million during 2008.  The majority of theincrease is attributed to the $64.5 million investment received from theTreasury Department as part of the CPP and to a $21.0 million private offeringof subordinated notes payable raised in the third and fourth quarters thatqualifies as Tier 2 capital.  In order tocomply with the regulatory capital constraints, the Company and its Board ofDirectors constantly monitor the capital level and its anticipated needs basedon the Company’s growth. The Company has identified sources of additionalcapital that could be used if needed, and monitors the costs and benefits ofthese sources, which include both the public and private markets.

 

The Company has issued a total of $70.0 million oftrust preferred securities through statutory trusts that are not included inthe Company’s consolidated financial statements. Although the accounts of thetrusts are not included in the Company’s consolidated financial statements, allof the $70.0 million in trust preferred securities issued by the trusts areincluded in Tier 1 capital for regulatory capital purposes as allowed bythe FRB. On February 28, 2005, the FRB finalized a rule that wouldcontinue to allow the inclusion of trust preferred securities issued byunconsolidated subsidiary trusts in Tier 1 capital, but with stricterquantitative and qualitative standards. Under the rule, after a transitionperiod ending on March 31, 2009, the aggregate amount of trust preferredsecurities and certain other capital elements would be limited to 25% ofTier 1 capital elements, net of goodwill that has been reduced by anyassociated deferred tax liability. The amount of trust preferred securities andcertain other elements in excess of the limit could be included in Tier 2capital, subject to restrictions. Based on the final rule, the Company’sallowable trust preferred securities in Tier 1 capital would decrease ifit had been in effect at December 31, 2008. The additional amount excludedfrom Tier 1 capital would be included in Tier 2 capital and the Company wouldstill be adequately capitalized.

 

The Company’s condensedconsolidated financial statements do not reflect various off-balance sheetcommitments that are made in the normal course of business, which may involvesome liquidity risk.  Off-balance sheet arrangements are discussed inthe Contractual Obligations and Commitments section following.  The Company has commitments to extend creditunder lines of credit and stand-by letters of credit. The Company has alsocommitted to investing in certain partnerships. See Note 15 to the Consolidated Financial Statements for additionaldiscussion on these commitments.

 

**Contractual Obligations and Commitments**

 

Summarized below are the Company’s contractualobligations (excluding deposit liabilities) to make future payments at December 31,2008:

 

62

----

Table of Contents

 
| **(In thousands)**                           | ** ** | **Within  one year** | ** ** | **After one  but within  three years** | ** ** | **After three  but within  five years** | ** ** | **After  five years** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|----------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|-----------------------|------------|-----------|------------|
| Federal funds  purchased (1)                 |       | $                    | 38,763     |                                   | $          | —                                  |       | $                     | —     |      | $          | — |   | $ | 38,763 |   |
| Term Auction  Facility (2)                   |       | 445,074              |       | —                                 |       | —                                  |       | —                |       | 445,074   |       |
| FHLB overnight  funds purchased (1)          |       | 59,300               |       | —                                 |       | —                                  |       | —                |       | 59,300    |       |
| Repurchase  agreements (1)                   |       | 133,478              |       | —                                 |       | —                                  |       | —                |       | 133,478   |       |
| Operating lease  obligations                 |       | 5,358                |       | 8,667                                  |       | 6,812                                   |       | 7,551                 |       | 28,388    |       |
| Long-term debt  obligations (3)              |       | 4,675                |       | 9,349                                  |       | 29,640                                  |       | 129,351               |       | 173,015   |       |
| Preferred Stock,  Series B dividend (4) |       | 3,223                |       | 6,445                                  |       | 70,823                                  |       | —                |       | 80,491    |       |
| Supplemental  executive retirement plan      |       | —               |       | —                                 |       | —                                  |       | 2,834                 |       | 2,834     |       |
|                                         |       |                 |       |                                   |       |                                    |       |                  |       |      |       |
| Total  contractual obligations               |       | $                    | 689,871    |                                   | $          | 24,461                                  |       | $                     | 107,275    |      | $          | 139,736 |   | $ | 961,343 |   |

 

----

(1)          Interest onthese obligations has been excluded due to the short-term nature of theinstruments.

 

(2)          Includesinterest of $0.1 million due “Within one year”.

 

(3)          Principalrepayment of the junior subordinated debentures is assumed to be contractualmaturity.  Principal repayment of thesubordinated notes payable is assumed to be its first call date.  Interest is calculated at the applicable rateat December 31, 2008 and reported in the related “due within”categories.   Included in long-term debtobligations are estimated interest payments related to Subordinated Debt(junior and unsecured) of $4.8 million due “Within one year”, $9.3 million due “Afterone but within three years”, $8.7 million due “After three but within fiveyears” and $57.2 million due “After five years.”  Interest reported above was calculated at theactual borrowing rates at December 31, 2008.  Interest rates paid on junior subordinateddebentures are variable rates and actual interest payments will differ based onactual LIBOR and actual amounts outstanding for the applicable periods. SeeNote 9 to the Consolidated Financial Statements for additional information onsubordinated debt.

 

(4)          CumulativePerpetual Preferred Stock, Series B issued to the US Treasury December 2008includes dividends payable at 5% on $64,450,000.  The preferred shares are shown in the tableas being due in the “After three but within five years” category.  This assumes the $64,450,000 in preferredstock will be redeemed in the year prior to the step up to 9% for the dividendrate.

 

The Company has employed a strategy to expand itsoffering of fee-based products through the acquisition of entities thatcomplement its business model. We will often structure the purchase price of anacquired entity to include an earn-out, which is a contingent payment based onachieving future performance levels. Given the uncertainty of today’s economicclimate and the performance challenges it creates for companies, we feel theuse of earn-outs in acquisitions is an effective method to bridge theexpectation gap between a buyer’s caution and a seller’s optimism. Earn-outshelp to protect buyers from paying a full valuation up front without theassurance of the acquisition’s performance, while allowing sellers toparticipate in the full value of the company provided the anticipatedperformance does occur. Since the earn-out payments are determined based on theacquired company’s performance during the earn-out period, the total paymentsto be made are not known at the time of the acquisition.

 

The Company has committed to make additional earn-outpayments to the former owners of Wagner based on earnings and performance. At December 31,2008, the Company did not accrue for any earn-out payments for the fiscal year2008.

 

The Company, at the time of the purchase of the assetsof BDA, placed into escrow $750,000 as deferred purchase price that could beearned by achieving certain agreed upon performance measures over the two-yearperiod following the acquisition.  At December 31,2008, it was determined the unit had met the first of two performance measuresand in January 2009 $375,000 of the deferred purchase price was releasedto the former owners.

 

The contractualamount of the Company’s financial instruments with off-balance sheet risk,expiring by period at December 31, 2008, is presented below:

 

63

----

Table of Contents

 
| **(In thousands)**                                   | ** ** | **Within  one year** | ** ** | **After one  but within  three years** | ** ** | **After three  but within  five years** | ** ** | **After  five years** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|-----------------------|------------|-----------|------------|
| Unfunded loan  commitments                           |       | $                    | 432,182    |                                   | $          | 166,576                                 |       | $                     | 36,811     |      | $          | 3,333 |   | $ | 638,902 |   |
| Standby letters  of credit                           |       | 45,031               |       | 4,881                                  |       | 150                                     |       | —                |       | 50,062    |       |
| Commercial  letters of credit                        |       | 1,263                |       | 3,283                                  |       | —                                  |       | —                |       | 4,546     |       |
| Unfunded  commitments for unconsolidated investments |       | 2,180                |       | —                                 |       | —                                  |       | —                |       | 2,180     |       |
| Company  guarantees                                  |       | 1,673                |       | —                                 |       | —                                  |       | —                |       | 1,673     |       |
|                                                 |       |                 |       |                                   |       |                                    |       |                  |       |      |       |
| Total  commitments                                   |       | $                    | 482,329    |                                   | $          | 174,740                                 |       | $                     | 36,961     |      | $          | 3,333 |   | $ | 697,363 |   |

 

The Company isparty to financial instruments with off-balance sheet risk in the normal courseof business to meet the liquidity, credit enhancement and financing needs ofits customers. These financial instruments include legally binding commitmentsto extend credit and standby letters of credit and involve, to varying degrees,elements of credit and interest rate risk in excess of the amount recognized onthe balance sheet. Credit risk is the principal risk associated with theseinstruments. The contractual amounts of these instruments represent the amountof credit risk should the instruments be fully drawn upon and the customerdefaults.

 

To control the creditrisk associated with entering into commitments and issuing letters of credit,the Company uses the same credit quality, collateral policies and monitoringcontrols in making commitments and letters of credit as it does with itslending activities. The Company evaluates each customer’s creditworthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary by theCompany upon extension of credit, is based on management’s credit evaluation.

 

Legally bindingcommitments to extend credit are agreements to lend to a customer as long asthere is no violation of any condition established in the contract. Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire payment of a fee. Since many of the commitments may expire withoutbeing drawn upon, the total commitment amounts do not necessarily representfuture cash requirements. Standby letters of credit obligate the Company tomeet certain financial obligations of its customers if, under the contractualterms of the agreement, the customers are unable to do so. The financialstandby letters of credit issued by the Company are irrevocable. Payment isonly guaranteed under these letters of credit upon the borrower’s failure toperform its obligations to the beneficiary.

 

Approximately $46.8million of total commitments at December 31, 2008, represent commitmentsto extend credit at fixed rates of interest, which exposes the Company to somedegree of interest-rate risk.

 

The Company has alsoentered into interest-rate swap agreements under which it is required to eitherreceive or pay cash to a counterparty depending on changes in interest rates.The interest-rate swaps are carried at their fair value on the consolidatedbalance sheet with the fair value representing the net present value ofexpected future cash receipts or payments based on market interest rates at thebalance sheet date. Interest-rate swaps recorded on the consolidated balancesheet at December 31, 2008, do not represent amounts that will ultimatelybe received or paid under the contract and are therefore excluded from thetable above.

 

**Effects of Inflation and Changing Prices**

 

The primary impact of inflation on our operations isincreased operating costs. Unlike most retail or manufacturing companies,virtually all of the assets and liabilities of a financial institution such asthe Company are monetary in nature. As a result, the impact of interest rateson a financial institution’s performance is generally greater than the impactof inflation. Although interest rates do not necessarily move in the samedirection, 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.

 

64

----

Table of Contents

 

**Item 7A. Quantitative and Qualitative DisclosuresAbout Market Risk**

 

**Asset/Liability Management**

 

Asset/liability management is concerned with thetiming and magnitude of repricing assets compared to liabilities. It is ourobjective to generate stable growth in net interest income and to attempt tocontrol risks associated with interest rate movements. In general, our strategyis to reduce the impact of changes in interest rates on net interest income bymaintaining a favorable match between the maturities or repricing dates of ourinterest-earning assets and interest-bearing liabilities. We adjust interestsensitivity during the year through changes in the mix of assets andliabilities. Our asset and liability management strategy is formulated andmonitored by the Asset-Liability Management Committee, in accordance withpolicies approved by the Board of Directors of the Bank. This committee meetsregularly to review, among other things, the sensitivity of our assets andliabilities to interest rate changes, the book and market values of assets andliabilities, unrealized gains and losses, purchase and sale activity, andmaturities of investments and borrowings. The asset-liability committee alsoapproves and establishes pricing and funding decisions with respect to ouroverall asset and liability composition. The committee reviews our liquidity,cash flow flexibility, maturities of investments, deposits and borrowings, depositactivity, current market conditions, and general levels of interest rates. Toeffectively measure and manage interest rate risk, we use simulation analysisto determine the impact on net interest income of changes in interest ratesunder various interest rate scenarios. From these simulations, interest raterisk is quantified and appropriate strategies are developed and implemented.

 

The following table presents an analysis of theinterest-rate sensitivity inherent in our net interest income and market valueof equity. The interest rate scenario presented in the table includes interestrates at December 31, 2008, as adjusted by instantaneous rate changesupward of up to 200 basis points.  Due tothe current interest rate environment — the FOMC has a 0-25 basis point targetfederal funds rate at December 31, 2008 with prime set at 300 basis pointsabove the FOMC target — the downward movement analysis was limited to a 100basis point change.  Since there arelimitations inherent in any methodology used to estimate the exposure tochanges in market interest rates, this analysis is not intended to be aforecast of the actual effect of a change in market interest rates. The marketvalue sensitivity analysis presented includes assumptions that (i) thecomposition of our interest rate sensitive assets and liabilities existing at December 31,2008, will remain constant over the 12-month measurement period; and (ii) thatchanges in market rates are parallel and instantaneous across the yield curveregardless of duration or repricing characteristics of specific assets orliabilities. Further, the analysis does not contemplate any actions that wemight undertake in response to changes in market interest rates. Accordingly,this analysis is not intended to and does not provide a precise forecast of theeffect 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    |       | n/a                                          |       | (3.1 | )% | — |   | 1.5 | % | 1.7 | % |
| Market value of  equity |       | n/a                                          |       | (9.9 | )% | — |   | 5.1 | % | 9.2 | % |

 

Our results of operations depend significantly on netinterest income. Like most financial institutions, our interest income and costof funds are affected by general economic conditions and by competition in themarketplace. Rising and falling interest rate environments can have variousimpacts on net interest income, depending on the interest rate profile (i.e.,the difference between the repricing of interest-earning assets andinterest-bearing liabilities), the relative changes in interest rates thatoccur when various assets and liabilities reprice, unscheduled repayments ofloans and investments, early withdrawals of deposits, and other factors. As ageneral rule, banks with positive interest rate gaps are more likely to besusceptible to declines in net interest income in periods of falling interestrates, while banks with negative interest rate gaps are more likely toexperience declines in net interest income in periods of rising interest rates.At December 31, 2008, our cumulative interest rate gap was a positive

 

65

----

Table of Contents

 

21.84%. Therefore, assuming no change in our gapposition, a rise in interest rates is likely to result in increased netinterest income, while a decline in interest rates is likely to result indecreased net interest income. This is a point-in-time position that iscontinually 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 andcontributes toward effective asset and liability management, shortcomings areinherent in gap analysis since certain assets and liabilities may not moveproportionally as interest rates change. Consequently, in addition to gapanalysis, we use the simulation model discussed above to test the interest ratesensitivity of net interest income and the balance sheet.

 

The following table sets forth the estimated maturityor repricing, and the resulting interest rate gap, of our interest-earningassets and interest-bearing liabilities at December 31, 2008. All amountsin the table are based on contractual repricing schedules. Actual prepaymentand withdrawal experience may vary significantly from the assumptions reflectedin the table. For information on the fair value of our interest-earning assetsand interest-bearing liabilities see Note 18 to the Consolidated FinancialStatements.

 
| ** **                                                     | ** ** | **Estimated maturity or repricing at December 31, 2008** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(In thousands)**                                             | ** ** | **Less than  three months**                                   | ** ** | **Three months  to less than  one year** | ** ** | **One to  five years** | ** ** | **Over  five years** | ** ** | **Total** | ** ** |
| Interest-earning  assets:                                      |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest bearing  deposits and federal funds sold              |       | $                                                             | 9,632      |   | $ | — |   | $ | — |   | $ | — |   | 9,632 |   |
| Fixed rate loans                                               |       | 58,982                                                        |       | 78,459 |   | 275,159 |   | 73,380 |   | 485,980 |   |
| Floating rate  loans                                           |       | 1,011,605                                                     |       | 28,655 |   | 491,598 |   | 13,415 |   | 1,545,273 |   |
| Investment  securities held to maturity and available for sale |       | 21,388                                                        |       | 13,556 |   | 321,974 |   | 143,530 |   | 500,448 |   |
| Total  interest-earning assets                                 |       | $                                                             | 1,101,607  |   | $ | 120,670 |   | $ | 1,088,731 |   | $ | 230,325 |   | $ | 2,541,333 |   |
|                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| NOW and money  market                                          |       | $                                                             | 297,144    |   | $ | 35,128 |   | $ | 68,315 |   | $ | 165,361 |   | $ | 565,948 |   |
| Savings                                                        |       | 3,710                                                         |       | 278 |   | 927 |   | 4,359 |   | 9,274 |   |
| Eurodollar                                                     |       | 88,025                                                        |       | — |   | — |   | — |   | 88,025 |   |
| Time deposits  under $100,000                                  |       | 153,540                                                       |       | 48,424 |   | 5,600 |   | — |   | 207,564 |   |
| Time deposits  $100,000 and over                               |       | 186,104                                                       |       | 120,579 |   | 7,806 |   | — |   | 314,489 |   |
| Securities sold  under agreements to repurchase                |       | 133,478                                                       |       | — |   | — |   | — |   | 133,478 |   |
| Other short-term  borrowings                                   |       | 543,063                                                       |       | — |   | — |   | — |   | 543,063 |   |
| Long-term debt                                                 |       | 72,166                                                        |       | — |   | — |   | 20,984 |   | 93,150 |   |
| Total  interest-bearing liabilities                            |       | $                                                             | 1,477,230  |   | $ | 204,409 |   | $ | 82,648 |   | $ | 190,704 |   | $ | 1,954,991 |   |
|                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest rate  gap                                             |       | $                                                             | (375,623   | ) | $ | (83,739 | ) | $ | 1,006,083 |   | $ | 39,621 |   | $ | 586,342 |   |
|                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| Cumulative  interest rate gap                                  |       | $                                                             | (375,623   | ) | $ | (459,362 | ) | $ | 546,721 |   | $ | 586,342 |   |   |   |
|                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
|                                                           |       | -11.10                                                        | %          | -18.06 | % | 19.54 | % | 21.84 | % |   |   |

 

To manage the relationship of our interest-earningassets and liabilities, we evaluate the following factors: liquidity, equity,debt/capital ratio, anticipated prepayment rates, portfolio maturities,maturing assets and maturing liabilities. Our Asset-Liability ManagementCommittee is responsible for establishing procedures that enable us to achieveour goals while adhering to prudent banking practices and existing loan andinvestment policies.

 

We have focused on maintaining balance betweeninterest-rate-sensitive assets and liabilities and repricing frequencies. Animportant element of this focus has been to emphasize variable-rate loans andinvestments funded by deposits that also mature or reprice over periods of 12months or less.

 

66

----

Table of Contents

 

The following table presents, at December 31,2008, loans by maturity in each major category of our portfolio. Actualmaturities may differ from the contractual maturities shown below as a resultof renewals and prepayments. Loan renewals are evaluated in the same manner asnew credit applications.

 
| ** **                       | ** ** | **At December 31, 2008** | ** ** |
|----------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **Less than**                 | ** ** | **One to** | ** ** | **Over** | ** ** | ** ** | ** ** |
| **(In thousands)**               | ** ** | **one year**                  | ** ** | **five years** | ** ** | **five years** | ** ** | **Total** | ** ** |
| Commercial                       |       | $                             | 442,894    |   | $ | 189,106 |   | $ | 16,968 |   | $ | 648,968 |   |
| Real estate —  mortgage     |       | 395,718                       |       | 552,823 |   | 68,903 |   | 1,017,444 |   |
| Real estate —  construction |       | 253,396                       |       | 13,532 |   | — |   | 266,928 |   |
| Consumer                         |       | 83,101                        |       | 3,297 |   | 303 |   | 86,701 |   |
| Other                            |       | 2,592                         |       | 7,999 |   | 621 |   | 11,212 |   |
|                             |       |                          |       |   |   |   |   |   |   |
| Total loans                      |       | $                             | 1,177,701  |   | $ | 766,757 |   | $ | 86,795 |   | $ | 2,031,253 |   |

 

Of the $853.5 million of loans with maturities of oneyear or more, approximately $332.9 million were fixed-rate loans and $505.0million were variable-rate loans at December 31, 2008.

 

To augment our asset and liability managementstrategy, we also began using interest-rate swaps in 2004, with the overallgoal of minimizing the impact of interest rate fluctuations on our net interestmargin. Interest-rate swaps involve the exchange of fixed-rate andvariable-rate interest payment obligations without the exchange of theunderlying notional amounts. Since we implemented the program in 2004, we haveentered into 18 different interest-rate swap agreements, seven of which wereoutstanding at December 31, 2008.

 

Under the interest-rate swap agreements, we receive afixed rate and pay a variable rate based on the prime rate. The swaps qualifyas cash flow hedges under SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended, andare designated as hedges of the variability of cash flows we receive fromcertain of our prime-indexed loans. In accordance with SFAS 133, these swapagreements are measured at fair value and reported as assets or liabilities onthe consolidated statements of financial condition. The portion of the changein the fair value of the swaps that is deemed effective in hedging the cashflows of the designated assets are recorded in accumulated other comprehensiveincome (loss), net of tax effects (OCI) and reclassified into interest incomewhen such cash flows occur in the future. Any ineffectiveness resulting fromthe hedges is recorded as a gain or loss in the consolidated statements ofincome and comprehensive income as a part of noninterest income.

 

Interest-rate swap information at December 31,2008, is summarized as follows:

 
| **(In thousands)**            | ** ** | **Amortization of Notional** | ** ** |
|-------------------------------|------------|------------------------------|------------|
| **Swap**                      | ** ** | **Maturity Date**            | ** ** | **Fixed  Rate** | ** ** | **Notional** | ** ** | **Fair Market  Value** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
| Swap -  January 26, 2007 |       | April 1, 2010           |       | 8.080 | % | $ | 10,000 |   | 349 |   | $ | 5,000 |   | $ | 5,000 |   | $ | — |   |
| Swap -  April 2, 2007    |       | May 1, 2010             |       | 7.776 | % | 10,000 |   | 360 |   | 5,000 |   | 5,000 |   | — |   |
| Swap -  May 29, 2007     |       | June 1, 2010            |       | 8.053 | % | 10,000 |   | 421 |   | 5,000 |   | 5,000 |   | — |   |
| Swap -  August 16, 2007  |       | August 1, 2010          |       | 7.630 | % | 10,000 |   | 445 |   | 5,000 |   | 5,000 |   | — |   |
| Swap -  October 5, 2007  |       | October 1, 2010         |       | 7.426 | % | 10,000 |   | 477 |   | 5,000 |   | 5,000 |   | — |   |
| Swap -  June 10, 2008    |       | June 1, 2011            |       | 6.360 | % | 15,000 |   | 541 |   | 5,000 |   | 5,000 |   | 5,000 |   |
| Swap -  October 17, 2008 |       | October 1, 2011         |       | 5.520 | % | 25,000 |   | 993 |   | — |   | — |   | 25,000 |   |
|                          |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total**                     |       |                         |       |   |   | $ | 90,000 |   | $ | 3,586 |   | $ | 30,000 |   | $ | 30,000 |   | $ | 30,000 |   |
|                               |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*During2008, 2007 and 2006, net interest income was increased or (decreased) by $2.1million, ($1.4) million and ($2.1) million, respectively, from the settlementof the interest-rate swaps.*

 

*In February 2009,the Company initiated a new series of interest-rate swap transactionsdesignated as cash flow hedges.  Theintent of the transactions are to fix the effective interest rate of paymentsdue on*

* *

*67*

----

Tableof Contents

 

*itsjunior subordinated debentures with the objective of reducing the Company’sexposure to adverse changes in cash flows relating to payments on its LIBOR-basedfloating-rate debt.  The swap agreements havinga total notional value of $70.0 million will fix the interest rates between4.7% and 5.5% and mature over varying lengths of time from five and 20 years.*

* *

**Item 8. Financial Statements and SupplementaryData**

 

*Referenceis made to our Consolidated Financial Statements, the reports thereon, and thenotes thereto beginning at page F-1 of this Form 10-K, whichfinancial statements, reports, notes and data are incorporated herein byreference.*

* *

**Item 9.Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

 

None.

 

**Item 9A. Controls and Procedures**

 

***DisclosureControls and Procedures****.**The Company carried out an evaluation, under the supervisionand with the participation of the Company’s management, including the Company’sCEO and the Company’s CFO, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures at the end of the periodcovered by this report pursuant to Exchange Act Rule 13a-15. Based uponthat evaluation, the Company’s CEO and CFO concluded the Company’s disclosurecontrols and procedures are effective in ensuring that information relating tothe Company, including its consolidated subsidiaries, required to be disclosedin reports that it files under the Exchange Act is (1) recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and (2) accumulated and communicated to ourmanagement, including our CEO and CFO, as appropriate to allow timely decisionsregarding required disclosure.*

 

***Changes in Internal Control over Financial Reporting***.  During the fourth quarter of 2008 no change in the Company’sinternal control over financial reporting was identified in connection withthis evaluation that has materially affected or is reasonably likely tomaterially affect internal control over financial reporting.

* *

*Management’sReport on Internal Control over Financial Reporting and the Report ofIndependent Registered Public Accounting Firm are set forth in our ConsolidatedFinancial Statements and the reports thereon beginning at page F-1.*

* *

**Item 9B. Other Information**

 

*None.*

* *

**PART III**

** **

**Item 10. Directors, Executive Officers andCorporate Governance**

 

Information concerningthe Company’s directors and officers called for by this item will be includedunder the captions “Election of Directors” and “Management” in the Company’sdefinitive Proxy Statement prepared in connection with the 2009 Annual Meetingof Shareholders (the “2009 Proxy Statement”) and is incorporated herein byreference. Information regarding audit committee financial experts and theaudit committee appearing under the caption “Meetings of the Board andCommittees — Audit Committee” will be included in our 2009 Proxy Statement andis hereby incorporated by reference. Information regarding disclosure ofcompliance with Section 16(a) of the Exchange Act appearing under thecaption “Section 16(a) Beneficial Ownership Reporting Compliance”will be included in our 2009 Proxy Statement and is hereby incorporated byreference.

 

68

----

Table of Contents

 

The Company has adopted aCode of Conduct and Ethics (“Code of Conduct”) that applies to the Company’sofficers, directors and employees, including the Company’s principal executiveofficer, principal financial officer, principal accounting officer orcontroller (collectively “Company Associates”), or persons performing similarfunctions. The Company has posted the Code of Conduct and will post any changesin or waivers of the Code of Conduct applicable to any Company Associate on itswebsite at *www.cobizfinancial.com*.

 

**Item 11. Executive Compensation**

 

Information concerning thecompensation of Company executives called for by this item will be included inthe 2009 Proxy Statement under the captions “Meetings of the Board andCommittees — Compensation of Directors” and “Executive Compensation” and isincorporated herein by reference.

 

**Item 12. Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

 

Information concerningsecurity ownership of certain beneficial owners and management called for bythis item will be included in the Company’s 2009 Proxy Statement under thecaption “Principal Shareholders” and is incorporated herein by reference.Information regarding securities authorized for issuance under equitycompensation plans appearing under the caption “Executive Compensation — Stock OptionPlans” will be included in our 2009 Proxy Statement and is hereby incorporatedby reference.

 

**Item 13. Certain Relationships and RelatedTransactions and Director Independence**

 

*Informationconcerning certain relationships and transactions between CoBiz and itsaffiliates called for by this item will be included in the Company’s 2009 ProxyStatement under the captions “Certain Relationships and Transactions” and “CompensationCommittee Interlocks and Insider Participation” and is incorporated herein byreference.*

* *

**Item 14. Principal Accountant Fees and Services**

 

*Informationrequired by this Item will be included under the caption “Relationship withIndependent Registered Public Accounting Firm” and “Audit Committee Report” inthe Company’s 2009 Proxy Statement and is incorporated herein by reference.*

* *

**PART IV**

** **

**Item 15. Exhibitsand Financial Statement Schedules**

** **
| (a)(1) |   | The following documents  are filed as part of this Annual Report on Form 10-K:                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                    |
|   |   | Management’s Report on  Internal Control Over Financial Reporting;                                                 |
|   |   |                                                                                                                    |
|   |   | Reports of Independent  Registered Public Accounting Firm;                                                              |
|   |   |                                                                                                                    |
|   |   | Consolidated Balance  Sheets at December 31, 2008 and 2007;                                                        |
|   |   |                                                                                                                    |
|   |   | Consolidated Statements  of Income and Comprehensive Income for the Years Ended December 31,  2008, 2007 and 2006; |
|   |   |                                                                                                                    |
|   |   | Consolidated Statements  of Shareholders’ Equity for the Years Ended December 31, 2008, 2007 and  2006;       |
|   |   |                                                                                                                    |
|   |   | Consolidated Statements  of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006;                       |
|   |   |                                                                                                                    |
|   |   | Notes to Consolidated  Financial Statements.                                                                            |

 

69

----

Table of Contents
| (2)    |   | All financial  statement schedules are omitted because they are not required or because the required  information is included in the financial statements and/or related notes. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                            |
| (3)    |   | Exhibits and  Index of Exhibits:                                                                                                                                                |
|   |   |                                                                                                                                                                            |

 
| (1)(2) | 2      | Amended  and Restated Agreement and Plan of Merger dated November 28, 2000.                                                                                                                                                                                                  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                              |
| (2)    | 3.1    | Amended  and Restated Articles of Incorporation of the Registrant.                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                              |
| (3)    | 3.2    | Amendment  to Articles of Incorporation                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                              |
| (8)    | 3.3    | Amendment  to Articles of Incorporation.                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                              |
| (4)    | 3.4    | Amendment  to Articles of Incorporation.                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                              |
| (14)   | 3.5    | Amended  and Restated Bylaws of the Registrant.                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                              |
| (18)   | 3.6    | Amendment to  Articles of Incorporation.                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                              |
| (25)   | 3.7    | Amendment to  Articles of Incorporation.                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                              |
| (23)   | 4.1    | Form of  Subordinated Unsecured Promissory Notes due 2018.                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                              |
| (23)   | 4.2    | Form of  Note Holders Agreement, dated August 18, 2008, by and between CoBiz  Financial Inc. and Holders of Promissory Notes Issued by CoBiz Financial Inc.  in connection with a Private Placement Memorandum of CoBiz Financial Inc.  dated as of July 25, 2008. |
|   |   |                                                                                                                                                                                                                                                                              |
| (25)   | 4.3    | Form of  Certificate for 64,450 shares of Fixed Rate Cumulative Perpetual Preferred  Stock, Series B, issued to the United States Department of the Treasury,  dated December 19, 2008.                                                                            |
|   |   |                                                                                                                                                                                                                                                                              |
| (25)   | 4.4    | Form of the  Warrant to Purchase 895,968 shares of Common Stock issued December 19,  2008 to the United States Department of the Treasury (original  warrantholder).                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                              |
| (2)    | 10.1   | CoBiz  Inc. 1998 Stock Incentive Plan.                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                              |
| (2)    | 10.2   | Amended  and Restated CoBiz Inc. 1997 Incentive Stock Option Plan.                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                              |
| (2)    | 10.3   | Amended  and Restated CoBiz Inc. 1995 Incentive Stock Option Plan.                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                              |
| (2)    | 10.4   | Employment  Agreement, dated at March 1, 1995, by and between Equitable Bankshares  of Colorado, Inc. and Jonathan C. Lorenz.                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                              |
| (2)    | 10.5   | Employment  Agreement, dated at January 3, 1998, by and between Colorado Business  Bankshares, Inc. and Richard J. Dalton.                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                              |
| (5)    | 10.6   | Lease  Agreement between Kesef, LLC and Colorado Business Bankshares, Inc.  dated May 1, 1998.                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                              |
| (6)    | 10.7   | First  Amendment to Lease Agreement between Kesef, LLC and Colorado Business  Bankshares, Inc. dated August 1, 2000.                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                              |
| (7)    | 10.8   | 2000  Employee Stock Purchase Plan.                                                                                                                                                                                                                                               |

 

70

----

Table of Contents

 
| (8)    | 10.9   | 2002  Equity Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (9)    | 10.10  | Employment  Agreement, dated August 12, 2003, by and between CoBiz Inc. and Lyne B.  Andrich.                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (10)   | 10.11  | Lease  Agreement between Za’hav and First Capital Bank of Arizona dated  June 15, 2001.                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (10)   | 10.12  | Lease  Agreement between Dorit, LLC and Colorado Business Bank, N.A. dated  March 31, 2003.                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (11)   | 10.13  | Employment  Agreement, dated November 19, 2004, by and between CoBiz Inc. and Steven  Bangert.                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (12)   | 10.14  | Supplemental  Executive Retirement Plan.                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (4)    | 10.15  | 2005  Equity Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (15)   | 10.16  | Indemnification  Agreements dated December 19, 2006 between CoBiz Inc. and each the  following directors and executive officers of the Corporation: Lyne B.  Andrich, Steven Bangert, Michael B. Burgamy, Jerry W. Chapman, Richard J.  Dalton, Morgan Gust, Thomas M. Longust, Jonathan C. Lorenz, Evan Makovsky,  Harold F. Mosanko, Robert B. Ostertag, Howard R. Ross, Noel N. Rothman,  Timothy J. Travis, Mary Beth Vitale and Mary White. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (13)   | 10.17  | Employment  Agreement, dated August 7, 2006, by and between CoBiz Inc. and Troy R.  Dumlao.                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (16)   | 10.18  | Amendments  dated March 16, 2006 to the Employment Agreements between CoBiz Inc. and  each of Steven Bangert, Jonathan C. Lorenz, Richard J. Dalton, Lyne B.  Andrich and Robert B. Ostertag.                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (17)   | 10.19  | Indemnification  Agreement dated March 5, 2007 between CoBiz Inc. and Troy R. Dumlao.                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (19)   | 10.20  | Revolving  Credit Agreement, dated August 2, 2007, by and between CoBiz Financial  Inc. and US Bank, NA.                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (19)   | 10.21  | Form of  Amended and Restated Executive Split Dollar Life Insurance Plan and  Agreements, dated December 31, 2007 between Cobiz Financial Inc and each  of Steven Bangert, Richard J. Dalton, Lyne B. Andrich and Robert B. Ostertag.                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (20)   | 10.22  | Second  and Third Amendments to Lease Agreement between Kesef, LLC and Colorado  Business Bankshares, Inc. dated August 1, 2000.                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (21)   | 10.23  | First  Amendment to Revolving Credit Agreement, dated May 9, 2008, by and  between CoBiz Financial Inc. and US Bank, NA.                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (22)   | 10.24  | Amended  and Restated 2005 Equity Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (24)   | 10.25  | Second  Amendment to the Revolving Credit Agreement dated July 31, 2008 between  CoBiz Financial Inc. and US Bank, NA.                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (25)   | 10.26  | Securities  Purchase Agreement , dated December 19, 2008, by and between CoBiz  Financial Inc. and the United Stated Department of the Treasury.                                                                                                                                                                                                                                                                                                 |

 

71

----

Table of Contents

 
| (25)   | 10.27  | Form of  Waiver of Claims Against the United States for changes in compensation or  benefits resulting from participation in the United States Department of the  Treasury’s TARP Capital Purchase Program.                                                                                                                                                                                                                                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (25)   | 10.28  | Form of  Letter Agreement to Amend the executive employment contracts to conform to requirements  and limitations promulgated by participation in the United States Department  of the Treasury’s TARP Capital Purchase Program and other regulations under  Section 409A of the Internal Revenue Code of 1986 (as amended) between  CoBiz Financial Inc. and each of Steven Bangert, Jonathan C. Lorenz, Richard  J. Dalton, Lyne B. Andrich and Robert B. Ostertag. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (10)   | 14     | Code  of Conduct and Ethics.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 21     | List  of subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 23     | Consent  of Independent Registered Public Accounting firm.                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 31.1   | Rule 13a-14(a)/15d-14(a) Certification  of the Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 31.2   | Rule 13a-14(a)/15d-14(a) Certification  of the Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 32.1   | Section 1350  Certification of the Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 32.2   | Section 1350  Certification of the Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                                     |

----

(1)                Incorporated herein by reference from the Registrant’sRegistration Statement on Form S-4 (File No. 333-51866).

 

(2)                Incorporated herein by reference from the Registrant’sRegistration Statement on Form SB-2 (File No. 333-50037).

 

(3)                Incorporated herein by reference from the Registrant’sCurrent Report on Form 8-K, as filed on March 23, 2001.

 

(4)                Incorporated herein by reference from the Registrant’sDefinitive Proxy Statement on Schedule 14A as filed on April 14, 2005.

 

(5)                Incorporated herein by reference from the Registrant’sQuarterly Report on Form 10QSB for the quarter ended September 30,1998, as filed on November 13, 1998.

 

(6)                Incorporated herein by reference from the Registrant’sQuarterly Report on Form 10-Q for the quarter ended September 30,2000, as filed on November 14, 2000.

 

(7)                Incorporated herein by reference from the Registrant’sProxy Statement filed in connection with its 2000 annual meeting ofshareholders, as filed on April 19, 2000.

 

(8)                Incorporated herein by reference from the Registrant’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2002, asfiled on August 14, 2002.

 

(9)                Incorporated herein by reference from the Registrant’sQuarterly Report on Form 10-Q for the quarter ended September 30,2003, as filed on November 13, 2003.

 

72

----

Table ofContents

 

(10)          Incorporated herein by reference from the Registrant’sAnnual Report on Form 10-K for the year ended December 31, 2003, asfiled on March 12, 2004.

 

(11)          Incorporated herein by reference from the Registrant’sCurrent Report on Form 8-K, as filed on November 24, 2004.

 

(12)          Incorporated herein by reference from the Registrant’sQuarterly Report on Form 10-Q for the quarter ended September 30,2007, as filed on November 9, 2007.

 

(13)          Incorporated herein by reference from the Registrant’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2006, asfiled on August 9, 2006.

 

(14)          Incorporated herein by reference from the Registrant’sCurrent Report on Form 8-K, as filed on December 18, 2006.

 

(15)          Incorporated herein by reference from theRegistrant’s Current Report on Form 8-K, as filed on December 20,2006.

 

(16)          Incorporated herein by reference from theRegistrant’s Current Report on Form 8-K, as filed on March 20, 2006.

 

(17)          Incorporated herein by reference from theRegistrant’s Annual Report on Form 10-K, as filed on March 15, 2007.

 

(18)          Incorporated herein by reference from the Registrant’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2007, asfiled on August 9, 2007.

 

(19)          Incorporated herein by reference from the Registrant’sAnnual Report on Form 10-K, as filed on March 17, 2008.

 

(20)          Incorporated herein by reference from the Registrant’sCurrent Report on Form 8-K, as filed April 4, 2008.

 

(21)          Incorporated herein by reference from the Registrant’sQuarterly Report on Form 10-Q for the quarter ended March 31, 2008,as filed on May 12, 2008.

 

(22)          Incorporated herein by reference from the Registrant’sProxy Statement filed in connection with its 2008 annual meeting ofshareholders, as filed on April 15, 2008.

 

(23)          Incorporated herein by reference from the Registrant’sCurrent Report on Form 8-K, as filed August 22, 2008.

 

(24)          Incorporated herein by reference from the Registrant’sQuarterly Report on Form 10-Q for the quarter ended September 30,2008, as filed on November 10, 2008.

 

(25)          Incorporated herein by reference from the Registrant’sCurrent Report on Form 8-K, as filed December 23, 2008.

 

+        Confidentialtreatment has been granted by the Securities and Exchange Commission as tocertain portions of exhibit. Such portions have been redacted.

 

(b)       Exhibits - See exhibit index included inItem 15(a)(3) of this Annual Report on Form 10-K.

(c)       Financial Statement Schedules - See Item15(a)(2) of this Annual Report on Form 10-K.

 

73

----

Table of Contents

 

SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

Dated:  March 13, 2009

 

|   | CoBiz Financial Inc. |
|--------|----------------------|
|   |                 |   |
|   | By:                  | /s/ Steven Bangert |
|   |                 | Steven Bangert |
|   |                 | Chief Executive Officer  andChairman of the Board of Directors |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

| **Signature:**         | ** ** | **Title:**                    | ** ** | **Date:**            |
|------------------------|------------|-------------------------------|------------|----------------------|
|                   |       |                          |       |                 |
| /s/ Steven Bangert     |       | Chairman of the Board  and    |       | March 13,  2009 |
| Steven Bangert         |       | Chief Executive Officer       |       |                 |
|                   |       |                          |       |                 |
| /s/ Jonathan C. Lorenz |       | Vice Chairman of the  Board   |       | March 13,  2009 |
| Jonathan C. Lorenz     |       |                          |       |                 |
|                   |       |                          |       |                 |
| /s/ Richard J. Dalton  |       | President                     |       | March 13,  2009 |
| Richard J. Dalton      |       |                          |       |                 |
|                   |       |                          |       |                 |
| /s/ Lyne B. Andrich    |       | Executive Vice  President and |       | March 13,  2009 |
| Lyne B. Andrich        |       | Chief Financial Officer       |       |                 |
|                   |       |                          |       |                 |
| /s/ Troy R. Dumlao     |       | Chief Accounting  Officer     |       | March 13,  2009 |
| Troy R. Dumlao         |       |                          |       |                 |
|                   |       |                          |       |                 |
| /s/ Michael B. Burgamy |       | Director                      |       | March 13,  2009 |
| Michael B. Burgamy     |       |                          |       |                 |
|                   |       |                          |       |                 |
| /s/ Morgan Gust        |       | Director                      |       | March 13,  2009 |
| Morgan Gust            |       |                          |       |                 |
|                   |       |                          |       |                 |
| /s/ Harold F. Mosanko  |       | Director                      |       | March 13,  2009 |
| Harold F. Mosanko      |       |                          |       |                 |
|                   |       |                          |       |                 |
| /s/ Thomas M. Longust  |       | Director                      |       | March 13,  2009 |
| Thomas M. Longust      |       |                          |       |                 |
|                   |       |                          |       |                 |
| /s/ Evan Makovsky      |       | Director                      |       | March 13,  2009 |
| Evan Makovsky          |       |                          |       |                 |
|                   |       |                          |       |                 |
| /s/ Doug Polson        |       | Director                      |       | March 13,  2009 |
| Doug Polson            |       |                          |       |                 |
|                   |       |                          |       |                 |
| /s/ Mary Rhinehart     |       | Director                      |       | March 13,  2009 |
| Mary Rhinehart         |       |                          |       |                 |
|                   |       |                          |       |                 |
| /s/ Noel N. Rothman    |       | Director                      |       | March 13,  2009 |
| Noel N. Rothman        |       |                          |       |                 |
|                   |       |                          |       |                 |
| /s/ Timothy J. Travis  |       | Director                      |       | March 13,  2009 |
| Timothy J. Travis      |       |                          |       |                 |
|                   |       |                          |       |                 |
| /s/ Mary Beth Vitale   |       | Director                      |       | March 13,  2009 |
| Mary Beth Vitale       |       |                          |       |                 |
|                   |       |                          |       |                 |
| /s/ Mary M. White      |       | Director                      |       | March 13,  2009 |
| Mary M. White          |       |                          |       |                 |

 

 

74

----

Table of Contents

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
| Management’s Report on Internal Control Over Financial  Reporting and Compliance with Designated Laws and Regulations |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                       |   |
| Reports of Independent Registered Public Accounting  Firm                                                                  |   |
|                                                                                                                       |   |
| Consolidated  Balance Sheets at December 31, 2008 and 2007                                                            |   |
|                                                                                                                       |   |
| Consolidated Statements of Income and Comprehensive  Income for the Years Ended  December 31, 2008, 2007 and 2006     |   |
|                                                                                                                       |   |
| Consolidated Statements of Shareholders’ Equity for  the Years Ended  December 31, 2008, 2007 and 2006           |   |
|                                                                                                                       |   |
| Consolidated  Statements of Cash Flows for the Years Ended  December 31, 2008, 2007 and 2006                          |   |
|                                                                                                                       |   |
| Notes to Consolidated Financial Statements at and for  the Years Ended  December 31, 2008, 2007 and 2006              |   |

 

75

----

Table ofContents

 

**MANAGEMENT’S REPORTON INTERNAL CONTROL OVER FINANCIAL REPORTING AND COMPLIANCE WITH DESIGNATEDLAWS AND REGULATIONS**

** **

**Management’s Report on Internal Control over Financial Reporting**

 

Management of CoBiz Financial Inc., together withits consolidated subsidiaries (the Company), is responsible for establishingand maintaining adequate internal control over financial reporting. The Company’sinternal control over financial reporting is a process designed under thesupervision of the Company’s Chief Executive Officer and Chief FinancialOfficer to provide reasonable assurance regarding the reliability of financialreporting and the preparation of the Company’s financial statements forexternal reporting purposes in accordance with accounting principles generallyaccepted in the United States of America.

 

As of December 31, 2008, management assessedthe effectiveness of the Company’s internal control over financial reportingbased on the framework established in *Internal Control —Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  This assessment included controls over thepreparation of the schedules equivalent to the basic financial statements inaccordance with the instructions for the Consolidated Financial Statements forBank Holding Companies (Form FRY-9C) to meet the reporting requirements ofsection 112 of the Federal Deposit Insurance Corporation Improvement Act.  Based on this assessment, management hasdetermined that the Company’s internal control over financial reporting as of December 31,2008, is effective.

 

Deloitte & Touche LLP, the independentregistered public accounting firm that audited the consolidated financialstatements included in this annual report on Form 10-K, has issued anattestation report on the effectiveness of the Company’s internal control overfinancial reporting at December 31, 2008. The report, which expresses anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2008, is included under the heading“Report of Independent Registered Public Accounting Firm”.

 

**Compliance with Designated Laws and Regulations**

 

Management is also responsible for ensuringcompliance with federal and state laws and regulations concerning loans toinsiders and dividend restrictions and which are designated by the FederalDeposit Insurance Corporation (FDIC), the Federal Reserve Bank and the ColoradoDivision of Banking as safety and soundness laws and regulations.

 

Management assessed its compliance with thedesignated safety and soundness laws and regulations and has maintained recordsof its determinations and assessments as required by the FDIC.  Based on this assessment, management believesthat the Company has complied, in all material respects, with the designatedsafety and soundness laws and regulations for the year ended December 31,2008.

 

March 13, 2009

 

 

| By:  /s/ Steven Bangert    |   |   | By:  /s/ Lyne B. Andrich      |   |
|----------------------------|--------|--------|-------------------------------|--------|
| Steven  Bangert            |   |   | Lyne  B. Andrich              |   |
| Chairman  of the Board and |   |   | Executive  Vice President and |   |
| Chief  Executive Officer   |   |   | Chief  Financial Officer      |   |

 

 

F-1

----

Table ofContents

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

**To theBoard of Directors and Shareholders of**

**CoBizFinancial Inc.**

**Denver,Colorado**

 

Wehave audited the internal control over financial reporting of CoBiz FinancialInc. and Subsidiaries (the “Company”) as of December 31, 2008, based oncriteria established in Internal Control — Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  Because management’s assessment and our auditwere conducted to meet the reporting requirements of Section 112 of theFederal Deposit Insurance Corporation Improvement Act (FDICIA), management’sassessment and our audit of the Company’s internal control over financialreporting included controls over the preparation of the schedules equivalent tothe basic financial statements in accordance with the instructions for theConsolidated Financial Statements for Bank Holding Companies (Form FRY-9C) or relevant report.  The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management’sReport on Internal Control Over Financial Reporting.  Our responsibility is to express an opinionon the Company’s internal control over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects.  Our audit included obtaining an understandingof internal control over financial reporting, assessing the risk that amaterial weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performingsuch other procedures as we considered necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed by,or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe company’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof the inherent limitations of internal control over financial reporting, includingthe possibility of collusion or improper management override of controls,material misstatements due to error or fraud may not be prevented or detectedon a timely basis.  Also, projections ofany evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2008, basedon the criteria established in Internal Control — Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission.

 

Wehave not examined and, accordingly, we do not express an opinion or any otherform of assurance on management’s statement referring to compliance with lawsand regulations.

 

F-2

----

Table ofContents

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financialstatements as of  and for the year ended December 31,2008, of the Company and our report dated March 13, 2009, expressed anunqualified opinion on those financial statements.

 

/s/DELOITTE & TOUCHE LLP

Denver,Colorado

March 13,2009

 

F-3

----

Table ofContents

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

**To theBoard of Directors and Shareholders of**

**CoBizFinancial Inc.**

**Denver,Colorado**

 

Wehave audited the accompanying consolidated balance sheets of CoBiz FinancialInc. and Subsidiaries (the “Company”) as of December 31, 2008 and 2007,and the related statements of income and comprehensive income, shareholders’equity, and cash flows for each of the three years in the period ended December 31,2008.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, such financial statements present fairly, in all materialrespects, the financial position of CoBiz Financial Inc. and Subsidiaries as ofDecember 31, 2008 and 2007, and the results of its operations and its cashflows for each of the three years in the period ended December 31, 2008,in conformity with accounting principles generally accepted in the UnitedStates of America.

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the Company’s internal control overfinancial reporting as of December 31, 2008, based on the criteriaestablished in Internal Control — Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission and our report dated March 13,2009 expressed an unqualified opinion on the Company’s internal control overfinancial reporting.

 

/s/DELOITTE & TOUCHE LLP

Denver,Colorado

March 13,2009

 

F-4

----

Table ofContents

 

**COBIZ FINANCIAL INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**AT DECEMBER 31, 2008 AND 2007**

**(In thousands, except share amounts)**

 
| ** **                                                                              | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                    |       |       |       |       |       |
| Cash and due from banks                                                                 |       | $          | 35,857     |       | $          | 45,951 |   |
| Interest bearing deposits and federal funds sold                                        |       | 9,632      |       | 3,675      |       |
|                                                                                    |       |       |       |       |       |
| Total cash and cash equivalents                                                         |       | 45,489     |       | 49,626     |       |
|                                                                                    |       |       |       |       |       |
| Investment securities available for sale (cost of $479,197 and  $379,677, respectively) |       | 476,506    |       | 378,565    |       |
|                                                                                    |       |       |       |       |       |
| Investment securities held to maturity (fair value of $374 and $473,  respectively)     |       | 376        |       | 470        |       |
|                                                                                    |       |       |       |       |       |
| Other investments — at cost                                                        |       | 23,566     |       | 16,628     |       |
|                                                                                    |       |       |       |       |       |
| Total investments                                                                       |       | 500,448    |       | 395,663    |       |
|                                                                                    |       |       |       |       |       |
| Loans — net of allowance for loan losses of $42,851 and $20,043,  respectively     |       | 1,988,402  |       | 1,826,283  |       |
|                                                                                    |       |       |       |       |       |
| Goodwill                                                                                |       | 46,160     |       | 43,386     |       |
|                                                                                    |       |       |       |       |       |
| Intangible assets — net of amortization of $3,235 and $2,511,  respectively        |       | 5,704      |       | 2,112      |       |
|                                                                                    |       |       |       |       |       |
| Bank-owned life insurance                                                               |       | 30,718     |       | 29,546     |       |
|                                                                                    |       |       |       |       |       |
| Premises and equipment — net of depreciation of $24,139 and $21,854,  respectively |       | 9,154      |       | 8,811      |       |
|                                                                                    |       |       |       |       |       |
| Accrued interest receivable                                                             |       | 8,617      |       | 10,201     |       |
|                                                                                    |       |       |       |       |       |
| Deferred income taxes                                                                   |       | 16,933     |       | 7,723      |       |
|                                                                                    |       |       |       |       |       |
| Other                                                                                   |       | 32,650     |       | 17,661     |       |
|                                                                                    |       |       |       |       |       |
| TOTAL                                                                                   |       | $          | 2,684,275  |       | $          | 2,391,012 |   |
|                                                                                    |       |       |       |       |       |

 

(Continued)

 

F-5

----

Table of Contents

 

**COBIZ FINANCIAL INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**AT DECEMBER 31, 2008 AND 2007**

**(In thousands, except share amounts)**

 
| ** **                                                                   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                         |       |       |       |       |       |
| LIABILITIES:                                                                 |       |       |       |       |       |
| Deposits:                                                                    |       |       |       |       |       |
| Demand                                                                       |       | $          | 453,731    |       | $          | 439,076 |   |
| NOW and money market                                                         |       | 565,948    |       | 631,391    |       |
| Savings                                                                      |       | 9,274      |       | 11,546     |       |
| Eurodollar                                                                   |       | 88,025     |       | 77,444     |       |
| Certificates of deposit                                                      |       | 522,053    |       | 583,232    |       |
|                                                                         |       |       |       |       |       |
| Total deposits                                                               |       | 1,639,031  |       | 1,742,689  |       |
|                                                                         |       |       |       |       |       |
| Securities sold under agreements to repurchase                               |       | 133,478    |       | 168,336    |       |
| Other short-term borrowings                                                  |       | 543,063    |       | 197,444    |       |
| Accrued interest and other liabilities                                       |       | 23,454     |       | 21,107     |       |
| Junior subordinated debentures                                               |       | 72,166     |       | 72,166     |       |
| Subordinated notes payable                                                   |       | 20,984     |       |       |       |
|                                                                         |       |       |       |       |       |
| Total liabilities                                                            |       | 2,432,176  |       | 2,201,742  |       |
|                                                                         |       |       |       |       |       |
| COMMITMENTS AND CONTINGENCIES (Note 15)                                      |       |       |       |       |       |
|                                                                         |       |       |       |       |       |
| SHAREHOLDERS’ EQUITY:                                                   |       |       |       |       |       |
| Cumulative preferred, $0.01 par value — authorized, 2,000,000           |       |       |       |       |       |
| shares; issued and outstanding, 64,450 ($1,000 per share liquidation  value) |       |       |       |       |       |
| and 0 shares, respectively                                                   |       | 1          |       | —     |       |
| Common, $0.01 par value — authorized, 50,000,000                        |       |       |       |       |       |
| shares; issued and outstanding, 23,374,762 and                               |       |       |       |       |       |
| 22,992,756 shares, respectively                                              |       | 232        |       | 230        |       |
| Additional paid-in capital                                                   |       | 164,484    |       | 96,906     |       |
| Retained earnings                                                            |       | 86,827     |       | 92,128     |       |
| Accumulated other comprehensive income — net of                         |       |       |       |       |       |
| income tax of $341 and $4, respectively                                      |       | 555        |       | 6          |       |
|                                                                         |       |       |       |       |       |
| Total shareholders’ equity                                              |       | 252,099    |       | 189,270    |       |
|                                                                         |       |       |       |       |       |
| TOTAL                                                                        |       | $          | 2,684,275  |       | $          | 2,391,012 |   |

 
| See  notes to consolidated financial statements. |   | (Concluded) |
|--------------------------------------------------|--------|-------------|

 

 

F-6

----

Table of Contents

 

**COBIZ FINANCIAL INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVEINCOME**

**FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006**

**(In thousands, except per share amounts)**

 
| ** **                                                                            | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                  |       |     |       |     |       |     |       |
| INTEREST INCOME:                                                                      |       |     |       |     |       |     |       |
| Interest and fees on loans                                                            |       | $        | 122,418    |     | $          | 132,965  |       | $ | 114,567 |   |
| Interest on investments:                                                              |       |     |       |     |       |     |       |
| Taxable securities                                                                    |       | 21,411   |       | 20,150   |       | 20,475   |       |
| Nontaxable securities                                                                 |       | 121      |       | 149      |       | 224      |       |
| Dividends on securities                                                               |       | 684      |       | 790      |       | 755      |       |
| Federal funds sold and other                                                          |       | 274      |       | 456      |       | 423      |       |
|                                                                                  |       |     |       |     |       |     |       |
| Total interest income                                                                 |       | 144,908  |       | 154,510  |       | 136,444  |       |
|                                                                                  |       |     |       |     |       |     |       |
| INTEREST EXPENSE:                                                                     |       |     |       |     |       |     |       |
| Interest on deposits                                                                  |       | 34,671   |       | 44,864   |       | 32,976   |       |
| Interest on short-term borrowings and securities sold under  agreements to repurchase |       | 9,996    |       | 16,096   |       | 18,585   |       |
| Interest on subordinated debentures                                                   |       | 4,890    |       | 5,651    |       | 5,454    |       |
|                                                                                  |       |     |       |     |       |     |       |
| Total interest expense                                                                |       | 49,557   |       | 66,611   |       | 57,015   |       |
|                                                                                  |       |     |       |     |       |     |       |
| NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES                                  |       | 95,351   |       | 87,899   |       | 79,429   |       |
|                                                                                  |       |     |       |     |       |     |       |
| PROVISION FOR LOAN LOSSES                                                             |       | 39,796   |       | 3,936    |       | 1,342    |       |
|                                                                                  |       |     |       |     |       |     |       |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                                   |       | 55,555   |       | 83,963   |       | 78,087   |       |
|                                                                                  |       |     |       |     |       |     |       |
| NONINTEREST INCOME:                                                                   |       |     |       |     |       |     |       |
| Service charges                                                                       |       | 4,067    |       | 3,154    |       | 2,778    |       |
| Investment advisory and trust income                                                  |       | 6,345    |       | 4,763    |       | 4,141    |       |
| Insurance income                                                                      |       | 15,113   |       | 9,397    |       | 13,094   |       |
| Investment banking income                                                             |       | 5,055    |       | 6,681    |       | 6,214    |       |
| Other income                                                                          |       | 4,819    |       | 4,294    |       | 3,738    |       |
|                                                                                  |       |     |       |     |       |     |       |
| Total noninterest income                                                              |       | 35,399   |       | 28,289   |       | 29,965   |       |
|                                                                                  |       |     |       |     |       |     |       |
| NONINTEREST EXPENSE:                                                                  |       |     |       |     |       |     |       |
| Salaries and employee benefits                                                        |       | 57,368   |       | 50,172   |       | 47,627   |       |
| Occupancy expenses, premises and equipment                                            |       | 13,075   |       | 11,541   |       | 11,360   |       |
| Amortization of intangibles                                                           |       | 724      |       | 471      |       | 475      |       |
| Loss on securities, other assets and other real estate owned                          |       | 4,592    |       | 1,039    |       | 1,782    |       |
| Other                                                                                 |       | 13,958   |       | 12,292   |       | 10,683   |       |
|                                                                                  |       |     |       |     |       |     |       |
| Total noninterest expense                                                             |       | 89,717   |       | 75,515   |       | 71,927   |       |
|                                                                                       |            |          |            |          |            |          |            |  |  |  |

 

(Continued)

 

F-7

----

Table of Contents

 

**COBIZ FINANCIAL INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**

**FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006**

**(In thousands, except per share amounts)**

 
| ** **                                                                                           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                 |       |     |       |     |       |     |       |
| INCOME BEFORE INCOME TAXES                                                                           |       | $        | 1,237      |     | $          | 36,737   |       | $ | 36,125 |   |
|                                                                                                 |       |     |       |     |       |     |       |
| PROVISION (BENEFIT) FOR INCOME TAXES                                                                 |       | (91      | )          | 13,713   |       | 13,299   |       |
|                                                                                                 |       |     |       |     |       |     |       |
| NET INCOME                                                                                           |       | 1,328    |       | 23,024   |       | 22,826   |       |
|                                                                                                 |       |     |       |     |       |     |       |
| UNREALIZED APPRECIATION ON SECURITIES AVAILABLE FOR SALE AND DERIVATIVES  — Net of income taxes |       | 549      |       | 2,620    |       | 3,261    |       |
|                                                                                                 |       |     |       |     |       |     |       |
| COMPREHENSIVE INCOME                                                                                 |       | $        | 1,877      |     | $          | 25,644   |       | $ | 26,087 |   |
|                                                                                                 |       |     |       |     |       |     |       |
| EARNINGS PER COMMON SHARE:                                                                           |       |     |       |     |       |     |       |
| Basic                                                                                                |       | $        | 0.05       |     | $          | 0.98     |       | $ | 1.01 |   |
|                                                                                                 |       |     |       |     |       |     |       |
| Diluted                                                                                              |       | $        | 0.05       |     | $          | 0.96     |       | $ | 0.98 |   |

 
| See  notes to consolidated financial statements. | (Concluded) |
|--------------------------------------------------|-------------|

 

F-8

----

 

Table of Contents

 

**COBIZ FINANCIAL INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006**

**(In thousands, except per share amounts)**

 
| ** **                                                                                                                | ** ** | ** **           | ** ** | ** **       | ** ** | ** **     | ** ** | ** ** | ** ** | ** **        | ** ** | ** **   | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|------------------|------------|----------------|------------|------------|------------|-------------------|------------|--------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                                | ** ** | ** **           | ** ** | ** **       | ** ** | ** **     | ** ** | ** ** | ** ** | ** **        | ** ** | ** **   | ** ** | **Other**       | ** ** | ** ** | ** ** |
| ** **                                                                                                                | ** ** | **Preferred  Stock** | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** ** | ** ** | **Comprehensive** | ** ** | ** **   | ** ** |
| ** **                                                                                                                | ** ** | **Shares**           | ** ** | ** **       | ** ** | **Shares**     | ** ** | ** ** | ** ** | **Paid-In**       | ** ** | **Retained** | ** ** | **Income**      | ** ** | ** ** | ** ** |
| ** **                                                                                                                | ** ** | **Issued**           | ** ** | **Amount**       | ** ** | **Issued**     | ** ** | **Amount** | ** ** | **Capital**       | ** ** | **Earnings** | ** ** | **(Loss)**      | ** ** | **Total**  | ** ** |
|                                                                                                                      |       |                 |       |             |       |           |       |       |       |              |       |         |       |            |       |       |       |
| BALANCE —  January 1, 2006                                                                                      |       | —               |       | $                | —     |           | 22,309,136 |       | $          | 223               |       | $            | 69,560     |            | $          | 72,636     |       | $ | (5,875 | ) | $ | 136,544 |   |
|                                                                                                                      |       |                 |       |             |       |           |       |       |       |              |       |         |       |            |       |       |       |
| Options exercised                                                                                                         |       | —               |       | —           |       | 339,277        |       | 4          |       | 1,917             |       | —       |       | —          |       | 1,921      |       |
| Employee stock  purchase plan                                                                                             |       | —               |       | —           |       | 36,901         |       | —     |       | 729               |       | —       |       | —          |       | 729        |       |
| Stock-based  compensation expense                                                                                         |       | —               |       | —           |       | —         |       | —     |       | 1,140             |       | —       |       | —          |       | 1,140      |       |
| Tax benefit from  stock-based compensation                                                                                |       | —               |       | —           |       | —         |       | —     |       | 905               |       | —       |       | —          |       | 905        |       |
| Dividends  paid-common ($0.22 per share)                                                                                  |       | —               |       | —           |       | —         |       | —     |       | —            |       | (4,960       | )          | —          |       | (4,960     | )          |
| Earn-out payment  for Alexander Capital Management Group                                                                  |       | —               |       | —           |       | 15,576         |       | —     |       | 309               |       | —       |       | —          |       | 309        |       |
| Net change in  unrealized gain on available for sale securities and derivative securities,  net of income taxes of $1,998 |       | —               |       | —           |       | —         |       | —     |       | —            |       | —       |       | 3,261           |       | 3,261      |       |
| Net income                                                                                                                |       | —               |       | —           |       | —         |       | —     |       | —            |       | 22,826       |       | —          |       | 22,826     |       |
|                                                                                                                      |       |                 |       |             |       |           |       |       |       |              |       |         |       |            |       |       |       |
| BALANCE —  December 31, 2006                                                                                    |       | —               |       | —           |       | 22,700,890     |       | 227        |       | 74,560            |       | 90,502       |       | (2,614          | )          | 162,675    |       |
|                                                                                                                      |       |                 |       |             |       |           |       |       |       |              |       |         |       |            |       |       |       |
| Cumulative effect  adjustment pursuant to the adoption of EITF 06-5                                                       |       | —               |       | —           |       | —         |       | —     |       | —            |       | (134         | )          | —          |       | (134       | )          |
| Options exercised                                                                                                         |       | —               |       | —           |       | 369,386        |       | 4          |       | 3,234             |       | —       |       | —          |       | 3,238      |       |
| Employee stock  purchase plan                                                                                             |       | —               |       | —           |       | 47,278         |       | —     |       | 706               |       | —       |       | —          |       | 706        |       |
| Stock-based  compensation expense                                                                                         |       | —               |       | —           |       | —         |       | —     |       | 1,524             |       | —       |       | —          |       | 1,524      |       |
| Tax benefit from  stock-based compensation                                                                                |       | —               |       | —           |       | —         |       | —     |       | 1,060             |       | —       |       | —          |       | 1,060      |       |
| Dividends  paid-common ($0.26 per share)                                                                                  |       | —               |       | —           |       | —         |       | —     |       | —            |       | (6,173       | )          | —          |       | (6,173     | )          |
| Earn-out payment  for Financial Designs Ltd.                                                                              |       | —               |       | —           |       | 19,501         |       | —     |       | 438               |       | —       |       | —          |       | 438        |       |
| Acquisition of  Wagner Investment Management Inc.                                                                         |       | —               |       | —           |       | 80,908         |       | 1          |       | 1,202             |       | —       |       | —          |       | 1,203      |       |
| Proceeds from  issuance of common stock, net of offering costs of approximately $106                                      |       | —               |       | —           |       | 975,000        |       | 10         |       | 19,141            |       | —       |       | —          |       | 19,151     |       |
| Repurchases of  common stock                                                                                              |       | —               |       | —           |       | (1,200,207     | )          | (12        | )          | (4,959            | )          | (15,091      | )          | —          |       | (20,062    | )          |
| Net change in  unrealized gain on available for sale securities and derivative securities,  net of income taxes of $1,606 |       | —               |       | —           |       | —         |       | —     |       | —            |       | —       |       | 2,620           |       | 2,620      |       |
| Net income                                                                                                                |       | —               |       | —           |       | —         |       | —     |       | —            |       | 23,024       |       | —          |       | 23,024     |       |
|                                                                                                                      |       |                 |       |             |       |           |       |       |       |              |       |         |       |            |       |       |       |
| BALANCE —  December 31, 2007                                                                                    |       | —               |       | —           |       | 22,992,756     |       | 230        |       | 96,906            |       | 92,128       |       | 6               |       | 189,270    |       |
|                                                                                                                      |       |                 |       |             |       |           |       |       |       |              |       |         |       |            |       |       |       |
| Cumulative effect  adjustment pursuant to the adoption of EITF 06-4                                                       |       | —               |       | —           |       | —         |       | —     |       | —            |       | (16          | )          | —          |       | (16        | )          |
| Series B  Preferred stock and warrant, net of issuance costs                                                         |       | 64,450               |       | 1                |       |           |       |       |       | 64,397            |       | —       |       | —          |       | 64,398     |       |
| Options exercised                                                                                                         |       | —               |       | —           |       | 98,532         |       | 1          |       | 641               |       | —       |       | —          |       | 642        |       |
| Employee stock  purchase plan                                                                                             |       | —               |       | —           |       | 67,974         |       | 1          |       | 602               |       | —       |       | —          |       | 603        |       |
| Restricted stock  awards, net of forfeitures                                                                              |       | —               |       | —           |       | 215,500        |       | —     |       | —            |       | —       |       | —          |       |       |       |
| Stock-based  compensation expense                                                                                         |       | —               |       | —           |       | —         |       | —     |       | 1,762             |       | —       |       | —          |       | 1,762      |       |
| Dividends  paid-common ($0.28 per share)                                                                                  |       | —               |       | —           |       | —         |       | —     |       | —            |       | (6,489       | )          | —          |       | (6,489     | )          |
| Dividends  paid/accumulated-preferred stock (5% on $1,000 per share liquidation value)                                    |       | —               |       | —           |       | —         |       | —     |       | 17                |       | (124         | )          | —          |       | (107       | )          |
| Tax benefit from  stock-based compensation                                                                                |       | —               |       | —           |       | —         |       | —     |       | 159               |       | —       |       | —          |       | 159        |       |
| Net change in  unrealized loss on available for sale securities and derivative securities,  net of income taxes of $337   |       | —               |       | —           |       | —         |       | —     |       | —            |       | —       |       | 549             |       | 549        |       |
| Net income                                                                                                                |       | —               |       | —           |       | —         |       | —     |       | —            |       | 1,328        |       | —          |       | 1,328      |       |
|                                                                                                                      |       |                 |       |             |       |           |       |       |       |              |       |         |       |            |       |       |       |
| BALANCE —  December 31, 2008                                                                                    |       | 64,450               |       | $                | 1          |           | 23,374,762 |       | $          | 232               |       | $            | 164,484    |            | $          | 86,827     |       | $ | 555 |   | $ | 252,099 |   |

 

See notes to consolidated financial statements.

 

F-9

----

Table of Contents

 

**COBIZ FINANCIAL INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006**

**(In thousands, except per share amounts)**

 
| ** **                                                                               | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |       |     |       |     |       |     |       |
| Net income                                                                               |       | $        | 1,328      |     | $          | 23,024   |       | $ | 22,826 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:       |       |     |       |     |       |     |       |
| Net amortization on investment securities                                                |       | 577      |       | 385      |       | 1,356    |       |
| Depreciation and amortization                                                            |       | 4,447    |       | 4,128    |       | 4,008    |       |
| Amortization of net loan fees                                                            |       | (2,357   | )          | (2,807   | )          | (2,912   | )          |
| Provision for loan and credit losses                                                     |       | 39,479   |       | 3,936    |       | 1,342    |       |
| Stock-based compensation                                                                 |       | 1,762    |       | 1,524    |       | 1,140    |       |
| Federal Home Loan Bank stock dividend                                                    |       | (475     | )          | (590     | )          | (573     | )          |
| Deferred income taxes                                                                    |       | (9,669   | )          | (1,513   | )          | (1,146   | )          |
| Excess tax benefits from stock-based compensation                                        |       | (159     | )          | (1,060   | )          | (905     | )          |
| Increase in cash surrender value of bank-owned life insurance                            |       | (1,172   | )          | (984     | )          | (1,003   | )          |
| Supplemental executive retirement plan                                                   |       | 717      |       | 783      |       | 690      |       |
| Loss on sale/write-down of other real estate owned, investment securities  and equipment |       | 4,592    |       | 1,039    |       | 1,781    |       |
| Other operating activities, net                                                          |       | (901     | )          | (973     | )          | (447     | )          |
| Changes in operating assets and liabilities:                                             |       |     |       |     |       |     |       |
| Accrued interest receivable                                                              |       | 1,584    |       | (454     | )          | (2,486   | )          |
| Other assets                                                                             |       | (2,756   | )          | 135      |       | (982     | )          |
| Accrued interest and other liabilities                                                   |       | (1,895   | )          | 1,756    |       | 3,854    |       |
|                                                                                     |       |     |       |     |       |     |       |
| Net cash provided by operating activities                                                |       | 35,102   |       | 28,329   |       | 26,543   |       |
|                                                                                     |       |     |       |     |       |     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |       |     |       |     |       |     |       |
| Purchase of other investments                                                            |       | (6,577   | )          | (2,572   | )          | (4,124   | )          |
| Proceeds from other investments                                                          |       | 1,104    |       | 425      |       | —   |       |
| Purchase of investment securities available for sale                                     |       | (210,855 | )          | (290,513 | )          | (152,966 | )          |
| Maturities of investment securities held to maturity                                     |       | 93       |       | 252      |       | 171      |       |
| Maturities of investment securities available for sale                                   |       | 109,104  |       | 333,909  |       | 128,763  |       |
| Proceeds from sale of investment securities                                              |       | —   |       | 1,053    |       | 56,027   |       |
| Net cash paid in earn-outs                                                               |       | —   |       | (438     | )          | (206     | )          |
| Purchase outstanding minority interests in ACMG                                          |       | —   |       | (351     | )          | —   |       |
| Purchase of Wagner, net of cash received                                                 |       | —   |       | (1,899   | )          | —   |       |
| Purchase of bank-owned life insurance                                                    |       | —   |       | (3,114   | )          | —   |       |
| Purchase of Bernard Dietrich and Associates                                              |       | (6,781   | )          | —   |       | —   |       |
| Proceeds from sale of other real estate owned                                            |       | 2,140    |       | —   |       | —   |       |
| Loan originations and repayments, net                                                    |       | (210,614 | )          | (301,210 | )          | (208,681 | )          |
| Purchase of premises and equipment                                                       |       | (3,737   | )          | (3,185   | )          | (3,365   | )          |
| Other investing activities, net                                                          |       | 2        |       | 99       |       | 43       |       |
|                                                                                     |       |     |       |     |       |     |       |
| Net cash used in investing activities                                                    |       | (326,121 | )          | (267,544 | )          | (184,338 | )          |
|                                                                                          |            |          |            |          |            |          |            |  |  |  |

 

(continued)

 

F-10

----

Table of Contents

 

**COBIZ FINANCIAL INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006**

**(In thousands, except per share amounts)**

 
| ** **                                                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                  |       |     |       |     |       |     |       |
| Net increase (decrease) in demand, NOW, money market, Eurodollar and  savings accounts |       | (42,479  | )          | 131,624  |       | 80,997   |       |
| Net increase (decrease) in certificates of deposits                                    |       | (61,441  | )          | 134,384  |       | 68,387   |       |
| Net increase (decrease) in short-term borrowings                                       |       | 345,619  |       | 45,244   |       | (12,800  | )          |
| Net increase (decrease) in securities sold under agreements to  repurchase             |       | (34,858  | )          | (59,281  | )          | 10,891   |       |
| Proceeds from issuance of subordinated notes payable-net                               |       | 20,900   |       | —   |       | —   |       |
| Proceeds from issuance of preferred stock and warrants-net                             |       | 64,398   |       | —   |       | —   |       |
| Proceeds from issuance of common stock-net                                             |       | 1,245    |       | 23,095   |       | 2,650    |       |
| Repurchase of common stock-net                                                         |       | —   |       | (20,062  | )          | —   |       |
| Dividends paid on common and preferred stock                                           |       | (6,613   | )          | (6,173   | )          | (4,960   | )          |
| Excess tax benefits from stock-based compensation                                      |       | 159      |       | 1,060    |       | 905      |       |
| Other financing activities-net                                                         |       | (48      | )          | (26      | )          | —   |       |
|                                                                                   |       |     |       |     |       |     |       |
| Net cash provided by financing activities                                              |       | 286,882  |       | 249,865  |       | 146,070  |       |
|                                                                                   |       |     |       |     |       |     |       |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   |       | (4,137   | )          | 10,650   |       | (11,725  | )          |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                           |       | 49,626   |       | 38,976   |       | 50,701   |       |
| CASH AND CASH EQUIVALENTS, END OF YEAR                                                 |       | $        | 45,489     |     | $          | 49,626   |       | $ | 38,976 |   |
|                                                                                   |       |     |       |     |       |     |       |
| Supplemental disclosures of cash information - cash paid during the  year for:         |       |     |       |     |       |     |       |
| Interest                                                                               |       | $        | 51,089     |     | $          | 66,101   |       | $ | 56,243 |   |
| Income taxes                                                                           |       | $        | 11,744     |     | $          | 14,325   |       | $ | 14,396 |   |
|                                                                                   |       |     |       |     |       |     |       |
| Supplemental disclosures of noncash activities:                                        |       |     |       |     |       |     |       |
| Stock issued for earn-out of Financial Designs Ltd.                                    |       | $        | —     |     | $          | 438      |       | $ | — |   |
| Stock issued for earn-out of Alexander Capital Management Group LLC                    |       | $        | —     |     | $          | —   |       | $ | 309 |   |
| Stock issued for acquisition of Wagner Investment Management Inc.                      |       | $        | —     |     | $          | 1,203    |       | $ | — |   |
| Deferred payment for acquisition of Bernard Dietrich and Associates  Inc.              |       | $        | 375        |     | $          | —   |       | $ | — |   |
| Loans transferred to other real estate owned                                           |       | $        | 11,001     |     | $          | —   |       | $ | — |   |

 

See Notes to Consolidated Financial Statements

 

F-11

----

Table of Contents

 

**COBIZ FINANCIAL INC. AND SUBSIDIARIES**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**AT AND FOR THE YEARS ENDED DECEMBER 31,2008, 2007, AND 2006**

 

**1.**   NATURE OF OPERATIONS ANDSIGNIFICANT ACCOUNTING POLICIES

** **

The accounting and reporting practices ofCoBiz Financial Inc. (Parent), formerly CoBiz Inc., and its wholly ownedsubsidiaries: CoBiz Bank (the Bank); CoBiz ACMG, Inc.; Financial DesignsLtd. (FDL); CoBiz Insurance Inc.; CoBiz GMB, Inc.; and Wagner InvestmentManagement, Inc. (Wagner), all collectively referred to as the Company orCoBiz, conform to accounting principles generally accepted in the United Statesof America and prevailing practices within the banking industry. The operationsof the Company are comprised predominately of the Bank, which operates in itsColorado market areas under the name Colorado Business Bank (CBB) and in itsArizona market areas under the name Arizona Business Bank (ABB).

 

The Company’s name was changed from CoBizInc. to CoBiz Financial Inc. at the Annual Meeting of Shareholders held on May 17,2007.

 

**Organization** — TheBank is a commercial banking institution with nine locations in the Denvermetropolitan area; two in Boulder; two near Vail; and eight in the Phoenixmetropolitan area. In April 2007, the Bank converted from a national bankcharter to a state bank charter. As a state chartered bank, deposits areinsured by the Bank Insurance Fund of the FDIC and the Bank is subject tosupervision, regulation and examination by the Federal Reserve, ColoradoDivision of Banking and the FDIC. Pursuant to such regulations, the Bank issubject to special restrictions, supervisory requirements and potentialenforcement actions. CoBiz ACMG, Inc. provides investment managementservices to institutions and individuals through its subsidiary AlexanderCapital Management Group, LLC (ACMG). FDL provides wealth transfer, employeebenefits consulting, insurance brokerage and related administrative support toindividuals, families and employers. CoBiz Insurance, Inc. providescommercial and personal property and casualty insurance brokerage, as well asrisk management consulting services to small and medium-sized businesses andindividuals. CoBiz GMB, Inc. provides investment banking services tomiddle-market companies through its wholly owned subsidiary, Green Manning &Bunch, Ltd. (GMB). Wagner complements the investment management services ofACMG with its focus on developing and delivering a proprietary investmentapproach with a growth bias.

 

**Use of Estimates** — Inpreparing its financial statements, management of the Company is required tomake estimates and assumptions that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ significantly fromthose estimates. Material estimates that are particularly susceptible tosignificant changes in the near-term relate to the determination of theallowance for loan losses; the recoverability of goodwill and intangibleassets; fair value estimates; and stock-based compensation.

 

The following is a summary of the Company’ssignificant accounting and reporting policies.

 

**Basis of Presentation** — Theconsolidated financial statements include the accounts of the Parent; the Bank;CoBiz ACMG, Inc.; FDL; CoBiz Insurance Inc.; CoBiz GMB, Inc.; andWagner. Intercompany balances and transactions are eliminated in consolidation.

 

**Cash and Cash Equivalents** — TheCompany considers all liquid investments with original maturities of threemonths or less to be cash equivalents. Cash and cash equivalents includeamounts that the Company is required to maintain at the Federal Reserve Bank ofKansas City to meet certain regulatory 

 

F-12

----

Table of Contents

 

reserve balance requirements. At December 31,2008 and 2007, the Company was required to maintain reserve balances of $0 and$1,081,000, respectively.

 

** Investments** — The Companyclassifies its investment securities as held to maturity, available for sale ortrading, according to  management’sintent. At December 31, 2008 and 2007, the Company had no tradingsecurities.

 

Available for sale securities consist of bonds,notes and debentures not classified as held to maturity securities and arereported at fair value as determined by quoted market prices. Unrealizedholding gains and losses, net of tax, are reported as a net amount inaccumulated other comprehensive income (loss) until realized.

 

InvestmentSecurities held to maturity consist of bonds, notes and debentures forwhich the Company has the positive intent and  ability to hold to maturity and are reportedat cost, adjusted for amortization of premiums and discounts.

 

Premiums and discounts, adjusted for prepayments asapplicable, are recognized in interest income using the level-yield method overthe period to maturity. Other than temporary declines in the fair value ofindividual investment securities held to maturity and available for sale arecharged against earnings. Gains and losses on disposal of investment securitiesare determined using the specific-identification method.  See Note 3 — Investments.

 

**Other Investments** — FederalHome Loan Bank of Topeka (FHLB), Federal Reserve Bank and other correspondentbank stocks are accounted for under the cost method.  See Note 3 — Investments.

 

**Loans** — Loansthat management has the intent and ability to hold for the foreseeable futureor until maturity or pay-off are reported at their outstanding principalbalance adjusted for any charge-offs, the allowance for loan losses, deferredfees or costs on originated loans, and unamortized premiums or discounts onpurchased loans. Interest is accrued and credited to income daily based on theprincipal balance outstanding. The accrual of interest income is generally discontinuedwhen a loan becomes 90 days past due as to principal and interest. When aloan is designated as nonaccrual, the current period’s accrued interestreceivable is charged against current earnings while any portions relating toprior periods are charged against the allowance for loan losses. Interestpayments received on nonaccrual loans are applied to the principal balance ofthe loan. Management may elect to continue the accrual of interest when theloan is in the process of collection and the realizable value of collateral issufficient to cover the principal balance and accrued interest.  See Note 4 — Loans.

 

**Loan Origination Fees and Costs** — Loanfees and certain costs of originating loans are deferred and the net amount isamortized over the contractual life of the related loans in accordance withFinancial Accounting Standards Board (FASB) Statement of Financial AccountingStandard (SFAS) No. 91, *Accounting forNonrefundable Fees and Costs Associated with Originating or Acquiring Loans andInitial Direct Costs of Leases*.

 

**Allowance for Loan Losses** — Theallowance for loan losses is established as losses are estimated to haveoccurred through a provision for loan losses charged against earnings. Loanlosses are charged against the allowance when management believes theuncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,are credited to the allowance.

 

The allowance for loan losses is evaluated ona regular basis by management and is based upon management’s periodic review ofthe collectibility of the loans in light of historical experience, the natureand volume of the loan portfolio, adverse situations that may affect theborrower’s ability to repay, estimated value of any underlying collateral, andprevailing economic conditions. This evaluation is inherently subjective as itrequires estimates that are susceptible to significant revision as newinformation becomes available.

 

F-13

----

Table of Contents

 

Impaired loans, with the exception of groupsof smaller-balance homogenous loans that are collectively evaluated forimpairment, are defined as loans for which, based on current information andevents, it is probable that the Company will be unable to collect the scheduledpayments of principal or interest when due according to the contractual termsof the loan agreement. Factors considered by management in determiningimpairment include payment status, collateral value, and the probability ofcollecting scheduled principal and interest payments when due. Loans thatexperience insignificant payment delays and payment shortfalls generally arenot classified as impaired. Management determines the significance of paymentdelays and payment shortfalls on a case-by-case basis, taking intoconsideration all of the circumstances surrounding the loan and the borrower,including the length of the delay, the reasons for the delay, the borrower’sprior payment record, and the amount of the shortfall in relation to theprincipal and interest owed. Impairment is measured on a loan-by-loan basis bythe present value of expected future cash flows discounted at the loan’seffective interest rate, the loan’s obtainable market price or the fair valueof the collateral if the loan is collateral dependent. Loans that are deemed tobe impaired are evaluated in accordance with SFAS No. 114, *Accounting by Creditors for Impairment of a Loan* and SFAS No. 5,*Accounting for Contingencies*.  See Note 4 — Loans.

 

**Allowance for Credit Losses** — Theallowance for credit losses is established as losses are estimated to haveoccurred through a provision for credit losses charged to earnings. Theallowance for credit losses represents management’s recognition of a separatereserve for off-balance sheet loan commitments and letters of credit. While theallowance for loan losses is recorded as a contra-asset to the loan portfolioon the consolidated balance sheets, the allowance for credit losses is recordedunder the caption “Accrued interest and other liabilities” in the accompanyingconsolidated balance sheets. Although the allowances are presented separatelyon the balance sheets, any losses incurred from credit losses would be reportedas a charge-off in the allowance for loan losses, as any loss would be recordedafter the off-balance sheet commitment had been funded.  See Note 4 — Loans.

 

**Goodwill and Intangible Assets** —Goodwill represents the excess purchase price over the fair value of net identifiableassets acquired in business combinations. Goodwill is not amortized but isreviewed for impairment at least annually on December 31st. Intangibleassets, primarily consisting of customer contracts and relationships, are beingamortized by the straight-line method over three to 15 years.  Intangible assets with an indefinite life arereviewed for impairment on an annual basis. See Note 6 — Goodwill and Intangible Assets.

 

**Bank-Owned Life Insurance (BOLI)** — TheBank invested in Bank-Owned Life Insurance policies to fund certain futureemployee benefit costs and are recorded at net realizable value. Changes in thecash surrender value are recorded in the consolidated statements of income andcomprehensive income under the caption “Other income.”

 

**Premises and Equipment** —Premises and equipment are stated at cost less accumulated depreciation andamortization, which is calculated using the straight-line method over theestimated useful lives of three to five years. Leasehold improvements arecapitalized and amortized using the straight-line method over the terms of therespective leases or the estimated useful lives of the improvements, whicheveris shorter. The Company reviews the carrying value of property and equipmentfor indications of impairment in accordance with FASB Statement No. 144, *Accounting for the Impairment and Disposal of Long-Lived Assets*.  See Note 5 — Premises and Equipment.

 

**Other Assets** —Included in other assets are certain investments, where the Company has theability to exercise significant influence or has ownership between 20% and 50%,that are accounted for under the equity method. The Company’s equity methodinvestments consist of four limited partnership mezzanine funds (the Funds)licensed as Small Business Investment Companies that invest primarily insubordinated debt securities. In certain circumstances, the Funds may alsoreceive warrants or other equity positions as part of their investments. Therewere no transactions between the Company and the Funds for the years ended December 31,2008, 2007, and 2006. The Company recognized income from the Funds of$1,169,000, $954,000, and $483,000 for the years ended December 31, 2008,2007, and 2006 which is included in “Other Income” in the consolidatedstatements of income and comprehensive income.

 

F-14

----

Table of Contents

 

**Foreclosed Assets** — Assetsacquired through, or in lieu of, loan foreclosures are held for sale andinitially recorded at the lower of carrying amount or estimated fair value atthe date of foreclosure.  Subsequent toforeclosure, valuations are periodically performed by management and the assetsare carried at the lower of carrying amount or fair value less costs to sell.Foreclosed assets included in the consolidated balance sheets under the caption“Other assets” at December 31, 2008 and 2007 totaled $0 and $90,000,respectively. Valuation adjustments charged to operations on foreclosed assetsfor the years ended December 31, 2008, 2007 and 2006 totaled $0, $469,000 and$0, respectively.

 

**Other Real Estate Owned (OREO)** — OREOheld for sale acquired through foreclosure or in settlement of debt is valuedat the lower of carrying amount or estimated fair value as of the date offoreclosure, and a related valuation allowance is provided for estimated coststo sell. Management periodically evaluates the value of real estate held forsale and increases the valuation allowance for any subsequent declines in fairvalue less selling costs. Subsequent declines in value are charged tooperations. At December 31, 2008 and 2007 OREO totaled $5,941,000 and $0,respectively and is included in the caption “Other” assets on the consolidatedbalance sheets.  Valuation adjustmentscharged to operations on OREO for the years ended December 31, 2008 and2007, and 2006 totaled $2,920,000, $0 and $0, respectively.

 

**Securities Sold Under Agreementsto Repurchase** — The Company sells certain securities underagreements to repurchase with its customers and other financial institutions.The agreements transacted with its customers are utilized as an overnightinvestment product service, while the agreements with other financialinstitutions are transacted as a wholesale borrowing source. Both types ofagreements are treated as secured borrowings, where the agreements arereflected as a liability of the Company and the securities underlying theagreements are reflected as a Company asset. See Note 8 — Borrowed Funds.

 

**Derivative Instruments** —Derivative financial instruments are accounted for at fair value. The Companyutilizes interest rate swaps to hedge a portion of its exposure to interestrate changes. These instruments are accounted for as cash flow hedges, asdefined by FASB Statement No. 133, *Accounting for DerivativeInstruments and Hedging Activities*(SFAS 133). The Company also hasa derivative program that offers interest rate caps, floors, swaps and collarsto customers of the Bank. The fair value amounts recognized for derivativeinstruments and the fair value amounts recognized for the right to reclaim orobligation to return cash collateral are offset when represented under a masternetting arrangement.  See Note 10 —Derivatives.

 

**Self Insurance Reserves** — TheCompany self-insures a portion of its employee medical costs. The Companymaintains a liability for incurred-but-not-reported claims based on assumptionsas to eligible employees, historical claims experience and lags in claimsreporting.

 

**Investment Advisory and TrustIncome** — Fees earned from providing investment advisory services arebased on the market value of assets under management and are collected eitherat the beginning or end of each quarter. Fees received at the beginning of thequarter are deferred and recognized ratably over the period as services areperformed.

 

**Insurance Income** —Insurance income includes commissions on the sale of life and property andcasualty insurance policies and other employee benefit products earned as anagent for unaffiliated insurance underwriters. Life insurance and property andcasualty income are primarily recognized upon policy origination and renewaldates. Benefits brokerage income is recognized on a monthly basis as thecustomer pays their insurance premiums.

 

**Investment Banking Income** —Investment banking income includes nonrefundable retainer fees recognized overthe expected term of the engagement and success fees recognized when thetransaction is completed and collectibility of fees is reasonably assured.

 

**Income Taxes** — Adeferred income tax liability or asset is recognized for temporary differenceswhich exist in the recognition of certain income and expense items forfinancial statement reporting purposes in periods different than for taxreporting purposes. The provision for income taxes is based on the 

 

F-15

----

Table of Contents

 

amount of current and deferred income taxespayable or refundable at the date of the financial statements as measured bythe provisions of current tax laws.  SeeNote 11 — Income Taxes.

 

**Stock-Based Compensation** — On January 1,2006, the Company adopted SFAS No. 123(R), *Share-BasedPayment*(SFAS 123R), using the modified prospective method. Underthis method, compensation cost is recognized for (1) all awards grantedafter the required effective date and to awards modified, cancelled, orrepurchased after that date; and (2) the portion of prior awards for whichthe requisite service has not yet been rendered, based on the grant-date fairvalue of those awards calculated for pro forma disclosures under SFAS No. 123,*Accounting for Stock Based Compensation*.

 

SFAS 123R requires that the cash retained asa result of the tax deductibility of employee share-based awards be presentedas a component of cash flows from financing activities in the consolidatedstatements of cash flows. In prior periods, this amount was reported as acomponent of cash flows from operating activities.  SFAS 123R specifies that the fair value of anemployee stock option must be based on an observable market price of an optionwith the same or similar terms and conditions if one is available or, if an observablemarket price is not available, the fair value must be estimated using avaluation technique that (1) is applied in a manner consistent with thefair value measurement objective and the other requirements of the Statement, (2) isbased on established principles of financial economic theory and generallyapplied to that field, and (3) reflects all substantive characteristics ofthe instrument. SFAS 123R permits entities to use any option-pricing model thatmeets the fair value objective in the statement.  See Note 14 — Employee Benefit and StockCompensation Plans.

 

**Earnings Per Common Share** — Basicearnings per share is based on net income available to common shareholdersdivided by the weighted-average number of common shares outstanding during theperiod. The weighted-average number of shares outstanding used to computediluted earnings per share include the number of additional common shares thatwould be outstanding if the potential dilutive common shares and common shareequivalents had been issued at the beginning of the period.  See Note 13 — Earnings Per Share.

 

**Stock Repurchases** — The Companyhas repurchased shares of its outstanding common stock through open marketpurchases. Repurchased shares are immediately retired on the trade date and thecash paid is allocated to common stock, additional paid-in-capital and retainedearnings. Retired shares are shown as authorized but not issued oroutstanding.  See Note 12 — Shareholders’Equity.

 

**Segment Information** — TheCompany has disclosed separately the results of operations relating to itssegments in Note 19 — Segments.

 

**Fair Value Measurements** —  On January 1, 2008, theCompany adopted the provisions of SFAS No. 157, *Fair ValueMeasurements*(SFAS 157), for financial assets and financialliabilities.   The Company will implement SFAS 157 for nonfinancialassets and nonfinancial liabilities measured at fair value on a nonrecurringbasis beginning on January 1, 2009 in accordance with FinancialAccounting Standards Board Staff Position (FSP) No. SFAS 157-2, *Effective Date of FASB Statement No. 157*.  SFAS 157 defines fair value, establishes a framework formeasuring fair value, and expands disclosures about fair value measurements.  See Note18 - Fair Value Measurements.

 

**Recent Accounting Pronouncements** — On January 1,2007, the Company adopted Emerging Issues Task Force (EITF) 06-5, *Accounting for Purchases of Life Insurance — Determining the AmountThat Could be Realized in Accordance with FASB Technical Bulletin No. 85-4*,*Accounting for Purchases of Life Insurance*(EITF 06-5). EITF 06-5, addresses various issues in determining the amountthat could be realized under an insurance contract. Upon adoption, the Companyrecorded a cumulative effect adjustment of approximately $134,000 that wascharged to retained earnings to reduce the amount that can be realized oninsurance contracts.

 

On January 1, 2008, the Company adoptedSFAS No. 157, *Fair Value Measurements*.SFAS 157 defines fair value, establishes a framework for measuring fair valuein generally accepted accounting

 

F-16

----

Table of Contents

 

principles and expands disclosures about fairvalue measurements. In October 2008, FASB Staff Position (FSP) FAS 157-3, *Determining the Fair Value of a Financial Asset When the Market forThat Asset Is Not Active*, was issued, effective immediately for allprior periods for which financial statements have not been issued.  ThisFSP provides clarification on the application of FASB 157 and issues to beconsidered when observable valuation inputs do not exist or observable inputsare from an inactive market. See Note 18 — Fair Value Measurements.

 

On January 1, 2008, the Company adoptedSFAS No. 159, T*he Fair Value Option forFinancial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115* (SFAS 159). SFAS 159 permits entities tochoose to measure certain financial assets and liabilities at fair value atspecified election dates. For financial instruments elected to be accounted forat fair value, an entity will report the unrealized gains and losses inearnings. The effect of the first remeasurement to fair value is to berecognized as a cumulative-effect adjustment to the opening balance of retainedearnings.  The Company has not electedthe fair value option for any financial instruments since the adoption on January 1,2008 and there was no impact on the consolidated financial statements relatingto the adoption of SFAS 159.

 

OnJanuary 1, 2008, the Company adopted EITF 06-4, *Accountingfor Deferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements* (EITF 06-4). The ratifiedfinal consensus on this issue requires companies to recognize an obligation forthe future post-retirement benefits provided to employees in the form of deathbenefits to be paid to their beneficiaries through endorsement split-dollarpolicies carried in Bank-Owned Life Insurance (BOLI), the effects of which areto be recognized through either (1) a change in accounting principlethrough a cumulative effect adjustment to retained earnings as of the beginningof the year of adoption, or (2) a change in accounting principle throughretrospective application to all prior periods. Upon adoption, the Companyrecorded a cumulative effect adjustment of approximately $16,000 that wascharged to retained earnings when it established the obligation for futurepost-retirement benefits relating to the Company’s applicable endorsementsplit-dollar life insurance arrangements.

 

InDecember 2007, the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements — An Amendment of ARB No. 51*(SFAS 160). This Statement amends ARB 51 to establish accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. It clarifies that a noncontrolling interest ina subsidiary is an ownership interest in the consolidated entity and should bereported as equity on the financial statements. SFAS 160 requires consolidatednet income to be reported at amounts that include the amounts attributable toboth the parent and the noncontrolling interest. Furthermore, disclosure of theamounts of consolidated net income attributable to the parent and to thenoncontrolling interest is required on the face of the financial statements.SFAS 160 is effective as of the beginning of an entity’s first fiscal year thatbegins after December 15, 2008. The Company is evaluating the impact, ifany, SFAS 160 will have on its consolidated financial statements.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities — an amendment of FASBStatement No. 133* (SFAS 161). SFAS 161 enhances the requireddisclosures under SFAS 133 in order to provide the investing communityadditional transparency in an entity’s financial statements and to moreadequately disclose the impact investments in derivative instruments and use ofhedging have on financial position, operating results and cash flows. SFAS 161is effective for fiscal years and interim periods beginning after November 15,2008, with early application allowed. The Company is currently evaluating the impact SFAS 161 will have on itsdisclosures as the Bank subsidiary utilizes a hedging strategy to manage itsexposure to interest rate changes as well as offering certain derivativeproducts to its customers.

 

InJune 2008, the FASB issued FSP EITF 03-6-1, *DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities.* This FSP gives guidance on the computationof earnings per share and the impact of share-based instruments that containcertain nonforfeitable rights to dividends or dividend equivalents.  The FSP is effective for fiscal yearsbeginning after 

 

F-17

----

Table of Contents

 

December 31,2008 and early application is prohibited. The Company is evaluating the impact,if any, the FSP will have on its consolidated financial statements.

 

**2.**   ACQUISITIONS ANDEARN-OUT ARRANGEMENTS

** **

**General** —Earn-out payments for the ACMG, FDL and Wagner transactions as well as deferredpayments for the BDA transaction are treated as additional costs of theacquisitions and recorded as goodwill in accordance with EITF Issue No. 95-08,*Accounting for Contingent Consideration Paid to theShareholders of an Acquired Enterprise in a Purchase Business Combination*(EITF95-08).  In determining theclassification of earn-out and deferred payments as additional costs of theacquisitions rather than compensation, the Company considered the followingfactors from EITF 95-08:

 

·                  terms of continuing employment;

·                  components of shareholder group;

·                  reasons for contingent consideration;

·                  formula for determining contingentconsideration; and

·                  other agreements and issues

 

Goodwill arising from these transactions isallocated between the operating segments expected to benefit from theacquisitions. See Note 6 — Goodwill and Intangible Assets for the amountof goodwill allocated to each operating segment.

 

**Alexander Capital ManagementGroup, LLC** — On April 1, 2003, the Company acquiredACMG, an SEC-registered investment advisory firm based in Denver, CO. Theacquisition was accounted for using the purchase method of accounting, andaccordingly, the results of ACMG’s operations have been included in theconsolidated financial statements since the date of purchase. The acquisitionof ACMG was completed through a merger of ACMG into a wholly owned subsidiarythat was formed in order to consummate the transaction and then a subsequentcontribution of the assets and liabilities of the merged entity into a newlyformed limited liability company called Alexander Capital ManagementGroup, LLC.

 

The terms of the ACMG merger agreement provided for additional earn-outpayments for each of the 12 months ended on March 31, 2004, 2005, and2006, to be paid to the former shareholders of Alexander Capital ManagementGroup, Inc. in proportion to their respective ownership immediately priorto the acquisition. All earn-out payments were made 40% in cash and 60% inCoBiz common stock.

 

The earn-out payment for 2006 was equal to amultiple of the excess of ACMG’s 2006 earnings before interest, taxes,depreciation and amortization as defined in the ACMG merger agreement (ACMGEBITDA) over the ACMG EBITDA for the previous year. For the earn-out periodended March 31, 2006, the Company paid $515,000 based on ACMG EBITDA of$715,000. The payment consisted of $206,000 in cash and 15,576 shares of CoBizstock valued at $309,000.

 

In addition to the earn-out, the formershareholders of Alexander Capital Management Group, Inc. were issued200,000 Profits Interest Units (PIUs) pursuant to a Unitholders’ Agreement,representing a 20% interest in the profits and losses of ACMG in periodsfollowing the acquisition (but no interest in the value of ACMG as of the dateof the acquisition), which is reflected in the accompanying consolidatedbalance sheets as a minority interest as a component of “Accrued interest andother liabilities” and is included in “Other” noninterest expense in theconsolidated statements of income and comprehensive income. Unlike the earn-outpayments, which are based on a multiple of earnings for a specified period oftime, the PIUs entitle the holders to share in the earnings of ACMG for as longas they are held. Pursuant to the terms of the Unitholders’ Agreement, undercertain circumstances, the Company has the ability to call the PIUs at a pricebased on a multiple of the trailing 12 months ACMG EBITDA. Likewise, theholders of the PIUs have, under certain circumstances, the ability to put the PIUsto the Company at a price based on a multiple of the trailing 12 monthsACMG EBITDA.

 

 

F-18

----

Table of Contents

 

In 2006, the Company called and retired20,008 PIUs. In 2007, the Company purchased and retired 153,284 PIUs for$351,000. In January 2008, the Company called and retired the remaining26,708 PIUs. At December 31, 2008 there were no PIUs outstanding.

 

**Financial Designs Ltd.** — On April 14,2003, the Company acquired FDL, a provider of wealth transfer and employeebenefit services based in Denver, CO. The acquisition was accounted for usingthe purchase method of accounting, and accordingly, the results of FDL’soperations have been included in the consolidated financial statements sincethe date of purchase. The acquisition of FDL was completed through a merger ofFDL into CoBiz Connect, Inc., a wholly owned subsidiary of CoBiz that hadprovided employee benefits consulting services since 2000. The survivingcorporation continues to use the FDL name.

 

Theterms of the FDL merger agreement provided for additional earn-out payments foreach of the calendar years 2003 through 2007 paid to the former shareholders ofFDL in proportion to their respective ownership immediately prior to theacquisition. The earn-out payments were payable 50% in cash and 50% in CoBizcommon stock.

 

The earn-out payment for the 2006 calendaryear was equal to a multiple of the excess of FDL’s earnings before interest,taxes, depreciation and amortization as defined in the FDL merger agreement(FDL EBITDA) over 2005’s FDL EBITDA. The 2006 earn-out was $876,000 based onFDL EBITDA of $2,308,000. The payment consisted of $438,000 in cash and 19,501shares of CoBiz common stock valued at $438,000. No earn-out payments were paidfor the 2007 calendar year because FDL EBITDA for 2007 did not exceed thehurdle rate.

 

**Wagner Investment Management, Inc.** — On December 31,2007, the Company acquired Wagner, an SEC-registered investment advisor locatedin Denver, CO.  The acquisition wasaccounted for using the purchase method of accounting.  Wagner’s acquisition had no impact on theresults of operations included in the consolidated financial statements for theyear ended December 31, 2007.  Theacquisition of Wagner was completed through the purchase of all of Wagner’scommon stock as of the purchase date.

 

The aggregate purchase price was $3,240,000,consisting of 80,908 shares of CoBiz common stock valued at $1,203,000;$1,965,000 in cash; and $72,000 in direct acquisition costs consistingprimarily of external legal fees. At December 31, 2007, the Companypreliminarily allocated $3,198,000 of the purchase price to goodwill, pendingthe valuations of certain intangible assets. In the first quarter of 2008 when the valuations were completed, theCompany reclassified $1,116,000 out of goodwill and into certain intangibleassets consisting of a customer list, trademark and a lease intangible. Anadjustment of $10,000 related to direct acquisition costs was also allocatedout of goodwill.  Goodwill arising from this transaction is taxdeductible. The customer list and the lease intangible will be amortized over12 years and two years (the remaining term of the lease), respectively. The trademark will be evaluated for impairment and will not be amortized.

 

The terms of the Wagner merger agreementprovide for additional earn-out payments for each of the calendar years 2008through 2010 to be paid to the former shareholders of Wagner in proportion totheir respective ownership immediately prior to the acquisition. The earn-outpayments are payable either in 100% in cash, or a mix of cash and stock, withthe Company having the option to pay up to 40% of the earn-out payment in CoBizcommon stock.

 

The calculation for the earn-out payment for2008 was based on a multiple of the excess of earnings before interest, taxes,depreciation, and amortization as defined in the Wagner merger agreement(Wagner EBITDA) over Wagner’s adjusted 2007 EBITDA.  No earn-out payment was payable for the 2008calendar year because Wagner’s EBITDA did not exceed the hurdle rate.  The earn-out payments for 2009 and 2010 willbe based on a multiple of the excess of Wagner’s EBITDA for each specific yearover the highest Wagner EBITDA previously recognized. The aggregate amount ofthe earn-out payments and the initial purchase consideration will not exceed$10,000,000.  Management estimates thattotal cumulative earn-out payments for 2009 to 2010 may range from $0 to$1,065,000.

 

F-19

----

Table of Contents

 

**Bernard Dietrich and Associates, Inc.**— On January 2, 2008, the Company acquired the assets andemployees of Bernard Dietrich and Associates, Inc. (BDA), a provider ofcommercial and personal property and casualty insurance brokerage, and riskmanagement consulting services located in Phoenix, AZ. The acquisition wasaccounted for using the purchase method of accounting, and accordingly, BDA’sresults of operations were included on the consolidated financial statementssince the date of acquisition.

 

The aggregate purchase price was $6,781,000,consisting of $6,750,000 in cash and $31,000 in direct acquisition costs.  A deposit of $750,000 was also put intoescrow for potential additional consideration. The terms of the BDA mergeragreement provide for deferred payments for each of the calendar years 2008 and2009 to be paid to the former shareholders of BDA in proportion to theirrespective ownership immediately prior to the acquisition. The deferredpayments are payable in cash from the escrowed funds of $750,000.  The deferred payments will be a maximum of$375,000 and $750,000 for 2008 and 2009, respectively. The aggregate amount oftotal deferred payments during this two-year period cannot exceed $750,000. Theyearly deferred payments will be based on maintaining a revenue threshold asdefined in the BDA asset purchase agreement. For the deferred payment period ended December 31, 2008, theCompany accrued $375,000 based on the 2008 revenue threshold that was paid inthe first quarter of 2009.  Managementestimates that the final deferred payment of $375,000 will be earned in 2009.

 

The Company allocated $3,900,000 of thepurchase price to goodwill, which is tax deductible, $3,200,000 to a customerlist intangible asset and $56,000 to other miscellaneous assets.  Thecustomer list will be amortized over 15 years.

 

**3.**   INVESTMENTS

** **

The amortized cost andestimated fair values of investment securities are summarized as follows:

 
| ** **                                                    | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|---------------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                                    | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| **December 31, 2008 (In thousands)**                     | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**     | ** ** |
|                                                          |       |          |       |           |       |           |       |          |       |
| Available for sale securities:                                |       |          |       |           |       |           |       |          |       |
| Mortgage-backed securities                                    |       | $             | 438,609    |           | $          | 5,193          |       | $             | 5,990      |   | $ | 437,812 |   |
| Trust preferred securities                                    |       | 24,536        |       | 438            |       | 2,224          |       | 22,750        |       |
| Corporate debt securities                                     |       | 13,362        |       | 132            |       | 65             |       | 13,429        |       |
| Obligations of states and political subdivisions              |       | 2,690         |       | 9              |       | 184            |       | 2,515         |       |
|                                                          |       |          |       |           |       |           |       |          |       |
|                                                          |       | $             | 479,197    |           | $          | 5,772          |       | $             | 8,463      |   | $ | 476,506 |   |
|                                                          |       |          |       |           |       |           |       |          |       |
| Held to maturity securities — Mortgage-backed securities |       | $             | 376        |           | $          | —         |       | $             | 2          |   | $ | 374 |   |

 

 

F-20

----

Table of Contents

 
| ** **                                                    | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|---------------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                                    | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| **December 31, 2007 (In thousands)**                     | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**     | ** ** |
|                                                          |       |          |       |           |       |           |       |          |       |
| Available for sale securities:                                |       |          |       |           |       |           |       |          |       |
| Mortgage-backed securities                                    |       | $             | 325,961    |           | $          | 1,104          |       | $             | 1,344      |   | $ | 325,721 |   |
| U.S. Government agencies                                      |       | 36,505        |       | 11             |       | 7              |       | 36,509        |       |
| Trust preferred securities                                    |       | 13,724        |       | 21             |       | 860            |       | 12,885        |       |
| Obligations of states and political subdivisions              |       | 3,487         |       | 4              |       | 41             |       | 3,450         |       |
|                                                          |       |          |       |           |       |           |       |          |       |
|                                                          |       | $             | 379,677    |           | $          | 1,140          |       | $             | 2,252      |   | $ | 378,565 |   |
|                                                          |       |          |       |           |       |           |       |          |       |
| Held to maturity securities — Mortgage-backed securities |       | $             | 470        |           | $          | 3              |       | $             | —     |   | $ | 473 |   |

 

Theamortized cost and estimated fair value of investments in debt securities at December 31,2008, by contractual maturity are shown below. Expected maturities can differfrom contractual maturities because borrowers may have the right to call orprepay obligations with or without penalties.

 
| ** **                             | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                             | ** ** | ** **             | ** ** | **Estimated**        | ** ** | ** ** | ** ** | **Estimated** | ** ** |
| ** **                             | ** ** | **Amortized**          | ** ** | **Fair**             | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| **(In thousands)**                     | ** ** | **Cost**               | ** ** | **Value**            | ** ** | **Cost** | ** ** | **Value** | ** ** |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Due in one year or less                |       | $                      | 10         |                 | $          | 10 |   | $ | — |   | $ | — |   |
| Due after one year through five years  |       | 14,598                 |       | 14,673               |       | — |   | — |   |
| Due after five years through ten years |       | 865                    |       | 817                  |       | — |   | — |   |
| Due after ten years                    |       | 25,115                 |       | 23,194               |       | — |   | — |   |
| Mortgage-backed securities             |       | 438,609                |       | 437,812              |       | 376 |   | 374 |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
|                                   |       | $                      | 479,197    |                 | $          | 476,506 |   | $ | 376 |   | $ | 374 |   |

 

During the years ended December 31,2008, 2007, 2006, there were no sales of held to maturity securities. Proceedsfrom sales of investment securities available for sale totaled $0, $1,053,000 and$56,027,000 for the years ended December 31, 2008, 2007, and 2006,respectively. The Company recognized losses for the years ended December 31,2008, 2007, 2006 on the sale of investment securities totaling $0, $33,000 and$1,766,000, respectively.

 

Investment securities with an approximatefair value of $99,474,000 and $96,065,000, were pledged to secure publicdeposits of $49,990,000 and $74,470,000, at December 31, 2008 and 2007,respectively.

 

Trust preferred securities, corporate debtsecurities and obligations of states and political subdivisions at December 31,2008, 2007, and 2006, do not include any single issuer for which the aggregatecarrying amount exceeds 10% of the Company’s shareholders’ equity.

 

Market changes in interest rates and overallmarket illiquidity can result in fluctuations in the market price of securitiesresulting in temporary unrealized losses. At December 31, 2008, the Company’s securities in a temporaryunrealized loss position consisted primarily of mortgage-backed and trustpreferred securities.  Themortgage-backed securities consist primarily of highly rated investment-gradesecurities issued by government-sponsored organizations. The fair value ofthese securities is expected to recover as the securities approach their statedmaturity or repricing date.  The trustpreferred

 

 

F-21

----

Table of Contents

 

securities are all single entity issues thathave been negatively impacted by the overall decrease in the financial servicesmarket.

 

In reviewing the realizable value of itssecurities in a loss position, the Company considered the following factors: (1) thelength of time and extent to which the market value had been less than cost; (2) thefinancial condition and near-term prospects of the issuer; and (3) theintent and ability of the Company to retain its investments for a period oftime sufficient to allow for any anticipated recovery in market value.  Declines in the fair value of held tomaturity and available for sale securities below their cost that are consideredto be other than temporary are reflected in earnings as realized losses.  The Company has both the intent and abilityto hold the securities classified as held to maturity until they mature, atwhich time the Company expects to receive full value for the securities.  Furthermore, the Company does not believe anyof the unrealized losses on available for sale securities are a result of significantdecreases in credit quality of the issuing organizations and the Company hasboth the intent and ability to hold these securities until maturity or theforecasted recovery of the fair value of the securities. The Company hasdetermined there were no other-than-temporary impairments (OTTI) associatedwith the 123 securities noted within the table below at December 31, 2008.

 
| ** **                                       | ** ** | **Less than 12 months** | ** ** | **Greater than 12 months** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|-----------|------------|
| ** **                                       | ** ** | **Fair**                | ** ** | **Unrealized**             | ** ** | **Fair**  | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **(In thousands)**                               | ** ** | **value**               | ** ** | **loss**                   | ** ** | **value** | ** ** | **loss** | ** ** | **value** | ** ** | **loss** | ** ** |
|                                             |       |                    |       |                       |       |      |       |   |   |   |   |   |   |
| Mortgage-backed securities                       |       | $                       | 113,610    |                       | $          | 2,659     |       | $ | 18,562 |   | $ | 3,333 |   | $ | 132,172 |   | $ | 5,992 |   |
| Trust preferred securities                       |       | 8,207                   |       | 1,091                      |       | 6,803     |       | 1,133 |   | 15,010 |   | 2,224 |   |
| Corporate debt securities                        |       | 2,402                   |       | 65                         |       | —    |       | — |   | 2,402 |   | 65 |   |
| Obligations of states and political subdivisions |       | 526                     |       | 1                          |       | 1,246     |       | 183 |   | 1,772 |   | 184 |   |
|                                             |       |                    |       |                       |       |      |       |   |   |   |   |   |   |
| Total                                            |       | $                       | 124,745    |                       | $          | 3,816     |       | $ | 26,611 |   | $ | 4,649 |   | $ | 151,356 |   | $ | 8,465 |   |

 

Forthe year ended December 31, 2008, the Company recorded an OTTI of $1,657,000on two securities.  The OTTI included a$1,279,000 write down resulting from an increase in the credit risk associatedwith a single issuer trust preferred security and a write down of $378,000 on aFNMA perpetual preferred security.  TheOTTI is included as a component of “loss on sale of other assets and securities”in the consolidated statements of income and comprehensive income.

 

Other investments at December 31, 2008 and2007, consist of the following:

 
| **(In thousands)**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |
| Other investments — at cost (1)                    |       | $        | 21,387     |     | $          | 14,446 |   |
| Investment in statutory trusts — equity method (2) |       | 2,179    |       | 2,182    |       |
|                                                    |       |     |       |     |       |
|                                                    |       | $        | 23,566     |     | $          | 16,628 |   |

 

----

(1)               Otherinvestments are comprised primarily of FHLB and Federal Reserve Bank stock.

 

(2)                                             Investments instatutory trusts represent the Company’s investment in 100% of the common stockissued by the entities described in Note 9 — Long Term Debt.

 

F-22

----

Table of Contents

 

**4.**   LOANS

** **

Categories of loans at December 31, 2008 and2007 include:

 
| **(In thousands)**              | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|---------------------------------|------------|-----------|------------|-----------|------------|
|                            |       |      |       |      |       |
| Commercial                      |       | $         | 648,851    |      | $          | 576,350 |   |
| Real estate — mortgage     |       | 1,018,091 |       | 875,135   |       |
| Real estate — construction |       | 268,050   |       | 310,951   |       |
| Consumer                        |       | 86,702    |       | 71,422    |       |
| Other                           |       | 11,212    |       | 14,151    |       |
|                            |       |      |       |      |       |
|                            |       | 2,032,906 |       | 1,848,009 |       |
|                            |       |      |       |      |       |
| Allowance for loan losses       |       | (42,851   | )          | (20,043   | )          |
|                            |       |      |       |      |       |
| Unearned net loan fees          |       | (1,653    | )          | (1,683    | )          |
|                            |       |      |       |      |       |
|                            |       | $         | 1,988,402  |      | $          | 1,826,283 |   |
|                            |       |      |       |      |       |

 

Most of the Company’s lending activity occurswithin the States of Colorado and Arizona, specifically in the Denver andPhoenix metropolitan areas, respectively. The majority of the Company’s loan portfolio consists of Commercial andReal Estate — mortgage loans. At December 31, 2008 and 2007, there were noconcentrations of loans related to any single industry in excess of 10% oftotal loans.

 

In the ordinary course of business, theCompany makes various direct and indirect loans to officers and directors ofthe Company. Activity with respect to officer and director loans is as followsfor the years ended December 31, 2008 and 2007:

 
| **(In thousands)**               | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Balance — beginning of year |       | $        | 8,573      |     | $          | 6,474 |   |
|                             |       |     |       |     |       |
| New loans                        |       | 15,651   |       | 14,726   |       |
| Principal paydowns and payoffs   |       | (18,130  | )          | (12,627  | )          |
|                             |       |     |       |     |       |
| Balance — end of year       |       | $        | 6,094      |     | $          | 8,573 |   |

 

 

F-23

----

Table of Contents

 

Transactions in the allowancefor loan and credit losses for the years ended December 31, 2008, 2007,and 2006, are summarized as follows:

 
| **(In thousands)**                                                                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                                    |       |     |       |     |       |     |       |
| Allowance for loan loss balance — beginning of year                                                                                |       | $        | 20,043     |     | $          | 17,871   |       | $ | 16,906 |   |
| Provision for loan losses                                                                                                               |       | 39,796   |       | 3,936    |       | 766      |       |
| Loans (charged-off)/recovered, net of recoveries/(charge-offs) of  $156,

 $74, and $(320) for 2008, 2007,  and 2006, respectively |       | (16,988  | )          | (1,764   | )          | 199      |       |
|                                                                                                                                    |       |     |       |     |       |     |       |
| Allowance for loan loss balance — end of year                                                                                      |       | $        | 42,851     |     | $          | 20,043   |       | $ | 17,871 |   |
|                                                                                                                                    |       |     |       |     |       |     |       |
| Allowance for credit loss balance — beginning of year                                                                              |       | 576      |       | 576      |       | —   |       |
| Provision for credit losses                                                                                                             |       | (317     | )          | —   |       | 576      |       |
|                                                                                                                                    |       |     |       |     |       |     |       |
| Allowance for credit loss balance — end of year                                                                                    |       | $        | 259        |     | $          | 576      |       | $ | 576 |   |
|                                                                                                                                    |       |     |       |     |       |     |       |
| Total allowance for loan and credit loss balance — end of year                                                                     |       | $        | 43,110     |     | $          | 20,619   |       | $ | 18,447 |   |

 

The recorded investment in impaired loans was$39,786,000 and $1,202,000 at December 31, 2008 and 2007,respectively.  At December 31, 2008and 2007, $5,177,000 and $0 of impaired loans did not have a related allowancefor loan loss.  The allowance for loanlosses applicable to impaired loans was $6,274,000 and $873,000 at December 31,2008 and 2007, respectively. No interest income was recognized on these loanssubsequent to their placement in nonaccrual status.

 

Average nonaccrual loans were $20,992,000,$2,053,000 and $684,000 during 2008, 2007 and 2006, respectively.  Interest income that would have been recordedhad nonaccrual loans performed in accordance with their original contract termsduring 2008 was $979,000.  Interestincome that would have been recorded had nonaccrual loans performed inaccordance with their original contract terms during 2007 and 2006 was notmaterial.  Interest income recognized onnonaccrual loans during 2008, 2007 and 2006 was also not material.  Loans 90 days or more delinquent and stillaccruing interest totaled $1,292,000 and $2,208,000 at December 31, 2008and 2007, respectively.

 

**5.**   PREMISES AND EQUIPMENT

** **

The major classes ofpremises and equipment at December 31, 2008 and 2007 are summarized asfollows:

 
| **(In thousands)**                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Leasehold improvements             |       | $        | 10,071     |     | $          | 8,717 |   |
| Furniture, fixtures, and equipment |       | 23,222   |       | 21,948   |       |
|                               |       |     |       |     |       |
|                               |       | 33,293   |       | 30,665   |       |
| Accumulated depreciation           |       | (24,139  | )          | (21,854  | )          |
|                               |       |     |       |     |       |
| Total                              |       | $        | 9,154      |     | $          | 8,811 |   |

 

The Company recorded depreciation expenserelated to premises and equipment of $3,431,000, $3,272,000, and $3,493,000during the years ended December 31, 2008, 2007, and 2006, respectively.

 

F-24

----

Table of Contents

 

 

**6.**   GOODWILL AND INTANGIBLE ASSETS

** **

The Company performed its annual goodwillimpairment test at December 31, 2008. Goodwill impairment is deemed toexist when the carrying value of a reporting unit exceeds its estimated fairvalue. The Company’s reporting units are consistent with the operating segmentsidentified in Note 19 — Segments. The Company estimated the fair value ofthe reporting units using multiples of comparable entities, including recenttransactions, or a combination of multiples and a discounted cash flowmethodology.  When conducting thegoodwill impairment analysis, the fair values of the reporting units isreconciled to the market capitalization of the Company, as adjusted for acontrol premium, to determine the overall reasonableness of thevaluations.  At December 31, 2008,the estimated fair value of all reporting units exceeded their carrying valuesand there was no impairment.  However,paragraph 28 of SFAS 142, *Goodwill and OtherIntangible Assets*, requires that the goodwill impairment analysis beconducted when events or circumstances occur that would more likely than notreduce the fair value of a reporting unit below its carrying amount.  An example of such an event includessignificant adverse changes in the business climate, such as a significantdecline in the Company’s market capitalization. 

 

F-25

----

Table of Contents

 

The Company allocatesgoodwill from acquisitions to its reporting units based on the synergies thatare expected to arise from the combinations using the with and without methodwhereby the difference between the fair value of a reporting unit before theacquisition and its fair value after the acquisition represents the amount ofgoodwill assigned to that reporting unit. A summary of goodwill and totalassets by operating segment at December 31, 2008, is as follows (seeNote 2 — Acquisitions and Earn-out Arrangements):

 
| ** **                    | ** ** | ** **            | ** ** | **Total**            | ** ** |
|-------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                    | ** ** | **Goodwill**          | ** ** | **assets**           | ** ** |
| ** **                    | ** ** | **December 31,** | ** ** | **Acquisitions and** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| **(In thousands)**            | ** ** | **2007**              | ** ** | **adjustments**      | ** ** | **2008** | ** ** | **2008** | ** ** |
|                          |       |                  |       |                 |       |   |   |   |   |
| Commercial banking            |       | $                     | 15,348     |                 | $          | — |   | $ | 15,348 |   | $ | 2,629,082 |   |
| Investment banking services   |       | 5,279                 |       | —               |       | 5,279 |   | 6,670 |   |
| Investment advisory and trust |       | 7,644                 |       | (1,126               | )          | 6,518 |   | 9,025 |   |
| Insurance                     |       | 15,115                |       | 3,900                |       | 19,015 |   | 28,706 |   |
| Corporate support and other   |       | —                |       | —               |       | — |   | 10,792 |   |
| Total                         |       | $                     | 43,386     |                 | $          | 2,774 |   | $ | 46,160 |   | $ | 2,684,275 |   |

 

At December 31, 2008and 2007, the Company’s intangible assets and related amortization consisted ofthe following:

 
| ** **             | ** ** | **Amortizing**        | ** ** | **Non-amortizing** | ** ** | ** **    | ** ** |
|------------------------|------------|-----------------------|------------|--------------------|------------|---------------|------------|
| ** **             | ** ** | **Customer**          | ** ** | ** **         | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **             | ** ** | **contracts, lists**  | ** ** | ** **         | ** ** | ** **    | ** ** | ** ** | ** ** |
| **(In thousands)**     | ** ** | **and relationships** | ** ** | **Other**          | ** ** | **Trademark** | ** ** | **Total** | ** ** |
| ** **             | ** ** | ** **            | ** ** | ** **         | ** ** | ** **    | ** ** | ** ** | ** ** |
| December 31, 2007 |       | $                     | 2,100      |               | $          | 12            |       | $ | — |   | $ | 2,112 |   |
| Acquisitions:          |       |                  |       |               |       |          |       |   |   |
| BDA                    |       | 3,200                 |       | —             |       | —        |       | 3,200 |   |
| Wagner                 |       | 783                   |       | 64                 |       | 269           |       | 1,116 |   |
| Amortization           |       | (687                  | )          | (37                | )          | —        |       | (724 | ) |
| December 31, 2008 |       | $                     | 5,396      |               | $          | 39            |       | $ | 269 |   | $ | 5,704 |   |

 

The Company recorded amortization expense related tointangible assets of $724,000, $471,000, and $475,000 during the years ended December 31,2008, 2007, and 2006, respectively. Amortization expense on intangible assetsfor each of the five succeeding years is estimated as follows:

 
| **Years Ending**      | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| **December 31,** | ** ** | ** ** | ** ** |
| **(In thousands)**    | ** ** | ** ** | ** ** |
|                  |       |       |       |
| 2009                  |       | $          | 674        |   |
| 2010                  |       | 642        |       |
| 2011                  |       | 638        |       |
| 2012                  |       | 638        |       |
| 2013                  |       | 423        |       |
|                       |            |            |            |  |

 

 

F-26

----

Table of Contents

 

**7.**        CERTIFICATES OFDEPOSIT

 

The composition of thecertificates of deposit portfolio at December 31, 2008 and 2007, is asfollows:

 
| **(In thousands)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
|               |       |     |       |     |       |
| Less than $100,000 |       | $        | 207,564    |     | $          | 126,478 |   |
| $100,000 and more  |       | 314,489  |       | 456,754  |       |
|               |       |     |       |     |       |
|               |       | $        | 522,053    |     | $          | 583,232 |   |

 

Related interest expense forthe years ended December 31, 2008, 2007, and 2006, is as follows:

 
| **(In thousands)** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------|------------|----------|------------|----------|------------|----------|------------|
|               |       |     |       |     |       |     |       |
| Less than $100,000 |       | $        | 8,659      |     | $          | 5,693    |       | $ | 3,177 |   |
| $100,000 and more  |       | 11,430   |       | 19,319   |       | 15,839   |       |
|               |       |     |       |     |       |     |       |
|               |       | $        | 20,089     |     | $          | 25,012   |       | $ | 19,016 |   |

 

Maturities of certificatesof deposit of $100,000 and more at December 31, 2008, are as follows:

 
| **(In thousands)**            | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|
| Remaining maturity:           |       |       |       |
| Less than three months        |       | $          | 186,104    |   |
| Three months up to six months |       | 67,308     |       |
| Six months up to one year     |       | 53,271     |       |
| One year and over             |       | 7,806      |       |
|                          |       |       |       |
| Total                         |       | $          | 314,489    |   |

 

**8.**        BORROWEDFUNDS

 

Securities sold underagreements to repurchase at December 31, 2008 and 2007 are summarized asfollows:

 
| **(In thousands)**                                                                                                                                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                          |       |     |       |     |       |
| Securities sold under agreements to repurchase (principally  mortgage-backed securities with an estimated fair value of $146,157 and  $172,382 in 2008 and 2007, respectively |       | $        | 133,478    |     | $          | 168,336 |   |
|                                                                                                                                                                               |            |          |            |          |            |  |  |

 

The Company enters intosales of securities under agreements to repurchase. The amounts received underthese agreements represent short-term borrowings and are reflected as aliability in the consolidated balance sheets. The securities underlying theseagreements are included in investment securities in the consolidated balancesheets. Securities sold under agreements to repurchase averaged $147,230,000and $228,342,000 during 2008 and 2007, respectively. The maximum amountsoutstanding at any month-end during 2008 and 2007 were $180,008,000 and$259,421,000, respectively.  At December 31,2008, the weighted-average interest rate was 0.9% and all securities sold underagreements to repurchase had a maturity date of less than three months.

 

F-27

----

Table of Contents

 

The composition of othershort-term borrowings, which are all due within one year, at December 31,2008 and 2007, is summarized as follows:

 
| **(In thousands)**                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Term auction facility                 |       | $        | 445,000    |     | $          | — |   |
| Federal Home Loan Bank line of credit |       | 59,300   |       | 30,000   |       |
| Federal funds purchased               |       | 38,763   |       | 150,374  |       |
| Revolving line of credit              |       | —   |       | 17,070   |       |
|                                  |       |     |       |     |       |
| Total                                 |       | $        | 543,063    |     | $          | 197,444 |   |

 

The Company participated in the Federal Reserve’stemporary Term Auction Facility (TAF) credit program during 2008 and at December 31,2008 had borrowings of $445,000,000 with a weighted-average interest rate of 0.84%.  The Company did not participate in the TAF in2007 when the Federal Reserve first implemented the program.  At December 31, 2008, the TAF borrowingswere collateralized by loans with a book value of $927,826,000.

 

The Company has advances and a line of credit from theFHLB with a weighted-average interest rate of 0.65% and 4.67% at December 31,2008 and 2007, respectively. Advances and the line of credit are collateralizedby either qualifying loans or investment securities not otherwise pledged as collateral.At December 31, 2008 and 2007, the FHLB advances and line of credit werecollateralized by loans of $580,006,000 and $541,277,000, respectively.

 

The Company has approved federal fund purchase lineswith 10 banks with an aggregate credit line of $250,000,000 as well asagreements with various companies to transact repurchase agreements based onavailable collateral. At December 31, 2008, there were no outstandingrepurchase agreements with noncustomer third parties.

 

In August 2007, the Company entered into a creditagreement with a revolving line of credit facility in the aggregate principalsum of up to $30,000,000 that bears interest at a LIBOR-based rate or avariable federal funds-based rate, plus a spread of 1.15% and expiring at July 31,2008.  The agreement was amended in July 2008,increasing the spread to 1.35% and extending the term to July 30, 2009, atwhich time any outstanding amounts are due and payable.  The credit facility is secured by a firstpriority security interest in 100% of the outstanding common stock of theBank.  At December 31, 2008, there wasno amount outstanding on the revolving line. The Company pays a commitment feeof 0.25% on the unused portion of the line of credit.

 

The terms of the credit agreement contain covenantsthat require the Company to maintain certain financial ratios, including:maintaining a well-capitalized status at the Bank; maintaining an adequatelycapitalized status for the Company; maintaining a minimum return on assetratio; and not exceeding a maximum non-performing asset to total loansratio.  At December 31, 2008, theCompany was in default on the minimum return on asset ratio and the maximumnon-performing asset to total loans ratio. Pursuant to the terms of the credit agreement, these events of defaultprovide the lender the right to declare all amounts under the agreement asimmediately due and payable.  Inaddition, the lender’s obligation to advance amounts available pursuant to theagreement is terminated.  The Company hasnot been notified by the lender that the credit agreement has been canceled dueto the events of default.

 

**9.**        LONG-TERMDEBT

 

Outstanding subordinateddebentures at December 31, 2008 and 2007 is summarized as follows:

 

F-28

----

Table ofContents

 

 
| **(In thousands)**                    | ** ** | **2008** | ** ** | **2007** | ** ** | **Interest Rate**     | ** ** | **Maturity Date**        | ** ** | **Earliest Call Date**   | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|-----------------------|------------|--------------------------|------------|--------------------------|------------|
|                                  |       |     |       |     |       |                  |       |                     |       |                     |       |
| Junior subordinated debentures:       |       |     |       |     |       |                  |       |                     |       |                     |       |
| CoBiz Statutory Trust I               |       | $        | 20,619     |     | $          | 20,619                |       | 3-month  LIBOR+ 2.95%    |       | September 17,  2033 |       | March 17,  2009 |   |
| CoBiz Capital Trust II                |       | 30,928   |       | 30,928   |       | 3-month  LIBOR+ 2.60% |       | July 23,  2034      |       | July 23,  2009      |       |
| CoBiz Capital Trust III               |       | 20,619   |       | 20,619   |       | 3-month  LIBOR+ 1.45% |       | September 30,  2035 |       | September 30,  2010 |       |
| Total junior subordinated debentures: |       | 72,166   |       | 72,166   |       |                  |       |                     |       |                     |       |
|                                  |       |     |       |     |       |                  |       |                     |       |                     |       |
| Other long-term debt:                 |       |     |       |     |       |                  |       |                     |       |                     |       |
| Subordinated notes payable            |       | 20,984   |       | —   |       | Fixed  9.00%          |       | August 18,  2018    |       | August 18,  2013    |       |
|                                  |       |     |       |     |       |                  |       |                     |       |                     |       |
| Total long-term debt                  |       | $        | 93,150     |     | $          | 72,166                |       |                     |       |                     |       |   |   |

 

In September 2003, the Company created a whollyowned trust, CoBiz Statutory Trust I, formed under the laws of the State ofConnecticut (the Statutory Trust). The Statutory Trust issued $20,000,000 oftrust preferred securities bearing an interest rate based on a spread abovethree-month LIBOR. Simultaneously with the issuance, the Company purchased aminority interest in the Statutory Trust for $619,000. The Statutory Trustinvested the proceeds thereof in $20,619,000 of junior subordinated debenturesof CoBiz that also bear an interest rate based on a spread above three-monthLIBOR. The securities and junior subordinated debentures provide cumulativedistributions at a floating rate that is reset each quarter on March 17, June 17,September 17 and December 17. The junior subordinated debentures willmature and the capital securities must be redeemed on September 17, 2033,which may be shortened to any quarterly distribution date, if certainconditions are met (including the Company having received prior approval fromthe Federal Reserve and any other required regulatory approvals) and notice isgiven at least 30 and not more than 60 days prior to the redemption date.

 

In May 2004, the Company created a wholly ownedtrust, CoBiz Capital Trust II, formed under the laws of the State of Delaware(the Capital Trust II). The Capital Trust II issued $30,000,000 of trustpreferred securities bearing an interest rate based on a spread abovethree-month LIBOR. Simultaneously with the issuance, the Company purchased aminority interest in the Capital Trust II for $928,000. The Capital Trust IIinvested the proceeds thereof in $30,928,000 of junior subordinated debenturesof CoBiz that also bear an interest rate based on a spread above three-monthLIBOR. The securities and junior subordinated debentures provide cumulativedistributions at a floating rate that is reset each quarter on January 23,April 23, July 23 and October 23. The junior subordinateddebentures will mature and the capital securities must be redeemed on July 23,2034, which may be shortened to a date not earlier than July 23, 2009, ifcertain conditions are met (including the Company having received priorapproval from the Federal Reserve and any other required regulatory approvals).

 

In August 2005, the Company created a whollyowned trust, CoBiz Capital Trust III, formed under the laws of the State ofDelaware (the Capital Trust III). The Capital Trust III issued $20,000,000 oftrust preferred securities bearing an interest rate based on a spread abovethree-month LIBOR. Simultaneously with the issuance, the Company purchased aminority interest in the Capital Trust III for $619,000. The Capital Trust IIIinvested the proceeds thereof in $20,619,000 of junior subordinated debenturesof CoBiz that also bear an interest rate based on a spread above three-monthLIBOR. The securities and junior subordinated debentures provide cumulativedistributions at a floating rate that is reset each quarter on March 30,June 30, September 30 and December 30. The junior subordinateddebentures will mature and the capital securities must be redeemed onSeptember 30, 2035, which may be shortened to a date not earlier thanSeptember 30, 2010, if certain conditions are met (including the Companyhaving received prior approval from the Federal Reserve and any other requiredregulatory approvals).

 

F-29

----

Table of Contents

 

The Company records the distributions of the juniorsubordinated debentures in interest expense on the consolidated statements ofincome and comprehensive income. All of the outstanding junior subordinateddebentures may be prepaid if certain events occur, including a change in taxstatus or regulatory capital treatment of trust preferred securities. In eachcase, redemption will be made at par, plus the accrued and unpaid distributionsthereon through the redemption date.

 

Although theaccounts of the Statutory Trust, Capital Trust II and Capital Trust IIIare not included in the Company’s consolidated financial statements,$70,000,000 in trust preferred securities issued by the trusts are included inTier 1 capital for regulatory capital purposes as allowed by the FederalReserve Board at December 31, 2008. On March 1, 2005, the FederalReserve Board finalized a rule that would continue to allow the inclusionof trust preferred securities issued by unconsolidated subsidiary trusts inTier 1 capital, but with stricter quantitative and qualitative standards.Under the rule, new quantitative limits become effective March 31, 2009where the aggregate amount of trust preferred securities and certain othercapital elements would be limited to 25% of Tier 1 capital elements, netof goodwill that has been reduced by any associated deferred tax liability. Theamount of trust preferred securities and certain other elements in excess ofthe limit could be included in Tier 2 capital, subject to certainrestrictions.

 

The Company completed a private placement of$20,984,000 of Subordinated Unsecured Promissory Notes (the Notes) during thethird and fourth quarter of 2008.  Thenotes will mature in 2018, 10 years after the initial issue date (August 18,2008).  The notes bear a fixed annualinterest rate of 9.00%, pay interest quarterly, and can be prepaid at parwithout penalty at any time on or after the fifth anniversary of the initialissue date.  The Notes qualify as Tier 2capital for regulatory capital purposes. Certain employees and directors of the Company participated in theprivate placement.  At December 31,2008, $3,550,000 in Notes and $27,000 in accrued interest, respectively, wereowed to related parties.

 

**10.**            DERIVATIVES

 

**Asset/Liability Management Hedges** — As part of its overall riskmanagement, the Company pursues various asset and liability managementstrategies, which may include obtaining derivative financial instruments tomitigate the impact of interest-rate fluctuations on the Company’s net interestmargin.

 

SFAS 133, as amended and interpreted, establishesaccounting and reporting standards for derivative instruments, includingcertain derivative instruments embedded in other contracts, and hedgingactivities. As required by SFAS 133, the Company records all derivatives on theconsolidated balance sheets at fair value. The accounting for changes in thefair value of derivatives depends on the intended use of the derivative and theresulting designation. Derivatives used to hedge the exposure to changes in thefair value of an asset, liability or firm commitment attributable to aparticular risk, such as interest rate risk, are considered fair value hedges.Derivatives used to hedge the exposure to variability in expected future cashflows, or other types of forecasted transactions, are considered cash flowhedges. In order to qualify for hedge accounting, the Company must comply withdetailed rules and strict documentation requirements at the inception ofthe hedge, and hedge effectiveness must be assessed at inception andperiodically throughout the life of each hedging relationship.

 

The Company’s objective in using derivatives is tominimize the impact of interest rate fluctuations on the Company’s interestincome and to reduce asset sensitivity. To accomplish this objective, theCompany uses interest-rate swaps as part of its cash flow hedging strategy.Under the interest-rate swap agreements, the Company receives a fixed-rate andpays a variable-rate based on the prime rate (Prime) over the life of theagreements without exchange of the underlying principal amount. For accountingpurposes, these swaps are designated as hedging the overall changes in cashflows related to portfolios of the Company’s Prime-based loans. Specifically,the Company has designated as the hedged transactions the first Prime-basedinterest payments received by the Company each calendar month during the termof the swaps that, in the aggregate for each period, are interest payments onprincipal from specified portfolios equal to the notional amount of the swaps.

 

F-30

----

Table of Contents

 

Based on the Company’s ongoing assessments, includingat inception of the hedging relationship, it is probable that there will besufficient Prime-based interest receipts through the maturity date of theswaps. The Company also monitors the risk of counterparty default on an ongoingbasis. The Company uses the “Hypothetical Derivative Method” method describedin Statement 133 Implementation Issue No. G7, *Cash FlowHedges: Measuring the Ineffectiveness for a Cash Flow Hedge under Paragraph 30(b) Whenthe Shortcut Method Is Not Applied*, for both prospective andretrospective assessments of hedge effectiveness on a quarterly basis. TheCompany also uses this methodology to measure hedge ineffectiveness eachquarter. For derivatives designated as cash flow hedges, the effective portionof changes in the fair value of the derivative is initially reported in othercomprehensive income (outside of earnings) and subsequently reclassified toearnings (“interest income on loans” for the hedging relationships describedabove) when the hedged transactions affect earnings. Any ineffectivenessresulting from the hedges are recorded as a gain or loss in the consolidatedstatements of income and comprehensive income as part of noninterest income.

 

Prepayments in the hedged loan portfolios areaccounted for consistent with the guidance in Statement 133 ImplementationIssue No. G25, Cash Flow Hedges: *Using theFirst-Payments-Received Technique in Hedging the Variable Interest Payments ona Group of Nonbenchmark-Rate-Based Loans*, which allows thedesignated forecasted transactions to be the variable Prime-rate-based interestpayments on a rolling portfolio of pre-payable interest-bearing loans using thefirst-payments-received technique as described above, thereby allowing interestpayments from loans that prepay to be replaced with interest payments from newloan originations.  Proceeds received orpaid upon termination of derivative financial instruments qualifying as cashflow hedges are deferred in other comprehensive income and amortized intoincome over the remaining life of the hedged item.

 

As described in the table below, at December 31,2008, derivatives designated as cash flow hedges had a net fair value of$3,586,000. The change in net unrealized gains of $2,465,000 (net of income taxexpense of $936,000) in 2008 for derivatives designated as cash flow hedges isseparately disclosed in the statement of changes in shareholders’ equity andcomprehensive income. The amount of hedge ineffectiveness for cash flow hedgeswas not material in 2008.

 

Amounts reported in accumulated other comprehensiveincome (loss) related to derivatives will be reclassified to interest income asinterest payments are received on the Company’s hedged Prime-based loans. Thechange in net unrealized gains on cash flow hedges reflects a reclassificationof $2,109,000 of net unrealized gains from accumulated other comprehensiveincome to interest income during 2008. During 2009, the Company estimates thatgains of $2,631,000 will be reclassified out of other comprehensive income(loss).

 

**CustomerAccommodation Derivatives** — The Company offers an interest-rate hedge program that includesderivative products such as swaps, caps, floors and collars to assist itscustomers in managing their interest-rate risk profile. In order to eliminatethe interest-rate risk associated with offering these products, the Companyenters into derivative contracts with third parties to offset the customercontracts.

 

**Derivatives** — Summary Information:

 
| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | **Hedged**            | ** ** | ** ** | ** ** | **Estimated** | ** ** | **Hedged** | ** ** | ** ** | ** ** | **Estimated** | ** ** |
| **(In thousands)**                         | ** ** | **Item**              | ** ** | **Notional** | ** ** | **Fair Value** | ** ** | **Item** | ** ** | **Notional** | ** ** | **Fair Value** | ** ** |
|                                       |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Asset/liability management hedges:         |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Cash flow hedge — interest rate swaps |       | $                     | 90,000     |   | $ | 90,000 |   | $ | 3,586 |   | $ | 135,000 |   | $ | 135,000 |   | $ | 1,123 |   |
|                                       |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Customer accommodation derivatives:        |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest rate swap                         | ** ** | ** **            |       | $ | 63,133 |   | $ | (7,055 | ) | ** ** |   | $ | 21,996 |   | $ | 1,104 |   |
| Reverse interest rate swap                 | ** ** | ** **            |       | 63,133 |   | 6,686 | ** ** | ** ** |   | 21,996 |   | (1,104 | ) |
|                                            |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-31

----

Table of Contents

 

The Company offsets the fair value of derivativeinstruments covered under master netting arrangements. At December 31,2008, derivative instruments with a fair value of $6,772,000 were included inthe caption “Other assets” and $3,555,000 were included in the caption “Otherliabilities” on the consolidated balance sheets.

 

The weighted-average interest rates for interest-rateswap positions outstanding at December 31, 2008, were as follows:

 
| ** **                         | ** ** | **Weighted Average** | ** ** |
|------------------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **Interest**         | ** ** | **Interest** | ** ** |
| ** **                         | ** ** | **Rate**             | ** ** | **Rate** | ** ** |
| ** **                         | ** ** | **Received**         | ** ** | **Paid** | ** ** |
|                               |       |                 |       |   |   |
| Asset/liability hedges             |       | 6.9                  | %          | 3.6 | % |
| Customer accommodation derivatives |       | 4.5                  | %          | 4.5 | % |

 

Investment securities with an approximate fair valueof $2,157,000 and $2,595,000 were pledged to collateralize derivativeinstruments at December 31, 2008 and 2007, respectively

 

In February 2009, the Company executed a seriesof interest-rate swap transactions designated as cash flow hedges that areeffective for interest payments starting in 2010.  The intent of the transactions is to fix theeffective interest rate for payments due on its junior subordinated debentureswith the objective of reducing the Company’s exposure to adverse changes incash flows relating to payments on its LIBOR-based floating rate debt.  Theswaps will be in force for varying lengths of time ranging from five to 14years.  Select critical terms of the cash flow hedges are as follows:

 
| **(In thousands)**      | ** ** | ** **   | ** ** | ** ** | ** ** | ** **      | ** **           |
|-------------------------|------------|--------------|------------|------------|------------|-----------------|----------------------|
| ** **              | ** ** | ** **   | ** ** | **Fixed**  | ** ** | **Termination** | ** **           |
| **Hedged item**         | ** ** | **Notional** | ** ** | **Rate**   | ** ** | **Date**        | ** **           |
|                    |       |         |       |       |       |            |                 |
| CoBiz Statutory Trust I |       | $            | 20,000     |       | 6.04       | %               | March 17,  2015 |   |
| CoBiz Capital Trust II  |       | $            | 30,000     |       | 5.99       | %               | April 23,  2020 |   |
| CoBiz Capital Trust III |       | $            | 20,000     |       | 5.02       | %               | March 30,  2024 |   |

 

**11.**            INCOME TAXES

 

The components ofconsolidated income tax expense for the years ended December 31, 2008,2007, and 2006, are as follows:

 

F-32

----

Table of Contents

 
| **(In thousands)**          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |     |       |
| Current tax expense:        |       |     |       |     |       |     |       |
| Federal tax expense         |       | $        | 8,364      |     | $          | 13,502   |       | $ | 12,955 |   |
| State tax expense           |       | 1,214    |       | 1,724    |       | 1,490    |       |
|                        |       |     |       |     |       |     |       |
| Total current tax expense   |       | 9,578    |       | 15,226   |       | 14,445   |       |
|                        |       |     |       |     |       |     |       |
| Deferred tax benefit:       |       |     |       |     |       |     |       |
| Federal tax benefit         |       | (8,445   | )          | (1,322   | )          | (1,004   | )          |
| State tax benefit           |       | (1,224   | )          | (191     | )          | (142     | )          |
|                        |       |     |       |     |       |     |       |
| Total deferred tax benefit  |       | (9,669   | )          | (1,513   | )          | (1,146   | )          |
|                        |       |     |       |     |       |     |       |
| Total tax expense (benefit) |       | $        | (91        | )        | $          | 13,713   |       | $ | 13,299 |   |

 

The primary component of the deferred tax benefit for2008, 2007, and 2006 is $8,525,000, $826,000 and $586,000, respectively,attributable to timing differences in the allowance for loan and credit losses.

 

F-33

----

Table of Contents

 

A deferred tax asset or liability isrecognized for the tax consequences of temporary differences in the recognitionof revenue and expense, and unrealized gains and losses, for financial and taxreporting purposes. Deferred tax assets are reduced by a valuation allowancewhen, in the opinion of management, it is more likely than not that some or allof the deferred tax assets may not be realized. At December 31, 2008 and2007, a valuation allowance was not recorded as it is more likely than not thatthe deferred tax assets will be realized. The net change in deferred taxesrelated to investment securities available for sale and cash flow hedges areincluded in other comprehensive income. The temporary differences, taxeffected, which give rise to the Company’s net deferred tax assets at December 31,2008 and 2007, are as follows:

 

| **(In thousands)**                                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                             |       |     |       |     |       |
| Deferred tax assets:                                                             |       |     |       |     |       |
| Allowance for loan and credit losses                                             |       | $        | 16,361     |     | $          | 7,836 |   |
| Valuation adjustments of investment securities and OREO                          |       | 1,449    |       | —   |       |
| Deferred loan fees                                                               |       | 588      |       | 1,000    |       |
| Supplemental executive retirement plan and other accrued liabilities             |       | 1,736    |       | 1,418    |       |
| Stock-based compensation                                                         |       | 1,000    |       | 537      |       |
| Depreciation on premises and equipment                                           |       | 781      |       | 919      |       |
| Other                                                                            |       | 91       |       | 193      |       |
|                                                                             |       |     |       |     |       |
| Total deferred tax assets                                                        |       | $        | 22,006     |     | $          | 11,903 |   |
|                                                                             |       |     |       |     |       |
| Deferred tax liabilities:                                                        |       |     |       |     |       |
| Intangible assets                                                                |       | $        | 1,554      |     | $          | 1,396 |   |
| Deferred initial direct loan costs                                               |       | 1,172    |       | 1,092    |       |
| Prepaid assets                                                                   |       | 1,022    |       | 986      |       |
| FHLB stock dividends                                                             |       | 830      |       | 649      |       |
| Net unrealized gain on investment securities available for sale and  derivatives |       | 341      |       | 4        |       |
| Other                                                                            |       | 154      |       | 53       |       |
|                                                                             |       |     |       |     |       |
| Total deferred tax assets                                                        |       | $        | 5,073      |     | $          | 4,180 |   |
|                                                                             |       |     |       |     |       |
| Net deferred tax assets                                                          |       | $        | 16,933     |     | $          | 7,723 |   |

 

F-34

----

Table of Contents

 

A reconciliation of income tax expense at thestatutory rate to the Company’s actual income tax expense for the years ended December 31,2008, 2007, and 2006, is shown below:

 

| **(In thousands)**                                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                       |       |     |       |     |       |     |       |
| Computed at the statutory rate (35%)                       |       | $        | 433        |     | $          | 12,858   |       | $ | 12,644 |   |
| Increase (decrease) resulting from:                        |       |     |       |     |       |     |       |
| State income taxes — net of federal income tax effect |       | (6       | )          | 1,120    |       | 969      |       |
| Tax exempt interest income on loans and securities         |       | (406     | )          | (327     | )          | (287     | )          |
| Bank-owned life insurance income                           |       | (410     | )          | (345     | )          | (351     | )          |
| Meals and entertainment                                    |       | 167      |       | 168      |       | 164      |       |
| Nondeductible stock-based compensation                     |       | 104      |       | 179      |       | 218      |       |
| Interest deduction disallowance                            |       | 83       |       | 95       |       | 99       |       |
| Other — net                                           |       | (56      | )          | (35      | )          | (157     | )          |
|                                                       |       |     |       |     |       |     |       |
| Actual tax provision                                       |       | $        | (91        | )        | $          | 13,713   |       | $ | 13,299 |   |

 

FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.FIN 48 also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition.  At December 31, 2008 and 2007, noamounts were recognized for tax benefits relating to uncertain tax positionstaken during those years.

 

Penalties and interest are classified asincome tax expense when incurred. There were no penalties or interestrecognized for the years ended December 31, 2008, 2007, and 2006.

 

The Company files income tax returns in theU.S. federal jurisdiction and in several state jurisdictions. The following arethe major tax jurisdictions in which the Company and its affiliates operate andthe earliest tax year subject to examination:

 

| **Jurisdiction** | ** ** | **Tax year** | ** ** |
|------------------|------------|--------------|------------|
|             |       |         |       |
| United States    |       | 2005         |       |
| Colorado         |       | 2004         |       |
| Arizona          |       | 2004         |       |

 

**12.**               SHAREHOLDERS’ EQUITY

** **

**Common Stock**— At December 31,2008 and 2007, the Company has reserved the following shares of its authorizedbut unissued common stock for possible future issuance in connection with thefollowing:

 

| ** **                                  | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|---------------------------------------------|------------|-----------|------------|-----------|------------|
|                                        |       |      |       |      |       |
| Exercise and future grants of stock options |       | 3,696,494 |       | 2,514,372 |       |
| Exercise of stock warrants                  |       | 895,968   |       | —    |       |
| Issuance pursuant to employee stock plans   |       | 36,493    |       | 104,467   |       |
|                                        |       |      |       |      |       |
|                                        |       | 4,628,955 |       | 2,618,839 |       |

 

**Preferred Stock** — TheBoard of Directors is authorized, among other things, to fix the designationand the powers, preferences and relative participating, optional and otherspecial rights for preferred shares.  On December 17,2008, the Company amended its articles of incorporation, to establish a Series B

 

F-35

----

Table of Contents

 

Preferred Stock and fix the powers,preferences and relative, participating, optional and other special rights, andthe qualifications, limitations and restrictions, of the shares of Series BPreferred Stock.

 

On December 19, 2008, as part of theCapital Purchase Program promulgated by the United States Department of theTreasury (the Treasury ) under the Troubled Asset Relief Program authorized bythe Emergency Economic Stabilization Act of 2008, the Company and the Treasuryentered into a Letter Agreement, which incorporates by reference the SecuritiesPurchase Agreement - Standard Terms (together, the Purchase Agreement),pursuant to which the Company issued and sold to the Treasury, for an aggregatepurchase price of $64,450,000, (1) 64,450 shares of the Company’s FixedRate Cumulative Perpetual Preferred Stock, Series B, par value $0.01 pershare, having a liquidation preference of $1,000 per share (the Series BPreferred Stock) and (2) a warrant (the Warrant) to purchase 895,968 sharesof the Company’s common stock, par value $0.01 per share, at an exercise priceof $10.79 per share.  The Warrant wasimmediately exercisable upon issuance provided that Treasury has agreed not toexercise the warrant for more than 447,984 shares of common stock until theearlier of the date on which the Company has received aggregate gross proceedsfrom a qualified equity offering of at least $64,450,000 and December 31,2009.

 

The Series B Preferred Stock payscumulative dividends, on February 15, May 15, August 15 and November 15of each year, at an annual rate of 5% for the first five years and 9%thereafter.  At December 31, 2008,the Company had accrued dividends of $107,000. The Series B Preferred Stock is non-voting, other than class votingrights on certain matters that could adversely affect the Series BPreferred Stock.  The American Recoveryand Reinvestment Act of 2009 (ARRA) that was signed into law on February 17,2009 allows for the redemption of the Series B Preferred Stock withoutlimitation if the approval of the Federal Reserve is obtained.

 

The Series B Preferred Stock rankssenior to common stock in terms of dividend payments and distributions uponliquidation, dissolution and winding up of the Company.  A merger,consolidation or sale of all or substantially all of the assets of the Companywill not, however, constitute a liquidation, dissolution or winding up of theCompany for purposes of the payment of any distribution on the Series BPreferred Stock.

 

Based on the guidance in AccountingPrinciples Board No. 14, *Accounting for ConvertibleDebt and Debt issued with Stock Purchase Warrants,*the Companyallocated the $64,450,000 in proceeds between the Series B Preferred Stockand the Warrant in accordance with their relative fair values at the time ofissuance.  Of the total proceeds,$61,447,000 was allocated to the Series B Preferred Stock and $3,003,000was allocated to the Warrant.  The$3,003,000 allocated to the Warrant also represents a discount on the Series BPreferred Stock that is being accreted from the date of issue to the fifthanniversary, at which time the rate increases to 9%.

 

**Dividends** — At December 31,2008, the Company’s ability to pay dividends on its common stock, if itdetermines to do so, was largely dependent upon the payment of dividends by theBank. At December 31, 2008, the Bank could have paid total dividends tothe Company of approximately $56,135,000 without prior regulatory approval.

 

Dividends on the Company’s capital stock(common and preferred stock) are prohibited under the terms of the juniorsubordinated debenture agreements (see Note 9 — Long Term Debt) if the Companyis in continuous default on its payment obligations to the capital trusts, haselected to defer interest payments on the debentures or extends the interestpayment period.  At December 31, 2008, the Company was not in defaulton any of the junior subordinated debt issuances.

 

Pursuant to the terms of the PurchaseAgreement executed in the issuance of the Series B Preferred Stock, theability of the Company to declare or pay dividends or distributions on, orpurchase, redeem or otherwise acquire for consideration, shares of its commonstock will be subject to restrictions in the event that the Company fails todeclare and pay full dividend on the Series B Preferred Stock.  In addition, the Company may not increase itsdividend prior to the earlier of  1)three years from the date of the Purchase Agreement or 2) the date on which theSeries B Preferred Stock is redeemed in whole.

 

F-36

----

Table of Contents

 

Dividends paid per common share for the yearsended December 31, 2008, 2007, and 2006 were $0.28, $0.26 and $0.22, respectively.

 

**Secondary Offering** — On January 24,2007, pursuant to a shelf registration originally filed on December 19,2006, the Company sold 975,000 shares of common stock at a public offeringprice of $20.90. In conjunction with the offering, the Company’s ChiefExecutive Officer and two members of its Board of Directors (SellingShareholders) sold 2,425,262 shares of common stock. The Company did notreceive any proceeds from the sale of common stock by the Selling Shareholders.

 

**Repurchase Program** — On July 19,2007, the Company’s Board of Directors authorized a new share repurchaseprogram for the repurchase of up to 5% or 1,200,207 shares of its outstandingcommon stock. The program concluded on November 19, 2007, when allauthorized shares had been repurchased. The shares were repurchased at aweighted-average price of $16.72 and a total cost of $20,062,000.

 

**13.**               EARNINGS PER COMMONSHARE

** **

Income available to common shareholders andthe weighted-average shares outstanding, used in the calculation of Basic andDiluted Earnings Per Share, for the years ended December 31, 2008, 2007and 2006, are as follows:

 

 

| **(In thousands, except share and per share amounts)**      | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                        |       |       |       |       |       |       |       |
| Net Income                                                  |       | $          | 1,328      |       | $          | 23,024     |       | $ | 22,826 |   |
| Less: preferred stock dividends                             |       | (124       | )          | —     |       | —     |       |
| Net Income available to common shareholders                 |       | $          | 1,204      |       | $          | 23,024     |       | $ | 22,826 |   |
|                                                        |       |       |       |       |       |       |       |
| Weighted average common shares - issued                     |       | 23,194,504 |       | 23,552,075 |       | 22,545,964 |       |
| Less: average nonvested restricted share awards             |       | (112,192   | )          | —     |       | —     |       |
| Weighted average common shares outstanding - basic          |       | 23,082,312 |       | 23,552,075 |       | 22,545,964 |       |
| Effect of dilutive nonvested share awards and stock options |       | 172,262    |       | 538,193    |       | 818,736    |       |
| Weighted average common shares outstanding - diluted        |       | 23,254,574 |       | 24,090,268 |       | 23,364,700 |       |
|                                                        |       |       |       |       |       |       |       |
| Basic earnings per common share                             |       | $          | 0.05       |       | $          | 0.98       |       | $ | 1.01 |   |
| Diluted earnings per common share                           |       | $          | 0.05       |       | $          | 0.96       |       | $ | 0.98 |   |

 

At December 31, 2008, 2007 and 2006,1,906,000, 837,706, and 363,824 dilutive securities (options and warrants),respectively, were excluded from the earnings per share computation solelybecause their effect was anti-dilutive. All shares of restricted stock are deducted from weighted average commonshares outstanding for the computation of basic earnings per share.  Performance based restricted stock awards areincluded in the dilutive earnings per share calculation at the beginning of theperiod in which the performance goal was met.

 

**14.**               EMPLOYEE BENEFIT ANDSTOCK COMPENSATION PLANS

** **

**Stock Options** — TheCompany has adopted several incentive stock option plans to reward and providelong-term incentives for directors and key employees of the Company. The termof all options issued may not exceed 10 years. The Company issues new sharesupon exercise of a stock option award.

 

The 1995 Incentive Stock Option Plan (the1995 Plan) authorizes the issuance of 445,332 shares of Common Stock.One-fourth of the options included under the 1995 Plan vest on each of thefirst four anniversaries of the grant. Under the 1995 Plan, Incentive StockOptions may not be granted at an

 

F-37

----

Table of Contents

 

exercise price of less than the fair marketvalue of the Common Stock on the date of grant. No additional shares under the1995 Plan are available to be granted.

 

The 1997 Incentive Stock Option Plan (the1997 Plan) authorizes the issuance of 227,331 shares at not less than themarket value of the Company’s stock at the date of grant. The majority of theoptions issued under the 1997 Plan are exercisable commencing one year from thedate of grant and vest 25% per year thereafter becoming fully exercisable afterfour years. No additional shares under the 1997 Plan are available to begranted.

 

The 1998 Stock Incentive Plan (the 1998 Plan)authorizes the issuance of 956,250 shares of Common Stock. The exercise pricefor options granted under the 1998 Plan must be at least equal to 100% of thefair market value of the Common Stock on the date of grant. The 1998 Planpermits the granting of Incentive Stock Options and nonqualified stock options.Options granted under the 1998 Plan have vesting schedules ranging fromimmediately exercisable to being exercisable four years from the grant date. Noadditional shares under the 1998 Plan are available to be granted.

 

The 2002 Equity Incentive Plan (the 2002Plan) authorizes the issuance of 975,000 shares of Common Stock. Under the 2002Plan, the Compensation Committee of the Company has the authority to determinethe identity of the key employees, consultants, and directors who shall begranted options; the option price, which shall not be less than 85% of the fairmarket value of the Common Stock on the date of grant; and the manner and timesat which the options shall be exercisable. Shares available for grant under the2002 Plan at December 31, 2008 totaled 94,173.

 

At the Annual Shareholder Meeting held May 15,2008, the 2005 Equity Incentive Plan (the 2005 Plan) was amended to increasethe authorized shares available under the plan by 1,500,000 shares to 2,750,000shares.  The 2005 Plan was also amendedto increase the shares available for restricted stock awards by 250,000 sharesto 500,000 shares. Under the 2005 Plan, the Compensation Committee of theCompany has the authority to determine the identity of the key employees,consultants and directors who shall be granted options; the option price, whichshall not be less than 85% of the fair market value of the Common Stock on thedate of grant; and the manner and times at which the options shall beexercisable. Shares available for grant at December 31, 2008, totaled1,314,849.

 

During 2008, 2007, and 2006, the Companyrecognized compensation expense, net of estimated forfeitures, of $1,762,000,$1,524,000, and $1,140,000, respectively, for stock-based compensation awardsfor which the requisite service was rendered during the year.

 

SFAS 123(R) requires the Company toselect a valuation technique that meets the measurement criteria set forth inthe standard. Valuation techniques that meet the criteria for estimating thefair values of employee stock options include a lattice model and a closed-formmodel (for example, the Black-Scholes formula). The Company is currently usingthe Black-Scholes model to estimate the fair value of stock options.  Restricted stock awards fair values are basedon the closing price of the Company stock on the award date.

 

The fair value of each option grant isestimated on the date of grant using the Black-Scholes option pricing model(the Model). The risk-free rate for periods within the contractual life of theoption is based on the U.S. Treasury yield in effect at the time of grant. Theexpected term of options granted is based on the options’ vesting schedule andthe Company’s historical exercise patterns for different employee groups andrepresents the period of time that options granted are expected to beoutstanding. Expected volatilities are based on the historical volatility ofthe Company’s stock and vesting period of the option to be issued. The dividendyield is determined by annualizing the dividend rate as a percentage of theCompany stock price at the time of grant. The following weighted-averageassumptions were used for grants issued during the years ended December 31,2008, 2007, and 2006:

 

F-38

----

Table ofContents

 

| ** **              | ** ** | **2008**     | ** ** | **2007**  | ** ** | **2006**     | ** ** |
|-------------------------|------------|--------------|------------|-----------|------------|--------------|------------|
| ** **              | ** ** | **Weighted** | ** ** | **Range** | ** ** | **Weighted** | ** ** | **Range** | ** ** | **Weighted** | ** ** | **Range** | ** ** |
| ** **              | ** ** | **Average**  | ** ** | **Low**   | ** ** | **High**     | ** ** | **Average** | ** ** | **Low** | ** ** | **High** | ** ** | **Average** | ** ** | **Low** | ** ** | **High** | ** ** |
| Risk-free interest rate |       | 2.91         | %          | 1.11      | %          | 3.46         | %          | 4.50 | % | 2.91 | % | 4.94 | % | 4.90 | % | 4.35 | % | 5.12 | % |
| Expected dividend yield |       | 2.34         | %          | 1.88      | %          | 3.76         | %          | 1.32 | % | 1.09 | % | 1.81 | % | 1.01 | % | 0.85 | % | 1.09 | % |
| Expected volatility     |       | 33.73        | %          | 29.37     | %          | 54.26        | %          | 28.14 | % | 26.53 | % | 29.12 | % | 30.81 | % | 27.90 | % | 33.88 | % |
| Expected life (years)   |       | 4.1          |       |      |       |         |       | 4.0 |   |   |   |   |   | 3.5 |   |   |   |   |   |

 

The summary of changes in shares under option and restricted stockawards for the years ended December 31, 2008, 2007, and 2006, is asfollows:

 

| ** **                   | ** ** | **2008**   | ** ** | **2007**                                       | ** ** | **2006**   | ** ** |
|------------------------------|------------|------------|------------|------------------------------------------------|------------|------------|------------|
| **Stock Options**            | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price**        | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                         |       |       |       |                                           |       |       |       |   |   |   |   |   |   |
| Outstanding — beginning |       | 2,201,722  |       | $                                              | 14.85      |       | 2,137,626  |   | $ | 12.84 |   | 2,203,184 |   | $ | 10.54 |   |
| Granted                      |       | 368,794    |       | 12.28                                          |       | 481,751    |       | 19.53 |   | 342,001 |   | 21.47 |   |
| Exercised                    |       | 98,532     |       | 6.51                                           |       | 369,386    |       | 8.76 |   | 339,277 |   | 5.66 |   |
| Forfeited                    |       | 184,512    |       | 16.46                                          |       | 48,269     |       | 19.50 |   | 68,282 |   | 17.40 |   |
|                         |       |       |       |                                           |       |       |       |   |   |   |   |   |   |
| Outstanding — ending    |       | 2,287,472  |       | $                                              | 14.66      |       | 2,201,722  |   | $ | 14.85 |   | 2,137,626 |   | $ | 12.84 |   |
|                         |       |       |       |                                           |       |       |       |   |   |   |   |   |   |
| Exercisable — ending    |       | 1,619,517  |       | $                                              | 13.92      |       | 1,419,800  |   | $ | 12.14 |   | 1,520,230 |   | $ | 10.27 |   |
|                         |       |       |       |                                           |       |       |       |   |   |   |   |   |   |
| **Restricted  Stock Awards** | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|                         |       |       |       |                                           |       |       |       |   |   |   |   |   |   |
| Nonvested — beginning   |       | 2,000      |       | $                                              | 21.07      |       | —     |   | $ | — |   | — |   | $ | — |   |
| Granted                      |       | 220,500    |       | 6.87                                           |       | 2,000      |       | 21 |   | — |   | — |   |
| Vested                       |       | 400        |       | 21.07                                          |       | —     |       | — |   | — |   | — |   |
| Forfeited                    |       | 5,000      |       | 6.87                                           |       | —     |       | — |   | — |   | — |   |
|                         |       |       |       |                                           |       |       |       |   |   |   |   |   |   |
| Nonvested — ending      |       | 217,100    |       | $                                              | 6.97       |       | 2,000      |   | $ | 21.07 |   | — |   | $ | — |   |

 

There were 2,253,280 options vested orexpected to vest with a weighted-average price of $14.65 at December 31,2008. The weighted-average remaining terms for options outstanding, vested orexpected to vest and options exercisable at the end of the period were 4.3, 4.2and 3.7 years, respectively. The aggregate intrinsic value for optionsoutstanding, vested or expected to vest and options exercisable at the end of theperiod was $828,000, $827,000, and $811,000, respectively. The weighted-averagegrant-date fair value of options granted during the years ended December 31,2008, 2007, and 2006 was $2.57, $4.57 and $4.96, respectively. The totalintrinsic value of options exercised during years ended December 31, 2008,2007, and 2006 was $560,000, $3,841,000, and $5,093,000, respectively.

 

At December 31, 2008, there was$3,224,000 of total unrecognized compensation cost related to nonvestedshare-based compensation arrangements granted under the Plans. The cost isexpected to be recognized over a weighted-average period of 2.9 years.

 

At December 31, 2008, a summary of theCompany’s stock options outstanding are as follows:

 

F-39

----

Table ofContents

 

| ** **                   | ** ** | **Options outstanding** | ** ** | **Options exercisable**                | ** ** |
|------------------------------|------------|-------------------------|------------|----------------------------------------|------------|
| **Range of  Exercise Price** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life  (Years)** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                         |       |                    |       |                                   |       |   |   |   |   |   |   |
| $4.58 - $9.35                |       | 388,682                 |       | $                                      | 7.61       |   | 1.8 |   | 380,182 |   | $ | 7.61 |   |
| $9.61 - $12.00               |       | 502,745                 |       | 11.12                                  |       | 3.8 |   | 478,995 |   | 11.14 |   |
| $12.01 - $13.93              |       | 410,240                 |       | 12.88                                  |       | 5.9 |   | 133,389 |   | 13.63 |   |
| $13.99 - $19.81              |       | 408,750                 |       | 18.52                                  |       | 4.6 |   | 324,363 |   | 18.81 |   |
| $19.82 - $21.65              |       | 548,488                 |       | 20.93                                  |       | 4.9 |   | 282,985 |   | 21.02 |   |
| $21.70 - $23.35              |       | 28,567                  |       | 22.90                                  |       | 4.5 |   | 19,603 |   | 22.90 |   |
|                         |       |                    |       |                                   |       |   |   |   |   |   |   |
|                         |       | 2,287,472               |       | $                                      | 14.66      |   | 4.3 |   | 1,619,517 |   | $ | 13.92 |   |

 

**Employee Stock Purchase Plan** — In January 2000,the Company’s Board of Directors approved the adoption of an Employee StockPurchase Plan (ESPP), which provides that all employees may elect to have apercentage of their payroll deducted and applied to the purchase of CommonStock at a discount. In addition, the Company may make a matching contributionup to 50% of an employee’s deduction toward the purchase of additional CommonStock. No matching contribution was made for the years ended December 31,2008, 2007, and 2006. The Company has reserved 36,493 shares for issuance underthe terms of the ESPP at December 31, 2008. The ESPP is administered by acommittee of two or more directors who are not employees or officers of theCompany and are appointed by the Board of Directors. During the years ended December 31,2008, 2007, and 2006, 67,974, 47,278, and 36,901 shares, respectively, wereissued.

 

**Employee 401(k) Plan** — TheCompany has a defined contribution plan covering substantially all employees.Employees may contribute up to 15% of their compensation with the Company’sdiscretionary matching within the limits defined for a 401(k) Plan.Employer contributions charged to expense for the years ended December 31,2008, 2007, and 2006, were $1,953,000, $1,724,000, and $1,428,000, respectivelyand are included in the consolidated statements of income and comprehensiveincome under the caption “Salaries and employee benefits.”

 

F-40

----

 

Table of Contents

 

**Supplemental Executive Retirement Plan** — The Companymaintains a Supplemental Executive Retirement Plan (SERP) for five active keyexecutives. The plan provides for target retirement benefits, as a percentageof pay, beginning at age 60 or after ten years of service and are paid asa monthly benefit for a ten-year period. The target percentage is 50% of paybased on the executives’ average monthly compensation during any five calendaryears during which the executives’ compensation is highest duringparticipation. Benefits under the SERP are vested 20% for each year of serviceand are 100% vested after five years of service.  At December 31, 2008, all participants werefully vested.  At December 31, 2008and 2007, the Company had accrued $2,834,000 and $2,119,000, respectively, forthe expected benefits under the SERP which are included in the consolidatedbalance sheets under the caption “Accrued interest and other liabilities.”

 

**15.**               COMMITMENTS ANDCONTINGENCIES

** **

**Lease Commitments** — The Company has various operatinglease agreements for office space. Most of the leases are subject to rentescalation provisions in subsequent years and have renewal options at the end ofthe initial lease terms. Total rental expense for the years ended December 31,2008, 2007, and 2006, was $5,065,000, $4,415,000, and $4,273,000, respectively.In 1998, certain officers and directors acquired the building in which thecorporate office is located and certain banking operations are performed. At December 31,2008, one director has a remaining interest in the building. Additionally, twobank branches are leased from entities controlled by a director of the Company.Rent payments for the related party leases for the years ended December 31,2008, 2007, and 2006, were $2,018,000, $1,907,000, and $1,738,000,respectively.  At December 31, 2008and 2007, the Company owed $199,000 and $108,000, respectively, to entitiescontrolled by the related party that is included in the consolidated balancesheets under the caption “Accrued interest and other liabilities.”

 

Future minimum lease payments at December 31,2008, under all noncancelable operating leases are as follows:

 
| **December 31,** | ** ** | **(In thousands)** | ** ** |
|-----------------------|------------|--------------------|------------|
|                  |       |               |       |
| 2009                  |       | $                  | 5,358      |   |
| 2010                  |       | 4,404              |       |
| 2011                  |       | 4,263              |       |
| 2012                  |       | 3,803              |       |
| 2013                  |       | 3,009              |       |
| Thereafter            |       | 7,551              |       |
|                  |       |               |       |
| Total                 |       | $                  | 28,388     |   |

 

F-41

----

Table of Contents

 

**Financial Instruments With Off-Balance Sheet Risk** — In thenormal course of business the Company has entered into financial instrumentswhich are not reflected in the accompanying consolidated financial statements.The Company had the following commitments at December 31, 2008:

 
| **(In thousands)**                                                                                                     | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
|                                                                                                                   |       |       |       |
| Commitments to originate commercial or real estate construction loans  and unused lines of credit granted to customers |       | $          | 582,739    |   |
|                                                                                                                   |       |       |       |
| Commitments to originate consumer loans — personal lines of credit  and equity lines                              |       | $          | 41,820     |   |
|                                                                                                                   |       |       |       |
| Overdraft protection plans                                                                                             |       | $          | 14,343     |   |
|                                                                                                                   |       |       |       |
| Letters of credit                                                                                                      |       | $          | 54,608     |   |
|                                                                                                                   |       |       |       |
| Unfunded commitments for unconsolidated investments                                                                    |       | $          | 2,180      |   |
|                                                                                                                   |       |       |       |
| Company guarantees                                                                                                     |       | $          | 1,673      |   |

 

**Commitments to Originate** — TheCompany makes contractual commitments to extend credit and provide standbyletters of credit, which are binding agreements to lend money to its customersat predetermined interest rates for a specific period of time. Thesecommitments are not held for sale. The credit risk involved in issuing thesefinancial instruments is essentially the same as that involved in grantingon-balance sheet financial instruments. As such, the Company’s exposure tocredit loss in the event of nonperformance by the counterparty to the financialinstrument is represented by the contractual amounts of those instruments.However, the Company applies the same credit policies, standards, and ongoingreassessments in making commitments and conditional obligations as it does forloans. In addition, the amount and type of collateral obtained, if deemednecessary upon extension of a loan commitment or standby letter of credit, isessentially the same as the collateral requirements provided for loans.Additional risk associated with providing these commitments arises when theyare drawn upon, such as the demands on liquidity the Company would experienceif a significant portion were drawn down at the same time. However, this isconsidered unlikely, as many commitments expire without being drawn upon andtherefore do not necessarily represent future cash requirements.

 

**Overdraft Protection Plans** — TheCompany provides personal credit lines on customer accounts to advance funds tocover overdrafts.

 

**Letters of Credit** — TheCompany provides standby and commercial letters of credit during the normalcourse of business. Standby letters of credit guarantee performance of acustomer to a third party while commercial letters of credit guarantee paymentson behalf of our customers.

 

**Unfunded Commitments forUnconsolidated Investments** — The Company hascommitted to purchase up to $10,000,000 in limited partnership interests offour entities, of which $2,180,000 is unfunded at December 31, 2008.Certain shareholders and directors also have interests in some of theseentities.

 

**Company Guarantees** — TheCompany guarantees, to the issuing merchant banks, the credit card debt andmerchant processing transactions for certain customers.

 

**Federal Reserve Bank Stock** — Thefair value of the Federal Reserve Bank stock approximates its carrying value,which is based on the redemption provisions of the Federal Reserve Bank. At December 31, 2008, the Company held 69,792 shares of Federal ReserveBank stock with a fair value of 

 

F-42

----

Table ofContents

 

$3,490,000(par value of $50).   This investment represents 50% of thesubscription amount due to the Federal Reserve to become a member bank and thestock cannot be sold, traded, or pledged as collateral for loans. Although the probability is remote, the remaining 50% or $3,490,000 due to theFederal Reserve Bank may be callable at their discretion.

 

**Employment Contracts** — Certainofficers of the Company have entered into employment agreements providing forsalaries and fringe benefits. In addition, severance is provided in the eventof termination for other than cause, and under certain changes in control, apayment is required.  However, the ARRAprohibits the payment of golden parachutes to certain executive officers, whichmay prohibit payments of severance payments.

 

**Indemnification Agreements** — We aresubject to certain indemnification obligations in conjunction with agreementssigned with officers and directors of the Company.  The IndemnificationAgreements require the Company to indemnify against judgments, fines, penaltiesand amounts paid in settlements incurred in connection with civil or criminalaction or proceedings, as it relates to their services to the Company.  Tothe extent the Company maintains an insurance policy or policies providingdirectors’ and officers’ liability insurance, the Indemnitee will be covered tothe maximum extent of the coverage available for any director or officer of theCompany.  However, certain indemnification payments may not be coveredunder the Company’s directors’ and officers’ insurance coverage.  Therights of the Indemnitee under the Indemnification Agreement are in addition toany rights the Indemnitee may have under the Company’s articles ofincorporation or bylaws.  While the likelihood is remote, performanceunder these indemnifications could materially affect net income in a particularquarter or annual period.

 

**Other Matters** — TheCompany is involved in various lawsuits which have arisen in the normal courseof business. It is management’s opinion, based upon advice of legal counsel,that the ultimate outcome of these lawsuits will not have a material impactupon the financial condition or results of operations of the Company.

 

**16.**               REGULATORY MATTERS

** **

The Company and the Bank are subject tovarious regulatory capital requirements administered by the federal bankingagencies. Failure to meet minimum capital requirements can trigger certain mandatory —and possibly additional discretionary — actions by regulators that, ifundertaken, could have a direct material effect on the Company’s financialcondition and results of operations. Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Company and the Bankmust meet specific capital guidelines that involve quantitative measures of theCompany and the Bank’s assets, liabilities and certain off-balance-sheet itemsas calculated under regulatory accounting practices. The Company and the Bank’scapital amounts and classification are also subject to qualitative judgments bythe regulators regarding components, risk weightings and other factors.

 

Quantitative measures established byregulation to ensure capital adequacy require the Company and the Bank tomaintain minimum amounts and ratios (set forth in the following table) of Tier1 and Total  Capital (as defined in theregulations) to risk-weighted assets, and of Tier I capital to averageassets. At December 31, 2008 and 2007, management believes the Company andBank meet all capital adequacy requirements to which they are subject.

 

At December 31, 2008, the most recentnotification from the Federal Reserve categorized the Bank as well capitalizedunder the regulatory framework for prompt corrective action. To be categorizedas well capitalized the Bank must maintain minimum total risk-based,Tier I risk-based, and Tier I leverage ratios as set forth in thefollowing table. There are no conditions or events that management believeshave changed the Bank’s categories.

 

F-43

----

Table of Contents

 

The following table shows the Company and Bank’s actualcapital amounts and ratios and regulatory thresholds at December 31, 2008and 2007:

 
| **2008**                                         | ** ** | **Holding**          | ** ** | ** **        | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|----------------------|------------|-------------------|------------|------------|------------|
| **(In thousands)**                               | ** ** | **Company**          | ** ** | **Bank**          | ** ** | ** ** | ** ** |
| Shareholders’ equity/ GAAP capital          |       | $                    | 252,099    |              | $          | 227,725    |       |   |   |
| Disallowed goodwill and other intangibles        |       | (50,196              | )          | (3,365            | )          |       |       |
| Unrealized loss on available for sale securities |       | 1,668                |       | 1,668             |       |       |       |
| Accumulated net gains on cash flow hedges        |       | (2,223               | )          | (2,223            | )          |       |       |
| Subordinated debentures                          |       | 70,000               |       | —            |       |       |       |
| Other deductions                                 |       | (298                 | )          | —            |       |       |       |
| Tier I regulatory capital                        |       | $                    | 271,050    |              | $          | 223,805    |       |   |   |
|                                             |       |                 |       |              |       |       |       |
| Subordinated debentures                          |       | 20,984               |       | —            |       |       |       |
| Allowance for loan losses                        |       | 27,760               |       | 27,532            |       |       |       |
| Total risk-based regulatory capital              |       | $                    | 319,794    |              | $          | 251,337    |       |   |   |
|                                             |       |                 |       |              |       |       |       |
| ** **                                       | ** ** | **Holding  Company** | ** ** |
| ** **                                       | ** ** | **Risk-based**       | ** ** | **Leverage**      | ** ** |
| **(In  thousands)**                              | ** ** | **Tier I**           | ** ** | **Total Capital** | ** ** | **Tier I** | ** ** |
| Regulatory capital                               |       | $                    | 271,050    |              | $          | 319,794    |       | $ | 271,050 |   |
| Minimum capital requirement                      |       | 88,217               |       | 176,433           |       | 104,584    |       |
| Regulatory capital - excess                      |       | $                    | 182,833    |              | $          | 143,361    |       | $ | 166,466 |   |
| Capital ratios                                   |       | 12.3                 | %          | 14.5              | %          | 10.4       | %          |
| Minimum capital requirement                      |       | 4.0                  | %          | 8.0               | %          | 4.0        | %          |
| Well capitalized requirement                     |       | N/A                  |       | N/A               |       | N/A        |       |
|                                             |       |                 |       |              |       |       |       |
| ** **                                       | ** ** | **Bank**             | ** ** |
|                                             | ** ** | **Risk-based**       | ** ** | **Leverage**      | ** ** |
| **(In  thousands)**                              | ** ** | **Tier I**           | ** ** | **Total Capital** | ** ** | **Tier I** | ** ** |
| Regulatory capital                               |       | $                    | 223,805    |              | $          | 251,337    |       | $ | 223,805 |   |
| Minimum capital requirement                      |       | 87,480               |       | 174,960           |       | 103,995    |       |
| Regulatory capital - excess                      |       | $                    | 136,325    |              | $          | 76,377     |       | $ | 119,810 |   |
| Capital ratios                                   |       | 10.2                 | %          | 11.5              | %          | 8.6        | %          |
| Minimum capital requirement                      |       | 4.0                  | %          | 8.0               | %          | 4.0        | %          |
| Well capitalized requirement                     |       | 6.0                  | %          | 10.0              | %          | 4.0        | %          |

 

F-44

----

Table of Contents

 
| **2007**                                         | ** ** | **Holding**          | ** ** | ** **        | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|----------------------|------------|-------------------|------------|------------|------------|
| **(In thousands)**                               | ** ** | **Company**          | ** ** | **Bank**          | ** ** | ** ** | ** ** |
| Shareholders’ equity/ GAAP capital          |       | $                    | 189,270    |              | $          | 224,560    |       |   |   |
| Disallowed goodwill and other intangibles        |       | (45,497              | )          | (3,365            | )          |       |       |
| Unrealized loss on available for sale securities |       | 690                  |       | 690               |       |       |       |
| Accumulated net gains on cash flow hedges        |       | (696                 | )          | (696              | )          |       |       |
| Subordinated debentures                          |       | 63,088               |       | —            |       |       |       |
| Minority interests in consolidated subsidiaries  |       | 1,663                |       | —            |       |       |       |
| Other deductions                                 |       | (261                 | )          | —            |       |       |       |
| Tier I regulatory capital                        |       | $                    | 208,257    |              | $          | 221,189    |       |   |   |
|                                             |       |                 |       |              |       |       |       |
| Subordinated debentures                          |       | 6,912                |       | —            |       |       |       |
| Allowance for loan losses                        |       | 20,620               |       | 20,620            |       |       |       |
| Total risk-based regulatory capital              |       | $                    | 235,789    |              | $          | 241,809    |       |   |   |
|                                             |       |                 |       |              |       |       |       |
| ** **                                       | ** ** | **Holding  Company** | ** ** |
| ** **                                       | ** ** | **Risk-based**       | ** ** | **Leverage**      | ** ** |
| **(In  thousands)**                              | ** ** | **Tier I**           | ** ** | **Total Capital** | ** ** | **Tier I** | ** ** |
| Regulatory capital                               |       | $                    | 208,257    |              | $          | 235,789    |       | $ | 208,257 |   |
| Minimum capital requirement                      |       | 88,254               |       | 176,507           |       | 91,294     |       |
| Regulatory capital - excess                      |       | $                    | 120,003    |              | $          | 59,282     |       | $ | 116,963 |   |
| Capital ratios                                   |       | 9.4                  | %          | 10.7              | %          | 9.1        | %          |
| Minimum capital requirement                      |       | 4.0                  | %          | 8.0               | %          | 4.0        | %          |
| Well capitalized requirement                     |       | N/A                  |       | N/A               |       | N/A        |       |
|                                             |       |                 |       |              |       |       |       |
| ** **                                       | ** ** | **Bank**             | ** ** |
|                                             | ** ** | **Risk-based**       | ** ** | **Leverage**      | ** ** |
| **(In  thousands)**                              | ** ** | **Tier I**           | ** ** | **Total Capital** | ** ** | **Tier I** | ** ** |
| Regulatory capital                               |       | $                    | 221,189    |              | $          | 241,809    |       | $ | 221,189 |   |
| Minimum capital requirement                      |       | 86,152               |       | 172,304           |       | 91,011     |       |
| Regulatory capital - excess                      |       | $                    | 135,037    |              | $          | 69,505     |       | $ | 130,178 |   |
| Capital ratios                                   |       | 10.3                 | %          | 11.2              | %          | 9.7        | %          |
| Minimum capital requirement                      |       | 4.0                  | %          | 8.0               | %          | 4.0        | %          |
| Well capitalized requirement                     |       | 6.0                  | %          | 10.0              | %          | 5.0        | %          |

 

**17.**               COMPREHENSIVE INCOME

** **

Comprehensive income isthe total of (1) net income plus (2) all other changes in net assetsarising from nonowner sources, and are referred to as other comprehensiveincome. Presented below are the changes in other comprehensive income whichconsist of unrealized gains (losses) on available for sale securities andderivatives, net of tax for the years ended December 31, 2008, 2007, and2006:

 
| **(In thousands)**                                                                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                                    |       |     |       |     |       |     |       |
| Other comprehensive income — before tax:                                                                                           |       |     |       |     |       |     |       |
| Unrealized (loss) gain on available for sale securities — net of  reclassification to operations of $(1,657), $(494), and $(1,766) |       | $        | (1,579     | )        | $          | 1,320    |       | $ | 4,223 |   |
| Unrealized gain on derivative securities — net of reclassification to  operations of $2,109, $(1,436), and $(2,093)                |       | 2,465    |       | 2,906    |       | 1,036    |       |
| Tax expense related to items of other comprehensive income                                                                              |       | (337     | )          | (1,606   | )          | (1,998   | )          |
|                                                                                                                                    |       |     |       |     |       |     |       |
| Other comprehensive income — net of tax                                                                                            |       | $        | 549        |     | $          | 2,620    |       | $ | 3,261 |   |

 

F-45

----

Table of Contents

 

**18.**               FAIR VALUEMEASUREMENTS

** **

OnJanuary 1, 2008, the Company adopted SFAS 157, which defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurements.  SFAS No. 157applies to reported balances that are required or permitted to be measured atfair value under existing accounting pronouncements; accordingly, the standarddoes not require any new fair value measurements of reported balances.  The effective date of SFAS 157 for allnonrecurring fair value measurements of nonfinancial assets and nonfinancialliabilities has been delayed until fiscal years beginning after November 15,2008.  Accordingly, the Company willapply the requirements of SFAS 157 to the evaluation of goodwill,indefinite-lived intangible assets and long-lived assets measured at fair valuefor impairment beginning January 1, 2009.

 

SFAS157 emphasizes that fair value is a market-based measurement, not anentity-specific measurement.  Therefore,a fair value measurement should be determined using assumptions that marketparticipants would use in pricing an asset or liability.  As a basis for considering market participantassumptions in fair value measurements, SFAS 157 establishes a fair valuehierarchy that distinguishes between market participant assumptions based onmarket data obtained from sources independent of the reporting entity(observable inputs that are classified within Levels 1 and 2 of the hierarchy)and the reporting entity’s own assumptions about market participant assumptions(unobservable inputs classified within Level 3 of the hierarchy).

 

*Level 1* inputs utilize quoted prices (unadjusted) in activemarkets for identical assets or liabilities that the Company has the ability toaccess at the measurement date.

 

*Level 2* inputs are inputs other than quoted prices includedin Level 1 that are observable for the asset or liability, either directly orindirectly. Level 2 inputs may include quoted prices for similar assets andliabilities in active markets, as well as inputs that are observable for theasset or liability (other than quoted prices), such as interest rates, foreignexchange rates and yield curves that are observable at commonly quotedintervals.

 

*Level 3* inputs are unobservable inputs for the asset orliability, which is typically based on an entity’s own assumptions, as there islittle, if any, related market activity.

 

Ininstances where the determination of the fair value measurement is based oninputs from different levels of the fair value hierarchy, the level in the fairvalue hierarchy within which the entire fair value measurement falls is basedon the lowest level input that is significant to the fair value measurement inits entirety. The Company’s assessment of the significance of a particularinput to the fair value measurement in its entirety requires judgment, andconsiders factors specific to the asset or liability.

 

Adescription of the valuation methodologies used for instruments measured atfair value, as well as the general classification of such instruments pursuantto the valuation hierarchy, is set forth below. These valuation methodologieswere applied to all of the Company’s financial assets and financial liabilitiescarried at fair value effective January 1, 2008.

 

**Available for sale securities** — At December 31,2008, the Company holds, as part of its investment portfolio, available forsale securities reported at fair value consisting of Mortgage-Backed Securities(MBS), obligations of states and political subdivisions, corporate debtsecurities and trust preferred securities. The fair value of the majority of MBS, obligations of states andpolitical subdivisions and corporate debt securities are determined usingwidely accepted valuation techniques including matrix pricing and broker-quotebased applications.  Inputs includebenchmark yields, reported trades, issuer spreads, prepayment speeds and otherrelevant items.  As a result, the Companyhas determined that these valuations fall within Level 2 of the fair valuehierarchy.  Certain private label MBS arevalued using broker-dealer quotes.  Asthe private label MBS market has become increasingly illiquid, these securityvaluations are more often based on modeling techniques and not observabletrades.  Accordingly, the Company hasassessed the input level and has reported the private label MBS as a Level 3input.  The Company also holds trustpreferred securities that are recorded at fair value based 

 

F-46

----

Table of Contents

 

onquoted market prices.  As a result, theCompany has determined that the valuation of its trust preferred securitiesfalls within Level 1 of the fair value hierarchy.  At December 31, 2008, the Companyrecognized an OTTI of $1,657,000 on two securities, which are recognized atfair value on a recurring basis.  TheOTTI included a $1,279,000 write down resulting from an increase in the creditrisk associated with a single issuer trust preferred security.  Also included in the OTTI is a write down of$378,000 on a FNMA perpetual preferred security.  The OTTI is included as a component of “losson sale of other assets and securities” in the consolidated statements ofincome and comprehensive income.

 

**Derivative financial instruments** — Currently, the Companyuses interest rate swaps as part of its cash flow strategy to manage itsinterest rate risk.  The valuation ofthese instruments is determined using widely accepted valuation techniquesincluding discounted cash flow analysis on the expected cash flows of eachderivative. This analysis reflects the contractual terms of the derivatives,including the period to maturity, and uses observable market-based inputs,including strike price, forward rates, volatility estimates and discountrates.   The fair values of interest rateswaps are determined using the market standard methodology of netting thediscounted future fixed cash receipts (or payments) and the discounted expectedvariable cash payments (or receipts).  The variable cash payments (orreceipts) are based on an expectation of future interest rates (forward curves)derived from observable market interest rate curves.

 

Tocomply with the provisions of SFAS 157, credit valuation adjustments areincorporated into the valuation to appropriately reflect both the Company’s ownnonperformance risk and the respective counterparty’s nonperformance risk inthe fair value measurements.  The Companyhas considered the impact of netting and any applicable credit enhancements,such as collateral postings and thresholds, by adjusting the fair value of itsderivative contracts for the effect of nonperformance risk.

 

Althoughthe Company has determined that the majority of the inputs used to value itsderivatives fall within Level 2 of the fair value hierarchy, the creditvaluation adjustments associated with its derivatives utilize Level 3 inputs,such as estimates of current credit spreads to evaluate the likelihood ofdefault by itself and its counterparties. However, at December 31, 2008, the Company has assessed thesignificance of the impact of the credit valuation adjustments on the overallvaluation of its derivative positions and has determined that the creditvaluation adjustments are not significant to the overall valuation of itsderivatives.  As a result, the Companyhas determined that its derivative valuations in their entirety are classifiedin Level 2 of the fair value hierarchy.

 

**Private equity investments**— The valuation of nonpublicprivate equity investments requires significant management judgment due to theabsence of quoted market prices, inherent lack of liquidity and the long-termnature of such assets.  The carryingvalues of private equity investments are adjusted either upwards or downwardsfrom the transaction price to reflect expected exit values as evidenced byfinancing and sale transactions with third parties, or when determination of avaluation adjustment is confirmed through ongoing reviews by management.  A variety of factors are reviewed andmonitored to assess positive and negative changes in valuation including, butnot limited to, current operating performance and future expectations of theparticular investment, industry valuations of comparable public companies,changes in market outlook and the third-party financing environment.  In determining valuation adjustmentsresulting from the investment review process, emphasis is placed on currentcompany performance and market conditions. As a result, the Company has determined that private equity investmentsare classified in Level 3 of the fair value hierarchy.  The value of private equity investments wasnot material at December 31, 2008.

 

**Impaired Loans —**Certain collateral-dependent impaired loansare reported at the fair value of the underlying collateral.  Impairment is measured based on the fairvalue of the collateral, which is typically derived from appraisals that takeinto consideration prices in observed transactions involving similar assets andsimilar locations, in accordance with SFAS 114. The fair value of other impaired loans is measured using a discountedcash flow analysis.

 

F-47

----

Table of Contents

 

Thefollowing table presents the Company’s assets measured at fair value on arecurring basis at December 31, 2008, aggregated by the level in the fairvalue hierarchy within which those measurements fall.

 

| ** **                                       | ** ** | ** **                              | ** ** | **Fair value measurements using:**                                     | ** ** |
|--------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(In thousands)**                               | ** ** | **Balance at  December 31,  2008** | ** ** | **Quoted prices  in active  markets for  identical assets  (Level 1)** | ** ** | **Significant  other  observable  inputs   (Level 2)** | ** ** | **Significant  unobservable  inputs (Level 3)** | ** ** |
| ** **                                       | ** ** | ** **                              | ** ** | ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**                                       | ** ** | ** **                              | ** ** | ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Available for sale securities:                   |       |                                    |       |                                                                   |       |   |   |   |   |
| Mortgage-backed securities                       |       | $                                       | 437,812    |                                                                   | $          | — |   | $ | 434,103 |   | $ | 3,709 |   |
| Trust preferred securities                       |       | 22,750                                  |       | 22,750                                                                 |       | — |   | — |   |
| Corporate debt securities                        |       | 13,429                                  |       | —                                                                 |       | 13,429 |   | — |   |
| Obligations of states and political subdivisions |       | 2,515                                   |       | —                                                                 |       | 2,515 |   | — |   |
| Total available for sale securities              |       | $                                       | 476,506    |                                                                   | $          | 22,750 |   | $ | 450,047 |   | $ | 3,709 |   |
|                                             |       |                                    |       |                                                                   |       |   |   |   |   |
| Derivatives:                                     |       |                                    |       |                                                                   |       |   |   |   |   |
| Cash flow hedge - interest rate swap             |       | $                                       | 3,586      |                                                                   | $          | — |   | $ | 3,586 |   | $ | — |   |
| Reverse interest rate swap                       |       | 6,686                                   |       | —                                                                 |       | 6,686 |   | — |   |
| Total derivative assets                          |       | $                                       | 10,272     |                                                                   | $          | — |   | $ | 10,272 |   | $ | — |   |
|                                             |       |                                    |       |                                                                   |       |   |   |   |   |
| **Liabilities**                                  | ** ** | ** **                              | ** ** | ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Derivatives                                      |       |                                    |       |                                                                   |       |   |   |   |   |
| Interest rate swap                               |       | $                                       | 7,055      |                                                                   | $          | — |   | $ | 7,055 |   | $ | — |   |

 

Areconciliation of the beginning and ending balances of assets measured at fairvalue, on a recurring basis, using Level 3 inputs follows:

 

| **(In thousands)**                               | ** ** | **Investment  securities  available for  sale** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|
| Balance at December 31, 2007                |       | $                                               | —     |   |
| Transfers into Level 3                           |       | 7,911                                           |       |
| Unrealized loss included in comprehensive income |       | (4,202                                          | )          |
| Balance at December 31, 2008                |       | $                                               | 3,709      |   |

 

Fairvalue is used on a nonrecurring basis to evaluate certain financial assets andfinancial liabilities in specific circumstances.  The following table presents the Company’sassets measured at fair value on a nonrecurring basis at December 31,2008, aggregated by the level in the fair value hierarchy within which thosemeasurements fall.

 

F-48

----

Table ofContents

 

| ** **         | ** ** | **Fair value measurements using:**      | ** ** |
|--------------------|------------|-----------------------------------------|------------|
| **(In thousands)** | ** ** | **Balance at  December 31,  2008** | ** ** | **Quoted prices in  active markets  for identical  assets   (Level 1)** | ** ** | **Significant  other  observable  inputs   (Level 2)** | ** ** | **Significant  unobservable  inputs   (Level 3)** | ** ** |
| Loans (impaired)   |       | $                                       | 35,683     |   | $ | — |   | $ | 27,448 |   | $ | 8,235 |   |
|                    |            |                                         |            |  |  |  |  |  |  |  |  |  |  |

 

TheCompany recorded an allowance for loan losses of $6,274,000 on impaired loansof $39,786,000 at December 31, 2008.

 

Thefollowing table includes the estimated fair value of the Company’s financialinstruments made in accordance with the requirements of SFAS No. 107, *Disclosures about Fair Value of Financial Instruments*(SFAS107). The methodologies for estimating the fair value of financial assets andfinancial liabilities measured at fair value on a recurring and nonrecurringbasis are discussed above.  Themethodologies for estimating the fair value for other financial assets andfinancial liabilities disclosed in accordance with SFAS 107 are discussedbelow.  The estimated fair value amountshave been determined by the Company using available market information andappropriate valuation methodologies. However, considerable judgment is requiredto interpret market data in order to develop the estimates of fair value.Accordingly, the estimates presented herein are not necessarily indicative ofthe amounts the Company could realize in a current market exchange. The use ofdifferent market assumptions and/or estimation methodologies may have amaterial effect on the estimated fair value amounts at December 31, 2008and 2007.

 

| ** **                                     | ** ** | **2008**            | ** ** | **2007**                   | ** ** |
|------------------------------------------------|------------|---------------------|------------|----------------------------|------------|
| **(In thousands)**                             | ** ** | **Carrying  Value** | ** ** | **Estimated  Fair  Value** | ** ** | **Carrying  Value** | ** ** | **Estimated  Fair  Value** | ** ** |
|                                           |       |                |       |                       |       |   |   |   |   |
| Financial assets:                              |       |                |       |                       |       |   |   |   |   |
| Cash and cash equivalents                      |       | $                   | 45,489     |                       | $          | 45,489 |   | $ | 49,626 |   | $ | 49,626 |   |
| Investment securities available for sale       |       | 479,197             |       | 476,506                    |       | 379,677 |   | 378,565 |   |
| Investment securities held to maturity         |       | 376                 |       | 374                        |       | 470 |   | 473 |   |
| Other investments                              |       | 23,566              |       | 23,566                     |       | 16,628 |   | 16,628 |   |
| Loans — net                               |       | 1,988,402           |       | 2,044,024                  |       | 1,826,283 |   | 1,841,732 |   |
| Other real estate owned                        |       | 5,941               |       | 5,941                      |       | — |   | — |   |
| Accrued interest receivable                    |       | 8,617               |       | 8,617                      |       | 10,201 |   | 10,201 |   |
| Interest rate swap                             |       | 6,772               |       | 6,772                      |       | 1,341 |   | 1,341 |   |
| Bank-owned life insurance                      |       | 30,718              |       | 30,718                     |       | 29,546 |   | 29,546 |   |
|                                           |       |                |       |                       |       |   |   |   |   |
| Financial liabilities:                         |       |                |       |                       |       |   |   |   |   |
| Deposits                                       |       | 1,639,031           |       | 1,641,555                  |       | 1,742,689 |   | 1,743,390 |   |
| Other short-term borrowings                    |       | 543,063             |       | 543,063                    |       | 197,444 |   | 197,444 |   |
| Securities sold under agreements to repurchase |       | 133,478             |       | 131,463                    |       | 168,336 |   | 164,615 |   |
| Accrued interest payable                       |       | 1,614               |       | 1,614                      |       | 3,160 |   | 3,160 |   |
| Junior subordinated debentures                 |       | 72,166              |       | 72,166                     |       | 72,166 |   | 72,166 |   |
| Subordinated notes payable                     |       | 20,984              |       | 24,649                     |       | — |   | — |   |
| Interest rate swap                             |       | 3,555               |       | 3,555                      |       | 218 |   | 218 |   |
|                                                |            |                     |            |                            |            |  |  |  |  |  |  |  |  |

 

Theestimation methodologies utilized by the Company are summarized as follows:

 

F-49

----

Table of Contents

 

**Cash and Cash Equivalents** — The carrying amountof cash and cash equivalents is a reasonable estimate of fair value.

 

**Other Investments** — The estimated fair value of otherinvestments approximates their carrying value.

 

**Loans** — The fair value of fixed-rate loans isestimated by discounting the future cash flows using the current rates at whichsimilar loans would be made to borrowers with similar credit ratings and forthe same remaining maturities. In computing the estimate of fair value for allloans, the estimated cash flows and/or carrying value have been reduced byspecific and general reserves for loan losses.

 

**Other Real Estate Owned (OREO)****—**OREO represents real property taken by the Bank either through foreclosure orthrough a deed in lieu thereof from the borrower.  OREO is measured at the lower of cost or fairvalue, less selling costs.

 

**Accrued Interest Receivable/Payable** — The carrying amountof accrued interest receivable/payable is a reasonable estimate of fair valuedue to the short-term nature of these amounts.

 

**Bank-Owned Life Insurance** — The carrying amountof bank-owned life insurance is based on the cash surrender value of thepolicies.

 

**Deposits** — The fair value of certificates of deposit isestimated by discounting the expected life using an index of the U.S. Treasurycurve. Nonmaturity deposits are reflected at their carrying value.

 

**Short-Term Borrowings** — The estimated fairvalue of variable-rate short-term borrowings approximates their carrying value.

 

**Securities Sold Under Agreements to Repurchase** —Estimated fair value is based on discounting cash flows for comparableinstruments.

 

**Junior Subordinated Debentures** — The estimated fairvalue of junior subordinated debentures approximates their carrying value.

 

**Subordinated Notes Payable** — The estimated fairvalue of subordinated notes payable is based on discounting cash flows forcomparable instruments.

 

**Commitments to Extend Credit and Standby Letters of Credit** — TheCompany’s off-balance sheet commitments are funded at current market rates atthe date they are drawn upon. It is management’s opinion that the fair value ofthese commitments would approximate their carrying value, if drawn upon.

 

Thefair value estimates presented herein are based on pertinent informationavailable to management at December 31, 2008 and 2007. Although managementis not aware of any factors that would significantly affect the estimated fairvalue amounts, such amounts have not been comprehensively revalued for purposesof these financial statements since that date and, therefore, current estimatesof fair value may differ significantly from the amounts presented herein.

 

**19.**               SEGMENTS

** **

The Company’s principal areas of activityconsist of commercial banking, investment banking, investment advisory andtrust services, insurance and corporate support and other.

 

The Company distinguishes its commercialbanking segments based on geographic markets served. Currently, we report theCBB and ABB banking markets as a single segment, commercial banking.

 

F-50

----

 

Table of Contents

 

The investment banking segment consists ofthe operations of GMB, which provides middle-market companies with merger andacquisition advisory services, institutional private placements of debt andequity, and other strategic financial advisory services.

 

The investment advisory and trust segmentconsists of the operations of ACMG, Wagner and CoBiz Trust. ACMG and Wagner areSEC-registered investment management firms that manage stock and bondportfolios for individuals and institutions. CoBiz Trust offers wealthmanagement and investment advisory services, fiduciary services, and estateadministration services.

 

The insurance segment includes the activitiesof FDL and CoBiz Insurance, Inc. FDL provides employee benefits consultingand brokerage, wealth transfer planning and preservation for high-net-worthindividuals, and executive benefits and compensation planning. FDL representsindividuals and companies in the acquisition of institutionally priced lifeinsurance products to meet wealth transfer and business needs. Employee benefitservices include assisting companies in creating and managing benefit programssuch as medical, dental, vision, 401(k), disability, life and cafeteria plans.CoBiz Insurance, Inc. provides commercial and personal property andcasualty insurance brokerage, as well as risk management consulting services toindividuals and small and medium-sized businesses. The majority of the revenuefor both FDL and CoBiz Insurance is derived from insurance product sales andreferrals, paid by third-party insurance carriers. Insurance commissions arenormally calculated as a percentage of the premium paid by our clients to theinsurance carrier, paid to us by the insurance carrier for distributing andservicing their insurance products.

 

Corporate support and other consists ofactivities that are not directly attributable to the other reportable segments.Included in this category are the activities of centralized bank operations andactivities of the Parent.

 

The financial information for each businesssegment reflects that information which is specifically identifiable or whichis allocated based on an internal allocation method. Results of operations andselected financial information by operating segment are as follows:

 
| **For the year ended**                                     | ** ** | ** **     | ** ** | ** **     | ** ** | **Investment** | ** ** | ** **    | ** ** | **Corporate**   | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|---------------|------------|-----------------|------------|------------------|------------|
| **December 31, 2008**                                 | ** ** | **Commercial** | ** ** | **Investment** | ** ** | **Advisory**   | ** ** | ** **    | ** ** | **Support and** | ** ** | ** **       | ** ** |
| **(In thousands)**                                         | ** ** | **Banking**    | ** ** | **Banking**    | ** ** | **and Trust**  | ** ** | **Insurance** | ** ** | **Other**       | ** ** | **Consolidated** | ** ** |
|                                                       |       |           |       |           |       |           |       |          |       |            |       |             |       |
| Income statement:                                          |       |           |       |           |       |           |       |          |       |            |       |             |       |
| Total interest income                                      |       | $              | 144,736    |           | $          | 38             |       | $             | 3          |            | $          | 4                |       | $ | 127 |   | $ | 144,908 |   |
| Total interest expense                                     |       | 43,988         |       | —         |       | 8              |       | 11            |       | 5,550           |       | 49,557           |       |
| Provision for loan losses                                  |       | 39,796         |       | —         |       | —         |       | —        |       | —          |       | 39,796           |       |
| Noninterest income                                         |       | 8,785          |       | 5,055          |       | 6,345          |       | 15,113        |       | 101             |       | 35,399           |       |
| Noninterest expense                                        |       | 33,098         |       | 5,117          |       | 6,223          |       | 14,090        |       | 31,189          |       | 89,717           |       |
| Management fees and allocations                            |       | 26,889         |       | 265            |       | 518            |       | 652           |       | (28,324         | )          | —           |       |
| Provision for income taxes                                 |       | 3,075          |       | (99            | )          | (113           | )          | 187           |       | (3,141          | )          | (91              | )          |
| Net income (loss)                                          |       | 6,675          |       | (190           | )          | (288           | )          | 177           |       | (5,046          | )          | 1,328            |       |
|                                                       |       |           |       |           |       |           |       |          |       |            |       |             |       |
| Depreciation and amortization                              |       | 2,919          |       | 827            |       | 72             |       | 255           |       | 82              |       | 4,155            |       |
| Capital expenditures                                       |       | 3,497          |       | 32             |       | 61             |       | 119           |       | 28              |       | 3,737            |       |
|                                                       |       |           |       |           |       |           |       |          |       |            |       |             |       |
| At December 31, 2008 —

Identifiable assets |       | $              | 2,629,082  |           | $          | 6,670          |       | $             | 9,025      |            | $          | 28,706           |       | $ | 10,792 |   | $ | 2,684,275 |   |

 

F-51

----

Table of Contents

 
| **For the year ended**                         | ** ** | ** **     | ** ** | ** **     | ** ** | **Investment** | ** ** | ** **    | ** ** | **Corporate**   | ** ** | ** **       | ** ** |
|------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|---------------|------------|-----------------|------------|------------------|------------|
| **December 31, 2007**                     | ** ** | **Commercial** | ** ** | **Investment** | ** ** | **Advisory**   | ** ** | ** **    | ** ** | **Support and** | ** ** | ** **       | ** ** |
| **(In thousands)**                             | ** ** | **Banking**    | ** ** | **Banking**    | ** ** | **and Trust**  | ** ** | **Insurance** | ** ** | **other**       | ** ** | **Consolidated** | ** ** |
|                                           |       |           |       |           |       |           |       |          |       |            |       |             |       |
| Income statement                               |       |           |       |           |       |           |       |          |       |            |       |             |       |
| Total interest income                          |       | $154,211       |       | $129           |       | $2             |       | $5            |       | $163            |       | $154,510         |       |
| Total interest expense                         |       | 60,756         |       | —         |       | —         |       | 4             |       | 5,851           |       | 66,611           |       |
| Provision for loan losses                      |       | 3,965          |       | —         |       | —         |       | —        |       | (29             | )          | 3,936            |       |
| Noninterest income                             |       | 7,398          |       | 6,681          |       | 4,763          |       | 9,397         |       | 50              |       | 28,289           |       |
| Noninterest expense                            |       | 28,444         |       | 5,949          |       | 4,335          |       | 9,497         |       | 27,290          |       | 75,515           |       |
| Management fees and allocations                |       | 23,045         |       | 321            |       | 402            |       | 703           |       | (24,471         | )          | —           |       |
| Provision for income taxes                     |       | 16,710         |       | 218            |       | 45             |       | (260          | )          | (3,000          | )          | 13,713           |       |
| Net income                                     |       | 28,689         |       | 322            |       | (17            | )          | (542          | )          | (5,428          | )          | 23,024           |       |
|                                           |       |           |       |           |       |           |       |          |       |            |       |             |       |
| Depreciation and amortization                  |       | 2,769          |       | 63             |       | 150            |       | 662           |       | 98              |       | 3,742            |       |
| Capital expenditures                           |       | 3,039          |       | 95             |       | 18             |       | 32            |       | 1               |       | 3,185            |       |
|                                           |       |           |       |           |       |           |       |          |       |            |       |             |       |
| At December 31, 2007

Identifiable assets |       | $2,348,520     |       | $7,636         |       | $9,661         |       | $19,810       |       | $5,385          |       | $2,391,012       |       |

 
| **For the year ended**                                     | ** ** | ** **     | ** ** | ** **     | ** ** | **Investment** | ** ** | ** **    | ** ** | **Corporate**   | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|---------------|------------|-----------------|------------|------------------|------------|
| **December 31, 2006**                                 | ** ** | **Commercial** | ** ** | **Investment** | ** ** | **Advisory**   | ** ** | ** **    | ** ** | **Support and** | ** ** | ** **       | ** ** |
| **(In thousands)**                                         | ** ** | **Banking**    | ** ** | **Banking**    | ** ** | **and Trust**  | ** ** | **Insurance** | ** ** | **Other**       | ** ** | **Consolidated** | ** ** |
|                                                       |       |           |       |           |       |           |       |          |       |            |       |             |       |
| Income statement:                                          |       |           |       |           |       |           |       |          |       |            |       |             |       |
| Total interest income                                      |       | $              | 136,119    |           | $          | 95             |       | $             | 23         |            | $          | 13               |       | $ | 194 |   | $ | 136,444 |   |
| Total interest expense                                     |       | 51,575         |       | —         |       | —         |       | 4             |       | 5,436           |       | 57,015           |       |
| Provision for loan losses                                  |       | 1,394          |       | —         |       | —         |       | —        |       | (52             | )          | 1,342            |       |
| Noninterest income                                         |       | 6,225          |       | 6,214          |       | 4,141          |       | 13,094        |       | 291             |       | 29,965           |       |
| Noninterest expense                                        |       | 20,701         |       | 5,129          |       | 3,571          |       | 11,450        |       | 31,076          |       | 71,927           |       |
| Management fees and allocations                            |       | 27,571         |       | 271            |       | 310            |       | 548           |       | (28,700         | )          | —           |       |
| Provision for income taxes                                 |       | 15,015         |       | 366            |       | 122            |       | 469           |       | (2,673          | )          | 13,299           |       |
| Net income (loss)                                          |       | 26,088         |       | 543            |       | 161            |       | 636           |       | (4,602          | )          | 22,826           |       |
|                                                       |       |           |       |           |       |           |       |          |       |            |       |             |       |
| Depreciation and amortization                              |       | 3,033          |       | 45             |       | 139            |       | 644           |       | 107             |       | 3,968            |       |
| Capital expenditures                                       |       | 2,493          |       | 63             |       | 170            |       | 565           |       | 74              |       | 3,365            |       |
|                                                       |       |           |       |           |       |           |       |          |       |            |       |             |       |
| At December 31, 2006 —

Identifiable assets |       | $              | 2,071,416  |           | $          | 9,369          |       | $             | 6,131      |            | $          | 22,436           |       | $ | 3,071 |   | $ | 2,112,423 |   |

 

**20.**            CONDENSED FINANCIALSTATEMENTS OF PARENT COMPANY

** **

**               **Condensed financialstatements pertaining only to CoBiz Financial Inc. are presented below.Investments in subsidiaries are stated using the equity method of accounting.

 

F-52

----

Table ofContents

 

| **(In thousands)**                         | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|
|                                       |       |       |       |       |       |
| **Condensed Statements of Condition**      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Assets:                                    |       |       |       |       |       |
| Cash on deposit at subsidiary bank         |       | $          | 54,966     |       | $          | 505 |   |
| Investment in subsidiaries                 |       | 278,325    |       | 267,752    |       |
| Accounts receivable from subsidiaries      |       | 5,075      |       | 8,235      |       |
| Other                                      |       | 13,571     |       | 7,667      |       |
|                                       |       |       |       |       |       |
| Total                                      |       | $          | 351,937    |       | $          | 284,159 |   |
|                                       |       |       |       |       |       |
| Liabilities and shareholders’ equity: |       |       |       |       |       |
| Liabilities:                               |       |       |       |       |       |
| Accounts payable to subsidiaries           |       | $          | 60         |       | $          | 154 |   |
| Long-term debt                             |       | 93,150     |       | 72,166     |       |
| Other short-term borrowings                |       | —     |       | 17,070     |       |
| Other liabilities                          |       | 6,628      |       | 5,499      |       |
|                                       |       |       |       |       |       |
| Total liabilities                          |       | 99,838     |       | 94,889     |       |
|                                       |       |       |       |       |       |
| Shareholders’ equity                  |       | 252,099    |       | 189,270    |       |
|                                       |       |       |       |       |       |
| Total                                      |       | $          | 351,937    |       | $          | 284,159 |   |

 

F-53

----

Table of Contents

 

| **(In thousands)**                                               | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                             |       |       |       |       |       |       |       |
| **Condensed Statements of Income**                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                             |       |       |       |       |       |       |       |
| Income:                                                          |       |       |       |       |       |       |       |
| Management fees                                                  |       | $          | 4,583      |       | $          | 4,495      |       | $ | 4,289 |   |
| Interest income                                                  |       | 151        |       | 180        |       | 178        |       |
| Other income                                                     |       | 125        |       | 73         |       | 295        |       |
|                                                             |       |       |       |       |       |       |       |
| Total income                                                     |       | 4,859      |       | 4,748      |       | 4,762      |       |
|                                                             |       |       |       |       |       |       |       |
| Expenses:                                                        |       |       |       |       |       |       |       |
| Salaries and employee benefits                                   |       | 4,836      |       | 4,680      |       | 4,540      |       |
| Interest expense                                                 |       | 5,575      |       | 5,863      |       | 5,454      |       |
| Other expense                                                    |       | 2,629      |       | 2,436      |       | 2,068      |       |
|                                                             |       |       |       |       |       |       |       |
| Total expenses                                                   |       | 13,040     |       | 12,979     |       | 12,062     |       |
|                                                             |       |       |       |       |       |       |       |
| Net loss before income taxes                                     |       | (8,181     | )          | (8,231     | )          | (7,300     | )          |
|                                                             |       |       |       |       |       |       |       |
| Income tax benefit                                               |       | 3,135      |       | 2,982      |       | 2,703      |       |
|                                                             |       |       |       |       |       |       |       |
| Net loss before equity in undistributed earnings of subsidiaries |       | (5,046     | )          | (5,249     | )          | (4,597     | )          |
|                                                             |       |       |       |       |       |       |       |
| Equity in undistributed earnings of subsidiaries                 |       | 6,374      |       | 28,273     |       | 27,423     |       |
|                                                             |       |       |       |       |       |       |       |
| Net income                                                       |       | $          | 1,328      |       | $          | 23,024     |       | $ | 22,826 |   |

 

F-54

----

Table of Contents

 
| **(In thousands)**                                           | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                         |       |       |       |       |       |       |       |
| **Condensed Statements of Cash Flow**                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                         |       |       |       |       |       |       |       |
| Cash flows from operating activities:                        |       |       |       |       |       |       |       |
| Net income                                                   |       | $          | 1,328      |       | $          | 23,024     |       | $ | 22,826 |   |
| Equity in undistributed earnings of subsidiaries             |       | (6,374     | )          | (28,273    | )          | (27,423    | )          |
| Stock-based compensation                                     |       | 339        |       | 291        |       | 1,140      |       |
| Excess tax benefit from stock-based compensation             |       | (159       | )          | (1,060     | )          | (905       | )          |
| Change in other assets and liabilities                       |       | (4,965     | )          | 1,313      |       | 1,167      |       |
|                                                         |       |       |       |       |       |       |       |
| Net cash used in operating activities                        |       | (9,831     | )          | (4,705     | )          | (3,195     | )          |
|                                                         |       |       |       |       |       |       |       |
| Cash flows from investing activities:                        |       |       |       |       |       |       |       |
| Net cash paid in earn-outs                                   |       | —     |       | (438       | )          | (206       | )          |
| Net cash paid for Wagner acquisition                         |       | —     |       | (2,037     | )          | —     |       |
| Net cash paid for BDA acquisition                            |       | (6,781     | )          | —     |       | —     |       |
| Net advances (repayments) to subsidiaries                    |       | 7,971      |       | (7,996     | )          | (6,283     | )          |
| Other                                                        |       |       |       | 8          |       | (56        | )          |
|                                                         |       |       |       |       |       |       |       |
| Net cash provided by (used in) investing activities          |       | 1,190      |       | (10,463    | )          | (6,545     | )          |
|                                                         |       |       |       |       |       |       |       |
| Cash flows from financing activities:                        |       |       |       |       |       |       |       |
| Net increase (decrease) from other short-term borrowings     |       | (17,070    | )          | 17,070     |       |       |       |
| Proceeds from issuance of common stock-net                   |       | 1,245      |       | 23,095     |       | 2,650      |       |
| Payments to repurchase common stock-net                      |       | —     |       | (20,062    | )          | —     |       |
| Proceeds from the issuance subordinated promissory notes-net |       | 20,900     |       | —     |       | —     |       |
| Proceeds from issuance of Preferred Stock-net                |       | 64,398     |       | —     |       | —     |       |
| Dividends                                                    |       | (6,613     | )          | (6,173     | )          | (4,960     | )          |
| Excess tax benefit from stock-based compensation             |       | 159        |       | 1,060      |       | 905        |       |
| Other                                                        |       | 83         |       | 1          |       | —     |       |
|                                                         |       |       |       |       |       |       |       |
| Net cash provided by (used in) financing activities          |       | 63,102     |       | 14,991     |       | (1,405     | )          |
|                                                         |       |       |       |       |       |       |       |
| Net increase (decrease) in cash and cash equivalents         |       | 54,461     |       | (177       | )          | (11,145    | )          |
|                                                         |       |       |       |       |       |       |       |
| Cash and cash equivalents — beginning of year           |       | 505        |       | 682        |       | 11,827     |       |
|                                                         |       |       |       |       |       |       |       |
| Cash and cash equivalents — end of year                 |       | $          | 54,966     |       | $          | 505        |       | $ | 682 |   |

 

F-55

----

Table of Contents

 

**21.**               SELECTED QUARTERLYFINANCIAL DATA (UNAUDITED)

** **

The table below sets forth unauditedfinancial information for each quarter of the last two years:

 
| **(In thousands, except per share  amounts)** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|
|                                          |       |                        |       |                         |       |                    |       |                     |       |                        |       |                         |       |                    |       |                     |       |
| Interest income                               |       | $                           | 35,820     |                         | $          | 36,052                  |       | $                        | 35,639     |                        | $          | 37,397                       |       | $                       | 40,164     |                     | $          | 39,703 |   | $ | 38,286 |   | $ | 36,357 |   |
| Interest expense                              |       | 10,181                      |       | 11,814                       |       | 12,143                  |       | 15,419                   |       | 17,275                      |       | 17,413                       |       | 16,581                  |       | 15,342                   |       |
| Net interest income                           |       | 25,639                      |       | 24,238                       |       | 23,496                  |       | 21,978                   |       | 22,889                      |       | 22,290                       |       | 21,705                  |       | 21,015                   |       |
| Net income                                    |       | (8,613                      | )          | 4,163                        |       | 4,183                   |       | 1,595                    |       | 5,474                       |       | 6,007                        |       | 5,660                   |       | 5,883                    |       |
|                                          |       |                        |       |                         |       |                    |       |                     |       |                        |       |                         |       |                    |       |                     |       |
| Earnings per common share—basic          |       | $                           | (0.38      | )                            | $          | 0.18                    |       | $                        | 0.18       |                        | $          | 0.07                         |       | $                       | 0.24       |                     | $          | 0.25 |   | $ | 0.24 |   | $ | 0.25 |   |
|                                          |       |                        |       |                         |       |                    |       |                     |       |                        |       |                         |       |                    |       |                     |       |
| Earnings per common share—diluted        |       | $                           | (0.38      | )                            | $          | 0.18                    |       | $                        | 0.18       |                        | $          | 0.07                         |       | $                       | 0.23       |                     | $          | 0.25 |   | $ | 0.24 |   | $ | 0.24 |   |

 

Thenet loss in the quarter ended December 31, 2008 was primarily caused by anincrease in the provision for loan losses that totaled $23,444,000.

 

******

 

F-56

----