Table of Contents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

***FORM 10-K***

* *

**(Markone)**

 
| **x** | **Annual Report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.** |
|-------|------------------------------------------------------------------------------------------------------|

 

**For thefiscal year ended December 31, 2009.**

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

 

**For thetransition period from                            to                           **

 

### **Commissionfile number 001-15955**

### ** **

**COBIZ FINANCIALINC.**

(Exact name ofregistrant 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) ofthe 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 ifthe registrant is a well-known seasoned issuer as defined in Rule 405 ofthe Securities Act. Yes o No x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on its  corporate Website, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes o  No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) isnot contained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

The aggregatemarket value of the voting common equity held by non-affiliates of theregistrant at June 30, 2009, computed by reference to the closing price onthe NASDAQ Global Select Market was $123,556,827.  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 ofshares outstanding of the registrant’s sole class of common stock February 17,2010, was 36,723,853.

 

Documentsincorporated by reference: Portions of the registrant’s proxy statement to befiled with the Securities and Exchange Commission in connection with theregistrant’s 2010 annual meeting of shareholders are incorporated by referenceinto Part III of this Form 10-K.

 

 

 

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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 Operations                         |   |
| 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. |                                                                                                                |

 

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A WARNING ABOUTFORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements thatdescribe CoBiz Financial’s future plans, strategies and expectations. Allforward-looking statements are based on assumptions and involve risks anduncertainties, many of which are beyond our control and which may cause ouractual results, performance or achievements to differ materially from theresults, performance or achievements contemplated by the forward-lookingstatements. Forward-looking statements can be identified by the fact that theydo not relate strictly to historical or current facts. They often include wordssuch as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” orwords of similar meaning, or future or conditional verbs such as “would,” “should,”“could” or “may.” Forward-looking statements speak only at the date they aremade. Important factors that could cause actual results to differ materiallyfrom our expectations are disclosed under “Risk Factors” and elsewhere in thisreport, 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 financial holding company headquarteredin Denver, CO. Through our subsidiary companies, we combine elements ofpersonalized service found in community banks with sophisticated financialproducts and services traditionally offered by larger regional banks that wemarket to our targeted customer base of professionals, high-net-worthindividuals and small to mid-sized businesses. At December 31, 2009, wehad total assets of $2.5 billion, net loans of $1.7 billion and deposits of$2.0 billion. We were incorporated in Colorado on February 19, 1980, asEquitable Bancorporation, Inc. Prior to its initial public offering in June 1998,the Company was acquired by a group of private investors in September 1994.

 

Our wholly ownedsubsidiary CoBiz Bank (the Bank) is a full-service business banking institutionserving two markets, Colorado and Arizona. In Colorado, the Bank operates underthe name Colorado Business Bank and has 12 locations, including nine in theDenver metropolitan area, one in Boulder and two in the Vail area. In Arizona,the Bank operates under the name Arizona Business Bank and has eight locationsserving the Phoenix metropolitan area and the surrounding area of MaricopaCounty. Each of the Bank’s locations is led by a local president withsubstantial decision-making authority. We focus on attracting and retaininghigh-quality personnel by maintaining an entrepreneurial culture and a decentralizedbusiness approach. We centrally support our bank and fee-based businesses withback-office services from our downtown Denver office.

 

Our banking products arecomplemented by our fee-based business lines, which we first introduced in 1998when we began offering trust and estate administration services. Through acombination of internal growth and acquisitions, our fee-based business lineshave grown to include employee benefits brokerage and consulting, insurancebrokerage, wealth transfer planning, investment banking and investmentmanagement services. We believe offering such complementary products allows usto both broaden our relationships with existing customers and attract newcustomers to our core business. In addition, we believe the fees generated bythese services will increase our noninterest income and decrease our dependencyon 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 

 

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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) providescommercial and personal property and casualty insurance brokerage, as well riskmanagement 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                                      |
|                                           | · | Interest-rate hedging                                |
|                                           | · | Depository products                                  |
| ** **                                     | · | 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                            |

 

In 2009, the Companyhired a Director of Wealth Management to lead its wealth management initiativeand to facilitate organic growth.  TheCompany’s wealth management initiative is comprised primarily of the activitiesin the Investment Advisory and Trust segment. One of the primary initiatives of this new role is to evaluate ourcurrent product offerings and to strategically focus our offerings to ourcustomers, while also increasing the Company’s operational efficiency.

 

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For a complete discussionof the segments included in our principal activities and for certain financialinformation for each segment, see Note 19 to the Consolidated financialstatements.

 

**MissionStatement**

 

Our mission is to servethe complete financial needs of successful businesses, business owners,professionals and high-net worth individuals. We create thoughtful, integrated, comprehensive solutions tailored toeach customer’s needs, thereby freeing them to succeed personally andprofessionally.

 

Our core values are:

 

·                  Focus on the customer

·                  Place people at the core

·                  Act with integrity

·                  Give back to the community

·                  Create sustained shareholder value

·                  Have fun

 

**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 relationships that meet the needs of professionals,small to medium-sized businesses and high-net-worth individuals. In all areasof our operations, we focus on attracting and retaining the highest qualitypersonnel by maintaining an entrepreneurial culture and decentralized business approach.In order to realize our strategic objectives, we are pursuing the followingstrategies:

 

**Organic Growth***.*We believe the Colorado and Arizona markets provide uswith significant long-term opportunities for internal growth. These markets continueto 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 Company hired Coloradoand Arizona market presidents for the Bank during 2009.  The new market presidents are responsible foroverseeing the Bank’s locations and providing direction for future growth.  Both of the market presidents havesubstantial experience in the regional marketplace.

 

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 30,2009.

 

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| **(percentage  of deposits)** | ** ** | **Arizona** | ** ** | **Colorado** | ** ** |
|-------------------------------|------------|-------------|------------|--------------|------------|
| CoBiz  Bank                   |       | 0.41        | %          | 1.58         | %          |
| Other  in-state banks         |       | 14.74       | %          | 47.36        | %          |
| Out-of-state  banks           |       | 84.85       | %          | 51.06        | %          |
| Total                         |       | 100.00      | %          | 100.00       | %          |

 

**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 the Arizona market.Since the acquisition of the Company by private investors in 1994, we haveintroduced 10 Colorado and six Arizona de novo locations. Management continuesto monitor opportunities for expansion in the western 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’ 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.

 

When evaluatingcomplementary business lines, the Company considers:

 

·                  Businesses that our core bankingfranchise can contribute significant value to the revenue potential.

·                  Businesses that provide financialservices and related products to our target market.

·                  Businesses where clients valuerelationships, service and product quality over price.

·                  Businesses with sustainable operatingmargins.

 

***Establish strong brandawareness. ****We recently completed aproject to clarify and strengthen the CoBiz brand, by focusing on therelationship between each of our business lines, our unique breadth of servicesand our exceptional reputation in the markets we serve. The project analysisincluded extensive customer and market research to help develop a cohesive andcomprehensive approach to our internal and external communications effortswhile leveraging the power of each subsidiary as part of the larger company.The branding initiative has been executed across all our companies. Theinitiative has refined the brand platform and unified the look and feel of theCoBiz identity across the Company.*

 

**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.

 

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**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 20locations, are not using our remote deposit capture product or simply do nothave the time to go to the Bank.

 

**Maintaining asset quality.**We seek to maintain asset quality througha program that includes regular reviews of loans by responsible loan officersand ongoing monitoring of the loan portfolio by a loan review department thatreports to the Chief Operations Officer of the Company but submits reportsdirectly to the audit committee of our Board of Directors. At December 31,2009, our ratio of nonperforming loans to total loans was 4.44%, compared to2.02% at December 31, 2008.

 

The slowdown in theoverall economy has negatively impacted our asset quality during 2008 and 2009.  In response to the deteriorating economicconditions and the increase in our nonperforming assets, we created a SpecialAssets Group in 2009 to focus on resolving problem assets.  This group is led by a senior banking officerwho has been with the bank for 13 years and previously served as the Bank’sChief Operations Officer.  All loans in adefault or workout status are assigned to the Special Assets Group.  The Special Assets Group meets withrepresentatives from each bank location on a monthly basis.  In addition, to further strengthen ourprocedures over asset quality, we separated our loan review function into twoseparate departments during 2009: a loan review department and a creditadministration department.  We believethese actions will facilitate recovery strategies and reduce credit losses.

 

**Controlling interest rate risk***.*We seek to control our exposure to changing interestrates by attempting to maintain an interest rate profile within a narrow rangearound an earnings neutral position. An important element of this focus hasbeen to emphasize variable-rate loans and investments funded by deposits thatalso mature or reprice over periods of 12 months or less.  We have also implemented interest rate floorsin many of our variable rate loans in order to preserve our net interest incomein the event of interest rate decreases. We actively monitor our interest rate profile in regular meetings of ourAsset-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 development professionalsto focus on customer service and sales strategies directed at each communitythat 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 andproduct lines as potential expansion initiatives, we will generally proceed onlyupon identifying quality management personnel with a loyal customer followingin the community 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 and 2009 will increase acquisition opportunities asentities that are undercapitalized look to partner with a stronger financialentity at relatively low deposit premiums.

 

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**Market Areas Served**

 

We operate in two of thefastest-growing western markets in the United States — Colorado and Arizona.These markets are currently dominated by a number of large regional andnational financial institutions that have acquired locally based banks. TheCompany’s success is dependent to a significant degree on the economicconditions of these two geographical markets. The current economic downturn has negatively impacted both markets.  The Colorado market was slower to enter therecession than other areas of the Country. Conversely, the Arizona market was one of the states that led the nationinto the recession and has been significantly impacted by unemployment, joblosses and foreclosure rates.  However,the long-term prospects of both markets remain solid due to the diversity ofindustry sectors, educated workforces and reputation as quality of life 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 variousindustries. The Denver metropolitan area is one of the fastest-growing regionsin the nation, helping to make Colorado the seventh-fastest growing state inthe United States in terms of percentage population growth from April 2000to July 2009. *Wehave two locations each in downtown Denver, Littleton and the Vail Valley, andone location each in Boulder, Commerce City, Cherry Creek, the DenverTechnological Center (DTC), Golden and Louisville.

 

***Arizona***. *Arizona consistently had one of the highest populationgrowth rates in the nation during the latter half of the 20th century,including being one of the fastest-growing states in terms of percentagepopulation growth from April 2000 to July 2009, second only toNevada. Our banks are located in Maricopa County, one of the nation’s largestcounties in terms of population size.*

 

**Market Snapshot. **The following table contains selected data for themarkets we serve.

 
|       | **Colorado  Snapshot**                                                                             | ** ** | ** ** | **Arizona  Snapshot**                                                                              |
|------------|----------------------------------------------------------------------------------------------------|------------|------------|----------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                         | ** ** | ** ** | ** **                                                                                         |
|       | **Population**                                                                                     | ** ** | ** ** | **Population**                                                                                     |
| ·     | Colorado: 4.9 million                                                                              |       | ·     | Arizona: 6.5 million                                                                               |
| ·     | Metropolitan Denver:  2.5 million                                                                  |       | ·     | Metropolitan Phoenix:  4.3 million                                                                 |
| ·     | Projected to increase  35% to 5.8 million from 2000 to 2030                                        |       | ·     | Projected to increase  109% to 10.7 million from 2000 to 2030                                      |
|       |                                                                                               |       |       |                                                                                               |
|       | **Significant  Industries**                                                                        | ** ** | ** ** | **Significant  Industries**                                                                        |
| ·     | Technology                                                                                         |       | ·     | Services                                                                                           |
| ·     | Communications                                                                                     |       | ·     | Trade                                                                                              |
| ·     | Manufacturing                                                                                      |       | ·     | Manufacturing                                                                                      |
| ·     | Tourism                                                                                            |       | ·     | Mining                                                                                             |
| ·     | Transportation                                                                                     |       | ·     | Agriculture                                                                                        |
| ·     | Aerospace                                                                                          |       | ·     | Construction                                                                                       |
| ·     | Biomedical/Healthcare                                                                              |       | ·     | Tourism                                                                                            |
| ·     | Financial Services                                                                                 |       |       |                                                                                               |
|       |                                                                                               |       |       |                                                                                               |
|       | **Economic  Outlook**                                                                              | ** ** | ** ** | **Economic  Outlook**                                                                              |
| ·     | Preliminary  unemployment rate at December 2009 was 7.5%, up from 5.8% in  December 2008 |       | ·     | Preliminary  unemployment rate at December 2009 was 9.1%, up from 6.6% in  December 2008 |
|       | (national average of  10.0%)                                                                       |       |       | (national average of  10.0%)                                                                       |
| ·     | Lost 86,600 jobs, 3.7%  decrease, from December 2008 to December 2009                    |       | ·     | Lost 122,100 jobs, 4.8%  decrease, from December 2008 to December 2009                   |

 

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** **

**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, recently a number of traditionalinvestment banks converted into bank holding companies, which may increasecompetition for deposits.

 

Please see “Risk Factors”below for additional information.

 

**Employees**

** **

At December 31,2009, we had 564 employees, including 545 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 Bank areextensively regulated under federal, Colorado and Arizona law. These laws andregulations are primarily intended to protect depositors and federal depositinsurance 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.

 

**The Holding 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 Board ofGovernors of the Federal Reserve System (FRB). CoBiz is required to file anannual report with the FRB and such other reports as may be required pursuantto the BHCA.

 

*Securities Exchange Act of 1934.*CoBiz has a class of securitiesregistered with the SEC under the Securities Exchange Act of 1934 (the ExchangeAct). The Exchange Act requires the Company to file periodic reports with theSEC, governs the Company’s disclosure in proxy solicitations and regulates insidertrading transactions.  The Company islisted on The NASDAQ Global Select Market (NASDAQ) and is subject to the rules ofthe NASDAQ.

 

*Emergency Economic StabilizationAct of 2008*(EESA).  Deteriorating market conditions in 2008 ledto the issuance of the EESA that was signed into law on October 3,2008.  The EESA authorized the TroubledAsset Relief Plan (TARP) with an objective to ease the downturn in the creditcycle.  The TARP provided up to $700billion to the Department of the Treasury (Treasury) to buy mortgages and othertroubled assets, 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 per depositoruntil December 31, 2009, and accelerated the date on which the FRB willbegin paying interest on required and excess reserve balances.  On May 20, 2009, President Obama signedthe Helping Families Save Their Homes Act, which extended the temporaryincrease in the limit on 

 

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federal deposit insurancecoverage to $250,000 per depositor to December 31, 2013.  The limit will decrease to $100,000 on January 1,2014.

 

On December 19,2008, the Company entered into an agreement with the Treasury pursuant to theCPP to issue shares of the Company’s Fixed Rate Cumulative Perpetual PreferredStock, Series B, par value $0.01 per share, having a liquidation preferenceof $1,000 per share (the Series B Preferred Stock) for an aggregatepurchase price of $64.5 million.  TheCompany also issued a warrant with a 10-year term to acquire 895,968 shares ofits common stock at an exercise price of $10.79.  Participation in the CPP limits the amount ofexecutive compensation that is deductible for tax purposes to $500,000 perperson; requires Treasury approval prior to any increase in common stockdividends; and requires Treasury approval prior to any common stock repurchases.  In addition, if dividends on the Series BPreferred Stock are not paid in full for six dividend periods, the Treasurywill have the right to elect two directors to the Company’s Board ofDirectors.  The right to elect directorswill end when full dividends have been paid for four consecutive dividendperiods.

 

*American Recovery andReinvestment Act of 2009 (ARRA).*  To furtherstimulate the lagging economy, President Barack Obama signed the ARRA into lawon February 17, 2009.  Title VII ofthe ARRA contains limits on executive compensation for senior executiveofficers of participants in the CPP for as long as any financial assistanceprovided under the TARP remain outstanding. The limitations include a prohibition on incentives that may encourageunsafe behavior; a provision for the recovery of bonuses in the event ofmaterially inaccurate financial statements; a prohibition on the payment ofgolden parachutes; and the prohibition of the accrual or payment of any bonus,retention award or incentive compensation. The prohibition on retention awards does not include the issuance ofrestricted stock as long as the restricted stock does not fully vest during theperiod in which the Series B Preferred Stock is outstanding and the fairvalue of the award does not exceed 1/3 of the receiving officers’ annualcompensation.  These limitations willapply to the five most highly compensated employees of the Company, or suchnumber of employees as the Treasury may deem necessary.  The ARRA also removed restrictions under theCPP plan that restricted the redemption of the Series B Preferred Stock bythe Company unless certain conditions were met. The Series B Preferred Stock may be redeemed by the Company subjectto approval from the FRB.

 

On June 15, 2009,the Treasury issued an interim final rule, TARP Standards For Compensation andCorporate Governance, to provide guidance on the executive compensation andcorporate governance provisions of the EESA as amended by the ARRA.

 

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

 

*Riegle-Neal Interstate Bankingand Branching Efficiency Act of 1994, as amended (the 1994 Act)*. The 1994 Act displaces state lawsgoverning interstate bank acquisitions. Under the 1994 Act, a financial or bankholding company may, subject to some limitations, acquire a bank outside of itshome state without regard to local law. Thus, an out-of-state holding companycould acquire the Bank, and we can acquire banks outside of Colorado.

 

All acquisitions pursuantto the 1994 Act require regulatory approval. In reviewing applications underthe 1994 Act, an applicant’s record under the CRA must be considered, and adetermination 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.

 

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The 1994 Act also permitsbank subsidiaries of a financial or bank holding company to act as agents foraffiliated institutions by receiving deposits, renewing time deposits, closingloans, servicing loans and receiving payments on loans. As a result, arelatively small Colorado or Arizona bank owned by an out-of-state holdingcompany could make available to customers in Colorado and Arizona some of theservices of a larger affiliated institution located in another state.

 

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

 

*Dividend Restrictions*.* *Dividends on the Company’s capitalstock (common and preferred stock) are prohibited under the terms of the juniorsubordinated debenture agreements (see Note 9 to the Consolidated financialstatements) if the Company is in continuous default on its payment obligationsto the capital trusts, has elected to defer interest payments on the debenturesor extends the interest payment period.  At December 31, 2009, theCompany was not in default, had not elected to defer interest payments and hadnot extended the interest payment period on any of the subordinated debtissuances.

 

Pursuant to the terms ofthe agreement executed in the issuance of the Series B Preferred Stock,the ability 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 dividends 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 issuanceor 2) the date on which the Series B Preferred Stock is redeemed in whole.

 

*Capital Adequacy*. The FRB monitors, on a consolidatedbasis, the capital adequacy of financial or bank holding companies that havetotal assets in excess of $500 million by using a combination of risk-based andleverage ratios. Failure to meet the capital guidelines may result in theapplication by the FRB of supervisory or enforcement actions. Under therisk-based capital guidelines, different categories of assets, includingcertain off-balance sheet items, such as loan commitments in excess of one yearand letters of credit, are assigned different risk weights, based generally onthe perceived 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 preferred stock (no morethan 25% of Tier 1 capital being comprised of cumulative preferred stock ortrust preferred stock) and noncontrolling 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 has also implemented a leverage ratio,which is defined to be a company’s Tier 1 capital divided by its average totalconsolidated assets. The FRB has established a minimum ratio of 3% for “strongholding companies” as defined by the FRB. For most other holding companies, theminimum required leverage ratio is 4%, but may be higher based on particularcircumstances or risk profile.

 

For regulatory capitalpurposes, the Series B Preferred Stock is treated the same as noncumulativeperpetual preferred stock as an unrestricted core capital element included inTier 1 Capital.

 

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The table below setsforth the capital ratios of the Company:

 
| ** **                              | ** ** | **At December 31, 2009** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | ** **                    | ** ** | **Minimum** | ** ** |
| **Ratio**                               | ** ** | **Actual**                    | ** ** | **Required** | ** ** |
|                                    |       |                          |       |   |   |
| Total  capital to risk-weighted assets  |       | 16.1                          | %          | 8.0 | % |
| Tier  I capital to risk-weighted assets |       | 13.8                          | %          | 4.0 | % |
| Tier  I leverage ratio                  |       | 11.4                          | %          | 4.0 | % |

 

On May 7, 2009, theBoard of Governors of the Federal Reserve System announced the results of theSupervisory Capital Assessment Program (SCAP), a review of the capital of the19 largest U.S. banks instituted by the federal banking regulators. TheSCAP was a forward-looking exercise designed to estimate losses, revenues andreserve trends under adverse macroeconomic scenarios.  The purpose of the SCAP review was toevaluate the capital position of the 19 largest U.S. banking institutionsto determine if additional capital was required to provide a buffer againstfuture losses.  Based on the SCAP review,federal banking regulators determined that 10 of the 19 banking institutionsneeded to raise additional capital.

 

Although we were notincluded in the group of 19 banking institutions reviewed under the SCAP, theresults indicate that federal banking regulators are focused on the compositionof regulatory capital, specifically that voting common equity should be thedominant element of Tier 1 capital. In addition, Tier 1 Common Capital was emphasized to reflect the factthat common equity is the first element of the capital structure to absorblosses, offering protection to more senior parts of the capital structure andlowering the risk of insolvency.  Theminimum Tier 1 Common Capital ratio specified in the SCAP review was 4%.  While Tier 1 Common Capital is not anofficial regulatory capital ratio, we do give consideration to the SCAP reviewsince it provides insight into the current regulatory environment.

 

*Support of Banks*. As discussed below, the Bank is alsosubject to capital adequacy requirements. Under the Federal Deposit InsuranceCorporation Improvement Act of 1991 (the FDICIA), CoBiz could be required toguarantee the capital restoration plan of the Bank, should the Bank become “undercapitalized”as defined in the FDICIA and the regulations thereunder. See “— The Bank —Capital Adequacy.”  Our maximum liabilityunder any such guarantee would be the lesser of 5% of the Bank’s total assetsat the time it became undercapitalized or the amount necessary to bring theBank into compliance with the capital plan. The FRB also has stated thatfinancial or bank holding companies are subject to the “source of strengthdoctrine.”   The “source of strengthdoctrine” requires such holding companies to serve as a source of “financialand managerial” strength to their subsidiary banks and to not conductoperations in an unsafe or unsound manner.

 

The FDICIA requires thefederal banking regulators to take “prompt corrective action” with respect tocapital-deficient institutions. In addition to requiring the submission of acapital restoration plan, the FDICIA contains broad restrictions on certainactivities 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-Oxley Act of 2002 (theSarbanes-Oxley Act)*.The Sarbanes-Oxley Act is intended to address systemic and structuralweaknesses of the capital markets in the United States that were perceived tohave contributed to corporate scandals. The Sarbanes-Oxley Act also attempts toenhance the responsibility of corporate management by, among other things, (i) requiringthe chief executive officer and chief financial officer of public companies toprovide certain certifications in their periodic reports regarding the accuracyof the periodic reports filed with the SEC, (ii) prohibiting officers anddirectors of public companies from fraudulently influencing an accountantengaged in the audit of the company’s 

 

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financial statements, (iii) requiringchief executive officers and chief financial officers to forfeit certainbonuses in the event of a restatement of financial results, (iv) prohibitingofficers and directors found to be unfit from serving in a similar capacitywith other public companies, (v) prohibiting officers and directors fromtrading in the company’s equity securities during pension blackout periods, and(vi) requiring the SEC to issue standards of professional conduct forattorneys representing public companies. In addition, public companies whose securitiesare listed on a national securities exchange or association must satisfy thefollowing additional requirements: (a) the company’s audit committee mustappoint and oversee the company’s auditors; (b) each member of the company’saudit committee must be independent; (c) the company’s audit committeemust establish procedures for receiving complaints regarding accounting,internal accounting controls and audit-related matters; (d) the company’saudit committee must have the authority to engage independent advisors; and (e) thecompany must provide appropriate funding to its audit committee, as determinedby the audit committee.

 

**The Bank**

 

*General*. The Bank is a state-chartered bankinginstitution, the deposits of which are insured by the Deposit Insurance Fund(DIF) of the FDIC, and is subject to supervision, regulation and examination bythe Colorado Division of Banking, the FRB and the FDIC. Prior to 2007, the Bankwas a nationally chartered institution and also subject to the supervision ofthe Office of the Comptroller of the Currency (OCC). Pursuant to suchregulations, the Bank is subject to special restrictions, supervisoryrequirements and potential enforcement actions. The FRB’s supervisory authorityover CoBiz can also affect the Bank.

 

*Community Reinvestment Act*. The CRA requires the Bank to adequatelymeet the credit needs of the communities in which it operates. The CRA allowsregulators to reject an applicant seeking, among other things, to make anacquisition or establish a branch, unless it has performed satisfactorily underthe CRA. Federal regulators regularly conduct examinations to assess theperformance of financial institutions under the CRA. In its most recent CRAexamination, the Bank received a satisfactory rating.

 

*Federal Home Loan BankMembership. *The Bank is a member of the Federal HomeLoan Bank of Topeka (FHLB).  Each memberof the FHLB is required to maintain a minimum investment in capital stock. TheBoard of Directors of the FHLB can increase the minimum investment requirementsin the event it has concluded that additional capital is required to allow itto meet its own regulatory capital requirements.  Any increase in the minimum investmentrequirements outside of specified ranges requires the approval of the FederalHousing Finance Board.  Because theextent of any obligation to increase our investment in the FHLB dependsentirely upon the occurrence of a future event, potential future payments tothe FHLB are not determinable.

 

*USA Patriot Act of 2001*. The Uniting and Strengthening Americaby Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Actof 2001 (the USA Patriot Act) is intended to allow the federal government toaddress terrorist threats through enhanced domestic security measures, expandedsurveillance powers, increased information sharing and broadenedanti-money-laundering requirements.

 

Among its provisions, theUSA Patriot Act requires each financial institution to: (i) establish ananti-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.

 

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

 

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

 

Regulation W of theFederal Reserve Act, which became effective on April 1, 2003, addressesthe application of Sections 23A and 23B to credit exposure arising out ofderivative transactions between an insured institution and its affiliates andintra-day extensions of credit by an insured depository institution to itsaffiliates. The rule requires institutions to adopt policies andprocedures reasonably designed to monitor, manage and control credit exposuresarising out of transactions and to clarify that the transactions are subject toSection 23B of the Federal Reserve Act.

 

*Dividend Restrictions*. Dividends paid by the Bank andmanagement fees from the Bank and our fee-based business lines providesubstantially all of our cash flow. The approval of the Colorado Division ofBanking 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 of that year combined with the retained net profitsfor the preceding two years. In addition, the FDICIA provides that the Bankcannot pay a dividend if it will cause the Bank to be “undercapitalized.”  See “— The Bank — Capital Adequacy.”

 

*Examinations*. The FRB and the Colorado Division ofBanking periodically examines and evaluates banks. Based upon such anevaluation, the examining regulator may revalue the assets of an insuredinstitution and require that it establish specific reserves to compensate forthe difference between the value determined by the regulator and the book valueof such assets.

 

*Capital Adequacy*. Federal regulations establish minimumrequirements for the capital adequacy of depository institutions that aregenerally the same as those established for bank holding companies. See “— TheHolding Company — Capital Adequacy.” Banks with capital ratios below the required minimum are subject tocertain administrative actions, including the termination of deposit insuranceand the appointment of a receiver, and may also be subject to significantoperating restrictions pursuant to regulations promulgated under the FDICIA.See “— The Holding Company — Support of Banks.”

 

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The following table setsforth the capital ratios of the Bank:

 
| ** **                              | ** ** | **At December 31, 2009** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | ** **                    | ** ** | **Minimum** | ** ** |
| **Ratio**                               | ** ** | **Actual**                    | ** ** | **Required** | ** ** |
|                                    |       |                          |       |   |   |
| Total  capital to risk-weighted assets  |       | 11.4                          | %          | 8.0 | % |
| Tier  I capital to risk-weighted assets |       | 10.1                          | %          | 4.0 | % |
| Tier  I leverage ratio                  |       | 8.3                           | %          | 4.0 | % |

 

Pursuant to the FDICIA,regulations have been adopted defining five capital levels: well capitalized,adequately capitalized, undercapitalized, significantly undercapitalized andcritically undercapitalized. Increasingly severe restrictions are placed on adepository institution as its capital level classification declines. Aninstitution is critically undercapitalized if it has a tangible equity to totalassets ratio less than or equal to 2%. An institution is adequately capitalizedif it has a total risk-based capital ratio less than 10%, but greater than orequal to 8%; or a Tier 1 risk-based capital ratio less than 6%, but greaterthan or equal to 4%; or a leverage ratio less than 5%, but greater than orequal to 4% (3% in certain circumstances). An institution is well capitalizedif it has a total risk-based capital ratio of 10% or greater, a Tier 1risk-based capital ratio of 6% or greater, and a leverage ratio of 5% orgreater; and the institution is not subject to an order, written agreement,capital directive or prompt corrective action directive to meet and maintain aspecific capital level for any capital measure. Under these regulations, at December 31,2009, the Bank was well capitalized, which places no significant restrictionson 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 capital adequacyand internal assessment processes; and (3) market discipline. The final rules becameeffective in April 2008.

 

*Interest Rate Restrictions. *Beginning January 1, 2010, insured depositoryinstitutions that are not well-capitalized will be subject to limitations ondeposit interest rates paid.  Pursuant tothe FDIC regulations, these institutions will be limited to offering a maximumdeposit rate of the “national rate” plus 75 basis points.  The national rate is defined for deposits ofsimilar size and maturity as a simple average of rates paid by all insureddepository institutions and branches for which data are available.

 

*Brokered Deposits*.  Well-capitalizedinstitutions are not subject to limitations on brokered deposits, while anadequately capitalized institution is able to accept, renew or roll overbrokered deposits only with a waiver from the FDIC and subject to certainrestrictions on the yield paid on such deposits. Undercapitalized institutionsare generally not permitted to accept brokered deposits.

 

*Internal Operating Requirements*. Federal regulations promote the safetyand soundness of individual institutions by specifically addressing, amongother things: (1) internal controls, information systems and internalaudit systems; (2) loan documentation; (3) credit underwriting; (4) interestrate exposure; (5) asset growth; and (6) compensation and benefitstandards for management officials.

 

*Real Estate Lending Evaluations*. Federal regulators have adopted uniformstandards for 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 sound bankingpractices. The Company has established loan-to-value ratio limitations on realestate loans, which are more stringent than the loan-to-value limitationsestablished by regulatory guidelines.

 

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*Deposit Insurance Premiums*. Under current regulations, FDIC-insureddepository institutions that are members of the FDIC pay insurance premiums atrates based on their assessment risk classification, which is determined, inpart, based on the institution’s capital ratios and on factors that the FDICdeems relevant to determine the risk of loss to the FDIC.  In 2007, the annual assessment rates changedto a range of 5-43 basis points, an increase from the 0-27 basis point rangethat had been in effect since 1996.  In2009, the base assessment rate range for Risk Category 1 institutions increasedto 7-24 basis points as part of the FDICs Restoration Plan for the DIF.  This increase is necessary to replenish theDIF due to the number of recent failures of FDIC-insured institutions.  As part of the new assessments that began April 1,2009, the FDIC introduced three new adjustments that may impact the assessmentbase.  These adjustments are for 1) apotential decrease for long-term unsecured debt, 2) a potential increase forsecured liabilities above a threshold amount and 3) for non-risk category 1institutions, a potential increase for brokered deposits above a threshold amount.  The base assessment rates for Risk CategoriesII — IV range from 17-78 basis points.  Achange in our risk category would negatively impact our assessment rates.

 

The amount an institutionis assessed is based upon statutory factors that include the balance of insureddeposits as well as the degree of risk the institution poses to the insurancefund and may be reviewed semi-annually. Additionally, all institutions insuredby the FDIC Bank Insurance Fund are assessed fees to cover the debt of the FinancingCorporation, the successor of the insolvent Federal Savings and Loan InsuranceCorporation.  The current assessment rateeffective for the first quarter of 2010 is 0.265 basis points (1.06 basispoints annually).  The assessment rate isadjusted quarterly.

 

On May 22, 2009, theFDIC voted to levy a special assessment on insured institutions as part of theFDIC’s efforts to rebuild the DIF and help maintain public confidence in thebanking system.  The special assessmentwas 5 basis points on each FDIC-insured depository institution’s assets, minusits Tier 1 capital, as of June 30, 2009. On September 30, 2009, the Company paid a special assessment of$1.2 million.

 

On November 12,2009, the FDIC voted to require insured institutions to prepay slightly overthree years of estimated insurance assessments. The pre-payment allows the FDICto strengthen the cash position of the DIF immediately without immediatelyimpacting earnings of the industry.  On December 31,2009, the Company pre-paid estimated assessments of $10.3 million for the years2010-2012.  For risk-based capitalpurposes, the pre-payment was assigned a zero percent risk weighting.

 

*Temporary Liquidity GuaranteeProgram (TLGP)*.  On October 14, 2008, the FDIC announcedthe enactment of the Temporary Liquidity Guarantee Program to strengthenconfidence and encourage liquidity in the banking system.  Pursuant to the program, the FDIC willguarantee certain senior unsecured debt issued by participating financialinstitutions issued on or after October 14, 2008 and before June 30,2009; and provide full FDIC deposit insurance coverage for non-interest bearingtransaction accounts at participating FDIC-insured institutions through December 31,2009 (Transaction Account Guarantee program). All FDIC insured institutions were covered under the program until December 5,2008, at no cost.  After December 5,2008, the cost for institutions electing to participate was a 10-basis-pointsurcharge applied to balances covered by the noninterest-bearing deposit transactionaccount guarantee and 75 basis points of the eligible senior unsecured debtguaranteed under the program.  TheCompany elected to participate in both the unlimited coverage fornoninterest-bearing transaction accounts and the debt guarantee program.

 

On June 3, 2009, theFDIC amended the TLGP to provide a limited extension of the debt guaranteeprogram.  Effective October 1, 2009,the FDIC also extended the full FDIC deposit insurance coverage for noninterest-bearingtransaction accounts at participating FDIC-insured institutions through June 30,2010.  

 

As part of the extension,insured institutions electing to continue participation will pay an increasedassessment ranging from 15-25 basis points depending on the entity’s RiskCategory.  The Company has elected tocontinue its participation in the Transaction Account Guarantee Program.

 

*Restrictions on Loans to OneBorrower*. Under statelaw, the aggregate amount of loans that may be made to one borrower by the Bankis generally limited to 15% of its unimpaired capital, surplus, undivided 

 

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profits and allowance forloan losses. The Bank seeks participations to accommodate borrowers whosefinancing needs exceed the Bank’s lending limits.

 

**Fee-Based Business 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 disclosureobligations. Virtually all aspects of ACMG’s and Wagner’s investment managementbusiness are subject to various federal and state laws and regulations. Theselaws and regulations generally grant supervisory agencies and bodies broadadministrative powers, including the power to limit or restrict ACMG or Wagner fromcarrying on its investment management business in the event that they fail 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 fiscal2009. 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 Designs Ltd.(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 Insurance Inc,acting as an insurance producer, must obtain and keep in force an insuranceproducer’s license with the State of Arizona and Colorado. In order to writeinsurance in other states, they are required to obtain non-resident insurancelicenses. All premiums belonging to insurance carriers and all unearnedpremiums belonging to customers received by the agency must be treated in afiduciary capacity.

 

**Changing Regulatory 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 and regulationsaffecting banks and financial or bank holding companies have changedsignificantly in recent years, and there is reason to expect changes willcontinue in the future, although it is difficult to predict the outcome ofthese changes. From time to time, various bills are introduced in the 

 

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United States Congresswith respect to the regulation of financial institutions. Certain of theseproposals, if adopted, could significantly change the regulation of banks andthe financial services industry.

 

**Monetary Policy**

 

The monetary policy ofthe FRB has a significant effect on the operating results of financial or bankholding companies and their subsidiaries. Among the means available to the FRBto affect the money supply are open market transactions in U.S. governmentsecurities, changes in the discount rate on member bank borrowings and changesin reserve requirements against member bank deposits. These means are used invarying combinations to influence overall growth and distribution of bankloans, investments and deposits, and their use may affect interest ratescharged on loans or paid on deposits. FRB monetary policies have materiallyaffected the operations of commercial banks in the past and are expected tocontinue to do so in the future. The nature of future monetary policies and theeffect of such policies on the business and earnings of the Company and itssubsidiaries cannot be predicted.

 

**Website Availability of ReportsFiled 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 regulatoryinitiatives to address difficult market and economic conditions may not stabilizethe U.S. economy or the U.S. banking system.**

 

On October 3, 2008,President Bush signed into law the Emergency Economic Stabilization Act of2008, or EESA, which, among other measures, authorizes the Treasury to purchasefrom financial institutions and their holding companies up to $700 billion inmortgage loans, mortgage-related securities and certain other financialinstruments, including debt and equity securities issued by financialinstitutions and their holding companies, under the Trouble Asset ReliefProgram, or TARP.  The purpose of TARP is to restore confidence andstability to the U.S. banking system and to encourage financial institutions toincrease their lending to customers and to each other.  Under the CapitalPurchase Program authorized by TARP (as well as the Capital Assistance Programannounced on February 25, 2009), the United States Department of Treasury,or Treasury, is purchasing equity securities from participatinginstitutions.  The EESA also increased federal deposit insurance on mostdeposit accounts from $100,000 to $250,000.  This increase is in placeuntil the end of 2013 and is not covered by deposit insurance premiums paid bythe banking industry.

 

The EESA followed, andhas been followed by, numerous actions by the Federal Reserve Bank, or FRB, theU.S. Congress, Treasury, the Federal Deposit Insurance Corporation, or theFDIC, the SEC and others to address the current liquidity and credit crisisthat has followed the sub-prime meltdown that commenced in 2007.  Thesemeasures include homeowner relief that encourage loan restructuring andmodification; the establishment of significant liquidity and credit facilitiesfor financial institutions and investment banks; the lowering of the federalfunds rate; emergency action against short selling practices; a temporaryguaranty program for money market funds; the establishment of a commercialpaper funding facility to provide back-stop liquidity to commercial paperissuers; and coordinated international efforts to 

 

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address illiquidity andother weaknesses in the banking sector.  Most recently, on February 17,2009, the American Reinvestment and Recovery Act of 2009, or ARRA, was signedinto law.  ARRA, more commonly known as the economic stimulus bill oreconomic recovery package, is intended to stimulate the economy and providesfor broad infrastructure, education and health spending.

 

The purpose of these andcertain other legislative and regulatory actions is to stabilize the U.S.banking system. The EESA, the ARRA and other regulatory initiatives may nothave their desired effects. If the volatility in the markets continues and economicconditions fail to improve or worsen, our business, financial condition,results of operations and cash flows could be materially and adverselyaffected.

 

***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.

 

***Weaknessin the economy and in the real estate market, including specific weaknesswithin the markets where our banks do business, has adversely affected us andmay continue to adversely affect us.***

 

In general, all of ourbusiness segments have been negatively impacted by current market conditions.There has been a downturn in the real estate market, a slow-down inconstruction and an oversupply of real estate for sale in both 2008 and 2009.  This downturn, and any additional softening,in our real estate markets could hurt our business because a majority of ourloans are secured by real estate. Real estate values and real estate marketsare generally affected by changes in national, regional or local economicconditions, fluctuations in interest rates and the availability of loans topotential purchasers, changes in tax laws and other governmental statutes,regulations and policies and acts of nature.

 

Substantially all of ourreal property collateral is located in Arizona and Colorado. Although theColorado economy has outperformed the majority of other metropolitan areasnationally, it began to show increasing signs of weakness during the fourthquarter of 2008. These broader economic trends have impacted our Colorado loanportfolio, which has seen an increase in adversely graded credits.Additionally, the Arizona market continues to be negatively impacted by aseverely depressed residential housing market. The receipt of borrowerfinancial statements as well as focused portfolio reviews by our bankerscontributed to an increase in adversely graded credits in both markets during2009.  If real estate prices continue todecline, 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 further diminished, and we would be more likely to suffer losses ondefaulted loans.

 

In addition, ourInsurance Segment’s revenues have been adversely affected by a continued softpremium market for property and casualty insurance; the decline in the broaderequity market has negatively impacted Investment Advisory earnings; andInvestment Banking transactions have been curtailed due to market uncertaintyand valuation issues.

 

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Continued weakness couldhave a material adverse effect on our business, financial condition, results ofoperations and cash flows and on the market for our common stock.

 

***Ourallowance for loan losses may not be adequate to cover actual loan losses.***

 

As a lender, we areexposed to the risk that our customers will be unable to repay their loansaccording to their terms and that any collateral securing the payment of theirloans may not be sufficient to assure repayment.  Credit losses are inherent in the lendingbusiness and could have a material adverse effect on our operatingresults.  We make various assumptions andjudgments about the collectibility of our loan portfolio and provide anallowance 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, weexpect to increase the number and amount of loans we originate, and we cannotguarantee that we will not experience an increase in delinquencies and lossesas these loans continue to age, particularly if the economic conditions inColorado and Arizona further deteriorate. The actual amount of future provisions for loan losses cannot be determinedat any specific point in time and may exceed the amounts of pastprovisions.  Additions to our allowancefor loan losses would decrease our net income.

 

***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 2008 and 2009. 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 on defaultedloans by foreclosing and selling the real estate collateral would then bediminished, and we would be more likely to suffer losses on defaulted loans.Substantially all of our real property collateral is located in Arizona andColorado. Any such downturn could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows.

 

***Our commercialand construction loans are subject to various lending risks depending on thenature of the borrower’s business, its cash flow and our collateral.***

 

Our commercial realestate loans involve higher principal amounts than other loans, and repaymentof these loans may be dependent on factors outside our control or the controlof our borrowers. Repayment of commercial real estate loans is generallydependent, in large part, on sufficient income from the properties securing theloans to cover operating expenses and debt service. Rental income may not risesufficiently over time to meet increases in the loan rate at repricing or increasesin operating 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 ourcommercial loans is often dependent on cash flow of the borrower, which may beunpredictable, and collateral securing these loans may fluctuate in value.Generally, this collateral is accounts receivable, inventory, equipment or realestate. In the case of loans secured by accounts receivable, the availabilityof funds for the repayment of these loans may be substantially dependent on theability of the borrower to collect amounts due from its customers. Othercollateral securing loans may depreciate over time, may be difficult toappraise and may fluctuate in value based on the success of the business.

 

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Our construction loansare based upon estimates of costs to construct and the value associated withthe completed project. These estimates may be inaccurate due to theuncertainties inherent in estimating construction costs, as well as the marketvalue of the completed project and the effects of governmental regulation ofreal property making it relatively difficult to accurately evaluate the totalfunds required to complete a project and the related loan-to-value ratio. As aresult, construction loans often involve the disbursement of substantial fundswith repayment dependent, in part, on the success of the ultimate project andthe ability of the borrower to sell or lease the property, rather than theability of the borrower or guarantor to repay principal and interest. Delays incompleting the project may arise from labor problems, material shortages andother unpredictable contingencies. If the estimate of construction costs isinaccurate, we may be required to advance additional funds to completeconstruction. If our appraisal of the value of the completed project proves tobe overstated, we may have inadequate security for the repayment of the loanupon completion of construction of the project.

 

***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, including federaland state bankruptcy and insolvency laws, may limit the amount that can berecovered on such loans.

 

***Thevalue of securities in our investment securities portfolio may be negativelyaffected by continued disruptions in securities markets.***

 

The market for someof the investment securities held in our portfoliohas become extremely volatile over the past 12months. Market conditions may negatively affect the value ofsecurities. There can be no assurance that the declines in market valueassociated with these disruptions will not result in other-than- temporaryimpairments of these assets, which would lead to accounting charges that couldhave a material adverse effect on our net income and capital levels.

 

***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 or is liquidated at pricesnot sufficient to recover the full amount of the credit or derivative exposuredue to the Company. Any such losses could have a material adverse affect on theCompany’s financial condition and results of operations.

 

***Weare subject to executive compensation restrictions because of our participationin the Treasury’s Capital Purchase Program.***

 

We are subject to TARP rules andstandards governing executive compensation, which generally apply to our ChiefExecutive Officer, Chief Financial Officer and the three next most highlycompensated senior executive officers and, with recent amendments, apply to anumber of other employees. The standards include (i) a requirement torecover any bonus payment to senior executive officers or certain otheremployees if payment was based on materially inaccurate financial statements orperformance metric criteria; (ii) a prohibition on making any goldenparachute payments to senior executive officers and certain other employees; (iii) aprohibition on paying or accruing any bonus payment to certain 

 

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employees, except asotherwise permitted by the rules; (iv) a prohibition on maintaining anyplan for senior executive officers that encourages such officers to takeunnecessary and excessive risks that threaten the Company’s value; (v) aprohibition on maintaining any employee compensation plan that encourages themanipulation of reported earnings to enhance the compensation of any employee;and (vi) a prohibition on providing tax gross-ups to senior executiveofficers and certain other employees. These restrictions and standards couldlimit our ability to recruit and retain executives.

 

***Thesecurities purchase agreement between us and Treasury permits Treasury toimpose additional restrictions on us retroactively.***

 

The securities purchaseagreement we entered into with Treasury permits Treasury to unilaterally amendthe terms of the securities purchase agreement to comply with any changes infederal 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 Bpreferred stock could generally only be repaid if we raised additional capitalto repay the 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.

 

***Supervisoryguidance on commercial real estate concentrations could restrict our activitiesand impose financial requirements or limitations on the conduct of ourbusiness.***

 

The OCC, the FRB and theFDIC finalized joint supervisory guidance in 2006 on sound risk managementpractices for concentrations in commercial real estate lending. The guidance isintended to help ensure that institutions pursuing a significant commercialreal estate lending strategy remain healthy and profitable while continuing toserve the credit needs of their communities. The agencies are concerned thatrising commercial 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 institutions in developing risk management practices and levels ofcapital that are commensurate with the level and nature of their commercialreal estate concentrations. Lending and risk management practices of theCompany will be taken into account in supervisory evaluation of capitaladequacy. Our commercial real estate portfolio at December 31, 2009 meetsthe definition of commercial real estate concentration as set forth in thefinal guidelines. If our risk management practices are found to be deficient,it could result in increased reserves and capital costs.

 

***Tothe extent that any of the real estate securing our loans becomes subject toenvironmental liabilities, the value of our collateral will be diminished.***

 

In certain situations,under various federal, state and local environmental laws, ordinances and regulationsas well as the common law, a current or previous owner or operator of realproperty may be liable for the cost of removal or remediation of hazardous ortoxic substances on such property or damage to property or personal injury.Such laws may impose liability whether or not the owner or operator wasresponsible for the presence of such hazardous or toxic substances.Environmental laws also may impose restrictions on the manner in whichproperties may be used or businesses may be operated, and these restrictionsmay require expenditures by one or more of our borrowers. Such laws may beamended so as to require compliance with stringent standards which couldrequire one or more of our borrowers to make unexpected expenditures, some ofwhich could be substantial. Environmental laws provide for sanctions in theevent 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 

 

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costs which woulddiminish the value of our collateral. The cost of defending against claims ofliability, of compliance with environmental regulatory requirements or ofremediating any contaminated property could be substantial and require amaterial portion of the cash flow of one or more of our borrowers, which woulddiminish the ability of any such borrowers to repay our loans.

 

***Changesin interest rates may affect our profitability.***

 

Our profitability is, inpart, a function of the spread between the interest rates earned oninvestments and loans, and the interest rates paid on deposits and otherinterest-bearing liabilities. Our net interest spread and margin will beaffected by general economic conditions and other factors, including fiscal andmonetary policies of the federal government, that influence market interestrates and our ability to respond to changes in such rates. At any given time,our assets and liabilities structures are such that they are affecteddifferently by a change in interest rates. As a result, an increase or decreasein interest rates, the length of loan terms or the mix of adjustable andfixed-rate loans in our portfolio could have a positive or negative effect onour net income, capital and liquidity. We have traditionally managed our assetsand liabilities in such a way that we have a positive interest rate gap. 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 and are more likely to experience increases in net interest income inperiods of rising interest rates.  Inaddition, an increase in interest rates may adversely affect the ability ofsome borrowers to pay the interest on and principal of their loans.

 

***Ourability to grow is substantially dependent upon our ability to increase ourdeposits.***

 

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 segment, GMB, the delay in the initiation or the termination of amajor new client engagement, or any changes in the anticipated closing date ofclient transactions can directly affect revenues and earnings for a particularquarter or year.  With respect to ourinsurance segment, CoBiz Insurance Inc. and FDL, our revenues and earnings alsocan experience quarterly and annual volatility, depending on the timing of theinitiation or termination of a major new client engagement.  In addition, a substantial portion of therevenues and earnings of our insurance segment are often generated during ourfourth quarter as many of their clients seek to finalize their wealth transferand estate plans by year end.  Withrespect to our investment advisory businesses, ACMG and Wagner, our revenuesand earnings are dependent on the value of our assets under management, whichin turn are heavily dependent upon general conditions in debt and equitymarkets.  Any significant volatility indebt or equity markets are likely to directly affect revenues and earnings ofACMG and Wagner for a particular quarter or year.

 

***Werely heavily on our management, and the loss of any of our senior officers mayadversely affect our operations.***

 

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

 

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***Wemay experience difficulties in managing our growth.***

 

As part of our strategy,we may expand into additional communities or attempt to strengthen our positionin our current markets by undertaking additional de novo branch openings or newbank formations. We believe that it may take up to 18 months for newbanking facilities to first achieve operational profitability due to the impactof overhead expenses, and the start-up phase of generating loans and deposits.To the extent that we undertake growth initiatives, we are likely to continueto experience the effects of higher operating expenses relative to operatingincome from the new operations, which may have an adverse effect on our levelsof reported net income, return on average equity and return on average assets.

 

In addition, we mayacquire financial institutions and related businesses that we believe provide astrategic fit with our business. To the extent that we grow throughacquisitions, we may not be able to adequately and profitably manage suchgrowth. Acquiring other financial institutions and businesses involves riskscommonly associated with acquisitions, including:  potential exposure to unknown or contingentliabilities of financial institutions and other businesses we acquire; exposureto potential asset quality issues of the acquired banks or businesses;difficulty and expense of integrating the operations and personnel of banks andbusinesses we acquire; potential disruption to our business; potentialdiversion of our management’s time and attention; and the possible loss of keyemployees and customers of the banks and businesses we acquire.

 

***Ourbusiness and financial condition may be adversely affected by competition.***

 

The banking business inthe Denver and Phoenix metropolitan areas is highly competitive and iscurrently dominated by a number of large regional and national financialinstitutions. In addition to these regional and national banks, there are anumber of smaller commercial banks that operate in these areas. We compete forloans and deposits with banks, savings and loan associations, financecompanies, credit unions, and mortgage bankers. In addition to traditionalfinancial institutions, we also compete for loans with brokerage and investmentbanking companies, and governmental agencies that make available low-cost orguaranteed loans to certain borrowers. Particularly in times of high interestrates, we also face significant competition for deposits from sellers ofshort-term money market securities and other corporate and governmentsecurities.  In addition, during 2008 anumber of traditional investment banks converted into bank holding companies,which may increase competition for deposits.

 

By virtue of their largercapital bases or affiliation with larger multibank holding companies, many ofour competitors have substantially greater capital resources and lending limitsthan we have and perform other functions that we offer only throughcorrespondents. Interstate banking and unlimited state-wide branch banking arepermitted in Colorado and Arizona. As a result, we have experienced, and expectto continue to experience, greater competition in our primary service areas.Our business, financial condition, results of operations and cash flows may beadversely affected by competition, including any increase in competition.Moreover, recently enacted and proposed legislation has focused on expandingthe ability of participants in the banking and thrift industries to engage inother lines of business. The enactment of such legislation could put us at acompetitive disadvantage because we may not have the capital to participate inother lines of business to the same extent as more highly capitalized financialservice holding companies.

 

***Wemay be required to make capital contributions to the Bank******if it becomesundercapitalized.***

 

Under federal law, a bankholding company may be required to guarantee a capital plan filed by anundercapitalized bank subsidiary with its primary regulator. If the subsidiarydefaults under the plan, the holding company may be required to contribute tothe capital of the subsidiary bank in an amount equal to the lesser of 5% ofthe Bank’s assets at the time it became undercapitalized or the amountnecessary to bring the Bank into compliance with applicable capital standards.Therefore, it is possible that we will be required to contribute capital to oursubsidiary bank or any other bank that we may acquire in the event that suchbank becomes undercapitalized. If we are required to make such capitalcontribution at a time when we have other significant capital needs, ourbusiness, financial condition, results of operations and cash flows could beadversely affected.

 

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***Wecontinually encounter technological change, and we may have fewer resourcesthan our competitors to continue to invest in technological improvements.***

 

The financial servicesindustry is undergoing rapid technological changes, with frequent introductionsof new technology-driven products and services. In addition to better servingcustomers, the effective use of 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, andservicing 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,financial condition, results of operations and cash flows.

 

***Weare subject to significant government regulation, and any regulatory changesmay 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.

 

**Item 1B. Unresolved Staff Comments**

 

None.

 

**Item 2. Properties**

 

At December 31, 2009, we had 12 bank locations, fourfee-based locations and an operations center in Colorado and eight banklocations in Arizona. Our executive offices are located at 821 17th Street,Denver, Colorado, 80202.  In 2009, CoBizInsurance — CO and CoBiz Insurance — AZ relocated into existing Companylocations.  CoBiz Insurance — CO is nowlocated at the 821 17th Street location and CoBiz Insurance — AZ isnow located at the 2600 N. Central Avenue location.  We lease our executive offices, our Northeastoffice and our Surprise office locations from entities partly owned orcontrolled by a director of the Company. See “Certain Relationships and RelatedTransactions and Director Independence” under Item 13 of Part III and Note15 to the Consolidated financial statements. The terms of these leases expirebetween 2013 and 2016. The Company leases all of its facilities. The followingtable sets forth specific information on each location.

 

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| ** **                 | ** ** | ** **                                                         | ** ** | **Lease**      |
|----------------------------|------------|--------------------------------------------------------------------|------------|----------------|
| **Bank  Locations**        | ** ** | **Address**                                                        | ** ** | **Expiration** |
| DTC                        |       | 8400 E. Prentice Ave.,  Ste. 150, Greenwood Village, CO 80111      |       | 2010           |
| Boulder                    |       | 2025 Pearl St.,  Boulder, CO 80302                                 |       | 2010           |
| West                       |       | 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           |
| Northwest                  |       | 400 Centennial Pkwy.,  Ste. 100, Louisville, CO 80027              |       | 2014           |
| Vail Valley                |       | 56 Edwards Village  Blvd., Ste. 130, Edwards, CO 81632             |       | 2014           |
| Prince                     |       | 2409 W. Main St.,  Littleton, CO 80120                             |       | 2014           |
| Tremont                    |       | 1275 Tremont Pl.,  Denver, CO 80202                                |       | 2014           |
| Denver                     |       | 821 17th St., Denver,  CO 80202                                    |       | 2016           |
| Denver - Operations        |       | 717 17th St., Ste. 400,  Denver, CO 80202                          |       | 2020           |
| Chandler                   |       | 2727 W. Frye Rd., Ste.  100, Chandler, AZ 85224                    |       | 2010           |
| Scottsdale                 |       | 6909 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 Main               |       | 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                |       | 821 17th St., Denver,  CO 80202                          |       | 2016           |
| Wagner  Investment Management, Inc        |       | 3200 Cherry Creek South  Dr., Ste. 240, Denver, CO 80209 |       | 2010           |
| CoBiz  Insurance Inc. - AZ                |       | 2600 N. Central Ave.,  Ste. 1950, Phoenix, AZ 85004      |       | 2017           |
| Green  Manning & Bunch, Ltd. (1) |       | 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           |

 

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(1) GMB has signed alease agreement for a new location that is expected to commence in April 2010.

 

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 lease terms.

 

**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.

 

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

 

*Nomatter was submitted to a vote of security holders during the fourth quarter offiscal 2009.*

* *

**PART II**

** **

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

 

**Market for Registrant’s Common Equity**

 

*The commonstock of the Company is traded on the NASDAQ Global Select Market under thesymbol “COBZ.”  At February 1, 2010,there were approximately 510 shareholders of record of CoBiz common stock.*

* *

*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**  | ** ** |
| 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          |       |
| 2009:           |       |       |       |       |       |          |       |
| First  Quarter  |       | $          | 9.99       |       | $          | 4.00          |       | $ | 0.07 |   |
| Second  Quarter |       | 8.09       |       | 4.81       |       | 0.01          |       |
| Third  Quarter  |       | 6.64       |       | 4.18       |       | 0.01          |       |
| Fourth  Quarter |       | 5.70       |       | 3.99       |       | 0.01          |       |

** **

*The timingand amount of future dividends declared by the Board of Directors of theCompany will depend upon the consolidated earnings, financial condition,liquidity and capital requirements of the Company and its subsidiaries, theamount of cash dividends paid to the Company by its subsidiaries, applicablegovernment regulations and policies, and other factors considered relevant bythe 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.*

* *

*Pursuantto the terms of the Purchase 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 Purchase Agreement or 2) the date on which the Series BPreferred Stock is redeemed in whole.  AtDecember 31, 2009, the Company has paid all required dividends under thePurchase Agreement when due.*

* *

*Capitaldistributions, including dividends, by institutions such as the Bank aresubject to restrictions tied to the institution’s earnings. See “Supervisionand Regulation — “The Bank”  and “TheHolding Company” — Dividend Restrictions” included under Item 1 of Part I.*

 

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The following table compares the cumulative total return on ahypothetical investment of $100 in CoBiz common stock on December 31, 2004and the closing prices on December 31, 2005, 2006, 2007, 2008 and 2009,with the hypothetical cumulative total return on the Russell 2000 Index and theNASDAQ Bank Index for the comparable period.

 

 
| ** **            | ** ** | **12/31/2004** | ** ** | **12/31/2005** | ** ** | **12/31/2006** | ** ** | **12/31/2007** | ** ** | **12/31/2008** | ** ** | **12/31/2009** | ** ** |
|-----------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| CoBiz  Financial Inc. |       | $              | 100.00     |           | $          | 90.74          |       | $              | 110.86     |           | $          | 75.90          |       | $ | 50.96 |   | $ | 25.37 |   |
| NASDAQ  Bank Index    |       | $              | 100.00     |           | $          | 98.07          |       | $              | 111.61     |           | $          | 89.40          |       | $ | 70.16 |   | $ | 58.73 |   |
| Russell  2000 Index   |       | $              | 100.00     |           | $          | 104.62         |       | $              | 123.90     |           | $          | 121.96         |       | $ | 80.74 |   | $ | 102.67 |   |

 

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**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.

 
| **At or for the year ended  December 31,**                  | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| **(in thousands, except per share data)**                        |       |      |       |      |       |      |       |      |       |      |       |
| Statement of income data:                                        |       |      |       |      |       |      |       |      |       |      |       |
| Interest income                                                  |       | $         | 129,450    |      | $          | 144,908   |       | $         | 154,510    |      | $          | 136,444 |   | $ | 103,456 |   |
| Interest expense                                                 |       | 26,066    |       | 49,557    |       | 66,611    |       | 57,015    |       | 32,481    |       |
| Net interest income before provision for loan  losses            |       | 103,384   |       | 95,351    |       | 87,899    |       | 79,429    |       | 70,975    |       |
| Provision for loan losses                                        |       | 105,815   |       | 39,796    |       | 3,936     |       | 1,342     |       | 2,465     |       |
| Net interest income (loss) after provision for loan  losses      |       | (2,431    | )          | 55,555    |       | 83,963    |       | 78,087    |       | 68,510    |       |
| Noninterest income                                               |       | 27,627    |       | 35,778    |       | 28,611    |       | 30,964    |       | 25,213    |       |
| Noninterest expense                                              |       | 141,410   |       | 89,717    |       | 75,515    |       | 71,927    |       | 62,480    |       |
| Income (loss) before taxes                                       |       | (116,214  | )          | 1,616     |       | 37,059    |       | 37,124    |       | 31,243    |       |
| Provision (benefit) for income taxes                             |       | (32,859   | )          | (91       | )          | 13,713    |       | 13,299    |       | 11,177    |       |
| Net income (loss) before noncontrolling interest                 |       | (83,355   | )          | 1,707     |       | 23,346    |       | 23,825    |       | 20,066    |       |
| Less: net (income) loss attributable to  noncontrolling interest |       | 314       |       | (379      | )          | (322      | )          | (999      | )          | (60       | )          |
| Net income (loss)                                                |       | $         | (83,041    | )         | $          | 1,328     |       | $         | 23,024     |      | $          | 22,826 |   | $ | 20,006 |   |
|                                                             |       |      |       |      |       |      |       |      |       |      |       |
| Earnings (loss) per common share - basic                         |       | $         | (2.98      | )         | $          | 0.05      |       | $         | 0.98       |      | $          | 1.01 |   | $ | 0.90 |   |
| Earnings (loss) per common share - diluted                       |       | $         | (2.98      | )         | $          | 0.05      |       | $         | 0.96       |      | $          | 0.98 |   | $ | 0.87 |   |
| Cash dividends declared per common share                         |       | $         | 0.10       |      | $          | 0.28      |       | $         | 0.26       |      | $          | 0.22 |   | $ | 0.19 |   |
| Dividend payout ratio                                            |       | NM        |       | 560.00    | %          | 26.53     | %          | 21.78     | %          | 21.05     | %          |
|                                                             |       |      |       |      |       |      |       |      |       |      |       |
| **Balance sheet data:**                                          |       |      |       |      |       |      |       |      |       |      |       |
| Total assets                                                     |       | $         | 2,466,015  |      | $          | 2,684,275 |       | $         | 2,391,012  |      | $          | 2,112,423 |   | $ | 1,933,056 |   |
| Total investments                                                |       | 545,980   |       | 500,448   |       | 395,663   |       | 438,894   |       | 466,150   |       |
| Loans                                                            |       | 1,780,866 |       | 2,031,253 |       | 1,846,326 |       | 1,544,460 |       | 1,332,668 |       |
| Allowance for loan losses                                        |       | 75,116    |       | 42,851    |       | 20,043    |       | 17,871    |       | 16,906    |       |
| Loans held for sale                                              |       | 1,820     |       | —    |       | —    |       | —    |       | —    |       |
| Deposits                                                         |       | 1,968,833 |       | 1,639,031 |       | 1,742,689 |       | 1,476,337 |       | 1,326,952 |       |
| Junior subordinated debentures                                   |       | 72,166    |       | 72,166    |       | 72,166    |       | 72,166    |       | 72,166    |       |
| Subordinated notes payable                                       |       | 20,984    |       | 20,984    |       | —    |       | —    |       | —    |       |
| Shareholders’ equity                                        |       | 230,451   |       | 252,099   |       | 189,270   |       | 162,675   |       | 136,544   |       |
|                                                             |       |      |       |      |       |      |       |      |       |      |       |
| **Key ratios:**                                                  |       |      |       |      |       |      |       |      |       |      |       |
| Return on average total assets                                   |       | (3.25     | )%         | 0.05      | %          | 1.04      | %          | 1.11      | %          | 1.10      | %          |
| Return on average shareholders’ equity                      |       | (35.23    | )%         | 0.67      | %          | 12.15     | %          | 15.45     | %          | 15.42     | %          |
| Average shareholders’ equity to average total  assets       |       | 9.22      | %          | 7.80      | %          | 8.54      | %          | 7.19      | %          | 7.16      | %          |
| Net interest margin                                              |       | 4.38      | %          | 4.08      | %          | 4.28      | %          | 4.20      | %          | 4.27      | %          |
| Efficiency ratio (1)                                             |       | 68.27     | %          | 65.10     | %          | 64.10     | %          | 64.12     | %          | 64.83     | %          |
| Nonperforming assets to total assets                             |       | 4.24      | %          | 1.75      | %          | 0.15      | %          | 0.06      | %          | 0.05      | %          |
| Nonperforming loans to total loans                               |       | 4.44      | %          | 2.02      | %          | 0.18      | %          | 0.09      | %          | 0.07      | %          |
| Allowance for loan and credit losses to total loans              |       | 4.23      | %          | 2.12      | %          | 1.12      | %          | 1.19      | %          | 1.27      | %          |
| Allowance for loan and credit losses to  nonperforming loans     |       | 97.28     | %          | 104.95    | %          | 604.69    | %          | 1392.30   | %          | 1863.95   | %          |
| Net charge-offs (recoveries) to average loans                    |       | 3.78      | %          | 0.87      | %          | 0.11      | %          | (0.01     | )%         | 0.02      | %          |

 

----

(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.

 

**NM - Not Meaningful**

 

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**Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operation**

 

**Executive Summary**

 

The Company is a financial holding company that offersa broad array of financial service products to its target market ofprofessionals, small and medium-sized businesses, and high-net-worthindividuals. Our operating segments include: commercial banking, investmentbanking, investment advisory and trust and insurance.

 

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 ourinterest-earning assets and interest-bearing liabilities to reduce the impactof interest rate changes on our operating results. We also have focused onreducing our dependency on our net interest margin by increasing ournoninterest 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 Note 14 tothe Consolidated Financial Statements.

 

**Industry Overview.**The U.S. commercial banking industry has beensignificantly impacted in 2008 and 2009 by decreased values in real estaterelated assets, a downturn in the financial markets and a significanttightening in the credit market.  Theweakened U.S. housing market has caused the industry to realize significantlosses on write-downs of investment securities securitized by real estate andhigher credit costs for write-downs of loans issued for investment.  During 2008, 25 banks failed and went intoreceivership with the FDIC.  In 2009, 140banks went into receivership.  Thiscompares to only 10 bank failures in the years 2003 to 2007.

 

Statements made by the Chairman of the Federal Reserveduring the third quarter of 2009 indicated the recession may be coming to anend from a technical perspective, but the economy could be weak for sometime.  The unemployment rate increasedfrom 4.9% in December 2007 to 10.0% in September 2009, the highestrate since June 1983.  The highunemployment rate is one of the driving factors that could prolong a weakeconomy.  In the third quarter of 2009,FDIC-insured commercial banks reported a combined net profit of $2.8 billion, asignificant improvement over the combined net loss of $4.3 billion recorded inthe second quarter of 2009.  The thirdquarter 2009 annualized net charge-offs for the industry set a record high at2.71% of loans.  This marked the thirdtime in the past four quarters that the net charge-off rate has reached a newhigh.  The industry continues to bechallenged by weakening asset quality as evidenced by the increase innoncurrent loans during the third quarter of 2009 to an all-time high.  Through September 30, 2009, noncurrentloans have increased for 14 consecutive quarters. However, some positive signswere also registered in the third quarter. While troubled loans increased, the rate of increase in noncurrent loanswas the smallest in the past four quarters. The overall market conditions led the Federal Open Markets Committee(FOMC) to maintain the target federal funds rate at a range of 0 to 25 basispoints since it was initially set in December 2008.

 

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**Company Overview.**From December 31, 1995, the first complete fiscalyear under the current management team, to December 31, 2009, 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 20 bank locations, six fee-based businesses and total assets of$2.5 billion. Certain key metrics of our operating segments at or for the yearsended December 31, 2009 and 2008 are as follows:

 
| ** **                                 | ** ** | ** **     | ** ** | ** **     | ** ** | **Investment**          | ** ** | ** **    | ** ** | **Corporate**   | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|----------------|------------|----------------|------------|-------------------------|------------|---------------|------------|-----------------|------------|------------------|------------|
| ** **                                 | ** ** | **Commercial** | ** ** | **Investment** | ** ** | **Advisory &** | ** ** | ** **    | ** ** | **Support and** | ** ** | ** **       | ** ** |
| ** **                                 | ** ** | **Banking**    | ** ** | **Banking**    | ** ** | **Trust**               | ** ** | **Insurance** | ** ** | **Other**       | ** ** | **Consolidated** | ** ** |
| **(in  thousands, except per share data)** | ** ** | **2009**       | ** ** |
| Net  loss                                  |       | $              | (47,698    | )              | $          | (4,585                  | )          | $             | (6,775     | )               | $          | (18,100          | )          | $ | (5,883 | ) | $ | (83,041 | ) |
| Diluted  loss per common share             |       | $              | (1.64      | )              | $          | (0.16                   | )          | $             | (0.23      | )               | $          | (0.62            | )          | $ | (0.33 | ) | $ | (2.98 | ) |
| Total  assets                              |       | $              | 2,380,362  |           | $          | 609                     |       | $             | 3,312      |            | $          | 10,278           |       | $ | 71,454 |   | $ | 2,466,015 |   |

 
| ** **                                | ** ** | **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 and 2009:

 

**2009**

 

·                  The Company recognized a $46.2 million goodwillimpairment charge in 2009.

 

·                  Commercial Banking lost $1.64 per diluted share in2009, down from a contribution of $0.28 in 2008.  Our commercial banking franchise recognizedprovision for loan losses of $103.4 million in 2009, compared to $39.8 millionin 2008.  Net charge-offs for 2009totaled $73.5 million, compared to $17.0 million for 2008.  Nonperforming assets also increased to $104.5million at the end of 2009, from $47.0 million at the end of 2008.  The Bank’s ratio of allowance for loan andcredit losses to total loans ended the year at 4.23%, the highest ratio theBank has had at the end of a year in its history, and the allowance exceeds 97%of nonperforming loans. The segment also realized a goodwill impairment chargeof $15.4 million.

 

·                  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.  TheCompany’s land acquisition and development portfolio represented 8.6% of totalloans, but accounted for approximately 61% of the provision for loan losses and59% of the gross charge-offs.

 

·                  Investment Banking lost $0.16 per diluted share in2009, down from a $0.01 loss in 2008. Mergers and acquisition activity wasmuted in 2009 due to the adverse impact of severe macro economicconditions.  The segment also realized agoodwill impairment charge of $5.3 million.

 

·                  Investment Advisory and Trust lost $0.23 per dilutedshare in 2009, down from a loss of $0.01 in 2008.  While the major market indices rose during2009, the market growth did not fully recapture the losses realized in2008.  The decline in average marketvalues in 2009 compared to 2008 continued to pressure top line revenue.  The segment also realized a goodwillimpairment charge of $6.5 million.

 

·                  Insurance lost $0.62 per diluted share in 2009, down from acontribution of $0.01 in 2008.  Thesegment was adversely impacted by a decrease in wealth transfer cases, asclients conserved cash reserves due to the recession.  The Company’s P&C revenues are generatedas a 

 

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percentage of its client’s insurance premiums.  As client payrolls, revenues and business assetshave shrunk due to economic conditions, premiums have also decreased.  Thus, the Company has realized lower revenueson a large part of its existing client base. The segment also realized a goodwill impairment charge of $19.0 million.

 

·                  Corporate Support and Other lost $0.33per diluted share in 2009, down from a loss of $0.22 in 2008.  The increase in the net loss per share wasprimarily due to the inclusion of the preferred stock dividends for a full yearin 2009.  The preferred stock wasoutstanding for less than a month in 2008. In addition, the segment recorded $2.4 million in provision for loanloss expense for non-performing assets transferred from the commercial bank.

 

·                  During the third quarter of 2009, the Company successfully completed acommon equity offering of $55.8 million, net of expenses.

 

·                  The Company recognized losses of $5.6million in 2009 on valuation adjustments of other real estate owned andother-than-temporary impairments on investments.

 

·                  The netinterest margin on a tax-equivalent basis was 4.38% compared to 4.08% in 2008.

 

·                  The Company’s total risk-based capital ratio increasedto 16.1% at the end of 2009 from 14.5% at the end of 2008.

 

**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-offs, 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.

 

·                  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 risk managementconsulting services to individuals and businesses in the AZ market.  The acquisition of BDA at the beginning of2008 positively impacted both top line revenue and net income for the segment.  The wealth transfer business is transactionalby nature and fluctuates based on the number of life insurance policies closedduring a year. During 2008, the segment nearly doubled the revenue on wealthtransfer cases from the amount recognized in 2007.  The wealth transfer business was negatively 

 

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impacted in 2007, when a higher-than-normal number ofcases were rejected in underwriting due to unforeseen medical issues. To alesser extent, the segment was also impacted by the overall reduction ininsurance premiums being 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.

 

·                  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.

 

**Bank.**The commercial bank segment, the cornerstone of ourfranchise, has been adversely impacted by the slowdown in the economy and thetightening in the credit markets over the past two years.  Loans fell by 12.3% and asset qualitysignificantly worsened during 2009.  Thenegative impact of asset quality not only effected the level of provision forloan losses, but also impacted net interest income as earning assets decreased.

 

**Fee-Based Business Lines.**The company’s fee-based business lines —investment banking, insurance, and investment advisory and trust — operated ata loss for 2009 on a combined basis.  Theimpairment of goodwill was the primary contributor to the combined netloss.  Our ratio of noninterest income tototal operating revenues also declined to 21% for 2009 compared to 27% in 2008.

 

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.

 

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 “Segment Results” discussed below and Note 19 to the Consolidated FinancialStatements.

 

**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 

 

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affect the reported amounts of assets, liabilities,revenues and expenses. In making those critical accounting estimates, we arerequired to make assumptions about matters that are highly uncertain at thetime of the estimate. Different estimates we could reasonably have used, orchanges in the assumptions that could occur, could have a material effect onour consolidated financial condition or consolidated results of operations.

 

**Allowance for Loan Losses**

 

The allowance for loan losses is a critical accountingpolicy that requires subjective estimates in the preparation of theConsolidated Financial Statements. The allowance for loan losses is evaluatedon a regular basis by management and is based upon management’s periodic reviewof the collectibilty of loans in light of historical experience, the nature andvolume of the loan portfolio, adverse situations that may affect the borrower’sability to repay, estimated value of any underlying collateral and prevailingeconomic conditions. This evaluation is inherently subjective as it requiresestimates that are susceptible to significant revision as more informationbecomes available.

 

We maintain a loan review program independent of thelending function that is designed to reduce and control risk in the lendingfunction. It includes the monitoring of lending activities with respect tounderwriting and processing new loans, preventing insider abuse, and timelyfollow-up and corrective action for loans showing signs of deterioration inquality. We also have a systematic process to evaluate individual loans andpools of loans within our loan portfolio. We maintain a loan grading systemwhereby each loan is assigned a grade between 1 and 8, with 1 representing thehighest quality credit, 7 representing a non-accrual loan where collection orliquidation in full is highly questionable and improbable, and 8 representing aloss that has been or will be charged-off. Grades are assigned based upon the degree of risk associated withrepayment of a loan in the normal course of business pursuant to the original terms.Loans above a certain dollar amount that are adversely graded are reported tothe Loan 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 Accounting StandardsCodification (ASC) Topic 310-10-35, *Receivables — SubsequentMeasurement*.

 

In determining the appropriate level of the allowancefor loan losses, we analyze the various components of the loan portfolio,including all significant credits, on an individual basis. When analyzing theadequacy, we segment the loan portfolio into components with similarcharacteristics, such as risk classification, past due status, type of loan,industry or collateral. Possible factors that may impact the allowance for loanlosses include, but are not limited to:

 

·                  Changes in lending policies and procedures, includingunderwriting standards as well as collection, charge-off and recoverypractices;

·                  Changes in national and local economic and businessconditions and developments, including the condition of various marketsegments;

·                  Changes in the nature and volume of the portfolio;

·                  Changes in the experience, ability, and depth oflending management and staff;

·                  Changes in the trend of the volume and severity ofpast-due and classified loans; and trends in the volume of non-accrual loans,troubled debt restructurings, and other loan modifications;

·                  The existence and effect of any concentrations ofcredit, and changes in the level of such concentrations; and

·                  The effect of external factors such as competition andlegal and regulatory requirements on the level of estimated credit losses inthe current portfolio.

 

Refer to the Analysis of Allowance For Loan and CreditLosses section under Financial Condition and Provision and Allowance for Loanand Credit Losses section under Results of Operations below for furtherdiscussion on management’s methodology.

 

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** **

**Other Real Estate owned**

 

Other Real Estate Owned (OREO) represents propertiesacquired through foreclosure or physical possession.  Write-downs to fair value at the time oftransfer to OREO is charged to allowance for loan losses.  Subsequent to foreclosure, we periodically evaluatethe value of OREO held for sale and record a valuation allowance for anysubsequent declines in fair value less selling costs.  Subsequent declines in value are charged tooperations.  Fair value is based on ourassessment of information available to us at the end of a reporting period anddepends upon a number of factors, including our historical experience, economicconditions, and issues specific to individual properties.  Our evaluation of these factors involvessubjective estimates and judgments that may change.

 

**Recoverability of Goodwill**

 

ASC Topic 350, Intangibles — *Goodwill and Other*(ASC 350), requires that we evaluate on an annual basis (or whenever eventsoccur which may indicate possible impairment) whether any portion of ourrecorded goodwill is impaired. The recoverability of goodwill is a criticalaccounting policy that requires subjective estimates in the preparation of theconsolidated financial statements. Goodwill impairment is determined using atwo-step process.  In the first step, the fair value of a reporting unitis compared to its carrying amount, including goodwill.  If the fair valueof the reporting unit exceeds its carrying amount, goodwill of the reportingunit is not considered impaired and it is not necessary to continue to step twoof the impairment process. If the fair value of the reporting unit is less thanthe carrying 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 computed as a residual value afterallocating the fair value of the reporting unit to its assets andliabilities  We estimate the fair value of our reporting units usingmarket multiples of comparable entities, including recent transactions, or acombination of market multiples and a discounted cash flow methodology.

 

Determining the fairvalue of a reporting unit requires a high degree of subjective managementassumption. Discounted cash flow valuation models utilize variables such asrevenue growth rates, expense trends, discount rates and terminal values. Basedupon an evaluation of key data and market factors, management selects from arange the specific variables to be incorporated into the valuation model.

 

We conducted interimevaluations of our reporting units at March 31, 2009 and September 30,2009 due to triggering events in those quarters.  As discussed in Note 6to the Consolidated Financial Statements, the estimated fair value of allreporting units was less than their carrying values and goodwill impairment wasdeemed to exist.  A goodwill impairment of $46.2 million was recorded in2009.

 

**Deferred Taxes**

 

The Company uses theasset and liability method of accounting for income taxes.  Underthis method, deferred tax assets and liabilities are recognized for the futuretax consequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases.  Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled.  Ifcurrent available information raises doubt as to the realization of thedeferred tax assets, a valuation allowance may be established.  Weconsider the determination of this valuation allowance to be a criticalaccounting policy because of the need to exercise significant judgment inevaluating the amount and timing of recognition of deferred tax liabilities andassets, including projections of future taxable income.  Thesejudgments and estimates are reviewed on a continual basis as regulatory andbusiness factors change.  A valuation allowance for deferred taxassets may be required if the amounts of taxes recoverable through loss carrybacks decline, or if we project lower levels of future taxableincome.  Such a valuation allowance would be established through acharge to income tax expense that would adversely affect our operating results.

 

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** **

**Share-based Payments**

 

On January 1, 2006,we adopted guidance now included in ASC Topic 718, *Compensation— Stock Compensation* (ASC 718), (originally issued as SFAS No. 123(R),*Share-Based Payment*), using the modifiedprospective method. Under this method, compensation cost is recognized for (1) allawards granted after the required effective date and to awards modified,cancelled or repurchased after that date and (2) the portion of priorawards for which the requisite service has not yet been rendered, based on thegrant-date fair value of those awards calculated for pro forma disclosuresunder SFAS No. 123, *Accounting for Stock BasedCompensation*(SFAS 123). Prior to the adoption of the guidance nowincluded in ASC 718, we applied the intrinsic-value method for our stock-basedcompensation plans in accordance with Accounting Principles Board Opinion No. 25(APB 25) *Accounting for Stock Issued to Employees*,which was allowed by SFAS 123 as an alternative to the fair value methodrecommended by SFAS 123.

 

ASC 718 requires that thecash retained as a result of the tax deductibility of employee share-basedawards be presented as a component of cash flows from financing activities inthe consolidated statement of cash flows.

 

Under ASC 718, we use theBlack-Scholes option valuation model to determine the fair value of our stockoptions as discussed in Note 14 to the Consolidated Financial Statements. TheBlack-Scholes fair value model includes various assumptions, including theexpected volatility, expected life and expected dividend rate of the options.In addition, the Company is required to estimate the amount of options issuedthat are expected to be forfeited. These assumptions reflect our bestestimates, but they involve inherent uncertainties based on market conditionsgenerally outside of our control. As a result, if other assumptions had beenused, stock-based compensation expense, as calculated and recorded under ASC718, could have been materially impacted. Furthermore, if we use differentassumptions in future periods, stock-based compensation expense could bematerially impacted in future periods.

 

**FairValue**

 

The Company has adoptedASC Topic 820, *Fair Value Measurements and Disclosures*(ASC 820) (originally issued as SFAS No. 157, *Fair ValueMeasurements*), as it applies to financial assets and liabilitieseffective January 1, 2008.  ASC 820 defines fair value,establishes a framework for measuring fair value under generally acceptedaccounting principles and enhances disclosures about fair value measurements.Fair value is defined under ASC 820 as the exchange price that would bereceived for an asset or paid to transfer a liability (an exit price) in theprincipal or most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date.

 

As a basis for considering market participant assumptions in fair valuemeasurements, ASC 820 establishes a fair value hierarchy that distinguishesbetween market participant assumptions based on market data obtained fromsources independent of the reporting entity (observable inputs that areclassified within Levels 1 and 2 of the hierarchy) and the reporting entity’sown assumptions about market participant assumptions (unobservable inputsclassified within Level 3 of the hierarchy). Fair value may be used on arecurring basis for certain assets and liabilities such as available for salesecurities and derivatives in which fair value is the primary basis ofaccounting.  Similarly, fair value may beused on a nonrecurring basis to evaluate certain assets or liabilities such asimpaired loans.  Depending on the natureof the asset or liability, the Company uses various valuation techniques andassumptions in accordance with ASC 820 to determine the instrument’s fairvalue.  At December 31, 2009, $536.9million of total assets, consisting of $529.2 million in available for salesecurities and $7.7 million in derivative instruments, represented assetsrecorded at fair value on a recurring basis. At December 31, 2009, $3.7 million of total liabilities representedderivative instruments recorded at fair value on a recurring basis.  Assets recorded at fair value on anonrecurring basis consisting of impaired loans represented $64.8 million oftotal assets.  Certain private label MBSvalued using broker-dealer quotes based on proprietary broker models, which areconsidered by the Company an unobservable input (Level 3), totaled $2.4 millionof total assets at December 31, 2009. The Company recognized $1.3 million in other-than-temporary impairmentson the private label MBS for the year-ended December 31, 2009.  For additional 

 

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information on the fair value of certain financial assets and liabilitiessee Note 18 to the Consolidated Financial Statements.

 

We also have otherpolicies that we consider to be significant accounting policies; however, thesepolicies, which are disclosed in Note 1 of Notes to Consolidated FinancialStatements, do not meet the definition of critical accounting policies becausethey do not generally require us to make estimates or judgments that aredifficult or subjective.

 

**Recent Accounting Pronouncements**

 

*Accounting Standards Codification*. The Financial Accounting StandardsBoard’s (FASB) Accounting Standards Codification became effective on July 1,2009.  At that date, the ASC became FASB’sofficial source of authoritative U.S. generally accepted accounting principles(GAAP) applicable to all public and non-public non-governmental entities,superseding existing guidance issued by the FASB, the American Institute ofCertified Public Accountants (AICPA), the Emerging Issues Task Force (EITF) andother related literature.  The FASB alsoissues Accounting Standards Updates.  AnAccounting Standards Update (ASU) is not authoritative, but communicatesamendments to the ASC. An ASU also provides information to help a user of GAAPunderstand how and why GAAP is changing and when the changes will be effective.

 

Effective January 1, 2009, the Company adopted guidance(originally issued as SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements — An Amendment of ARB No. 51*)amending existing GAAP to establish accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. The adopted guidance, now included in ASC Topic 810, *Consolidation* (ASC 810), clarifies that a noncontrollinginterest in a subsidiary is an ownership interest in the consolidated entityand should be reported as equity on the financial statements. ASC 810 requiresconsolidated net income to be reported at amounts that include the amountsattributable to both the parent and the noncontrolling interest. Furthermore,disclosure of the amounts of consolidated net income attributable to the parentand to the noncontrolling interest is required on the face of the financialstatements. Upon adoption, the Company reclassified noncontrolling intereststotaling $2.0 million from “Accrued interest and other liabilities” on theconsolidated balance sheets to noncontrolling interest within equity.  Prior balances have also been retrospectivelyapplied to conform to the current year presentation, as follows:

 
| ** **                                 | ** ** | ** **                            | ** ** | **As reported at**         | ** ** | **As**       | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|--------------|------------|
| **(in  thousands)**                        | ** ** | ** **                            | ** ** | **December 31, 2008** | ** ** | **adjusted** | ** ** |
| Accrued  interest and other liabilities    |       | Consolidated balance  sheet           |       | $                          | 23,454     |         | $          | 21,469 |   |
| Total  equity                              |       | Consolidated balance  sheet           |       | 252,099                    |       | 254,084      |       |
| Total  noninterest income                  |       | Consolidated statement  of operations |       | 35,399                     |       | 35,778       |       |
| Net  income before noncontrolling interest |       | Consolidated statement  of cash flows |       | 1,328                      |       | 1,707        |       |
| Other  operating activities, net           |       | Consolidated statement  of cash flows |       | (901                       | )          | (1,280       | )          |
|                                            |            |                                       |            |                            |            |              |            |  |  |

 
| ** **                                 | ** ** | ** **                            | ** ** | **As reported at**    | ** ** | **As**       | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|-----------------------|------------|--------------|------------|
| **(in  thousands)**                        | ** ** | ** **                            | ** ** | **December 31, 2007** | ** ** | **adjusted** | ** ** |
| Accrued  interest and other liabilities    |       | Consolidated balance  sheet           |       | $                     | 21,107     |         | $          | 19,444 |   |
| Total  equity                              |       | Consolidated balance  sheet           |       | 189,270               |       | 190,933      |       |
| Total  noninterest income                  |       | Consolidated statement  of operations |       | 28,289                |       | 28,611       |       |
| Net  income before noncontrolling interest |       | Consolidated statement  of cash flows |       | 23,024                |       | 23,346       |       |
| Other  operating activities, net           |       | Consolidated statement  of cash flows |       | (973                  | )          | (1,295       | )          |
|                                            |            |                                       |            |                       |            |              |            |  |  |

 

Effective January 1, 2009, the Company adopted guidance(originally issued as SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133*)which enhances the required disclosures under ASC Topic 815, *Derivative and Hedging*(ASC 815), in order to provide theinvesting community additional transparency in an entity’s financial statementsand to more adequately disclose the impact investments in derivativeinstruments and use of hedging have on the financial position, operatingresults and cash flows. There was no impact to the

 

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consolidated financial statements upon adoption.  For additional disclosures pursuant to ASC815 see Note 10 - Derivatives.

 

Effective January 1, 2009, the Company adoptednew authoritative accounting guidance (originally issued as FASB Staff PositionEITF 03-6-1) under ASC 260, which provides that nonvested share-based paymentawards containing nonforfeitable rights to dividends (whether paid or unpaid)are participating securities and will be included in the computation ofearnings per share pursuant to the two-class method. The Company determinedthat its outstanding nonvested stock awards are participating securities.Accordingly, effective January 1, 2009, earnings per common share iscomputed using the two-class method prescribed under ASC 260.  Earnings per share for 2008 did not changedue to the adoption of the guidance and there were no participating securitiesoutstanding during the year ended December 31, 2007.  See Note 13 - Earnings (Loss) per CommonShare for additional information.

 

Effective January 1,2009, the Company adopted new authoritative accounting guidance (originallyissued as FASB Staff Position EITF 99-20-1) under ASC Topic 325, *Investments—Other* (ASC 325) amending the existing impairmentguidance to achieve more consistent determination of whether an other thantemporary impairment (OTTI) has occurred. The guidance emphasizes the objective of an OTTI assessment and therelated disclosure requirements in ASC Topic 320, *Investments—Debtand Equity Securities*(ASC 320). The adoption of this guidance didnot have a material impact on the Company’s consolidated financial statements.

 

Effective July 1,2009, the Company adopted new authoritative accounting guidance (originallyissued as FSP FAS 157-4) on estimating fair value when the volume and level ofactivity for the asset or liability have significantly decreased and requiresdisclosure of a change in valuation technique. The adoption of the guidance, now included in ASC 820, did not have amaterial impact on the Company’s consolidated financial statements.  See Note 18 - Fair Value Measurements, foradditional information.

 

In April 2009, theFASB issued guidance (originally issued as FSP FAS 115-2 and FAS 124-2, *Recognition and Presentation of Other-Than Temporary Impairments*)amending existing GAAP relating to OTTI for debt securities to improvepresentation and disclosure of OTTI on debt and equity securities in thefinancial statements.  Existingrecognition and measurement guidance related to OTTI of equity securities isnot amended by this guidance but rather amends the existing requirement thatthe entity’s management assert it has both the intent and ability to hold animpaired security until recovery; requires that an entity recognize noncreditlosses on held-to-maturity debt securities in other comprehensive income andamortize the amount over the remaining life of the security in a prospectivemanner by offsetting the recorded value of the asset unless the security issubsequently sold or there are additional credit losses; and requires an entityto present the total OTTI in the statement of earnings with an offset for theamount recognized in other comprehensive income.  Upon adoption, an entity is required torecord a cumulative effect adjustment as of the beginning of the period ofadoption to reclassify the noncredit component of a previously recognized OTTIfrom retained earnings to accumulated other comprehensive income if the entitydoes not intend to sell the security and it is not more likely than not thatthe entity will be required to sell the security before recovery.  The adoption of the guidance, now included inASC 320, did not have a material impact on the Company’s consolidated financialstatements.  See Note 3 — Investments,for additional information.

 

In April 2009, theFASB issued guidance (originally issued as FSP FAS 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Statements*)amending existing GAAP in ASC Topic 825, *Financial Instruments,*to require disclosures about fair value of financial instruments for interimreporting periods of publicly traded companies as well as in annual financialstatements.  The guidance also requiresthose disclosures in summarized financial information at interim reportingperiods.  The adoption of the guidancedid not have an impact on the Company’s consolidated financial statements.  See Note 18 - Fair Value Measurements, foradditional information.

 

InMay 2009, the FASB issued guidance (originally issued as SFAS No. 165,Subsequent Events) to establish general standards of accounting for anddisclosing events that occur after the balance sheet date, but prior to theissuance of financial statements. The Statement provides guidance on when

 

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financialstatements should be adjusted for subsequent events and requires companies todisclose subsequent events and the date through which subsequent events havebeen evaluated. The Statement is effective for interim and annual periodsending after June 15, 2009.  The adoption of this Statement, nowincluded in ASC Topic 855, *Subsequent Events*,did not have a material impact on the Company’s consolidated financialstatements.  For the annual period ending on December 31, 2009,subsequent events were evaluated through February 19, 2010 the date thefinancial statements were issued.

 

In August 2009, FASBissued ASU No. 2009-05, *Fair Value Measurementsand Disclosures (Topic 820) — Measuring Liabilities at Fair Value*(ASU2009-05).  The amendments in ASU 2009-05were effective as of the beginning of each reporting entity’s first reportingperiod (including interim periods) that begins after August 2009.  ASU 2009-05 provides clarification that incircumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using certain techniques. ASU 2009-05 also clarifies that when estimatingthe fair value of a liability, a reporting entity is not required to include aseparate input or adjustment to other inputs relating to the existence of arestriction that prevents the transfer of a liability. ASU 2009-05 alsoclarifies that both a quoted price in an active market for the identicalliability at the measurement date and the quoted price for the identicalliability when traded as an asset in an active market when no adjustments tothe quoted price of the asset are required are Level 1 fair value measurements.The adoption of ASU 2009-05 did not have an impact on the Company’sconsolidated financial statements.  SeeNote 18 - Fair Value Measurements, for additional information.

 

In December 2009,the FASB issued ASU No. 2009-16, *Transfers and Servicing(Topic 860) — Accounting for Transfers of Financial Assets* (ASU2009-16).  The amendments in ASU 2009-16are the result of SFAS No. 166, *Accounting for Transfersof Financial Assets, an amendment of FASB Statement No. 140,*originallyissued on June 12, 2009.* *ASU 2009-16 communicates thatupdates to ASC 860 will require additional information about transfers offinancial assets, including securitization transactions, and where entitiescontinue to have exposure to risks relating to transferred financialassets.  The amendments change requirements for derecognizing financialassets, enhance disclosure requirements and eliminate the ‘qualifyingspecial-purpose entity.’   Furthermore, the term ‘participatinginterest’ is defined to establish specific conditions for reporting a transferof a portion of a financial asset as a sale.  The amendments requiretransferred assets and liabilities incurred to be recognized and measured atfair value.  The amendments are effective as of the beginning of eachreporting entity’s first annual reporting period that begins after November 15,2009, for interim periods within that first annual reporting period and forinterim and annual reporting periods thereafter.  Early application is notpermitted.  The Company is currently evaluating the effect, if any, theamendments to ASC 860 will have on its consolidated financial statements.

 

In December 2009,the FASB issued ASU No. 2009-17, *Consolidations (Topic 810)- Improvements to Financial Reporting by Enterprises Involved with VariableInterest Entities* (ASU 2009-17). The amendments in ASA 2009-17 are the result of SFAS No. 167, *Amendments to FASB Interpretation No. 46(R),*originallyissued on June 12, 2009.* *ASU 2009-17 communicates thatupdates to ASC 810 changes how a reporting entity determines an entity that isinadequately capitalized or is not controlled through voting power or similarrights should be consolidated.  ASC 810 willrequire the performance of an analysis to determine whether the reportingentity’s variable interest or interests give it a controlling financialinterest in a variable interest entity. ASC 810 identifies a primary beneficiary of a variable interest ashaving both the power to direct activities of a variable interest entity thatmost significantly impact the entity’s economic performance and the obligationto absorb losses of the entity that could potentially be significant to thevariable interest entity or the right to receive benefits from the entity thatcould potentially be significant to the variable interest entity.  ASC 810 will require enhanced disclosuresthat will present users of financial statements with more transparentinformation about the reporting entity’s involvement in a variable interestentity.  The amendments to ASC 810 areeffective as of the beginning of each reporting entity’s first annual reportingperiod that begins after November 15, 2009, for interim periods withinthat first annual reporting period, and for interim and annual reportingperiods thereafter.  Early application isnot permitted.  The Company is currentlyevaluating the impact, if any, the amendments to ASC 810 will have on itsconsolidated financial statements.

 

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In January 2010, theFASB issued ASU No. 2010-06, *Fair Value Measurementsand Disclosures* (ASU 2010-06), which amends ASC 820, adding newrequirements for disclosures for Levels 1 and 2, separate disclosures ofpurchases, sales, issuances, and settlements relating to Level 3 measurementsand clarification of existing fair value disclosures.  ASU 2010-06 is effectivefor interim and annual periods beginning after December 15, 2009, exceptfor the requirement to provide Level 3 activity of purchases, sales, issuances,and settlements on a gross basis, which will be effective for fiscal yearsbeginning after December 15, 2010.  The Company is currentlyevaluating the impact, if any, ASU 2010-06 will have on its consolidatedfinancial statements.

 

**FinancialCondition**

 

The financial conditionof the Company was impacted in 2008 by the acquisition of BDA.  The acquisition was accounted for as apurchase and the assets and liabilities and results of operations of theacquired entity are included in the Company’s consolidated balance sheet andconsolidated statement of operations at and for the year ended December 31,2008, and thereafter.

 

***LendingActivities***

 

**General**. We provide a broad range of commercial and retaillending services, including commercial loans, commercial and residential realestate construction loans, commercial and residential real estate mortgageloans, consumer loans, revolving lines of credit, and equipment leasefinancing. Our primary lending focus is commercial and real estate lending tosmall and medium-sized businesses with annual sales of $5.0 million to $75.0million, and businesses and individuals with borrowing requirements of $250,000to $15.0 million. At December 31, 2009, substantially all of ouroutstanding loans were to customers within Colorado and Arizona. Interest ratescharged on loans vary with the degree of risk, maturity, underwriting andservicing costs, principal amount, and extent of other banking relationshipswith the customer.  Interest rates arefurther subject to competitive pressures, money market rates, availability offunds, and government regulations. See “Net Interest Income” for an analysis ofthe interest rates on our loans.

 

**Credit Procedures and Review**. We address credit risk through internalcredit policies and procedures, including underwriting criteria, officer andcustomer lending limits, a multi-layered loan approval process for largerloans, periodic document examination, justification for any exceptions tocredit policies, loan review and concentration monitoring. In response tocurrent conditions and heightened default risk due to depressed real estate andcollateral values, Management expanded the resources of the credit and loanreview departments with the objective to identify problem credit situationsearlier.  In addition, we provide ongoingloan officer training and review. We have a continuous loan review processdesigned to promote early identification of credit quality problems, assistedby a dedicated Senior Credit Officer in each geographic market. All loanofficers are charged with the responsibility of reviewing, at least on amonthly basis, all past due loans in their respective portfolios. In addition,each of the loan officers establishes a watch list of loans to be reviewed bythe boards****of directors of the Bank and CoBiz.The loan portfolio is also monitored regularly by a loan review department thatreports to the Chief Operations Officer of the Company and submits reportsdirectly to the audit committee of the board of directors and the creditadministration department.

 

In response to the current credit cycle, decliningasset quality and increasing foreclosures, the Company made a significantinvestment in establishing a Special Assets Group comprised of seasoned andtalented specialists to efficiently manage nonperforming assets.  Management believes having the specializedfunction will enable our bankers to continue to pursue new lending and depositrelationships and immediately address the Company’s troubled assets.

 

**Composition of Loan Portfolio***.*The following table sets forth the composition of ourloan portfolio at the dates indicated.

 

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| ** **                       | ** ** | **At  December 31,** | ** ** |
|----------------------------------|------------|---------------------------|------------|
| ** **                       | ** ** | **2009**                  | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **(in thousands)**               | ** ** | **Amount**                | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Commercial                       |       | $                         | 559,612    |   | 32.8 |   | $ | 648,968 |   | 32.6 |   | $ | 576,959 |   | 31.6 |   | $ | 482,309 |   | 31.6 |   | $ | 421,497 |   | 32.0 |   |
| Real  estate - mortgage          |       | 935,510                   |       | 54.8 |   | 1,017,444 |   | 51.2 |   | 874,226 |   | 47.9 |   | 698,951 |   | 45.8 |   | 682,503 |   | 51.9 |   |
| Real  estate – construction |       | 193,735                   |       | 11.3 |   | 266,928 |   | 13.4 |   | 309,568 |   | 17.0 |   | 292,952 |   | 19.2 |   | 150,680 |   | 11.5 |   |
| Consumer                         |       | 76,103                    |       | 4.5 |   | 86,701 |   | 4.4 |   | 71,422 |   | 3.9 |   | 57,990 |   | 3.8 |   | 65,932 |   | 5.0 |   |
| Other                            |       | 15,906                    |       | 0.9 |   | 11,212 |   | 0.6 |   | 14,151 |   | 0.7 |   | 12,258 |   | 0.8 |   | 12,056 |   | 0.9 |   |
| Total  loans                     |       | $                         | 1,780,866  |   | 104.3 |   | $ | 2,031,253 |   | 102.2 |   | $ | 1,846,326 |   | 101.1 |   | $ | 1,544,460 |   | 101.2 |   | $ | 1,332,668 |   | 101.3 |   |
| Less  allowance for loan losses  |       | (75,116                   | )          | (4.4 | ) | (42,851 | ) | (2.2 | ) | (20,043 | ) | (1.1 | ) | (17,871 | ) | (1.2 | ) | (16,906 | ) | (1.3 | ) |
| Net  loans held for investment   |       | $                         | 1,705,750  |   | 99.9 |   | $ | 1,988,402 |   | 100.0 |   | $ | 1,826,283 |   | 100.0 |   | $ | 1,526,589 |   | 100.0 |   | $ | 1,315,762 |   | 100.0 |   |
| Loans  held for sale             |       | 1,820                     |       | 0.1 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Net  loans                       |       | $                         | 1,707,570  |   | 100.0 |   | $ | 1,988,402 |   | 100.0 |   | $ | 1,826,283 |   | 100.0 |   | $ | 1,526,589 |   | 100.0 |   | $ | 1,315,762 |   | 100.0 |   |

 

Gross loans decreased by $250.4 million to $1.78billion at December 31, 2009. The decline was driven by customer paydownsin each major category of the portfolio outpacing new loan demand and theincreased level of charge-offs.  Loangeneration slowed in 2009 as businesses de-leveraged their balance sheets andaccumulated cash reserves in response to economic factors.  The decrease in total loans was equallyshared between the Colorado and Arizona markets.

 

Gross loans increased by $184.9 million in 2008.  Growth in the loan portfolio consisted ofapproximately $128.7 million and $56.2 million loans generated in our Coloradoand Arizona markets, respectively.  Theincrease in the loan portfolio in 2008 was primarily due to growth of ourCommercial and Industrial Loans (C&I) and Term Commercial Mortgages.

 

Under state law, the aggregate amount of loans we canmake to one borrower is generally limited to 15% of our unimpaired capital,surplus, undivided profits and allowance for loan losses. At December 31,2009, our individual legal lending limit was $41.0 million. The Bank’s Board ofDirectors has established an internal lending limit of $15.0 million for normalcredit extensions and $20.0 million for the highest rated credit types. Toaccommodate customers whose financing needs exceed our internal lending limitsand to address portfolio concentration concerns, we sell loan participations tooutside participants. At December 31, 2009 and 2008, the outstandingbalance of loan participations sold by us was $30.8 million and $53.7 million, respectively.At December 31, 2009 and 2008, we had loan participations purchased fromother banks totaling $37.3 million and $38.9 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.

 

Dueto the nature of our business as a commercial banking institution, our lendingrelationships are typically larger than those of a retail bank. The followingtable describes the number of relationships and the percentage of the dollarvalue of the loan portfolio by the size of the credit relationship. Themajority of the loan relationships exceeding $3.0 million are in our realestate and commercial portfolios.  At December 31,2009, 2008, and 2007, there were no concentrations of loans related to anysingle industry in excess of 10% of total loans. However, the Company may besubject to additional regulatory supervisory oversight due to its concentrationin commercial real estate lending. Pursuant to interagency guidance issued by the Federal Reserve and otherfederal banking agencies, supervisory criteria were put in place to definecommercial real estate concentrations as:

 

·                  Construction,land development and other land loans that represent 100% or more of totalrisk-based capital; or

·                  Commercialreal estate loans (as defined in the guidance) that represent 300% or more oftotal risk-based capital and the real estate portfolio has increased by morethan 50% or more during the prior 36 months.

 

AtDecember 31, 2009 and 2008, the Company was considered to have acommercial real estate concentration.

 

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| ** **                    | ** ** | **2009**                     | ** ** | **2008**                 | ** ** | **2007**                     | ** ** |
|-------------------------------|------------|------------------------------|------------|--------------------------|------------|------------------------------|------------|
| **Credit  Relationships**     | ** ** | **Number of  Relationships** | ** ** | **% of  Loan Portfolio** | ** ** | **Number of  Relationships** | ** ** | **% of  Loan Portfolio** | ** ** | **Number of  Relationships** | ** ** | **% of  Loan Portfolio** | ** ** |
| Greater  than $6.0 million    |       | 28                           |       | 13.6                     | %          | 32                           |       | 13.7 | % | 26 |   | 11.3 | % |
| $3.0  million to $6.0 million |       | 85                           |       | 19.6                     | %          | 101                          |       | 20.7 | % | 95 |   | 21.0 | % |
| $1.0  million to $3.0 million |       | 347                          |       | 33.4                     | %          | 385                          |       | 33.2 | % | 377 |   | 34.1 | % |
| $0.5  million to $1.0 million |       | 374                          |       | 14.7                     | %          | 427                          |       | 14.8 | % | 422 |   | 15.8 | % |
| Less  than $0.5 million       |       | 4,565                        |       | 18.7                     | %          | 4,701                        |       | 17.6 | % | 4,889 |   | 17.8 | % |
|                          |       | 5,399                        |       | 100.0                    | %          | 5,646                        |       | 100.0 | % | 5,809 |   | 100.0 | % |

 

In the ordinary course of business, we enter intovarious types of transactions that include commitments to extend credit. Weapply the same credit standards to these commitments as we apply to our otherlending activities and have included these commitments in our lending riskevaluations. Our exposure to credit loss under commitments to extend credit isrepresented by the amount of these commitments. See Note 15 to the ConsolidatedFinancial Statements for additional discussion on our commitments.

 

**Commercial Loans**. Commercial lending consists of loans tosmall and medium-sized businesses in a wide variety of industries. The Bank’sareas of emphasis in commercial lending include, but are not limited to, loansto wholesalers, manufacturers, construction and business services companies. Weprovide a broad range of commercial loans, including lines of credit forworking capital purposes and term loans for the acquisition of equipment andother purposes. Commercial loans are generally collateralized by inventory,accounts receivable, equipment, real estate and other commercial assets, andmay be supported by other credit enhancements such as personal guarantees.However, where warranted by the overall financial condition of the borrower,loans may be unsecured and based on the cash flow of the business. Terms ofcommercial loans generally range from one to five years, and the majority ofsuch loans have floating interest rates.

 

The following tablesummarizes the Company’s commercial loan portfolio, segregated by the NorthAmerican Industry Classification System (NAICS).

 
| ** **                                         | ** ** | **2009**    | ** ** | **2008**                                           | ** ** | **2007**    | ** ** |
|----------------------------------------------------|------------|-------------|------------|----------------------------------------------------|------------|-------------|------------|
| **Commercial  Loans by NAICS Code (in thousands)** | ** ** | **Balance** | ** ** | **% of Commercial  Loan Portfolio** | ** ** | **Balance** | ** ** | **% of Commercial  Loan Portfolio** | ** ** | **Balance** | ** ** | **% of Commercial  Loan Portfolio** | ** ** |
| Manufacturing                                      |       | $           | 76,832     |                                               | 13.7       | %           | $          | 98,486 |   | 15.2 | % | $ | 73,627 |   | 12.8 | % |
| Real  estate                                       |       | 79,454      |       | 14.2                                               | %          | 85,917      |       | 13.3 | % | 87,849 |   | 15.2 | % |
| Finance  and Insurance                             |       | 78,302      |       | 14.0                                               | %          | 84,028      |       | 13.0 | % | 65,537 |   | 11.4 | % |
| Wholesale  trade                                   |       | 54,175      |       | 9.7                                                | %          | 73,600      |       | 11.3 | % | 64,916 |   | 11.3 | % |
| Health  Care                                       |       | 63,508      |       | 11.4                                               | %          | 69,060      |       | 10.6 | % | 64,385 |   | 11.2 | % |
| Construction                                       |       | 53,240      |       | 9.5                                                | %          | 60,500      |       | 9.3 | % | 50,830 |   | 8.8 | % |
| Retail  trade                                      |       | 33,687      |       | 6.0                                                | %          | 33,933      |       | 5.2 | % | 34,102 |   | 5.9 | % |
| All  other                                         |       | 120,414     |       | 21.5                                               | %          | 143,444     |       | 22.1 | % | 135,713 |   | 23.5 | % |
|                                               |       | $           | 559,612    |                                               | 100.0      | %           | $          | 648,968 |   | 100.0 | % | $ | 576,959 |   | 100.0 | % |

 

**Real Estate Mortgage Loans**. Real estate mortgage loans includevarious types of loans for which we hold real property as collateral. Wegenerally restrict commercial real estate lending activity to owner-occupiedproperties or to investor properties that are owned by customers with which wehave a current banking relationship. We make commercial real estate loans atboth fixed and floating interest rates, with maturities generally ranging fromfive to 20 years. The Bank’s underwriting standards generally require that acommercial real estate loan not exceed 75% of the appraised value of theproperty securing the loan. In addition, we originate Small BusinessAdministration 504 loans (SBA) on owner-occupied properties with maturities ofup to 25 years in which the SBA allows for financing of up to 90% of theproject cost and takes a security position that is subordinated to us, as wellas U.S. Department of Agriculture (USDA) Rural Development loans. At December 31,2009, less than 1% of our outstanding loans were guaranteed by the SBA andapproximately 1% were guaranteed by the USDA. We also originate residentialmortgage loans on a limited basis as an accommodation to our preferred customers.

 

The primary risks of realestate mortgage loans include the borrower’s inability to pay, materialdecreases in the value of the real estate that is being held as collateral andsignificant increases in interest rates,

 

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which may make the realestate mortgage loan unprofitable. Historically, we have not actively soughtresidential mortgage loans for our own portfolio, but rather refer such loansto other financial institutions. However, for those residential mortgage loansthat are extended, we attempt to apply conservative loan-to-value ratios andobtain personal guarantees and generally require a strong history of debtservicing capability and fully amortized terms of 20 years or less.  Real estate loans may be more adverselyaffected by conditions in the real estate markets or in the general economy.  The properties securing the Company’s realestate mortgage loan portfolio are located primarily in the states of Coloradoand Arizona.  At December 31, 2009and 2008, 57% of the Company’s outstanding real estate mortgage loans were inthe Colorado market.

 

The following tablesummarizes the Company’s real estate mortgage portfolio, segregated by propertytype.

** **
| ** **               | ** ** | **At December 31,** | ** ** |
|--------------------------|------------|--------------------------|------------|
| **Real  Estate by Type** | ** ** | **2009**                 | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(in  thousands)**      | ** ** | **Balance**              | ** ** | **%** | ** ** | **Balance** | ** ** | **%** | ** ** | **Balance** | ** ** | **%** | ** ** |
| Commercial  owner        |       | $                        | 418,115    |   | 44.7 |   | $ | 439,489 |   | 43.2 |   | $ | 383,126 |   | 43.8 |   |
| Commercial  investor     |       | 284,602                  |       | 30.4 |   | 286,977 |   | 28.2 |   | 230,111 |   | 26.3 |   |
| Residential  owner       |       | 43,707                   |       | 4.7 |   | 43,224 |   | 4.2 |   | 35,453 |   | 4.1 |   |
| Residential  investor    |       | 86,085                   |       | 9.2 |   | 100,572 |   | 9.9 |   | 79,386 |   | 9.1 |   |
| Land  acquisition        |       | 103,001                  |       | 11.0 |   | 147,182 |   | 14.5 |   | 146,150 |   | 16.7 |   |
|                     |       | $                        | 935,510    |   | 100.0 |   | $ | 1,017,444 |   | 100.0 |   | $ | 874,226 |   | 100.0 |   |

 

**Real Estate Construction Loans***.*We originate loans to finance construction projectsinvolving one- to four-family residences. We provide financing to residentialdevelopers that we believe have demonstrated a favorable record of accuratelyprojecting completion dates and budgeting expenses. We provide loans for theconstruction of both pre-sold projects and projects built prior to the locationof a specific buyer, although loans for projects built prior to theidentification of a specific buyer are provided on a more selective basis.Residential construction loans are due upon the sale of the completed projectand are generally collateralized by first liens on the real estate and havefloating interest rates. In addition, these loans are generally secured bypersonal guarantees to provide an additional source of repayment. We generallyrequire a permanent financing commitment or prequalification be in place beforewe make a residential construction loan. Moreover, we generally monitorconstruction draws monthly and inspect property to ensure that construction isprogressing as projected. Our underwriting standards generally require that theprincipal amount of a speculative loan be no more than 75% of the appraisedvalue of the completed construction project or 80% of pre-sold projects. Valuesare determined primarily by approved independent appraisers.  With the deep valuation declines in the realestate markets throughout 2008 and 2009, the Company has become very selectivein the extension of credit for new construction projects. The Company hasintentionally managed the construction portfolio down 27% in 2009 to $193.7million at December 31, 2009, from $266.9 million at December 31,2008.  During 2008, management succeededin shrinking the portfolio 14% from $309.6 million at December 31, 2007.

 

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 Company focused onreducing its exposure to land acquisition and development in 2009 due to thevaluation decrease in the residential real estate market.  The properties securing the Company’s realestate loan portfolio are generally located in the states of Arizona andColorado.  At 

 

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December 31, 2009,the majority (60%) of the Company’s real estate construction loans weregenerated in the Colorado market.

 

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

 
| ** **                | ** ** | **At December 31,** | ** ** |
|---------------------------|------------|--------------------------|------------|
| **Construction  by Type** | ** ** | **2009**                 | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(in  thousands)**       | ** ** | **Balance**              | ** ** | **%** | ** ** | **Balance** | ** ** | **%** | ** ** | **Balance** | ** ** | **%** | ** ** |
| Commercial  speculative   |       | $                        | 51,875     |   | 26.8 |   | $ | 41,789 |   | 15.7 |   | $ | 29,518 |   | 9.5 |   |
| Commercial  pre-leased    |       | 36,862                   |       | 19.0 |   | 62,960 |   | 23.6 |   | 58,419 |   | 18.9 |   |
| Residential  speculative  |       | 49,215                   |       | 25.4 |   | 73,947 |   | 27.7 |   | 87,104 |   | 28.2 |   |
| Residential  pre-sold     |       | 6,117                    |       | 3.2 |   | 13,468 |   | 5.0 |   | 44,040 |   | 14.2 |   |
| Land  development         |       | 49,666                   |       | 25.6 |   | 74,764 |   | 28.0 |   | 90,487 |   | 29.2 |   |
|                      |       | $                        | 193,735    |   | 100.0 |   | $ | 266,928 |   | 100.0 |   | $ | 309,568 |   | 100.0 |   |

 

**Consumer Loans***.*We provide a broad range of consumer loans tocustomers, including personal lines of credit, home equity loans and automobileloans. In order to improve customer service, continuity and customer retention,the same loan officer often services the banking relationships of both thebusiness and business owners or management.

 

***Nonperforming Assets***

 

Our nonperforming assets consist of nonaccrual loans,restructured loans, past due loans more than 90 days, Other Real Estate Ownedother repossessed assets. Nonaccrual loans are those loans for which theaccrual of interest has been discontinued. Impaired loans are defined as loansfor which, based on current information and events, it is probable that theCompany will be unable to collect the scheduled payments of principal orinterest when due according to the contractual terms of the loan agreement (allof which were on a non-accrual basis). The following table sets forthinformation with respect to these assets at the dates indicated.

 
| ** **                                                            | ** ** | **At December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------|------------|
| **(in  thousands)**                                                   | ** ** | **2009**                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Nonperforming  loans:                                                 |       |                     |       |   |   |   |   |   |   |   |   |
| Loans  90 days or more delinquent and still accruing interest         |       | $                        | 509        |   | $ | 1,292 |   | $ | 2,208 |   | $ | 990 |   | $ | — |   |
| Nonaccrual  loans                                                     |       |                     |       |   |   |   |   |   |   |   |   |
| Commercial                                                            |       | 12,696                   |       | 9,312 |   | 758 |   | 147 |   | 786 |   |
| Real  estate - mortgage                                               |       | 45,422                   |       | 13,616 |   | 84 |   | 103 |   | 121 |   |
| Real  estate - construction                                           |       | 17,075                   |       | 15,557 |   | 360 |   | 85 |   | — |   |
| Consumer  and other                                                   |       | 3,496                    |       | 1,301 |   | — |   | — |   | — |   |
| Total  nonaccrual loans                                               |       | 78,689                   |       | 39,786 |   | 1,202 |   | 335 |   | 907 |   |
| Total  nonperforming loans                                            |       | 79,198                   |       | 41,078 |   | 3,410 |   | 1,325 |   | 907 |   |
| OREO  and repossessed assets                                          |       | 25,318                   |       | 5,941 |   | 90 |   | — |   | — |   |
| Total  nonperforming assets                                           |       | $                        | 104,516    |   | $ | 47,019 |   | $ | 3,500 |   | $ | 1,325 |   | $ | 907 |   |
|                                                                  |       |                     |       |   |   |   |   |   |   |   |   |
| Allowance  for loan losses                                            |       | $                        | 75,116     |   | $ | 42,851 |   | $ | 20,043 |   | $ | 17,871 |   | $ | 16,906 |   |
| Allowance  for credit losses                                          |       | 155                      |       | 259 |   | 576 |   | 576 |   | — |   |
| Allowance  for loan and credit losses                                 |       | $                        | 75,271     |   | $ | 43,110 |   | $ | 20,619 |   | $ | 18,447 |   | $ | 16,906 |   |
| Ratio  of nonperforming assets to total assets                        |       | 4.24                     | %          | 1.75 | % | 0.15 | % | 0.06 | % | 0.05 | % |
| Ratio  of nonperforming loans to total loans                          |       | 4.44                     | %          | 2.02 | % | 0.18 | % | 0.09 | % | 0.07 | % |
| Ratio  of nonperforming loans and OREO to total loans and OREO        |       | 5.78                     | %          | 2.31 | % | 0.19 | % | 0.09 | % | 0.07 | % |
| Ratio  of allowance for loan and credit losses to total loans         |       | 4.23                     | %          | 2.12 | % | 1.12 | % | 1.19 | % | 1.27 | % |
| Ratio  of allowance for loan and credit losses to nonperforming loans |       | 97.28                    | %          | 104.95 | % | 604.69 | % | 1392.30 | % | 1863.95 | % |

 

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.

 

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When the issues relating to a nonaccrual loan arefinally resolved, there may ultimately be an actual write-down or charge-off ofthe principal balance of the loan, which may necessitate additional charges toearnings. Restructured loans are those for which concessions, including thereduction of interest rates below a rate otherwise available to the borrower,or the reduction of interest or principal, have been granted due to theborrower’s weakened financial condition. Interest on restructured loans isaccrued at the restructured rates when it is anticipated that no loss oforiginal principal will occur. Interest income that would have been recordedhad nonaccrual loans performed in accordance with their original contract termswas $1.8 million and $1.0 million for the years ended December 31, 2009and 2008, respectively.  The amount in2007 was not material.  OREO representsreal property taken by the Bank either through foreclosure or through a deed inlieu thereof from the borrower. Repossessed assets include vehicles and othercommercial assets acquired under agreements with delinquent borrowers.  Repossessed assets and OREO are carried atthe lesser of cost or fair market value, less selling costs.  See Note 18 to the Consolidated FinancialStatements for additional discussion on the valuation of OREO assets.

 

Nonperforming assets increased by $57.5 million in2009 to $104.5 million at December 31, 2009, from $47.0 million at December 31,2008.  The following table summarizesnonperforming assets by type and market.

 
| ** **                        | ** ** | **2009**     | ** ** | **2008**    | ** ** |
|-----------------------------------|------------|--------------|------------|-------------|------------|
| ** **                        | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** | **NPAs as  a % of** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **NPAs as  a % of** | ** ** |
| **(in thousands)**                | ** ** | **Colorado** | ** ** | **Arizona** | ** ** | **Total** | ** ** | **Loans and OREO** | ** ** | **Colorado** | ** ** | **Arizona** | ** ** | **Total** | ** ** | **Loans and OREO** | ** ** |
| Commercial                        |       | $            | 8,658      |        | $          | 4,537 |   | $ | 13,195 |   | 2.36 | % | $ | 8,428 |   | $ | 937 |   | $ | 9,365 |   | 1.44 | % |
| Term  real estate                 |       | 9,000        |       | 9,832       |       | 18,832 |   | 2.26 | % | 1,178 |   | 3,438 |   | 4,616 |   | 0.53 | % |
| Land  acquisition and development |       | 17,358       |       | 16,675      |       | 34,033 |   | 22.29 | % | 6,415 |   | 11,632 |   | 18,047 |   | 8.13 | % |
| Construction                      |       | 3,900        |       | 5,732       |       | 9,632 |   | 6.67 | % | 7,038 |   | 711 |   | 7,749 |   | 4.03 | % |
| Consumer                          |       | 905          |       | 252         |       | 1,157 |   | 1.52 | % | 221 |   | 1,080 |   | 1,301 |   | 1.50 | % |
| Other  loans                      |       | —       |       | 2,349       |       | 2,349 |   | 13.25 | % | — |   | — |   | — |   | — |   |
| OREO  and repossessed assets      |       | 15,169       |       | 10,149      |       | 25,318 |   | — |   | 114 |   | 5,827 |   | 5,941 |   | — |   |
| Nonperforming  assets             |       | $            | 54,990     |        | $          | 49,526 |   | $ | 104,516 |   | 5.78 | % | $ | 23,394 |   | $ | 23,625 |   | $ | 47,019 |   | 2.31 | % |

 

Included in nonperforming assets was $25.3 million ofOREO and other repossessed assets, comprised of 19 properties, the largest ofwhich has a fair value of $12.0 million. In addition to the nonperforming assets described above, the Company had199 customer relationships considered by management to be potential problemloans with outstanding principal of approximately $151.6 million. A potentialproblem loan is one as to which management has concerns about the borrower’sfuture performance 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.

 

**Analysis of Allowance for Loan and Credit 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 byadditional charges 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 these allowances,as extensions of credit underwritten through a comprehensive risk analysis,information on both the allowance for loan and credit losses positions ispresented in the following table.*

 

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| ** **                                                        | ** ** | **For the  year ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                                | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance of allowance for loan losses at beginning  of period      |       | $                                         | 42,851     |   | $ | 20,043 |   | $ | 17,871 |   | $ | 16,906 |   | $ | 14,674 |   |
| Charge-offs:                                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Commercial                                                        |       | 14,991                                    |       | 2,194 |   | 1,803 |   | 278 |   | 363 |   |
| Real estate - mortgage                                            |       | 38,685                                    |       | 427 |   | — |   | — |   | 246 |   |
| Real estate - construction                                        |       | 20,734                                    |       | 14,122 |   | — |   | — |   | — |   |
| Consumer                                                          |       | 2,081                                     |       | 364 |   | 30 |   | 34 |   | 99 |   |
| Other                                                             |       | 86                                        |       | 37 |   | 5 |   | 8 |   | — |   |
| Total charge-offs                                                 |       | 76,577                                    |       | 17,144 |   | 1,838 |   | 320 |   | 708 |   |
| Recoveries:                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Commercial                                                        |       | 1,989                                     |       | 42 |   | 56 |   | 487 |   | 104 |   |
| Real estate — mortgage                                       |       | 568                                       |       | 7 |   | — |   | 25 |   | 277 |   |
| Real estate - construction                                        |       | 414                                       |       | — |   | — |   | — |   | — |   |
| Consumer                                                          |       | 36                                        |       | 103 |   | 18 |   | 7 |   | 90 |   |
| Other                                                             |       | 20                                        |       | 4 |   | — |   | — |   | 4 |   |
| Total recoveries                                                  |       | 3,027                                     |       | 156 |   | 74 |   | 519 |   | 475 |   |
| Net (charge-offs) recoveries                                      |       | (73,550                                   | )          | (16,988 | ) | (1,764 | ) | 199 |   | (233 | ) |
| Provision for loan losses charged to operations                   |       | 105,815                                   |       | 39,796 |   | 3,936 |   | 766 |   | 2,465 |   |
| Balance of allowance for loan losses at end of  period            |       | $                                         | 75,116     |   | $ | 42,851 |   | $ | 20,043 |   | $ | 17,871 |   | $ | 16,906 |   |
|                                                              |       |                                      |       |   |   |   |   |   |   |   |   |
| Balance of allowance for credit losses at beginning  of period    |       | $                                         | 259        |   | $ | 576 |   | $ | 576 |   | $ | — |   | $ | — |   |
| Provision (credit) for credit losses charged to  operations       |       | (104                                      | )          | (317 | ) | — |   | 576 |   | — |   |
| Balance of allowance for credit losses at end of  period          |       | $                                         | 155        |   | $ | 259 |   | $ | 576 |   | $ | 576 |   | $ | — |   |
|                                                              |       |                                      |       |   |   |   |   |   |   |   |   |
| Total provision for loan and credit losses charged  to operations |       | $                                         | 105,711    |   | $ | 39,479 |   | $ | 3,936 |   | $ | 1,342 |   | $ | 2,465 |   |
|                                                              |       |                                      |       |   |   |   |   |   |   |   |   |
| Ratio of net charge-offs (recoveries) to average  loans           |       | 3.78                                      | %          | 0.87 | % | 0.11 | % | (0.01 | )% | 0.02 | % |
|                                                              |       |                                      |       |   |   |   |   |   |   |   |   |
| Average loans outstanding during the period                       |       | $                                         | 1,948,120  |   | $ | 1,944,728 |   | $ | 1,665,379 |   | $ | 1,446,964 |   | $ | 1,209,377 |   |

 

Additions to the allowances for loan and creditlosses, which are charged as expenses on our consolidated statements ofoperations, are made periodically to maintain the allowances at the appropriatelevel, based on our analysis of the potential risk in the loan and commitmentportfolios. Loans charged off, net of amounts recovered from previously chargedoff loans, reduce the allowance for loan losses. The amount of the allowance isa function of the levels of loans outstanding, the level of nonperformingloans, historical loan loss experience, amount of loan losses charged againstthe reserve during a given period and current economic conditions. Federalregulatory agencies, as part of their examination process, review our loans andallowance for loan and credit losses. We believe that our allowance for loanand credit losses is adequate to cover anticipated loan and credit losses.However, management may determine a need to increase the allowances for loanand credit losses, or regulators, when reviewing the Bank’s loan and commitmentportfolio in the future, may request the Bank increase such allowances. Eitherof these events could adversely affect our earnings. Further, there can be noassurance that actual loan and credit losses will not exceed the allowances forloan and credit losses.

 

The allowance for loan lossesconsists of three elements: (i) specific reserves determined in accordancewith *ASC Topic 310 — Receivables* (formerlyFAS No. 114, *Accounting by Creditorsfor Impairment of a Loan*) based on probable losses on specificloans; (ii) general reserves determined in accordance with guidance in *ASC Topic 450 — Contingencies* (formerly SFAS No. 5,*Accounting for Contingencies)*, based onhistorical loan loss experience adjusted for other qualitative risk factorsboth 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

 

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impaired are based on discountedexpected cash flows using the loan’s initial effective interest rate, theobservable market value of the loan or the fair value of the collateral forcertain collateral-dependent loans. The fair value of the collateral isdetermined in accordance withASC 820. Loans are considered to be impaired in accordance with theprovisions of ASC 310, when it is probable that all amounts due in accordancewith the contractual terms will not be collected. Factors contributing to thedetermination of specific reserves include the financial condition of theborrower, changes in the value of pledged collateral and general economicconditions.

 

***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 considered bymanagement that are likely to cause estimated credit losses associated with ourcurrent portfolio to differ from historical loss experience include:

 

·      Changes in national and local economic and businessconditions and developments;

·      Changes in lending policies and procedures, includingunderwriting standards and collection, charge-off, and recovery practices;

·      Changes in the nature and volume of the portfolio;

·      Changes in the experience, ability, and depth oflending management and staff;

·      Changes in the trend of the volume and severity ofpast due loans; and trends in the volume of non-accrual loans, troubled debtrestructurings, and other loan modifications;

·      Changes in the quality of the Bank’s loan reviewsystem and the degree of oversight by the Bank’s Board of Directors;

·      The existence and effect of any concentrations ofcredit, and changes in the level of such concentrations;

·      The impact of competition on loan structuring andpricing; and

·      The effect of external factors, such as legal andregulatory requirements, on the level of estimated credit losses in the Bank’scurrent portfolio.

 

The Company has aninternal loan review department that operates independent of the lendingfunction to challenge and corroborate the loan grading system and provideadditional analysis in determining the adequacy of the allowance for loanlosses.

 

In addition to theallocated reserve for graded loans, a portion of the allowance is determined bysegmenting the portfolio into product groupings with similar riskcharacteristics.  Part of thesegmentation involves assigning increased reserve factors to those lendingactivities deemed higher-risk such as leverage-financings, unsecured loans,certain loans lacking personal guarantees, land acquisition and developmentloans, and speculative real-estate loans. This supplemental portion of the allowance includes our judgmentalconsideration of any additional amounts necessary for subjective factors suchas economic uncertainties and excess concentration risks. Concentration risklimits have been established for, among other things, certain industryconcentrations, large balance and highly leveraged credit relationships thatexceed specified risk grades, and loans originated with policy exceptions.Management evaluates the degree of risk that each one of these components hason the quality of the loan portfolio on a quarterly basis. While managementutilizes its best judgment and information available, the ultimate adequacy ofthe allowance is dependent upon a variety of factors beyond the Company’scontrol, including the performance of our loan portfolio, the economy, changesin interest rates and the view of the regulatory authorities toward loanclassifications.

 

***UnallocatedReserves***. Theunallocated reserve, which is judgmentally determined, is maintained torecognize the imprecision in estimating and measuring loss when evaluatingreserves for individual loans

 

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or pools of loans.  Included in the unallocated reserve is amissed grade component that is intended to capture the inherent risk thatcertain loans may be assigned the incorrect loan grade.

 

The methodology used inthe periodic review of reserve adequacy, which is performed at least quarterly,is designed to be dynamic and responsive to changes in actual and expectedcredit losses. These changes are reflected in both the general and unallocatedreserves. The historical loss ratios and estimated risk factors related tosegmenting our loan portfolio, which are key considerations in this analysis, areupdated quarterly and are weighted more heavily for recent economic conditions.The review of reserve adequacy is performed by executive management andpresented to the Audit Committee quarterly for its review and consideration.

 

The table below providesan allocation of the allowance for loan and credit losses by loan andcommitment type; however, allocation of a portion of the allowance to onecategory of loans does not preclude its availability to absorb losses in othercategories:

 
| ** **                        | ** ** | **At  December 31,**     | ** ** |
|-----------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **(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                        |       | $                             | 15,733     |   | 31.4 | % | $ | 13,190 |   | 31.9 | % | $ | 8,015 |   | 31.2 | % | $ | 7,162 |   | 31.2 | % | $ | 8,517 |   | 31.6 | % |
| Real  estate — mortgage      |       | 14,535                        |       | 46.7 | % | 11,209 |   | 42.8 | % | 3,406 |   | 39.4 | % | 3,190 |   | 36.9 | % | 3,296 |   | 39.9 | % |
| Land  acquisition and development |       | 30,097                        |       | 8.6 | % | 9,098 |   | 10.9 | % | 4,516 |   | 12.8 | % | 2,668 |   | 14.2 | % | 1,533 |   | 18.1 | % |
| Real  estate — construction  |       | 5,700                         |       | 8.1 | % | 6,714 |   | 9.5 | % | 2,792 |   | 11.9 | % | 2,617 |   | 13.2 | % | 1,355 |   | 4.5 | % |
| Consumer                          |       | 2,143                         |       | 4.3 | % | 1,404 |   | 4.3 | % | 710 |   | 3.9 | % | 652 |   | 3.8 | % | 801 |   | 4.9 | % |
| Other                             |       | 419                           |       | 0.9 | % | — |   | 0.6 | % | — |   | 0.8 | % | 35 |   | 0.8 | % | 44 |   | 0.9 | % |
| Unallocated                       |       | 6,489                         |       | 0.0 | % | 1,236 |   | 0.0 | % | 604 |   | 0.0 | % | 1,547 |   | 0.0 | % | 1,360 |   | 0.0 | % |
| Off-balance  sheet commitments    |       | 155                           |       | 0.0 | % | 259 |   | 0.0 | % | 576 |   | 0.0 | % | 576 |   | 0.0 | % | — |   | 0.0 | % |
| Total                             |       | $                             | 75,271     |   | 100.0 | % | $ | 43,110 |   | 100.0 | % | $ | 20,619 |   | 100.0 | % | $ | 18,447 |   | 100.0 | % | $ | 16,906 |   | 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.

 

The land acquisition and development (Land A&D)component has been identified by Management as a higher-risk loancategory.  The quality of the LandA&D category is highly dependent on property values both in terms of thelikelihood of repayment once the property is transacted by the current owner aswell as the level of collateral the Company has securing the loan in the eventof default.  Loans in this category arecharacterized by the speculative nature of commercial and residentialdevelopment properties and can include property in various stages ofdevelopment from raw land to finished lots. Management relies heavily on recent loss experience in determining riskin the category which it believes provides a more accurate gauge of actual riskgiven the negative trends in the current economic cycle.

 

Economic conditions that began to deteriorate in late2007 worsened in 2008 with high profile bankruptcies, government-orchestratedmergers and a freeze in the credit markets. Conditions continued to worsen in 2009 with broad economic declines,historically high unemployment rates, continued devaluation of real estate, andsevere credit defaults.  Despiteindications the economic recession may have technically ended there continuesto be strong pressure holding real estate values down near recent lows andasset quality also remains low. Borrowers in general are strained as depressed consumer spending hasstressed revenues and cash flows which has in turn caused sharp increases inthe past due obligations, foreclosures and charge-offs of lenders.

 

The Arizona and Colorado markets the Company operatesin were not immune to these widespread economic problems.  The provision for loan and credit losses ofthe Company increased by $66.2 million and $35.5 million to $105.7 million and$39.5 million for the respective years ended December 31, 2009 and2008.  During 2009 and 2008, the Companyprovided $32.2 million and $22.5 million more in provision for loan and creditlosses than net charge-offs during the respective years.  The Company’s allowance for loan and creditlosses to total loans was 4.23% and 2.12% at December 31, 2009 and 2008,respectively.  The allowance for loan andcredit losses to nonperforming loans decreased from

 

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104.95% at December 31, 2008 to 97.28% at December 31,2009, a decline largely the result of the elevated net charge-off activityduring the year.  We believe that ourallowance for loan and credit losses is adequate to cover anticipated loan andcredit losses.  However, due to changesin the factors considered by management in evaluating the adequacy of theallowance for loan and credit losses, it is possible management may determine aneed to increase the 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 issued by government sponsored entities or securities rated “AAA” orbetter by various nationally recognized rating agencies, with the majority ofthe portfolio either maturing or repricing within a one-to five-year period.Our practice is to purchase primarily U.S. Treasury and U.S. governmentagency-backed securities. Our investment strategies are reviewed in bi-monthly meetingsof the Asset-Liability Management Committee.

 

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 theconstraints of applicable liquidity requirements; and

·  Complement asset/liability managementstrategies.

 

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)**         | ** ** | **2009**                 | ** ** | **2008** | ** ** | **2007** | ** ** |
| Mortgage-backed  securities |       | $                        | 403,215    |   | $ | 438,188 |   | $ | 326,191 |   |
| U.S.  Government agencies   |       | 56,453                   |       | — |   | 36,509 |   |
| Trust  preferred securities |       | 34,781                   |       | 22,750 |   | 12,885 |   |
| Corporate  debt securities  |       | 32,641                   |       | 13,429 |   | — |   |
| Municipal  Securities       |       | 2,417                    |       | 2,515 |   | 3,450 |   |
| Other  investments          |       | 16,473                   |       | 23,566 |   | 16,628 |   |
| Total                       |       | $                        | 545,980    |   | $ | 500,448 |   | $ | 395,663 |   |

 

At December 31, 2009, investments comprised22.14% of total assets compared to 18.64% a year earlier.  During 2009, investments, net of unrealizedgains on available for sale securities, increased by $45.5 million to $546.0million from $500.4 million at December 31, 2008.  During 2009, the Company purchased $152.1million of securities.  The purchaseswere comprised primarily of $56.7 million in Government agencies; $55.9 millionin mortgage-backed securities; $13.3 million in trust preferred securities; and$25.8 million in corporate bond securities. The increase from security purchases was offset by $109.4 million inmaturities and principal pay downs; and $2.2 million in security sales.  Available-for-sale securities had a netunrealized gain of $12.0 million at December 31, 2009, a $14.7 millionincrease over the net unrealized loss of $2.7 million at December 31,2008.

 

During 2008, the Company purchased $210.9 million ofsecurities.  The purchases included mortgage-backed securities, trustpreferred securities and corporate bond securities.  The increase fromsecurity purchases was offset by $109.1 million in maturities and principal paydowns; there were no sales of available-for-sale securities in2008. During 2008, the net unrealized loss increased by $1.6 million from$1.1 million at December 31, 2007.

 

*At December 31,2009, the Company’s securities in a temporary unrealized loss positionconsisted primarily of mortgage-backed, U.S. government agencies and trustpreferred securities.  The mortgage-*

* *

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* *

*backedsecurities consist primarily of securities issued by government-sponsoredentities. The fair value of these securities is expected to recover as thesecurities approach their stated maturity or repricing date.  The trust preferred securities are allsingle-entity issues that have been impacted by the overall decrease in thefinancial services market.*

* *

*Forthe year ended December 31, 2009, the Company had OTTI on investmentsecurities of $2.3 million compared to $1.7 million for the year ended December 31,2008.  The 2009 OTTI of $2.3 millionrelated to two private-label mortgage-backed securities and two single-issuertrust preferred securities.  The 2008OTTI of $1.7 million was comprised of a $1.3 million write down resulting froman increase in the credit risk associated with a single issuer trust preferredsecurity and a write down of $0.4 million on a FNMA perpetual preferred security.*

* *

*During2009, other investments decreased by $7.1 million primarily due to FHLB stocksales of $7.9 million offset by FHLB stock dividends of $0.2 million and FRBstock purchases of $0.5 million.  TheCompany sold FHLB stock in 2009 due to an increased liquidity position that didnot require as large a borrowing base (that is calculated on FHLB stockholdings and available collateral) as in prior years.*

* *

*During2008, other investments increased by $6.9 million mainly due to FHLB stockpurchases of $6.4 million and FHLB stock dividends of $0.5 million. The Companypurchased additional FHLB stock in 2008 to increase its borrowing base with theFHLB.*

* *

The following table sets forth the book value,maturity or repricing frequency and approximate yield of the securities in ourinvestment portfolio at December 31, 2009.

 
| ** **                  | ** ** | **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 |       | $                          | 84,110     |               | 4.18       | % | $ | 202,315 |   | 5.47 | % | $ | 22,885 |   | 5.34 | % | $ | 93,905 |   | 4.89 | % | $ | 403,215 |   | 5.06 | % |
| U.S.  Government agencies   |       | —                     |       | 0.00               | %          | 39,363 |   | 2.43 | % | 17,090 |   | 2.85 | % | — |   | 0.00 | % | 56,453 |   | 2.56 | % |
| Trust  preferred securities |       | —                     |       | 0.00               | %          | — |   | 0.00 | % | — |   | 0.00 | % | 34,781 |   | 7.64 | % | 34,781 |   | 7.64 | % |
| Corporate  debt securities  |       | 2,503                      |       | 4.20               | %          | 27,562 |   | 4.90 | % | 2,576 |   | 6.05 | % | — |   | 0.00 | % | 32,641 |   | 4.94 | % |
| Municipal  securities       |       | 771                        |       | 5.58               | %          | 1,086 |   | 5.53 | % | — |   | 0.00 | % | 560 |   | 8.87 | % | 2,417 |   | 6.32 | % |
| Other  investments          |       | 14,301                     |       | 3.52               | %          | — |   | 0.00 | % | — |   | 0.00 | % | 2,172 |   | 2.46 | % | 16,473 |   | 3.38 | % |
| Total                       |       | $                          | 101,685    |               | 4.10       | % | $ | 270,326 |   | 4.97 | % | $ | 42,551 |   | 4.39 | % | $ | 131,418 |   | 5.59 | % | $ | 545,980 |   | 4.91 | % |

 

----

(1)  Yields have beenadjusted to reflect a tax-equivalent basis where applicable.

 

Excluding securities issued by government-sponsoredentities, the investment portfolio at December 31, 2009, does not includeany single issuer for which the aggregate carrying amount exceeds 10% of theCompany’s shareholders’ equity.

 

***Other Assets***

 

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

 

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| ** **                   | ** ** | ** **               | ** ** | ** **              | ** ** | ** **              | ** ** | **2009 vs 2008** | ** ** | **2008 vs 2007** | ** ** |
|------------------------------|------------|--------------------------|------------|-------------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|
| ** **                   | ** ** | **At December 31,** | ** ** | **Increase/(decrease)** | ** ** | **Increase/(decrease)** | ** ** |
| **(in  thousands)**          | ** ** | **2009**                 | ** ** | **2008**                | ** ** | **2007**                | ** ** | **Amount**       | ** ** | **%**            | ** ** | **Amount** | ** ** | **%** | ** ** |
| Goodwill                     |       | $                        | —     |                    | $          | 46,160                  |       | $                | 43,386     |             | $          | (46,160 | ) | (100.0 | )% | $ | 2,774 |   | 6.4 | % |
| Intangible  assets, net      |       | 4,910                    |       | 5,704                   |       | 2,112                   |       | (794             | )          | (13.9            | )%         | 3,592 |   | 170.1 | % |
| Bank-owned  life insurance   |       | 34,560                   |       | 30,718                  |       | 29,546                  |       | 3,842            |       | 12.5             | %          | 1,172 |   | 4.0 | % |
| Premises  and equipment, net |       | 8,203                    |       | 9,154                   |       | 8,811                   |       | (951             | )          | (10.4            | )%         | 343 |   | 3.9 | % |
| Accrued  interest receivable |       | 8,184                    |       | 8,617                   |       | 10,201                  |       | (433             | )          | (5.0             | )%         | (1,584 | ) | (15.5 | )% |
| Deferred  income taxes, net  |       | 29,654                   |       | 16,933                  |       | 7,723                   |       | 12,721           |       | 75.1             | %          | 9,210 |   | 119.3 | % |
| Other  real estate owned     |       | 25,182                   |       | 5,941                   |       | —                  |       | 19,241           |       | 323.9            | %          | 5,941 |   | 100.0 | % |
| Other                        |       | 54,135                   |       | 26,709                  |       | 17,661                  |       | 27,426           |       | 102.7            | %          | 9,048 |   | 51.2 | % |
| Total                        |       | $                        | 164,828    |                    | $          | 149,936                 |       | $                | 119,440    |             | $          | 14,892 |   | 9.9 | % | $ | 30,496 |   | 25.5 | % |

 

*Goodwill. *During the year ended December 31,2009, the Company conducted a detailed impairment analysis on goodwill.  The result of the review indicated animpairment of goodwill and at March 31, 2009 and September 30, 2009,impairment charges totaling $46.2 million were recorded eliminating allgoodwill from the consolidated balance sheet of the Company.  See Note 6 to the Consolidated FinancialStatements for additional discussion of the analysis.

 

*Intangible Assets. *Intangibleassets on the balance sheet at December 31, 2009 represent valueassociated with client relationship lists and employee non-competeagreements.  During 2009, the Companyrecorded a $0.1 million impairment on a non-amortizing tradename intangibleasset.

 

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

 

*Bank-Owned Life Insurance (BOLI). *BOLI increased by $3.8 million to $34.6 million at December 31,2009.  The increase relates to additionalpurchases of BOLI of $2.7 million and growth in the cash surrender value of thepolicies.

 

BOLI increased by $1.2 million to $30.7 million duringthe year ended December 31, 2008 as a result of growth in the cashsurrender value of the policies.

 

*Deferred Income Taxes. *The increase in deferred income taxes of $12.7 millionto $29.7 million at December 31, 2009 is primarily the result of the taxeffect of the provision for loan losses net of charge offs, accounting forapproximately $12.2 million of the change. The goodwill impairment charges mentioned above as well as amortizingrelationship intangibles also contributed approximately $4.6 million to the netdeferred tax asset increase during 2009 as a certain components of goodwillwere tax deductible.  Increases wereoffset by other transactions that include OTTI charges, amortization ofdeferred loan fees, changes in OCI related to the available for sale securitiesand derivative portfolios.  Income taxesand temporary tax differences are discussed in greater detail in Note 11 to theConsolidated Financial Statements.

 

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

 

*Other Real Estate Owned*. OREO increased by $19.2 million to $25.2 million during the year ended December 31,2009.  Foreclosures increased during 2009as negative economic trends impacted our borrowers as well as continueddeclines in real estate values impacted the valuations of real estatecollateral.  At December 31, 2009,the Company’s recorded investment in OREO was distributed between its twooperating markets, with approximately $10.0 million and $15.2 million inArizona and Colorado, respectively. During 2009, the Company established the Special Assets Group staffedwith highly qualified personnel whose objective is to efficiently managenonperforming assets, including OREO.

 

OREO of $5.9 million was recorded at December 31,2008 compared to $0 in 2007.

 

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*Other Assets. *Otherassets increased by $27.4 million to $54.1 million during the year ended December 31,2009.  The primary drivers of theincrease related to prepaid FDIC assessments of $10.3 million, net change inincome taxes receivable of $12.3 million and $7.4 million of restricted cashplaced as collateral with correspondent banks relating to letters of creditissued on behalf of our customers.

 

Other assets increased $9.0 million to $26.7 millionduring the year ended December 31, 2008. Contributing to the increase was a $5.4 million increase in the fairvalue of derivatives, and a $2.4 million receivable for estimated tax paymentsmade in excess of the tax liability.

 

***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. The Eurodollar has gainedsignificant acceptance with our customer base and at December 31, 2009,balances totaled $107.5 million.  At December 31,2009, noninterest-bearing deposits increased by $89.0 million, or nearly 20%over the prior year balance to $542.8 million. Growth in this deposit category,and many others, significantly outpaced 2008 growth when noninterest-bearingdeposits grew by $14.7 million or 3% over 2007. We believe that 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.  The Company iscurrently participating in the TLGP created by the FDIC, which provides fullcoverage for noninterest-bearing deposit accounts regardless of the dollaramount.  Interest-bearing accounts earninterest at rates based on competitive market factors and our desire toincrease or decrease certain types of maturities or deposits. The Company had$10.3 million, $66.6 million and $148.1 million in brokered deposits at December 31,2009, 2008 and 2007, respectively.  TheCompany excludes reciprocal Certificate of Deposit Account Registry Service ®(CDARS) accounts which we view as customer related deposits. Brokered depositsare considered a wholesale financing source and are used as an alternative toother short-term borrowings. The following tables present the average balancesfor each major category of deposits and the weighted average interest ratespaid for interest-bearing deposits for the periods indicated.

 
| ** **                          | ** ** | **For the  year ended December 31,** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                          | ** ** | ** **                                | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                          | ** ** | **Average**                               | ** ** | **average** | ** ** | **Average** | ** ** | **average** | ** ** | **Average** | ** ** | **average** | ** ** |
| **(in thousands)**                  | ** ** | **balance**                               | ** ** | **interest  rate** | ** ** | **balance** | ** ** | **interest  rate** | ** ** | **balance** | ** ** | **interest  rate** | ** ** |
| NOW and money market                |       | $                                         | 567,363    |   | 1.06 | % | $ | 622,295 |   | 1.97 | % | $ | 584,677 |   | 3.19 | % |
| Savings                             |       | 9,711                                     |       | 0.48 | % | 10,217 |   | 1.19 | % | 11,184 |   | 1.73 | % |
| Eurodollar                          |       | 105,946                                   |       | 1.23 | % | 108,154 |   | 2.02 | % | 26,326 |   | 3.74 | % |
| Certificates of deposits            |       | 619,772                                   |       | 1.99 | % | 568,120 |   | 3.54 | % | 503,178 |   | 4.97 | % |
| Total interest-bearing deposits     |       | $                                         | 1,302,792  |   | 1.51 | % | $ | 1,308,786 |   | 2.65 | % | $ | 1,125,365 |   | 3.99 | % |
| Noninterest-bearing demand accounts |       | 486,335                                   |       |   |   | 434,926 |   |   |   | 439,285 |   |   |   |
| Total deposits                      |       | $                                         | 1,789,127  |   | 1.10 | % | $ | 1,743,712 |   | 1.99 | % | $ | 1,564,650 |   | 2.87 | % |

 

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

 

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| **(in  thousands)**            | ** ** | **At December 31, 2009** | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| Remaining  maturity:           |       |                          |       |
| Less  than three months        |       | $                             | 243,014    |   |
| Three  months up to six months |       | 135,773                       |       |
| Six  months up to one year     |       | 136,544                       |       |
| One  year and over             |       | 11,388                        |       |
|                           |       |                          |       |
| Total                          |       | $                             | 526,719    |   |

 

Throughout 2009, new and existing customersaccumulated cash deposits, building their liquidity positions due to economicuncertainty.  Deposits overall increasedby $329.8 million to $1.97 billion at December 31, 2009, compared to $1.64billion at December 31, 2008.  NOWand money market deposits also grew significantly in 2009, increasing $142.5million from December 31, 2008 to $708.4 million at December 31,2009.  Certificate of deposits increasedto $599.6 million at December 31, 2009, from $522.1 million at December 31,2008.  In 2008, a provision in the EESAtemporarily raised the limit on federal deposit insurance coverage to at least$250,000 per depositor.  In 2009. theincreased coverage was extended through December 31, 2013.  The combined results of the higher depositinsurance limits and the deposit gathering efforts of our bankers havesignificantly grown the deposit base in 2009. This has allowed the Company to reduce its reliance on short-termborrowings and wholesale deposit arrangements.

 

Deposits decreased $103.7 million to $1.6 billion at December 31,2008.  The decrease in deposits wasmainly due to a decrease of $81.5 million in brokered deposits and $65.4million in NOW and money market deposits offset by an increase of $77.7 millionin reciprocal CDARS.

 

Noninterest-bearing demand deposits comprised 27.6%and 27.7% of total deposits at December 31, 2009 and 2008, respectively.

 

***Short-TermBorrowings***

 

Our short-term borrowings include federal fundspurchased, term investment option (TIO) and term auction facility funds (TAF)offered through the FRB, securities sold under agreements to repurchase whichgenerally mature within 90 days or less, advances from the FHLB with originalmaturities of one year or less, and advances under a revolving credit facility.Auctions under the TIO program were halted in November 2008 as the FRBintroduced a number of alternative lending programs for financialinstitutions.  Short-term borrowingopportunities became available under the TAF program in 2008 which the Companyutilized in 2008 and 2009.  A $30.0million revolving credit facility that originated in July 2007 wascancelled by the Company in June 2009 prior to its contractualexpiration.  There was no amount drawn onthe line of credit and the line was last used in December 2008.

 

The following table sets forth information relating toour short-term borrowings during the years ended December 31, 2009, 2008and 2007.  See the Liquidity and CapitalResources discussion below and Note 8 to the Consolidated Financial Statementsfor further discussion.

 

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| ** **                                                     | ** ** | **At or for the year  ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in  thousands)**                                            | ** ** | **2009**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Federal  funds purchased                                       |       |                                            |       |   |   |   |   |
| Balance  at end of period                                      |       | $                                               | 240        |   | $ | 38,763 |   | $ | 150,374 |   |
| Average  balance outstanding for the period                    |       | 15,023                                          |       | 62,836 |   | 20,983 |   |
| Maximum  amount outstanding at any month end during the period |       | 46,028                                          |       | 157,683 |   | 150,374 |   |
| Weighted  average interest rate for the period                 |       | 0.44                                            | %          | 2.03 | % | 5.03 | % |
| Weighted  average interest rate at period end                  |       | 1.00                                            | %          | 0.59 | % | 4.23 | % |
| Term  investment option / Term auction facility funds          |       |                                            |       |   |   |   |   |
| Balance  at end of period                                      |       | $                                               | —     |   | $ | 445,000 |   | $ | — |   |
| Average  balance outstanding for the period                    |       | 240,362                                         |       | 82,503 |   | 5,699 |   |
| Maximum  amount outstanding at any month end during the period |       | 475,000                                         |       | 445,000 |   | 10,000 |   |
| Weighted  average interest rate for the period                 |       | 0.26                                            | %          | 1.20 | % | 5.11 | % |
| Weighted  average interest rate at period end                  |       | 0.00                                            | %          | 0.84 | % | 0.00 | % |
| FHLB  overnight advances                                       |       |                                            |       |   |   |   |   |
| Balance  at end of period                                      |       | $                                               | —     |   | $ | 59,300 |   | $ | 30,000 |   |
| Average  balance outstanding for the period                    |       | 32,052                                          |       | 70,858 |   | 47,404 |   |
| Maximum  amount outstanding at any month end during the period |       | 90,000                                          |       | 270,000 |   | 99,800 |   |
| Weighted  average interest rate for the period                 |       | 0.38                                            | %          | 2.16 | % | 5.38 | % |
| Weighted  average interest rate at period end                  |       | 0.00                                            | %          | 0.65 | % | 4.67 | % |
| FHLB  term advances                                            |       |                                            |       |   |   |   |   |
| Balance  at end of period                                      |       | $                                               | —     |   | $ | — |   | $ | — |   |
| Average  balance outstanding for the period                    |       | 6,332                                           |       | 108,877 |   | 68,524 |   |
| Maximum  amount outstanding at any month end during the period |       | 70,400                                          |       | 300,000 |   | 110,000 |   |
| Weighted  average interest rate for the period                 |       | 0.58                                            | %          | 2.61 | % | 5.26 | % |
| Weighted  average interest rate at period end                  |       | 0.00                                            | %          | 0.00 | % | 0.00 | % |
| Securities  sold under agreement to repurchase                 |       |                                            |       |   |   |   |   |
| Balance  at end of period                                      |       | $                                               | 139,794    |   | $ | 133,478 |   | $ | 168,336 |   |
| Average  balance outstanding for the period                    |       | 125,053                                         |       | 147,230 |   | 228,342 |   |
| Maximum  amount outstanding at any month end during the period |       | 162,308                                         |       | 180,008 |   | 259,421 |   |
| Weighted  average interest rate for the period                 |       | 0.91                                            | %          | 1.81 | % | 3.67 | % |
| Weighted  average interest rate at period end                  |       | 0.92                                            | %          | 0.90 | % | 3.00 | % |
| 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                 |       | 0.00                                            | %          | 3.71 | % | 6.42 | % |
| Weighted  average interest rate at period end                  |       | 0.00                                            | %          | 0.00 | % | 5.16 | % |

 

***Long-termDebt***

 

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

 

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| ** **                            | ** ** | **At December 31,** | ** ** |
|---------------------------------------|------------|--------------------------|------------|
| **(in  thousands)**                   | ** ** | **2009**                 | ** ** | **2008** | ** ** | **2007** | ** ** |
| 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     |   | $ | 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**

 

Results of operations for the year ended December 31,2008, were impacted by the acquisition of BDA. The acquisition was accounted for as a purchase, and the assets andliabilities as well as the results of operations of the acquired entity areincluded in the Company’s consolidated balance sheet and consolidated statementof operations at and for the year ended December 31, 2008.

 

The following table presents, for the periodsindicated, certain information related to our results of operations.

 
| ** **                                                  | ** ** | ** **                                | ** ** | ** **              | ** ** | ** **              | ** ** | **2009 vs  2008** | ** ** | **2008 vs  2007** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                  | ** ** | **For the  year ended December 31,** | ** ** | **Increase/(decrease)** | ** ** | **Increase/(decrease)** | ** ** |
| **(in thousands, except per share  data)**                  | ** ** | **2009**                                  | ** ** | **2008**                | ** ** | **2007**                | ** ** | **Amount**        | ** ** | **%**             | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                                        |       |                                      |       |                    |       |                    |       |              |       |              |       |   |   |   |   |
| *INCOME STATEMENT DATA*                                     |       |                                      |       |                    |       |                    |       |              |       |              |       |   |   |   |   |
| Interest  income                                            |       | $                                         | 129,450    |                    | $          | 144,908                 |       | $                 | 154,510    |              | $          | (15,458 | ) | (10.7 | )% | $ | (9,602 | ) | (6.2 | )% |
| Interest  expense                                           |       | 26,066                                    |       | 49,557                  |       | 66,611                  |       | (23,491           | )          | (47.4             | )%         | (17,054 | ) | (25.6 | )% |
| NET  INTEREST INCOME BEFORE PROVISION                       |       | 103,384                                   |       | 95,351                  |       | 87,899                  |       | 8,033             |       | 8.4               | %          | 7,452 |   | 8.5 | % |
| Provision  for loan losses                                  |       | 105,815                                   |       | 39,796                  |       | 3,936                   |       | 66,019            |       | 165.9             | %          | 35,860 |   | 911.1 | % |
| NET  INTEREST INCOME (LOSS) AFTER PROVISION                 |       | (2,431                                    | )          | 55,555                  |       | 83,963                  |       | (57,986           | )          | (104.4            | )%         | (28,408 | ) | (33.8 | )% |
| Noninterest  income                                         |       | 27,627                                    |       | 35,778                  |       | 28,611                  |       | (8,151            | )          | (22.8             | )%         | 7,167 |   | 25.0 | % |
| Noninterest  expense                                        |       | 95,250                                    |       | 89,717                  |       | 75,515                  |       | 5,533             |       | 6.2               | %          | 14,202 |   | 18.8 | % |
| Impairment  of goodwill                                     |       | 46,160                                    |       | —                  |       | —                  |       | 46,160            |       | 100.0             | %          | — |   | .0 | % |
| INCOME  (LOSS) BEFORE INCOME TAXES                          |       | (116,214                                  | )          | 1,616                   |       | 37,059                  |       | (117,830          | )          | NM                |       | (35,443 | ) | (95.6 | )% |
| Provision  (benefit) for income taxes                       |       | (32,859                                   | )          | (91                     | )          | 13,713                  |       | (32,768           | )          | NM                |       | (13,804 | ) | (100.7 | )% |
| NET  INCOME (LOSS)                                          |       | (83,355                                   | )          | 1,707                   |       | 23,346                  |       | (85,062           | )          | NM                |       | (21,639 | ) | (92.7 | )% |
| Net  (income) loss attributable to noncontrolling interests |       | 314                                       |       | (379                    | )          | (322                    | )          | 693               |       | (182.8            | )%         | (57 | ) | 17.7 | % |
| NET  INCOME (LOSS) ATTRIBUTABLE TO COBIZ FINANCIAL          |       | $                                         | (83,041    | )                       | $          | 1,328                   |       | $                 | 23,024     |              | $          | (84,369 | ) | NM |   | $ | (21,696 | ) | (94.2 | )% |
|                                                        |       |                                      |       |                    |       |                    |       |              |       |              |       |   |   |   |   |
| Earnings  (loss) per common share - basic                   |       | $                                         | (2.98      | )                       | $          | 0.05                    |       | $                 | 0.98       |              |       |   |   |   |   |   |   |   |
| Earnings  (loss) per common share - diluted                 |       | $                                         | (2.98      | )                       | $          | 0.05                    |       | $                 | 0.96       |              |       |   |   |   |   |   |   |   |
| Cash  dividends declared per common share                   |       | $                                         | 0.10       |                    | $          | 0.28                    |       | $                 | 0.26       |              |       |   |   |   |   |   |   |   |
|                                                        |       |                                      |       |                    |       |                    |       |              |       |              |       |   |   |   |   |
| NM -  Not Meaningful                                        |       |                                      |       |                    |       |                    |       |              |       |              |       |   |   |   |   |

 

***Earnings Performance***. Net loss was****$83.0 million for the year ended December 31, 2009compared to net income of $1.3 million and $23.0 million for the years ended December 31,2008 and 2007, respectively.  The 2009net loss is primarily attributable to an increase of $66.0 million in theprovision for loan losses, goodwill impairment of $46.2 million and $5.5million in noninterest expense offset by an increase of $32.8 million inbenefit for income taxes. Net income declined by $21.7 million in 2008 ascompared to 2007, primarily relating to an increase in provision for loan lossesof $35.9 million over the $3.9 million provision reported for 2007.  Respective increases of $7.5 million and $7.2million in net interest income before provision and noninterest income wereoffset by a $14.2 million increase in noninterest expense from the year ended2007.  Reported loss per common share ona fully diluted basis for the year ended December 31, 2009 was $(2.98) ascompared to earnings per share of $0.05 in 2008.

 

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Reported earnings per common share for the year ended December 31,2008 declined by $0.91 from $0.96 in 2007. The decline in earnings per common share over the prior two years isprimarily the result of increasing levels of provision for loan losses due toincreases in the level of distressed assets and continued marketdeterioration.  Also impacting 2009earnings (loss) per common share was the issuance of 13,205,600 shares ofcommon stock.  The Company completed anunderwritten public offering of 12,670,000 shares of the Company’s common stockin July 2009.  Subsequently, in August 2009,the Company issued an additional 535,600 shares of common stock for the purposeof fulfilling underwriter purchase options.

 

***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 interestexpense, principally on customer deposits and borrowings. Changes in netinterest income result from changes in volume, net interest spread and netinterest margin. Volume refers to the average dollar levels of interest-earningassets and interest-bearing liabilities. Net interest spread refers to thedifference between the average yield on interest-earning assets and the averagecost of interest-bearing liabilities. Net interest margin refers to netinterest income divided by average interest-earning assets and is influenced bythe level and relative mix of interest-earning assets and interest-bearingliabilities.

 

As the majority of our assets are interest-earning andour liabilities are interest-bearing, changes in interest rates may impact ournet interest margin. The Federal Open Markets Committee (“FOMC”) uses thefederal funds rate, which is the interest rate used by banks to lend to eachother, to influence interest rates and the national economy. Changes in thefederal funds rate have a direct correlation to changes in the prime rate, theunderlying index for most of the variable-rate loans issued by theCompany.  In September 2007, theFOMC began lowering its target for the federal funds rate and continuedlowering the target through December 2008 by which time it had reduced thetarget rate by 500 basis points to a range of 0-25 basis points.

 

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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,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                        | ** ** | ** **                                | ** ** | **2009** | ** ** | ** ** | ** ** | ** ** | ** ** | **2008** | ** ** | ** ** | ** ** | ** ** | ** ** | **2007** | ** ** | ** ** | ** ** |
| ** **                                                                        | ** ** | ** **                                | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                                                        | ** ** | **Average**                               | ** ** | **earned** | ** ** | **yield** | ** ** | **Average** | ** ** | **earned** | ** ** | **yield** | ** ** | **Average** | ** ** | **earned** | ** ** | **yield** | ** ** |
| **(in thousands)**                                                                | ** ** | **balance**                               | ** ** | **or paid** | ** ** | **or cost  (1)** | ** ** | **balance** | ** ** | **or paid** | ** ** | **or cost  (1)** | ** ** | **balance** | ** ** | **or paid** | ** ** | **or cost  (1)** | ** ** |
| ***Assets***                                                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal  funds sold and other                                                     |       | $                                         | 13,011     |   | $ | 105 |   | 0.81 | % | $ | 7,958 |   | $ | 274 |   | 3.44 | % | $ | 8,557 |   | $ | 456 |   | 5.33 | % |
| Investment  securities (3)                                                        |       | 482,859                                   |       | 24,107 |   | 4.99 | % | 427,902 |   | 22,298 |   | 5.21 | % | 410,361 |   | 21,207 |   | 5.17 | % |
| Loans  (2), (3)                                                                   |       | 1,948,120                                 |       | 105,965 |   | 5.44 | % | 1,944,728 |   | 123,055 |   | 6.33 | % | 1,665,379 |   | 133,446 |   | 8.01 | % |
| Allowance  for loan losses                                                        |       | (67,862                                   | )          |   |   |   |   | (25,750 | ) |   |   |   |   | (18,559 | ) | — |   |   |   |
| Total  interest-earning assets                                                    |       | 2,376,128                                 |       | 130,177 |   | 5.32 | % | 2,354,838 |   | 145,627 |   | 6.11 | % | 2,065,738 |   | 155,109 |   | 7.51 | % |
| Noninterest-earning  assets                                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash  and due from banks                                                          |       | 37,473                                    |       |   |   |   |   | 44,846 |   |   |   |   |   | 45,097 |   |   |   |   |   |
| Other                                                                             |       | 143,105                                   |       |   |   |   |   | 130,217 |   |   |   |   |   | 107,790 |   |   |   |   |   |
| Total  assets                                                                     |       | $                                         | 2,556,706  |   |   |   |   |   | $ | 2,529,901 |   |   |   |   |   | $ | 2,218,625 |   |   |   |   |   |
|                                                                              |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ***Liabilities and Shareholders’ Equity***                                   |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW  and money market                                                             |       | $                                         | 567,363    |   | $ | 6,011 |   | 1.06 | % | $ | 622,295 |   | $ | 12,280 |   | 1.97 | % | $ | 584,677 |   | $ | 18,673 |   | 3.19 | % |
| Savings                                                                           |       | 9,711                                     |       | 47 |   | 0.48 | % | 10,217 |   | 122 |   | 1.19 | % | 11,184 |   | 194 |   | 1.73 | % |
| Eurodollar                                                                        |       | 105,946                                   |       | 1,305 |   | 1.23 | % | 108,154 |   | 2,180 |   | 2.02 | % | 26,326 |   | 985 |   | 3.74 | % |
| Certificates  of deposit                                                          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Brokered                                                                          |       | 33,115                                    |       | 468 |   | 1.41 | % | 104,421 |   | 3,919 |   | 3.75 | % | 114,867 |   | 6,066 |   | 5.28 | % |
| Reciprocal  CDARS                                                                 |       | 132,994                                   |       | 1,888 |   | 1.42 | % | 52,858 |   | 1,134 |   | 2.15 | % | 16,524 |   | 758 |   | 4.59 | % |
| Under  $100,000                                                                   |       | 61,254                                    |       | 1,503 |   | 2.45 | % | 94,455 |   | 3,621 |   | 3.83 | % | 100,807 |   | 4,934 |   | 4.89 | % |
| $100,000  and over                                                                |       | 392,409                                   |       | 8,458 |   | 2.16 | % | 316,386 |   | 11,415 |   | 3.61 | % | 270,980 |   | 13,254 |   | 4.89 | % |
| Total  interest-bearing deposits                                                  |       | 1,302,792                                 |       | 19,680 |   | 1.51 | % | 1,308,786 |   | 34,671 |   | 2.65 | % | 1,125,365 |   | 44,864 |   | 3.99 | % |
| Other  borrowings                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities  sold under agreements to repurchase                                   |       | 125,053                                   |       | 1,137 |   | 0.91 | % | 147,230 |   | 2,669 |   | 1.81 | % | 228,342 |   | 8,379 |   | 3.67 | % |
| Other  short-term borrowings                                                      |       | 293,768                                   |       | 885 |   | 0.30 | % | 343,530 |   | 7,327 |   | 2.13 | % | 145,916 |   | 7,717 |   | 5.29 | % |
| Long-term  debt                                                                   |       | 93,150                                    |       | 4,365 |   | 4.69 | % | 79,306 |   | 4,890 |   | 6.17 | % | 72,166 |   | 5,651 |   | 7.83 | % |
| Total  interest-bearing liabilities                                               |       | 1,814,763                                 |       | 26,067 |   | 1.44 | % | 1,878,852 |   | 49,557 |   | 2.64 | % | 1,571,789 |   | 66,611 |   | 4.24 | % |
| Noninterest-bearing  demand accounts                                              |       | 486,335                                   |       |   |   |   |   | 434,926 |   |   |   |   |   | 439,285 |   |   |   |   |   |
| Total  deposits and interest-bearing liabilities                                  |       | 2,301,098                                 |       |   |   |   |   | 2,313,778 |   |   |   |   |   | 2,011,074 |   |   |   |   |   |
| Other  noninterest-bearing liabilities                                            |       | 18,841                                    |       |   |   |   |   | 17,040 |   |   |   |   |   | 18,049 |   |   |   |   |   |
| Total  liabilities                                                                |       | 2,319,939                                 |       |   |   |   |   | 2,330,818 |   |   |   |   |   | 2,029,123 |   |   |   |   |   |
| Total  equity                                                                     |       | 236,767                                   |       |   |   |   |   | 199,083 |   |   |   |   |   | 189,502 |   |   |   |   |   |
| Total  liabilities and equity                                                     |       | $                                         | 2,556,706  |   |   |   |   |   | $ | 2,529,901 |   |   |   |   |   | $ | 2,218,625 |   |   |   |   |   |
| Net  interest income - taxable equivalent                                         |       |                                      |       | $ | 104,110 |   |   |   |   |   | $ | 96,070 |   |   |   |   |   | $ | 88,498 |   |   |   |
| Net  interest spread                                                              |       |                                      |       |   |   | 3.88 | % |   |   |   |   | 3.47 | % |   |   |   |   | 3.27 | % |
| Net  interest margin                                                              |       |                                      |       |   |   | 4.38 | % |   |   |   |   | 4.08 | % |   |   |   |   | 4.28 | % |
| Ratio  of average interest-earning assets to average interest-bearing liabilities |       | 130.93                                    | %          |   |   |   |   | 125.33 | % |   |   |   |   | 131.43 | % |   |   |   |   |

 

----

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

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

(3)  Yields have beenadjusted to reflect a tax-equivalent basis where applicable.

 

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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.

 
| ** **                                      | ** ** | **For the year ended December 31,  Increase (Decrease)  2009 vs 2008** | ** ** | **For the year ended December 31,  Increase (Decrease)  2008 vs 2007** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| **(in thousands)**                              | ** ** | **Volume**                                                                  | ** ** | **Rate**                                                                    | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Total** | ** ** |
| *Interest-earning assets*                       |       |                                                                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Federal  funds sold and other                   |       | $                                                                           | 174        |                                                                        | $          | (343 | ) | $ | (169 | ) | $ | (32 | ) | $ | (150 | ) | $ | (182 | ) |
| Investment  securities (1)                      |       | 2,864                                                                       |       | (1,055                                                                      | )          | 1,809 |   | 906 |   | 185 |   | 1,091 |   |
| Loans  (1), (2)                                 |       | 215                                                                         |       | (17,305                                                                     | )          | (17,090 | ) | 22,384 |   | (32,775 | ) | (10,391 | ) |
| Total  interest earning assets                  |       | 3,253                                                                       |       | (18,703                                                                     | )          | (15,450 | ) | 23,258 |   | (32,740 | ) | (9,482 | ) |
| * *                                        |       |                                                                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| *Interest-bearing liabilities*                  |       |                                                                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| NOW  and money market deposits                  |       | (1,084                                                                      | )          | (5,185                                                                      | )          | (6,269 | ) | 1,201 |   | (7,594 | ) | (6,393 | ) |
| Savings  deposits                               |       | (6                                                                          | )          | (69                                                                         | )          | (75 | ) | (17 | ) | (55 | ) | (72 | ) |
| Eurodollar  deposits                            |       | (45                                                                         | )          | (830                                                                        | )          | (875 | ) | 3,061 |   | (1,866 | ) | 1,195 |   |
| Certificates  of deposit                        |       | 513                                                                         |       | (8,285                                                                      | )          | (7,772 | ) | 3,228 |   | (8,151 | ) | (4,923 | ) |
|                                            |       |                                                                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| *Other borrowings*                              |       |                                                                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Securities  sold under agreements to repurchase |       | (402                                                                        | )          | (1,130                                                                      | )          | (1,532 | ) | (2,976 | ) | (2,734 | ) | (5,710 | ) |
| Other  short-term borrowings                    |       | (1,061                                                                      | )          | (5,381                                                                      | )          | (6,442 | ) | 10,451 |   | (10,841 | ) | (390 | ) |
| Long-term  debt                                 |       | 854                                                                         |       | (1,379                                                                      | )          | (525 | ) | 559 |   | (1,320 | ) | (761 | ) |
| Total  interest-bearing liabilities             |       | (1,231                                                                      | )          | (22,259                                                                     | )          | (23,490 | ) | 15,507 |   | (32,561 | ) | (17,054 | ) |
| Net  increase (decrease) in net interest income |       | $                                                                           | 4,484      |                                                                        | $          | 3,556 |   | $ | 8,040 |   | $ | 7,751 |   | $ | (179 | ) | $ | 7,572 |   |

 

----

(1)   *Interest earned has been adjusted to reflect tax exemptassets on a fully tax-equivalent basis*.

*(2) *Loan fees included in interestincome are not material. Nonaccrual loans are included in average loansoutstanding.

 

Net interest income on a tax equivalent basisincreased by $8.0 million or 8.4% to $104.1 million for the year ended December 31,2009 from $96.1 million at December 31, 2008.  During 2009, the net interest marginincreased by 30 basis points to 4.38%. Average interest-earning assets increased slightly by $21.3 million or0.9% from 2008 primarily as a result of a $55.0 million growth in investmentsecurities.  A decline of $38.7 millionor (2.0)% in average net loans at December 31, 2009 offset the growth ininvestment securities.  Yields onaverage-earning assets decreased by 79 basis points during 2009.  The impact to the net interest margin ofchanges in interest-earning assets was a decrease of 71 basis points due tolower interest rates.  The slight declineof $6.0 million or 0.46% in interest-bearing deposits coupled with a decreaseof 114 basis points in rates paid on interest-bearing deposits resulted in anincrease of 64 basis points on the net interest margin.  A decrease of $71.9 million in the Company’sutilization of other borrowings such as securities sold under agreements topurchase, the Federal Reserve’s TAF program, and federal funds purchased as wellas a decrease of 155 basis points on rates paid on the aforementionedborrowings resulted in a favorable effect on the net interest margin of 36basis points.

 

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 14.0% during2008 compared to 2007, largely related to growth of $279.3 million in averageloan portfolio.  However, due to fallingrates throughout 2008, the yield on the interest-earning asset base fellsharply, overshadowing the asset growth. The impact to the net interest margin of changes in interest-earningassets was a decrease of 132 basis points. Loan growth was funded by average interest-bearing deposit growth of$183.4 million and increases in other borrowings of $123.6 million.  The impact of changes in interest-bearingdeposits on the net interest 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.

 

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.  During 2008 the Company entered into two newswap agreements with a total notional value of $40.0 million, 

 

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amortizing over a period of three years.  The Company receives a fixed rate and pays avariable rate based on the notional amounts. The Company had $130.0 million and$90.0 million in notional values outstanding at December 31, 2009 and2008, respectively. The weighted-average interest rate paid was 3.25% versus aweighted-average interest rate received of 6.61% at December 31, 2009.  The weighted-average interest rate paid was3.6% versus a weighted-average interest rate received of 6.9% at December 31,2008. During 2009 and 2008, interest-rate swaps contributed 11 basis points and9 basis points, respectively to net interest margin.

 

In February 2009,the Company executed a series of interest-rate swap transactions designated ascash flow hedges that are effective for interest payments starting in2010.  The intent of the transactions isto fix the effective interest rate for payments due on the junior subordinateddebentures with the objective of reducing the Company’s exposure to adversechanges in cash flows relating to payments on its LIBOR-based floating ratedebt.  The swaps will be effective for varying lengths of time rangingfrom five to 14 years.  Select critical terms of the cash flow hedges areas follows:

 
| **Hedged  item**         | ** ** | **Notional  (in thousands)** | ** ** | **Fixed  rate** | ** ** | **Termination  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 |   |

 

***Provision and Allowance for Loanand Credit Losses***. Thefollowing table presents provision for loan and credit losses for the yearsended December 31, 2009, 2008 and 2007.

* *
| ** **                                                | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|
| **(in  thousands)**                                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                      |       |                             |       |   |   |   |   |
| Provision  for loan losses                                |       | $                                | 105,815    |   | $ | 39,796 |   | $ | 3,936 |   |
| Provision  for credit losses (included in other expenses) |       | (104                             | )          | (317 | ) | — |   |
| Total  provision for loan and credit losses               |       | $                                | 105,711    |   | $ | 39,479 |   | $ | 3,936 |   |

* *

*Theprovision for loan and credit losses increased by $66.2 million to $105.7million for the year ended December 31, 2009.  The provision for loan and credit lossesincreased by $35.5 million to $39.5 million for the year ended December 31,2008.  The increases in 2009 and 2008were made in recognition of the continued decline in property values in both theColorado and Arizona markets and the impact to the portfolio of generallynegative trends in the local economies the Company operates in.  The overall asset quality continued todeteriorate in 2009 as nonperforming loans to total loans increased from 2.02%to 4.44%.  Nonperforming loans increasedto $79.2 million at December 31, 2009, from $41.1 million at December 31,2008.  Net charge-offs during 2009 were$73.5 million compared to $17.0 million in the prior year.  Approximately 51.3% or $39.3 million incharge-offs relate to Arizona relationships while the remaining 48.7% or $37.3million relate to Colorado relationships. Charge-offs in excess of $1.0 million each relating to 10 relationshipsin Colorado comprised over 50% of charge-offs generated in that market.  Approximately 70% of total Arizonacharge-offs in 2009 related to 11 relationships.  Management believes the allowance is at asufficient level to absorb potential losses in the portfolio.  At December 31, 2009, the allowance forloan and credit losses amounted to $75.3 million, or 97.3% of nonperformingloans compared to $43.1 million and 105.0% of nonperforming loans at December 31,2008.*

 

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***Noninterest Income***. The following table presents noninterest income for theyears ended December 31, 2009, 2008 and 2007.

* *
| ** **                            | ** ** | ** **                                | ** ** | ** **              | ** ** | ** **              | ** ** | **2009 vs  2008** | ** ** | **2008 vs  2007** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                            | ** ** | **For the  year ended December 31,** | ** ** | **Increase/(decrease)** | ** ** | **Increase/(decrease)** | ** ** |
| **(in thousands)**                    | ** ** | **2009**                                  | ** ** | **2008**                | ** ** | **2007**                | ** ** | **Amount**        | ** ** | **%**             | ** ** | **Amount** | ** ** | **%** | ** ** |
| *NONINTEREST INCOME*                  |       |                                      |       |                    |       |                    |       |              |       |              |       |   |   |   |   |
| Service  charges                      |       | $                                         | 4,919      |                    | $          | 4,067                   |       | $                 | 3,154      |              | $          | 852 |   | 20.9 | % | $ | 913 |   | 28.9 | % |
| Other  loan fees                      |       | 1,254                                     |       | 1,017                   |       | 1,023                   |       | 237               |       | 23.3              | %          | (6 | ) | (.6 | )% |
| Investment  advisory and trust income |       | 5,186                                     |       | 6,345                   |       | 4,763                   |       | (1,159            | )          | (18.3             | )%         | 1,582 |   | 33.2 | % |
| Insurance  income                     |       | 11,778                                    |       | 15,113                  |       | 9,397                   |       | (3,335            | )          | (22.1             | )%         | 5,716 |   | 60.8 | % |
| Investment  banking income            |       | 1,154                                     |       | 5,055                   |       | 6,681                   |       | (3,901            | )          | (77.2             | )%         | (1,626 | ) | (24.3 | )% |
| Other  income                         |       | 3,336                                     |       | 4,181                   |       | 3,593                   |       | (845              | )          | (20.2             | )%         | 588 |   | 16.4 | % |
| Total  noninterest income             |       | $                                         | 27,627     |                    | $          | 35,778                  |       | $                 | 28,611     |              | $          | (8,151 | ) | (22.8 | )% | $ | 7,167 |   | 25.0 | % |

 

*Service Charges*. Deposit service charges primarily consist of fees earned from ourtreasury management services. Customers are given the option to pay for theseservices in cash or by offsetting the fees for these services against anearnings credit that is given for maintaining noninterest-bearing deposits.Fees earned from treasury management services will fluctuate based on thenumber of customers using the services and from changes in U.S. Treasury rateswhich are used as a benchmark for the earnings credit rate. Other miscellaneousdeposit charges are transactional by nature and may not be consistent period-over-period.   The increase in service charges during thelast two years is attributed to a decrease in the earnings credit rate that hasfallen due to a decrease in the U.S. Treasury rate.  As the earnings credit rate decreases, theamount of cash fees paid for service charges increases.

 

*Investment Advisory and Trust Income*. Investment advisory and trust income decreased by $1.2 million or 18.3%to $5.2 million for the year ended December 31, 2009.  Investment and advisory trust income for 2008increased by $1.6 million or 33.2% over the prior year due to the acquisitionof Wagner on December 31, 2007.  Theacquisition of Wagner contributed $1.9 million of the total increase, which wasoffset by a decrease in revenue from the Company’s existing investmentportfolio.

 

Revenues from this sourceare generally a function of the value of assets under management (AUM). Marketchanges will have a positive or negative impact on the earnings of thecompanies operating in this business line. Discretionary assets under management at December 31, 2009, were$755.2 million compared to $709.2 million at December 31, 2008, whichrepresents a 6.5% increase.  Total assetsunder management, custodial assets and assets under advisement at December 31,2009, were $1.5 billion.  Revenuemaintenance and generation was challenging as the downturn in the stock marketcontinued during 2009.

* *

*Insurance Income*. Insurance income is derived from three main areas, wealth transfer,benefits consulting and P&C.  Themajority of fees earned on wealth transfer transactions are earned at theinception of the product offering in the form of commissions.  As the fees on these products aretransactional by nature, fee income can fluctuate from period to period basedon the number of transactions that have been closed.  Revenue from benefits consulting and P&Care more recurring revenue sources.

 

For the year ended December 31,2009, 2008 and 2007, revenue earned from the insurance segment was comprised ofthe following:

 
| ** **                                 | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |     |       |
| Wealth transfer and executive compensation |       | 22.4     | %          | 33.0     | %          | 38.9     | %          |
| Benefits consulting                        |       | 28.2     | %          | 23.6     | %          | 35.6     | %          |
| Property and casualty                      |       | 46.9     | %          | 41.4     | %          | 22.3     | %          |
| Fee income                                 |       | 2.5      | %          | 2.0      | %          | 3.2      | %          |
|                                       |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |

 

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Insurance income for 2009decreased by $3.3 million or 22.1% to $11.8 million from $15.1 million in2008.  The decrease is primarilyattributable to lower insurance commissions of $2.3 million on the placement oflife insurance policies in wealth transfer cases.  Also, contributing to the overall decline ininsurance income are the decreases in property and casualty and bonus income of$0.6 million and $0.3 million, respectively. Insurance income for 2008 increased $5.7 million from 2007 to $15.1million for the year ended December 31, 2008.  The change largely related to the acquisitionof CoBiz Insurance — Arizona which contributed $4.0 million in its first year ofoperating as a CoBiz Financial company. Insurance income derived from wealth transfer cases increased $1.8million in 2008 over 2007.  In 2007 therewere a number of cases that were adversely impacted in the medical underwritingstages.

 

*In2009, wealth transfer income comprised 22.4% of total insurance income downfrom 33.0% and 38.9% in 2008 and 2007, respectively.  Due to the aforementioned decline in wealthtransfer income, property and casualty income in 2009 represents 46.9% of totalinsurance income.  Property and casualtyincome comprised 41.4% and 22.3% in 2008 and 2007, respectively.  The increase in property and casualty in 2008is attributable to the acquisition of BDA, now CoBiz Insurance — AZ, on January 2,2008.*

 

*Investment Banking Income**.  Investment banking income includes retainerfees which are recognized over the expected term of the engagement and successfees which are recognized when the transaction is completed and collectibilityof fees is reasonably assured. Investment banking income is transactional by nature and will fluctuatebased on the number of clients engaged and transactions successfully closed.*

* *

*Investment banking income decreased by $3.9 million or 77.2%to $1.2 million during the year ended December 31, 2009.  Revenues for the Investment Banking segmentfell by $1.6 million to $5.1 million or 24.3% for the year ended December 31,2008.  During 2009, restricted creditmarkets and substantial uncertainty over sellers’ future performance andcash-flow, had an adverse impact on the number of deals closed as well as onthe number of deals actively engaged during 2009.  The Company believes it has a significantpipeline of potential transactions though marketing and closing transactionscould be challenging.*

 

*Other Income*.  *Other income is comprised ofchanges in the cash surrender value of BOLI, earnings on equity methodinvestments, merchant charges, bankcard fees, wire transfer fees, foreignexchange fees and safe deposit income.*

 

*Other income of $3.3 million for the year ended December 31,2009 decreased by $0.8 million from the prior year.  The decline in other income is primarilyattributable to a decrease in income derived from equity method investments of$0.4 million and a decrease in income from private equity investments of $0.7million offset by an increase of $0.3 million in earnings on customer swaps.*

 

*Other income for 2008 grew by $0.6 million for the yearended December 31, 2008, or 16.4% over 2007.*

 

***Noninterest Expense***.The following table presentsnoninterest expense for the years ended December 31, 2009, 2008 and 2007.

* *
| ** **                                                                       | ** ** | ** **                                | ** ** | ** **              | ** ** | ** **              | ** ** | **2009 vs.  2008** | ** ** | **2008 vs  2007** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------|------------|-------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                       | ** ** | **For the  year ended December 31,** | ** ** | **Increase/(decrease)** | ** ** | **Increase/(decrease)** | ** ** |
| **(in thousands)**                                                               | ** ** | **2009**                                  | ** ** | **2008**                | ** ** | **2007**                | ** ** | **Amount**         | ** ** | **%**             | ** ** | **Amount** | ** ** | **%** | ** ** |
| *NONINTEREST EXPENSES*                                                           |       |                                      |       |                    |       |                    |       |               |       |              |       |   |   |   |   |
| Salaries  and employee benefits                                                  |       | $                                         | 53,316     |                    | $          | 55,606                  |       | $                  | 48,648     |              | $          | (2,290 | ) | (4 | )% | $ | 6,958 |   | 14.3 | % |
| Stock-based  compensation expense                                                |       | 1,543                                     |       | 1,762                   |       | 1,524                   |       | (219               | )          | (12               | )%         | 238 |   | 15.6 | % |
| Occupancy  expenses, premises and equipment                                      |       | 13,215                                    |       | 13,075                  |       | 11,541                  |       | 140                |       | 1                 | %          | 1,534 |   | 13.3 | % |
| Amortization  of intangibles                                                     |       | 674                                       |       | 724                     |       | 471                     |       | (50                | )          | (7                | )%         | 253 |   | 53.7 | % |
| FDIC  and other assessments                                                      |       | 4,871                                     |       | 1,504                   |       | 1,021                   |       | 3,367              |       | 224               | %          | 483 |   | 47.3 | % |
| Other  real estate owned and loan workout costs                                  |       | 4,660                                     |       | 687                     |       | 539                     |       | 3,973              |       | 578               | %          | 148 |   | 27.5 | % |
| Impairment  of goodwill                                                          |       | 46,160                                    |       | —                  |       | —                  |       | 46,160             |       | 100               | %          | — |   | 0.0 | % |
| Net  other than temporary impairment losses on securities recognized in earnings |       | 922                                       |       | —                  |       | —                  |       | 922                |       | 100               | %          | — |   | 0.0 | % |
| Loss  on securities, other assets and other real estate owned                    |       | 4,677                                     |       | 4,592                   |       | 1,039                   |       | 85                 |       | 2                 | %          | 3,553 |   | 342.0 | % |
| Other                                                                            |       | 11,372                                    |       | 11,767                  |       | 10,732                  |       | (395               | )          | (3                | )%         | 1,035 |   | 9.6 | % |
| Total  noninterest expenses                                                      |       | $                                         | 141,410    |                    | $          | 89,717                  |       | $                  | 75,515     |              | $          | 51,693 |   | 58 | % | $ | 14,202 |   | 18.8 | % |

 

Our efficiency ratio was 68.3% for the year ended December 31,2009, compared to and 65.1% and 64.1% for 2008 and 2007, respectively.  The efficiency ratio is a measure of theCompany’s overhead, measuring the percentage of each dollar of income that ispaid in operating expenses.  Ourefficiency

 

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ratio increase has escalated since 2007 as growth inoperating expenses outpaced growth in operating revenues.  Loan workout expenses and FDIC and otherassessments are the primary contributors to the increase in operating expensesduring 2009, overshadowing our cost containment initiatives.  Loan workout expenses and FDIC costsreflected increases of $4.0 million and $3.4 million, respectively, during theyear ended December 31, 2009.  TheCompany maintains its goal of reducing the ratio over the next few years and iscommitted to exploring cost-reduction strategies as they are identified.

 

*Salaries and Employee Benefits*. Salaries and employee benefits,excluding share-based compensation, decreased by $2.3 million or 4.1% for theyear ended December 31, 2009.  The2009 decrease is primarily attributable to a decrease in employee bonuses of$2.8 million and a decrease of $1.6 million in commission-based compensationfrom the insurance segment.  Commissionspaid to insurance producers are tied directly to insurance revenues, whichdecreased by 22.1% in 2009.  Salaryexpense increased by $1.6 million, partially offsetting the decreases in bonusesand commission-based compensation.  Theincrease in salary expenses are attributed to the following:

 

·                  Annual merit increases effective January 1, 2009averaged 2.0%.

·                  The Company filled key management positions during2009 such as the following:  Director ofWealth Management; Colorado and Arizona Bank Market Presidents.

·                  A new Special Asset Group was formed and as a resultthe Company hired eight employees in 2009.

·                  Overall, our employee base increased to 545 full-timeequivalent employees at the end of 2009 from 535 at the end of 2008.

 

Salaries and employee benefits increased by $7.0million, or 14.3%, to $55.6 million during the year ended December 31,2008.  The increase included expensesrelated to CoBiz Insurance — Arizona of $2.9 million and Wagner of $1.4million, business units 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 included anincrease in 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.

 

*Stock-Based Compensation*. ASC Topic 718 requires recognition ofcompensation costs associated with the grant-date fair value of awards issuedafter the adoption date and for the portion of awards for which the requisiteservice period had not previously been rendered.  Costs decreased $0.2 million during the yearended December 31, 2009.  Anincrease in option cancellations and a decrease in the weighted average fairvalue of awards issued over the past few years contributed to the overalldecrease in stock-based compensation during 2009.  Stock-based compensation in 2008 increased by$0.2 million as a result of new awards granted. The Company uses stock-based compensation to retain existing employees,recruit new employees and is considered an important part of overallcompensation.  The Company expects tocontinue using stock-based compensation in the future.

 

*Occupancy Costs*. Occupancy costs for the year ended December 31,2009, increased slightly by $0.1 million. For the year ended December 31, 2008, occupancy costs increased by$1.5 million over the year ended December 31, 2007.  The acquisitions of CoBiz Insurance — Arizonaand Wagner contributed approximately $0.4 million to the 2008 occupancy costincrease.  Two de novo locations thatwere not fully operational in 2007 also increased 2008 expense by $0.2 million.Maintenance costs, primarily related to computer systems, increased $0.3million and depreciation on computer hardware and software deployed in 2007-2008increased $0.2 million.  The Company alsoexpanded its leased premises during 2008 at the Company headquarters, whichincreased occupancy costs by $0.2 million.

 

*FDIC and Other Assessments. *FDIC and other assessments consist of premiums paid byFDIC-insured institutions and by Colorado chartered banks.  The assessments by the FDIC and the ColoradoDivision of Banking are based on statutory and risk classificationfactors.  FDIC and other assessmentsincreased by $3.4 million and $0.5 million for the years ended December 31,2009 and 2008, respectively.  Theincrease in 2009 FDIC costs is primarily attributed to an increase in rates onstandard assessments and a

 

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special assessment adopted by the FDIC on May 22,2009.  The special assessment increasedcosts by $1.2 million alone in the second quarter of 2009.  The Company’s standard FDIC assessments havebeen escalating since late 2008 when higher deposit insurance levels were madeavailable and the number of bank failures climbed (25 failures in 2008 and 140failures in 2009).

 

*Other Real Estate Owned and Loan Workout Costs.* Carrying costs and workout expenses of nonperforming loans and OREOincreased by $4.0 million and $0.1 million for the years ended December 31,2009 and 2008, respectively.  These costsare directly correlated to increased levels of nonperforming assets during2009, which totaled $104.5 million at December 31, 2009, compared to $47.0million a year earlier.

 

*Impairment of Goodwill. *During the first quarter of 2009, the Companyconcluded that the decline in its market capitalization and continued economicuncertainty were triggering events that would require a goodwill impairmenttest.  The results of the impairmentanalysis indicated that goodwill was impaired by $33.7 million, which wasincluded in the interim three month period ended on March 31, 2009.  During the third quarter of 2009, the Companytook an additional goodwill impairment of $12.5 million, entirely removinggoodwill from the consolidated balance sheet.

 

*Net Other Than Temporary Impairment Losses onSecurities.*Netother than temporary impairment losses on securities include credit lossesrecognized on available for sale securities during the year ended December 31,2009 in accordance with FASB guidance implemented by the Company during thesecond quarter of 2009.  The $0.9 millioncredit related OTTI was recognized on two debt securities.

 

*Loss on Securities, Other Assets and Other RealEstate Owned*.  Loss on securities, other assets and OREO of$4.7 million during 2009 remained comparable to 2008.  The loss on securities, other assets and OREOincreased by $3.6 million during 2008. The loss on securities, other assets and real estate owned werecomprised of the following during the years ended December 31, 2009, 2008,and 2007:

 
| ** **                     | ** ** | **Loss for the year ended December 31,** | ** ** | **Increase / (decrease)** | ** ** |
|--------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------|------------|
| **(in thousands)**        | ** ** | **2009**                                                               | ** ** | **2008**                            | ** ** | **2007** | ** ** | **2009 vs 2008** | ** ** | **2008 vs 2007** | ** ** |
| Available  for sale securities |       | $                                                                      | 1,140      |                                | $          | 1,657 |   | $ | 494 |   | $ | (517 | ) | $ | 1,163 |   |
| Loans  held for sale           |       | 139                                                                    |       | —                              |       | — |   | 139 |   | — |   |
| OREO  and repossessed assets   |       | 3,294                                                                  |       | 2,920                               |       | 471 |   | 374 |   | 2,449 |   |
| Other                          |       | 104                                                                    |       | 15                                  |       | 74 |   | 89 |   | (59 | ) |
|                           |       | $                                                                      | 4,677      |                                | $          | 4,592 |   | $ | 1,039 |   | $ | 85 |   | $ | 3,553 |   |

 

The 2009 loss on available for sale securitiesprimarily relates to a noncredit loss of $0.9 million on two single issuertrust preferred securities and $0.4 million on one debt security.  The 2008 loss was comprised of a $1.3 millionwrite down resulting from an increase in the credit risk associated with asingle issuer trust preferred security and a write down of $0.4 million on aFNMA perpetual preferred security. 

 

During 2009, the Company sold $15.8 million in OREOand recognized a $2.5 million loss upon sale. The remainder $0.8 million loss in OREO represents valuation adjustmentstaken on OREO held at December 31, 2009. Losses recognized on OREO sold during 2009 were primarily generated bythe sale of Land A&D and residential properties, which represent $1.3million and $1.2 million, respectively, of the total loss recognized in2009.  Of the $2.5 million loss generatedon the sale of OREO, $0.9 million related to properties located in Colorado and$1.6 million to properties located in Arizona.

 

During 2008, the Company recognized a $2.9 millionloss on OREO.  The loss included avaluation adjustment of $2.2 million and a loss of $0.7 million on the sale ofOREO.  The loss related to two LandA&D properties in Arizona.

 

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*Other Operating Expenses*. Other operating expenses for the yearended December 31, 2009, decreased by $0.4 million compared to an increaseof $1.0 million for the year ended December 31, 2008.  The decrease of $0.4 million in 2009 isattributed to a decrease in legal expenses of $0.4 million.  The 2008 increase of $1.0 million wasprimarily due an increase in service contracts and courier expense of $0.8million.

 

*Federal Income Taxes*. The net income tax benefit for the year ended December 31,2009, increased to $32.9 million from $0.1 million at December 31,2008.  The provision for income taxes was$13.7 million for the year ended December 31, 2007.  Pre-tax loss for the year ended December 31,2009 was $116.2 million compared to a pre-tax income of $1.6 million for theyear ended December 31, 2008. Permanent tax differences for the year ended December 31, 2009, comprisedprimarily of the nondeductible goodwill impairment of $33.3 million, increasedtaxable income by $31.5 million. Permanent differences for the year ended December 31, 2008, whichwere primarily comprised of tax-exempt income, reduced taxable income by $(1.7)million.  The effective tax rates for2009, 2008 and 2007 were 28.36%, (7.4)%, and 37.3%, respectively.

 

**Segment Results**

 

The Company reports fiveoperating segments: Commercial Banking, Investment Banking, Investment Advisoryand Trust, Insurance, and Corporate Support. A description of each segment is provided in Note 19 of theaccompanying notes to the Consolidated Financial Statements.  A valuation analysis of the Company’soperating segments was performed in 2009 to evaluate impairment of goodwill andother intangible assets.  The analyses indicated goodwill was impaired andnoncash charges of $33.7 million and $12.5 million were recorded at March 31,2009 and September 30, 2009, respectively.  The cumulative chargesremoved all goodwill from the Company’s consolidated balance sheet at December 31,2009.  For additional discussion of theimpairment see Note 6 to the Consolidated Financial Statements. Certainfinancial metrics of each operating segment (excluding Corporate Support) arepresented below.

 

*Commercial Banking.*

 
| ** **                                             | ** ** | **Commercial  Banking**           | ** ** | **2009 vs  2008**       | ** ** | **2008 vs  2007**       | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **Year  ended December 31,** | ** ** | **Increase/(decrease)** | ** ** | **Increase/(decrease)** | ** ** |
| **(in thousands)**                                     | ** ** | **2009**                          | ** ** | **2008**                | ** ** | **2007**                | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| *Income Statement*                                     |       |                              |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Net  interest income                                   |       | $                                 | 107,213    |                    | $          | 100,748                 |       | $ | 93,455 |   | $ | 6,465 |   | 6 | % | $ | 7,293 |   | 8 | % |
| Provision  for loan losses                             |       | 103,427                           |       | 39,796                  |       | 3,965                   |       | 63,631 |   | 160 | % | 35,831 |   | 904 | % |
| Noninterest  income                                    |       | 9,555                             |       | 8,785                   |       | 7,398                   |       | 770 |   | 9 | % | 1,387 |   | 19 | % |
| Noninterest  expense                                   |       | 34,533                            |       | 33,098                  |       | 28,444                  |       | 1,435 |   | 4 | % | 4,654 |   | 16 | % |
| Impairment  of goodwill                                |       | 15,348                            |       | —                  |       | —                  |       | 15,348 |   | 100 | % | — |   |   |   |
| Provision  (benefit) for income taxes                  |       | (19,829                           | )          | 3,075                   |       | 16,710                  |       | (22,904 | ) | (745 | )% | (13,635 | ) | (82 | )% |
| Net  income (loss) before management fees and overhead |       | (16,711                           | )          | 33,564                  |       | 51,734                  |       | (50,275 | ) | (150 | )% | (18,170 | ) | (35 | )% |
| Management  fees and overhead allocations, net of tax  |       | 30,987                            |       | 26,889                  |       | 23,045                  |       | 4,098 |   | 15 | % | 3,844 |   | 17 | % |
| Net  income (loss)                                     |       | $                                 | (47,698    | )                       | $          | 6,675                   |       | $ | 28,689 |   | $ | (54,373 | ) | (815 | )% | $ | (22,014 | ) | (77 | )% |

 

The Commercial Bankingsegment reported a net loss of $47.7 million for the year ended December 31,2009, compared to net income of $6.7 million in the prior year period.  The increase in net interest income during2009 was primarily the result of a decrease in interest paid on investmentsecurities and a decline on interest paid on interest-bearing liabilitiesresulting from historically low interest rates. An increase in loan charge-offs, increased levels of nonperforming loansand deterioration in the credit quality of certain other loans resulted in a$63.6 million increase in the provision for loan losses.  Pursuant to the March 31, 2009, goodwillimpairment analysis, a $15.3 million goodwill impairment charge was recorded.

 

Net income for the yearended December 31, 2008 decreased by $22.0 million from the prior year to$6.7 million.  The $22.0 million decreasewas primarily attributable to an increase in provision for loan losses of $35.8million, an increase in noninterest expenses of $4.7 million, and an increasein management fees and overhead allocations of $3.8 million.  Net interest income and noninterest incomeincreased by $7.3

 

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million and $1.4 million,respectively, during the year ended December 31, 2008.  Provision for income taxes decreasedsignificantly by $13.6 million to $3.1 million during the year ended December 31,2008.

 

*Investment Banking.*

 
| ** **                                             | ** ** | **Investment  Banking**           | ** ** | **2009 vs  2008**       | ** ** | **2008 vs  2007**       | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **Year  ended December 31,** | ** ** | **Increase/(decrease)** | ** ** | **Increase/(decrease)** | ** ** |
| **(in thousands)**                                     | ** ** | **2009**                          | ** ** | **2008**                | ** ** | **2007**                | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| *Income  Statement*                                    |       |                              |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Net interest  income                                   |       | $                                 | 7          |                    | $          | 38                      |       | $ | 129 |   | $ | (31 | ) | (82 | )% | $ | (91 | ) | (71 | )% |
| Noninterest  income                                    |       | 1,154                             |       | 5,055                   |       | 6,681                   |       | (3,901 | ) | (77 | )% | (1,626 | ) | (24 | )% |
| Noninterest  expense                                   |       | 4,024                             |       | 5,117                   |       | 5,949                   |       | (1,093 | ) | (21 | )% | (832 | ) | (14 | )% |
| Impairment of  goodwill                                |       | 5,279                             |       | —                  |       | —                  |       | 5,279 |   | 100 | % | — |   | 0 | % |
| Provision  (benefit) for income taxes                  |       | (3,768                            | )          | (99                     | )          | 218                     |       | (3,669 | ) | (3,706 | )% | (317 | ) | (145 | )% |
| Net income (loss)  before management fees and overhead |       | (4,374                            | )          | 75                      |       | 643                     |       | (4,449 | ) | (5,932 | )% | (568 | ) | (88 | )% |
| Management fees  and overhead allocations, net of tax  |       | 211                               |       | 265                     |       | 321                     |       | (54 | ) | (20 | )% | (56 | ) | (17 | )% |
| Net income (loss)                                      |       | $                                 | (4,585     | )                       | $          | (190                    | )          | $ | 322 |   | $ | (4,395 | ) | (2,313 | )% | $ | (512 | ) | (159 | )% |

 

Net losses for theyears ended December 31, 2009 and 2008 were $4.6 million and $0.2 million,respectively.  The increase in losses for the segment during 2009 and 2008is primarily attributed to a decline in noninterest income resulting from adecrease in the number and size of deals closing during these years.  Alsocontributing to the net loss in 2009 was a $5.3 million noncash goodwillimpairment recorded as a result of goodwill analyses conducted.

 

Restricted credit marketshad an adverse impact on both volume and multiples in middle-markettransactions during 2009 and 2008.  Thesegment continues to have a diversified backlog of engaged transactions, thoughthe number of engaged deals placed on hold or reaching the agreed upon maximumretainer billings increased during 2009.  The segment’s bankers continueto work engaged deals and seek new deals in new industries.  During 2009,the segment added new bankers experienced in technological companies. Management believes the near-term cost increases will be outweighed by thebenefits of the segment’s increased expertise as credit markets continue toloosen for prospective acquirers and valuations become more attractive to prospectivesellers.

 

*Investment Advisory and Trust.*

** **
| ** **                                             | ** ** | **Investment  Advisory and Trust** | ** ** | **2009 vs  2008**       | ** ** | **2008 vs  2007**       | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **Year  ended December 31,**  | ** ** | **Increase/(decrease)** | ** ** | **Increase/(decrease)** | ** ** |
| **(in thousands)**                                     | ** ** | **2009**                           | ** ** | **2008**                | ** ** | **2007**                | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| *Income Statement*                                     |       |                               |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Net  interest income                                   |       | $                                  | (16        | )                       | $          | (5                      | )          | $ | 2 |   | $ | (11 | ) | (220 | )% | $ | (7 | ) | (350 | )% |
| Noninterest  income                                    |       | 5,186                              |       | 6,345                   |       | 4,763                   |       | (1,159 | ) | (18 | )% | 1,582 |   | 33 | % |
| Noninterest  expense                                   |       | 6,252                              |       | 6,223                   |       | 4,335                   |       | 29 |   |   | % | 1,888 |   | 44 | % |
| Impairment  of goodwill                                |       | 6,518                              |       | —                  |       | —                  |       | 6,518 |   | 100 | % | — |   | 0 | % |
| Provision  (benefit) for income taxes                  |       | (1,440                             | )          | (113                    | )          | 45                      |       | (1,327 | ) | (1,174 | )% | (158 | ) | (351 | )% |
| Net  income (loss) before management fees and overhead |       | (6,160                             | )          | 230                     |       | 385                     |       | (6,390 | ) | (2,778 | )% | (155 | ) | (40 | )% |
| Management  fees and overhead allocations, net of tax  |       | 615                                |       | 518                     |       | 402                     |       | 97 |   | 19 | % | 116 |   | 29 | % |
| Net  income (loss)                                     |       | $                                  | (6,775     | )                       | $          | (288                    | )          | $ | (17 | ) | $ | (6,487 | ) | (2,252 | )% | $ | (271 | ) | (1,594 | )% |

 

Net loss for theyear ended December 31, 2009 increased $6.5 million to $6.8 millionfrom the prior year.  The increase in the net loss for the segment during2009 was impacted by a decline in noninterest income of $1.2 million resultingfrom a drop in AUM levels.  Revenues of this segment are generally afunction of the value of AUM, but despite significant gains in the broadermarket during the latter half of 2009, equity values remain well off the higherlevels during 2008.  Additionally,goodwill was completely eliminated from the segment during 2009 through anoncash goodwill impairment charge of $6.5 million.

 

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The net loss forthe year ended December 31, 2008 was $0.3 million compared to a net lossof less than $0.1 million during the year ended December 31, 2007. The increase in noninterest income of $1.6 million was overshadowed by anincrease of $1.9 million in noninterest expenses during 2008.  Theincreases in noninterest income and expenses during 2008 resulted from theinclusion of Wagner in our results of operations.  Wagner was acquired on December 31,2007.

 

Discretionary AUMincreased by $46.0 million to $755.2 million at December 31, 2009 from$709.2 at December 31, 2008.  Discretionary AUM at December 31,2007 were $963.2 million.  Total AUM, including custody and advisoryassets, were $1.5 billion at December 31, 2009, a decline of $104.4million from the prior year.  Total AUM at December 31, 2007 were$1.7 billion.  Total AUM includes custody assets and a significantadvisory client base, which receives an hourly consulting fee as opposed to abasis-point-fee on AUM.

 

In general, adecline in the broader equity market has negatively impacted the segment’s AUMlevels. Existing discretionary assets have decreased due to negative equityreturns and attracting new assets billed at the standard rates is proving to bedifficult given general market conditions.  Continued pressure on AUM andfee levels may mute current-year revenue growth.

 

*Insurance.*

 
| ** **                                             | ** ** | **Insurance**                     | ** ** | **2009 vs  2008**       | ** ** | **2008 vs  2007**       | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **Year  ended December 31,** | ** ** | **Increase/(decrease)** | ** ** | **Increase/(decrease)** | ** ** |
| **(in thousands)**                                     | ** ** | **2009**                          | ** ** | **2008**                | ** ** | **2007**                | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| *Income Statement*                                     |       |                              |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Net  interest income                                   |       | $                                 | (13        | )                       | $          | (7                      | )          | $ | 1 |   | $ | (6 | ) | (86 | )% | $ | (8 | ) | (800 | )% |
| Noninterest  income                                    |       | 11,778                            |       | 15,113                  |       | 9,397                   |       | (3,335 | ) | (22 | )% | 5,716 |   | 61 | % |
| Noninterest  expense                                   |       | 12,149                            |       | 14,090                  |       | 9,497                   |       | (1,941 | ) | (14 | )% | 4,593 |   | 48 | % |
| Impairment  of goodwill                                |       | 19,015                            |       | —                  |       | —                  |       | 19,015 |   | 100 | % | — |   | 0 | % |
| Provision  (benefit) for income taxes                  |       | (1,934                            | )          | 187                     |       | (260                    | )          | (2,121 | ) | (1,134 | )% | 447 |   | 172 | % |
| Net  income (loss) before management fees and overhead |       | (17,465                           | )          | 829                     |       | 161                     |       | (18,294 | ) | (2,207 | )% | 668 |   | 415 | % |
| Management  fees and overhead allocations, net of tax  |       | 635                               |       | 652                     |       | 703                     |       | (17 | ) | (3 | )% | (51 | ) | (7 | )% |
| Net  income (loss)                                     |       | $                                 | (18,100    | )                       | $          | 177                     |       | $ | (542 | ) | $ | (18,277 | ) | (10,326 | )% | $ | 719 |   | 133 | % |

 

Net loss for the yearended December 31, 2009 was $18.1 million compared to net income of $0.2million for the year ended December 31, 2008.  The decline in netincome of $18.3 million during 2009 is primarily attributed to a decline of$3.3 million in noninterest income and a $19.0 million noncash goodwillimpairment charge offset by a decline of $1.9 million in noninterest expenses,primarily salaries and benefits.  Thedecline in noninterest income is largely the result of slower life insurancesales, which have been affected by the current economic climate as clients arecautious in committing to the large cash premiums generally associated with thewhole life products that generate the majority of new life insurancesales.  Income from the property and casualty insurance units was alsodown compared to the 2008 period as a result of a persistent softness inpremiums as well as downward pressure on agent commissions.

 

Net income for the yearended December 31, 2008 was $0.2 million compared to a net loss of $0.5million for the year ended December 31, 2007.  The increase innet income during 2008 was primarily attributed to the acquisition of CoBizInsurance — AZ on January 2, 2008.  CoBiz Insurance — AZ contributed$4.0 million in revenues during its first year of operations as part of theCompany.

 

**Liquidity and Capital Resources**

 

Liquidity refers to theCompany’s ability to generate adequate amounts of cash to meet financial obligationsto its customers and shareholders in order to fund loans, to respond to depositoutflows and to cover operating expenses.  Maintaining a level ofliquid funds through asset/liability management seeks to ensure that theseneeds are met at a reasonable cost.  Liquidity is essential tocompensate for fluctuations in the balance sheet and provide funds for growthand normal operating

 

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expenditures.  Sourcesof funds include customer deposits, scheduled amortization of loans, loanprepayments, scheduled maturities of investments and cash flows frommortgage-backed securities.  Liquidity needs may also be met bydeposit growth, converting assets into cash, raising funds in the brokeredcertificate of deposit market or borrowing using lines of credit withcorrespondent banks, the FHLB, the FRB or the Treasury.  Longer-term liquidity needs may be met byselling securities available for 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 primaryresponsibilities are to ensure the necessary level of funds are available fornormal operations as well as maintain a contingency funding policy to ensurethat liquidity stress events are quickly identified and management plans are inplace to respond. This is accomplished through the use of policies whichestablish limits and require measurements to monitor liquidity trends,including management reporting that identifies the amounts and costs of allavailable funding 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, 2009, totaled $540.1 million, whichrepresents 23.8% of the Company’s earning assets.  Available funding is comprised of $234.8million in available federal funds purchased lines and $305.3 million in FHLBborrowing capacity. In addition, the Company had $101.1 million in securitiesavailable to be pledged for collateral for additional FHLB borrowings and TAFborrowings at December 31, 2009.

 

Liquidity from assetcategories is provided through cash and interest-bearing deposits with otherbanks, which totaled $47.6 million at December 31, 2009, compared to $45.5million at December 31, 2008.  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 99% and 96% of our total deposits balance of $2.0 billionand $1.6 billion at December 31, 2009 and 2008, respectively.  Our loan portfolio decreased by $248.6million or 12.2% to $1.8 billion at December 31, 2009.  The Company’s loan to core deposit ratiodecreased to 91.0% at December 31, 2009, from 129.2% at December 31,2008.  The combination of the decline inthe loan portfolio and the increase in the deposit portfolio has allowed theCompany to reduce its wholesale borrowings (short-term borrowings and brokeredCDs) by $599.1 million during 2009.

 

The Company uses variousforms of short-term borrowings for cash management and liquidity purposes.These forms of borrowings include federal funds purchased, securities soldunder agreements to repurchase, borrowings from the FHLB and revolvinglines-of-credit. At December 31, 2009, the Bank has approved unsecuredfederal funds purchase lines with nine correspondent banks with an aggregatecredit line of $235.0 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 2009, the Company’s aggregatecorrespondent credit lines decreased by $15.0 million.  As a result, the

 

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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 unpledged securitiesand qualifying loans. Borrowings may also be used on a longer-term basis tosupport expanded lending activities and to match the maturity or repricingintervals of assets.

 

The Company was approvedto participate in the Federal Reserve’s TAF program.  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, 2009, the Company did not have a balanceoutstanding under the TAF.  The averageTAF outstanding balance during 2009 was $240.4 million and the weighted averageinterest rate paid ranged from 0.2% to 1.39%. The Company had approximately $340.0 million available in loans topledge as collateral for additional funding under the TAF.  The Federal Reserve announced in June 2009that due to improvements in the financial markets, the size and terms ofcertain liquidity programs, including the TAF, were being changed.  While the TAF does not have a fixedexpiration date, the size of the auctions was reduced from $150.0 billion to$75.0 billion.  However, the auctionshave not been fully subscribed even at the reduced level.  The Company intends to continue utilizing theTAF as funding needs arise.

 

At the holding companylevel, our primary sources of funds are dividends paid from the Bank andfee-based subsidiaries, management fees assessed to the Bank and the fee-basedbusiness lines, proceeds from the issuance of common stock, and other capital marketsactivity.  The main use of this liquidityis the quarterly payment of dividends on our common and preferred stock,quarterly interest payments on the subordinated debentures and notes payable,payments for mergers and acquisitions activity (including potential earn-outpayments), and payments for the salaries and benefits for the employees of theholding company.  In March 2009, theCompany reduced its quarterly dividend payment from $0.07 per share to $0.01per share in order to preserve its capital base.  The reduction in the quarterly dividend savedthe Company approximately $5.6 million per year based on shares outstanding atthe date of the dividend reduction. 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.”  At December 31, 2009, the Bank wasrestricted in its ability to pay dividends to the holding company as itsearnings in the current and prior two years, net of dividends paid during thoseyears, was negative.  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 FederalReserve Board of Governors (see Note 16 of the Notes to the ConsolidatedFinancial Statements).

 

Our primary source ofshareholders’ equity is the retention of our net after-tax earnings andproceeds from the issuance of common stock. On July 20, 2009, the Company completed an underwritten publicplacement of 13,205,600 shares of the Company’s common stock (including anunderwriter’s option) at a price of $4.50 per share. The offering provided netproceeds to the Company of approximately $55.8 million after deductingunderwriting discounts and estimated offering expenses.  The proceeds will be used to support thegrowth and related capital needs of the Bank, expand our operations through newde novo branch offices, fund possible acquisitions, and fund working capitalneeds.

 

At December 31,2009, shareholders’ equity totaled $230.5 million, a $21.6 million decreasefrom December 31, 2008.  Thedecrease was primarily due to a net loss of $83.0 million; dividends paid onpreferred stock of $3.2 million; and dividends paid on common stock of $2.6million.  The aforementioned decreaseswere offset by $55.8 million in net proceeds from the issuance of 13,205,600shares of common stock; $1.5 million in stock-based compensation expense; $0.4million of stock options, excess tax benefits on option exercises and employeestock purchase plan activity; and an increase of $9.5 million in accumulatedother comprehensive income due mainly to net unrealized gains in the availablefor sales securities portfolio.

 

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On June 23, 2009, the Company terminated itsrevolving line of credit facility with U.S. Bank National Association.  The revolving line of credit had an aggregateprincipal sum of up to $30.0 million with an interest rate based on aLIBOR-based rate or a variable federal funds-based rate, plus a spread of1.35%.  The agreement was terminated atthe request of the Company prior to its expiration on July 30, 2009.  There was no amount drawn on the line ofcredit at the time of the termination and no premium or penalty was assessed tothe Company for early termination.

 

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 were 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 depositfunding sources.  Based on our currentfinancial condition and our results of operations, we believe that the Companywill be able to sustain its ability to raise adequate capital through one ofthese financing sources.

 

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 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, 2009, the Bank was well-capitalized with a Tier 1Capital ratio of 10.1%, and Total Capital ratio of 11.4%. 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 1 Capitalratio at December 31, 2009, was 13.8%, and its Total Capital ratio 16.1%.Total Risk-Based Capital for the consolidated company increased by $6.4 millionduring 2009.  In order to comply with theregulatory capital constraints, the Company and its Board of Directorsconstantly monitor the capital level and its anticipated needs based on theCompany’s growth. The Company has identified sources of additional capital thatcould be used if needed, and monitors the costs and benefits of these sources,which include both the public and private markets.

 

The Company has issued atotal of $70.0 million of trust preferred securities through statutory truststhat are not included in the Company’s Consolidated Financial Statements.  Although the accounts of the Statutory Trust,Capital Trust II and Capital Trust III are not included in the Company’sConsolidated Financial Statements, $70.0 million in trust preferred securitiesissued by the trusts are included in Tier 1 capital for regulatory capitalpurposes as allowed by the Federal Reserve Board at December 31,2009.  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, after a transition period ending on March 31, 2009, theaggregate amount of trust preferred securities and certain other capitalelements would be limited to 25% of Tier 1 capital elements, net of goodwillthat has been reduced by any associated 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 certain restrictions. On March 17, 2009, the Federal Reserve Board announced the adoptionof a final rule that delays the initial effective date of March 31,2009 to March 31, 2011.  Uponadoption of this rule, the Company would still maintain its well capitalizedstatus.

 

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The Company’sConsolidated 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 following Contractual Obligations and Commitments section.  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 andCommitments**

 

Summarized below are the Company’s contractualobligations (excluding deposit liabilities) to make future payments at December 31,2009:

 
| ** **                                   | ** ** | ** **   | ** ** | **After one**   | ** ** | **After three** | ** ** | ** **     | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|--------------|------------|-----------------|------------|-----------------|------------|----------------|------------|------------|------------|
| ** **                                   | ** ** | **Within**   | ** ** | **but within**  | ** ** | **but within**  | ** ** | **After**      | ** ** | ** ** | ** ** |
| **(in  thousands)**                          | ** ** | **one year** | ** ** | **three years** | ** ** | **five years**  | ** ** | **five years** | ** ** | **Total**  | ** ** |
| Federal  funds purchased (1)                 |       | $            | 240        |            | $          | —          |       | $              | —     |       | $          | — |   | $ | 240 |   |
| Repurchase  agreements (1)                   |       | 139,794      |       | —          |       | —          |       | —         |       | 139,794    |       |
| Operating  lease obligations                 |       | 4,981        |       | 10,095          |       | 7,966           |       | 10,536         |       | 33,578     |       |
| Long-term  debt obligations (2)              |       | 6,012        |       | 12,022          |       | 30,419          |       | 121,149        |       | 169,602    |       |
| Preferred  Stock, Series B dividend (3) |       | 3,223        |       | 6,445           |       | 67,601          |       | —         |       | 77,269     |       |
| Supplemental  executive retirement plan      |       | —       |       | —          |       | —          |       | 2,920          |       | 2,920      |       |
|                                         |       |         |       |            |       |            |       |           |       |       |       |
| Total  contractual obligations               |       | $            | 154,250    |            | $          | 28,562          |       | $              | 105,986    |       | $          | 134,605 |   | $ | 423,403 |   |

 

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

 

(2)          Principalrepayment of the junior subordinated debentures is assumed to be at thecontractual maturity while principal repayment of the subordinated notespayable is assumed to be its first call date (see Note 9 to the ConsolidatedFinancial Statements) .  Interest on thejunior subordinated debentures is calculated at the fixed rate associated withthe applicable hedging instrument through the instrument maturity date (seeNote 10 to the Consolidated Financial Statements) and then at the currentvariable rate through contractual maturity and is reported in the “due within”categories during which the interest expense is expected to be incurred.  Included in long-term debt obligations areestimated interest payments related to Subordinated Debt (junior and unsecured)of $6.0 million due “Within one year”, $12.0 million due “After one but withinthree years”, $9.4 million due “After three but within five years” and $49.0million due “After five years.”  Variableinterest rate payments on junior subordinated debentures after maturity of therelated fixed interest rate swap hedge and actual interest payments will differbased on actual LIBOR and actual amounts outstanding for the applicableperiods.

 

(3)       Cumulative PerpetualPreferred Stock, Series B issued to the US Treasury in December 2008includes dividends payable at 5% on $64.5 million.  The preferred shares are shown in the tableas being due in the “After three but within five years” category which assumesthe $64.5 million in preferred stock will be redeemed in the year prior to thecontractual dividend rate step up to 9% effective in December 2013.

 

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 31,2009, the Company did not accrue for any earn-out payments for the fiscal year2009.  No amount was earned under theearn-out arrangements for the year ended December 31, 2008.  See Note 2 to the Consolidated FinancialStatements for additional discussion on these earn-outs.

 

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The Company, at the time of the purchase of the assetsof BDA, placed into escrow $0.8 million as deferred purchase price that couldbe earned by achieving certain agreed upon performance measures over thetwo-year period following the acquisition. At December 31, 2008, it was determined the unit had met the firstof two performance measures and in January 2009 $0.4 million of thedeferred purchase price was released to the former owners. At December 31,2009, performance measures were not met, no additional amounts were earnedunder the deferred purchase price arrangement and the remaining $0.4 millionwas released from escrow to the Company.

 

The contractualamount of the Company’s financial instruments with off-balance sheet risk,expiring by period at December 31, 2009, is presented below:

 
| ** **                                           | ** ** | ** **   | ** ** | **After one**   | ** ** | **After three** | ** ** | ** **     | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|--------------|------------|-----------------|------------|-----------------|------------|----------------|------------|------------|------------|
| ** **                                           | ** ** | **Within**   | ** ** | **but within**  | ** ** | **but within**  | ** ** | **After**      | ** ** | ** ** | ** ** |
| **(in  thousands)**                                  | ** ** | **one year** | ** ** | **three years** | ** ** | **five years**  | ** ** | **five years** | ** ** | **Total**  | ** ** |
| Unfunded  loan commitments                           |       | $            | 371,177    |            | $          | 95,531          |       | $              | 28,629     |       | $          | 2,719 |   | $ | 498,056 |   |
| Standby  letters of credit                           |       | 55,013       |       | 1,474           |       | 120             |       | —         |       | 56,607     |       |
| Commercial  letters of credit                        |       | 202          |       | —          |       | —          |       | —         |       | 202        |       |
| Unfunded  commitments for unconsolidated investments |       | 2,180        |       | —          |       | —          |       | —         |       | 2,180      |       |
| Company  guarantees                                  |       | 1,346        |       | —          |       | —          |       | —         |       | 1,346      |       |
|                                                 |       |         |       |            |       |            |       |           |       |       |       |
| Total  commitments                                   |       | $            | 429,918    |            | $          | 97,005          |       | $              | 28,749     |       | $          | 2,719 |   | $ | 558,391 |   |

 

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 bythe Company upon extension of credit, is based on management’s creditevaluation.

 

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 $25.1million of total commitments at December 31, 2009, 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 balance sheetat December 31, 2009, do not represent amounts that will ultimately bereceived or paid under the contract and are therefore excluded from the tableabove.

 

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**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.

 

**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 our objectiveto generate stable growth in net interest income and to attempt to controlrisks associated with interest rate movements. In general, our strategy is toreduce 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 and liabilitiesto interest rate changes, the book and market values of assets and liabilities,unrealized gains and losses, purchase and sale activity, and maturities ofinvestments and borrowings. The asset-liability committee also approves andestablishes pricing and funding decisions with respect to our overall asset andliability composition. The committee reviews our liquidity, cash flowflexibility, 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, 2009, 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, 2009, with prime set at 300 basispoints above the FOMC target — the downward movement analysis was limited to a100 basis 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 31,2009, 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                                          |       | (.9 | )% | — |   | 1.2 | % | 2.0 | % |
| Market  value of equity |       | n/a                                          |       | (8.8 | )% | — |   | 6.9 | % | 12.2 | % |

 

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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 to experiencedeclines in net interest income in periods of rising interest rates. At December 31,2009, our cumulative interest rate gap was a positive 27.9%. Therefore,assuming no change in our gap position, a rise in interest rates is likely toresult in increased net interest income, while a decline in interest rates islikely to result in decreased net interest income. This is a point-in-timeposition that is continually changing and is not indicative of our position atany other time. While the gap position is a useful tool in measuring interestrate risk and contributes toward effective asset and liability management,shortcomings are inherent in gap analysis since certain assets and liabilitiesmay not move proportionally as interest rates change. Consequently, in additionto gap analysis, we use the simulation model discussed above to test theinterest rate sensitivity 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, 2009. 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, 2009** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                     | ** ** | ** **                                                    | ** ** | **Three months** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Less than**                                                 | ** ** | **to less than** | ** ** | **One to** | ** ** | **Over** | ** ** | ** ** | ** ** |
| **(in  thousands)**                                            | ** ** | **three months**                                              | ** ** | **one year** | ** ** | **five years** | ** ** | **five years** | ** ** | **Total** | ** ** |
| Interest-earning  assets:                                      |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest  bearing deposits and federal funds sold              |       | $                                                             | 18,651     |   | $ | — |   | $ | — |   | $ | — |   | $ | 18,651 |   |
| Fixed  rate loans                                              |       | 77,753                                                        |       | 91,161 |   | 291,291 |   | 81,614 |   | 541,819 |   |
| Floating  rate loans                                           |       | 746,985                                                       |       | 30,769 |   | 443,317 |   | 19,796 |   | 1,240,867 |   |
| Investment  securities held to maturity and available for sale |       | 101,180                                                       |       | 505 |   | 270,326 |   | 173,969 |   | 545,980 |   |
| Total  interest-earning assets                                 |       | $                                                             | 944,569    |   | $ | 122,435 |   | $ | 1,004,934 |   | $ | 275,379 |   | $ | 2,347,317 |   |
|                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                 |       |                                                          |       |   |   |   |   |   |   |   |   |
| NOW  and money market                                          |       | $                                                             | 24,278     |   | $ | 110,316 |   | $ | 346,316 |   | $ | 227,535 |   | $ | 708,445 |   |
| Savings                                                        |       | 528                                                           |       | 528 |   | 3,060 |   | 6,436 |   | 10,552 |   |
| Eurodollar                                                     |       | 107,500                                                       |       | — |   | — |   | — |   | 107,500 |   |
| Time  deposits under $100,000                                  |       | 35,034                                                        |       | 34,036 |   | 3,720 |   | 59 |   | 72,849 |   |
| Time  deposits $100,000 and over                               |       | 243,014                                                       |       | 272,317 |   | 11,210 |   | 178 |   | 526,719 |   |
| Securities  sold under agreements to repurchase                |       | 139,794                                                       |       | — |   | — |   | — |   | 139,794 |   |
| Other  short-term borrowings                                   |       | 240                                                           |       | — |   | — |   | — |   | 240 |   |
| Subordinated  debentures                                       |       | —                                                        |       | — |   | — |   | 93,150 |   | 93,150 |   |
| Total  interest-bearing liabilities                            |       | $                                                             | 550,388    |   | $ | 417,197 |   | $ | 364,306 |   | $ | 327,358 |   | $ | 1,659,249 |   |
|                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest  rate gap                                             |       | $                                                             | 394,181    |   | $ | (294,762 | ) | $ | 640,628 |   | $ | (51,979 | ) | $ | 688,068 |   |
|                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| Cumulative  interest rate gap                                  |       | $                                                             | 394,181    |   | $ | 99,419 |   | $ | 740,047 |   | $ | 688,068 |   |   |   |
|                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| Cumulative  interest rate gap to total assets                  |       | 15.98                                                         | %          | 4.03 | % | 30.01 | % | 27.90 | % |   |   |

 

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.

 

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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.

 

The following table presents, at December 31,2009, 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, 2009** | ** ** |
|----------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **Less than**                 | ** ** | **One to** | ** ** | **Over** | ** ** | ** ** | ** ** |
| **(in  thousands)**              | ** ** | **one year**                  | ** ** | **five years** | ** ** | **five years** | ** ** | **Total** | ** ** |
| Commercial                       |       | $                             | 370,897    |   | $ | 155,701 |   | $ | 33,014 |   | $ | 559,612 |   |
| Real  estate – mortgage     |       | 320,635                       |       | 547,824 |   | 67,051 |   | 935,510 |   |
| Real  estate – construction |       | 177,927                       |       | 15,808 |   | — |   | 193,735 |   |
| Consumer                         |       | 73,327                        |       | 2,658 |   | 118 |   | 76,103 |   |
| Other                            |       | 3,882                         |       | 12,617 |   | 1,227 |   | 17,726 |   |
|                             |       |                          |       |   |   |   |   |   |   |
| Total  loans                     |       | $                             | 946,668    |   | $ | 734,608 |   | $ | 101,410 |   | $ | 1,782,686 |   |

 

Of the $836.0 million of loans with maturities of oneyear or more, approximately $373.0 million were fixed-rate loans and $463.0million were variable-rate loans at December 31, 2009.

 

To augment our asset and liability management strategy,we also began using interest-rate swaps on our loan portfolio in 2004, with theoverall goal of minimizing the impact of interest rate fluctuations on our netinterest margin. 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, 2009.

 

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 ASC Topic 815, *Derivatives and Hedging*(ASC815), (originally issued as 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 ASC 815, 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 ofoperations as a part of noninterest income.

 

Interest-rate swap information at December 31,2009, is summarized as follows:

 

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| **(in thousands)**            | ** ** | **Amortization of notional** | ** ** |
|-------------------------------|------------|------------------------------|------------|
| **Swap**                      | ** ** | **Maturity date**            | ** ** | **Fixed rate** | ** ** | **Notional** | ** ** | **Fair market  value** | ** ** | **2010** | ** ** | **2011** | ** ** |
| Swap  - January 26, 2007 |       | April 1,  2010          |       | 8.080 | % | $ | 5,000 |   | $ | 62 |   | $ | 5,000 |   | $ | — |   |
| Swap  - April 2, 2007    |       | May 1, 2010             |       | 7.776 | % | 5,000 |   | 77 |   | 5,000 |   | — |   |
| Swap  - May 29, 2007     |       | June 1,  2010           |       | 8.053 | % | 5,000 |   | 103 |   | 5,000 |   | — |   |
| Swap  - August 16, 2007  |       | August 1,  2010         |       | 7.630 | % | 5,000 |   | 129 |   | 5,000 |   | — |   |
| Swap  - October 5, 2007  |       | October 1,  2010        |       | 7.426 | % | 5,000 |   | 155 |   | 5,000 |   | — |   |
| Swap  - June 10, 2008    |       | June 1,  2011           |       | 6.360 | % | 10,000 |   | 252 |   | 5,000 |   | 5,000 |   |
| Swap  - October 17, 2008 |       | October 1,  2011        |       | 5.520 | % | 25,000 |   | 667 |   | — |   | 25,000 |   |
|                          |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Total                         |       |                         |       |   |   | $ | 60,000 |   | $ | 1,445 |   | $ | 30,000 |   | $ | 30,000 |   |

 

*During2009, 2008 and 2007, net interest income was increased or (decreased) by $2.6million, $2.1 million and ($1.4) million, respectively, from the settlement ofthe 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 its junior subordinated debentures with the objective of reducing theCompany’s exposure to adverse changes in cash flows relating to payments on itsLIBOR-based floating-rate debt.  The swapagreements having a total notional value of $70.0 million will fix the interestrates between 5.0% and 6.0% and mature over varying lengths of time from fiveand 20 years.  These interest-rate swapsare effective for cash settlements beginning in February 2010.*

 

**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 2009 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 of IndependentRegistered Public Accounting Firm are set forth in our Consolidated FinancialStatements and the reports thereon beginning at page F-1.*

 

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**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 2010 Annual Meetingof Shareholders (the “2010 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 2010 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 2010 Proxy Statement and is hereby incorporated byreference.

 

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 concerningthe compensation of Company executives called for by this item will be includedin the 2010 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 by thisitem will be included in the Company’s 2010 Proxy Statement under the caption “PrincipalShareholders” and is incorporated herein by reference. Information regardingsecurities authorized for issuance under equity compensation plans appearingunder the caption “Executive Compensation — Stock Option Plans” will beincluded in our 2010 Proxy Statement and is hereby incorporated by 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 2010 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 2010 Proxy Statement and is incorporated herein by reference.*

 

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**PART IV**

** **

**Item 15. Exhibitsand Financial Statement Schedules**

 

(a)(1)              The following documents are filed as partof this Annual Report on Form 10-K:

 

Management’s Report onInternal Control Over Financial Reporting;

 

Reports of IndependentRegistered Public Accounting Firm;

 

Consolidated BalanceSheets at December 31, 2009 and 2008;

 

Consolidated Statementsof Operations and Comprehensive Income (Loss) for the Years Ended December 31,2009, 2008 and 2007;

 

Consolidated Statementsof Equity for the Years Ended December 31, 2009, 2008 and 2007;

 

Consolidated Statementsof Cash Flows for the Years Ended December 31, 2009, 2008 and 2007;

 

Notes to ConsolidatedFinancial Statements at and for the Years Ended December 31, 2009, 2008and 2007.

 

(2)          All financial statement schedules are omitted becausethey are not required or because the required information is included in thefinancial statements and/or related notes.

 

(3)          Exhibits and Index of Exhibits:

 

(1)(2)                                                        2                                       Amended and Restated Agreement and Planof Merger dated November 28, 2000.

 

(2)                                                                      3.1                              Amended and Restated Articles ofIncorporation 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 theRegistrant.

 

(18)                                                                3.6                              Amendment to Articles of Incorporation.

 

(25)                                                                3.7                              Amendment to Articles of Incorporation.

 

(23)                                                                4.1                              Form of Subordinated UnsecuredPromissory Notes due 2018.

 

(23)                                                                4.2                              Form of Note Holders Agreement,dated August 18, 2008, by and between CoBiz Financial Inc. and Holders ofPromissory Notes Issued by CoBiz Financial Inc. in connection with a PrivatePlacement Memorandum of CoBiz Financial Inc. dated as of July 25, 2008.

 

(25)                                                                4.3                              Form of Certificate for 64,450shares 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 Purchase895,968 shares of Common Stock issued December 19, 2008 to the UnitedStates Department of the Treasury (original warrantholder).

 

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(2)                                                                      10.1                        CoBiz Inc. 1998 Stock Incentive Plan.

 

(2)                                                                      10.2                        Amended and Restated CoBiz Inc. 1997Incentive Stock Option Plan.

 

(2)                                                                      10.3                        Amended and Restated CoBiz Inc. 1995Incentive Stock Option Plan.

 

(2)                                                                      10.4                        Employment Agreement, dated at March 1,1995, by and between Equitable Bankshares of Colorado, Inc. and JonathanC. 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 andColorado Business Bankshares, Inc. dated May 1, 1998.

 

(6)                                                                      10.7                        First Amendment to Lease Agreementbetween Kesef, LLC and Colorado Business Bankshares, Inc. dated August 1,2000.

 

(7)                                                                      10.8                        CoBiz Financial Inc. Employee StockPurchase Plan.

 

(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 FirstCapital Bank of Arizona dated June 15, 2001.

 

(10)                                                                10.12                  Lease Agreement between Dorit, LLC andColorado 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 officersof the Corporation: Lyne B. Andrich, Steven Bangert, Michael B. Burgamy, JerryW. 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 tothe 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.

 

(21)                                                                10.20                  Form of Indemnification Agreementdated January 16, 2009 between CoBiz 

 

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Financial Inc. andDirectors Douglas L. Polson and Mary Rhinehart.

 

(19)                                                                10.21                   Form of Amended and RestatedExecutive 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 LeaseAgreement between Kesef, LLC and Colorado Business Bankshares, Inc. dated August 1,2000.

 

(22)                                                                10.23                  Amended and Restated 2005 EquityIncentive Plan.

 

(25)                                                                10.24                  Securities Purchase Agreement , dated December 19,2008, by and between CoBiz Financial Inc. and the United States Department ofthe Treasury.

 

(25)                                                                10.25                  Form of Waiver of Claims Against theUnited States for changes in compensation or benefits resulting fromparticipation in the United States Department of the Treasury’s TARP CapitalPurchase Program.

 

(25)                                                                10.26                  Form of Letter Agreement to Amendthe executive employment contracts to conform to requirements and limitationspromulgated by participation in the United States Department of the Treasury’sTARP Capital Purchase Program and other regulations under Section 409A ofthe Internal Revenue Code of 1986 (as amended) between CoBiz Financial Inc. andeach of Steven Bangert, Jonathan C. Lorenz, Richard J. Dalton, Lyne B. Andrichand Robert B. Ostertag.

 

(24)                                                                10.27                  Incentive compensation guidelines fornamed executive officers.

 

14                                   Code of Conduct and Ethics.

 

21                                   List of subsidiaries.

 

23                                   Consent of Independent Registered PublicAccounting firm.

 

31.1                          Rule 13a-14(a)/15d-14(a) Certificationof the Chief Executive Officer.

 

31.2                          Rule 13a-14(a)/15d-14(a) Certificationof the Chief Financial Officer.

 

32.1                          Section 1350 Certification of theChief Executive Officer.

 

32.2                          Section 1350 Certification of the ChiefFinancial Officer.

 

99.1                         Certification of Chief Executive Officerpursuant to Section 111(b)(4) of the Emergency Economic StabilizationAct of 2008.

 

99.2                          Certification of Chief Financial Officerpursuant to Section 111(b)(4) of the Emergency Economic StabilizationAct of 2008.

 

----

(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).

 

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(3)                Incorporated herein by reference from theRegistrant’s Current Report on Form 8-K, as filed on March 23, 2001.

 

(4)                Incorporated herein by reference from theRegistrant’s Definitive Proxy Statement on Schedule 14A as filed on April 14,2005.

 

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

 

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

 

(7)                Incorporated herein by reference from theRegistrant’s Proxy Statement filed in connection with its 2009 annual meetingof shareholders, as filed on April 7, 2009.

 

(8)                Incorporated herein by reference from theRegistrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,2002, as filed on August 14, 2002.

 

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

 

(10)          Incorporated herein by reference from theRegistrant’s Annual Report on Form 10-K for the year ended December 31,2003, as filed on March 12, 2004.

 

(11)          Incorporated herein by reference from theRegistrant’s Current Report on Form 8-K, as filed on November 24,2004.

 

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

 

(13)          Incorporated herein by reference from theRegistrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,2006, as filed on August 9, 2006.

 

(14)          Incorporated herein by reference from theRegistrant’s Current Report on Form 8-K, as filed on December 18,2006.

 

(15)          Incorporated herein by reference from the Registrant’sCurrent Report on Form 8-K, as filed on December 20, 2006.

 

(16)          Incorporated herein by reference from the Registrant’sCurrent Report on Form 8-K, as filed on March 20, 2006.

 

(17)          Incorporated herein by reference from the Registrant’sAnnual Report on Form 10-K, as filed on March 15, 2007.

 

(18)          Incorporated herein by reference from theRegistrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,2007, as filed on August 9, 2007.

 

(19)          Incorporated herein by reference from theRegistrant’s Annual Report on Form 10-K, as filed on March 17, 2008.

 

(20)          Incorporated herein by reference from theRegistrant’s Current Report on Form 8-K, as filed April 4, 2008.

 

(21)          Incorporated herein by reference from theRegistrant’s Current Report on Form 8-K, as filed on January 20,2009.

 

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(22)          Incorporated herein by reference from theRegistrant’s Proxy Statement filed in connection with its 2008 annual meetingof shareholders, as filed on April 15, 2008.

 

(23)          Incorporated herein by reference from theRegistrant’s Current Report on Form 8-K, as filed August 22, 2008.

 

(24)          Incorporated herein by reference from theRegistrant’s Current Report on Form 8-K, as filed January 26, 2010.

 

(25)          Incorporated herein by reference from theRegistrant’s Current Report on Form 8-K, as filed December 23, 2008.

 

(b)              Exhibits - See exhibit index included in Item 15(a)(3) ofthis Annual Report on Form 10-K.

(c)               Financial Statement Schedules - See Item 15(a)(2) ofthis Annual Report on Form 10-K.

 

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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:  February 19, 2010 |                                                            | CoBiz Financial Inc. |
|--------------------------------|-----------------------------------------------------------------|----------------------|
|                           |                                                            |                 |
|                           | By:                                                             | /s/ Steven Bangert   |
|                           | Steven Bangert                                                  |
|                           | Chief Executive Officer  and Chairman 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    |       |                   |
| Steven Bangert         |       | Chief Executive Officer       |       | February 19, 2010 |
|                   |       |                          |       |                   |
| /s/ Lyne B. Andrich    |       | Executive Vice  President and |       |                   |
| Lyne B. Andrich        |       | Chief Financial Officer       |       | February 19, 2010 |
|                   |       |                          |       |                   |
| /s/ Troy R. Dumlao     |       | Chief Accounting  Officer     |       |                   |
| Troy R. Dumlao         |       |                          |       | February 19, 2010 |
|                   |       |                          |       |                   |
| /s/ Michael B. Burgamy |       | Director                      |       |                   |
| Michael B. Burgamy     |       |                          |       | February 19, 2010 |
|                   |       |                          |       |                   |
| /s/ Morgan Gust        |       | Director                      |       |                   |
| Morgan Gust            |       |                          |       | February 19, 2010 |
|                   |       |                          |       |                   |
| /s/ Evan Makovsky      |       | Director                      |       |                   |
| Evan Makovsky          |       |                          |       | February 19, 2010 |
|                   |       |                          |       |                   |
| /s/ Douglas Polson     |       | Director                      |       |                   |
| Douglas Polson         |       |                          |       | February 19, 2010 |
|                   |       |                          |       |                   |
| /s/ Mary Rhinehart     |       | Director                      |       |                   |
| Mary Rhinehart         |       |                          |       | February 19, 2010 |
|                   |       |                          |       |                   |
| /s/ Noel N. Rothman    |       | Director                      |       |                   |
| Noel N. Rothman        |       |                          |       | February 19, 2010 |
|                   |       |                          |       |                   |
| /s/ Timothy J. Travis  |       | Director                      |       |                   |
| Timothy J. Travis      |       |                          |       | February 19, 2010 |
|                   |       |                          |       |                   |
| /s/ Mary Beth Vitale   |       | Director                      |       |                   |
| Mary Beth Vitale       |       |                          |       | February 19, 2010 |
|                   |       |                          |       |                   |
| /s/ Mary M. White      |       | Director                      |       |                   |
| Mary M. White          |       |                          |       | February 19, 2010 |

 

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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, 2009 and 2008                                                                   |
|                                                                                                                              |
| Consolidated  Statements of Operations and Comprehensive Income (Loss) for the Years Ended  December 31, 2009, 2008 and 2007 |
|                                                                                                                              |
| Consolidated  Statements of Equity for the Years Ended December 31, 2009, 2008 and  2007                                     |
|                                                                                                                              |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and  2007                                 |
|                                                                                                                              |
| **Notes to  Consolidated Financial Statements at and for the Years Ended  December 31, 2009, 2008 and 2007**                 |

 

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**MANAGEMENT’S REPORT ONINTERNAL CONTROL OVERFINANCIAL REPORTING AND COMPLIANCE WITH DESIGNATED LAWS AND REGULATIONS**

 

**Management’sReport on Internal Control over Financial Reporting**

 

Managementof CoBiz Financial Inc., together with its consolidated subsidiaries (theCompany), is responsible for establishing and maintaining adequate internalcontrol over financial reporting. The Company’s internal control over financialreporting is a process designed under the supervision of the Company’s ChiefExecutive Officer and Chief Financial Officer to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of theCompany’s financial statements for external reporting purposes in accordancewith accounting principles generally accepted in the United States of America.

 

As of December 31,2009, management assessed the effectiveness of the Company’s internal controlover financial reporting based on the framework established in *Internal Control — Integrated Framework*issued by theCommittee of Sponsoring Organizations 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 31,2009, is effective.

 

Deloitte &Touche LLP, the independent registered public accounting firm that audited theconsolidated financial statements included in this annual report on Form 10-K,has issued an attestation report on the effectiveness of the Company’s internalcontrol over financial reporting at December 31, 2009. The report isincluded under the heading “Report of Independent Registered Public AccountingFirm”.

 

**Compliancewith Designated Laws and Regulations**

 

Managementis also responsible for ensuring compliance with federal and state laws andregulations concerning loans to insiders and dividend restrictions and whichare designated by the Federal Deposit Insurance Corporation (FDIC), the FederalReserve Bank and the Colorado Division of Banking as safety and soundness lawsand regulations.

 

Managementassessed its compliance with the designated safety and soundness laws andregulations and has maintained records of its determinations and assessments asrequired by the FDIC.  Based on thisassessment, management believes that the Company has complied, in all materialrespects, with the designated safety and soundness laws and regulations for theyear ended December 31, 2009.

 

February 19,2010

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

 

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**REPORT OFINDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

**To the Board of Directors and Shareholdersof**

**CoBiz Financial Inc.**

**Denver, Colorado**

 

We have audited theinternal control over financial reporting of CoBiz Financial Inc. andSubsidiaries (the “Company”) as of December 31, 2009, based on criteriaestablished in Internal Control — Integrated Framework issued by the Committeeof 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.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audit includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, testing and evaluating thedesign and operating effectiveness of internal control based on the assessedrisk, and performing such other procedures as we considered necessary in thecircumstances.  We believe that our auditprovides a reasonable basis for our opinion.

 

A company’s internal controlover financial reporting is a process designed by, or under the supervision of,the company’s principal executive and principal financial officers, or personsperforming similar functions, and effected by the company’s board of directors,management, and other personnel to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherentlimitations of internal control over financial reporting, including thepossibility of collusion or improper management override of controls, materialmisstatements due to error or fraud may not be prevented or detected on atimely basis.  Also, projections of anyevaluation 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.

 

In our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2009, based on the criteriaestablished in Internal Control — Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission.

 

We have not examined and,accordingly, we do not express an opinion or any other form of assurance onmanagement’s statement referring to compliance with laws and regulations.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements as of  and for the year ended December 31,2009, of the Company and our report dated February 19, 2010, expressed anunqualified opinion on those financial statements.

 

/s/ DELOITTE &TOUCHE LLP

Denver, Colorado

February 19, 2010

 

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**REPORT OFINDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

**To the Board of Directors andShareholders of**

**CoBiz Financial Inc.**

**Denver, Colorado**

 

We have audited the accompanyingconsolidated balance sheets of CoBiz Financial Inc. and Subsidiaries (the “Company”)as of December 31, 2009 and 2008, and the related statements of operationsand comprehensive income (loss), equity, and cash flows for each of the threeyears in the period ended December 31, 2009.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, suchfinancial statements present fairly, in all material respects, the financialposition of CoBiz Financial Inc. and Subsidiaries as of December 31, 2009and 2008, and the results of its operations and its cash flows for each of thethree years in the period ended December 31, 2009, in conformity withaccounting principles generally accepted in the United States of America.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the Company’s internal control over financial reporting as of December 31,2009, based on the criteria established in Internal Control — IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission and our report dated February 19, 2010 expressed an unqualifiedopinion on the Company’s internal control over financial reporting.

 

/s/ DELOITTE &TOUCHE LLP

Denver, Colorado

February 19, 2010

 

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**COBIZ FINANCIAL INC. AND SUBSIDIARIES**

 

CONSOLIDATED BALANCE SHEETS

AT DECEMBER 31,2009 AND 2008

 
| **(in  thousands, except share amounts)**                                                                                                                              | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| ***Assets***                                                                                                                                                           |       |      |       |      |       |
| Cash  and due from banks                                                                                                                                               |       | $         | 28,986     |      | $          | 35,857 |   |
| Interest  bearing deposits and federal funds sold                                                                                                                      |       | 18,651    |       | 9,632     |       |
| Total  cash and cash equivalents                                                                                                                                       |       | 47,637    |       | 45,489    |       |
|                                                                                                                                                                   |       |      |       |      |       |
| Investment  securities available for sale (cost of $517,192 and $479,197, respectively)                                                                                |       | 529,205   |       | 476,506   |       |
| Investment  securities held to maturity (fair value of $308 and $374, respectively)                                                                                    |       | 302       |       | 376       |       |
| Other  investments - at cost                                                                                                                                           |       | 16,473    |       | 23,566    |       |
| Total  investments                                                                                                                                                     |       | 545,980   |       | 500,448   |       |
|                                                                                                                                                                   |       |      |       |      |       |
| Loans  - net of allowance for loan losses of $75,116 and $42,851, respectively                                                                                         |       | 1,705,750 |       | 1,988,402 |       |
| Loans  held for sale                                                                                                                                                   |       | 1,820     |       | —    |       |
| Goodwill                                                                                                                                                               |       | —    |       | 46,160    |       |
| Intangible  assets - net of amortization of $3,909 and $3,235, respectively                                                                                            |       | 4,910     |       | 5,704     |       |
| Bank-owned  life insurance                                                                                                                                             |       | 34,560    |       | 30,718    |       |
| Premises  and equipment - net of depreciation of $26,831 and $24,139, respectively                                                                                     |       | 8,203     |       | 9,154     |       |
| Accrued  interest receivable                                                                                                                                           |       | 8,184     |       | 8,617     |       |
| Deferred  income taxes, net                                                                                                                                            |       | 29,654    |       | 16,933    |       |
| Other  real estate owned - net of valuation allowance of $804 and $2,200,  respectively                                                                                |       | 25,182    |       | 5,941     |       |
| Other                                                                                                                                                                  |       | 54,135    |       | 26,709    |       |
| TOTAL                                                                                                                                                                  |       | $         | 2,466,015  |      | $          | 2,684,275 |   |
|                                                                                                                                                                   |       |      |       |      |       |
| ***Liabilities and Equity***                                                                                                                                           |       |      |       |      |       |
|                                                                                                                                                                   |       |      |       |      |       |
| ***Liabilities***                                                                                                                                                      |       |      |       |      |       |
| Deposits:                                                                                                                                                              |       |      |       |      |       |
| Demand                                                                                                                                                                 |       | $         | 542,768    |      | $          | 453,731 |   |
| NOW  and money market                                                                                                                                                  |       | 708,445   |       | 565,948   |       |
| Savings                                                                                                                                                                |       | 10,552    |       | 9,274     |       |
| Eurodollar                                                                                                                                                             |       | 107,500   |       | 88,025    |       |
| Certificates  of deposits                                                                                                                                              |       | 599,568   |       | 522,053   |       |
| Total  deposits                                                                                                                                                        |       | 1,968,833 |       | 1,639,031 |       |
| Securities  sold under agreements to repurchase                                                                                                                        |       | 139,794   |       | 133,478   |       |
| Other  short-term borrowings                                                                                                                                           |       | 240       |       | 543,063   |       |
| Accrued  interest and other liabilities                                                                                                                                |       | 32,418    |       | 21,469    |       |
| Junior  subordinated debentures                                                                                                                                        |       | 72,166    |       | 72,166    |       |
| Subordinated  notes payable                                                                                                                                            |       | 20,984    |       | 20,984    |       |
| TOTAL  LIABILITIES                                                                                                                                                     |       | 2,234,435 |       | 2,430,191 |       |
|                                                                                                                                                                   |       |      |       |      |       |
| ***Commitments and contingencies (Note 15)***                                                                                                                          |       |      |       |      |       |
|                                                                                                                                                                   |       |      |       |      |       |
| ***Shareholders’ Equity***                                                                                                                                        |       |      |       |      |       |
| Cumulative  preferred, $.01 par value - 2,000,000 shares authorized; and 64,450 and  64,450 issued and outstanding, respectively ($1,000 per share liquidation  value) |       | 1         |       | 1         |       |
| Common,  $.01 par value - 50,000,000 shares authorized; and 36,723,853 and 23,374,762 issued  and outstanding, respectively                                            |       | 365       |       | 232       |       |
| Additional  paid-in capital                                                                                                                                            |       | 222,609   |       | 164,484   |       |
| Retained  earnings (deficit)                                                                                                                                           |       | (2,543    | )          | 86,827    |       |
| Accumulated  other comprehensive income, net of income tax of $6,142 and $341,  respectively                                                                           |       | 10,019    |       | 555       |       |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                                                                                       |       | 230,451   |       | 252,099   |       |
| Noncontrolling  interest                                                                                                                                               |       | 1,129     |       | 1,985     |       |
| TOTAL  EQUITY                                                                                                                                                          |       | 231,580   |       | 254,084   |       |
| TOTAL  LIABILITIES AND EQUITY                                                                                                                                          |       | $         | 2,466,015  |      | $          | 2,684,275 |   |

 

See Notes to ConsolidatedFinancial Statements

 

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**COBIZ FINANCIAL INC. AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(LOSS)

FOR THE YEARSENDED DECEMBER 31, 2009, 2008 AND 2007

 
| **(in  thousands, except per share amounts)**                                                         | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| INTEREST  INCOME:                                                                                     |       |     |       |     |       |     |       |
| Interest  and fees on loans                                                                           |       | $        | 105,310    |     | $          | 122,418  |       | $ | 132,965 |   |
| Interest  on investments:                                                                             |       |     |       |     |       |     |       |
| Taxable  securities                                                                                   |       | 23,470   |       | 21,411   |       | 20,150   |       |
| Nontaxable  securities                                                                                |       | 98       |       | 121      |       | 149      |       |
| Dividends  on securities                                                                              |       | 467      |       | 684      |       | 790      |       |
| Federal  funds sold and other                                                                         |       | 105      |       | 274      |       | 456      |       |
| Total  interest income                                                                                |       | 129,450  |       | 144,908  |       | 154,510  |       |
|                                                                                                  |       |     |       |     |       |     |       |
| INTEREST  EXPENSE:                                                                                    |       |     |       |     |       |     |       |
| Interest  on deposits                                                                                 |       | 19,680   |       | 34,671   |       | 44,864   |       |
| Interest  on short-term borrowings and securities sold under agreements to repurchase                 |       | 2,019    |       | 9,996    |       | 16,096   |       |
| Interest  on subordinated debentures                                                                  |       | 4,367    |       | 4,890    |       | 5,651    |       |
| Total  interest expense                                                                               |       | 26,066   |       | 49,557   |       | 66,611   |       |
|                                                                                                  |       |     |       |     |       |     |       |
| NET  INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES                                                 |       | 103,384  |       | 95,351   |       | 87,899   |       |
| PROVISION  FOR LOAN LOSSES                                                                            |       | 105,815  |       | 39,796   |       | 3,936    |       |
| NET  INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES                                           |       | (2,431   | )          | 55,555   |       | 83,963   |       |
|                                                                                                  |       |     |       |     |       |     |       |
| NONINTEREST  INCOME:                                                                                  |       |     |       |     |       |     |       |
| Service  charges                                                                                      |       | 4,919    |       | 4,067    |       | 3,154    |       |
| Investment  advisory and trust income                                                                 |       | 5,186    |       | 6,345    |       | 4,763    |       |
| Insurance  income                                                                                     |       | 11,778   |       | 15,113   |       | 9,397    |       |
| Investment  banking income                                                                            |       | 1,154    |       | 5,055    |       | 6,681    |       |
| Other  income                                                                                         |       | 4,590    |       | 5,198    |       | 4,616    |       |
| Total  noninterest income                                                                             |       | 27,627   |       | 35,778   |       | 28,611   |       |
|                                                                                                  |       |     |       |     |       |     |       |
| NONINTEREST  EXPENSE:                                                                                 |       |     |       |     |       |     |       |
| Salaries  and employee benefits                                                                       |       | 54,859   |       | 57,368   |       | 50,172   |       |
| Occupancy  expenses and premises and equipment                                                        |       | 13,215   |       | 13,075   |       | 11,541   |       |
| Amortization  of intangibles                                                                          |       | 674      |       | 724      |       | 471      |       |
| FDIC  and other assessments                                                                           |       | 4,871    |       | 1,504    |       | 1,021    |       |
| Other  real estate owned and loan workout costs                                                       |       | 4,660    |       | 687      |       | 539      |       |
| Impairment  of goodwill                                                                               |       | 46,160   |       | —   |       | —   |       |
| Net  other than temporary impairment losses on securities recognized in earnings                      |       | 922      |       | —   |       | —   |       |
| Loss  on securities, other assets and other real estate owned                                         |       | 4,677    |       | 4,592    |       | 1,039    |       |
| Other                                                                                                 |       | 11,372   |       | 11,767   |       | 10,732   |       |
| Total  noninterest expense                                                                            |       | 141,410  |       | 89,717   |       | 75,515   |       |
|                                                                                                  |       |     |       |     |       |     |       |
| INCOME  (LOSS) BEFORE INCOME TAXES                                                                    |       | (116,214 | )          | 1,616    |       | 37,059   |       |
| PROVISION  (BENEFIT) FOR INCOME TAXES                                                                 |       | (32,859  | )          | (91      | )          | 13,713   |       |
| NET  INCOME (LOSS) BEFORE NONCONTROLLING INTEREST                                                     |       | (83,355  | )          | 1,707    |       | 23,346   |       |
| LESS:  NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST                                      |       | 314      |       | (379     | )          | (322     | )          |
| NET  INCOME (LOSS)                                                                                    |       | $        | (83,041    | )        | $          | 1,328    |       | $ | 23,024 |   |
|                                                                                                  |       |     |       |     |       |     |       |
| UNREALIZED  APPRECIATION ON SECURITIES AVAILABLE FOR SALE AND DERIVATIVES — Net of income  taxes |       | 9,464    |       | 549      |       | 2,620    |       |
| COMPREHENSIVE  INCOME (LOSS)                                                                          |       | $        | (73,577    | )        | $          | 1,877    |       | $ | 25,644 |   |
|                                                                                                  |       |     |       |     |       |     |       |
| EARNINGS  (LOSS) PER COMMON SHARE:                                                                    |       |     |       |     |       |     |       |
| Basic                                                                                                 |       | $        | (2.98      | )        | $          | 0.05     |       | $ | 0.98 |   |
| Diluted                                                                                               |       | $        | (2.98      | )        | $          | 0.05     |       | $ | 0.96 |   |

 

See Notes toConsolidated Financial Statements

 

F-5

----

Tableof Contents

 

**COBIZFINANCIAL INC. AND SUBSIDIARIES**

** **

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007

 
| ** **                                                                                  | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(in  thousands)**                                                                         | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                      |       |                                     |       |   |   |   |   |
| Net  income (loss) before noncontrolling interest                                           |       | $                                        | (83,355    | ) | $ | 1,707 |   | $ | 23,346 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities:   |       |                                     |       |   |   |   |   |
| Net  amortization on investment securities                                                  |       | 559                                      |       | 577 |   | 385 |   |
| Depreciation  and amortization                                                              |       | 4,386                                    |       | 4,447 |   | 4,128 |   |
| Amortization  of net loan fees                                                              |       | (924                                     | )          | (2,357 | ) | (2,807 | ) |
| Provision  for loan and credit losses                                                       |       | 105,711                                  |       | 39,479 |   | 3,936 |   |
| Stock-based  compensation                                                                   |       | 1,543                                    |       | 1,762 |   | 1,524 |   |
| Federal  Home Loan Bank stock dividend                                                      |       | (245                                     | )          | (475 | ) | (590 | ) |
| Deferred  income taxes                                                                      |       | (18,493                                  | )          | (9,669 | ) | (1,513 | ) |
| Excess  tax benefit from stock-based compensation                                           |       | (5                                       | )          | (159 | ) | (1,060 | ) |
| Increase  in cash surrender value of bank-owned life insurance                              |       | (1,184                                   | )          | (1,172 | ) | (984 | ) |
| Supplemental  executive retirement plan                                                     |       | 85                                       |       | 717 |   | 783 |   |
| Impairment  of goodwill                                                                     |       | 46,160                                   |       | — |   | — |   |
| Loss  on sale/write-down of premises and equipment, investment securities and OREO          |       | 5,599                                    |       | 4,592 |   | 1,039 |   |
| Other  operating activities, net                                                            |       | (1,258                                   | )          | (1,280 | ) | (1,295 | ) |
| Changes  in operating assets and liabilities:                                               |       |                                     |       |   |   |   |   |
| Prepaid  FDIC insurance                                                                     |       | (10,262                                  | )          | — |   | — |   |
| Restricted  cash                                                                            |       | (7,358                                   | )          | — |   | — |   |
| Accrued  interest and other liabilities                                                     |       | (2,390                                   | )          | (1,895 | ) | 1,756 |   |
| Accrued  interest receivable                                                                |       | 433                                      |       | 1,584 |   | (454 | ) |
| Other  assets                                                                               |       | (11,077                                  | )          | (2,756 | ) | 135 |   |
| Net  cash provided by operating activities                                                  |       | 27,925                                   |       | 35,102 |   | 28,329 |   |
|                                                                                        |       |                                     |       |   |   |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                      |       |                                     |       |   |   |   |   |
| Purchases  of other investments                                                             |       | (542                                     | )          | (6,577 | ) | (2,572 | ) |
| Proceeds  from other investments                                                            |       | 8,705                                    |       | 1,104 |   | 425 |   |
| Proceeds  from sale of investment securities available for sale                             |       | 2,158                                    |       | — |   | 1,053 |   |
| Purchases  of investment securities available for sale                                      |       | (136,436                                 | )          | (210,855 | ) | (290,513 | ) |
| Maturities  of investment securities held to maturity                                       |       | 77                                       |       | 93 |   | 252 |   |
| Maturities  of investment securities available for sale                                     |       | 109,275                                  |       | 109,104 |   | 333,909 |   |
| Purchase  of Bernard Dietrich and Associates                                                |       | —                                   |       | (6,781 | ) | — |   |
| Purchase  of Wagner Investment Management Inc.                                              |       | —                                   |       | — |   | (1,899 | ) |
| Purchase  outstanding noncontrolling interests in ACMG                                      |       | —                                   |       | — |   | (351 | ) |
| Deferred  payments and cash paid in earn-outs, net                                          |       | (375                                     | )          | — |   | (438 | ) |
| Purchase  of bank-owned life insurance                                                      |       | (2,658                                   | )          | — |   | (3,114 | ) |
| Net  proceeds from sale of loans and other real estate owned                                |       | 16,873                                   |       | 2,140 |   | — |   |
| Loan  originations and repayments, net                                                      |       | 136,985                                  |       | (210,614 | ) | (301,210 | ) |
| Purchase  of premises and equipment                                                         |       | (2,784                                   | )          | (3,737 | ) | (3,185 | ) |
| Other  investing activities, net                                                            |       | (567                                     | )          | 2 |   | 99 |   |
| Net  cash provided by (used in) investing activities                                        |       | 130,711                                  |       | (326,121 | ) | (267,544 | ) |
|                                                                                        |       |                                     |       |   |   |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                      |       |                                     |       |   |   |   |   |
| Net  increase (decrease) in demand, NOW, money market, Eurodollar and savings  accounts     |       | 252,287                                  |       | (42,479 | ) | 131,624 |   |
| Net  increase (decrease) in certificates of deposits                                        |       | 77,496                                   |       | (61,441 | ) | 134,384 |   |
| Net  increase (decrease) in short term borrowings                                           |       | (542,823                                 | )          | 345,619 |   | 45,244 |   |
| Net  increase (decrease) in securities sold under agreements to repurchase                  |       | 6,316                                    |       | (34,858 | ) | (59,281 | ) |
| Proceeds  from the issuance of subordinated notes payable, net                              |       | —                                   |       | 20,900 |   | — |   |
| Proceeds  from issuance of common stock, net                                                |       | 56,340                                   |       | 1,245 |   | 23,095 |   |
| Proceeds  from issuance of preferred stock and warrants, net                                |       | —                                   |       | 64,398 |   | — |   |
| Repurchase  of common stock, net                                                            |       | —                                   |       | — |   | (20,062 | ) |
| Dividends  paid on common stock                                                             |       | (2,597                                   | )          | (6,613 | ) | (6,173 | ) |
| Dividends  paid on preferred stock                                                          |       | (2,919                                   | )          | — |   | — |   |
| Excess  tax benefit from stock-based compensation                                           |       | 5                                        |       | 159 |   | 1,060 |   |
| Net  distribution to noncontrolling interests                                               |       | (542                                     | )          | (57 | ) | (135 | ) |
| Other  financing activities, net                                                            |       | (51                                      | )          | 9 |   | (111 | ) |
| Net  cash provided by (used in) financing activities                                        |       | (156,488                                 | )          | 286,882 |   | 249,645 |   |
|                                                                                        |       |                                     |       |   |   |   |   |
| NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                       |       | 2,148                                    |       | (4,137 | ) | 10,650 |   |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                             |       | 45,489                                   |       | 49,626 |   | 38,976 |   |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD                                                   |       | $                                        | 47,637     |   | $ | 45,489 |   | $ | 49,626 |   |
|                                                                                        |       |                                     |       |   |   |   |   |
| Supplemental  disclosures of cash information - cash paid / (received) during the year for: |       |                                     |       |   |   |   |   |
| Interest                                                                                    |       | $                                        | 26,181     |   | $ | 51,089 |   | $ | 66,101 |   |
| Income  taxes                                                                               |       | $                                        | (1,933     | ) | $ | 11,744 |   | $ | 14,325 |   |
|                                                                                        |       |                                     |       |   |   |   |   |
| Supplemental  disclosures of noncash activities:                                            |       |                                     |       |   |   |   |   |
| Loans  transferred to other real estate owned                                               |       | $                                        | 35,252     |   | $ | 11,001 |   | $ | — |   |
| Loans  transferred to loans held for sale                                                   |       | $                                        | 5,600      |   | $ | — |   | $ | — |   |
| Trade  date accounting for investment purchases                                             |       | $                                        | 15,614     |   | $ | — |   | $ | — |   |
| Cash  transferred to restricted cash (Other assets)                                         |       | $                                        | 7,358      |   | $ | — |   | $ | — |   |
| Stock  issued for earn-out of Financial Designs Ltd.                                        |       | $                                        | —     |   | $ | — |   | $ | 438 |   |
| Stock  issued for acquisition of Wagner Investment Management Inc.                          |       | $                                        | —     |   | $ | — |   | $ | 1,203 |   |
| Deferred  payment for acquisition of Bernard Dietrich and Associates                        |       | $                                        | —     |   | $ | 375 |   | $ | — |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-6

----

 

Tableof Contents

 

**COBIZ FINANCIAL INC. AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTSOF EQUITY

FOR THE YEARSENDED DECEMBER 31, 2009, 2008 AND 2007

 
| ** **                                                                                                                  | ** ** | ** ** | ** ** | **CoBiz Financial Inc. Shareholders** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|------------------|------------|
| ** **                                                                                                                  | ** ** | ** ** | ** ** | ** **                            | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                                                                                  | ** ** | ** ** | ** ** | **Preferred Stock**                   | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** ** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                                                  | ** ** | ** ** | ** ** | **Shares**                            | ** ** | ** **       | ** ** | **Shares** | ** ** | ** ** | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Income** | ** ** | **Noncontrolling** | ** ** |
| **(in  thousands, except per share amounts)**                                                                               | ** ** | **Total**  | ** ** | **Issued**                            | ** ** | **Amount**       | ** ** | **Issued** | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **(Loss)** | ** ** | **Interest** | ** ** |
|                                                                                                                        |       |       |       |                                  |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE  — January 1, 2007                                                                                        |       | $          | 164,151    |                                  | —     |             | $          | — |   | 22,700,890 |   | $ | 227 |   | $ | 74,560 |   | $ | 90,502 |   | $ | (2,614 | ) | $ | 1,476 |   |
|                                                                                                                        |       |       |       |                                  |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative  effect adjustment pursuant to the adoption of ASC Topic 325-30, *Investments in Insurance Contracts*            |       | (134       | )          | —                                |       | —           |       | — |   | — |   | — |   | (134 | ) | — |   | — |   |
| Options  exercised                                                                                                          |       | 3,238      |       | —                                |       | —           |       | 369,386 |   | 4 |   | 3,234 |   | — |   | — |   | — |   |
| Employee  stock purchase plan                                                                                               |       | 706        |       | —                                |       | —           |       | 47,278 |   | — |   | 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.                                                                                |       | 438        |       | —                                |       | —           |       | 19,501 |   | — |   | 438 |   | — |   | — |   | — |   |
| Acquisition  of Wagner Investment Management Inc.                                                                           |       | 1,203      |       | —                                |       | —           |       | 80,908 |   | 1 |   | 1,202 |   | — |   | — |   | — |   |
| Proceeds  from issuance of common stock net of offering costs of approximately $106                                         |       | 19,151     |       | —                                |       | —           |       | 975,000 |   | 10 |   | 19,141 |   | — |   | — |   | — |   |
| Repurchases  of common stock                                                                                                |       | (20,062    | )          |                                  |       |             |       | (1,200,207 | ) | (12 | ) | (4,959 | ) | (15,091 | ) | — |   | — |   |
| Net  change in unrealized loss on available for sale securities and derivative  securities, net of income taxes of $1,606   |       | 2,620      |       | —                                |       | —           |       | — |   | — |   | — |   | — |   | 2,620 |   | — |   |
| Net  income                                                                                                                 |       | 23,346     |       | —                                |       | —           |       | — |   | — |   | — |   | 23,024 |   | — |   | 322 |   |
| Distribution  to noncontrolling interest                                                                                    |       | (135       | )          | —                                |       | —           |       | — |   | — |   | — |   | — |   | — |   | (135 | ) |
| BALANCE  — December 31, 2007                                                                                      |       | 190,933    |       | —                                |       | —           |       | 22,992,756 |   | 230 |   | 96,906 |   | 92,128 |   | 6 |   | 1,663 |   |
|                                                                                                                        |       |       |       |                                  |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative  effect adjustment pursuant to the adoption of ASC Topic 715, *Compensation - Retirement Benefits*               |       | (16        | )          | —                                |       | —           |       | — |   | — |   | — |   | (16 | ) | — |   | — |   |
| Series B  Preferred stock and warrant, net of issuance costs                                                           |       | 64,398     |       | 64,450                                |       | 1                |       | — |   | — |   | 64,397 |   | — |   | — |   | — |   |
| Options  exercised                                                                                                          |       | 642        |       | —                                |       | —           |       | 98,532 |   | 1 |   | 641 |   | — |   | — |   | — |   |
| Employee  stock purchase plan                                                                                               |       | 603        |       | —                                |       | —           |       | 67,974 |   | 1 |   | 602 |   | — |   | — |   | — |   |
| Restricted  stock awards, net of forfeitures                                                                                |       | —     |       | —                                |       | —           |       | 215,500 |   | — |   | — |   | — |   | — |   | — |   |
| Stock-based  compensation expense                                                                                           |       | 1,762      |       | —                                |       | —           |       | — |   | — |   | 1,762 |   | — |   | — |   | — |   |
| Tax  benefit from stock-based compensation                                                                                  |       | 159        |       | —                                |       | —           |       | — |   | — |   | 159 |   | — |   | — |   | — |   |
| Dividends  paid-common ($0.28 per share)                                                                                    |       | (6,489     | )          | —                                |       | —           |       | — |   | — |   | — |   | (6,489 | ) | — |   | — |   |
| Dividends  paid/accumulated-preferred stock (5% on $1,000 per share liquidation value)                                      |       | (107       | )          | —                                |       | —           |       | — |   | — |   | 17 |   | (124 | ) | — |   | — |   |
| Net  change in unrealized loss on available for sale securities and derivative  securities, net of income taxes of $337     |       | 549        |       | —                                |       | —           |       | — |   | — |   | — |   | — |   | 549 |   | — |   |
| Net  income                                                                                                                 |       | 1,707      |       | —                                |       | —           |       | — |   | — |   | — |   | 1,328 |   | — |   | 379 |   |
| Distribution  to noncontrolling interest                                                                                    |       | (57        | )          | —                                |       | —           |       | — |   | — |   | — |   | — |   | — |   | (57 | ) |
| BALANCE  — December 31, 2008                                                                                      |       | 254,084    |       | 64,450                                |       | 1                |       | 23,374,762 |   | 232 |   | 164,484 |   | 86,827 |   | 555 |   | 1,985 |   |
|                                                                                                                        |       |       |       |                                  |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Options  exercised                                                                                                          |       | 153        |       | —                                |       | —           |       | 23,479 |   | — |   | 153 |   | — |   | — |   | — |   |
| Employee  stock purchase plan                                                                                               |       | 371        |       | —                                |       | —           |       | 79,662 |   | 1 |   | 370 |   | — |   | — |   | — |   |
| Proceeds  from the issuance of common stock, net of offering costs ($3,609)                                                 |       | 55,816     |       | —                                |       | —           |       | 13,205,600 |   | 132 |   | 55,684 |   |   |   |   |   |   |   |
| Restricted  stock awards, net of forfeitures                                                                                |       | —     |       | —                                |       | —           |       | 40,350 |   | — |   | — |   | — |   | — |   | — |   |
| Stock-based  compensation expense                                                                                           |       | 1,543      |       | —                                |       | —           |       | — |   | — |   | 1,543 |   | — |   | — |   | — |   |
| Tax  benefit from stock-based compensation                                                                                  |       | 5          |       | —                                |       | —           |       | — |   | — |   | 5 |   | — |   | — |   | — |   |
| Dividends  paid-common ($0.10 per share)                                                                                    |       | (2,597     | )          | —                                |       | —           |       | — |   | — |   | — |   | (2,597 | ) | — |   | — |   |
| Dividends  paid/accumulated-preferred stock (5% on $1,000 per share liquidation value)                                      |       | (3,222     | )          | —                                |       | —           |       | — |   | — |   | 510 |   | (3,732 | ) | — |   | — |   |
| Net  change in unrealized gain on available for sale securities and derivative  securities, net of income taxes of $(4,844) |       | 9,464      |       | —                                |       | —           |       | — |   | — |   | — |   | — |   | 9,464 |   | — |   |
| Net  loss                                                                                                                   |       | (83,355    | )          | —                                |       | —           |       | — |   | — |   | — |   | (83,041 | ) | — |   | (314 | ) |
| Distribution  to noncontrolling interest                                                                                    |       | (542       | )          | —                                |       | —           |       | — |   | — |   | — |   | — |   | — |   | (542 | ) |
| Other                                                                                                                       |       | (140       | )          | —                                |       | —           |       | — |   | — |   | (140 | ) | — |   | — |   | — |   |
| BALANCE  — December 31, 2009                                                                                      |       | $          | 231,580    |                                  | 64,450     |             | $          | 1 |   | 36,723,853 |   | $ | 365 |   | $ | 222,609 |   | $ | (2,543 | ) | $ | 10,019 |   | $ | 1,129 |   |

 

See Notes toConsolidated Financial Statements.

 

F-7

----

 

Tableof Contents

 

**COBIZFINANCIAL INC. AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**AT ANDFOR THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007**

 

**1.**              NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

 

The accounting and reporting practices of CoBiz Financial Inc.(Parent), formerly CoBiz Inc., and its wholly owned subsidiaries: CoBizBank (the Bank); CoBiz ACMG, Inc.; Financial Designs Ltd. (FDL); CoBizInsurance Inc.; CoBiz GMB, Inc.; and Wagner Investment Management, Inc.(Wagner), collectively referred to as the Company or CoBiz, conform toaccounting principles generally accepted in the United States of America andprevailing practices within the banking industry. The operations of the Companyare comprised predominately of the Bank, which operates in its Colorado marketareas under the name Colorado Business Bank (CBB) and in its Arizona marketareas under the name Arizona Business Bank (ABB).

 

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

 

**Organization** — The Bank is a commercial banking institutionwith nine locations in the Denver metropolitan area; one in Boulder; two nearVail; and eight in the Phoenix metropolitan area. In April 2007, the Bankconverted from a national bank charter to a state bank charter. As a statechartered bank, deposits are insured by the Bank Insurance Fund of the FDIC andthe Bank is subject to supervision, regulation and examination by the FederalReserve, the Colorado Division of Banking and the FDIC. Pursuant to suchregulations, the Bank is subject to special restrictions, supervisoryrequirements and potential enforcement actions. CoBiz ACMG, Inc. providesinvestment management services to institutions and individuals through itssubsidiary Alexander Capital Management Group, LLC (ACMG). FDL provides wealthtransfer, employee benefits consulting, insurance brokerage and relatedadministrative support to individuals, families and employers. CoBiz Insurance, Inc.provides commercial and personal property and casualty insurance brokerage, aswell as risk management consulting services to small and medium-sizedbusinesses and individuals. CoBiz GMB, Inc. provides investment bankingservices to middle-market companies through its wholly owned subsidiary, GreenManning & Bunch, Ltd. (GMB). Wagner complements the investmentmanagement services of ACMG with its focus on developing and delivering aproprietary investment approach with a growth bias.

 

**Use of Estimates** — In preparing its financial statements,management of the Company is required to make estimates and assumptions thataffect the reported amount of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ significantly from those estimates. Material estimates that areparticularly susceptible to significant changes in the near-term relate to thedetermination of the allowance for loan losses; the recoverability of goodwilland intangible assets; valuation of other real estate owned; fair value;recoverability of deferred taxes; and stock-based compensation.

 

The following is a summary of the Company’s significant accounting andreporting policies.

 

**Basis of Presentation** — The consolidated financialstatements include the accounts of the Parent; the Bank; CoBiz ACMG, Inc.;FDL; CoBiz Insurance Inc.; CoBiz GMB, Inc.; and Wagner. Intercompanybalances and transactions are eliminated in consolidation.

 

**Cash and Cash Equivalents** — The Company considers all liquidinvestments with original maturities of three months or less to be cash equivalents.Cash and cash equivalents include 

 

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amounts that the Company is required to maintain at the Federal ReserveBank of Kansas City to meet certain regulatory reserve balance requirements. AtDecember 31, 2009 and 2008, the Company was required to maintain reservebalances of $0.1 million and $0, respectively.

 

**Restricted Cash** — Restricted cash consists of cash deposits thatare contractually restricted as collateral for outstanding letters ofcredit.  At December 31, 2009 and2008, the Company had restricted cash of $7.4 million and $0, respectively,recorded under the caption “Other” in the accompanying consolidated balancesheets.

 

**Investments** — The Company classifies its investmentsecurities as held to maturity, available for sale or trading, according tomanagement’s intent. At December 31, 2009 and 2008, the Company had notrading securities.

 

Available for sale securities consist of bonds, notesand debentures not classified as held to maturity securities and are reportedat fair value as determined by quoted market prices. Unrealized holding gainsand losses, net of tax, are reported as a net amount in accumulated othercomprehensive income (loss) until realized.

 

Investment securities held to maturity consist ofbonds, notes and debentures for which the Company has the positive intent andability to hold to maturity and are reported at cost, adjusted for amortizationof premiums and discounts.

 

Premiums and discounts, adjusted for prepayments as applicable, arerecognized in interest income using the level-yield method over the period tomaturity. Other than temporary declines in the fair value of individualinvestment securities held to maturity and available for sale are chargedagainst earnings. Gains and losses on disposal of investment securities aredetermined using the specific-identification method.  See Note 3 — Investments.

 

**Other Investments** — Federal Home Loan Bank of Topeka (FHLB),Federal Reserve Bank and other correspondent bank stocks are accounted forunder the cost method.  See Note 3 —Investments.

 

**Loans** — Loans that management has theintent and ability to hold for the foreseeable future or until maturity orpay-off are reported at their outstanding principal balance adjusted for anycharge-offs, the allowance for loan losses, deferred fees or costs onoriginated loans, and unamortized premiums or discounts on purchased loans.Interest is accrued and credited to income daily based on the principal balanceoutstanding. The accrual of interest income is generally discontinued when aloan becomes 90 days past due as to principal and interest. When a loan isdesignated as nonaccrual, the current period’s accrued interest receivable ischarged against current earnings while any portions relating to prior periodsare charged against the allowance for loan losses. Interest payments receivedon nonaccrual loans are applied to the principal balance of the loan. Loans arereturned to accrual status when all the principal and interest amountscontractually due are brought current and future payments are reasonablyassured.  Management may elect tocontinue the accrual of interest when the loan is in the process of collectionand the realizable value of collateral is sufficient to cover the principalbalance and accrued interest.  See Note 4— Loans.

 

**Loans Held For Sale** — Loans held for sale include loans theCompany has demonstrated the ability and intent to sell.  Loans held for sale are carried at the lowerof cost or fair value.

 

**Loan Origination Fees and Costs** — Loan fees and certain costs oforiginating loans are deferred and the net amount is amortized over thecontractual life of the related loans in accordance with Accounting StandardsCodification (ASC) Topic 310-20, *Nonrefundable Fees andOther Costs*.

 

**Allowance for Loan Losses** — The allowance for loan losses isestablished as losses are estimated to have occurred through a provision forloan losses charged against earnings. Loan 

 

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losses 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 on a regular basis bymanagement and is based upon management’s periodic review of the collectibilityof the loans in light of historical experience, the nature and volume of theloan portfolio, adverse situations that may affect the borrower’s ability torepay, estimated value of any underlying collateral, and prevailing economicconditions. This evaluation is inherently subjective as it requires estimatesthat are susceptible to significant revision as new information becomesavailable.

 

**Impairedloans** — Impairedloans, with the exception of groups of smaller-balance homogenous loans thatare collectively evaluated for impairment, 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. Factors considered bymanagement in determining impairment include payment status, collateral value,and the probability of collecting scheduled principal and interest paymentswhen due. Loans that experience insignificant payment delays and paymentshortfalls generally are not classified as impaired. Management determines thesignificance of payment delays and payment shortfalls on a case-by-case basis,taking into consideration all of the circumstances surrounding the loan and theborrower, including the length of the delay, the reasons for the delay, theborrower’s prior payment record, and the amount of the shortfall in relation tothe principal and interest owed. Impairment is measured on a loan-by-loan basisby the 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 ASC Topic 310-10-35, *Receivables — Subsequent Measurement* (ASC 310) and ASC Topic450-20, *Loss Contingencies*.  See Note 4 — Loans.  Included in impaired loans are troubled debtrestructurings.  A troubled debtrestructuring is a formal restructure of a loan where the Company, for economicor legal reasons related to the borrower’s financial difficulties, grants aconcession to the borrower. The concessions may be granted in various forms,including reduction in the stated interest rate, reduction in the loan balanceor accrued interest, and extension of the maturity date.  Troubled debt restructurings are evaluated inaccordance with ASC Topic 310-10-40, *Troubled DebtRestructurings by Creditors.*

 

**Allowance for Credit Losses** — The allowance for credit losses isestablished as losses are estimated to have occurred through a provision forcredit losses charged to earnings. The allowance for credit losses representsmanagement’s recognition of a separate reserve for off-balance sheet loancommitments and letters of credit. While the allowance for loan losses isrecorded as a contra-asset to the loan portfolio on the consolidated balancesheets, the allowance for credit losses is recorded under the caption “Accruedinterest and other liabilities” in the accompanying consolidated balancesheets. Although the allowances are presented separately on the balance sheets,any losses incurred from credit losses would be reported as a charge-off in theallowance for loan losses, as any loss would be recorded after the off-balancesheet commitment had been funded.  SeeNote 4 — Loans.

 

**Goodwill and Intangible Assets** — Goodwill represents the excesspurchase price over the fair value of net identifiable assets acquired inbusiness combinations. Goodwill is not amortized but is reviewed for impairmentat least annually on December 31 or when triggering events occur.Intangible assets, primarily consisting of customer contracts andrelationships, are being amortized by the straight-line method over three to15 years.  Intangible assets with anindefinite life are reviewed for impairment on an annual basis.  See Note 6 — Goodwill and Intangible Assets.

 

**Bank-Owned Life Insurance (BOLI)** — The Bank invested in Bank-OwnedLife Insurance policies to fund certain future employee benefit costs and arerecorded at net realizable value. Changes in the cash surrender value arerecorded in the consolidated statements of operations under the caption “Otherincome.”

 

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**Premises and Equipment** — Premises and equipment are statedat cost less accumulated depreciation and amortization, which is calculatedusing the straight-line method over the estimated useful lives of three to fiveyears. Leasehold improvements are capitalized and amortized using thestraight-line method over the terms of the respective leases or the estimateduseful lives of the improvements, whichever is shorter. The Company reviews thecarrying value of property and equipment for indications of impairment inaccordance with ASC Topic 360-10-35, *Impairment or Disposal ofLong-Lived Assets*.  See Note 5— Premises and Equipment.

 

**Other Assets** — Included in other assets are certaininvestments, where the Company has the ability to exercise significantinfluence or has ownership between 20% and 50%, that are accounted for underthe equity method. The Company’s equity method investments consist of fourlimited partnership mezzanine funds (the Funds) licensed as Small BusinessInvestment Companies that invest primarily in subordinated debt securities. Incertain circumstances, the Funds may also receive warrants or other equitypositions as part of their investments. There were no transactions between theCompany and the Funds for the years ended December 31, 2009, 2008, and2007. The Company recognized income from the Funds of $0.9 million, $1.2million, and $1.0 million for the years ended December 31, 2009, 2008, and2007, respectively, which is included in “Other Income” in the consolidatedstatements of operations.

 

**Foreclosed Assets** — Assets acquired through, or in lieu of, loanforeclosures are held for sale and initially recorded at the lower of carryingamount or estimated fair value at the date of foreclosure.  Subsequent to foreclosure, valuations areperiodically performed by management and the assets are carried at the lower ofcarrying amount or fair value less costs to sell. Foreclosed assets included inthe consolidated balance sheets under the caption “Other assets” at December 31,2009 and 2008 totaled $0.1 million and $0, respectively. Valuation adjustmentscharged to operations on foreclosed assets for the years ended December 31,2009, 2008, and 2007 totaled $0, $0 and $0.5 million, respectively.

 

**Other Real Estate Owned (OREO)** — OREO held for sale acquiredthrough foreclosure, physical possession or in settlement of debt is valued atthe lower of carrying amount or estimated fair value as of the date of receipt,and a related valuation allowance is provided for estimated costs to sell.Management periodically evaluates the value of real estate held for sale andincreases the valuation allowance for any subsequent declines in fair valueless selling costs. Subsequent declines in value are charged tooperations.  Valuation adjustmentscharged to operations on OREO for the years ended December 31, 2009, 2008,and 2007 totaled $3.3 million, $2.9 million and $0, respectively.

 

**Securities Sold Under Agreements to Repurchase** — The Company sells certainsecurities under agreements to repurchase with its customers and otherfinancial institutions. The agreements transacted with its customers areutilized as an overnight investment product service, while the agreements withother financial institutions are transacted as a wholesale borrowing source.Both types of agreements are treated as secured borrowings, where theagreements are reflected as a liability of the Company and the securitiesunderlying the agreements are reflected as a Company asset.  See Note 8 — Borrowed Funds.

 

**Derivative Instruments** — Derivative financial instrumentsare accounted for at fair value. The Company utilizes interest rate swaps tohedge a portion of its exposure to interest rate changes. These instruments areaccounted for as cash flow hedges, as defined by ASC Topic 815,*Derivatives and Hedging*(ASC 815). The Company also has aderivative program that offers interest rate caps, floors, swaps and collars tocustomers 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.

 

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**Self Insurance Reserves** — The Company self-insures aportion of its employee medical costs. The Company maintains a liability forincurred-but-not-reported claims based on assumptions as to eligible employees,historical claims experience and lags in claims reporting.

 

**Investment Advisory and Trust Income** — Fees earned from providinginvestment advisory services are based on the market value of assets undermanagement and are collected either at the beginning or end of each quarter.Fees received at the beginning of the quarter are deferred and recognizedratably over the period as services are performed.

 

**Insurance Income** — Insurance income includes commissions on thesale of life and property and casualty insurance policies and other employeebenefit products earned as an agent for unaffiliated insurance underwriters.Life insurance and property and casualty income are primarily recognized upon policyorigination and renewal dates. Benefits brokerage income is recognized on amonthly basis as the customer pays their insurance premiums.

 

**Investment Banking Income** — Investment banking incomeincludes nonrefundable retainer fees recognized over the expected term of theengagement and success fees recognized when the transaction is completed andcollectibility of fees is reasonably assured.

 

**Income Taxes** — A deferred income tax liability or asset isrecognized for temporary differences which exist in the recognition of certainincome and expense items for financial statement reporting purposes in periodsdifferent than for tax reporting purposes. The provision for income taxes isbased on the amount of current and deferred income taxes payable or refundableat the date of the financial statements as measured by the provisions ofcurrent tax laws.  A valuation allowanceis provided when it is more likely than not that some portion or all of adeferred tax asset will not be realized. The ultimate realization of deferredtax assets depends on the generation of future taxable income during the periodin which related temporary differences become deductible. Management considersthe scheduled reversal of deferred tax liabilities, projected future taxableincome and tax planning strategies in its assessment of a valuationallowance.  See Note 11 — Income Taxes.

 

**Stock-Based Compensation** — Pursuant to ASC Topic 718, *Compensation — Stock Compensation*(ASC 718), the Companyrecognizes the fair value of stock-based awards to employees as compensationcost over the requisite service period. See Note 14 — Employee Benefit and Stock Compensation Plans.

 

**Earnings (Loss) Per Common Share** — Basic earnings per share is basedon the two-class method prescribed in ASC Topic 260, *Earnings PerShare*(ASC 260).   Theweighted-average number of shares outstanding used to compute diluted earningsper share include the number of additional common shares that would beoutstanding if the potential dilutive common shares and common shareequivalents had been issued at the beginning of the period.  See Note 13 — Earnings (Loss) Per Share.

 

**Stock Repurchases** — The Company has repurchased shares of itsoutstanding common stock through open market purchases. Repurchased shares areimmediately retired on the trade date and the cash paid is allocated to commonstock, additional paid-in-capital and retained earnings. Retired shares areshown as authorized but not issued or outstanding.  See Note 12 — Shareholders’ Equity.

 

**Segment Information** — The Company has disclosed separately theresults of operations relating to its segments in Note 19 — Segments.

 

**Fair Value Measurements** — The Company measuresfinancial assets, financial liabilities, nonfinancial assets and nonfinancial liabilities pursuantto ASC Topic 820, *Fair Value Measurements and Disclosures*(ASC 820).  ASC 820defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements.  See Note 18 - Fair Value Measurements.

 

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**Recent Accounting Pronouncements** — *AccountingStandards Codification*. The Financial Accounting Standards Board’s(FASB) Accounting Standards Codification became effective on July 1,2009.  At that date, the ASC became FASB’sofficial source of authoritative U.S. generally accepted accounting principles(GAAP) applicable to all public and non-public non-governmental entities,superseding existing guidance issued by the FASB, the American Institute ofCertified Public Accountants (AICPA), the Emerging Issues Task Force (EITF) andother related literature.  The FASB alsoissues Accounting Standards Updates.  AnAccounting Standards Update (ASU) is not authoritative, but communicatesamendments to the ASC. An ASU also provides information to help a user of GAAPunderstand how and why GAAP is changing and when the changes will be effective.

 

Effective January 1, 2009, the Company adopted guidance(originally issued as SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements — An Amendment of ARB No. 51*)amending existing GAAP to establish accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. The adopted guidance, now included in ASC Topic 810, *Consolidation* (ASC 810), clarifies that a noncontrollinginterest in a subsidiary is an ownership interest in the consolidated entityand should be reported as equity on the financial statements. ASC 810 requiresconsolidated net income to be reported at amounts that include the amountsattributable to both the parent and the noncontrolling interest. Furthermore,disclosure of the amounts of consolidated net income attributable to the parentand to the noncontrolling interest is required on the face of the financialstatements. Upon adoption, the Company reclassified noncontrolling intereststotaling $2.0 million from “Accrued interest and other liabilities” on theconsolidated balance sheets to noncontrolling interest within equity.  Prior balances have also been retrospectivelyapplied to conform to the current year presentation, as follows:

 
| ** **                                 | ** ** | ** **                            | ** ** | **As reported at**         | ** ** | **As**       | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|--------------|------------|
| **(in  thousands)**                        | ** ** | ** **                            | ** ** | **December 31, 2008** | ** ** | **adjusted** | ** ** |
| Accrued  interest and other liabilities    |       | Consolidated balance  sheet           |       | $                          | 23,454     |         | $          | 21,469 |   |
| Total  equity                              |       | Consolidated balance  sheet           |       | 252,099                    |       | 254,084      |       |
| Total  noninterest income                  |       | Consolidated statement  of operations |       | 35,399                     |       | 35,778       |       |
| Net  income before noncontrolling interest |       | Consolidated statement  of cash flows |       | 1,328                      |       | 1,707        |       |
| Other  operating activities, net           |       | Consolidated statement  of cash flows |       | (901                       | )          | (1,280       | )          |
|                                            |            |                                       |            |                            |            |              |            |  |  |

 
| ** **                                 | ** ** | ** **                            | ** ** | **As reported at**         | ** ** | **As**       | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|--------------|------------|
| **(in  thousands)**                        | ** ** | ** **                            | ** ** | **December 31, 2007** | ** ** | **adjusted** | ** ** |
| Accrued  interest and other liabilities    |       | Consolidated balance  sheet           |       | $                          | 21,107     |         | $          | 19,444 |   |
| Total  equity                              |       | Consolidated balance  sheet           |       | 189,270                    |       | 190,933      |       |
| Total  noninterest income                  |       | Consolidated statement  of operations |       | 28,289                     |       | 28,611       |       |
| Net  income before noncontrolling interest |       | Consolidated statement  of cash flows |       | 23,024                     |       | 23,346       |       |
| Other  operating activities, net           |       | Consolidated statement  of cash flows |       | (973                       | )          | (1,295       | )          |
|                                            |            |                                       |            |                            |            |              |            |  |  |

 

Effective January 1, 2009, the Company adopted guidance(originally issued as SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133*)which  enhances the required disclosuresunder ASC Topic 815, *Derivative and Hedging*(ASC815), in order to provide the investing community additional transparency in anentity’s financial statements and to more adequately disclose the impactinvestments in derivative instruments and use of hedging have on the financialposition, operating results and cash flows. There was no impact to theconsolidated financial statements upon adoption.  For additional disclosures pursuant to ASC815 see Note 10 - Derivatives.

 

Effective January 1, 2009, the Company adopted new authoritativeaccounting guidance (originally issued as FASB Staff Position EITF 03-6-1)under ASC 260, which provides that nonvested share-based payment awardscontaining nonforfeitable rights to dividends (whether paid or unpaid) areparticipating securities and will be included in the computation of earningsper share pursuant to the two-class method. The Company determined that itsoutstanding nonvested stock awards are participating securities. Accordingly,effective January 1, 2009, earnings per common share is

 

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computed using the two-class method prescribed under ASC 260.  Earnings per share for 2008 did not changedue to the adoption of the guidance and there were no participating securitiesoutstanding during the year ended December 31, 2007.  See Note 13 - Earnings (Loss) per CommonShare for additional information.

 

Effective January 1,2009, the Company adopted new authoritative accounting guidance (originallyissued as FASB Staff Position EITF 99-20-1) under ASC Topic 325, *Investments—Other* (ASC 325) amending the existing impairmentguidance to achieve more consistent determination of whether an other thantemporary impairment (OTTI) has occurred. The guidance emphasizes the objective of an OTTI assessment and therelated disclosure requirements in ASC Topic 320, *Investments—Debtand Equity Securities*(ASC 320). The adoption of this guidance didnot have a material impact on the Company’s consolidated financial statements.

 

Effective July 1,2009, the Company adopted new authoritative accounting guidance (originallyissued as FSP FAS 157-4) on estimating fair value when the volume and level ofactivity for the asset or liability have significantly decreased and requiresdisclosure of a change in valuation technique. The adoption of the guidance, now included in ASC 820, did not have amaterial impact on the Company’s consolidated financial statements.  See Note 18 - Fair Value Measurements, foradditional information.

 

In April 2009, theFASB issued guidance (originally issued as FSP FAS 115-2 and FAS 124-2, *Recognition and Presentation of Other-Than Temporary Impairments*)amending existing GAAP relating to OTTI for debt securities to improvepresentation and disclosure of OTTI on debt and equity securities in thefinancial statements.  Existingrecognition and measurement guidance related to OTTI of equity securities isnot amended by this guidance but rather amends the existing requirement thatthe entity’s management assert it has both the intent and ability to hold animpaired security until recovery; requires that an entity recognize noncreditlosses on held-to-maturity debt securities in other comprehensive income andamortize the amount over the remaining life of the security in a prospectivemanner by offsetting the recorded value of the asset unless the security issubsequently sold or there are additional credit losses; and requires an entityto present the total OTTI in the statement of earnings with an offset for theamount recognized in other comprehensive income.  Upon adoption, an entity is required torecord a cumulative effect adjustment as of the beginning of the period ofadoption to reclassify the noncredit component of a previously recognized OTTIfrom retained earnings to accumulated other comprehensive income if the entitydoes not intend to sell the security and it is not more likely than not thatthe entity will be required to sell the security before recovery.  The adoption of the guidance, now included inASC 320, did not have a material impact on the Company’s consolidated financialstatements.  See Note 3 — Investments,for additional information.

 

In April 2009, theFASB issued guidance (originally issued as FSP FAS 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Statements*)amending existing GAAP in ASC Topic 825, *Financial Instruments,*to require disclosures about fair value of financial instruments for interimreporting periods of publicly traded companies as well as in annual financialstatements.  The guidance also requiresthose disclosures in summarized financial information at interim reportingperiods.  The adoption of the guidancedid not have an impact on the Company’s consolidated financial statements.  See Note 18 - Fair Value Measurements, foradditional information.

 

In May 2009, the FASB issued guidance (originallyissued as SFAS No. 165, Subsequent Events) to establish general standardsof accounting for and disclosing events that occur after the balance sheetdate, but prior to the issuance of financial statements. The Statement providesguidance on when financial statements should be adjusted for subsequent eventsand requires companies to disclose subsequent events and the date through whichsubsequent events have been evaluated. The Statement is effective for interimand annual periods ending after June 15, 2009.  The adoption of thisStatement, now included in ASC Topic 855, *Subsequent Events*,did not have a material impact on the Company’s consolidated financialstatements.  For the annual period ending on

 

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December 31, 2009, subsequent events wereevaluated through February 19, 2010 the date the financial statements wereissued.

 

In August 2009, FASBissued ASU No. 2009-05, *Fair Value Measurementsand Disclosures (Topic 820) — Measuring Liabilities at Fair Value*(ASU2009-05).  The amendments in ASU 2009-05were effective as of the beginning of each reporting entity’s first reportingperiod (including interim periods) that begins after August 2009.  ASU 2009-05 provides clarification that incircumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using certain techniques. ASU 2009-05 also clarifies that when estimatingthe fair value of a liability, a reporting entity is not required to include aseparate input or adjustment to other inputs relating to the existence of arestriction that prevents the transfer of a liability. ASU 2009-05 alsoclarifies that both a quoted price in an active market for the identicalliability at the measurement date and the quoted price for the identicalliability when traded as an asset in an active market when no adjustments tothe quoted price of the asset are required are Level 1 fair value measurements.The adoption of ASU 2009-05 did not have an impact on the Company’sconsolidated financial statements.  SeeNote 18 - Fair Value Measurements, for additional information.

 

In December 2009,the FASB issued ASU No. 2009-16, *Transfers and Servicing(Topic 860) — Accounting for Transfers of Financial Assets* (ASU2009-16).  The amendments in ASU 2009-16are the result of SFAS No. 166, *Accounting for Transfersof Financial Assets, an amendment of FASB Statement No. 140,*originallyissued on June 12, 2009.* *ASU 2009-16 communicates thatupdates to ASC 860 will require additional information about transfers offinancial assets, including securitization transactions, and where entitiescontinue to have exposure to risks relating to transferred financialassets.  The amendments change requirements for derecognizing financialassets, enhance disclosure requirements and eliminate the ‘qualifyingspecial-purpose entity.’   Furthermore, the term ‘participatinginterest’ is defined to establish specific conditions for reporting a transferof a portion of a financial asset as a sale.  The amendments requiretransferred assets and liabilities incurred to be recognized and measured atfair value.  The amendments are effective as of the beginning of eachreporting entity’s first annual reporting period that begins after November 15,2009, for interim periods within that first annual reporting period and forinterim and annual reporting periods thereafter.  Early application is notpermitted.  The Company is currently evaluating the effect, if any, theamendments to ASC 860 will have on its consolidated financial statements.

 

In December 2009, theFASB issued ASU No. 2009-17, *Consolidations (Topic 810)- Improvements to Financial Reporting by Enterprises Involved with VariableInterest Entities* (ASU 2009-17). The amendments in ASA 2009-17 are the result of SFAS No. 167, *Amendments to FASB Interpretation No. 46(R),*originallyissued on June 12, 2009.* *ASU 2009-17 communicates thatupdates to ASC 810 changes how a reporting entity determines an entity that isinadequately capitalized or is not controlled through voting power or similarrights should be consolidated.  ASC 810will require the performance of an analysis to determine whether the reportingentity’s variable interest or interests give it a controlling financialinterest in a variable interest entity. ASC 810 identifies a primary beneficiary of a variable interest ashaving both the power to direct activities of a variable interest entity thatmost significantly impact the entity’s economic performance and the obligationto absorb losses of the entity that could potentially be significant to thevariable interest entity or the right to receive benefits from the entity thatcould potentially be significant to the variable interest entity.  ASC 810 will require enhanced disclosuresthat will present users of financial statements with more transparentinformation about the reporting entity’s involvement in a variable interestentity.  The amendments to ASC 810 areeffective as of the beginning of each reporting entity’s first annual reportingperiod that begins after November 15, 2009, for interim periods withinthat first annual reporting period, and for interim and annual reportingperiods thereafter.  Early application isnot permitted.  The Company is currentlyevaluating the impact, if any, the amendments to ASC 810 will have on itsconsolidated financial statements.

 

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In January 2010, theFASB issued ASU No. 2010-06, *Fair Value Measurementsand Disclosures* (ASU 2010-06), which amends ASC 820, adding newrequirements for disclosures for Levels 1 and 2, separate disclosures ofpurchases, sales, issuances, and settlements relating to Level 3 measurementsand clarification of existing fair value disclosures.  ASU 2010-06 iseffective for interim and annual periods beginning after December 15,2009, except for the requirement to provide Level 3 activity of purchases,sales, issuances, and settlements on a gross basis, which will be effective forfiscal years beginning after December 15, 2010.  The Company iscurrently evaluating the impact, if any, ASU 2010-06 will have on itsconsolidated financial statements.

 

**2.****                  ****ACQUISITIONS AND EARN-OUTARRANGEMENTS**

 

**Wagner Investment Management, Inc.** — On December 31, 2007, theCompany acquired Wagner, an SEC-registered investment advisor located inDenver, 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 $3.2 million consisting of 80,908shares of CoBiz common stock valued at $1.2 million; $1.9 million in cash; and$0.1 million in direct acquisition costs consisting primarily of external legalfees. The Company allocated $2.1 million of the purchase price togoodwill.  Goodwill arising from this transaction is tax deductible.  Additionally, the Company recorded $1.1million in intangible assets consisting primarily of a customer list, trademarkand a lease intangible.

 

The terms of the Wagner merger agreement provide for additional earn-outpayments for each of the calendar years 2008 through 2010 to be paid to theformer shareholders of Wagner in proportion to their respective ownershipimmediately prior to the acquisition. The earn-out payments are payable eitherin 100% in cash, or a mix of cash and stock, with the Company having the optionto pay up to 40% of the earn-out payment in CoBiz common stock.

 

The earn-out payments are based on a multiple of the excess of Wagner’searnings before interest, taxes, depreciation, and amortization as defined inthe Wagner merger agreement (Wagner EBITDA) for each specific year over thehighest Wagner EBITDA previously recognized (including Wagner’s adjusted 2007EBITDA prior to acquisition). The aggregate amount of the earn-out payments andthe initial purchase consideration can not exceed $10.0 million.  No earn-out payment was payable for the 2008or 2009 calendar years because Wagner’s EBITDA did not exceed the hurdlerate.  Management believes it is unlikelythat the 2010 earn-out payment will be earned.

 

**Bernard Dietrich and Associates, Inc.**— On January 2, 2008, the Companyacquired the assets and employees of Bernard Dietrich and Associates, Inc.(BDA), a provider of commercial and personal property and casualty insurancebrokerage, and risk management consulting services located in Phoenix, AZ. Theacquisition was accounted for using the purchase method of accounting, andaccordingly, BDA’s results of operations were included on the consolidatedfinancial statements since the date of acquisition.

 

The aggregate purchase price was $6.8 million, consisting of $6.7million in cash and $0.1 million in direct acquisition costs.  A deposit of $0.8 million was also put intoescrow for potential additional consideration. The terms of the BDA merger agreementprovided for deferred payments for each of the calendar years 2008 and 2009 tobe paid to the former shareholders of BDA in proportion to their respectiveownership immediately prior to the acquisition. The deferred payments werepayable in cash from the escrowed funds of $0.8 million.  The deferred payments were a maximum of $0.4million and $0.8 million for 2008 and 2009, respectively. The aggregate amountof total deferred payments during this two-year period could not exceed $0.8million. The yearly deferred payments were based on maintaining a revenuethreshold as defined in the BDA asset purchase

 

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agreement.  For the deferredpayment period ended December 31, 2008, the Company paid $0.4 million in January 2009based on the 2008 revenue threshold. During 2009, the revenue threshold was not maintained and the finaldeferred payment of $0.4 million was released to the Company from escrow.

 

The Company allocated $3.9 million of the purchase price to goodwill,which is tax deductible, $3.2 million to a customer list intangible asset and$0.1 million to other miscellaneous assets.  The customer list will be amortizedover 15 years.

 

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**General** — Earn-out payments for the Wagner transactionas well as deferred payments for the BDA transaction are treated as additionalcosts of the acquisitions and recorded as goodwill in accordance with ASC Topic805, *Business Combinations* (ASC 805).  In determining the classification of earn-outand deferred payments as additional costs of the acquisitions rather thancompensation, the Company considered the following factors from ASC 805:

 

·                  terms of continuing employment;

·                  components of shareholder group;

·                  reasons for contingent consideration;

·                  linkage to the valuation;

·                  formula for determining contingentconsideration; and

·                  other agreements and issues

 

Goodwill arising from these transactions was allocated between theoperating segments expected to benefit from the acquisitions. The Companyconducted goodwill impairment tests at March 31, 2009, and September 30,2009, due to events and circumstances during those periods, and as a resultrecorded a goodwill impairment of $46.2 million during 2009.  See Note 6 — Goodwill and IntangibleAssets for the amount of goodwill allocated to each operating segment.

 

**3.**              INVESTMENTS

 

The amortized cost and estimated fair values of investment securitiesare summarized as follows:

 
| ** **                                                     | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                     | ** ** | ** **                 | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                                                     | ** ** | **Amortized**              | ** ** | **unrealized** | ** ** | **unrealized** | ** ** | **fair** | ** ** |
| **(in  thousands)**                                            | ** ** | **cost**                   | ** ** | **gains** | ** ** | **losses** | ** ** | **value** | ** ** |
|                                                           |       |                       |       |   |   |   |   |   |   |
| Available  for sale securities:                                |       |                       |       |   |   |   |   |   |   |
| Mortgage-backed  securities                                    |       | $                          | 391,394    |   | $ | 14,630 |   | $ | 3,111 |   | $ | 402,913 |   |
| U.S.  Government Agencies                                      |       | 56,733                     |       | 4 |   | 284 |   | 56,453 |   |
| Trust  preferred securities                                    |       | 34,950                     |       | 1,236 |   | 1,405 |   | 34,781 |   |
| Corporate  debt securities                                     |       | 31,706                     |       | 991 |   | 56 |   | 32,641 |   |
| Municipal  securities                                          |       | 2,409                      |       | 26 |   | 18 |   | 2,417 |   |
|                                                           |       |                       |       |   |   |   |   |   |   |
|                                                           |       | $                          | 517,192    |   | $ | 16,887 |   | $ | 4,874 |   | $ | 529,205 |   |
|                                                           |       |                       |       |   |   |   |   |   |   |
| Held  to maturity securities — Mortgage-backed securities |       | $                          | 302        |   | $ | 6 |   | $ | — |   | $ | 308 |   |

 

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| ** **                                                     | ** ** | **December 31, 2008** | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                     | ** ** | ** **                 | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                                                     | ** ** | **Amortized**              | ** ** | **unrealized** | ** ** | **unrealized** | ** ** | **fair** | ** ** |
| **(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 |   |
| Municipal  Securities                                          |       | 2,690                      |       | 9 |   | 184 |   | 2,515 |   |
|                                                           |       |                       |       |   |   |   |   |   |   |
|                                                           |       | $                          | 479,197    |   | $ | 5,772 |   | $ | 8,463 |   | $ | 476,506 |   |
|                                                           |       |                       |       |   |   |   |   |   |   |
| Held  to maturity securities — Mortgage-backed securities |       | $                          | 376        |   | $ | — |   | $ | 2 |   | $ | 374 |   |

 

The amortized cost and estimated fair value of investments in debtsecurities at December 31, 2009, by contractual maturity are shown below.  Expected maturities can differ fromcontractual maturities because borrowers may have the right to call or prepayobligations 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                |       | $                      | 3,236      |                 | $          | 3,249 |   | $ | — |   | $ | — |   |
| Due  after one year through five years  |       | 58,994                 |       | 59,960               |       | — |   | — |   |
| Due  after five years through ten years |       | 28,040                 |       | 27,741               |       | — |   | — |   |
| Due  after ten years                    |       | 35,528                 |       | 35,342               |       | — |   | — |   |
| Mortgage-backed  securities             |       | 391,394                |       | 402,913              |       | 302 |   | 308 |   |
|                                    |       |                   |       |                 |       |   |   |   |   |
|                                    |       | $                      | 517,192    |                 | $          | 529,205 |   | $ | 302 |   | $ | 308 |   |

 

Investment securities with an approximate fair valueof $206.7 million and $99.5 million, were pledged to secure public deposits of$169.7 million and $50.0 million, at December 31, 2009 and 2008,respectively.

 

Market changes in interest rates and overall market illiquidity canresult in fluctuations in the market price of securities resulting in temporaryunrealized losses.  At December 31,2009, the Company’s securities in a temporary realized loss position consistedprimarily of mortgage-backed and trust preferred securities.  The mortgage-backed securities consistprimarily of highly rated investment-grade securities or securities issued bygovernment-sponsored entities.  The fairvalue of these securities is expected to recover as the securities approachtheir stated maturity or repricing date. The trust preferred securities are all single issuer securities thathave been negatively impacted by the overall decrease in the financial servicesmarket.  All trust preferred securitiesheld by the Company were paying dividends at December 31, 2009, and nonehad announced a future deferral of dividend payments.

 

Trust preferred securities, corporate debt securities and obligationsof states and political subdivisions at December 31, 2009, 2008 and 2007do not include any single issuer for which aggregate carrying amount exceeds10% of the Company’s shareholders’ equity.

 

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In reviewing therealizable value of its securities in a loss position, the Company consideredthe following factors: (1) the length of time and extent to which themarket had been less than cost; (2) the financial condition and near-termprospects of the issuer: (3) investment downgrades by rating agencies; and(4) whether it is more likely than not that the Company will have to sellthe security before a recovery in value. When it is probable that the Company will be unable to collect allamounts due according to the contractual terms of the security, and the fairvalue of the investment security is less than its amortized cost, an OTTI isrecognized in earnings.

 

For debt securities thatare considered other-than-temporarily impaired and that the Company does notintend to sell and will not be required to sell prior to recovery of theamortized cost basis, an OTTI is recognized. In April 2009, the FASB issued guidance amending existing GAAPrelating to OTTI for debt securities to improve presentation and disclosure ofOTTI on debt and equity securities in the financial statements.  The new guidance requires the Company toseparate the amount of the OTTI into the amount that is credit related (creditloss component) and the amount due to all other factors. The credit losscomponent is recognized in earnings and is the difference between a security’samortized cost basis and the discounted present value of expected future cashflows. The amount due to all other factors is recognized in other comprehensiveincome.

 

During the years ended December 31, 2009, 2008, and 2007, therewere no sales of held to maturity securities. Proceeds from sales of investment securities available for sale totaled$2.2 million, $0 and $1.1 million for the years ended December 31, 2009,2008 and 2007, respectively.

 

During the year ended December 31, 2009, the Company recognized$2.3 million in OTTI of which $1.3 million was credit related OTTI on twoprivate-label mortgage-backed securities ($0.9 million is separately reportedin the consolidated statement of operations due to the adoption of FSP FAS115-2 and FAS 124-2); and $1.0 million was on two single-issuer trust preferredsecurities intended to be sold.  For theyear ended December 31, 2008, the Company recorded an OTTI of $1.7 millioncomprised of a $1.3 million write down associated with a single issuer trustpreferred security and $0.4 million on a FNMA perpetual preferredsecurity.  Credit related OTTI subsequentto March 31, 2009 is included in the “Net other than temporary impairmentlosses on securities recognized in earnings” caption of the consolidatedstatements of operations.  Credit relatedOTTI prior to March 31, 2009 and non-credit related OTTI is included inthe “Loss on securities, other assets and real estate owned” caption of theconsolidated statements of operations.

 

The Company has determined there was no unrecognized OTTI associatedwith the 36 securities noted within the table below at December 31, 2009.

 
| ** **                  | ** ** | **Less than 12 months** | ** ** | **12 months or Greater** | ** ** | **Total** | ** ** |
|-----------------------------|------------|-------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                  | ** ** | **Fair**                | ** ** | **Unrealized**           | ** ** | **Fair**  | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **(in  thousands)**         | ** ** | **value**               | ** ** | **loss**                 | ** ** | **value** | ** ** | **loss** | ** ** | **value** | ** ** | **loss** | ** ** |
|                        |       |                    |       |                     |       |      |       |   |   |   |   |   |   |
| Mortgage-backed  securities |       | $                       | 17,338     |                     | $          | 189       |       | $ | 2,402 |   | $ | 2,921 |   | $ | 19,740 |   | $ | 3,110 |   |
| U.S.  Government Agencies   |       | 40,098                  |       | 285                      |       | —    |       | — |   | 40,098 |   | 285 |   |
| Trust  preferred securities |       | 3,471                   |       | 343                      |       | 6,819     |       | 1,062 |   | 10,290 |   | 1,405 |   |
| Corporate  debt securities  |       | 2,576                   |       | 56                       |       | —    |       | — |   | 2,576 |   | 56 |   |
| Municipal  Securities       |       | 585                     |       | 18                       |       | —    |       | — |   | 585 |   | 18 |   |
|                        |       |                    |       |                     |       |      |       |   |   |   |   |   |   |
| Total                       |       | $                       | 64,068     |                     | $          | 891       |       | $ | 9,221 |   | $ | 3,983 |   | $ | 73,289 |   | $ | 4,874 |   |

 

The following table presents a roll-forward of the credit losscomponent of OTTI on debt securities recognized in earnings during the yearended December 31, 2009.  The creditloss component represents the difference between the present value of expectedfuture cash flows and the amortized cost basis of the security.  The credit component of OTTI recognized inearnings during the year ended 2009 is presented in two parts based uponwhether the current period is the first time the debt security was creditimpaired or if it is an additional credit impairment.  The credit loss component is reduced if theCompany sells, intends to sell or believes it will be required to sellpreviously credit impaired securities. Additionally, the credit loss component is reduced if the 

 

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Company receives cash flows in excess of what it expected to receiveover the remaining life of the credit impaired debt security or when thesecurity matures.

 
| ** **                         | ** ** | **For the period ended**   | ** ** |
|------------------------------------|------------|----------------------------|------------|
| **(in  thousands)**                | ** ** | **December 31, 2009** | ** ** |
| Balance  at April 1, 2009     |       | $                          | 2,269      |   |
|                               |       |                       |       |
| Additions  (1):                    |       |                       |       |
| Initial  credit impairment         |       | 76                         |       |
| Additional  credit impairment      |       | 846                        |       |
| Reductions:                        |       |                       |       |
| Securities  intended to be sold    |       | (1,860                     | )          |
|                               |       |                       |       |
| Balance  at December 31, 2009 |       | $                          | 1,331      |   |

 

----

(1) ExcludesOTTI on investments we intend to sell.

 

During the year ended December 31,2009, the Company recognized an OTTI in earnings on two private-labelmortgage-backed securities consisting of the credit loss component.  The amount of OTTI related to other factorswas recorded in other comprehensive income. In determining the credit loss, the Company estimated expected futurecash flows of the security by estimating the expected future cash flows of theunderlying collateral and applying those collateral cash flows, together withany credit enhancements such as subordination interests owned by third partiesto the security. The expected future cash flows of the underlying collateralare determined using the remaining contractual cash flows adjusted for futureexpected credit losses (which consider current and future delinquencies,default rates and loss severities) and prepayments. The expected cash flows ofthe security are then discounted to arrive at a present value amount.

 

The following table presentsa summary of the significant inputs considered in determining the measurementof the credit loss component recognized in earnings during the year ended December 31,2009, for the aforementioned two private-label mortgage-backed securities.  A range of inputs is provided for securitieswith multiple impairments during the year.

 
| ** **                        | ** ** | **Security #1** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|-----------------|------------|------------|------------|
| **Inputs**                        | ** ** | **Low**         | ** ** | **High**   | ** ** | **Security #2** | ** ** |
| Prepayment  speed (CPR) (1)       |       | 13.8            | %          | 19.0       | %          | 10.9 | % |
| Default  rate (CDR) (2)           |       | 9.1             | %          | 19.1       | %          | 9.6 | % |
| Severity  (3)                     |       | 43.2            | %          | 48.2       | %          | 41.3 | % |
|                              |       |            |       |       |       |   |   |
| Credit  Impairment (in thousands) |       | $               | 846        |       |       |   | $ | 76 |   |
|                                   |            |                 |            |            |            |  |  |  |  |

 

----

(1) Estimatedprepayments as a percentage of outstanding loans

(2) Estimateddefault rate as a percentage of outstanding loans

(3) Estimatedloss rate on collateral liquidations

 

Other investments at December 31, 2009 and 2008, consist of thefollowing:

 
| ** **                                           | ** ** | **At December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|
| **(in  thousands)**                                  | ** ** | **2009**                 | ** ** | **2008** | ** ** |
|                                                 |       |                     |       |   |   |
| Other  investments — at cost                    |       | $                        | 14,300     |   | $ | 21,387 |   |
| Investment  in statutory trusts — equity method |       | 2,173                    |       | 2,179 |   |
|                                                 |       |                     |       |   |   |
|                                                 |       | $                        | 16,473     |   | $ | 23,566 |   |

 

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Other investments — at cost consists primarily of stock in the FHLBwhich is part of the Federal Home Loan Bank System (FHLB System).  The Company considers its FHLB stock as along-term investment that provides access to competitive products andliquidity.  During 2009, certain FederalHome Loan Banks in the FHLB System suspended repurchases of excess capitalstock.  However, at December 31,2009, the Federal Home Loan Bank of Topeka had not suspended repurchases ofexcess capital stock.  The Companyevaluates impairment in this investment based on the ultimate recoverability ofthe par value and at December 31, 2009, did not consider the investment tobe other than temporarily impaired.

 

**4.**              LOANS

 

Categoriesof loans at December 31, 2009 and 2008 include:

 
| ** **                       | ** ** | **At December 31,** | ** ** |
|----------------------------------|------------|--------------------------|------------|
| **(in  thousands)**              | ** ** | **2009**                 | ** ** | **2008** | ** ** |
|                             |       |                     |       |   |   |
| Commercial                       |       | $                        | 559,342    |   | $ | 648,851 |   |
| Term  Real Estate                |       | 935,909                  |       | 1,018,091 |   |
| Construction                     |       | 194,121                  |       | 268,050 |   |
| Consumer                         |       | 76,103                   |       | 86,702 |   |
| Other                            |       | 15,698                   |       | 11,212 |   |
| Gross  loans held for investment |       | 1,781,173                |       | 2,032,906 |   |
|                             |       |                     |       |   |   |
| Allowance  for loan losses       |       | (75,116                  | )          | (42,851 | ) |
| Unearned  net loan fees          |       | (307                     | )          | (1,653 | ) |
| Net  loans held for investment   |       | 1,705,750                |       | 1,988,402 |   |
|                             |       |                     |       |   |   |
| Loans  held for sale             |       | 1,820                    |       | — |   |
|                             |       |                     |       |   |   |
| Total  net loans                 |       | $                        | 1,707,570  |   | $ | 1,988,402 |   |

 

AtDecember 31, 2009 and 2008, overdraft demand deposits totaling $1.1million and $1.6 million, respectively, were reclassified from deposits toloans.

 

Substantiallyall of the Company’s lending activity occurs within the states of Colorado andArizona, specifically in the Denver and Phoenix metropolitan areas,respectively.  The majority of the Company’sloan portfolio consists of Commercial and Term Real Estate mortgage loans.  At December 31, 2009 and 2008, therewere no concentrations of loans related to any single industry in excess of 10%of total loans.  However, the Company maybe subject to additional regulatory supervisory oversight due to itsconcentration in commercial real estate lending.  Pursuant to interagency guidance issued bythe Federal Reserve and other federal banking agencies, supervisory criteriawere put in place to define commercial real estate concentrations as:

 

·                  Construction,land development and other land loans that represent 100% or more of totalrisk-based capital; or

·                  Commercialreal estate loans (as defined in the guidance) that represent 300% or more oftotal risk-based capital and the real estate portfolio has increased by morethan 50% or more during the prior 36 months.

 

AtDecember 31, 2009 and 2008, the Company was considered to have acommercial real estate concentration.

 

Inthe ordinary course of business, the Company makes various direct and indirectloans to officers and directors of the Company. Activity with respect toofficer and director loans is as follows for the years ended December 31,2009 and 2008:

 

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| **(in  thousands)**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Balance  — beginning of year |       | $        | 6,094      |     | $          | 8,573 |   |
|                              |       |     |       |     |       |
| New  loans                        |       | 17,082   |       | 15,651   |       |
| Principal  paydowns and payoffs   |       | (18,973  | )          | (18,130  | )          |
|                              |       |     |       |     |       |
| Balance  — end of year       |       | $        | 4,203      |     | $          | 6,094 |   |

 

Transactionsin the allowance for loan and credit losses for the years ended December 31,2009, 2008, and 2007, are summarized as follows:

 
| ** **                                                           | ** ** | **At and for the year ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in  thousands)**                                                  | ** ** | **2009**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                 |       |                                            |       |   |   |   |   |
| Allowance  for loan loss balance — beginning of year            |       | $                                               | 42,851     |   | $ | 20,043 |   | $ | 17,871 |   |
| Provision  for loan losses                                           |       | 105,815                                         |       | 39,796 |   | 3,936 |   |
| Loan  charge-offs                                                    |       | (76,577                                         | )          | (17,144 | ) | (1,838 | ) |
| Loan  recoveries                                                     |       | 3,027                                           |       | 156 |   | 74 |   |
| Allowance  for loan loss balance — end of year                  |       | $                                               | 75,116     |   | $ | 42,851 |   | $ | 20,043 |   |
|                                                                 |       |                                            |       |   |   |   |   |
| Allowance  for credit loss balance — beginning of year          |       | $                                               | 259        |   | $ | 576 |   | $ | 576 |   |
| Provision  for credit losses                                         |       | (104                                            | )          | (317 | ) | — |   |
|                                                                 |       |                                            |       |   |   |   |   |
| Allowance  for credit loss balance — end of year                |       | $                                               |  155  |   | $ | 259 |   | $ | 576 |   |
|                                                                 |       |                                            |       |   |   |   |   |
| Total  allowance for loan and credit loss balance — end of year |       | $                                               | 75,271     |   | $ | 43,110 |   | $ | 20,619 |   |

 

Informationon impaired loans is reported in the following table:

 

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| ** **                                             | ** ** | **At December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|
| **(in  thousands)**                                    | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| Nonaccrual  loans                                      |       | $                        | 74,624     |   | $ | 39,786 |   |
| Troubled  debt restructurings                          |       | 2,245                    |       | — |   |
| Impaired  loans                                        |       | 76,869                   |       | 39,786 |   |
| Nonaccrual  loans held for sale                        |       | 1,820                    |       | — |   |
| Total  impaired loans                                  |       | $                        | 78,689     |   | $ | 39,786 |   |
|                                                   |       |                     |       |   |   |
| Loans  90 days or more delinquent and still accruing   |       | $                        | 509        |   | $ | 1,292 |   |
|                                                   |       |                     |       |   |   |
| Impaired  loans with a specific valuation allowance    |       | $                        | 36,679     |   | $ | 34,609 |   |
|                                                   |       |                     |       |   |   |
| Impaired  loans without a specific valuation allowance |       | $                        | 40,190     |   | $ | 5,177 |   |
|                                                   |       |                     |       |   |   |
| Valuation  allowance on impaired loans                 |       | $                        | 13,897     |   | $ | 6,274 |   |

 
| ** **                            | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|
| **(in  thousands)**                   | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
| Average  investment in impaired loans |       | $                                        | 65,696     |   | $ | 20,992 |   | $ | 2,053 |   |
|                                       |            |                                          |            |  |  |  |  |  |  |  |

 

AtDecember 31, 2009 and 2008, there were no available commitments onrestructured loans.  Interest income thatwould have been recorded had nonaccrual loans performed in accordance withtheir original contract terms during 2009 was $1.8 million, $1.0 million during2008 and an immaterial amount in 2007. Interest income recognized on nonaccrual loans was not material in 2009,2008 and 2007.

 

**5.**              PREMISES AND EQUIPMENT

 

The major classes of premises and equipment at December 31,2009 and 2008, are summarized as follows:

 
| ** **                          | ** ** | **At December 31,** | ** ** |
|-------------------------------------|------------|--------------------------|------------|
| **(in  thousands)**                 | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| ** **                          | ** ** | ** **               | ** ** | ** ** | ** ** |
| Leasehold  improvements             |       | $                        | 9,945      |   | $ | 10,071 |   |
| Furniture,  fixtures, and equipment |       | 25,089                   |       | 23,222 |   |
|                                |       | 35,034                   |       | 33,293 |   |
|                                |       |                     |       |   |   |
| Accumulated  depreciation           |       | (26,831                  | )          | (24,139 | ) |
|                                |       |                     |       |   |   |
| Total                               |       | $                        | 8,203      |   | $ | 9,154 |   |

 

The Company recorded depreciation expense related topremises and equipment of $3.7 million, $3.4 million, and $3.3 million, duringthe years ended December 31, 2009, 2008 and 2007, respectively.

 

**6.**              GOODWILL AND INTANGIBLE ASSETS

 

Pursuant to ASC Topic 350, *Intangibles-Goodwilland Other*(ASC 350), the Company performs goodwill impairmenttesting on an annual basis and more frequently if events or circumstances occurthat would more likely than not reduce the fair value of a reporting unit belowits carrying 

 

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amount.  Whenconducting the goodwill impairment analysis, the fair value of the reportingunits is reconciled to the market capitalization of the Company, as adjustedfor a control premium, to determine the overall reasonableness of thevaluations.  The Company performed goodwill impairment tests at March 31,2009 and September 30, 2009 due to events and circumstances during thoseperiods.

 

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 unitexceeds its carrying amount, goodwill of the reporting unit is not consideredimpaired and it is not necessary to continue to the second step 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.

 

For the three months ended March 31, 2009, the average marketprice of the Company’s common share was $5.76 compared to $10.39 during thethree months ended December 31, 2008. Due to the significant decline in the market price during that periodand uncertainty surrounding the economy at that time, the Company concludedthat a triggering event had occurred that required an impairment test at March 31,2009.

 

As part of the step oneprocess for evaluating goodwill, with the assistance of a third-party valuationconsultant, the Company determined that the fair value of each of its reportingunits was less than their carrying amounts at March 31, 2009.  The fair value of the reporting units isestimated using a combination of market multiples of comparable entities,including recent transactions, and a discounted cash flow methodology.  Determining the fair value of a reportingunit requires a high degree of subjective management assumption. Discountedcash flow valuation models utilize variables such as revenue growth rates,expense trends, discount rates and terminal values. Based upon an evaluation ofkey data and market factors, management selects from a range the specificvariables to be incorporated into the valuation model.

 

To estimate the fairvalue of each reporting unit the Company used both a market approach and anincome approach based on a March 31, 2009 valuation date.

 

The market approachincluded both a guideline company method and a merger and acquisition method forall reporting units, except for the Investment Banking unit.  Due to the lack of comparable transactions,the merger and acquisition method was not used for Investment Banking.   In the guideline company method, the Companycollected data on prices investors paid to acquire minority interests incomparable businesses.  A valuationmultiple was then selected for the reporting units by referencing a multiple ofinvested capital to revenue (a multiple of tangible book value on theCommercial Banking unit was also reviewed) based on current trading multiplesand applying those multiples to our reporting units.  The multiples used in the guideline companymethod ranged from 0.5 to 1.2, which were further adjusted for a small companydiscount.  A control premium of 10% wasapplied to the minority acquisition multiples to reflect fair value on acontrolling basis.  In the merger andacquisition method, the Company collected data on prices paid to purchasecontrolling interests in comparable businesses. A valuation multiple was then selected for the reporting units byreferencing a multiple of invested capital to revenue (a multiple of tangiblebook value on the Commercial Banking unit was also reviewed) based on currenttrading multiples and applying those multiples to our reporting units.  The multiples used in the merger andacquisition method ranged from 0.5 to 1.4.

 

The income approachutilized a discounted cash flow analysis that incorporated the Company’sforecasts of balance sheet growth, revenues, level of non-performing assets,expenses, capital expenditures and working capital requirements.  The Company’s forecasts took intoconsideration the current and future economic environments and the impact onthe various revenue streams of the reporting units.  The cash flows were then discounted by a riskadjusted discount rate based on 

 

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the Company’s cost ofcapital and market conditions.  Thediscount rates used in the cash flow analysis incorporated specific risks dueto industry concentrations, size, operational risks and current operatinglosses.  Terminal values for eachreporting unit were developed using the Gordon Growth model that assumed along-term growth rate of 3% for each reporting unit.

 

In step two, the Companypreliminarily allocated the fair values determined in step one to each of thereporting unit’s assets and liabilities, including unrecognized intangibleassets, to determine the amount of implied goodwill on each unit.  The Company performed a preliminary step twoallocation during the quarter ended March, 31, 2009.  The Company finalized step two of itsimpairment analysis during the quarter ended June 30, 2009, which did notresult in an adjustment to the step two allocation completed in the firstquarter.  The noncash impairment chargerecorded at March 31, 2009 was $33.7 million of which $3.8 million isexpected to be tax deductible over the applicable term as allowed by theInternal Revenue Code.  The impairment ofgoodwill is included as a noninterest expense in the consolidated statements ofoperations.

 

During the quarter ended September 30,2009, the following triggering events resulted in an additional goodwillimpairment review:

 

·                  The Companysold 13,205,600 shares of common stock in an equity offering at $4.50.

·                  A producer whomanaged a significant insurance line resigned from the Company.

·                  Due to theproducer resignation, the Company reviewed its long-lived assets forimpairment.

·                  The operatingresults of the Company’s reporting units were below forecast for twoconsecutive quarters.

·                  The Companyupdated its forecast as part of the annual budget process that starts in thethird quarter of each year.  The Company’sforecast projected lower revenues than the forecast used at March 31,2009.

 

As part of the step one process for evaluatinggoodwill at September 30, 2009, the Company estimated the fair value ofthe reporting units using a combination of market multiples and a discountedcash flow method.  The significant inputsand measures used in the March 31 and September 30, 2009 evaluationsare noted below:

 
| **Inputs**                                 | ** ** | **March 31, 2009** | ** ** | **September 30, 2009** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Range of guideline  company multiples      |       | 0.5 to 1.2              |       | 0.5 to 1.2                  |       |
| Range of merger and  acquisition multiples |       | 0.5 to 1.4              |       | 0.1 to 0.7                  |       |
| Range of small company  discounts          |       | 22.0% to 26.0%          |       | 22.0% to 26.0%              |       |
| Control premium                            |       | 10.0%                   |       | 10.0%                       |       |
| Range of discount rates                    |       | 21.0% to 28.0%          |       | 16.0% to 25.0%              |       |
| Long-term growth rate                      |       | 3.0%                    |       | 3.0%                        |       |

 

In step two, the Companyallocated the fair values determined in step one to each of the reporting unit’sassets and liabilities, including unrecognized intangible assets, to determinethe amount of implied goodwill on each unit. This review indicated that the carrying value of goodwill exceededimplied goodwill.  Accordingly, at September 30,2009, the Company recorded a noncash goodwill impairment charge of $12.5million of which $9.1 million is expected to be tax deductible over theapplicable term as allowed by the Internal Revenue Code.  The impairment of goodwill is included as anoninterest expense in the consolidated statements of income and comprehensive.

 

A summary of goodwill,adjustments to goodwill and total assets by operating segment at December 31,2009, is noted below.

 

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| **(in  thousands)**                         | ** ** | **Commercial  banking** | ** ** | **Investment  banking** | ** ** | **Investment  advisory and  trust** | ** ** | **Insurance** | ** ** | **Corporate  support and  other** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-------------------------|------------|------------------------------------------|------------|---------------|------------|----------------------------------------|------------|-----------|------------|
|                                        |       |                    |       |                    |       |                                     |       |          |       |                                   |       |      |       |
| Goodwill  balance at December 31, 2007 |       | $                       | 15,348     |                    | $          | 5,279                                    |       | $             | 7,644      |                                   | $          | 15,115    |       | $ | — |   | $ | 43,386 |   |
| Acquisitions  and adjustments               |       | —                  |       | —                  |       | (1,126                                   | )          | 3,900         |       | —                                 |       | 2,774     |       |
| Goodwill  balance at December 31, 2008 |       | 15,348                  |       | 5,279                   |       | 6,518                                    |       | 19,015        |       | —                                 |       | 46,160    |       |
| Impairment  losses in 2009                  |       | (15,348                 | )          | (5,279                  | )          | (6,518                                   | )          | (19,015       | )          | —                                 |       | (46,160   | )          |
| Goodwill balance at December 31, 2009  |       | $                       | —     |                    | $          | —                                   |       | $             | —     |                                   | $          | —    |       | $ | — |   | $ | — |   |
|                                        |       |                    |       |                    |       |                                     |       |          |       |                                   |       |      |       |
| Accumulated goodwill impairment losses      |       | $                       | (15,348    | )                       | $          | (5,279                                   | )          | $             | (6,518     | )                                      | $          | (19,015   | )          | $ | — |   | $ | (46,160 | ) |
|                                        |       |                    |       |                    |       |                                     |       |          |       |                                   |       |      |       |
| Total  assets at December 31, 2008     |       | $                       | 2,629,082  |                    | $          | 6,670                                    |       | $             | 9,025      |                                   | $          | 28,706    |       | $ | 10,792 |   | $ | 2,684,275 |   |
| Total  assets at December 31, 2009     |       | $                       | 2,380,362  |                    | $          | 609                                      |       | $             | 3,312      |                                   | $          | 10,278    |       | $ | 71,454 |   | $ | 2,466,015 |   |

 

At December 31, 2009and 2008, the Company’s intangible assets and related accumulated amortizationconsisted of the following:

 
| ** **              | ** ** | **Amortizing**        | ** ** | **Non-amortizing** | ** ** | ** **    | ** ** |
|-------------------------|------------|-----------------------|------------|--------------------|------------|---------------|------------|
| ** **              | ** ** | **Customer**          | ** ** | ** **         | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **              | ** ** | **contracts, lists**  | ** ** | ** **         | ** ** | ** **    | ** ** | ** ** | ** ** |
| **(in  thousands)**     | ** ** | **and relationships** | ** ** | **Other**          | ** ** | **Tradename** | ** ** | **Total** | ** ** |
| December 31,  2008 |       | $                     | 5,396      |               | $          | 39            |       | $ | 269 |   | $ | 5,704 |   |
| Impairment  loss        |       | —                |       | —             |       | (120          | )          | (120 | ) |
| Amortization            |       | (638                  | )          | (36                | )          | —        |       | (674 | ) |
| December 31,  2009 |       | $                     | 4,758      |               | $          | 3             |       | $ | 149 |   | $ | 4,910 |   |

 

In conjunction with the March 31, 2009 goodwill impairmentevaluation, the Company determined that the indefinite-lived tradenameintangible asset was impaired by $0.1 million. This was determined by a review of the future cash flows of the associatedbusiness and the royalty rate used in valuing the tradename.  The tradename impairment is included in the “Netloss on securities, other assets and other real estate owned” line on theaccompanying consolidated statements of operations.  The carrying value of intangible assetsreviewed at September 30, 2009, prior to performing the goodwillimpairment analysis did not result in any additional impairment.  The Company recorded amortization expense of$0.7 million during the years ended December 31, 2009 and 2008 and $0.5million for the year ended December 31, 2007.  Amortization expense on intangible assets for each ofthe five succeeding years is estimated in the following table.

 
| **(in  thousands)** |   |   |   |
|---------------------|--------|--------|--------|
| 2010                |   | $      | 642    |   |
| 2011                |   | 638    |   |
| 2012                |   | 638    |   |
| 2013                |   | 426    |   |
| 2014                |   | 316    |   |
|                     |        |        |        |  |

 

**7.**              CERTIFICATES OF DEPOSIT

 

The composition of thecertificates of deposit portfolio at December 31, 2009 and 2008, is asfollows:

 

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| ** **          | ** ** | **At December 31,** | ** ** |
|---------------------|------------|--------------------------|------------|
| **(in  thousands)** | ** ** | **2009**                 | ** ** | **2008** | ** ** |
|                |       |                     |       |   |   |
| Less  than $100,000 |       | $                        | 72,849     |   | $ | 207,564 |   |
| $100,000 and more   |       | 526,719                  |       | 314,489 |   |
|                |       |                     |       |   |   |
|                |       | $                        | 599,568    |   | $ | 522,053 |   |

 

Related interest expense forthe years ended December 31, 2009, 2008, and 2007, is as follows:

 
| ** **          | ** ** | **For the year ended December 31,** | ** ** |
|---------------------|------------|------------------------------------------|------------|
| **(in  thousands)** | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|                |       |                                     |       |   |   |   |   |
| Less  than $100,000 |       | $                                        | 2,208      |   | $ | 8,659 |   | $ | 5,693 |   |
| $100,000  and more  |       | 10,109                                   |       | 11,430 |   | 19,319 |   |
|                |       |                                     |       |   |   |   |   |
|                |       | $                                        | 12,317     |   | $ | 20,089 |   | $ | 25,012 |   |

 

Maturities of certificatesof deposit of $100,000 and more at December 31, 2009, are as follows:

 
| **(in  thousands)**            |   |    |    |
|--------------------------------|--------|---------|---------|
| Remaining  maturity:           |   |    |    |
| Less  than three months        |   | $       | 243,014 |   |
| Three  months up to six months |   | 135,773 |    |
| Six  months up to one year     |   | 136,544 |    |
| One  year and over             |   | 11,388  |    |
|                           |   |    |    |
| Total                          |   | $       | 526,719 |   |

 

**8.     BORROWED FUNDS**

 

Securities sold under agreements to repurchase at December 31,2009 and 2008, are summarized as follows:

 
| ** **                                                                                                                                                                      | ** ** | **At December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| **(in  thousands)**                                                                                                                                                             | ** ** | **2009**                 | ** ** | **2008** | ** ** |
|                                                                                                                                                                            |       |                     |       |   |   |
| Securities  sold under agreements to repurchase (principally mortgage-backed securities  with an estimated fair value of $147,168 and $146,157 in 2009 and 2008,  respectively) |       | $                        | 139,794    |   | $ | 133,478 |   |
|                                                                                                                                                                                 |            |                          |            |  |  |  |  |

 

The Company enters into sales of securities under agreements torepurchase. The amounts received under these agreements represent short-termborrowings and are reflected as a liability in the consolidated balance sheets.The securities underlying these agreements are included in investmentsecurities in the consolidated balance sheets. Securities sold under agreementsto repurchase averaged $125.1 million and $147.2 million during 2009 and 2008,respectively. The maximum amounts outstanding at any month-end during 2009 and2008 were $162.3 million and $180.0 million, respectively.  At December 31, 2009, theweighted-average interest rate was 0.92% 

 

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and all securities sold under agreements to repurchase had a maturitydate of less than three months.

 

The composition of other short-term borrowings, whichare all due within one year, at December 31, 2009 and 2008, is summarizedas follows:

 
| ** **                             | ** ** | **At December 31,** | ** ** |
|----------------------------------------|------------|--------------------------|------------|
| **(in  thousands)**                    | ** ** | **2009**                 | ** ** | **2008** | ** ** |
|                                   |       |                     |       |   |   |
| Term  auction facility                 |       | $                        | —     |   | $ | 445,000 |   |
| Federal  Home Loan Bank line of credit |       | —                   |       | 59,300 |   |
| Federal  funds purchased               |       | 240                      |       | 38,763 |   |
|                                   |       |                     |       |   |   |
| Total                                  |       | $                        | 240        |   | $ | 543,063 |   |

 

The Company participated in the Federal Reserve’s temporary TermAuction Facility (TAF) credit program during 2009 but did not have anoutstanding balance at December 31, 2009. At December 31, 2008, the Company had borrowings of $445.0 millionwith a weighted-average interest rate of 0.84%. At December 31, 2008, the TAF borrowings were collateralized byloans with a book value of $927.8 million.

 

The Company has advances and a line of credit from the FHLB with aweighted-average interest rate of 0.65% at December 31, 2008.  No amounts were outstanding at December 31,2009.  Advances and the line of creditare collateralized by either qualifying loans or investment securities nototherwise pledged as collateral. At December 31, 2009, the Company hadloans of $546.5 million with a lending value of $305.3 million available tocollateralize FHLB borrowings.  At December 31,2008, the FHLB advances and line of credit were collateralized by loans of$580.0 million with a lending value of $314.3 million.

 

The Company has approved federal fund purchase lines with nine bankswith an aggregate credit line of $235.0 million as well as agreements withvarious companies to transact repurchase agreements based on availablecollateral. At December 31, 2009, there were no outstanding repurchaseagreements with noncustomer third parties.

 

In August 2007, the Company entered into a credit agreement with arevolving line of credit facility in the aggregate principal sum of up to $30.0million with an interest rate based on a LIBOR-based rate or a variable federalfunds-based rate, plus an initial spread of 1.15%.  The agreement wasamended in July 2008, increasing the spread to 1.35% and extending theterm to July 30, 2009.  On June 23, 2009, the Company terminatedits revolving line of credit facility. The agreement was terminated at the request of the Company prior to itsexpiration on July 30, 2009.  Therewas no amount drawn on the line of credit at the time of the termination and nopremium or penalty was assessed to the Company for early termination.

 

The credit facility was secured by a first prioritysecurity interest in 100% of the outstanding common stock of the Bank.  AtDecember 31, 2008, there was no amount outstanding on the revolving line.The Company paid a commitment fee of 0.25% on the unused portion of the line ofcredit.

 

The terms of the credit agreement contained covenantsthat required 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, the Company was in default on theminimum return on asset ratio and the maximum non-performing asset to totalloans ratio.  Pursuant to the terms of the credit agreement, these eventsof default provided the lender the right to declare all amounts under theagreement as immediately due and payable.  In addition, the lender’sobligation to advance amounts available pursuant to the 

 

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agreement was terminated.  The Company was notnotified by the lender that the credit agreement had been canceled due to theevents of default.

 

**9.**              LONG-TERM DEBT

 

Outstanding subordinated debentures and notes payable at December 31,2009 and 2008, is summarized as follows:

 
| ** **                            | ** ** | **At December 31,** | ** ** | ** ** | ** ** | ** **             | ** ** | ** **               | ** ** |
|---------------------------------------|------------|--------------------------|------------|------------|------------|------------------------|------------|--------------------------|------------|
| **(in  thousands)**                   | ** ** | **2009**                 | ** ** | **2008**   | ** ** | **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,  2010 |   |
| CoBiz  Capital Trust II               |       | 30,928                   |       | 30,928     |       | 3-month LIBOR +  2.60% |       | July 23,  2034      |       | January 23,  2010 |   |
| 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     |       | $          | 20,984                 |       | Fixed 9%                 |       | August 18,  2018 |   | August 18,  2013 |   |

 

In September 2003, the Company created a wholly owned trust, CoBizStatutory Trust I, formed under the laws of the State of Connecticut (theStatutory Trust). The Statutory Trust issued $20.0 million of trust preferredsecurities bearing an interest rate based on a spread above three-month LIBOR.Simultaneously with the issuance, the Company purchased a minority interest inthe Statutory Trust for $0.6 million. The Statutory Trust invested the proceedsthereof in $20.6 million of junior subordinated debentures of CoBiz that alsobear an interest rate based on a spread above three-month LIBOR. The securitiesand junior subordinated debentures provide cumulative distributions at afloating rate that is reset each quarter on March 17, June 17, September 17and December 17. The junior subordinated debentures will mature and thecapital securities must be redeemed on September 17, 2033, which may beshortened to any quarterly distribution date, if certain conditions are met(including the Company having received prior approval from the Federal Reserveand any other required regulatory approvals) and notice is given at least 30and not more than 60 days prior to the redemption date.

 

In May 2004, the Company created a wholly owned trust, CoBiz CapitalTrust II, formed under the laws of the State of Delaware (the Capital TrustII). The Capital Trust II issued $30.0 million of trust preferred securitiesbearing an interest rate based on a spread above three-month LIBOR.Simultaneously with the issuance, the Company purchased a minority interest inthe Capital Trust II for $0.9 million. The Capital Trust II invested theproceeds thereof in $30.9 million of junior subordinated debentures of CoBizthat also bear an interest rate based on a spread above three-month LIBOR. Thesecurities and junior subordinated debentures provide cumulative distributionsat a floating rate that is reset each quarter on January 23, April 23,July 23 and October 23. The junior subordinated debentures willmature and the capital securities must be redeemed on July 23, 2034, whichmay be shortened to a date not earlier than July 23, 2009, if certainconditions are met (including the Company having received prior approval fromthe Federal Reserve and any other required regulatory approvals).

 

In August 2005, the Company created a wholly owned trust, CoBizCapital Trust III, formed under the laws of the State of Delaware (the CapitalTrust III). The Capital Trust III issued $20.0 million of trust preferredsecurities bearing an interest rate based on a spread above three-month LIBOR.Simultaneously with the issuance, the Company purchased a minority interest inthe Capital Trust III for $0.6 million. The Capital Trust III invested theproceeds thereof in $20.6 million of junior subordinated debentures of CoBizthat also bear an interest rate based on a spread above three-month LIBOR. Thesecurities and junior subordinated debentures provide cumulative distributionsat a floating rate that is reset each quarter on March 30, June 30, September 30and December 30. The junior subordinated debentures will mature and thecapital securities must be redeemed on September 30, 2035, which may beshortened to a date not earlier than 

 

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September 30, 2010, if certain conditions are met (including theCompany having received prior approval from the Federal Reserve and any otherrequired regulatory approvals).

 

TheCompany records the distributions of the junior subordinated debentures ininterest expense on the consolidated statements of operations. All of theoutstanding junior subordinated debentures may be prepaid if certain eventsoccur, including a change in tax status or regulatory capital treatment oftrust preferred securities. In each case, redemption will be made at par, plusthe accrued and unpaid distributions thereon 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, $70.0million 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, 2009. On March 1, 2005, the Federal Reserve Board finalized a rule thatwould continue to allow the inclusion of trust preferred securities issued byunconsolidated subsidiary trusts in Tier 1 capital, but with stricter quantitativeand qualitative standards. Under the rule, after a transition period ending on March 31,2009, the aggregate amount of trust preferred securities and certain othercapital elements would be limited to 25% of Tier 1 capital elements, net ofgoodwill that has been reduced by any associated 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 certain restrictions. On March 17, 2009, the Federal Reserve Board announced the adoptionof a final rule that delays the initial effective date of March 31,2009 to March 31, 2011.

 

The Company completed a private placement of $21.0 million ofSubordinated Unsecured Promissory Notes (the Notes) during the third and fourthquarter of 2008.  The notes will matureon August 18, 2018, 10 years after the initial issue date.  The notes bear a fixed annual interest rateof 9.00%, pay interest quarterly, and can be prepaid at par without penalty atany time on or after the fifth anniversary of the initial issue date.  The Notes qualify as Tier 2 capital forregulatory capital purposes.  Certainemployees and directors of the Company participated in the privateplacement.  At December 31, 2009,there were $3.5 million in Notes owed to related parties.  The Company paid $0.3 million and $0.1million in interest to related parties during the years ended December 31,2009 and 2008, respectively.

 

**10.**       DERIVATIVES

 

ASC 815 contains theauthoritative guidance on accounting and reporting standards for derivativeinstruments, including certain derivative instruments embedded in othercontracts, and hedging activities. The Company has adopted guidance amending andexpanding the disclosure requirements of ASC 815 with the intent to provideusers of financial statements with an enhanced understanding of: (a) howand why an entity uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for under GAAP, and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance and cash flows. As required by ASC 815, theCompany records all derivatives on the consolidated balance sheets at fairvalue.  The accounting for changes in the fair value of derivativesdepends on the intended use of the derivative, whether the Company has electedto designate a derivative in a hedging relationship and apply hedge accountingand whether the hedging relationship has satisfied the criteria necessary to applyhedge accounting. Derivatives designated and qualifying as a hedge of theexposure to changes in the fair value of an asset, liability or firm commitmentattributable to a particular risk, such as interest rate risk, are consideredfair value hedges. Derivatives designated and qualifying as a hedge of theexposure to variability in expected future cash flows, or other types offorecasted transactions, are considered cash flow hedges.

 

In order to qualify forhedge accounting, the Company must comply with detailed rules and strictdocumentation requirements at the inception of the hedge, and hedgeeffectiveness must be assessed at inception and periodically throughout thelife of each hedging relationship. Hedge accounting generally provides for the matchingof the timing of gain or loss recognition on the hedging instrument with therecognition of the changes in the fair value of the hedged asset or 

 

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liability that are attributable to the hedged risk ina fair value hedge or the earnings effect of the hedged forecasted transactionsin a cash flow hedge.  The Company mayenter into derivative contracts that are intended to economically hedge certainof its risks, even though hedge accounting does not apply or the Company electsnot to apply hedge accounting under ASC 815.

 

The Company is exposed to certain risks arising from both its businessoperations and economic conditions.  TheCompany principally manages its exposures to a wide variety of business andoperational risks through management of its core business activities. TheCompany manages economic risks, including interest rate, liquidity and creditrisk, primarily by managing the amount, sources, and duration of its assets andliabilities and the use of derivative financial instruments.  Specifically, the Company enters intoderivative financial instruments to manage exposures that arise from businessactivities that result in the receipt or payment of future known and uncertaincash amounts, the value of which are determined by interest rates.  The Company’s derivative financialinstruments are used to manage differences in the amount, timing, and duration ofthe Company’s known or expected cash receipts and its known or expected cashpayments principally related to certain variable-rate loan assets andvariable-rate borrowings.

 

The Company’s objective in using derivatives is to minimize the impactof interest rate fluctuations on the Company’s interest income and to reduceasset sensitivity. To accomplish this objective, the Company uses interest-rateswaps as part of its cash flow hedging strategy. Under the interest-rate swapagreements, the Company receives a fixed-rate and pays a variable-rate based onthe prime rate (Prime) over the life of the agreements without exchange of theunderlying principal amount. For accounting purposes, these swaps aredesignated as hedging the overall changes in cash flows related to portfoliosof the Company’s Prime-based loans. Specifically, the Company has designated asthe hedged transactions the first Prime-based interest payments received by theCompany each calendar month during the term of the swaps that, in the aggregatefor each period, are interest payments on principal from specified portfoliosequal to the notional amount of the swaps.

 

Based on the Company’s ongoing assessments, including at inception ofthe hedging relationship, it is probable that there will be sufficientPrime-based interest receipts through the maturity date of the swaps. TheCompany also monitors the risk of counterparty default on an ongoing basis. TheCompany uses the “Hypothetical Derivative Method” method described in ASC815-30-35 (formerly DIG Issue No. G7, *Cash Flow Hedges: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 operations as part of noninterest income/expense.

 

Prepayments in the hedged loan portfolios are accounted for consistentwith the guidance in ASC 815-20-25 (formerly DIG Issue No. G25, *Cash Flow Hedges: Using the First-Payments-Received Technique inHedging the Variable Interest Payments on a Group of Nonbenchmark-Rate-BasedLoans*), which allows the designated forecasted transactions to bethe variable Prime-rate-based interest payments on a rolling portfolio ofpre-payable interest-bearing loans using the first-payments-received techniqueas described above, thereby allowing interest payments from loans that prepayto be replaced with interest payments from new loan originations.  Proceeds received or paid upon termination ofderivative financial instruments qualifying as cash flow hedges are deferred inother comprehensive income and amortized into income over the remaining life ofthe hedged item.

 

The Company also 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

 

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order to eliminate the interest-rate risk associated with offeringthese products, the Company enters into derivative contracts with third partiesto offset the customer contracts.  Thesecustomer accommodation interest rate swap contracts are not designated ashedging instruments.

 

The table below presents the fair value of the Company’s derivativefinancial instruments as well as their classification on our consolidatedbalance sheets.

 
| ** **                                                       | ** ** | **Asset derivatives** | ** ** | **Liability derivatives** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|---------------------------|------------|
| ** **                                                       | ** ** | ** **            | ** ** | **Fair value**            | ** ** | ** ** | ** ** | **Fair value** | ** ** |
| ** **                                                       | ** ** | **Balance sheet**     | ** ** | **At December 31,**  | ** ** | **Balance sheet** | ** ** | **At December 31,** | ** ** |
| **(in  thousands)**                                              | ** ** | **classification**    | ** ** | **2009**                  | ** ** | **2008** | ** ** | **classification** | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                             |       |                  |       |                      |       |   |   |   |   |   |   |   |   |
| Derivatives designated as hedging instruments under  ASC 815     |       |                  |       |                      |       |   |   | Accrued  interest |   |   |   |   |   |
| Interest rate swap                                               |       | Other  assets         |       | $                         | 4,202      |   | $ | 3,586 |   | and  other liabilities |   | $ | 55 |   | $ | — |   |
|                                                             |       |                  |       |                      |       |   |   |   |   |   |   |   |   |
| Derivatives not designated as hedging instruments  under ASC 815 |       |                  |       |                      |       |   |   | Accrued  interest |   |   |   |   |   |
| Interest rate swap                                               |       | Other  assets         |       | $                         | 3,495      |   | $ | 6,686 |   | and  other liabilities |   | $ | 3,623 |   | $ | 7,055 |   |

 

**Cash Flow Hedges of Interest Rate Risk**— For hedges of the Company’svariable-rate loan assets, interest rate swaps designated as cash flow hedgesinvolve the receipt of fixed-rate amounts from a counterparty in exchange forthe Company making variable-rate payments over the life of the agreementswithout exchange of the underlying notional amount.  For hedges of the Company’s variable-rateborrowings, interest rate swaps designated as cash flow hedges involve thereceipt of variable-rate amounts from a counterparty in exchange for theCompany making fixed-rate payments.  In February 2009,the Company executed a series of interest-rate swap transactions designated ascash flow hedges that are effective for interest payments starting in2010.  The intent of the transactions isto fix the effective interest rate for payments due on the junior subordinateddebentures with the objective of reducing the Company’s exposure to adversechanges in cash flows relating to payments on its LIBOR-based floating ratedebt.  The swaps will be effective for varying lengths of time rangingfrom five to 14 years.  Select critical terms of the cash flow hedges areas follows:

 
| **Hedged**               | ** ** | **Notional**       | ** ** | **Fixed** | ** ** | **Termination** | ** **           |
|--------------------------|------------|--------------------|------------|-----------|------------|-----------------|----------------------|
| **item**                 | ** ** | **(in thousands)** | ** ** | **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 |   |

 

Including the cash flow hedges in the table above, theCompany had 10 interest rate swaps with an aggregate notional amount of $130.0million that were designated as cash flow hedges of interest rate risk at December 31,2009.

 

The effective portion of changes in the fair value ofderivatives designated and that qualify as cash flow hedges is recorded inAccumulated Other Comprehensive Income and is subsequently reclassified intoearnings in the period that the hedged forecasted transaction affects earnings.During 2009, such derivatives were used to hedge the variable cash inflowsassociated with existing pools of Prime-based loan assets, as well as variablecash outflows associated with subordinated debt related to trust preferredsecurities beginning in 2010.  Theineffective portion of the change in fair value of the derivatives, if any, isrecognized directly in earnings. The Company’s derivatives did not have anyhedge ineffectiveness recognized in earnings during the years ended December 31,2009 and 2008.

 

Amounts reported in accumulated other comprehensive income related toderivatives will be reclassified to interest income or expense as interestpayments are received or made on the

 

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Company’s variable-rate assets/liabilities. During the next 12 months,the Company estimates that $1.3 million will be reclassified as an increase tointerest income and $1.6 million will be reclassified as an increase tointerest expense.

 

**Non-designated Hedges** — Derivatives not designated as hedges are not speculative and result froma service the Company provides to certain customers.  The Company executes interest rate swaps withcommercial banking customers to facilitate their respective risk managementstrategies.  Those interest rate swapsare simultaneously hedged by offsetting interest rate swaps that the Companyexecutes with a third party, such that the Company minimizes its net riskexposure resulting from such transactions. As the interest rate swaps associated with this program do not meet GAAPhedge accounting requirements, changes in the fair value of both the customerswaps and the offsetting swaps are recognized directly in earnings.  At December 31, 2009, the Company had 55interest rate swaps with an aggregate notional amount of $134.3 million relatedto this program.  During the years ended December 31,2009 and 2008, the Company recognized a net gain of $0.2 million and a net lossof $0.4 million, respectively, related to changes in fair value of these swaps.

 

The table below summarizes gains and losses recognized in othercomprehensive income (loss) (OCI) and in conjunction with our derivativesdesignated as hedging instruments for the years ended December 31, 2009,2008 and 2007.

 
| ** **          | ** ** | **Gain recognized in OCI**               | ** ** |
|---------------------|------------|------------------------------------------|------------|
| ** **          | ** ** | **(Effective portion)**                  | ** ** |
| ** **          | ** ** | **for the year ended December 31,** | ** ** |
| **(in  thousands)** | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
| Cash flow hedges    |       |                                     |       |   |   |   |   |
| Interest rate swap  |       | $                                        | 561        |   | $ | 2,465 |   | $ | 2,906 |   |
|                     |            |                                          |            |  |  |  |  |  |  |  |

 
| ** **              | ** ** | **Gain (loss) reclassified from accumulated OCI into earnings** | ** ** |
|-------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| ** **              | ** ** | **(Effective portion)**                                                                       | ** ** |
| ** **              | ** ** | **for the year ended December 31,**                                       | ** ** |
| **(in thousands)** | ** ** | **2009**                                                                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Cash flow hedges        |       |                                                                                               |       |   |   |   |   |
| Interest rate swap      |       | $                                                                                                  | 2,631      |   | $ | 2,109 |   | $ | (1,436 | ) |
|                         |            |                                                                                                    |            |  |  |  |  |  |  |  |

 

The Company offsets thefair value of derivative instruments covered under master nettingagreements.  The Company has agreementswith its derivative counterparties that contain a provision where if theCompany defaults on any of its indebtedness, including default whererepayment of the indebtedness has not been accelerated by thelender, then the Company could also be declared in default on itsderivative obligations.  The Company alsohas agreements with certain of its derivative counterparties that contain aprovision where if the Bank fails to maintain its status as a well oradequately capitalized institution, then the counterparty could terminate thederivative positions and the Company would be required to settle itsobligations under the agreements.

 

At December 31,2009, the fair value of derivatives in a net liability position, includingaccrued interest but excluding any adjustment for nonperformance risk, relatedto these agreements was $1.3 million. At December 31, 2009, the Companyhad minimum collateral posting thresholds with certain of its derivativecounterparties and has posted collateral of $0.8 million against itsobligations under these agreements.  At December 31,2009, the Company was not in default with any of its debt covenants.

 

See also Note 18 to consolidated financial statements for additionaldiscussion of derivatives and fair value.

 

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**11.**               INCOME TAXES

 

The components of consolidated income tax expense (benefit) for theyears ended December 31, 2009, 2008, and 2007 are as follows:

 
| ** **                          | ** ** | **For the year ended December 31,** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|
| **(in  thousands)**                 | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                |       |                                     |       |   |   |   |   |
| Current tax expense:                |       |                                     |       |   |   |   |   |
| Federal tax expense (benefit)       |       | $                                        | (14,366    | ) | $ | 8,364 |   | $ | 13,502 |   |
| State tax expense                   |       | —                                   |       | 1,214 |   | 1,724 |   |
|                                |       |                                     |       |   |   |   |   |
| Total current tax expense (benefit) |       | (14,366                                  | )          | 9,578 |   | 15,226 |   |
|                                |       |                                     |       |   |   |   |   |
| Deferred tax benefit:               |       |                                     |       |   |   |   |   |
| Federal tax benefit                 |       | (14,269                                  | )          | (8,445 | ) | (1,322 | ) |
| State tax benefit                   |       | (2,172                                   | )          | (1,224 | ) | (191 | ) |
| Net operating loss carryforward     |       | (2,052                                   | )          | — |   | — |   |
|                                |       |                                     |       |   |   |   |   |
| Total deferred tax benefit          |       | (18,493                                  | )          | (9,669 | ) | (1,513 | ) |
|                                |       |                                     |       |   |   |   |   |
| Total tax expense (benefit)         |       | $                                        | (32,859    | ) | $ | (91 | ) | $ | 13,713 |   |

 

The primary component ofthe deferred tax expense (benefit) for 2009, 2008, and 2007 was $12.2 million,$8.5 million, and $0.8 million, respectively, attributable to timingdifferences in the allowance for loan and credit losses.  During 2009, the Company recorded a goodwillimpairment of $46.2 million, of which $12.9 million was deductible for incometax purposes over the applicable term as allowed by the Internal RevenueCode.  The Company did not recordgoodwill impairment in prior periods. The Company has a net operating loss carryforward for Arizona andColorado that originated in 2009.  Thestates of Arizona and Colorado do not allow net loss carrybacks, but allow netloss carryforwards of 5 and 20 years, respectively.

 

A deferred tax asset or liability is recognized for the taxconsequences of temporary differences in the recognition of revenue andexpense, and unrealized gains and losses, for financial and tax reportingpurposes. Deferred tax assets are reduced by a valuation allowance when, in theopinion of management, it is more likely than not that some or all of thedeferred tax assets may not be realized.

 

The Company conducted ananalysis to assess the need of a valuation allowance at December 31,2009.  As part of this assessment, allavailable evidence, including both positive and negative, was considered todetermine whether based on the weight of such evidence, a valuation allowancefor deferred tax assets was needed.  Inaccordance with ASC Topic 740-10, *Income Taxes*(ASC740), a valuation allowance is deemed to be needed when, based on the weight ofthe available evidence, it is more likely than not (a likelihood of more than50%) that some portion or all of a deferred tax asset will not berealized.  The future realization of thetax benefit depends on the existence of sufficient taxable income within thecarryback and carryforward periods.

 

As part of its analysis,the Company considered the following positive evidence:

 

·                  Taxes paid in the prior two years of$21.0 million.

·                  The Company’s 2009 net loss was largelyattributable to:

·                  A non-recurring goodwill impairment

 

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·                  Losses on its Land Acquisition andDevelopment portfolio (Land A&D) that represented approximately 61% of theprovision for loan losses.  Thisportfolio has significantly decreased during the current year and the Companyis not growing the portfolio.

·                  The Company has a long history ofearnings profitability.

·                  The Company is projecting future taxableand book income will be generated by operations.

·                  The size of loan credits in the Company’spipeline of potential problem loans has significantly decreased.

·                  The Company is able to carry forwardfederal and Colorado tax losses for 20 years and Arizona tax losses for 5years.

·                  The Federal Reserve has indicated thatthe economy has exited the recession.

 

As part of its analysis,the Company considered the following negative evidence:

 

·                  The Company recorded a large net loss in2009.

·                  The Company did not meet its financialgoals in 2009.

·                  The Company may not meet its projectionsconcerning future taxable and book income.

 

The Company’s financialperformance improved during the latter half of 2009 as the pretax net lossdecreased each of the last two quarters. The Company expects this quarterly improvement to continue during 2010.  In addition, the Company does not expectlosses from its Land A&D portfolio in 2010 to be as significant as thelosses in 2009.  The Company hassignificantly reduced the Land A&D portfolio and has worked through many ofthe impaired credits.

 

At December 31,2009, the Company believes that it is more likely than not that it will be ableto fully realize its deferred tax assets and has not recorded a valuationallowance.  Should the timing of deductibility of expenses or expectationsfor future earnings change, the Company could conclude that a valuationallowance is necessary.  If this were to occur, tax expense could bematerially increased in the period that a valuation allowance isestablished.  At December 31, 2008,the Company did not record a valuation allowance.

 

The net change in deferredtaxes related to investment securities available for sale and cash flow hedgesare included in other comprehensive income. The temporary differences, taxeffected, which give rise to the Company’s net deferred tax assets at December 31,2009, 2008 and 2007, are as follows:

 

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| ** **                                                                       | ** ** | **At December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------|------------|
| **(in  thousands)**                                                              | ** ** | **2009**                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                             |       |                     |       |   |   |   |   |
| Deferred tax assets:                                                             |       |                     |       |   |   |   |   |
| Allowance for loan and credit losses                                             |       | $                        | 28,583     |   | $ | 16,361 |   | $ | 7,836 |   |
| Intangible assets                                                                |       | 3,038                    |       | — |   | — |   |
| Valuation adjustments on investment securities and  OREO                         |       | 305                      |       | 1,449 |   | — |   |
| Deferred loan fees                                                               |       | —                   |       | 588 |   | 1,000 |   |
| Supplemental Executive Retirement Plan and other  accrued liabilities            |       | 1,941                    |       | 1,736 |   | 1,418 |   |
| Stock-based compensation                                                         |       | 1,443                    |       | 1,000 |   | 537 |   |
| Depreciation on premises and equipment                                           |       | 735                      |       | 781 |   | 919 |   |
| Interest on nonaccrual loans                                                     |       | 455                      |       | 28 |   | — |   |
| Net operating loss carryover                                                     |       | 2,052                    |       | — |   | — |   |
| Other                                                                            |       | 502                      |       | 63 |   | 193 |   |
|                                                                             |       |                     |       |   |   |   |   |
| Total deferred tax assets                                                        |       | $                        | 39,054     |   | $ | 22,006 |   | $ | 11,903 |   |
|                                                                             |       |                     |       |   |   |   |   |
| Deferred tax liabilities:                                                        |       |                     |       |   |   |   |   |
| Intangible assets                                                                |       | $                        | —     |   | $ | 1,554 |   | $ | 1,396 |   |
| Deferred initial direct loan costs                                               |       | 1,030                    |       | 1,172 |   | 1,092 |   |
| Prepaid assets                                                                   |       | 1,138                    |       | 1,022 |   | 986 |   |
| FHLB stock dividends                                                             |       | 815                      |       | 830 |   | 649 |   |
| Net unrealized gain on investment securities available  for sale and derivatives |       | 6,142                    |       | 341 |   | 4 |   |
| Other                                                                            |       | 275                      |       | 154 |   | 53 |   |
|                                                                             |       |                     |       |   |   |   |   |
| Total deferred tax liabilities                                                   |       | $                        | 9,400      |   | $ | 5,073 |   | $ | 4,180 |   |
|                                                                             |       |                     |       |   |   |   |   |
| Net deferred tax assets                                                          |       | $                        | 29,654     |   | $ | 16,933 |   | $ | 7,723 |   |

 

A reconciliation of income tax expense at thestatutory rate to the Company’s actual income tax expense for the years ended December 31,2009, 2008 and 2007 is shown below:

 
| ** **                                                  | ** ** | **For the year ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------|------------|
| **(in  thousands)**                                         | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                        |       |                                     |       |   |   |   |   |
| Computed  at the statutory rate (35%)                       |       | $                                        | (40,565    | ) | $ | 433 |   | $ | 12,858 |   |
| Increase  (decrease) resulting from:                        |       |                                     |       |   |   |   |   |
| State  income taxes — net of federal income tax effect |       | (3,456                                   | )          | (6 | ) | 1,120 |   |
| Tax  exempt interest income on loans and securities         |       | (408                                     | )          | (406 | ) | (327 | ) |
| Goodwill  impairment                                        |       | 11,636                                   |       | — |   | — |   |
| Bank-owned  life insurance income                           |       | (414                                     | )          | (410 | ) | (345 | ) |
| Other  — net                                           |       | 348                                      |       | 298 |   | 407 |   |
|                                                        |       |                                     |       |   |   |   |   |
| Actual  tax provision                                       |       | $                                        | (32,859    | ) | $ | (91 | ) | $ | 13,713 |   |

 

Accounting guidance inASC 740 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The quidance in ASC 740, formerlyreferred to as *FIN 48,* also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.  At December 31,2009 and 2008, no amounts were recognized for tax benefits relating touncertain tax positions taken during those years.

 

Penalties and interest are classified as income tax expense whenincurred. There were no penalties or interest recognized for the years ended December 31,2009, 2008 and 2007.

 

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The Company files income tax returns in the U.S.federal jurisdiction and in several state jurisdictions. The following are themajor tax jurisdictions in which the Company and its affiliates operate and theearliest tax year subject to examination:

 
| **Jurisdiction** | ** ** | **Tax year** | ** ** |
|------------------|------------|--------------|------------|
| ** **       | ** ** | ** **   | ** ** |
| United  States   |       | 2006         |       |
| Colorado         |       | 2005         |       |
| Arizona          |       | 2005         |       |

 

**12.**               SHAREHOLDERS’ EQUITY

 

**Common Stock** — At December 31, 2009 and 2008,the Company has reserved the following shares of its authorized but unissuedcommon stock for possible future issuance in connection with the following:

 
| ** **                                  | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|---------------------------------------------|------------|-----------|------------|-----------|------------|
|                                        |       |      |       |      |       |
| Exercise  of outstanding stock options      |       | 2,522,243 |       | 2,287,472 |       |
| Exercise  of outstanding stock warrants     |       | 895,968   |       | 895,968   |       |
| Future  granting of option and stock awards |       | 959,164   |       | 1,409,022 |       |
| Future  stock purchases through the ESPP    |       | 406,831   |       | 36,493    |       |
|                                        |       | 4,784,206 |       | 4,628,955 |       |

 

**Preferred Stock** — The Board of Directors is authorized,among other things, to fix the designation and the powers, preferences andrelative participating, optional and other special rights for preferredshares.  On December 17, 2008, theCompany amended its articles of incorporation, to establish a Series BPreferred Stock and fix the powers, preferences and relative, participating,optional and other special rights, and the qualifications, limitations andrestrictions, of the shares of Series B Preferred Stock.

 

OnDecember 19, 2008, as part of the Capital Purchase Program promulgated bythe United States Department of the Treasury (the Treasury) under the TroubledAsset Relief Program authorized by the Emergency Economic Stabilization Act of2008, the Company and the Treasury entered into a Letter Agreement, whichincorporates by reference the Securities Purchase Agreement - Standard Terms(together, the Purchase Agreement), pursuant to which the Company issued andsold to the Treasury, for an aggregate purchase price of $64.5 million , (1) 64,450shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B,par value $0.01 per share, having a liquidation preference of $1,000 per share(the Series B Preferred Stock) and (2) a warrant (the Warrant) topurchase 895,968 shares of the Company’s common stock, par value $0.01 pershare, at an exercise price of $10.79 per share.  The Warrant was immediately exercisable uponissuance provided that Treasury had agreed not to exercise the warrant for morethan 447,984 shares of common stock until the earlier of the date on which theCompany has received aggregate gross proceeds from a qualified equity offeringof at least $64.5 million and December 31, 2009.  Since the Company did not receive aggregategross proceeds from a qualified equity offering of at least $64.5 million priorto December 31, 2009, the full warrant to purchase 895,968 shares isexercisable beginning on January 1, 2010.

 

TheSeries B Preferred Stock pays cumulative dividends, on February 15, May 15,August 15 and November 15 of each year, at an annual rate of 5% forthe first five years and 9% thereafter. At December 31, 2009 and 2008, the Company had accrued dividends of$0.4 million and $0.1 million, respectively. The Series B Preferred Stock is non-voting, other than class votingrights on certain

 

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mattersthat could adversely affect the Series B Preferred Stock.  The American Recovery and Reinvestment Act of2009 (ARRA) that was signed into law on February 17, 2009, allows for theredemption of the Series B Preferred Stock without limitation if theapproval of the Federal Reserve is obtained.

 

TheSeries B Preferred Stock ranks senior to common stock in terms of dividendpayments and distributions upon liquidation, dissolution and winding up of theCompany.  A merger, consolidation or saleof all or substantially all of the assets of the Company will not, however,constitute a liquidation, dissolution or winding up of the Company for purposesof the payment of any distribution on the Series B Preferred Stock.

 

Basedon the accounting guidance for convertible debt and debt issued with stockpurchase warrants in ASC 470 — Debt, the Company allocated the $64.5 million inproceeds between the Series B Preferred Stock and the Warrant inaccordance with their relative fair values at the time of issuance.  Of the total proceeds, $61.5 million wasallocated to the Series B Preferred Stock and $3.0 million was allocatedto the Warrant.  The $3.0 millionallocated 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** — TheCompany’s ability to pay dividends to its shareholders is largely dependentupon the payment of dividends by the Bank to the Parent.  At December 31, 2009, the Bank wasrestricted in its ability to pay a dividend to the Parent as its earnings inthe current and prior two years, net of dividends paid during those years, wasnegative.  However, at December 31,2009, the Company had the ability to pay dividends on its common stock withoutreliance on the Bank due to the significant amount of capital raised by theParent company during 2009.

 

Dividendson the Company’s capital stock (common and preferred stock) are prohibitedunder the terms of the junior subordinated debenture agreements (see Note 9 —Long-term debt) if the Company is in continuous default on its payment obligationsto the capital trusts, has elected to defer interest payments on the debenturesor extends the interest payment period. At December 31, 2009, the Company was not in default on any of thejunior subordinated debt issuances.

 

Pursuantto the terms of the Purchase 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 dividend 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 Purchase Agreement or 2) the date on which the Series BPreferred Stock is redeemed in whole.  AtDecember 31, 2009, the Company has paid all required dividends under thePurchase Agreement when due.

 

Dividendspaid per common share for the years ended December 31, 2009, 2008 and 2007were $0.10, $0.28 and $0.26, respectively. Dividends paid on the Series B Preferred Stock for the year ended December 31,2009 was $2.9 million.  No preferredstock dividends were paid in the years ended December 31, 2008 and 2007.

 

**SecondaryOfferings —** 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.

 

On July 20, 2009,pursuant to the shelf registration originally filed on December 19, 2006, theCompany completed an underwritten public offering of 12,670,000 shares of theCompany’s common stock at a price of $4.50 per share. The offering provided netproceeds to the Company of

 

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approximately $53.5 million after deductingunderwriting discounts and commissions and estimated offering expenses. On August 7, 2009, the Company issued 535,600 shares of common stock at$4.50 per share, fulfilling underwriter purchase options, which providedadditional net proceeds of $2.3 million after discounts and commissions.

 

**Repurchase Program —** On July 19, 2007, the Company’sBoard of Directors authorized a share repurchase program for the repurchase ofup to 5% or 1,200,207 shares of its outstanding common stock. The programconcluded on November 19, 2007, when all authorized shares had beenrepurchased. The shares were repurchased at a weighted-average price of $16.72and a total cost of $20.1 million.

 

**13.**               EARNINGS (LOSS) PER COMMON SHARE

** **

Effective January 1, 2009, the Company adopted authoritativeaccounting guidance in ASC 260, which provides that unvested share-basedpayment awards containing nonforfeitable rights to dividends, paid or unpaid,are participating securities and will be included in the computation ofearnings per share pursuant to the two-class method. The Company determinedthat its outstanding unvested stock awards are participating securities andcomputes earnings per share using the prescribed two-class method. However, the impact of these shares is not included in the common shareholderbasic loss per share for the year ended December 31, 2009 because theeffect of including those shares would be anti-dilutive due to the net loss inthat year.  Earnings per share for the years ended December 31, 2008and 2007 did not change due to the adoption of the guidance.

 

Income available to common shareholders and the weighted-average sharesoutstanding, used in the calculation of Basic and Diluted Earnings (Loss) PerShare, for the years ended December 31, 2009, 2008 and 2007, are asfollows:

 
| ** **                                          | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| **(in thousands, except share  amounts)**           | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                |       |                             |       |   |   |   |   |
| Net  income (loss)                                  |       | $                                | (83,041    | ) | $ | 1,328 |   | $ | 23,024 |   |
| Preferred  stock dividends                          |       | (3,732                           | )          | (124 | ) | — |   |
| Net  income (loss) available to common shareholders |       | $                                | (86,773    | ) | $ | 1,204 |   | $ | 23,024 |   |
|                                                |       |                             |       |   |   |   |   |
| Distributed  earnings (1)                           |       | $                                | —     |   | $ | — |   | $ | — |   |
| Undistributed  earnings (loss)                      |       | (86,773                          | )          | 1,204 |   | 23,024 |   |
| Earnings  (loss) allocated to common stock          |       | $                                | (86,773    | ) | $ | 1,204 |   | $ | 23,024 |   |

 

----

(1) Dividends paid during the years ended December 31,2009, 2008 and 2007 were not considered current period distributions.

 
| Weighted  average common shares - issued              |   | 29,388,038 |   | 23,194,504 |   | 23,552,075 |   |
|-------------------------------------------------------|--------|------------|--------|------------|--------|------------|--------|
| Average  unvested restricted share awards             |   | (242,064   | )      | (112,192   | )      | —     |   |
| Weighted  average common shares outstanding - basic   |   | 29,145,974 |   | 23,082,312 |   | 23,552,075 |   |
| Effect  of dilutive stock options outstanding         |   | —     |   | 172,262    |   | 538,193    |   |
| Weighted  average common shares outstanding - diluted |   | 29,145,974 |   | 23,254,574 |   | 24,090,268 |   |
|                                                  |   |       |   |       |   |       |   |
| Basic  earnings (loss) per share                      |   | $          | (2.98  | )          | $      | 0.05       |   | $ | 0.98 |   |
| Diluted  earnings (loss) per share                    |   | $          | (2.98  | )          | $      | 0.05       |   | $ | 0.96 |   |

 

At December 31, 2009, 2008 and 2007, 3,488,340, 1,906,000 and837,706 dilutive securities comprised of options and warrants were excludedfrom the respective earnings per share computations solely because the effectwas anti-dilutive.

 

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**14.**               EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS

** **

**Stock Options and Awards**— 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.

 

The1995 Incentive Stock Option Plan (the 1995 Plan) authorizes the issuance of445,332 shares of common stock. One-fourth of the options included under the1995 Plan vest on each of the first four anniversaries of the grant. Under the1995 Plan, Incentive Stock Options may not be granted at an exercise price ofless than the fair market value of the common stock on the date of grant. Noadditional shares under the 1995 Plan are available to be granted.

 

The1997 Incentive Stock Option Plan (the 1997 Plan) authorizes the issuance of227,331 shares at not less than the market value of the Company’s stock at thedate of grant. The majority of the options issued under the 1997 Plan areexercisable commencing one year from the date of grant and vest 25% per yearthereafter becoming fully exercisable after four years. No additional sharesunder the 1997 Plan are available to be granted.

 

The1998 Stock Incentive Plan (the 1998 Plan) authorizes the issuance of 956,250shares of common stock. The exercise price for options granted under the 1998Plan must be at least equal to 100% of the fair market value of the commonstock on the date of grant. The 1998 Plan permits the granting of IncentiveStock Options and nonqualified stock options. Options granted under the 1998Plan have vesting schedules ranging from immediately exercisable to beingexercisable four years from the grant date. No additional shares under the 1998Plan are available to be granted.

 

The2002 Equity Incentive Plan (the 2002 Plan) authorizes the issuance of 975,000shares of common stock. Under the 2002 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,which shall not be less than 85% of the fair market value of the common stockon the date of grant; and the manner and times at which the options shall beexercisable. Shares available for grant under the 2002 Plan at December 31,2009 totaled 119,448.

 

The2005 Equity Incentive Plan (the 2005 Plan) originally authorized the issuance1,250,000 shares of common stock.  The2005 Plan was amended at the May 15, 2008 Annual Shareholder Meeting toincrease the authorized shares available under the plan to 2,750,000 shares ofcommon stock.  The 2005 Plan was alsoamended to increase the shares available for restricted stock awards by 250,000shares to 500,000 shares. Under the 2005 Plan, the Compensation Committee ofthe Company 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 under the 2005 Plan at December 31,2009, totaled 839,716.

 

During2009, 2008 and 2007, the Company recognized compensation expense, net ofestimated forfeitures, of $1.5 million, $1.8 million and $1.5 million,respectively, for stock-based compensation awards for which the requisiteservice was rendered during the year. The Company recognized an income tax benefit of $0.5 million, $0.5million and $0.4 million on the compensation expense for 2009, 2008 and 2007,respectively.

 

Relevantaccounting guidance in ASC 718 requires the Company to select a valuationtechnique that meets the measurement criteria set forth in the standard.Valuation techniques that meet the criteria for estimating the fair values ofemployee stock options include a lattice model and a closed-form model (forexample, the Black-Scholes formula). The Company uses the Black-Scholes optionpricing model (Model) to estimate the fair value of stock options.  Restricted stock award fair values are based onthe closing price of the Company stock on the award date.

 

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Thefair value of each option grant is estimated on the date of grant using theModel. The risk-free rate for periods within the contractual life of the optionis 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’s stock price. The following weighted-average assumptions were used forgrants issued during the years ended December 31, 2009, 2008, and 2007:

 
| ** **               | ** ** | **2009**              | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|--------------------------|------------|-----------------------|------------|-----------|------------|------------|------------|
| ** **               | ** ** | ** **            | ** ** | **Range** | ** ** | ** ** | ** ** | **Range** | ** ** | ** ** | ** ** | **Range** | ** ** |
| ** **               | ** ** | **Weighted  Average** | ** ** | **Low**   | ** ** | **High**   | ** ** | **Weighted  Average** | ** ** | **Low** | ** ** | **High** | ** ** | **Weighted  Average** | ** ** | **Low** | ** ** | **High** | ** ** |
| Risk-free  interest rate |       | 1.75                  | %          | 1.02      | %          | 2.72       | %          | 2.91 | % | 1.11 | % | 3.46 | % | 4.50 | % | 2.91 | % | 4.94 | % |
| Expected  dividend yield |       | 0.87                  | %          | 0.55      | %          | 2.98       | %          | 2.34 | % | 1.88 | % | 3.76 | % | 1.32 | % | 1.09 | % | 1.81 | % |
| Expected  volatility     |       | 63.08                 | %          | 49.18     | %          | 74.54      | %          | 33.73 | % | 29.37 | % | 54.26 | % | 28.14 | % | 26.53 | % | 29.12 | % |
| Expected  life (years)   |       | 4.2                   |       |      |       |       |       | 4.1 |   |   |   |   |   | 4.0 |   |   |   |   |   |

 

Thesummary of changes in shares under option and restricted stock awards for theyears ended December 31, 2009, 2008, and 2007 is as follows:

 
| ** **                            | ** ** | **2009**   | ** ** | **2008**              | ** ** | **2007**   |       |
|---------------------------------------|------------|------------|------------|-----------------------|------------|------------|------------|
| ** **                            | ** ** | ** ** | ** ** | **Weighted  average** | ** ** | ** ** | ** ** | **Weighted  average** | ** ** | ** ** | ** ** | **Weighted  average** |   |
| ** **                            | ** ** | ** ** | ** ** | **exercise**          | ** ** | ** ** | ** ** | **exercise** | ** ** | ** ** | ** ** | **exercise** |   |
| **Option Awards**                     | ** ** | **Shares** | ** ** | **price**             | ** ** | **Shares** | ** ** | **price** | ** ** | **Shares** | ** ** | **price** |   |
|                                  |       |       |       |                  |       |       |       |   |   |   |   |   |   |
| Outstanding  — beginning of year |       | 2,287,472  |       | $                     | 14.66      |       | 2,201,722  |   | $ | 14.85 |   | 2,137,626 |   | $ | 12.84 |   |
| Granted                               |       | 518,201    |       | 6.28                  |       | 368,794    |       | 12.28 |   | 481,751 |   | 19.53 |   |
| Exercised                             |       | 23,479     |       | 6.53                  |       | 98,532     |       | 6.51 |   | 369,386 |   | 8.76 |   |
| Forfeited                             |       | 259,951    |       | 12.30                 |       | 184,512    |       | 16.46 |   | 48,269 |   | 19.50 |   |
|                                  |       |       |       |                  |       |       |       |   |   |   |   |   |   |
| Outstanding  — end of year       |       | 2,522,243  |       | $                     | 13.26      |       | 2,287,472  |   | $ | 14.66 |   | 2,201,722 |   | $ | 14.85 |   |
|                                  |       |       |       |                  |       |       |       |   |   |   |   |   |   |
| Exercisable  — end of year       |       | 1,727,266  |       | $                     | 14.88      |       | 1,619,517  |   | $ | 13.92 |   | 1,419,800 |   | $ | 12.14 |   |

 
| ** **                                        | ** ** | **2009**   | ** ** | **2008**              | ** ** | **2007**   | ** ** |
|---------------------------------------------------|------------|------------|------------|-----------------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | **Weighted  average** | ** ** | ** ** | ** ** | **Weighted  average** | ** ** | ** ** | ** ** | **Weighted  average** | ** ** |
| ** **                                        | ** ** | ** ** | ** ** | **grant  date**       | ** ** | ** ** | ** ** | **grant  date** | ** ** | ** ** | ** ** | **grant  date** | ** ** |
| **Stock Awards**                                  | ** ** | **Shares** | ** ** | **fair  value**       | ** ** | **Shares** | ** ** | **fair  value** | ** ** | **Shares** | ** ** | **fair  value** | ** ** |
| Unvested  — beginning of year                |       | 217,100    |       | $                     | 6.97       |       | 2,000      |   | $ | 21.07 |   | — |   | $ | — |   |
| Granted                                           |       | 49,950     |       | 6.36                  |       | 220,500    |       | 6.87 |   | 2,000 |   | 21.07 |   |
| Vested                                            |       | 400        |       | 21.07                 |       | 400        |       | 21.07 |   | — |   | — |   |
| Forfeited                                         |       | 9,600      |       | 6.86                  |       | 5,000      |       | 6.87 |   | — |   | — |   |
|                                              |       |       |       |                  |       |       |       |   |   |   |   |   |   |
| Unvested  — end of year                      |       | 257,050    |       | $                     | 6.84       |       | 217,100    |   | $ | 6.97 |   | 2,000 |   | $ | 21.07 |   |
|                                              |       |       |       |                  |       |       |       |   |   |   |   |   |   |
| Total  fair value of vested shares (in thousands) |       |       |       | $                     | 2          |       |       |   | $ | 6 |   |   |   | $ | — |   |

 

Therewere 2,469,259 options vested or expected to vest with a weighted-average priceof $13.38 at December 31, 2009. The weighted-average remaining terms foroptions outstanding, vested or expected to vest and options exercisable at theend of the period were 4.1, 4.0 and 3.2 years, respectively. The aggregateintrinsic value for options outstanding, vested or expected to vest and optionsexercisable at the end of the period was insignificant due to the gap betweenthe Company’s stock price and the weighted-average exercise price of optionsfor the year ended December 31, 2009. The weighted average grant-date fairvalue of options granted during the years ended December 31, 2009, 2008and 2007 was $2.62, $2.57 and $4.57, respectively. The total intrinsic value ofoptions exercised during years ended December 31, 2009, 2008, and 2007 was$0.1 million, $0.6 million and $3.8 million, respectively.

 

AtDecember 31, 2009, there was $3.0 million of total unrecognizedcompensation cost related to unvested share-based compensation arrangementsgranted under the Plans. The cost is expected to be recognized over aweighted-average period of 3.1 years.

 

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At December 31, 2009, a summary of the Company’s stock optionsoutstanding are as follows:

 
| ** **         | ** ** | **Options outstanding** | ** ** | **Options exercisable** | ** ** |
|--------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **         | ** ** | ** **              | ** ** | ** **              | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **         | ** ** | ** **              | ** ** | **Weighted**            | ** ** | **average** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **         | ** ** | ** **              | ** ** | **average**             | ** ** | **remaining** | ** ** | ** ** | ** ** | **average** | ** ** |
| **Range of**       | ** ** | **Number**              | ** ** | **exercise**            | ** ** | **life** | ** ** | **Number** | ** ** | **exercise** | ** ** |
| **exercise price** | ** ** | **outstanding**         | ** ** | **price**               | ** ** | **(years)** | ** ** | **exercisable** | ** ** | **price** | ** ** |
|               |       |                    |       |                    |       |   |   |   |   |   |   |
| $4.01 - $6.62      |       | 513,624                 |       | $                       | 6.03       |   | 6.0 |   | 63,473 |   | $ | 5.64 |   |
| $7.11 - $11.30     |       | 516,501                 |       | 9.48                    |       | 2.6 |   | 457,337 |   | 9.55 |   |
| $11.64 - $13.73    |       | 507,515                 |       | 12.33                   |       | 4.2 |   | 352,208 |   | 12.31 |   |
| $13.75 - $20.52    |       | 695,352                 |       | 18.63                   |       | 3.9 |   | 588,328 |   | 18.51 |   |
| $20.72 - $23.35    |       | 289,251                 |       | 21.56                   |       | 3.6 |   | 265,920 |   | 21.61 |   |
|               |       | 2,522,243               |       | $                       | 13.26      |   | 4.1 |   | 1,727,266 |   | $ | 14.88 |   |

 

**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 31,2009, 2008, and 2007. On May 21, 2009, the Company’s shareholders approvedan increase in the maximum number of shares to be issued through all plan yearsfrom 450,000 to 900,000 shares.  At December 31,2009, the Company has reserved 406,831 shares for issuance under the terms ofthe ESPP.  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 31,2009, 2008, and 2007, 79,662, 67,974 and 47,278 shares, respectively, wereissued.

 

**Employee 401(k) Plan** — TheCompany has a defined contribution plan covering substantially all itsemployees. Employees may contribute up to 15% of their compensation with theCompany’s discretionary matching within the limits defined for a 401(k) Plan.  In 2009, the Company reduced its matchingcontribution from 6% to 3% of eligible compensation.  Matching contributions of 6% of eligiblecompensation were made in 2008 and 2007. Employer contributions charged to expense for the years ended December 31,2009, 2008 and 2007 were $1.2 million, $2.0 million and $1.7 million,respectively, and are included in the consolidated statements of operationsunder the caption “Salaries and employee benefits.”

 

**Supplemental Executive Retirement Plan** — TheCompany maintains a Supplemental Executive Retirement Plan (SERP) for fiveactive key executives. The plan provides for target retirement benefits, as apercentage of pay, beginning at age 60 or after 10 years of service and arepaid as a monthly benefit for a 10-year period. The target percentage is 50% ofpay based on the executives’ average monthly compensation during any fivecalendar years 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, 2009, all participantswere fully vested.  At December 31,2009 and 2008, the Company had accrued $2.9 million and $2.8 million,respectively, for the expected benefits under the SERP which are included inthe consolidated balance sheets under the caption “Accrued interest and otherliabilities.”

 

**15.**               COMMITMENTS ANDCONTINGENCIES

 

**LeaseCommitments** —The Company has various operating lease agreements for office space. Most ofthe leases are subject to rent escalation provisions in subsequent years andhave renewal 

 

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options at the end of the initial lease terms. Totalrental expense for the years ended December 31, 2009, 2008, and 2007, was$5.1 million, $5.1 million, and $4.4 million, respectively. In 1998, certainofficers and directors acquired the building in which the corporate office islocated and certain banking operations are performed. At December 31,2009, 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 31,2009, 2008, and 2007, were $2.0 million, $2.0 million, and $1.9 million,respectively.  At December 31, 2009 and 2008, the Company owed $0.3million and $0.2 million, respectively, to entities controlled by the relatedparty that is included in the consolidated balance sheets under the caption “Accruedinterest and other liabilities.”

 

Future minimum lease payments at December 31,2009, under all noncancelable operating leases are as follows:

 
| **December 31,** | ** ** | **(in thousands)** | ** ** |
|-----------------------|------------|--------------------|------------|
|                  |       |               |       |
| 2010                  |       | $                  | 4,981      |   |
| 2011                  |       | 5,256              |       |
| 2012                  |       | 4,839              |       |
| 2013                  |       | 4,073              |       |
| 2014                  |       | 3,893              |       |
| Thereafter            |       | 10,536             |       |
|                  |       |               |       |
| Total                 |       | $                  | 33,578     |   |

 

**Financial Instruments WithOff-Balance Sheet Risk** — In the normal course of business the Company has entered intofinancial instruments which are not reflected in the accompanying consolidatedfinancial statements. The Company had the following commitments at December 31,2009:

 
| **(in  thousands)**                                                                                                     | ** ** | **Amount** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
|                                                                                                                    |       |       |       |
| Commitments  to originate commercial or real estate construction loans and unused lines of  credit granted to customers |       | $          | 447,536    |   |
|                                                                                                                    |       |       |       |
| Commitments to  originate consumer loans — personal lines of credit and equity lines                               |       | $          | 38,694     |   |
|                                                                                                                    |       |       |       |
| Overdraft  protection plans                                                                                             |       | $          | 11,826     |   |
|                                                                                                                    |       |       |       |
| Letters  of credit                                                                                                      |       | $          | 56,809     |   |
|                                                                                                                    |       |       |       |
| Unfunded  commitments for unconsolidated investments                                                                    |       | $          | 2,180      |   |
|                                                                                                                    |       |       |       |
| Company  guarantees                                                                                                     |       | $          | 1,346      |   |

 

**Commitments to Originate** — The Company makes contractualcommitments to extend credit and provide standby letters of credit, which arebinding agreements to lend money to its customers at predetermined interestrates for a specific period of time. These commitments are not held for sale.The credit risk involved in issuing these financial instruments is essentiallythe same as that involved in granting on-balance sheet financial instruments.As such, the Company’s exposure to credit loss in the event of nonperformanceby the counterparty to the financial instrument is

 

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represented by the contractual amounts of thoseinstruments. However, the Company applies the same credit policies, standards,and ongoing reassessments in making commitments and conditional obligations asit does for loans. In addition, the amount and type of collateral obtained, ifdeemed necessary upon extension of a loan commitment or standby letter ofcredit, is essentially the same as the collateral requirements provided forloans. Additional risk associated with providing these commitments arises whenthey are drawn upon, such as the demands on liquidity the Company wouldexperience if a significant portion were drawn down at the same time. However,this is considered unlikely, as many commitments expire without being drawnupon and therefore do not necessarily represent future cash requirements.

 

**Overdraft Protection Plans** — The Company provides personalcredit lines on customer accounts to advance funds to cover overdrafts.

 

**Letters of Credit** — The Company provides standby andcommercial letters of credit during the normal course of business. Standbyletters of credit guarantee performance of a customer to a third party whilecommercial letters of credit guarantee payments on behalf of our customers.

 

**Unfunded Commitments forUnconsolidated Investments** — The Company has committed to purchase up to$10.0 million in limited partnership interests of four entities, of which $2.2million is unfunded at December 31, 2009. Certain shareholders anddirectors also have interests in some of these entities.

 

**Company Guarantees** — The Company guarantees, to theissuing merchant banks, the credit card debt and merchant processingtransactions for certain customers.

 

**Federal Reserve Bank Stock** — The fair value of the FederalReserve Bank stock approximates its carrying value, which is based on theredemption provisions of the Federal Reserve Bank.  At December 31,2009, the Company held 80,621 shares of Federal Reserve Bank stock with a fairvalue of  $4.0 million (par value of $50).  This investmentrepresents 50% of the subscription amount due to the Federal Reserve to becomea member bank and the stock cannot be sold, traded, or pledged as collateral forloans.  Although the probability is remote, the remaining 50% or $4.0million due to the Federal Reserve Bank may be callable at their discretion.

 

**Employment Contracts** — Certain officers of the Companyhave entered into employment agreements providing for salaries and fringebenefits. In addition, severance is provided in the event of termination forother than cause, and under certain changes in control, a payment isrequired.  However, the ARRA prohibits the payment of golden parachutes tocertain executive officers, which may prohibit payments of severance payments.

 

**Indemnification Agreements** — The Company is subject to certainindemnification obligations in conjunction with agreements signed with officersand directors of the Company.  The Indemnification Agreements require theCompany to indemnify against judgments, fines, penalties and amounts paid insettlements incurred in connection with civil or criminal action orproceedings, as it relates to their services to the Company.  To the extentthe Company maintains an insurance policy or policies providing directors’ andofficers’ liability insurance, the Indemnitee will be covered to the maximumextent 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 of incorporationor bylaws.  While the likelihood is remote, performance under theseindemnifications could materially affect net income in a particular quarter orannual period.

 

**Other Matters** — The Company is involved invarious lawsuits which have arisen in the normal course of business. It ismanagement’s opinion, based upon advice of legal counsel, that the ultimateoutcome of these lawsuits will not have a material impact upon the financialcondition or results of operations of the Company.

 

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**16.**               REGULATORY MATTERS

** **

TheCompany and the Bank are subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capitalrequirements can trigger certain mandatory — and possibly additionaldiscretionary — actions by regulators that, if undertaken, could have a directmaterial effect on the Company’s financial condition and results of operations.Under capital adequacy guidelines and the regulatory framework for promptcorrective action, the Company and the Bank must meet specific capitalguidelines that involve quantitative measures of the Company and the Bank’sassets, liabilities and certain off-balance-sheet items as calculated underregulatory accounting practices. The Company and the Bank’s capital amounts andclassification are also subject to qualitative judgments by the regulatorsregarding components, risk weightings and other factors.

 

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany and the Bank to maintain minimum amounts and ratios (set forth in thefollowing table) of Tier 1 and Total Capital (as defined in the regulations) to risk-weighted assets, and ofTier I capital to average assets. At December 31, 2009 and 2008,management believes the Company and Bank meet all capital adequacy requirementsto which they are subject.

 

AtDecember 31, 2009, the most recent notification from the Federal Reservecategorized the Bank as well capitalized under the regulatory framework forprompt corrective action. To be categorized as well capitalized the Bank mustmaintain minimum total risk-based, Tier I risk-based, and Tier I leverageratios as set forth in the following table. There are no conditions or eventsthat management believes have changed the Bank’s categories.

 

Thefollowing table shows the Company and Bank’s actual capital amounts and ratiosand regulatory thresholds at December 31, 2009 and 2008:

 
| **(in  thousands)**                               | ** ** | **Company** | ** ** | **Bank** | ** ** |
|---------------------------------------------------|------------|-------------|------------|----------|------------|
| Shareholders’  equity (GAAP capital)         |       | $           | 230,451    |     | $          | 206,490 |   |
| Disallowed  goodwill and other intangibles        |       | (4,493      | )          | —   |       |
| Unrealized  loss on available for sale securities |       | (7,448      | )          | (7,448   | )          |
| Accumulated  net gains on cash flow hedges        |       | (2,571      | )          | (897     | )          |
| Subordinated  debentures                          |       | 70,000      |       | —   |       |
| Deferred  tax asset disallowance                  |       | (6,373      | )          | —   |       |
| Other  deductions                                 |       | (220        | )          | —   |       |
| Tier  I regulatory capital                        |       | $           | 279,346    |     | $          | 198,145 |   |
|                                              |       |        |       |     |       |
| Subordinated  notes payable                       |       | $           | 20,984     |     | $          | — |   |
| Allowance  for loan losses                        |       | 25,895      |       | 25,081   |       |
| Total  risk-based regulatory capital              |       | $           | 326,225    |     | $          | 223,226 |   |

 
| ** **                        | ** ** | **Company**    | ** ** | **Bank**          | ** ** |
|-----------------------------------|------------|----------------|------------|-------------------|------------|
| **At  December 31, 2009**    | ** ** | **Risk-based** | ** ** | **Leverage**      | ** ** | **Risk-based** | ** ** | **Leverage** | ** ** |
| **(in  thousands)**               | ** ** | **Tier I**     | ** ** | **Total capital** | ** ** | **Tier I** | ** ** | **Tier I** | ** ** | **Total capital** | ** ** | **Tier I** | ** ** |
| Regulatory  capital               |       | $              | 279,346    |              | $          | 326,225 |   | $ | 279,346 |   | $ | 198,145 |   | $ | 223,226 |   | $ | 198,145 |   |
| Well-capitalized  requirement     |       | 80,890         |       | 161,780           |       | 98,352 |   | 78,256 |   | 156,511 |   | 95,390 |   |
| Regulatory  capital - excess      |       | $              | 198,456    |              | $          | 164,445 |   | $ | 180,994 |   | $ | 119,889 |   | $ | 66,715 |   | $ | 102,755 |   |
| Capital  ratios                   |       | 13.8           | %          | 16.1              | %          | 11.4 | % | 10.1 | % | 11.4 | % | 8.3 | % |
| Minimum  capital requirement      |       | 4.00           | %          | 8.00              | %          | 4.00 | % | 4.00 | % | 8.00 | % | 4.00 | % |
| Well  capitalized requirement (1) |       | NA             |       | NA                |       | NA |   | 6.00 | % | 10.00 | % | 5.00 | % |

 

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| **At  December 31, 2008**                    | ** ** | ** **  | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-------------|------------|------------|------------|
| **(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  notes payable                       |       | $           | 20,984     |       | $          | — |   |
| Allowance  for loan losses                        |       | 27,760      |       | 27,532     |       |
| Total  risk-based regulatory capital              |       | $           | 319,794    |       | $          | 251,337 |   |

 
| ** **                        | ** ** | **Company**    | ** ** | **Bank**          | ** ** |
|-----------------------------------|------------|----------------|------------|-------------------|------------|
| **At  December 31, 2008**    | ** ** | **Risk-based** | ** ** | **Leverage**      | ** ** | **Risk-based** | ** ** | **Leverage** | ** ** |
| **(in  thousands)**               | ** ** | **Tier I**     | ** ** | **Total capital** | ** ** | **Tier I** | ** ** | **Tier I** | ** ** | **Total capital** | ** ** | **Tier I** | ** ** |
| Regulatory  capital               |       | $              | 271,050    |              | $          | 319,794 |   | $ | 271,050 |   | $ | 223,805 |   | $ | 251,337 |   | $ | 223,805 |   |
| Well-capitalized  requirement     |       | 88,217         |       | 176,433           |       | 104,584 |   | 87,480 |   | 174,960 |   | 103,995 |   |
| Regulatory  capital - excess      |       | $              | 182,833    |              | $          | 143,361 |   | $ | 166,466 |   | $ | 136,325 |   | $ | 76,377 |   | $ | 119,810 |   |
| Capital  ratios                   |       | 12.3           | %          | 14.5              | %          | 10.4 | % | 10.2 | % | 11.5 | % | 8.6 | % |
| Minimum  capital requirement      |       | 4.00           | %          | 8.00              | %          | 4.00 | % | 4.00 | % | 8.00 | % | 4.00 | % |
| Well  capitalized requirement (1) |       | NA             |       | NA                |       | NA |   | 6.00 | % | 10.00 | % | 5.00 | % |

 

----

(1) The ratios for the well-capitalized requirement areonly applicable to the Bank. However, the Company manages its capital positionas if the requirement applies to the consolidated entity and has presented theratios as if they also applied to the Company.

 

**17.**       COMPREHENSIVE INCOME (LOSS)

** **

Comprehensive income is the total of (1) net income plus (2) allother changes in net assets arising from non-owner sources, and are referred toas other comprehensive income. Presented below are the changes in othercomprehensive income which consist of unrealized gains (losses) on availablefor sale securities and derivatives, net of tax for the years ended December 31,2009, 2008, and 2007:

 
| **(in  thousands)**                                                                                                                     | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                                    |       |     |       |     |       |     |       |
| Other  comprehensive income — before tax:                                                                                          |       |     |       |     |       |     |       |
| Unrealized  (loss) gain on available for sale securities — net of reclassification to  operations of $(2,062), $(1,657) and $(494) |       | $        | 13,779     |     | $          | (1,579   | )          | $ | 1,320 |   |
|                                                                                                                                    |       |     |       |     |       |     |       |
| Change  in OTTI-related component of unrealized gain (loss)                                                                             |       | 925      |       | —   |       | —   |       |
|                                                                                                                                    |       |     |       |     |       |     |       |
| Unrealized  gain on derivative securities — net of reclassification to operations of  $2,631, $2,109, and $(1,436)                 |       | 561      |       | 2,465    |       | 2,906    |       |
|                                                                                                                                    |       |     |       |     |       |     |       |
| Tax  expense related to items of other comprehensive income                                                                             |       | (5,801   | )          | (337     | )          | (1,606   | )          |
| Other  comprehensive income — net of tax                                                                                           |       | $        | 9,464      |     | $          | 549      |       | $ | 2,620 |   |

 

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**18.**       FAIR VALUE MEASUREMENTS

** **

ASC 820 emphasizes that fair value is a market-based measurement, notan entity-specific measurement. Therefore, a fair value measurement should be determined usingassumptions that market participants would use in pricing an asset orliability.  As a basis for consideringmarket participant assumptions in fair value measurements, ASC 820 establishesa fair value hierarchy that distinguishes between market participantassumptions based on market data obtained from sources independent of thereporting entity (observable inputs that are classified within Levels 1 and 2of the hierarchy) and the reporting entity’s own assumptions about marketparticipant assumptions (unobservable inputs classified within Level 3 of thehierarchy).

 

*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.

 

In instances where the determination of the fair value measurement isbased on inputs from different levels of the fair value hierarchy, the level inthe fair value hierarchy within which the entire fair value measurement fallsis based on the lowest level input that is significant to the fair valuemeasurement in its entirety. The Company’s assessment of the significance of aparticular input to the fair value measurement in its entirety requiresjudgment, and considers factors specific to the asset or liability.

 

A description of the valuation methodologies used for instrumentsmeasured at fair value, as well as the general classification of suchinstruments pursuant to the valuation hierarchy, is set forth below.

 

**Available for sale securities** — At December 31, 2009, the Companyholds, as part of its investment portfolio, available for sale securitiesreported at fair value consisting of Mortgage-Backed Securities (MBS),obligations of states and political subdivisions, agencies, 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 has assessedthe input level and has reported the private label MBS as a Level 3 input.  The Company also holds trust preferredsecurities that are recorded at fair value based on unadjusted quoted marketprices for identical securities in an active market.  As a result, the Company has determined thevaluation of its trust preferred securities falls within Level 1 of the fairvalue hierarchy.  However, the Companyalso held two single issuer trust preferred securities for which the volume andlevel of trading activity declined in 2009. The Company determines the fair value of these securities based onquoted market prices of comparable instruments and as a result has transferredthe securities to Level 2.  During 2009,the Company recognized OTTI of $2.3 million on four securities, which arerecognized at fair value on a recurring basis. The OTTI included a $0.9 million write down resulting from an increasein the credit risk associated with two of the single issuer trust preferredsecurities.  The OTTI is included as acomponent of “net other than temporary impairment losses on securitiesrecognized in earnings” and “loss on securities, other assets and other realestate owned” in the consolidated statements of operations.

 

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**Derivative financial instruments** — Currently, the Company uses interestrate swaps as part of its cash flow strategy to manage its interest rate risk.  The valuation of these instruments isdetermined using widely accepted valuation techniques including discounted cashflow analysis on the expected cash flows of each derivative. This analysisreflects the contractual terms of the derivatives, including the period tomaturity, and uses observable market-based inputs, including strike price,forward rates, volatility estimates and discount rates.   The fair values of interest rate swaps aredetermined using the market standard methodology of netting the discountedfuture fixed cash receipts (or payments) and the discounted expected variablecash payments (or receipts).  The variable cash payments (or receipts) arebased on an expectation of future interest rates (forward curves) derived fromobservable market interest rate curves.

 

To comply with the provisions of ASC 820, credit valuation adjustmentsare incorporated into the valuation to appropriately reflect both the Company’sown nonperformance risk and the respective counterparty’s nonperformance riskin the fair value measurements.  TheCompany has considered the impact of netting and any applicable creditenhancements, such as collateral postings and thresholds.

 

Although the Company has determined that the majority of the inputsused to value its derivatives fall within Level 2 of the fair value hierarchy,the credit valuation adjustments associated with its derivatives utilize Level3 inputs, such as estimates of current credit spreads to evaluate thelikelihood of default by itself and its counterparties.  However, at December 31, 2009, theCompany has assessed the significance of the impact of the credit valuationadjustments on the overall valuation of its derivative positions and hasdetermined that the credit valuation adjustments are not significant to theoverall valuation of its derivatives.  Asa result, the Company has determined that its derivative valuations in theirentirety are classified in Level 2 of the fair value hierarchy.

 

**Private equity investments**— The valuation of nonpublic privateequity investments requires significant management judgment due to the absenceof quoted market prices, inherent lack of liquidity and the long-term nature ofsuch assets.  The carrying values ofprivate equity investments are adjusted either upwards or downwards from thetransaction price to reflect expected exit values as evidenced by financing andsale transactions with third parties, or when determination of a valuationadjustment 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, changesin 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, 2009.

 

**Impaired Loans —**Certain collateral-dependent impaired loans arereported 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 ASC 310. The fair value of other impaired loans is measured using a discountedcash flow analysis.

 

The following table presents the Company’s financial assets measured atfair value on a recurring basis at December 31, 2009, aggregated by thelevel in the fair value hierarchy within which those measurements fall.

 

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| ** **                            | ** ** | ** **                 | ** ** | **Fair value measurements using:**                           | ** ** |
|---------------------------------------|------------|----------------------------|------------|--------------------------------------------------------------|------------|
| ** **                            | ** ** | **Balance at**             | ** ** | **Quoted prices in   active markets for   identical assets** | ** ** | **Significant other  observable  inputs** | ** ** | **Significant  unobservable  inputs** | ** ** |
| **(in  thousands)**                   | ** ** | **December 31, 2009** | ** ** | **(Level 1)**                                                | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Assets                                |       |                       |       |                                                         |       |   |   |   |   |
| Available  for sale securities:       |       |                       |       |                                                         |       |   |   |   |   |
| Mortgage-backed  securities           |       | $                          | 402,913    |                                                         | $          | — |   | $ | 400,540 |   | $ | 2,373 |   |
| U.S.  Government Agencies             |       | 56,453                     |       | —                                                       |       | 56,453 |   | — |   |
| Trust  preferred securities           |       | 34,781                     |       | 28,931                                                       |       | 5,850 |   | — |   |
| Corporate  debt securities            |       | 32,641                     |       | —                                                       |       | 32,641 |   | — |   |
| Municipal  securities                 |       | 2,417                      |       | —                                                       |       | 2,417 |   | — |   |
| Total  available for sale securities  |       | $                          | 529,205    |                                                         | $          | 28,931 |   | $ | 497,901 |   | $ | 2,373 |   |
|                                  |       |                       |       |                                                         |       |   |   |   |   |
| Derivatives:                          |       |                       |       |                                                         |       |   |   |   |   |
| Cash  flow hedge - interest rate swap |       | $                          | 4,202      |                                                         | $          | — |   | $ | 4,202 |   | $ | — |   |
| Reverse  interest rate swap           |       | 3,495                      |       | —                                                       |       | 3,495 |   | — |   |
| Total  derivative assets              |       | $                          | 7,697      |                                                         | $          | — |   | $ | 7,697 |   | $ | — |   |
|                                  |       |                       |       |                                                         |       |   |   |   |   |
| Liabilities                           |       |                       |       |                                                         |       |   |   |   |   |
| Derivatives:                          |       |                       |       |                                                         |       |   |   |   |   |
| Cash  flow hedge - interest rate swap |       | $                          | 55         |                                                         | $          | — |   | $ | 55 |   | $ | — |   |
| Reverse  interest rate swap           |       | 3,623                      |       | —                                                       |       | 3,623 |   | — |   |
| Total  derivative liabilities         |       | $                          | 3,678      |                                                         | $          | — |   | $ | 3,678 |   | $ | — |   |

 

A reconciliation of the beginning and ending balances of assetsmeasured at fair value, on a recurring basis, using Level 3 inputs follows:

 
| **(in thousands)**                           | ** ** | **Investment  securities available   for sale** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------------|------------|
| Balance  at December 31, 2008                |       | $                                                              | 3,709      |   |
| Transfers  in                                     |       | —                                                         |       |
| Realized  loss on OTTI                            |       | (1,331                                                         | )          |
| Paydowns                                          |       | (1,361                                                         | )          |
| Net  accretion                                    |       | 75                                                             |       |
| Unrealized  gain included in comprehensive income |       | 1,281                                                          |       |
|                                              |       |                                                           |       |
| Balance  at December 31, 2009                |       | $                                                              | 2,373      |   |

 

Fair value is used on a nonrecurring basis to evaluate certainfinancial assets and financial liabilities in specific circumstances.  The following table presents the Company’sassets measured at fair value on a nonrecurring basis at December 31,2009, aggregated by the level in the fair value hierarchy within which thosemeasurements fall.

 
| ** **             | ** ** | **Fair value measurements using:** | ** ** |
|------------------------|------------|------------------------------------|------------|
| ** **             | ** ** | **Balance at**                     | ** ** | **Quoted prices in   active markets for   identical assets** | ** ** | **Significant  other  observable  inputs** | ** ** | **Significant  unobservable  inputs** | ** ** |
| **(in  thousands)**    | ** ** | **December 31, 2009**         | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Loans  (impaired), net |       | $                                  | 62,972     |   | $ | — |   | $ | 872 |   | $ | 62,100 |   |
| Loans  held for sale   |       | 1,820                              |       | — |   | — |   | 1,820 |   |
|                        |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

 

At December 31, 2009, impaired loans had a carrying value of $76.9million and a fair value of $63.0 million. During 2009, the Company recorded a provision for loan losses of $84.2million and

 

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charge-offs on impaired loans of $70.7 million.  At December 31, 2009, the Company heldone loan for sale.  During 2009,charge-offs on loans transferred at fair value to held for sale totaled $5.9million.  The Company recorded an additional$0.1 million loss upon the sale of these loans.

 

Fair value is also used on a nonrecurring basis for nonfinancial assetsand nonfinancial liabilities such as foreclosed assets, other real estateowned, intangible assets, nonfinancial assets and liabilities evaluated in agoodwill impairment analysis and other nonfinancial assets measured at fairvalue for purposes of assessing impairment. A description of the valuation methodologies used for nonfinancialassets measured at fair value, as well as the general classification of suchinstruments pursuant to the valuation hierarchy, is set forth below.

 

**Goodwill impairment analysis** — Goodwill impairment is determinedusing a two-step process.  In the firststep, the fair value of a reporting unit is compared to its carrying amount,including goodwill.  If the fair value ofthe reporting unit exceeds its carrying amount, goodwill of the reporting unitis less than the carrying amount, step two is performed, where the implied fairvalue of goodwill is compared to the carrying value of the reporing units’goodwill.  Implied goodwill is computedas a residual value after allocating the fair value of the reporting unit toits assets and liabilities.  The Companyestimates the fair value of its reporting units using market multiples ofcomparable entities, including recent transactions, or a combination of marketmultiples and a discounted cash flow methodology.  Since these methods incorporate assumptionsspecific to the entity, such as the use of financial forecasts, the fair valueof the reporting units and their assets and liabilities are considered a Level3 input by the Company.  See Note 6 — Goodwilland Intangible assets, for additional information.

 

**Intangible assets**—**Intangible**assets consist primarily of amortizing customer lists and nonamortizing tradename that were initially recorded at fair value.  Intangible assets are subject to impairmenttesting whenever events or changes in circumstances indicate that the carryingamount may not recoverable.  The fairvalue of intangible assets is based on an income approach using a present valuemodel, considered a Level 3 input by the Company.

 

**Other real estate owned (OREO)**—****OREOrepresents real property taken by the Bank either through foreclosure orthrough a deed in lieu thereof from the borrower.  The fair value of OREO is based on propertyappraisals adjusted at management’s discretion to reflect a further decline inthe fair value of properties since the time the appraisal analysis wasperformed.  It has been the Company’sexperience that appraisals quickly become outdated due to the volatilereal-estate environment.  Therefore, theinputs used to determine the fair value of OREO fall within Level 3.

 

The following table presents the Company’s nonfinancial assets measuredat fair value on a nonrecurring basis at December 31, 2009, aggregated bythe level in the fair value hierarchy within which those measurements fall.

 

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| ** **          | ** ** | **Fair value measurements using:** | ** ** | ** **                                                  | ** ** |
|---------------------|------------|------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **          | ** ** | **Balance at**                     | ** ** | **Quoted prices in  active markets  for identical  assets** | ** ** | **Significant  other  observable  inputs** | ** ** | **Significant  unobservable  inputs** | ** ** | **Total loss for the  year ended** | ** ** |
| **(in  thousands)** | ** ** | **December 31, 2009**         | ** ** | **(Level 1)**                                               | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** | **December 31, 2009** | ** ** |
| Goodwill            |       | $                                  | —     |                                                        | $          | — |   | $ | — |   | $ | — |   | $ | (46,160 | ) |
| Tradename           |       | 149                                |       | —                                                      |       | — |   | 149 |   | (120 | ) |
| OREO                |       | 26,507                             |       | —                                                      |       | — |   | 26,507 |   | (3,292 | ) |
|                     |            |                                    |            |                                                             |            |  |  |  |  |  |  |  |  |  |  |  |

 

As aresult of the goodwill impairment analysis, Goodwill was fully written down at December 31,2009, from $46.2 million at December 31, 2008.  The Company recorded a goodwill impairment of$33.7 million and $12.5 million during the first and third quarter of 2009,respectively.  In addition, a trade namewith a carrying value of $0.3 million was written down to its fair value of$0.2 million during the first quarter of 2009 resulting in an impairment chargeof $0.1 million.  Total impairmentcharges of $46.2 million are included in earnings for the year ended 2009.

 

Inaccordance with ASC 310, the fair value of OREO recorded as an asset is reducedby estimated selling costs.  Thefollowing table is a reconciliation of the fair value measurement of OREOdisclosed pursuant to ASC 820 to the amount recorded on the consolidatedbalance sheet:

 
| ** **                   | ** ** | **Balance at**             | ** ** |
|------------------------------|------------|----------------------------|------------|
| **(in  thousands)**          | ** ** | **December 31, 2009** | ** ** |
| OREO  recorded at fair value |       | $                          | 26,507     |   |
| Estimated  selling costs     |       | (1,325                     | )          |
| OREO                         |       | $                          | 25,182     |   |

 

Valuationadjustments on OREO are recognized in current earnings under the caption “Losson securities, other assets and other real estate owned.”  Below is a summary of the 2009 OREOtransactions:

 
| **(in  thousands)**                         | ** ** | ** ** | ** ** | **OREO** | ** ** |
|---------------------------------------------|------------|------------|------------|----------|------------|
| OREO  at December 31, 2008             |       |       |       | $        | 5,941      |   |
| Foreclosed  loans                           |       | 53,377     |       |     |       |
| Charge-offs                                 |       | (18,125    | )          |     |       |
| Loans  transferred to OREO                  |       |       |       | 35,252   |       |
| OREO  sales                                 |       |       |       | (13,347  | )          |
| Net  loss on sale and valuation adjustments |       |       |       | (3,292   | )          |
| Other                                       |       |       |       | 628      |       |
| OREO  at December 31, 2009             |       |       |       | 25,182   |       |
| Estimated  selling costs                    |       |       |       | 1,325    |       |
| OREO  recorded at fair value                |       |       |       | $        | 26,507     |   |

 

Thefollowing table includes the estimated fair value of the Company’s financialinstruments.  The methodologies forestimating the fair value of financial assets and financial liabilitiesmeasured at fair value on a recurring and nonrecurring basis are discussedabove.  The methodologies for estimatingthe fair value for other financial assets and financial liabilities arediscussed below.  The estimated fairvalue amounts have been determined by the Company using available marketinformation and appropriate valuation methodologies.  However, considerable judgment is required tointerpret market data in order to develop the estimates of fair value.  Accordingly, the estimates presented hereinare not necessarily indicative of the amounts the Company could realize in acurrent market exchange.  The use ofdifferent market assumptions and/or estimation methodologies may have amaterial effect on the estimated fair value amounts at December 31, 2009and 2008.

 

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| ** **                                      | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | ** **                 | ** ** | **Estimated**              | ** ** | ** ** | ** ** | **Estimated** | ** ** |
| ** **                                      | ** ** | **Carrying**               | ** ** | **fair**                   | ** ** | **Carrying** | ** ** | **fair** | ** ** |
| **(in  thousands)**                             | ** ** | **value**                  | ** ** | **value**                  | ** ** | **value** | ** ** | **value** | ** ** |
|                                            |       |                       |       |                       |       |   |   |   |   |
| Financial  assets:                              |       |                       |       |                       |       |   |   |   |   |
| Cash  and cash equivalents                      |       | $                          | 47,637     |                       | $          | 47,637 |   | $ | 45,489 |   | $ | 45,489 |   |
| Investment  securities available for sale       |       | 529,205                    |       | 529,205                    |       | 476,506 |   | 476,506 |   |
| Investment  securities held to maturity         |       | 302                        |       | 308                        |       | 376 |   | 374 |   |
| Other  investments                              |       | 16,473                     |       | 16,473                     |       | 23,566 |   | 23,566 |   |
| Loans                                           |       | 1,705,750                  |       | 1,704,299                  |       | 1,988,402 |   | 2,044,024 |   |
| Loans  held for sale                            |       | 1,820                      |       | 1,820                      |       | — |   | — |   |
| Accrued  interest receivable                    |       | 8,184                      |       | 8,184                      |       | 8,617 |   | 8,617 |   |
| Interest  rate swaps                            |       | 7,697                      |       | 7,697                      |       | 6,772 |   | 6,772 |   |
| Bank-owned  life insurance                      |       | 34,560                     |       | 34,560                     |       | 30,718 |   | 30,718 |   |
|                                            |       |                       |       |                       |       |   |   |   |   |
| Financial  liabilities:                         |       |                       |       |                       |       |   |   |   |   |
| Deposits                                        |       | $                          | 1,968,833  |                       | $          | 1,971,213 |   | $ | 1,639,031 |   | $ | 1,641,555 |   |
| Other  short-term borrowings                    |       | 240                        |       | 240                        |       | 543,063 |   | 543,063 |   |
| Securities  sold under agreements to repurchase |       | 139,794                    |       | 136,329                    |       | 133,478 |   | 131,463 |   |
| Accrued  interest payable                       |       | 1,500                      |       | 1,500                      |       | 1,614 |   | 1,614 |   |
| Junior  subordinated debentures                 |       | 72,166                     |       | 72,166                     |       | 72,166 |   | 72,166 |   |
| Subordinated  notes payable                     |       | 20,984                     |       | 18,676                     |       | 20,984 |   | 24,649 |   |
| Interest  rate swaps                            |       | 3,678                      |       | 3,678                      |       | 3,555 |   | 3,555 |   |

 

The estimation methodologies utilized by the Company are summarized asfollows:

 

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

 

**Other Investments** — The estimated fair value of other investmentsapproximates 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.

 

**Accrued Interest Receivable/Payable** — The carrying amount of accruedinterest receivable/payable is a reasonable estimate of fair value due to theshort-term nature of these amounts.

 

**Bank-Owned Life Insurance** — The carrying amount of bank-ownedlife insurance is based on the cash surrender value of the policies and is areasonable estimate of fair value.

 

**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 for purposesof estimating fair value.

 

**Short-Term Borrowings** — The estimated fair value ofshort-term borrowings approximates their carrying value, due to theirshort-term nature.

 

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**Securities Sold Under Agreements to Repurchase** — Estimated fair value is based ondiscounting cash flows for comparable instruments.

 

**Junior Subordinated Debentures** — The estimated fair value ofjunior subordinated debentures approximates their carrying value, due to thevariable interest rate paid on the debentures.

 

**Subordinated Notes Payable** — The estimated fair value ofsubordinated notes payable is based on discounting cash flows for comparableinstruments.

 

**Commitments to Extend Credit and Standby Lettersof Credit** —The Company’s off-balance sheet commitments are funded at current market ratesat the date they are drawn upon. It is management’s opinion that the fair valueof these commitments would approximate their carrying value, if drawn upon.

 

The fair value estimates presented herein are based on pertinentinformation available to management at December 31, 2009 and 2008.Although management is not aware of any factors that would significantly affectthe estimated fair value amounts, such amounts have not been comprehensivelyrevalued for purposes of these financial statements since that date and,therefore, current estimates of fair value may differ significantly from theamounts presented herein.

 

**19.**       SEGMENTS

** **

TheCompany’s principal areas of activity consist of commercial banking, investmentbanking, investment advisory and trust services, insurance and corporatesupport and other.

 

Theinvestment banking segment consists of the operations of GMB, which providesmiddle-market companies with merger and acquisition advisory services,institutional private placements of debt and equity, and other strategicfinancial advisory services.

 

Theinvestment advisory and trust segment consists of the operations of ACMG,Wagner and CoBiz Trust. ACMG and Wagner are SEC-registered investmentmanagement firms that manage stock and bond portfolios for individuals andinstitutions. CoBiz Trust offers wealth management and investment advisoryservices, fiduciary services, and estate administration services.

 

Theinsurance segment includes the activities of FDL and CoBiz Insurance, Inc.FDL provides employee benefits consulting and brokerage, wealth transferplanning and preservation for high-net-worth individuals, and executivebenefits and compensation planning. FDL represents individuals and companies inthe acquisition of institutionally priced life insurance products to meetwealth transfer and business needs. CoBiz Insurance, Inc. is a propertyand casualty (P&C) broker agency focusing on commercial and affluentindividual lines of coverage. The majority of the revenue for both FDL andCoBiz Insurance is derived from insurance product sales and referrals, paid bythird-party insurance carriers.

 

Thecorporate support and other segment consists of activities that are notdirectly attributable to the other reportable segments and include centralizedbank operations and the activities of the Parent.

 

The financial information for each business segment reflects thatinformation which is specifically identifiable or which is allocated based onan internal allocation method. Results of operations and selected financialinformation by operating segment are as follows:

 

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| ** **                                                 | ** ** | ** **     | ** ** | **Investment** | ** ** | **Trust and** | ** ** | ** **    | ** ** | **Corporate**   | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|----------------|------------|----------------|------------|---------------|------------|---------------|------------|-----------------|------------|------------------|------------|
| **For  the year ended December 31, 2009**             | ** ** | **Commercial** | ** ** | **Banking**    | ** ** | **Advisory**  | ** ** | ** **    | ** ** | **Support and** | ** ** | ** **       | ** ** |
| **(in  thousands)**                                        | ** ** | **Banking**    | ** ** | **Services**   | ** ** | **Services**  | ** ** | **Insurance** | ** ** | **Other**       | ** ** | **Consolidated** | ** ** |
|                                                       |       |           |       |           |       |          |       |          |       |            |       |             |       |
| Income  statement                                          |       |           |       |           |       |          |       |          |       |            |       |             |       |
| Total  interest income                                     |       | $              | 128,914    |           | $          | 7             |       | $             | —     |            | $          | —           |       | $ | 529 |   | $ | 129,450 |   |
| Total  interest expense                                    |       | 21,701         |       | —         |       | 16            |       | 13            |       | 4,336           |       | 26,066           |       |
| Provision  for loan losses                                 |       | 103,427        |       | —         |       | —        |       | —        |       | 2,388           |       | 105,815          |       |
| Noninterest  income                                        |       | 9,555          |       | 1,154          |       | 5,186         |       | 11,778        |       | (46             | )          | 27,627           |       |
| Noninterest  expense                                       |       | 34,533         |       | 4,024          |       | 6,252         |       | 12,149        |       | 38,292          |       | 95,250           |       |
| Impairment  of goodwill                                    |       | 15,348         |       | 5,279          |       | 6,518         |       | 19,015        |       | —          |       | 46,160           |       |
| Management  fees and allocations                           |       | 30,987         |       | 211            |       | 615           |       | 635           |       | (32,448         | )          | —           |       |
| Provision  (benefit) for income taxes                      |       | (19,829        | )          | (3,768         | )          | (1,440        | )          | (1,934        | )          | (5,888          | )          | (32,859          | )          |
| Net  income (loss) before noncontrolling interest          |       | (47,698        | )          | (4,585         | )          | (6,775        | )          | (18,100       | )          | (6,197          | )          | (83,355          | )          |
| Net  (income) loss attributable to noncontrolling interest |       | —         |       | —         |       | —        |       | —        |       | 314             |       | 314              |       |
| Net  loss                                                  |       | (47,698        | )          | (4,585         | )          | (6,775        | )          | (18,100       | )          | (5,883          | )          | (83,041          | )          |
|                                                       |       |           |       |           |       |          |       |          |       |            |       |             |       |
| Depreciation  and amortization                             |       | 3,272          |       | 67             |       | 203           |       | 759           |       | 61              |       | 4,362            |       |
| Capital  expenditures                                      |       | 2,628          |       | 10             |       | 1             |       | 123           |       | 22              |       | 2,784            |       |
|                                                       |       |           |       |           |       |          |       |          |       |            |       |             |       |
| At  December 31, 2009 Identifiable assets             |       | $              | 2,380,362  |           | $          | 609           |       | $             | 3,312      |            | $          | 10,278           |       | $ | 71,454 |   | $ | 2,466,015 |   |

 
| ** **                                            | ** ** | ** **     | ** ** | **Investment** | ** ** | **Trust and** | ** ** | ** **    | ** ** | **Corporate**   | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|----------------|------------|----------------|------------|---------------|------------|---------------|------------|-----------------|------------|------------------|------------|
| **For  the year ended December 31, 2008**        | ** ** | **Commercial** | ** ** | **Banking**    | ** ** | **Advisory**  | ** ** | ** **    | ** ** | **Support and** | ** ** | ** **       | ** ** |
| **(in  thousands)**                                   | ** ** | **Banking**    | ** ** | **Services**   | ** ** | **Services**  | ** ** | **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        |       | 480             |       | 35,778           |       |
| 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  (benefit) for income taxes                 |       | 3,075          |       | (99            | )          | (113          | )          | 187           |       | (3,141          | )          | (91              | )          |
| Net  income (loss) before noncontrolling interest     |       | 6,675          |       | (190           | )          | (288          | )          | 177           |       | (4,667          | )          | 1,707            |       |
| Net  (income) attributable to noncontrolling interest |       | —         |       | —         |       | —        |       | —        |       | (379            | )          | (379             | )          |
| Net  income (loss)                                    |       | 6,675          |       | (190           | )          | (288          | )          | 177           |       | (5,046          | )          | 1,328            |       |
|                                                  |       |           |       |           |       |          |       |          |       |            |       |             |       |
| Depreciation  and amortization                        |       | 2,919          |       | 72             |       | 255           |       | 827           |       | 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 |   |

 
| ** **                                            | ** ** | ** **     | ** ** | **Investment** | ** ** | **Trust and** | ** ** | ** **    | ** ** | **Corporate**   | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|----------------|------------|----------------|------------|---------------|------------|---------------|------------|-----------------|------------|------------------|------------|
| **For  the year ended December 31, 2007**        | ** ** | **Commercial** | ** ** | **Banking**    | ** ** | **Advisory**  | ** ** | ** **    | ** ** | **Support and** | ** ** | ** **       | ** ** |
| **(in  thousands)**                                   | ** ** | **Banking**    | ** ** | **Services**   | ** ** | **Services**  | ** ** | **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         |       | 372             |       | 28,611           |       |
| 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  (benefit) for income taxes                 |       | 16,710         |       | 218            |       | 45            |       | (260          | )          | (3,000          | )          | 13,713           |       |
| Net  income (loss) before noncontrolling interest     |       | 28,689         |       | 322            |       | (17           | )          | (542          | )          | (5,106          | )          | 23,346           |       |
| Net  (income) attributable to noncontrolling interest |       | —         |       | —         |       | —        |       | —        |       | (322            | )          | (322             | )          |
| Net  income (loss)                                    |       | 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 |   |

 

**20.**       CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

 

Condensed financial statements pertaining only to CoBiz Financial Inc.are presented below. Investments in subsidiaries are stated using the equitymethod of accounting.

 

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| **(in  thousands)**                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
|                                        |       |          |       |     |       |
| Condensed  Statements of Condition          |       |     |       |     |       |
|                                        |       |          |       |     |       |
| Assets:                                     |       |     |       |     |       |
| Cash  on deposit at subsidiary bank         |       | $        | 33,461     |     | $          | 54,966 |   |
| Investment  in subsidiaries                 |       | 269,472  |       | 278,325  |       |
| Accounts  receivable from subsidiaries      |       | 5,033    |       | 5,075    |       |
| Taxes  receivable                           |       | 14,749   |       | 2,426    |       |
| Other                                       |       | 11,115   |       | 11,145   |       |
|                                        |       |     |       |     |       |
| Total                                       |       | $        | 333,830    |     | $          | 351,937 |   |
|                                        |       |          |       |     |       |
| Liabilities  and shareholders’ equity: |       |     |       |     |       |
| Liabilities:                                |       |     |       |     |       |
| Accounts  payable to subsidiaries           |       | $        | 6,289      |     | $          | 60 |   |
| Subordinated  debentures                    |       | 93,150   |       | 93,150   |       |
| Other  liabilities                          |       | 3,940    |       | 6,628    |       |
|                                        |       |          |       |     |       |
| Total  liabilities                          |       | 103,379  |       | 99,838   |       |
|                                        |       |          |       |     |       |
| Shareholders’  equity                  |       | 230,451  |       | 252,099  |       |
|                                        |       |          |       |     |       |
| Total                                       |       | $        | 333,830    |     | $          | 351,937 |   |

 

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| **(in  thousands)**                                        | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                       |       |     |       |     |       |     |       |
| Condensed  Statements of Operations                        |       |     |       |     |       |     |       |
|                                                       |       |     |       |     |       |     |       |
| Income:                                                    |       |     |       |     |       |     |       |
| Management  fees                                           |       | $        | 3,664      |     | $          | 4,583    |       | $ | 4,495 |   |
| Interest  income                                           |       | 131      |       | 151      |       | 180      |       |
| Other  income                                              |       | 3,332    |       | 125      |       | 73       |       |
|                                                       |       |     |       |     |       |     |       |
| Total  income                                              |       | 7,127    |       | 4,859    |       | 4,748    |       |
|                                                       |       |     |       |     |       |     |       |
| Expenses:                                                  |       |     |       |     |       |     |       |
| Salaries  and employee benefits                            |       | 3,733    |       | 4,836    |       | 4,680    |       |
| Interest  expense                                          |       | 4,396    |       | 5,575    |       | 5,863    |       |
| Other  expense                                             |       | 2,907    |       | 2,629    |       | 2,436    |       |
|                                                       |       |     |       |     |       |     |       |
| Total  expenses                                            |       | 11,036   |       | 13,040   |       | 12,979   |       |
|                                                       |       |     |       |     |       |     |       |
| Net  loss before income taxes                              |       | (3,909   | )          | (8,181   | )          | (8,231   | )          |
|                                                       |       |     |       |     |       |     |       |
| Income  tax benefit                                        |       | 5,376    |       | 3,135    |       | 2,982    |       |
|                                                       |       |     |       |     |       |     |       |
| Net  income (loss) before equity in undistributed earnings |       |     |       |     |       |     |       |
| of  subsidiaries                                           |       | 1,467    |       | (5,046   | )          | (5,249   | )          |
|                                                       |       |     |       |     |       |     |       |
| Equity  in undistributed earnings (loss) of subsidiaries   |       | (84,508  | )          | 6,374    |       | 28,273   |       |
|                                                       |       |     |       |     |       |     |       |
| Net  income (loss)                                         |       | $        | (83,041    | )        | $          | 1,328    |       | $ | 23,024 |   |

 

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| **(in  thousands)**                                            | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                           |       |     |       |     |       |     |       |
| Condensed  Statements of Cash Flows                            |       |     |       |     |       |     |       |
|                                                           |       |     |       |     |       |     |       |
| Cash  flows from operating activities:                         |       |     |       |     |       |     |       |
| Net  income (loss)                                             |       | $        | (83,041    | )        | $          | 1,328    |       | $ | 23,024 |   |
| Equity  in undistributed loss (income) of subsidiaries         |       | 84,508   |       | (6,374   | )          | (28,273  | )          |
| Stock-based  compensation                                      |       | 372      |       | 339      |       | 291      |       |
| Excess  tax benefit from stock-based compensation              |       | (5       | )          | (159     | )          | (1,060   | )          |
| Change  in other assets and liabilities                        |       | (6,221   | )          | (4,965   | )          | 1,313    |       |
|                                                           |       |     |       |     |       |     |       |
| Net  cash used by operating activities                         |       | (4,387   | )          | (9,831   | )          | (4,705   | )          |
|                                                           |       |     |       |     |       |     |       |
| Cash  flows from investing activities:                         |       |     |       |     |       |     |       |
| Net  cash paid in earn-outs                                    |       | (375     | )          | —   |       | (438     | )          |
| Net  cash paid for Wagner acquisition                          |       | —   |       | —   |       | (2,037   | )          |
| Net  cash paid for BDA acquisition                             |       | —   |       | (6,781   | )          | —   |       |
| Net  advances to subsidiaries                                  |       | (67,523  | )          | 7,971    |       | (7,996   | )          |
| Other                                                          |       | 7        |       | —   |       | 8        |       |
|                                                           |       |     |       |     |       |     |       |
| Net  cash (used) provided by investing activities              |       | (67,891  | )          | 1,190    |       | (10,463  | )          |
|                                                           |       |     |       |     |       |     |       |
| Cash  flows from financing activities:                         |       |     |       |     |       |     |       |
| Proceeds  from purchased funds and other short-term borrowings |       | —   |       | (17,070  | )          | 17,070   |       |
| Proceeds  from issuance of common stock                        |       | 56,340   |       | 1,245    |       | 23,095   |       |
| Payments  to repurchase common stock                           |       | —   |       | —   |       | (20,062  | )          |
| Proceeds  from issuance of subordinated promissory notes       |       | —   |       | 20,900   |       | —   |       |
| Proceeds  from the issuance of preferred stock                 |       | —   |       | 64,398   |       | —   |       |
| Dividends                                                      |       | (5,516   | )          | (6,613   | )          | (6,173   | )          |
| Excess  tax benefit from stock-based compensation              |       | 5        |       | 159      |       | 1,060    |       |
| Other                                                          |       | (56      | )          | 83       |       | 1        |       |
|                                                           |       |     |       |     |       |     |       |
| Net  cash provided by financing activities                     |       | 50,773   |       | 63,102   |       | 14,991   |       |
|                                                           |       |     |       |     |       |     |       |
| Net  (decrease) increase in cash and cash equivalents          |       | (21,505  | )          | 54,461   |       | (177     | )          |
|                                                           |       |     |       |     |       |     |       |
| Cash  and cash equivalents — beginning of year            |       | 54,966   |       | 505      |       | 682      |       |
|                                                           |       |     |       |     |       |     |       |
| Cash  and cash equivalents — end of year                  |       | $        | 33,461     |     | $          | 54,966   |       | $ | 505 |   |

 

**21.  SELECTEDQUARTERLY FINANCIAL DATA (UNAUDITED)**

 

The table below sets forth unaudited financialinformation for each quarter of the last two years:

 

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| ** **                             | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|------------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|------------------------|------------|-------------------|------------|--------------------|------------|
| **(in  thousands)**                    | ** ** | **2009**              | ** ** | **2009**               | ** ** | **2009**          | ** ** | **2009**           | ** ** | **2008**              | ** ** | **2008**               | ** ** | **2008**          | ** ** | **2008**           | ** ** |
|                                   |       |                  |       |                   |       |              |       |               |       |                  |       |                   |       |              |       |               |       |
| Interest income                        |       | $                     | 30,973     |                   | $          | 32,102            |       | $                  | 32,841     |                  | $          | 33,534                 |       | $                 | 35,820     |               | $          | 36,052 |   | $ | 35,639 |   | $ | 37,397 |   |
| Interest expense                       |       | 5,981                 |       | 6,515                  |       | 6,615             |       | 6,955              |       | 10,181                |       | 11,814                 |       | 12,143            |       | 15,419             |       |
| Net interest income                    |       | 24,992                |       | 25,587                 |       | 26,226            |       | 26,579             |       | 25,639                |       | 24,238                 |       | 23,496            |       | 21,978             |       |
| Net income                             |       | (4,538                | )          | (15,743                | )          | (15,811           | )          | (46,949            | )          | (8,613                | )          | 4,163                  |       | 4,183             |       | 1,595              |       |
|                                   |       |                  |       |                   |       |              |       |               |       |                  |       |                   |       |              |       |               |       |
| Earnings (loss) per share—basic   |       | $                     | (0.15      | )                      | $          | (0.50             | )          | $                  | (0.72      | )                     | $          | (2.07                  | )          | $                 | (0.38      | )                  | $          | 0.18 |   | $ | 0.18 |   | $ | 0.07 |   |
|                                   |       |                  |       |                   |       |              |       |               |       |                  |       |                   |       |              |       |               |       |
| Earnings (loss) per share—diluted |       | $                     | (0.15      | )                      | $          | (0.50             | )          | $                  | (0.72      | )                     | $          | (2.07                  | )          | $                 | (0.38      | )                  | $          | 0.18 |   | $ | 0.18 |   | $ | 0.07 |   |

 

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