Cobiz Financial (COBZ) 10-K 2016 FY Annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

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

For the fiscal year ended December 31, 2016.

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

For the transition period from _______________ to ________________

Commission file number 001-15955

COBIZ FINANCIAL INC.

(Exact name of registrant as specified in its charter)

COLORADO	84-0826324
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
1401 Lawrence St., Ste. 1200, Denver, CO	80202
(Address of principal executive offices)	(Zip Code)

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

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

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

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

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

Yes No X

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

Yes No X

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

Yes X No

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

Yes X No

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

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

Large accelerated filer ____	Accelerated filer     X
Non-accelerated filer   ____ (Do not check if a smaller reporting company)	Smaller reporting company ____

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

Yes No X

The aggregate market value of the voting common equity held by non-affiliates of the registrant at June 30, 2016, computed by reference to the closing price on the NASDAQ Global Select Market was $325,958,771.  Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock (as publicly reported by such persons pursuant to Section 13 and Section 16 of the Securities Exchange Act of 1934) have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant’s sole class of common stock as of February 14,  2017,  was 41,573,341.

Documents incorporated by reference: Portions of the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2017 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

PART I
Item 1.	Business	4
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	22
Item 2.	Properties	22
Item 3.	Legal Proceedings	22
Item 4.	Mine Safety Disclosures	22
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases of Equity Securities	22
Item 6.	Selected Financial Data	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	60
Item 8.	Financial Statements and Supplementary Data	62
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	62
Item 9A.	Controls and Procedures	63
Item 9B.	Other Information	63
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	63
Item 11.	Executive Compensation	63
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	63
Item 13.	Certain Relationships and Related Transactions and Director Independence	64
Item 14.	Principal Accounting Fees and Services	64
PART IV
Item 15.	Exhibits and Financial Statement Schedules	65
Item 16.	Form 10-K Summary	67
SIGNATURES		68
Index to Consolidated Financial Statements		F-1

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A WARNING ABOUT FORWARD-LOOKING STATEMENTS

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

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

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PART I

Item 1. Business

Overview

CoBiz Financial Inc. (CoBiz or the Company) is a diversified financial services company headquartered in Denver, Colorado. Through our subsidiary companies, we combine elements of personalized service found in community banks with sophisticated financial products and services traditionally offered by larger regional banks that we market to our targeted customer base of professionals, high-net-worth individuals and small to mid-sized businesses. At December 31, 2016, we had total assets of $3.6 billion, net loans of $2.9 billion and deposits of $3.0 billion. We were incorporated in Colorado in 1980. 

Our wholly-owned subsidiary CoBiz Bank (the Bank) is a full-service business banking institution serving two markets, Colorado and Arizona. In Colorado, the Bank operates under the name Colorado Business Bank and has 11 locations (excluding one bank location that closed in January 2017), including seven in the Denver metropolitan area, and one each in Boulder, Colorado Springs, Fort Collins and Vail.  In Arizona, the Bank operates under the name Arizona Business Bank and has four locations serving the Phoenix metropolitan area and the surrounding area of Maricopa County. Each of the Bank’s locations is led by a local president with substantial decision-making authority. We support our bank and fee-based businesses with back-office services from our downtown Denver offices.

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

Segments

We operate three distinct segments, as follows:

· Commercial Banking

· Fee-Based Lines

· Corporate Support and Other

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

Commercial Banking through:	•	Commercial banking
Colorado Business Bank	•	Real estate banking
Arizona Business Bank	•	Professional banking
	•	Treasury management
	•	Leveraged lending
Fee-Based Services through:	Wealth Management
CoBiz Wealth, LLC	•	Retirement income strategy
CoBiz Insurance, Inc.	•	Coordinated investment planning
	•	Financial & insurance review
	•	Will & trust review
	•	Investment management
	Insurance - Employee Benefits
	•	Performance-based analytics
	•	24/7 online benefit technology
	•	Employee education
	•	Multi-year planning
	Insurance - Risk Management
	•	Business insurance including workers' compensation
	•	Personal insurance including umbrella coverage
	•	24/7 online access to policy detail

During the first quarter of 2015, the Company ceased the operations of its investment banking division.  In 2012, the Company closed its trust department and sold its wealth transfer business.  The decision to exit these business lines was based on the Company’s desire to focus on activities that provide more predictable, recurring revenue.  The operations of the trust department, wealth transfer and investment banking divisions have been reported as discontinued operations throughout this report (all within the Fee-Based Lines segment).

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

Mission Statement

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

Our core values are:

· Focus on the customer

· Place people at the core

· Act with integrity

· Give back to the community

· Create sustained shareholder value

· Have fun and be well

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Business Strategy

Our primary strategy is to differentiate ourselves from our competitors by providing our local presidents with substantial decision-making authority in developing their respective markets, and expanding our products and services to build long-term relationships that meet the needs of small to mid-sized businesses, business owners and professionals in high-growth Western markets. In all areas of our operations, we focus on attracting and retaining the highest-quality personnel by maintaining an environment which allows our employees to effectively respond to customer needs and manage those relationships.  In order to realize our strategic objectives, we are pursuing the following strategies:

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

The following table details the Company’s market share of deposits in Colorado and Arizona, as well as other banks headquartered in our market areas and out-of-state banks as reported by the Federal Deposit Insurance Corporation (the FDIC) and SNL Financial at June 30, 2016 and 2015, the most recent information available.

	June 30, 2016				June 30, 2015
Market share	Colorado %		Arizona %		Colorado %		Arizona %
CoBiz Bank	1.76	%	0.54	%	1.80	%	0.58	%
Other in-state banks	32.97	%	6.67	%	32.22	%	9.36	%
Out-of-state banks	65.27	%	92.79	%	65.98	%	90.06	%
Total	100.00	%	100.00	%	100.00	%	100.00	%
Deposit market share rank	12th		16th		12th		17th

The following table details the Company’s deposit market share by Metropolitan Statistical Area (MSA):

	June 30, 2016			June 30, 2015
	Deposit Market			Deposit Market
MSA	Share Rank	Market Share %		Share Rank	Market Share %
Denver-Aurora-Lakewood, CO	8th	2.38	%	9th	2.52	%
Boulder, CO	9th	3.54	%	9th	3.57	%
Edwards, CO	6th	2.43	%	7th	2.23	%
Fort Collins, CO	25th	0.16	%	27th	0.10	%
Colorado Springs, CO	34th	0.26	%	37th	0.11	%
Phoenix-Mesa-Glendale, AZ	12th	0.73	%	13th	0.78	%

Loan portfolio growth and diversification.  We have emphasized expanding our overall loan products in order to diversify and grow the loan portfolio.  In recent years, we have had growth initiatives focused on the following lending areas: residential mortgage, public finance, Small Business Administration (SBA), structured finance and healthcare.  The addition of these products has enabled the Bank to continue to grow its loan portfolio in a competitive and challenging environment.

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Establishing strong brand awareness.We have developed a cohesive and comprehensive approach to our internal and external communications efforts to leverage the power of each subsidiary as part of the larger company.  Our brand platform has unified the look and feel of the CoBiz identity across the Company. With a target market that is similar across subsidiaries, our strong brand awareness helps generate cross-sell opportunities while strengthening client relationships.

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

Maintaining asset quality. We seek to maintain asset quality through a program that includes regular reviews of loans and ongoing monitoring of the loan portfolio by a loan review department that reports to the Chief Operations Officer of the Company but submits reports directly to the Audit Committee of our Board of Directors. At December 31, 2016, our ratio of nonperforming loans to total loans was 0.11%, compared to 0.60% at December 31, 2015.  The improvement in the ratio during 2016 was due to the resolution of one large loan of $11.2 million that was impaired at the end of 2015.

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

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

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

Market Areas Served

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

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

	Colorado Snapshot		Arizona Snapshot
	Demographics		Demographics
•	Colorado population: 5.5 million	•	Arizona population: 6.9 million
•	Metropolitan Denver population: 2.8 million	•	Metropolitan Phoenix population: 4.6 million
•	Population projected to increase 21% to 6.7 million by 2030	•	Population projected to increase 30% to 9.0 million by 2030
•	Median household income 2015: $66,596	•	Median household income 2015: $52,248
•	Median home price for Metropolitan Denver at September 30, 2016: $386,800	•	Median home price for Metropolitan Phoenix at September 30, 2016: $235,300
	Significant Industries		Significant Industries
•	Technology	•	Aerospace & Defense
•	Energy and natural resources	•	Technology & Innovation
•	Manufacturing	•	Renewable Energy
•	Tourism	•	Bioscience & Healthcare
•	Transportation	•	Optics/Photonics
•	Aerospace	•	Advanced Manufacturing
•	Biomedical & Healthcare	•	Advanced Business Services
•	Financial Services
	Economic Outlook		Economic Outlook
•	Total employer establishments: 158,064	•	Total employer establishments: 134,434
•	Preliminary unemployment rate at December 2016 was 3.0%, down from 3.5% in December 2015 (national average of 4.7%)	•	Preliminary unemployment rate at December 2016 was 4.8%, down from 5.9% in December 2015 (national average of 4.7%)
•	State with the 14th highest job growth between December 2015 and December 2016	•	State with the 22nd highest job growth between December 2015 and December 2016

Competition

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

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

Employees

We had 533 full time equivalent employees at December 31, 2016.  Employees of the Company are entitled to participate in a variety of employee benefit programs, including: equity plans; an employee stock purchase plan; a 401(k) plan; various comprehensive medical, accident and group life insurance plans; and paid vacations. No Company employee is covered by a collective bargaining agreement, and we believe our relationship with our employees to be excellent.

Supervision and Regulation

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

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

The Holding Company

General. CoBiz is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (BHCA), and is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (Federal Reserve or FRB). CoBiz is required to file an annual report with the FRB and such other reports as may be required pursuant to the BHCA.

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

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

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

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

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to any covered institution with average total consolidated assets greater than or equal to $1 billion that offers incentive-based compensation to covered persons.

Acquisitions. As a financial holding company, we are required to obtain the prior approval of the FRB before acquiring direct or indirect ownership or control of more than 5% of the voting shares of a bank or bank holding company. The FRB will not approve any acquisition, merger or consolidation that would result in substantial anti-competitive effects, unless the anti-competitive effects of the proposed transaction are outweighed by a greater public interest in meeting the needs and convenience of the public. In reviewing applications for such transactions, the FRB also considers managerial, financial, capital and other factors, including the record of performance of the applicant and the bank or banks to be acquired under the Community Reinvestment Act of 1977, as amended (CRA). See “The Bank — Community Reinvestment Act” below.

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

Dividend Restrictions.  Dividends on the Company’s capital stock (common and preferred stock) are prohibited under the terms of the junior subordinated debenture agreements (see Note 9 – Long-Term Debt) if the Company is in continuous default on its payment obligations to the capital trusts, has elected to defer interest payments on the debentures or extends the interest payment period.  At December 31, 2016, the Company was not in default, had not elected to defer interest payments and had not extended the interest payment period on any of the subordinated debt issuances. 

Support of Banks. As discussed below, the Bank is also subject to capital adequacy requirements. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), CoBiz could be required to guarantee the capital restoration plan of the Bank if the Bank becomes “undercapitalized” as defined in the FDICIA and the regulations thereunder. See “Capital Adequacy at the Holding Company and Bank.”  Our maximum liability under any such guarantee would be the lesser of 5% of the Bank’s total assets at the time it became undercapitalized or the amount necessary to bring the Bank into compliance with the capital plan. The FRB also has stated that financial or bank holding companies are subject to the “source of strength doctrine,” which requires such holding companies to serve as a source of “financial and managerial” strength to their subsidiary banks and to not conduct operations in an unsafe or unsound manner.

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

Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act). The Sarbanes-Oxley Act is intended to address systemic and structural weaknesses of the capital markets in the United States that were perceived to have contributed to corporate scandals. The Sarbanes-Oxley Act also attempts to enhance the responsibility of corporate management by, among other things, (i) requiring the chief executive officer and chief financial officer of public companies to provide certain certifications in their periodic reports regarding the accuracy of the periodic reports filed with the SEC, (ii) prohibiting officers and directors of public companies from fraudulently influencing an accountant engaged in the audit of the company’s financial statements, (iii) requiring chief executive officers and chief financial officers to forfeit certain bonuses in the event of a restatement of financial results, (iv) prohibiting officers and directors found to be unfit from serving in a similar capacity with other public companies, (v) prohibiting officers and directors from trading in the company’s equity securities

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during pension blackout periods, and (vi) requiring the SEC to issue standards of professional conduct for attorneys representing public companies. In addition, public companies whose securities are listed on a national securities exchange or association must satisfy the following additional requirements: (a) the company’s audit committee must appoint and oversee the company’s auditors; (b) each member of the company’s audit committee must be independent; (c) the company’s audit committee must establish procedures for receiving complaints regarding accounting, internal accounting controls and audit-related matters; (d) the company’s audit committee must have the authority to engage independent advisors; and (e) the company must provide appropriate funding to its audit committee, as determined by the audit committee. 

The Bank

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

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

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

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

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

Section 23B of the Federal Reserve Act requires that certain transactions between the Bank and any affiliate must be on substantially the same terms, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with, or involving, non-affiliated companies or, in the absence of comparable

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transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, non-affiliated companies. The aggregate amount of the Bank’s loans to its officers, directors and principal shareholders (or their affiliates) is limited to the amount of its unimpaired capital and surplus, unless the FDIC determines that a lesser amount is appropriate.

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

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

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

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

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

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

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

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

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

The assessment base is calculated on average daily consolidated assets less average monthly tangible equity,  defined as Tier 1 Capital.  The FDIC has adopted a progressively lower assessment rate schedule

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based on the level of the reserve ratio (Deposit Insurance Fund divided by the total estimated insured deposits of the industry).  Assessment rates decline when the reserve ratio exceeds 1.15%, 2.0% and 2.5%.  In June 2016, the reserve ratio exceeded 1.15% which set the initial base assessment rate for a Risk Category I institution at 3 to 7 basis points and the base assessment rates for Risk Categories II – IV range to 12 to 30 basis points.  The amount an institution is assessed is based upon statutory factors that includes the degree of risk the institution poses to the insurance fund and may be reviewed semi-annually. A change in our risk category would negatively impact our assessment rates.

Additionally, all institutions insured by the FDIC Bank Insurance Fund are assessed fees to cover the debt of the Financing Corporation, the successor of the insolvent Federal Savings and Loan Insurance Corporation.  The assessment rate effective for the fourth quarter of 2016 was 0.14 basis points (0.56 basis points annually).  The assessment rate is adjusted quarterly.

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

Capital Adequacy at the Holding Company and Bank.

The FRB monitors, on a consolidated basis, the capital adequacy of financial or bank holding companies by using a combination of risk-based and leverage ratios. Failure to meet the capital guidelines may result in supervisory or enforcement actions by the FRB. Under the risk-based capital guidelines, different categories of assets, including certain off-balance sheet items, such as loan commitments and letters of credit, are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base.

On January 1, 2015, the Basel III regulatory capital rules (Regulation Q, Capital Adequacy of Bank Holding Companies) became effective for the Company. Basel III increased most of the required minimum regulatory capital ratios, introduced a new Common Equity Tier 1 Capital ratio and the concept of a Capital Conservation Buffer (CCB) that became effective in 2016.  The CCB is designed to establish a capital range above minimum requirements to insulate banks from periods of stress and impose constraints on dividends, share repurchases and discretionary bonus payments when capital levels fall below prescribed levels. The minimum CCB in 2016 is 0.625% and increases 0.625% annually through 2019 to 2.5%.

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

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

	Total	Tier 1	Common equity	Tier 1
Prompt corrective	risk-based	risk-based	tier 1	leverage
action category	capital	capital	risk-based capital	ratio
Well capitalized	10.0%	8.0%	6.5%	5.0%
Adequately capitalized	8.0%	6.0%	4.5%	4.0%
Undercapitalized	< 8.0%	< 6.0%	< 4.5%	< 4.0%
Significantly undercapitalized	< 6.0%	< 4.0%	< 3.0%	< 3.0%
Critically undercapitalized	Tangible equity / Total assets < 2.0%

Increasingly severe restrictions are placed on a depository institution as its capital level classification declines.  Banks with capital ratios below the required minimum are subject to certain administrative actions, including the termination of deposit insurance and the appointment of a receiver, and may also be subject to significant operating restrictions pursuant to regulations promulgated under the FDICIA. 

In addition to the ratios in the table above, an institution is only well-capitalized if it is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. Under these regulations, at December 31, 2016, the Bank was well-capitalized, which places no significant restrictions on the Bank’s activities.  See Note 17 – Regulatory Matters for additional information on the Company’s and the Bank’s capital ratios.

Fee-Based Lines

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

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

Changing Regulatory Structure

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

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

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Monetary Policy

The monetary policy of the FRB has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the means available to the FRB to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits. FRB monetary policies have materially affected the operations of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of the Company and its subsidiaries cannot be predicted.

Website Availability of Reports Filed with the SEC

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

Item 1A.  Risk Factors

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

We are subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors' funds, the FDIC funds, customers and the banking system as a whole, rather than stockholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things.

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

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

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

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

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

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

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

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

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

In general, all of our business segments were negatively impacted by market conditions in 2009-2011. During that period, there was a downturn in the real estate market, a slow-down in construction and an oversupply of real estate for sale.  While the overall economy and the business of the Company has improved, softening in our real estate markets could hurt our business as a majority of our loans are secured by real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature.

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

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

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

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

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

As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment.  Credit losses are inherent in the lending business and could have a material adverse effect on our operating results.  We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for potential losses based on a number of factors.  If our assumptions are wrong, our allowance for loan losses may not be sufficient to cover our losses, thereby having an adverse effect on our operating results, and may cause us to increase the allowance in the future.  In addition, we intend to increase the number and amount of loans we originate, and we cannot guarantee that we will not experience an increase in delinquencies and losses as these loans continue to age, particularly if the economic conditions in Colorado and Arizona deteriorate.  The actual amount of future provisions for loan losses cannot be determined at any specific point in time and may exceed the amounts of past provisions.  Additions to our allowance for loan losses would decrease our net income. 

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

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

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

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

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completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project.

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

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

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

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

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

We could experience an unexpected inability to obtain needed liquidity.  

Liquidity measures the ability to meet current and future cash flow needs as they become due. Our liquidity position reflects our ability to meet loan requests, accommodate deposit outflows, service principal and interest repayments on debt and to fund our strategic initiatives. Our ability to meet current financial obligations is a function of our balance sheet structure, ability to liquidate assets and access to alternative sources of funds. We seek to ensure that our funding needs are met by maintaining an appropriate level of

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liquidity through asset and liability management. If we become unable to obtain funds when needed, it could have a material adverse effect on our business, financial condition and results of operations.

We may not realize our deferred income tax assets, we may incur a non-cash charge if corporate tax rates are reduced and our built in losses could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.

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

In addition, a change in the corporate tax rate would result in an adjustment of our net deferred tax assets,  which are recorded using current statutory tax rates,  through the income tax provision.  For example, while a decrease in the corporate tax rate would reduce future income tax expense, the adjustment to our deferred taxes in the period of change would result in a non-cash charge to income tax expense.  A reduction in the corporate tax rate may also adversely impact the value of tax-exempt assets held by the Company.

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

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

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

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

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

Financial service institutions are interrelated as a result of trading, clearing, counterparty and other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose the

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Company to credit risk in the event of a default by a counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be realized or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse effect on the Company’s financial condition and results of operations.

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

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

In December 2015, the Agencies released a new statement on prudent risk management for CRE lending (2015 Statement).  The Agencies expressed concern in the 2015 Statement about an easing of CRE underwriting standards and an observation of troubling risk management practices at some financial institutions.  In light of these developments, the Agencies directed financial institutions to review their policies and practices related to CRE lending and to maintain risk management practices and capital levels commensurate with the level and nature of their CRE concentration risk.  In 2016, the Agencies continued to pay “special attention to potential risks associated with CRE lending.” 

Our CRE portfolio at December 31, 2016 did not meet the definition of CRE concentration as set forth in the final guidelines. If the Company is considered to have a concentration in the future and our risk management practices are found to be deficient, it could result in increased reserves and capital costs.

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

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

Changes in interest rates may affect our profitability.

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

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

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

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

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

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

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

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

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

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

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our principal executive offices are located at 1401 Lawrence Street, Denver, CO, 80202.  We also have other facilities in our market areas within Colorado and Arizona.  We lease the majority of our facilities.  Through the end of 2016, we leased our executive offices from an entity partly owned by a director of the Company. See “Certain Relationships and Related Transactions and Director Independence” under Item 13 of Part III and Note 16 to the consolidated financial statements.

All locations are in good operating condition and are believed adequate for our present and foreseeable future operations. We do not anticipate any difficulty in leasing additional suitable space upon expiration of any present lease terms.

Item 3. Legal Proceedings

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

Item 4.  Mine Safety Disclosures

None.

PART II

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

Market for Registrant’s Common Equity

The common stock of the Company is traded on the NASDAQ Global Select Market under the symbol “COBZ.”  At February 14, 2017, there were approximately 396 shareholders of record of CoBiz common stock.

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

					Cash
					Dividends
	High		Low		Declared
2015:
First Quarter	$	13.23	$	10.88	$	0.040
Second Quarter		13.54		11.32		0.040
Third Quarter		13.44		12.25		0.045
Fourth Quarter		13.94		11.95		0.045
2016:
First Quarter	$	13.20	$	10.31	$	0.045
Second Quarter		12.87		10.79		0.045
Third Quarter		13.42		11.60		0.050
Fourth Quarter		17.19		12.40		0.050

On January 19, 2017, the Board of Directors approved a quarterly dividend for the first quarter of 2017 of $0.05 per share.  The timing and amount of future dividends declared by the Board of Directors of the Company will depend upon the consolidated earnings, financial condition, liquidity and capital requirements of the Company and its subsidiaries, the amount of cash dividends paid to the Company by its subsidiaries, applicable government regulations and policies, and other factors considered relevant by the Board of Directors of the Company.  The Company is subject to certain covenants pursuant to the issuance of its junior subordinated debentures as described in Note 12 to the consolidated financial statements that could limit our ability to pay dividends. 

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

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The following table compares the cumulative total return on a hypothetical investment of $100 in CoBiz common stock on December 31, 2011 and the closing prices on each of the five years in the period ended December 31, 2016, with the hypothetical cumulative total return on the SNL U.S. Bank NASDAQ Index and the Russell 2000 Index for the comparable period. 

	2011		2012		2013		2014		2015		2016
CoBiz Financial Inc.	$	100.00	$	130.84	$	212.28	$	236.19	$	244.81	$	312.92
SNL U.S. Bank NASDAQ	$	100.00	$	119.19	$	171.31	$	177.42	$	191.53	$	265.56
Russell 2000 Index	$	100.00	$	116.35	$	161.52	$	169.43	$	161.95	$	196.45

Securities Authorized for Issuance under Equity Compensation Plans

The Company has adopted the Amended and Restated 2005 Equity Incentive Plan (the “2005 Plan”).  Under the 2005 Plan, the Compensation Committee has the authority to determine the identity of the key employees, consultants, and directors who shall be granted options or restricted stock awards; the option price, which shall not be less than 85% the fair market value of the common stock on the date of grant; the vesting requirements; and the manner and times at which the options shall be exercisable. As of December 31, 2016, there were 2,421,120 shares available for grant under the 2005 Plan.  The Company also has an Employee Stock Purchase Plan, which had 197,066 shares available for issuance at December 31, 2016.

	Number of	Weighted-		Number of
	securities to be	average		securities remaining
	issued upon	exercise price		available for future
	exercise of	of outstanding		issuance under equity
	outstanding options,	options,		compensation
Plan Category	warrants and rights	warrants and rights		plans
Equity Compensation plans approved by security holders	285,999	$	10.45	2,618,186
Equity compensation plans not approved by security holders	-		-	-
Total	285,999	$	10.45	2,618,186

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Item 6. Selected Financial Data

The following table sets forth selected financial data for the Company for the periods indicated.  Discontinued operations have been reported retrospectively for all periods presented in the following table as discussed in Note 2 – Discontinued Operations. 

	At or for the year ended December 31,
(in thousands, except per share data)	2016			2015			2014			2013			2012
Statement of income data:
Interest income	$	127,782		$	121,266		$	114,317		$	106,127		$	106,128
Interest expense		11,731			9,590			8,429			10,426			12,750
Net interest income before provision for loan losses		116,051			111,676			105,888			95,701			93,378
Provision for loan losses		(2,101)			6,420			(4,155)			(8,804)			(4,733)
Net interest income after provision for loan losses		118,152			105,256			110,043			104,505			98,111
Noninterest income		34,160			30,667			27,909			28,606			26,720
Noninterest expense		105,231			100,177			94,136			90,912			87,022
Income before taxes		47,081			35,746			43,816			42,199			37,809
Provision for income taxes		12,182			9,606			15,018			13,909			13,411
Net income from continuing operations		34,899			26,140			28,798			28,290			24,398
Net income (loss) from discontinued operations, net of tax		-			(71)			209			(679)			172
Net income	$	34,899		$	26,069		$	29,007		$	27,611		$	24,570
Basic earnings per common share from continuing operations	$	0.84		$	0.63		$	0.69		$	0.68		$	0.55
Diluted earnings per common share from continuing operations	$	0.84		$	0.62		$	0.69		$	0.68		$	0.55
Basic earnings (loss) per common share from discontinued operations	$	-		$	-		$	0.01		$	(0.02)		$	-
Diluted earnings (loss) per common share from discontinued operations	$	-		$	-		$	0.01		$	(0.02)		$	-
Basic earnings per common share	$	0.84		$	0.63		$	0.70		$	0.66		$	0.55
Diluted earnings per common share	$	0.84		$	0.62		$	0.70		$	0.66		$	0.55
Cash dividends declared per common share	$	0.19		$	0.17		$	0.15		$	0.12		$	0.07
Dividend payout ratio		22.62	%		27.42	%		21.43	%		18.18	%		12.73	%
Balance sheet data:
Total assets	$	3,630,313		$	3,351,767		$	3,062,166		$	2,800,691		$	2,653,641
Total investments		510,387			512,812			484,621			556,796			571,665
Loans		2,934,105			2,699,205			2,405,575			2,084,359			1,926,432
Allowance for loan losses		33,293			40,686			32,765			37,050			46,866
Deposits		3,029,783			2,741,712			2,492,291			2,279,037			2,129,260
Junior subordinated debentures		72,166			72,166			72,166			72,166			72,166
Subordinated notes payable		59,111			59,031			-			-			20,984
Shareholders' equity		302,310			273,536			308,769			281,085			257,051
Key ratios:
Return on average total assets		1.02	%		0.83	%		0.99	%		1.02	%		0.98	%
Pre-tax, Adjusted Earnings return on assets (PTAE ROA)(1)		1.52	%		1.54	%		1.40	%		1.36	%		1.41	%
Return on average shareholders' equity		12.15	%		8.77	%		9.82	%		10.29	%		10.15	%
Average shareholders' equity to average total assets		8.36	%		9.44	%		10.10	%		9.93	%		9.65	%
Net interest margin		3.73	%		3.86	%		3.91	%		3.81	%		3.99	%
Efficiency ratio(2)		66.79	%		67.91	%		70.30	%		71.01	%		71.27	%
Nonperforming assets to total assets		0.23	%		0.64	%		0.49	%		0.68	%		1.14	%
Nonperforming loans to total loans		0.11	%		0.60	%		0.38	%		0.67	%		1.02	%
Allowance for loan and credit losses to total loans		1.13	%		1.51	%		1.36	%		1.78	%		2.43	%
Allowance for loan and credit losses to nonperforming loans		1,010.41	%		250.81	%		357.89	%		265.78	%		237.75	%
Net charge-offs (recoveries) to average loans		0.19	%		(0.06)	%		0.01	%		0.05	%		0.23	%

(1) Pre-tax, Adjusted Earnings (PTAE) is a non-GAAP measure and is calculated as total revenue less noninterest expense (excluding impairment and valuation losses).  The Company believes that PTAE is a useful financial measure that enables investors and others to assess the Company's ability to generate capital to cover credit losses and is a reflection of earnings generated by the core business.  The following is a reconciliation of PTAE earnings to its most comparable GAAP measure.

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	At and for the year ended December 31,
(in thousands)	2016			2015			2014			2013			2012
Net income from continuing operations - GAAP	$	34,899		$	26,140		$	28,798		$	28,290		$	24,398
Adjusted for:
Taxable equivalent adjustment		7,531			5,720			3,807			2,760			1,907
Provision for income taxes		12,182			9,606			15,018			13,909			13,411
Severance		-			1,043			-			-			-
Provision for loan and credit losses		(2,101)			6,420			(4,155)			(8,804)			(4,768)
Net other than temporary impairment losses on securities recognized in earnings		-			-			-			-			297
Net (gain) loss on securities, other assets and other real estate owned		(121)			(369)			(2,597)			683			65
Pre-tax, Adjusted Earnings	$	52,390		$	48,560		$	40,871		$	36,838		$	35,310
Average assets	$	3,435,703		$	3,149,310		$	2,925,168		$	2,702,211		$	2,508,222
PTAE ROA		1.52	%		1.54	%		1.40	%		1.36	%		1.41	%

(2) The following table includes non-GAAP financial measures used in the computation of the efficiency ratio.  The efficiency ratio equals noninterest expense adjusted to exclude gains and losses on other real estate owned (OREO), other assets and investments, divided by the sum of tax equivalent net interest income and noninterest income.  To calculate tax equivalent net interest income, the interest earned on tax exempt loans and investment securities has been adjusted to reflect the amount that would have been earned had these investments been subject to normal income taxation.  The Company believes the efficiency ratio is a useful supplementary financial measure that enables investors to assess the performance of the Company’s operations and for comparison to the Company’s peers.

	At and for the year ended December 31,
(in thousands)	2016			2015			2014			2013			2012
Noninterest expense - GAAP	$	105,231		$	100,177		$	94,136		$	90,912		$	87,022
Adjusted for:
Net (gain) loss on securities, other assets and other real estate owned		(121)			(369)			(2,597)			683			65
Adjusted noninterest expense - non-GAAP	$	105,352		$	100,546		$	96,733		$	90,229		$	86,957
Net interest income - GAAP	$	116,051		$	111,676		$	105,888		$	95,701		$	93,378
Noninterest income - GAAP		34,160			30,667			27,909			28,606			26,720
Operating revenue		150,211			142,343			133,797			124,307			120,098
Taxable equivalent adjustment		7,531			5,720			3,807			2,760			1,907
Operating revenue - taxable equivalent - non-GAAP	$	157,742		$	148,063		$	137,604		$	127,067		$	122,005
Efficiency ratio - taxable equivalent - non-GAAP		66.79	%		67.91	%		70.30	%		71.01	%		71.27	%

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

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

From December 31, 1995, the first complete fiscal year under the current management team, to December 31, 2016, our organization has grown from a bank holding company with two bank locations and total assets of $160.4 million to a diversified financial services holding company with 15 bank locations (excluding one bank location closed in January 2017) and total assets of $3.6 billion.  We have also expanded into wealth and insurance services.  The Company has a well-capitalized balance sheet that includes common equity, subordinated notes payable and subordinated debentures. 

Earnings are derived primarily from our net interest income, which is interest income less interest expense, and our noninterest income earned from Fee-Based Lines and banking service fees, offset by noninterest

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expense. As the majority of our assets are interest-earning and our liabilities are interest-bearing, changes in interest rates impact our net interest margin, the largest component of our operating revenue (which is defined as net interest income plus noninterest income). We manage our interest-earning assets and interest-bearing liabilities to reduce the impact of interest rate changes on our operating results. We also have focused on reducing our dependency on our net interest margin by increasing our noninterest income.

We concentrate on developing an organization with personnel, management systems and products that will allow us to compete effectively and position us for growth. Although we strive to minimize costs that do not impact customer service, we continue to invest in systems and business production personnel to strengthen our future growth prospects. 

The Company is focused on achieving four financial objectives as part of its three to five year plan. Those objectives are 10% loan and deposit growth, 8% noninterest income growth and limiting noninterest expense growth to 4%. We anticipate that achieving these objectives, coupled with maintaining our asset quality, will enable us to enhance shareholder return. 

Steps taken in 2016 to realize progress on the loan, deposit and noninterest income goals include: aligning production employee variable compensation with these objectives; strengthening internal networking to enhance synergies between product lines within the Company; formalizing a leadership development program; structuring management roles to provide more accountability; setting clear expectations for all producers and continuing to work with producers who are not meeting their goals; and building customer relationships.

To further the noninterest expense objective in 2016, the Company conducted a comprehensive review of its staffing levels and expenditures in each functional area to identify areas for improvement.  The Company intends to update this study annually to continually monitor incremental improvement and new areas for emphasis.  The Company also completed a thorough analysis of its loan origination and credit underwriting process.  Based on this review, the Company intends to implement procedural changes and clarify employee responsibilities in 2017, which we believe will improve operational efficiencies, reduce costs, and improve customer satisfaction and employee morale.  Finally, the Company has initiated an ongoing review of its facility strategy with a goal of servicing its customer base in a cost-effective manner.  In 2016, this resulted in the closure of two bank locations, the combination of two bank locations in downtown Denver into one location, a planned closure of a bank location in 2017, and the relocation of the Company’s principal executive offices.  As a result of the relocation of our principal executive offices, all of our revenue producing employees in the downtown area are in one location for the first time.  The Company believes this will further strengthen internal synergies and will provide a broader platform to service the financial needs of its customers.

As discussed in “Item 1. Business” and Note 2 to the consolidated financial statements, the Company ceased the operations of its investment banking division in the first quarter of 2015.  The results of operations related to investment banking have been reported as discontinued operations.  The prior period disclosures in the following table have been adjusted to conform to the new presentation. 

Internally, management measures the contribution of the Fee-Based Lines before parent company management fees and overhead allocations.  The Company believes this to be a more useful measurement as centralized administration expenses and overhead are generally not impacted by the Fee-Based Lines, but are most affected by the operations of the Bank.  While the Company allocates a portion of the costs related to shared resources to the Fee-Based Lines, we measure their profitability based on a pre-allocation basis as it approximates the operating cash flow generated by the segment. A description of each segment is provided in Note 19 to the consolidated financial statements.

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Certain key metrics of our operating segments at or for the years ended December 31, 2016, 2015 and 2014 are as follows: 

					Corporate
					Support
	Commercial		Fee-Based		and
	Banking		Lines		Other		Consolidated
(in thousands)	2016
Operating revenue (1)	$	137,026	$	18,259	$	(5,074)	$	150,211
Net income (loss)	$	40,165	$	(1,208)	$	(4,058)	$	34,899
	2015
Operating revenue (1)	$	127,376	$	17,837	$	(2,870)	$	142,343
Net income (loss)	$	29,786	$	(542)	$	(3,175)	$	26,069
	2014
Operating revenue (1)	$	119,434	$	16,851	$	(2,488)	$	133,797
Net income (loss)	$	32,264	$	115	$	(3,372)	$	29,007

(1) Net interest income plus noninterest income.

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Noted below are some of the significant financial performance measures and operational results for 2016 and 2015:

2016	2015
Commercial Banking operating revenue increased 7.6% in 2016 to $137.0 million, while net income increased 34.8% to $40.2 million.  The increase in net income was due to an $8.7 million decrease in the provision for loan losses and a $7.0 million increase in net interest income.	Commercial Banking operating revenue increased 6.6% in 2015, while net income declined $2.5 million, primarily due to a $10.2 million increase in the provision for loan losses.
Operating revenue from the Fee-Based Lines increased 2.4% in 2016, while the net loss increased $0.7 million to a net loss of $1.2 million in 2016.	Operating revenue from the Fee-Based Lines increased 5.9% in 2015 and noninterest expense increased 7.9% in the same period.
Operating revenue declined and the net loss increased on the Corporate Support and Other segment in 2016, primarily due to the additional interest expense on the subordinated notes that were issued in June 2015.	The Corporate Support segment benefited from the recapture of past due interest income on a nonperforming loan portfolio that increased interest income $1.0 million in 2015.  Offsetting this increase was additional interest expense of $1.8 million from the new subordinated notes issuance.
Total assets grew $278.5 million to $3.6 billion during 2016, primarily due to a 9.1% year-over-year increase in net loans.	Total assets grew $289.6 million to $3.4 billion during 2015, primarily due to a 12% year-over-year increase in net loans.
Average noninterest bearing deposits, the most valuable part of the deposit portfolio, represented 43.3%  of total average deposits in 2016, compared to 41.2% in 2015.	Average noninterest bearing deposits represented 41.2% of total average deposits in 2015, compared to 42.5% in 2014.
The net interest margin on a tax-equivalent basis declined 13 basis points to 3.73%, due to the first full year of interest expense on the new subordinated notes and to a decline in loan yields.	The net interest margin on a tax-equivalent basis contracted 5 basis points to 3.86%, due to the increased interest expense on the new subordinated notes that reduced the net interest margin by 6 basis points in 2015.
Net income increased 33.9% to $34.9 million in 2016 from $26.1 million in 2015.  Positively impacting net income was an $8.5 million decrease in provision for loan losses in 2016.	Net income declined 10% to $26.1 million in 2015 from $29.0 million in 2014.  Negatively impacting net income was a $10.6 million increase in provision for loan losses in 2015.
The Company had net charge-offs of $5.3 million in 2016, compared to a net recovery of $1.5 million in 2015.	In the first quarter of 2015, the Company ceased the operations of its investment banking division in order to focus on noninterest income sources that were less transactional in nature.
Two bank locations were closed in 2016 and another is planned for 2017.  Over the past five years, the Company has closed seven bank locations.  The closures were part of the Company’s ongoing evaluation of its operations.  The Company remains committed to growing its presence in the Colorado and Arizona markets while efficiently managing the Company’s cost structure, including its occupancy costs.	In the first quarter of 2015, the Company transferred securities with a book value of $279.8 million and a fair value of $288.6 million from the available for sale category to the held to maturity category.
The Company’s principal executive offices were moved to a new location in downtown Denver.  Overall square footage in our executive offices was reduced 28%.	On June 25, 2015, the Company issued $60.0 million of unsecured fixed-to-floating rate subordinated notes due 2030 (Notes). Unless redeemed, the Notes will bear 5.625% annual interest until June 25, 2025 and thereafter until maturity in June 2030 at a floating rate equal to LIBOR plus 317 basis points.
The Company’s total risk-based capital ratio was 14.5% at the end of 2016.  Implementation of the Capital Conservation Buffer required by Basel III increased the minimum capital requirements.  See Note 17 – Regulatory Matters for additional information.	On July 22, 2015, the Company redeemed the $57.4 million in preferred stock issued to the Treasury.  The dividend rate on the preferred stock was scheduled to increase from 1.0% in 2015 to 9.0% in 2016.
	The Company’s total risk-based capital ratio was 13.7% at the end of 2015.  Implementation of Basel III in 2015 had the effect of reducing total risk-based capital.  Also impacting the composition of risk-based capital during 2015 was the issuance of the Notes which increased Tier 2 capital, while the redemption of the SBLF preferred stock in July 2015 decreased Tier 1 capital.

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This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this Form 10-K beginning on page F-1. For a discussion of the segments included in our principal activities and for certain financial information for each segment, see “Segments” discussed below and Note 19 to the consolidated financial statements.

Critical Accounting Policies

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

Allowance for Loan Losses

The allowance for loan losses is a critical accounting policy that requires subjective estimates in the preparation of the consolidated financial statements. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

In determining the appropriate level of the allowance for loan losses, we analyze the various components of the loan portfolio, including impaired loans, on an individual basis. When analyzing the adequacy, we segment the loan portfolio into components with similar characteristics, such as risk classification, past due status, type of loan, industry or collateral.  We have a systematic process to evaluate individual loans and pools of loans within our loan portfolio. We maintain a loan grading system whereby each loan is assigned a grade between 1 and 8, with 1 representing the highest quality credit, 7 representing a loan where collection or liquidation in full is highly questionable and improbable, and 8 representing a loss that has been or will be charged-off.  Loans that are graded 5 or lower are categorized as non-classified credits, while loans graded 6 and higher are categorized as classified credits that have a higher risk of loss. Grades are assigned based upon the degree of risk associated with repayment of a loan in the normal course of business pursuant to the original terms.

Differences between the actual credit outcome of a loan and the risk assessment made by the Company could negatively impact the Company’s earnings by requiring additional provision for loan losses.  As a hypothetical example, if $25.0 million of grade 3, non-classified loans were downgraded as classified at the same historical loss factor of existing classified loans, an additional $1.5 million of provision for loan losses would be required.  Conversely, a $25.0 million decrease in classified loans would result in a $1.5 million reversal of provision for loan losses.    

See Note 4 – Loans for further discussion on management’s methodology.

Fair Value

The Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), as it applies to financial assets and liabilities.  ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an

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asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Fair value may be used on a recurring basis for certain assets and liabilities such as available for sale securities and derivatives in which fair value is the primary basis of accounting.  Similarly, fair value may be used on a nonrecurring basis to evaluate certain assets or liabilities, such as impaired loans.  Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions in accordance with ASC 820 to determine the instrument’s fair value.  At December 31, 2016, $136.3 million of total assets, consisting of $133.0 million in available for sale securities and $3.3 million in derivative instruments, represented assets recorded at fair value on a recurring basis.  At December 31, 2015, $157.6 million of total assets, consisting of $153.7 million in available for sale securities and $3.9 million in derivative instruments, represented assets recorded at fair value on a recurring basis.  At December 31, 2016, the Company had  $9.4 million of single-issuer trust preferred securities (TPS)  classified as Level 3.  The fair value of these TPS is determined using broker-dealer quotes and trade data that may not be current.  These TPS are classified as Level 3 due to lack of current market data and their illiquid nature. At December 31, 2016 and 2015,  $11.2 million and $9.9 million, respectively, of total liabilities represented derivative instruments recorded at fair value on a recurring basis.  Assets recorded at fair value on a nonrecurring basis consisted of impaired loans and OREO totaling $1.4 million and $5.4 million, at December 31, 2016.  Impaired loans and OREO were $6.3 million and $5.4 million at December 31, 2015.  For additional information on the fair value of certain financial assets and liabilities see Note 18 – Fair Value Measurements.

Deferred Taxes

The Company uses the asset and liability method of accounting for income taxes.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance may be established.  We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income.  These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.  See Note 11 – Income Taxes for additional information.  A valuation allowance for deferred tax assets may be required in the future if the amounts of taxes recoverable through loss carry backs decline, if we project lower levels of future taxable income, or we project lower levels of tax planning strategies.  Such valuation allowance would be established through a charge to income tax expense that would adversely affect our operating results.

We also have other policies that we consider to be significant accounting policies; however, these policies, which are disclosed in Note 1 of the consolidated financial statements, do not meet the definition of critical accounting policies because they do not generally require us to make estimates or judgments that are difficult or subjective.

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Financial Condition

The Company had total assets of $3.6 billion and total liabilities of $3.3 billion at December 31, 2016 compared to total assets of $3.4 billion and total liabilities of $3.1 billion at December 31, 2015.  The following sections address the specific components of the balance sheets and significant matters relating to those components at and for the years ended December 31, 2016 and 2015.

Lending Activities

General. We provide a broad range of lending services, including commercial loans, commercial and residential real estate construction loans, commercial and residential real estate-mortgage loans, consumer loans, revolving lines of credit, and tax-exempt financing. Our primary lending focus is commercial and real estate lending to small and medium-sized businesses with annual sales of $5.0 million to $75.0 million, and businesses and individuals with borrowing requirements of $250,000 to $15.0 million. At December 31, 2016, substantially all of our outstanding loans were to customers within Colorado and Arizona. Interest rates charged on loans vary with the degree of risk, maturity, underwriting and servicing costs, principal amount, and extent of other banking relationships with the customer.  Interest rates are further subject to competitive pressures, money market rates, availability of funds, and government regulations. See “Net Interest Income” for an analysis of the interest rates on our loans.

Credit Procedures and Review. We address credit risk through internal credit policies and procedures, including underwriting criteria, officer and customer lending limits, a multi-layered loan approval process for larger loans, periodic document examination, justification for any exceptions to credit policies, loan review and concentration monitoring. In response to the last economic downturn, the Company expanded the resources of the credit and loan review departments to provide for a more proactive identification and management of problem credits.  In addition, we provide ongoing loan officer training and review. We have a continuous loan review process designed to promote early identification of credit quality problems, assisted by a dedicated Senior Credit Officer in each geographic market. All loan officers are charged with the responsibility of reviewing, at least on a monthly basis, all past due loans in their respective portfolios. In addition, the credit administration department establishes a watch list of loans to be reviewed by the Boardof Directors of the Bank. The loan portfolio is also monitored regularly by a loan review department that reports to the Chief Operations Officer of the Company and submits reports directly to the Audit Committee of the Board of Directors and the credit administration department.

The Company’s credit approval process is as follows:

· Internal lending limits for loans extended to a single borrower are established by the Board of Directors of the Bank. 

· Credits equal to the Bank’s internal lending limit require two signatures from either the CEO of the Bank, Chief Credit Officer or a Bank President/Senior Credit Officer. 

· Loan authority of officers is approved by the Bank’s Board of Directors, reviewed annually and updated according to the growth of the Bank.  The Board of Directors may designate different approval authorities depending on loan grade, loan type, and whether the loan is a new credit or renewal of credit.   

· The Board of Directors of the Bank designates the approval authority of the loan committee.  The presence of two of the following is required for any committee loan approval: CEO, Chief Credit Officer or a Market President.  A quorum requires at least three designated committee members to be in attendance.

· Loan officers are permitted within a 12-month period to approve up to $0.2 million in new credit per customer aggregate loan relationship.  In cases where the aggregate credit size exceeds the loan credit officer’s individual authority, the Bank President may approve the additional credit.

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

	At December 31,
	2016				2015				2014				2013				2012
(in thousands)	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
Commercial	$	1,217,732	42.0	%	$	1,175,379	44.2	%	$	977,699	41.2	%	$	824,453	40.3	%	$	729,442	38.8	%
Real estate - mortgage		1,171,123	40.4	%		1,016,268	38.2	%		989,719	41.7	%		900,864	44.0	%		880,377	46.8	%
Construction & land		174,451	6.0	%		201,281	7.6	%		181,864	7.7	%		127,952	6.2	%		120,584	6.4	%
Consumer		267,013	9.2	%		253,317	9.5	%		207,955	8.8	%		181,056	8.8	%		149,638	8.0	%
Other		103,786	3.5	%		52,960	2.0	%		48,338	2.0	%		50,034	2.5	%		46,391	2.5	%
Total loans	$	2,934,105	101.1	%	$	2,699,205	101.5	%	$	2,405,575	101.4	%	$	2,084,359	101.8	%	$	1,926,432	102.5	%
Less allowance for loan losses		(33,293)	(1.1)	%		(40,686)	(1.5)	%		(32,765)	(1.4)	%		(37,050)	(1.8)	%		(46,866)	(2.5)	%
Net loans	$	2,900,812	100.0	%	$	2,658,519	100.0	%	$	2,372,810	100.0	%	$	2,047,309	100.0	%	$	1,879,566	100.0	%

Total loans increased $234.9 million and $293.6 million in 2016 and 2015, respectively. The Real estate – mortgage loan segment contributed 65.9% of the loan portfolio growth in 2016, increasing $154.9 million.  Other loan categories with modest growth in 2016 include Commercial ($42.4 million), Consumer ($13.7 million), and Other ($50.8 million) loans, while construction & land declined $26.8 million. 

The Company saw growth across all its loan segments in 2015.  The Commercial loan segment continued to be the main contributor to loan growth, increasing $197.7 million.  Consumer loans, particularly driven by the Company’s residential mortgage product, increased $45.4 million, or 21.8%, while Construction & land increased $19.4 million or 10.7% during 2015.      

Under state law, the aggregate amount of loans we can make to one borrower is generally limited to 15% of our unimpaired capital, surplus, undivided profits and allowance for loan losses. At December 31, 2016, our individual legal lending limit was $59.0 million. The Bank’s Board of Directors has established an internal lending limit of $15.0 million for normal credit extensions and $20.0 million for the highest rated credits. To accommodate customers whose financing needs exceed our internal lending limits and to address portfolio concentration concerns, we may sell loan participations to outside participants. At December 31, 2016 and 2015, the outstanding balance of loan participations sold by us was $15.9 million and $8.3 million, respectively. At December 31, 2016 and 2015, we had loan participations purchased from other banks totaling $118.3 million and $74.0 million, respectively. We use the same analysis in deciding whether to purchase a participation in a loan as we would in deciding whether to originate the same loan. 

Due to the nature of our business as a commercial banking institution, our lending relationships are typically larger than those of a retail bank. The following table describes the number of relationships and the percentage of the dollar value of the loan portfolio by the size of the credit relationship.

	At December 31,
	2016			2015			2014
	Number of	% of loan		Number of	% of loan		Number of	% of loan
Credit Relationships	relationships	portfolio		relationships	portfolio		relationships	portfolio
Greater than $6.0 million	105	34.3	%	98	32.9	%	77	29.1	%
$3.0 million to $6.0 million	132	18.7	%	124	19.2	%	112	19.9	%
$1.0 million to $3.0 million	443	25.4	%	406	25.1	%	363	25.1	%
$0.5 million to $1.0 million	464	11.2	%	445	11.8	%	420	12.7	%
Less than $0.5 million	3,752	10.4	%	3,844	11.0	%	3,981	13.2	%
	4,896	100.0	%	4,917	100.0	%	4,953	100.0	%

The majority of the loan relationships exceeding $3.0 million are in our real estate and commercial portfolios.  At December 31, 2016 the Company had loans to lessors of nonresidential buildings in the amount of $396.6 million and loans to lessors of other real estate property in the amount of $330.3 million that exceeded 10% of total loans.  There were no other concentrations in excess of 10% of the Company’s loan portfolio at December 31, 2016.    The Company may be subject to additional regulatory supervisory oversight if its

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concentration in commercial real estate lending exceeds regulatory parameters.  Pursuant to interagency guidance issued by the Federal Reserve and other federal banking agencies, supervisory criteria were put in place to define commercial real estate concentrations as:

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

· Commercial real estate loans (as defined in the guidance) that represent 300% or more of total risk-based capital and the real estate portfolio has increased more than 50% or more during the prior 36 months.

At December 31, 2016 and 2015, the Company’s exposure to commercial real estate lending was below the parameters discussed above. 

In the ordinary course of business, we enter into various types of transactions that include commitments to extend credit. We apply the same credit standards to these commitments as we apply to our other lending activities and have included these commitments in our lending risk evaluations. Our exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. See Note 16 – Commitments and Contingencies for additional discussion on our commitments.

Commercial Loans. Commercial loans increased $42.4 million, or 3.6%, from $1.17 billion at December 31, 2015 to $1.22 billion at December 31, 2016. Commercial lending consists of loans to small and medium-sized businesses in a wide variety of industries. We provide a broad range of commercial loans, including lines of credit for working capital purposes and term loans for the acquisition of equipment and other purposes. Commercial loans are generally collateralized by inventory, accounts receivable, equipment, real estate and other commercial assets, and may be supported by other credit enhancements such as personal guarantees. However, where warranted by the overall financial condition of the borrower, loans may be unsecured and based on the cash flow of the business.    

The following table summarizes the Company’s commercial loan portfolio, segregated by the North American Industry Classification System (NAICS).

	At December 31,
	2016				2015				2014
			% of				% of				% of
			Commercial				Commercial				Commercial
(in thousands)	Balance		loan portfolio		Balance		loan portfolio		Balance		loan portfolio
Manufacturing	$	96,684	7.9	%	$	135,058	11.5	%	$	126,130	12.9	%
Finance and insurance		50,358	4.1	%		64,261	5.5	%		80,966	8.4	%
Health care		154,537	12.7	%		126,771	10.8	%		91,969	9.4	%
Real estate services		126,029	10.4	%		118,923	10.1	%		112,913	11.5	%
Construction		58,902	4.9	%		58,081	4.9	%		56,638	5.8	%
Public administration		256,332	21.0	%		221,325	18.8	%		178,778	18.2	%
All other		474,890	39.0	%		450,960	38.4	%		330,305	33.8	%
	$	1,217,732	100.0	%	$	1,175,379	100.0	%	$	977,699	100.0	%

Real Estate - Mortgage Loans. Real estate mortgage loans increased $154.9 million, or 15.2%, from $1.02 billion at December 31, 2015 to $1.17 billion at December 31, 2016.  Real estate mortgage loans include various types of loans for which we hold real property as collateral. We generally restrict commercial real estate lending activity to owner-occupied properties or to investor properties that are owned by customers with which we have a current banking relationship. We make commercial real estate loans at both fixed-and,floating-interest rates, with maturities generally ranging from five to 20 years. The Bank’s underwriting standards generally require that a commercial real estate loan not exceed 75% of the appraised value of the property securing the loan. In addition, we originate SBA 504 loans on owner-occupied properties with maturities of up to 25 years in which the SBA allows for financing of up to 90% of the project cost and takes a

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security position that is subordinated to us, as well as U.S. Department of Agriculture (USDA) Rural Development loans.

The properties securing the Company’s real estate mortgage loan portfolio are located primarily in the states of Colorado and Arizona.  At December 31, 2016 and 2015, 67% and 66% of the Company’s outstanding real estate mortgage loans were in the Colorado market, respectively.

The following table summarizes the Company’s real estate mortgage portfolio, segregated by property type.

	At December 31,
	2016				2015				2014
(in thousands)	Balance		%		Balance		%		Balance		%
Residential & commercial owner-occupied	$	475,287	40.6	%	$	436,643	43.0	%	$	422,471	42.7	%
Residential & commercial investor		695,836	59.4	%		579,625	57.0	%		567,248	57.3	%
	$	1,171,123	100.0	%	$	1,016,268	100.0	%	$	989,719	100.0	%

Construction and land.  Construction and land decreased $26.8 million, or 13.3%, from $201.3 million at December 31, 2015 to $174.5 million at December 31, 2016. We have a portfolio of loans for the acquisition and development of land for residential building projects.  We also finance construction projects involving one- to four-family residences.  We provide financing to residential developers that we believe have demonstrated a favorable record of accurately projecting completion dates and budgeting expenses. We provide loans for the construction of both pre-sold projects and projects built prior to the location of a specific buyer (speculative loan), although speculative loans are provided on a more selective basis. Residential construction loans are due upon the sale of the completed project and are generally collateralized by first liens on the real estate and have floating interest rates. In addition, these loans are generally secured by personal guarantees to provide an additional source of repayment. We typically require a permanent financing commitment or prequalification be in place before we make a residential construction loan. Moreover, we generally monitor construction draws monthly and inspect property to ensure that construction is progressing as projected. Our underwriting standards generally require that the principal amount of a speculative loan be no more than 75% of the appraised value of the completed construction project or 80% of pre-sold projects. Values are determined primarily by approved independent appraisers.

We also originate loans to finance the construction of multi-family, office, industrial, retail and tax credit projects. These projects are predominantly owned by the user of the property, or are sponsored by financially strong developers who maintain an ongoing banking relationship with us. Our underwriting standards generally require that the principal amount of these loans be no more than 75% of the appraised value. Values are determined primarily by approved independent appraisers.

Construction and land loans may be more adversely affected by conditions in the real estate markets or in the general economy.  The properties securing the construction and land portfolio are generally located in the states of Colorado and Arizona. At December 31, 2016 and 2015, 71% and 80%, respectively, of the Company’s construction and land loans outstanding were generated in the Colorado market.

Consumer Loans.  Consumer loans increased $13.7 million, or 5.4%, from $253.3 million at December 31, 2015 to $267.0 million at December 31, 2016.  We provide a broad range of consumer loans to customers, including personal lines of credit, home equity loans and automobile loans. In order to improve customer service, continuity and customer retention, the same loan officer often services the banking relationships of both the business and business owners or management. We offer residential mortgage loans as part of our consumer mortgage products.  This residential mortgage financing program offers competitive pricing and terms for the purchase, refinance or permanent financing of mortgage loans, with an average loan size of approximately $800,000.  For primary residences, the standard loan-to-value is 80% for loans up to $1.5 million.  The loan-to-value decreases as the size of the loan increases, with a standard loan-to-value of 55% on loans in excess of $3.0 million. In addition, we generally only finance 5/1, and 7/1 adjustable-rate

35

mortgage loans as well as 15-year fixed-rate loans.  Residential mortgage loans at December 31, 2016 and 2015, totaled $197.9 million or 74% and $183.2 million or 72%, respectively, of the consumer loan portfolio.

Other loans.  Other loans increased $50.8 million, or 96.0%, from $53.0 million at December 31, 2015 to $103.8 million at December 31, 2016.  Other loans include lending products such as taxable and tax-exempt leasing, not defined as commercial real estate, acquisition and development, construction, or consumer loans. 

Nonperforming Assets

Our nonperforming assets consist of nonaccrual loans, restructured loans, loans past due 90 days or more, OREO and other repossessed assets. Nonaccrual loans are those loans for which the accrual of interest has been discontinued. Impaired loans are defined as loans for which, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement (all of which were on a nonaccrual basis). The following table sets forth information with respect to these assets at the dates indicated.

	At December 31,
(in thousands)	2016			2015			2014			2013			2012
Nonperforming loans:
Loans 90 days or more past due and still accruing interest	$	657		$	505		$	161		$	19		$	35
Nonaccrual loans:
Commercial		2,202			15,109			3,317			1,330			3,324
Real estate - mortgage		269			499			3,416			10,504			10,779
Construction & land		-			27			135			1,986			4,926
Consumer and other		167			82			2,126			101			648
Total nonaccrual loans		2,638			15,717			8,994			13,921			19,677
Total nonperforming loans		3,295			16,222			9,155			13,940			19,712
OREO and repossessed assets		5,079			5,079			5,819			5,097			10,577
Total nonperforming assets	$	8,374		$	21,301		$	14,974		$	19,037		$	30,289
Performing renegotiated loans	$	23,612		$	28,196		$	27,275		$	29,683		$	43,321
Allowance for loan losses	$	33,293		$	40,686		$	32,765		$	37,050		$	46,866
Allowance for credit losses		-			-			-			-			-
Allowance for loan and credit losses	$	33,293		$	40,686		$	32,765		$	37,050		$	46,866
Nonperforming assets to total assets		0.23	%		0.64	%		0.49	%		0.68	%		1.14	%
Nonperforming loans to total loans		0.11	%		0.60	%		0.38	%		0.67	%		1.02	%
Nonperforming loans and OREO to total loans and OREO		0.28	%		0.79	%		0.62	%		0.91	%		1.56	%
Allowance for loan and credit losses to total loans (excluding loans held for sale)		1.13	%		1.51	%		1.36	%		1.78	%		2.43	%
Allowance for loan and credit losses to nonperforming loans		1,010.41	%		250.81	%		357.89	%		265.78	%		237.75	%

Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed on nonaccrual status when it becomes 90 days past due. When a loan is placed on nonaccrual status, all accrued and unpaid interest on the loan is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. When the issues relating to a nonaccrual loan are finally resolved, there may ultimately be an actual write-down or charge-off of the principal balance of the loan, which may necessitate additional charges to earnings. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to the borrower, or the reduction of interest or principal, have been granted due to the borrower’s weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. Interest income that would have been recorded had nonaccrual loans performed in accordance with their original contract terms during 2016, 2015 and 2014,  was $0.1 

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million, $0.2 million and $0.3 million, respectively.  OREO represents real property taken by the Company either through foreclosure or through a deed in lieu thereof from the borrower. Repossessed assets include vehicles and other commercial assets acquired under agreements with delinquent borrowers.  Subsequent to acquisition at fair value, repossessed assets and OREO are carried at the lesser of cost or fair market value, less selling costs.  See Note 18 – Fair Value Measurements for additional discussion on the valuation of OREO assets.

Nonperforming assets decreased $12.9 million to $8.4 million at December 31, 2016, from $21.3 million at December 31, 2015.  The following table summarizes nonperforming assets by type and market.

	2016										2015
							Total in		NPAs								Total in		NPAs
(in thousands)	Colorado		Arizona		Total		category		as a %		Colorado		Arizona		Total		category		as a %
Commercial	$	1,966	$	236	$	2,202	$	1,217,732	0.18	%	$	14,255	$	854	$	15,109	$	1,175,379	1.29	%
Real estate - mortgage		-		269		269		1,171,123	0.02	%		-		499		499		1,016,268	0.05	%
Construction & land		657		-		657		174,451	0.38	%		27		-		27		201,281	0.01	%
Consumer		167		-		167		267,013	0.06	%		82		505		587		253,317	0.23	%
Other loans		-		-		-		103,786	-	%		-		-		-		52,960	-	%
OREO and repossessed assets		4,903		176		5,079		5,079	NA			4,903		176		5,079		5,079	NA
Nonperforming assets	$	7,693	$	681	$	8,374	$	2,939,184	0.28	%	$	19,267	$	2,034	$	21,301	$	2,704,284	0.79	%

All nonperforming loan categories, except construction and land, reflected improvements year over year.  The decline was primarily attributed to the resolution of an $11.2 million commercial credit, disclosed as impaired and on nonaccrual in 2015.  The Company’s OREO portfolio consisted of two properties at December 31, 2016.  The Company has entered into a contract to sell its largest OREO property, located in Colorado and comprising 97% of the overall OREO balance.  The Company does not expect a material gain or loss on the disposition of this property.  The Company has dedicated significant resources to the workout and resolution of nonaccrual loans and OREO, and continues to closely monitor the financial condition of its clients.  

In addition to the nonperforming assets described above, the Company had 56 customer relationships considered by management to be potential problem loans with outstanding principal of approximately $49.2 million.  A potential problem loan is one as to which management has concerns about the borrower’s future performance under the terms of the loan contract.  These loans are current as to the principal and interest and, accordingly, are not included in the nonperforming asset categories. However, further deterioration may result in the loan being classified as nonperforming. The level of potential problem loans is factored into the determination of the adequacy of the allowance for loan losses.

Allowance for Loan Losses. The allowance for loan losses consists of three elements: (i) specific reserves determined in accordance with ASC Topic 310 – Receivables based on probable losses on specific loans; (ii) general reserves determined in accordance with guidance in ASC Topic 450 – Contingencies, based on historical loan loss experience adjusted for other qualitative risk factors both internal and external to the Company; and (iii) unallocated reserves, which is intended to capture potential misclassifications in the loan grading system.

The allowance for loan losses represents management’s recognition of the risks of extending credit and its evaluation of the quality of the loan portfolio. The allowance is maintained to provide for probable credit losses related to specifically identified loans and for probable incurred losses in the loan portfolio at the balance sheet date. The allowance is based on various factors affecting the loan portfolio, including a review of problem loans, business conditions, historical loss experience, evaluation of the quality of the underlying collateral, and holding and disposal costs. The allowance is increased by additional charges to operating income and reduced by loans charged off, net of recoveries.

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	For the year ended December 31,
(in thousands)	2016			2015			2014			2013			2012
Balance of allowance for loan losses at beginning of period	$	40,686		$	32,765		$	37,050		$	46,866		$	55,629
Charge-offs:
Commercial		(7,767)			(588)			(1,956)			(613)			(1,122)
Real estate - mortgage		-			(186)			(52)			(3,055)			(2,789)
Construction & land		-			(107)			(50)			(796)			(4,002)
Consumer		(37)			(130)			(453)			(122)			(653)
Other		-			(285)			(6)			(5)			(34)
Total charge-offs		(7,804)			(1,296)			(2,517)			(4,591)			(8,600)
Recoveries:
Commercial		1,284			239			373			1,035			2,021
Real estate - mortgage		31			1,112			435			1,099			746
Construction & land		1,165			1,155			1,519			1,399			1,760
Consumer		32			19			54			45			43
Other		-			272			6			1			-
Total recoveries		2,512			2,797			2,387			3,579			4,570
Net recoveries (charge-offs)		(5,292)			1,501			(130)			(1,012)			(4,030)
Provision for loan losses charged to operations		(2,101)			6,420			(4,155)			(8,804)			(4,733)
Balance of allowance for loan losses at end of period	$	33,293		$	40,686		$	32,765		$	37,050		$	46,866
Ratio of net (recoveries) charge-offs to average loans		0.19	%		(0.06)	%		0.01	%		0.05	%		0.23	%
Average loans outstanding during the period	$	2,793,516		$	2,517,766		$	2,259,265		$	1,991,251		$	1,743,473

Additions to the allowance for loan losses, which are charged as expenses on our consolidated statements of income, are made periodically to maintain the allowances at the appropriate level, based on our analysis of the potential risk in the loan and commitment portfolios. Loans charged off, net of amounts recovered from previously charged off loans, reduce the allowance for loan losses. The amount of the allowance is a function of the levels of loans outstanding, the level of nonperforming loans, historical loan loss experience, amount of loan losses charged against the reserve during a given period and current economic conditions. Federal regulatory agencies, as part of their examination process, review our loans and allowance for loan and credit losses. We believe that our allowance for loan and credit losses is adequate to cover anticipated loan and credit losses. However, management may determine a need to increase the allowances for loan and credit losses, or regulators, when reviewing the Bank’s loan and commitment portfolio in the future, may request the Bank increase such allowances. Either of these events could adversely affect our earnings. Further, there can be no assurance that actual loan and credit losses will not exceed the allowances for loan and credit losses.

The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in actual and expected credit losses. These changes are reflected in both the general and unallocated reserves. The historical loss ratios and estimated risk factors related to segmenting our loan portfolio, which are key considerations in this analysis, are updated quarterly.  The review of reserve adequacy is performed by executive management and presented to the Audit Committee quarterly for its review and consideration. For additional information on the Company’s methodology for estimating the allowance for loan and credit losses, see Note 4 – Loans. 

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The table below provides an allocation of the allowance for loan and credit losses by loan type; however, allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories:

	At December 31,
	2016					2015					2014					2013					2012
			Loans in					Loans in					Loans in					Loans in					Loans in
			category					category					category					category					category
			as a %					as a %					as a %					as a %					as a %
			of total					of total					of total					of total					of total
	Amount of		gross			Amount of		gross			Amount of		gross			Amount of		gross			Amount of		gross
(in thousands)	allowance		loans			allowance		loans			allowance		loans			allowance		loans			allowance		loans
Commercial	$	15,398		41.5	%	$	24,215		43.5	%	$	14,614		40.6	%	$	14,103		39.6	%	$	13,448		37.9	%
Real estate - mortgage		11,475		39.9	%		10,372		37.6	%		12,463		41.1	%		14,919		43.2	%		17,832		45.7	%
Construction & land		1,997		6.0	%		2,111		7.5	%		2,316		7.6	%		3,346		6.1	%		9,893		6.3	%
Consumer		2,803		9.1	%		2,592		9.4	%		2,329		8.7	%		2,471		8.7	%		3,061		7.8	%
Other		945		3.5	%		643		2.0	%		488		2.0	%		479		2.4	%		451		2.3	%
Unallocated		675		-	%		753		-	%		555		-	%		1,732		-	%		2,181		-	%
Total	$	33,293		100.0	%	$	40,686		100.0	%	$	32,765		100.0	%	$	37,050		100.0	%	$	46,866		100.0	%

We believe that any allocation of the allowance into categories creates an appearance of precision that does not exist. The allocation table should not be interpreted as an indication of the specific amounts, by loan classification, to be charged to the allowance. We believe that the table is a useful device for assessing the adequacy of the allowance as a whole. The allowance is utilized as a single unallocated allowance available for all loans.  As part of the overall allowance, the Company maintains an unallocated portion that is intended to capture the inherent risk that certain loans may be assigned an incorrect loan grade.  The Company determines the level of the unallocated allowance by reference to its migration of historical losses and the percentage of loans identified as incorrectly graded through the loan review process. 

The Company recorded a $2.1 million provision for loan losses reversal during 2016 compared to a $6.4 provision for loan loss in 2015.  The negative provision was due to improvement in the credit quality of the loan portfolio, current year recoveries and the release of a specific reserve on an impaired credit that is discussed below.  Nonperforming assets declined $12.9 million, or 60.7% to $8.4 million at December 31, 2016 from $21.3 million a year earlier.  The decline in nonperforming assets was due to the resolution of an $11.2 million commercial credit, disclosed as impaired in 2015.  Resolution of this credit in 2016 included payments of $6.3 million, a net charge-off of $4.9 million and the release of a $2.3 million specific reserve in 2015.  The Company had charge-offs of $7.8 million and $1.3 million during 2016 and 2015, respectively.  The Company had recoveries of $2.5 million and $2.8 million in 2016 and 2015, respectively.  Although the Company continues to record charge-offs, management believes that its credit quality outlook remains favorable and that the Company’s allowance for loan and credit losses provides adequate coverage for probable loan and credit losses.  The allowance for loan and credit losses to total loans was 1.13% and 1.51% at December 31, 2016 and 2015, respectively.  The allowance for loan and credit losses to nonperforming loans was 1,010.4%  and 250.8% at December 31, 2016 and 2015, respectively.  It is possible management may determine a need to increase the allowance for loan and credit losses due to changes in the factors considered by management in evaluating the adequacy of the allowance for loan and credit losses.  Such determination could have an adverse effect in the level of future loan and credit loss provisions and the Company’s earnings. 

Investments

The investment portfolio is primarily composed of residential mortgage-backed securities (MBS) explicitly (GNMA) and implicitly (FNMA and FHLMC) backed by the U.S. Government, with the majority of the portfolio either maturing or repricing within one to five years. The portfolio does not include any securities exposed to sub-prime mortgage loans. The investment portfolio also includes single-issuer TPS and corporate debt securities. The corporate debt securities portfolio primarily consists of senior and subordinated debentures issued by the financial services industry.  None of the issuing institutions are in default nor have interest payments on the TPS been deferred.  Our investment strategies are reviewed in meetings of the Asset-Liability Management Committee (ALCO).

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Certain TPS and corporate debt securities held by the Company are subject to deduction from regulatory capital under the Corresponding Deduction Approach promulgated in Basel III.  These deductions are being phased in over a three-year period beginning in 2015, which will allow the Company to mitigate the impact of the deduction of the impacted securities through calls, maturities and sales.  As such, the Company expects its portfolio of TPS and corporate debt securities to decrease in future periods. 

In the first quarter of 2015, the Company transferred MBS and municipal securities with a book value of $279.8 million and a fair value of $288.6 million from the available for sale category to the held to maturity category.  The net pre-tax unrealized gain on these securities at the time of transfer was $8.8 million and is now part of the amortized cost basis of the securities that will be amortized to interest income over the life of the securities.  The amortization of this net pre-tax unrealized gain will be offset by the amortization of the related pre-tax amount recorded in accumulated other comprehensive income.  There will be no effect to interest income as a result of this transfer.  There were no security transfers between the available for sale and held to maturity categories during 2016. 

Our goals with respect to the securities portfolio are to:

· Maximize safety and soundness;

· Provide adequate liquidity;

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

· Complement asset/liability management strategies.

The following table sets forth the book value of the securities in our investment portfolio by type at the dates indicated.  See Note 3 – Investments for additional information.

	At December 31,						2016 vs 2015				2015 vs 2014
							Increase (decrease)				Increase (decrease)
(in thousands)	2016		2015		2014		Amount		%		Amount		%
Mortgage-backed securities	$	319,978	$	312,658	$	283,644	$	7,320	2.3	%	$	29,014	10.2	%
Trust preferred securities		48,244		56,607		72,844		(8,363)	(14.8)	%		(16,237)	(22.3)	%
Corporate debt securities		92,077		103,736		101,210		(11,659)	(11.2)	%		2,526	2.5	%
Municipal securities		38,723		27,350		15,446		11,373	41.6	%		11,904	77.1	%
Other investments		11,365		12,461		11,477		(1,096)	(8.8)	%		984	8.6	%
Total	$	510,387	$	512,812	$	484,621	$	(2,425)	(0.5)	%	$	28,191	5.8	%

At December 31, 2016, investments represented 14.06% of total assets compared to 15.30%  at December 31, 2015.  Available for sale securities had a net unrealized gain of $2.7 million at December 31, 2016. 

At December 31, 2016, the Company’s available for sale securities in a temporary unrealized loss position of $0.6 million consisted primarily of TPS.  The fair value of these securities is expected to recover as the securities approach their stated maturity or repricing date.    

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Other investments consist primarily of FHLB stock required to support a borrowing base with the FHLB.  FHLB stock holdings are largely dependent upon the Company’s liquidity position.  To the extent the need for wholesale funding increases or decreases, the Company may purchase additional or sell excess FHLB stock, respectively.  During 2016, other investments decreased $1.1  million due to net redemptions of FHLB stock.

The following table sets forth the book value,  maturity and approximate yield of the securities in our investment portfolio at December 31, 2016. Other investments include stock in the Federal Home Loan Bank and the Federal Reserve Bank, which have no maturity date.  These investments have been included in the total column only.

��

	Maturity
	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	$	1	2.38	%	$	486	5.26	%	$	12,094	4.35	%	$	307,397	2.59	%	$	319,978	2.66	%
Trust preferred securities		-	-	%		-	-	%		-	-	%		48,244	3.84	%		48,244	3.84	%
Corporate debt securities		35,336	4.84	%		43,750	5.46	%		12,991	3.91	%		-	-	%		92,077	5.00	%
Municipal securities		874	2.00	%		25,461	3.99	%		3,891	4.09	%		8,497	4.86	%		38,723	4.15	%
Other investments		-	-	%		-	-	%		-	-	%		2,173	3.32	%		11,365	5.16	%
Total	$	36,211	4.77	%	$	69,697	4.93	%	$	28,976	4.11	%	$	366,311	2.81	%	$	510,387	3.36	%

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

Excluding securities issued by government-sponsored entities, the investment portfolio at December 31, 2016 did not include any single issuer for which the aggregate carrying amount exceeded 10% of shareholders’ equity.

Other Assets

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

	At December 31,						2016 vs 2015				2015 vs 2014
							Increase (decrease)				Increase (decrease)
(in thousands)	2016		2015		2014		Amount		%		Amount		%
Intangible assets, net	$	1,326	$	1,926	$	2,526	$	(600)	(31.2)	%	$	(600)	(23.8)	%
Bank-owned life insurance		53,674		49,373		48,040		4,301	8.7	%		1,333	2.8	%
Premises and equipment, net		11,019		6,122		7,250		4,897	80.0	%		(1,128)	(15.6)	%
Accrued interest receivable		12,223		10,362		9,617		1,861	18.0	%		745	7.7	%
Deferred income taxes, net		19,901		22,221		20,008		(2,320)	(10.4)	%		2,213	11.1	%
Other real estate owned		5,079		5,079		5,819		-	-	%		(740)	(12.7)	%
Other		19,842		18,041		19,910		1,801	10.0	%		(1,869)	(9.4)	%
Total	$	123,064	$	113,124	$	113,170	$	9,940	8.8	%	$	(46)	-	%

Intangible Assets.  Intangible assets primarily represent client relationship lists. The Company recognized $0.6 million of intangible asset amortization from continuing operations during the years ended December 31, 2016 and 2015.   Other than amortization, no other activity occurred in intangible assets during 2016 and 2015. 

Bank-Owned Life Insurance (BOLI).    BOLI increased $4.3 million in 2016 to $53.7 million at December 31, 2016.  During 2016, the Company purchased additional policies of $3.2 million, had an increase of $1.3 million due to growth in the cash surrender values of the underlying policies and claims of $0.2 million.  BOLI increased $1.3 million in 2015 to $49.4 million at December 31, 2015, solely due to changes in the cash surrender value of the underlying policies.     

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Deferred Income Taxes, net. Deferred income taxes decreased $2.3 million in 2016 to $19.9 million at December 31, 2016.  The decrease was primarily from the tax effect of the $7.4 million decrease in the allowance for loan losses in 2016.  Deferred income taxes increased $2.2 million to $22.2 million at December 31, 2015.  The increase was primarily due to the tax effect of the $7.9 million increase in the allowance for loan losses, offset by a decline in deferred tax assets for net operating loss carryforwards and accrued bonuses.  Deferred income taxes are recorded using current statutory tax rates.  If the statutory tax rates were to decrease, the adjustment to deferred income taxes would result in a non-cash charge to income tax expense.  See Note 11 – Income Taxes for additional discussion of income taxes and deferred tax items.

Other Real Estate Owned.  During 2016, the Company had no OREO activity.  In 2015, OREO decreased $0.7 million to $5.1 million at December 31, 2015 due to sales activity. At December 31, 2016, the Company held two properties, with one Colorado property comprising over 97% of the total OREO balance.  The Company has entered into a contract to sell the Colorado property and does not expect a material gain or loss on the disposition. 

Other Assets.  Other assets increased $1.8 million during 2016 to $19.8 million at December 31, 2016.  The increase is primarily due to a receivable from the Company’s landlord on reimbursement for leasehold improvements on the new executive office lease.  The reimbursement will be accounted for as an incentive and recognized as a reduction to rent over the lease term.  In 2015, other assets declined $1.9 million to $18.0 million at December 31, 2015.  The decline in other assets in 2015 was primarily attributable to a $1.0 million decrease in the fair market value of derivative assets and a $0.9 million net decrease in various other assets.

Deposits

Our primary source of funds has historically been customer deposits. We offer a variety of accounts for depositors, which are designed to attract both short- and long-term deposits. These accounts include certificates of deposit (CDs), money market accounts, savings accounts, checking accounts, and individual retirement accounts. In the first quarter of 2014, the Company commenced an initiative to move customer balances out of securities sold under agreement to purchase (Customer Repurchases) and into other deposit products.  In 2016, deposit generation was concentrated within the interest-bearing ($128.5 million addition) and noninterest-bearing ($102.1 million addition) demand deposit categories, which contributed 44.6% and 35.5% of the total deposit growth, respectively.  Average interest-bearing and noninterest-bearing deposits increased $19.6 million and $162.5 million, from $585.2 million and $1.08 billion, respectively, at December 31, 2015.  We believe we receive a large amount of noninterest-bearing deposits because we provide customers the option of paying for treasury management services in cash or by maintaining additional noninterest-bearing account balances.  The Company’s noninterest-bearing deposits represented over 42% and 43% of total deposits at December 31, 2016 and 2015, respectively.  Interest-bearing accounts earn interest at rates based on competitive market factors and our desire to increase or decrease certain types of maturities or deposits.

The Company views its reciprocal Certificate of Deposit Account Registry Service ® (CDARS) and Insured Cash Sweep (ICS) accounts as customer-related deposits.  The CDARS and ICS programs are provided through a third party and are designed to provide full FDIC insurance on deposit amounts by exchanging or reciprocating larger depository relationships with other member banks. Depositor funds are broken into smaller amounts and placed with other banks that are members of the network. Each member bank issues deposit amounts at a level that the entire deposit is eligible for FDIC insurance. CDARS and ICS are technically brokered deposits; however, the Company considers the reciprocal deposits placed through these programs as core funding due to the customer relationship that generated the transaction and does not report the balances as brokered sources in its internal or external financial reports.  The Company had balances of $327.8 million and $236.7 million in CDARS and ICS accounts at December 31, 2016 and 2015, respectively.  

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The following tables present the average balances for each major category of deposits and the weighted average interest rates paid for interest-bearing deposits for the periods indicated.

	For the year ended December 31,
	2016				2015				2014
			Weighted				Weighted				Weighted
			average				average				average
	Average		interest		Average		interest		Average		interest
(in thousands)	balance		rate %		balance		rate %		balance		rate %
Money market	$	842,870	0.27	%	$	758,389	0.28	%	$	610,525	0.32	%
Interest-bearing demand		604,799	0.15	%		585,241	0.13	%		488,255	0.18	%
Savings		18,904	0.05	%		18,015	0.06	%		15,140	0.07	%
Certificates of deposit		154,362	0.40	%		175,482	0.42	%		229,511	0.44	%
Total interest-bearing deposits		1,620,935	0.24	%		1,537,127	0.24	%		1,343,431	0.29	%
Noninterest-bearing demand accounts		1,239,819	-	%		1,077,283	-	%		993,685	-	%
Total deposits	$	2,860,754	0.13	%	$	2,614,410	0.14	%	$	2,337,116	0.17	%

Maturities of CDs of $100,000 and more at December 31, 2016, are as follows:

(in thousands)	Amount
Remaining maturity:
Three months or less	$	48,517
Over three months through six months		35,472
Over six months through 12 months		31,709
2018		7,627
2019		2,475
2020		1,874
2021		735
Total	$	128,409

Deposits overall increased $288.1 million or 10.5% and $249.4 million or 10.0% to $3.0 billion and $2.7 billion at December 31, 2016 and 2015, respectively.  CDs decreased $1.2 million or (0.8)% and $58.0 million or (27.5)% at December 31, 2016 and 2015, respectively.  The Company has intentionally priced CDs out of its portfolio due to the relatively high cost of these deposits. 

Short-Term Borrowings

Our short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, which generally mature within 90 days or less, and a line of credit with the FHLB typically used as an overnight borrowing source.

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The following table sets forth information relating to our short-term borrowings during the years ended December 31, 2016, 2015 and 2014. See the Liquidity and Capital Resources section below and Note 8 to the consolidated financial statements for further discussion.

	At or for the year ended December 31,
(in thousands)	2016			2015			2014
Federal funds purchased
Balance at end of period	$	-		$	-		$	-
Average balance outstanding for the period		2,038			1,250			9,290
Maximum amount outstanding at any month end during the period		16,443			7,841			96,044
Weighted average interest rate for the period		0.68	%		0.32	%		0.40	%
Weighted average interest rate at period end		-	%		-	%		-	%
FHLB overnight advances
Balance at end of period	$	106,230		$	132,000		$	112,469
Average balance outstanding for the period		82,803			61,078			104,213
Maximum amount outstanding at any month end during the period		235,000			132,000			260,000
Weighted average interest rate for the period		0.55	%		0.29	%		0.24	%
Weighted average interest rate at period end		0.72	%		0.48	%		0.25	%
Securities sold under agreements to repurchase
Balance at end of period	$	27,639		$	47,459		$	49,976
Average balance outstanding for the period		45,967			57,280			83,543
Maximum amount outstanding at any month end during the period		71,014			68,613			115,309
Weighted average interest rate for the period		0.06	%		0.06	%		0.18	%
Weighted average interest rate at period end		0.07	%		0.06	%		0.08	%

The following tables contain supplemental information on securities sold under agreements to repurchase during the years ended December 31, 2016, 2015 and 2014.  The Company uses Customer Repurchases as a way to enhance our customers' interest-earning ability.  We do not consider Customer Repurchases to be a wholesale funding source but rather an additional treasury management service provided to our customer base. 

	Average balance for quarter ended
(in thousands)	March 31,		June 30,		September 30,		December 31,
Year
2016	$	46,615	$	34,754	$	57,400	$	44,985
2015		54,707		61,626		60,687		52,090
2014		104,534		79,615		92,429		58,007
	Ending balance for quarter ended
(in thousands)	March 31,		June 30,		September 30,		December 31,
Year
2016	$	39,141	$	37,908	$	52,114	$	27,639
2015		58,814		58,328		62,182		47,459
2014		89,521		74,565		76,041		49,976
	Highest monthly balance for quarter ended
(in thousands)	March 31,		June 30,		September 30,		December 31,
Year
2016	$	51,225	$	37,908	$	71,014	$	56,709
2015		59,920		68,613		62,182		53,014
2014		115,309		81,700		112,371		61,803

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Long-Term Debt

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

	At December 31,
(in thousands)	2016		2015
Junior subordinated debentures:
CoBiz Statutory Trust I	$	20,619	$	20,619
CoBiz Capital Trust II		30,928		30,928
CoBiz Capital Trust III		20,619		20,619
Total junior subordinated debentures	$	72,166	$	72,166
Other long-term debt:
Subordinated notes payable ($60,000 face amount)	$	59,111	$	59,031

For a discussion of long-term debt and for certain financial information for each issuance, see Note 9 – Long-Term Debt.

Results of Operations

The following table presents, for the periods indicated, certain information related to our results of operations, followed by discussion of the major components of revenues, expense and performance.

During the first quarter of 2015, the Company ceased the operations of its investment banking division.  The table below reports, for all periods presented, the results of operations associated with this business line as discontinued operations, net of tax. See Note 2 – Discontinued Operations for additional information.

	For the year ended December 31,						2016 vs 2015				2015 vs 2014
							Increase (decrease)				Increase (decrease)
(in thousands)	2016		2015		2014		Amount		%		Amount		%
INCOME STATEMENT DATA
Interest income	$	127,782	$	121,266	$	114,317	$	6,516	5.4	%	$	6,949	6.1	%
Interest expense		11,731		9,590		8,429		2,141	22.3	%		1,161	13.8	%
Net interest income before provision for loan losses		116,051		111,676		105,888		4,375	3.9	%		5,788	5.5	%
Provision for loan losses		(2,101)		6,420		(4,155)		(8,521)	(132.7)	%		10,575	254.5	%
Net interest income after provision for loan losses		118,152		105,256		110,043		12,896	12.3	%		(4,787)	(4.4)	%
Noninterest income		34,160		30,667		27,909		3,493	11.4	%		2,758	9.9	%
Noninterest expense		105,231		100,177		94,136		5,054	5.0	%		6,041	6.4	%
Income before taxes		47,081		35,746		43,816		11,335	31.7	%		(8,070)	(18.4)	%
Provision for income taxes		12,182		9,606		15,018		2,576	26.8	%		(5,412)	(36.0)	%
Net income from continuing operations		34,899		26,140		28,798		8,759	33.5	%		(2,658)	(9.2)	%
Net income (loss) from discontinued operations, net of tax		-		(71)		209		71	100.0	%		(280)	(134.0)	%
Net income	$	34,899	$	26,069	$	29,007	$	8,830	33.9	%	$	(2,938)	(10.1)	%
Basic earnings per common share from continuing operations	$	0.84	$	0.63	$	0.69
Diluted earnings per common share from continuing operations	$	0.84	$	0.62	$	0.69
Basic earnings (loss) per common share from discontinued operations	$	-	$	-	$	0.01
Diluted earnings (loss) per common share from discontinued operations	$	-	$	-	$	0.01
Basic earnings per common share	$	0.84	$	0.63	$	0.70
Diluted earnings per common share	$	0.84	$	0.62	$	0.70
Cash dividends declared per common share	$	0.19	$	0.17	$	0.15

Earnings Performance. Net income for the year ended December 31, 2016 was $34.9 million, a 33.9% increase from $26.1 million a year earlier.  Return on average assets increased to 1.02% for 2016 compared

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to 0.83% a year earlier.  Return on average shareholders’ equity also increased for 2016 to 12.15% from 8.77% in 2015.  The financial improvement in 2016 was due to an increase in net interest income of $4.4 million and a decrease of $8.5 million in the provision for loan losses in 2016 over 2015. 

Net income for the year ended December 31, 2015 was $26.1 million, a decline of 10.1% from $29.0 million a year earlier.  Return on average assets declined to 0.83% for 2015 compared to 0.99% a year earlier.  Return on average shareholders’ equity also declined for 2015 to 8.77% from 9.82% in 2014.  While net interest income expanded $5.8 million in 2015 over 2014, a $10.6 million increase in the provision for loan losses in 2015 over 2014 more than offset the increase.  Net income in 2014 also benefited from a pre-tax net gain on securities, other assets and OREO of $2.6 million.  The net gain from these items in 2015 totaled $0.4 million, a decline of $2.2 million from 2014.

Earnings per common share on a diluted basis (from continuing operations) for the year ended December 31, 2016, 2015 and 2014, was $0.84, $0.62 and $0.69, respectively.

Net Interest Income. The largest component of our net income is our net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.

The majority of our assets are interest-earning and our liabilities are interest-bearing.  Accordingly, changes in interest rates may impact our net interest margin. The FOMC uses the federal funds rate, which is the interest rate used by banks to lend to each other, to influence interest rates and the national economy. Changes in the federal funds rate have a direct correlation to changes in the prime rate, the underlying index for most of the variable-rate loans issued by the Company.  The target federal funds rate was held at a range of 0-25 basis points between December 2008 and December 2015.  On December 17, 2015, the FOMC increased the target rate to 25-50 basis points, the first increase since June 2006.  The target rate was increased again in December 2016 to 50-75 basis points.  As the Company is asset sensitive, low rates negatively impact the Company’s earnings and net interest margin and the Company will benefit as the target rate increases.

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

	For the year ended December 31,
	2016							2015							2014
				Interest		Average					Interest		Average					Interest		Average
	Average			earned		yield or		Average			earned		yield or		Average			earned		yield or
(in thousands)	balance			or paid		cost (3)		balance			or paid		cost (3)		balance			or paid		cost (3)
Assets
Federal funds sold and other	$	32,437		$	166	0.51	%	$	24,142		$	58	0.24	%	$	20,518		$	102	0.50	%
Investment securities (1)		483,328			13,412	2.77	%		499,219			13,935	2.79	%		522,822			15,742	3.01	%
Loans (1)(2)		2,793,516			121,735	4.36	%		2,517,766			112,994	4.49	%		2,259,265			102,281	4.53	%
Total interest-earning assets	$	3,309,281		$	135,313	4.09	%	$	3,041,127		$	126,987	4.18	%	$	2,802,605		$	118,125	4.21	%
Noninterest-earning assets		126,422							108,183							122,563
Total assets	$	3,435,703						$	3,149,310						$	2,925,168
Liabilities and Shareholders' Equity
Deposits
Money market	$	842,870		$	2,298	0.27	%	$	758,389		$	2,102	0.28	%	$	610,525		$	1,954	0.32	%
Interest-bearing demand		604,799			934	0.15	%		585,241			789	0.13	%		488,255			886	0.18	%
Savings		18,904			10	0.05	%		18,015			10	0.06	%		15,140			10	0.07	%
Certificates of deposit
Reciprocal		43,728			81	0.19	%		45,187			99	0.22	%		69,465			222	0.32	%
Under $100		20,684			77	0.37	%		22,687			90	0.40	%		25,888			110	0.42	%
$100 and over		89,950			454	0.50	%		107,608			550	0.51	%		134,158			685	0.51	%
Total interest-bearing deposits	$	1,620,935		$	3,854	0.24	%	$	1,537,127		$	3,640	0.24	%	$	1,343,431		$	3,867	0.29	%
Other borrowings
Securities sold under agreements to repurchase		45,967			28	0.06	%		57,280			36	0.06	%		83,543			154	0.18	%
Other short-term borrowings		84,841			466	0.55	%		62,328			178	0.29	%		113,504			286	0.25	%
Long-term debt		131,236			7,383	5.63	%		102,884			5,736	5.58	%		72,166			4,122	5.71	%
Total interest-bearing liabilities	$	1,882,979		$	11,731	0.62	%	$	1,759,619		$	9,590	0.55	%	$	1,612,644		$	8,429	0.52	%
Noninterest-bearing demand accounts		1,239,819							1,077,283							993,685
Total deposits and interest-bearing liabilities		3,122,798							2,836,902							2,606,329
Other noninterest-bearing liabilities		25,578							15,228							23,362
Total liabilities		3,148,376							2,852,130							2,629,691
Total equity		287,327							297,180							295,477
Total liabilities and equity	$	3,435,703						$	3,149,310						$	2,925,168
Net interest income - taxable equivalent				$	123,582						$	117,397						$	109,696
Net interest spread						3.47	%						3.63	%						3.69	%
Net interest margin						3.73	%						3.86	%						3.91	%
Ratio of average interest-earning assets to average interest-bearing liabilities		175.75	%						172.83	%						173.79	%

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

(2) Loan fees included in interest income were $6.0 million, $5.7 million and $5.5 million in 2016, 2015 and 2014, respectively. Nonaccrual loans are included in average loans outstanding.

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

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

	2016 vs 2015						2015 vs 2014
	Increase (decrease)						Increase (decrease)
(in thousands)	Volume		Rate		Total		Volume		Rate		Total
Interest-earning assets
Federal funds sold and other	$	20	$	88	$	108	$	18	$	(62)	$	(44)
Investment securities		(444)		(79)		(523)		(711)		(1,096)		(1,807)
Loans		12,375		(3,634)		8,741		11,703		(990)		10,713
Total interest-earning assets	$	11,951	$	(3,625)	$	8,326	$	11,010	$	(2,148)	$	8,862
Interest-bearing liabilities
Money market deposits	$	234	$	(38)	$	196	$	473	$	(325)	$	148
Interest-bearing demand		26		119		145		176		(273)		(97)
Savings deposits		-		-		-		2		(2)		-
Certificates of deposit		(101)		(26)		(127)		(227)		(51)		(278)
Other borrowings
Securities sold under agreements to repurchase		(7)		(1)		(8)		(48)		(70)		(118)
Other short-term borrowings		64		224		288		(129)		21		(108)
Long-term debt		1,581		66		1,647		1,755		(141)		1,614
Total interest-bearing liabilities	$	1,797	$	344	$	2,141	$	2,002	$	(841)	$	1,161
Net increase (decrease) in net interest income - taxable equivalent	$	10,154	$	(3,969)	$	6,185	$	9,008	$	(1,307)	$	7,701

Average interest-earning assets increased $268.2 million to $3.31 billion at December 31, 2016.  The loan portfolio increased $275.8 million in 2016, while the investment portfolio declined $15.9 million, the sixth consecutive year the investment portfolio has declined.  Based on the steepening of the yield curve at the end of 2016, the Company expects to expand the investment portfolio in 2017.  Taxable-equivalent interest income grew $6.2 million due to the growth in interest-earning assets, primarily in the loan portfolio.  In addition, net interest income included 366 days in 2016 due to the leap year, compared to 365 days in 2015.  The yield on earning assets declined nine basis points, from 4.18% to 4.09% in 2016, primarily due to a lower yield on the loan portfolio.  In October 2016, the Company entered into two interest-rate swaps to hedge the cash flows on a portion of its LIBOR-based loan portfolio.  The swaps have a weighted average term of six years and a combined notional value of $100.0 million.  The Company pays a variable rate based on 1-month LIBOR and receives a weighted average fixed-rate of 1.20%.

Average interest-bearing liabilities increased $123.4 million during 2016 to $1.88 billion.  The increase was due to an $83.8 million increase in interest-bearing deposits and a $39.6 million net increase in Customer Repurchases and short/long-term borrowings. The average cost of liabilities increased in 2016, to 0.62%, from 0.55% in 2015.  The increase in the yield on interest-bearing liabilities was primarily due to the increase in the target federal funds rate in December 2015, which increased short-term borrowing costs in 2016.

Average interest-earning assets increased $238.5 million to $3.04 billion at December 31, 2015, driven by the loan portfolio, which grew average balances by 11.4% during 2015.  Investment securities as a percentage of average earnings assets declined for the fifth consecutive year to 16.4% from 27.0% in 2011, as a result of a growing loan portfolio and reduction in collateralized Customer Repurchases.  Taxable-equivalent interest income grew $8.9 million due to the growth in interest-earning assets.  The yield on earning assets declined due to a decrease in loan and investment yields, partially offset by an improvement of the mix of earning assets.

Average interest-bearing liabilities increased $147.0 million during 2015 to $1.76 billion.  The increase was due to a $193.7 million increase in interest-bearing demand deposits, offset by a $46.7 million net decrease in Customer Repurchases and short/long term borrowings. The average cost of liabilities increased in 2015, to 0.55%, from 0.52% in 2014.  The increase in the yield on interest-bearing liabilities relates primarily to the issuance of $60.0 million of Notes on June 25, 2015 with an effective interest cost of 5.85% (including amortization of a debt discount).

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The Company has executed a series of interest-rate swap transactions designated as cash flow hedges. The swaps fix the effective interest rate for payments due on the junior subordinated debentures with the objective of reducing the Company’s exposure to adverse changes in cash flows relating to payments on its LIBOR-based floating rate debt.  The weighted average interest rate paid (fixed-rate) was 5.43%, 5.48% and 5.73% in 2016, 2015 and 2014, respectively.  The decline in the rate during 2015 and 2016 was due to the maturity of a swap in early 2015 with a fixed-rate of 6.04% that was replaced with a new swap with a fixed-rate of 4.99%.  The remaining contractual maturities of the swaps vary between 4 and 8 years.  Certain terms of the cash flow hedges are as follows:

(in thousands)	Notional amount		Fixed-rate		Termination date
Hedged item - Junior subordinated debentures issued by:
CoBiz Statutory Trust I	$	20,000	4.99	%	March 17, 2022
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 Loan Losses.  The following table presents provision for loan losses for the years ended December 31, 2016, 2015 and 2014. 

	For the year ended December 31,						2016 vs 2015				2015 vs 2014
							Increase (decrease)				Increase (decrease)
(in thousands)	2016		2015		2014		Amount		%		Amount		%
Provision for loan losses	$	(2,101)	$	6,420	$	(4,155)	$	(8,521)	(132.7)	%	$	10,575	254.5	%

The Company recorded a loan loss provision of ($2.1) million, $6.4 million, and ($4.2) million during 2016, 2015, and 2014, respectively.  The decrease in the provision for loan losses in 2016 was primarily due to the reversal of a $2.3 million specific reserve on an impaired credit, recoveries of $2.5 million and a decrease in multi-family lending, a category with a higher reserve allocation.  Partially offsetting these items were loan growth and a $6.8 million increase in classified loans in 2016. 

In 2015, the loan loss provision was the result of one large credit with a balance at December 31, 2015 of $11.2 million and a specific reserve of $7.2 million, which resolved in 2016.  Resolution of this credit in 2016 included payments of $6.3 million, a net charge-off of $4.9 million and the release of a $2.3 million specific reserve recorded in 2015.    

Nonperforming loans to total loans were 0.11%, 0.60%, and 0.38% at December 31, 2016, 2015 and 2014, respectively.   At December 31, 2016, the allowance for loan and credit losses was $33.3 million or 1.13% of total loans compared to $40.7 million or 1.51% of total loans at December 31, 2015.

Noninterest Income. The following table presents noninterest income for the years ended December 31, 2016, 2015 and 2014.

	For the year ended December 31,						2016 vs 2015				2015 vs 2014
NONINTEREST INCOME							Increase (decrease)				Increase (decrease)
(in thousands)	2016		2015		2014		Amount		%		Amount		%
Service charges	$	6,059	$	5,862	$	5,598	$	197	3.4	%	$	264	4.7	%
Investment advisory income		5,714		5,832		5,736		(118)	(2.0)	%		96	1.7	%
Insurance income		12,568		12,047		11,150		521	4.3	%		897	8.0	%
Other income		9,819		6,926		5,425		2,893	41.8	%		1,501	27.7	%
Total noninterest income	$	34,160	$	30,667	$	27,909	$	3,493	11.4	%	$	2,758	9.9	%

Service Charges.  Deposit service charges primarily consist of fees earned from our treasury management services. Customers are given the option to pay for these services in cash or by offsetting the fees for these services against an earnings credit that is given for maintaining noninterest-bearing deposits. Fees earned from treasury management services will fluctuate based on the number of customers using the services and

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from changes in U.S. Treasury rates which are used as a benchmark for the earnings credit rate. Other miscellaneous deposit charges are transactional by nature and may not be consistent period over period.  As the earnings credit rate increases, the amount of cash fees paid for service charges decreases.  In the fourth quarter of 2016, the Company evaluated and increased the rates assessed for treasury management services.

Investment Advisory Income.  Investment advisory income decreased $0.1 million or 2.0% to $5.7 million for the year ended December 31, 2016.  For the year ended December 31, 2015, advisory income increased $0.1 million or 1.7% to $5.8 million compared to 2014.  Revenue from this source is generally a function of the value of Assets Under Management (AUM) on the last day of each quarter.  Discretionary AUM at December 31, 2016 and 2015 were $844.5 million and $859.2 million, respectively. Average AUM was $831.8 million, $876.0 million and $844.0, in 2016, 2015 and 2014, respectively.  Revenue from investment  advisory income benefits from market appreciation and is negatively impacted from market depreciation.

Insurance Income.  Insurance income is derived from two main areas: benefits consulting and P&C. Revenue from benefits consulting and P&C are recurring revenue sources as policies and contracts generally renew or rewrite on an annual or more frequent basis.  For the years ended December 31, 2016, 2015, and 2014, revenue earned from the insurance segment was composed of the following:

	2016		2015		2014
Benefits consulting	58.7	%	54.6	%	53.1	%
Property and casualty	41.3	%	45.4	%	46.9	%

In 2015 and 2016, the average P&C rate for the industry has declined.  As our revenue is typically derived as percentage of the premium, this has negatively impacted revenue.  At the same time, the Company’s benefits consulting division has continued to grow.  The combination of these two factors has caused the shift in the percentage of revenue in the table above. 

Other Income.  Other income is composed of changes in the cash surrender value of BOLI, earnings on other investments, loan and commitment fees, merchant and bankcard fees, customer swap fees, wire transfer fees, foreign exchange fees and safe deposit income. 

Other income increased $2.9 million to $9.8 million during the year ended December 31, 2016, compared to a $1.5 million increase to $6.9 million during the year ended December 31, 2015.  The increase in 2016 is due to a $1.2 million increase in other investments and a $1.0 million increase in customer swap fees.  Other investments consist primarily of funds licensed as Small Business Investment Companies.  The Company’s income from these funds will vary based on transactions occurring within the funds.  Income from customer swap fees increased in 2016 as our customers locked in lending rates through the use of swaps due to the potential for higher interest rates.

The increase in other income in 2015 compared to 2014 was due to a realized a loss on other investments during 2014, which caused most of the year-over-year variance.  

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Noninterest Expense.  The following table presents noninterest expense for the years ended December 31, 2016, 2015 and 2014.

	For the year ended December 31,						2016 vs 2015				2015 vs 2014
NONINTEREST EXPENSES							Increase (decrease)				Increase (decrease)
(in thousands)	2016		2015		2014		Amount		%		Amount		%
Salaries and employee benefits	$	71,471	$	69,526	$	66,008	$	1,945	2.8	%	$	3,518	5.3	%
Occupancy expenses, premises and equipment		14,966		13,079		13,100		1,887	14.4	%		(21)	(0.2)	%
Amortization of intangibles		600		600		597		-	-	%		3	0.5	%
FDIC and other assessments		1,692		1,813		1,737		(121)	(6.7)	%		76	4.4	%
Other real estate owned and loan workout costs		512		388		1,066		124	32.0	%		(678)	(63.6)	%
Net gain on securities, other assets and other real estate owned		(121)		(369)		(2,597)		248	67.2	%		2,228	85.8	%
Other expense		16,111		15,140		14,225		971	6.4	%		915	6.4	%
Total noninterest expense	$	105,231	$	100,177	$	94,136	$	5,054	5.0	%	$	6,041	6.4	%

Our efficiency ratio on a taxable equivalent basis was 66.8% for the year ended December 31, 2016, compared to 67.9% and 70.3% for 2015 and 2014, respectively (see non-GAAP reconciliation included in Item 6. Selected Financial Data).  The efficiency ratio is a measure of the Company’s overhead, measuring the percentage of each dollar of income that is paid in operating expenses.  In 2016 and 2015, the Company was successful in improving its operating leverage by growing net interest income while limiting the growth in expenses.  The Company maintains its goal of reducing the efficiency ratio over the next few years and is committed to exploring cost-reduction strategies.  Further increases in the federal funds target rate by the FOMC would benefit the Company’s net interest income and efficiency ratio. 

Salaries and Employee Benefits. The Company’s full-time equivalent employee base at the end of 2016 was 533 compared to 532 in 2015.

Salaries and employee benefits increased $1.9 million or 2.8% during the year ended December 31, 2016.  Contributing to the increase in 2016 was a $0.9 million increase in salaries and commission expense, $0.6 million increase in 401(k) matching expense and a $0.5 million increase in insurance benefits.  Salaries increased by the annual cost of living and merit increases effective in the second quarter of 2016, offset by a decrease in severance expense in 2016.  The Company has a 401(k) matching program that is based on the overall profitability of the Company.  Based on the Company’s financial performance in 2016, an additional match of $0.5 million was made in 2016 that was not made in 2015.  The Company is partially self-insured on its medical and dental programs.  Insurance benefits will vary based on participant claims.  In 2016, the Company’s participants experienced several large claims that increased our insurance expense.

Salaries and employee benefits increased $3.5 million or 5.3% during the year ended December 31, 2015.  Included in the increase is approximately $1.0 million in severance expense the Company incurred in the fourth quarter of 2015 related to the termination of certain positions.  Salaries were also impacted by the annual cost of living and merit increases effective in the second quarter of 2015. 

Included in salaries and employee benefits is expense related to share-based compensation used to retain existing employees and to recruit new employees.  The Company expects to continue using share-based compensation in the future as it is considered an important part of overall compensation.  Costs associated with the plan are influenced by the number of participants in the Company’s stock bonus pool and the proportion of incentive compensation paid in cash versus stock.

Occupancy Expenses, Premises and Equipment.  Occupancy costs consist primarily of rent, utilities, property taxes, insurance, depreciation and information systems maintenance.  Occupancy costs increased $1.9 million or 14.4% during the year ended December 31, 2016.  In January 2016, the Company signed a new lease agreement for its principal executive offices and recognized seven months of expense related to the lease in 2016, in addition to a full year of expense on the former principal executive office lease that terminated on December 31, 2016.  Occupancy costs in 2015 were flat compared with 2014. 

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FDIC and Other Assessments.  FDIC and other assessments consist of premiums paid by the FDIC-insured institutions and by Colorado chartered banks.  The assessments by the FDIC and the Colorado Division of Banking are based on statutory and risk classification factors.  The decrease in 2016 was due to a statutory reduction in assessment rates in the second half of 2016.  FDIC and other assessments slightly increased in 2015 due to growth in the Company’s balance sheet.

Other Real Estate Owned and Loan Workout Costs. Carrying costs and workout expenses of nonperforming loans and OREO increased $0.1 million in 2016 and decreased $0.7 million in 2015.  These costs are related to the level of nonperforming assets.  The Company has seen a general decline in workout expenses in recent years. 

Net Gain on Securities, Other Assets and Other Real Estate Owned. The Company recognized gains on securities, other assets and OREO of $0.1 million, $0.4 million and $2.6 million in 2016, 2015 and 2014, respectively.  The (gain) loss on securities, other assets and real estate owned was comprised of the following:

	(Gain) loss for the year ended December 31,						Increase (decrease)
(in thousands)	2016		2015		2014		2016 vs 2015		2015 vs 2014
Investment securities	$	(94)	$	(318)	$	(1,154)	$	224	$	836
OREO and repossessed assets		-		(69)		(1,459)		69		1,390
Other		(27)		18		16		(45)		2
	$	(121)	$	(369)	$	(2,597)	$	248	$	2,228

Net gains on securities for the years presented were primarily from securities called/redeemed, as issuers of higher yielding trust preferred securities called those issuances that lost favorable regulatory capital treatment under Basel III. 

In 2014, net gains on OREO and repossessed assets of $1.5 million were related to the sale of several properties.  The Company does not expect to recognize gains of this magnitude in the future, as the number of properties in the OREO portfolio has significantly declined. 

Other Expense. Other operating expenses increased $1.0 million and $0.9 million, or 6.4%, in 2016 and 2015, respectively.  The increase in 2016 was partially due to an increase in professional service costs related to the Company’s process and efficiency evaluations conducted in 2016.  The Company has continued to see an increase in expenses in this area due to ongoing regulatory compliance and information technology projects. The increase in 2015 was primarily due to a $1.0 million increase in contract and professional service costs. 

Federal Income Taxes. The effective tax rate was 25.9%, 26.9%, and 34.3% for 2016, 2015, and 2014, respectively.  The decrease in the effective tax rate in 2016 and 2015 was due to growth in the Company’s tax-exempt loan and investment portfolios.  In addition, the early adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, reduced the effective tax rate approximately 1% in 2016.     

Permanent differences, primarily arising from changes in the cash surrender value of BOLI and tax-exempt income are the primary activities impacting the effective tax rate in each year.

Segment Results

The Company has three segments: Commercial Banking, Fee-Based Lines, and Corporate Support and Other.  See Note 19 – Segments for additional discussion regarding segments.  Certain financial metrics of each operating segment are presented below.

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Commercial Banking.

	Commercial Banking						2016 vs 2015				2015 vs 2014
	Year ended December 31,						Increase (decrease)				Increase (decrease)
(in thousands)	2016		2015		2014		Amount		%		Amount		%
Income Statement
Net interest income	$	122,976	$	115,949	$	109,494	$	7,027	6.1	%	$	6,455	5.9	%
Provision for loan losses		(1,816)		6,837		(3,346)		(8,653)	(126.6)	%		10,183	304.3	%
Noninterest income		14,050		11,427		9,940		2,623	23.0	%		1,487	15.0	%
Noninterest expense		38,159		37,849		35,602		310	0.8	%		2,247	6.3	%
Provision for income taxes		32,606		27,679		30,926		4,927	17.8	%		(3,247)	(10.5)	%
Net income before management fees and overhead allocations		68,077		55,011		56,252		13,066	23.8	%		(1,241)	(2.2)	%
Management fees and overhead allocations, net of tax		27,912		25,225		23,988		2,687	10.7	%		1,237	5.2	%
Net income	$	40,165	$	29,786	$	32,264	$	10,379	34.8	%	$	(2,478)	(7.7)	%

The Commercial Banking segment reported net income of $40.2 million and $29.8 million during 2016 and 2015, respectively. Volume increases in our interest earning assets was the primary reason for the increase in net interest income.  Average loans were $275.8 million higher in 2016 than in 2015, which muted the effect of lower yields on interest-earning assets.  Asset quality improvements and recoveries on charged-off loans resulted in a loan loss provision reversal of $1.8 million.  Noninterest income grew in 2016, primarily due to $1.2 million in fees generated from the sale of interest rate swaps.

The Commercial Banking segment reported net income of $29.8 million and $32.3 million during 2015 and 2014, respectively. Lower net income in 2015 resulted from a higher provision for loan losses which increased $10.2 million in 2015 compared to 2014, more than offsetting higher net interest income and noninterest income. Average loans in 2015 grew 11%, driving higher net interest income while average yields on interest-earning assets declined 3 basis points.  The higher provision for loan losses in 2015 was largely driven by the impairment of a single loan during the fourth quarter as well as overall growth in the portfolio.  Noninterest expense for 2015 included a $1.0 million charge relating to severance payments incurred at the end of the year as several positions were eliminated in the segment. 

Fee-Based Lines.

	Fee-Based Lines						2016 vs 2015				2015 vs 2014
	Year ended December 31,						Increase (decrease)				Increase (decrease)
(in thousands)	2016		2015		2014		Amount		%		Amount		%
Income Statement
Net interest income	$	(23)	$	(42)	$	(35)	$	19	45.2	%	$	(7)	(20.0)	%
Noninterest income		18,282		17,879		16,886		403	2.3	%		993	5.9	%
Noninterest expense		17,422		16,331		15,140		1,091	6.7	%		1,191	7.9	%
Provision for income taxes		372		643		690		(271)	(42.1)	%		(47)	(6.8)	%
Net income before management fees and overhead allocations		465		863		1,021		(398)	(46.1)	%		(158)	(15.5)	%
Income from discontinued operations		-		(71)		209		71	100.0	%		(280)	(134.0)	%
Management fees and overhead allocations, net of tax		1,673		1,334		1,115		339	25.4	%		219	19.6	%
Net income (loss)	$	(1,208)	$	(542)	$	115	$	(666)	(122.9)	%	$	(657)	(571.3)	%

During the first quarter of 2015, the Company ceased operations of GMB, a provider of investment banking services that was a component of the Fee-Based Lines segment.  The decision was based in part by  increasing regulatory compliance costs related to maintaining GMB’s broker-dealer license and earnings volatility which was highly dependent on deal volume.  Results for GMB for all periods presented have been reclassified as discontinued operations.  See Note 2 – Discontinued Operations for additional discussion. 

Net loss in the Fee-Based Lines segment increased $0.7 million in 2016 compared to 2015.  Lower investment advisory and insurance revenue coupled with higher salary and benefit costs contributed to the net loss in 2016.   At December 31, 2016, AUM decreased $14.7 million during 2016 to $844.5 million from

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$859.2 million at the end of 2015.  Average AUM in 2016 was $831.8 million compared to $876.0 million in 2015.  Noninterest expense in the segment is predominately compensation-related, which is primarily variable and directly related to revenue.  However, as the Company invests in new production staff, compensation as a percentage of revenue for those employees is higher in the earlier years until those new producers build a revenue base.

Net income before allocations and discontinued operations in the Fee-Based Lines segment declined 15.5% in 2015 compared to 2014.  Noninterest income growth was driven primarily by insurance revenue which increased $0.9 million during the year.  AUM of $859.2 million at December 31, 2015 was unchanged from the end of 2014.  Noninterest expense in the segment is predominately compensation-related.  Compensation costs in 2015 increased, in part, due to higher revenue and investments in new personnel.  In addition, the segment also experienced a $0.1 million increase in professional and service contract expense in 2015 over 2014.

Corporate Support and Other.

	Corporate Support and Other						2016 vs 2015				2015 vs 2014
	Year ended December 31,						Increase (decrease)				Increase (decrease)
(in thousands)	2016		2015		2014		Amount		%		Amount		%
Income Statement
Net interest income	$	(6,902)	$	(4,231)	$	(3,571)	$	(2,671)	(63.1)	%	$	(660)	(18.5)	%
Provision for loan losses		(285)		(417)		(809)		132	31.7	%		392	48.5	%
Noninterest income		1,828		1,361		1,083		467	34.3	%		278	25.7	%
Noninterest expense		49,650		45,997		43,394		3,653	7.9	%		2,603	6.0	%
Benefit for income taxes		(20,796)		(18,716)		(16,598)		(2,080)	(11.1)	%		(2,118)	(12.8)	%
Net loss before management fees and overhead allocations		(33,643)		(29,734)		(28,475)		(3,909)	(13.1)	%		(1,259)	(4.4)	%
Management fees and overhead allocations, net of tax		(29,585)		(26,559)		(25,103)		(3,026)	(11.4)	%		(1,456)	(5.8)	%
Net loss	$	(4,058)	$	(3,175)	$	(3,372)	$	(883)	(27.8)	%	$	197	5.8	%

The Corporate Support and Other segment consists of activities of the parent company (Parent); non-production, back-office support operations; and eliminating transactions in consolidation.  Non-production, back-office operations include human resources, accounting and finance, audit and compliance, information technology, Special Assets Group, and loan and deposit operations.  The Company has a process for allocating these support operations back to the production lines based on an internal allocation methodology that is updated annually.  Noninterest expense includes salaries and benefits of employees of the Parent and support functions as well as the nonemployee overhead operating costs not directly associated with another segment.

The segment reported a net loss of $4.1 million in 2016 compared to a net loss of $3.2 million in the prior year.  Lower net interest income was the result of additional interest expense of $1.7 million in 2016 relating to the Notes and lower interest income due to a prior-year recapture of $1.0 million of interest income on problem loan resolutions.  Higher salary, health insurance, facility rents and service contract costs resulted in an increase in noninterest expense during 2016.

For the year ended December 31, 2015, the segment reported a net loss of $3.2 million, an improvement of $0.2 from the prior year.  Net interest expense for 2015 increased due the issuance of $60.0 million of Notes in June 2015, leading to an incremental increase in interest expense of $1.8 million in 2015.  Proceeds of the issuance were used to redeem all $57.4 million of outstanding preferred stock issued under the U.S. Treasury’s SBLF program.  Offsetting higher interest costs was a recapture of interest income relating to problem loan resolutions in the first quarter of 2015. Increased noninterest expense in 2015 is primarily compensation-related.

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The provision for loan losses relates to a portfolio of loans purchased by the Parent from the Bank. This portfolio has steadily decreased since the 2009 purchase due to loan repayments and collateral sales.  The declining balance of the portfolio and the overall asset quality improvement has contributed to the trend of declining provision for loan losses.  

Liquidity and Capital Resources

Liquidity refers to the Company’s ability to generate adequate amounts of cash to meet financial obligations to its customers and shareholders in order to fund loans, to respond to deposit outflows and to cover operating expenses.  Maintaining a level of liquid funds through asset/liability management seeks to ensure that these needs are met at a reasonable cost.  Liquidity is essential to compensate for fluctuations in the balance sheet and provide funds for growth and normal operating expenditures.  Sources of funds include customer deposits, scheduled amortization of loans, loan prepayments, scheduled maturities of investments and cash flows from mortgage-backed securities.  Liquidity needs may also be met by deposit growth, converting assets into cash, raising funds in the brokered CD market or borrowing using lines of credit with correspondent banks, the FHLB or the FRB.  Longer-term liquidity needs may be met by selling securities available for sale or raising additional capital.

Liquidity management is the process by which the Company manages the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost. The objective of liquidity management is to ensure the Company has the ability to satisfy the cash flow requirements of depositors and borrowers and to allow us to sustain our operations.  These funding commitments include withdrawals by depositors, credit commitments to borrowers, shareholder dividends, debt payments, expenses of our operations and capital expenditures.  Liquidity is monitored and closely managed by ALCO, a group of senior officers from the lending, deposit gathering, finance and treasury areas.  ALCO’s primary responsibilities are to ensure the necessary level of funds are available for normal operations as well as maintain a contingency funding policy to ensure that liquidity stress events are quickly identified and management plans are in place to respond.  This is accomplished through the use of policies which establish limits and require measurements to monitor liquidity trends, including management reporting that identifies the amounts and costs of all available funding sources.

The Company's current liquidity position is expected to be more than adequate to fund expected asset growth.  Historically, our primary source of funds has been customer deposits.  Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and unscheduled loan prepayments – which are influenced by fluctuations in the general level of interest rates, returns available on other investments, competition, economic conditions, and other factors – are less predictable.

Liquidity from asset categories is provided through cash and interest-bearing deposits with other banks, which totaled $96.1 million at December 31, 2016, compared to $67.3 million at December 31, 2015.  Additional asset liquidity sources include principal and interest payments from securities in the Company’s investment portfolio and loan portfolio.  Liability liquidity sources include attracting deposits at competitive rates and maintaining wholesale borrowing (short-term borrowings and brokered CDs) credit relationships.

The Company’s loan to core deposit ratio decreased to 96.8% at December 31, 2016, from 98.4% at December 31, 2015.  At December 31, 2016 and 2015, the Company had $106.2 million and $132.0 million in outstanding wholesale borrowings, respectively.  Average wholesale borrowings were $84.8 million and $62.3 million during the years ended December 31, 2016 and 2015.

The Company uses various forms of short-term borrowings for cash management and liquidity purposes, regularly accessing its federal funds and FHLB lines to manage its daily cash position. At December 31, 2016, the Bank has approved federal funds purchase lines with eight correspondent banks with an aggregate credit line of $170.0 million.  The Bank also has a line of credit from the FHLB that is limited by the amount of eligible collateral available to secure it and the Company’s investment in FHLB stock.  Borrowings under the FHLB line are required to be secured by unpledged securities and qualifying loans.

55

Borrowings may also be used on a longer-term basis to support expanded lending activities and to match the maturity or repricing intervals of assets.

Available funding through correspondent lines and the FHLB at December 31, 2016, totaled $659.0 million or 19.0% of the Company’s earning assets.  Available funding comprised $170.0 million of federal fund lines and $489.0 million in secured FHLB borrowing capacity.  Access to funding through correspondent lines is dependent upon the cash position of the correspondent banks and there may be times when certain lines are not available.  In addition, certain lines require a one day rest period after a specified number of consecutive days of accessing the lines. The Company believes it has sufficient borrowing capacity and diversity in correspondent banks to meet its needs.

At the holding company level, our primary sources of funds are dividends paid from the Bank and fee-based subsidiaries, management fees assessed to the Bank and the Fee-Based Lines, proceeds from the issuance of common stock, and other capital markets activity.  The main use of this liquidity is the quarterly payment of dividends on our common stock, quarterly interest payments on the subordinated debentures and notes payable, payments for mergers and acquisitions activity, and payments for the salaries and benefits for the employees of the holding company.  In July 2015, the Company redeemed $57.4 million of preferred stock issued pursuant to the SBLF program.  The redemption was funded with proceeds from the June 2015 issuance of $60.0 million of Notes.

The Company also maintains a revolving line of credit for an aggregate amount of up to $20.0 million, all of which was available at December 31, 2016.  The line of credit has a one year term and matures in May 2017.  Funds drawn will be used for general corporate purposes and backup liquidity.

The approval of the Colorado State Banking Board is required prior to the declaration of any dividend by the Bank if the total of all dividends declared by the Bank in any calendar year exceeds the total of its net profits for that year combined with the retained net profits for the preceding two years.  In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 provides that the Bank cannot pay a dividend if it will cause the Bank to be “undercapitalized.”  At December 31, 2016, the Bank was not otherwise restricted in its ability to pay dividends to the holding company.  The Company’s ability to pay dividends on its common stock depends upon the availability of dividends from the Bank, earnings from its Fee-Based Lines, and upon the Company’s compliance with the capital adequacy guidelines of the Federal Reserve Board of Governors (see Note 17 – Regulatory Matters).  The holding company has a liquidity policy that requires the maintenance of at least 18 months of liquidity on the balance sheet based on projected cash usages, exclusive of dividends from the Bank.  At December 31, 2016, the Company had a liquidity position that exceeds the policy limit, and we believe the Company has the ability to continue paying dividends.

Net loss from discontinued operations for the year ended December 31, 2015 was $0.1 million, which reasonably approximated the cash flows of those operations not separately stated in the Company’s consolidated statements of cash flows.

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Shareholders’ equity was $302.3 million and $273.5 million at December 31, 2016 and 2015, respectively.  Changes in shareholders’ equity are due to the following:

	For the year ended December 31,
(in thousands)	2016		2015
Beginning balance	$	273,536	$	308,769
Stock-based compensation		3,213		3,324
Options and restricted stock, net		1,227		1,058
Redemption of preferred stock		-		(57,366)
Dividends paid-common		(7,858)		(6,953)
Dividends paid-preferred		-		(320)
Other comprehensive loss, net of tax		(2,717)		(1,045)
Other		10		-
Net income		34,899		26,069
Ending balance	$	302,310	$	273,536

We anticipate that our cash and cash equivalents, expected cash flows from continuing operations together with alternative sources of funding are sufficient to meet our anticipated cash requirements for working capital, loan originations, capital expenditures and other obligations for at least the next 12 months.  We continually monitor existing and alternative financing sources to support our capital and liquidity needs, including but not limited to, debt issuance, common stock issuance and deposit funding sources.  Based on our current financial condition and our results of operations, we believe the Company will be able to sustain its ability to raise adequate capital through one or more of these financing sources.

We are subject to minimum risk-based capital limitations as set forth by federal banking regulations at both the consolidated Company level and the Bank level. Under the risk-based capital guidelines, different categories of assets, including certain off-balance sheet items, such as loan commitments in excess of one year and letters of credit, are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base. For purposes of the risk-based capital guidelines, total capital is defined as the sum of “Common Equity Tier 1,” “Additional Tier 1” and “Tier 2” capital elements. Common Equity Tier 1 consists of common stock, related surplus and retained earnings.  Additional Tier 1 capital includes, with certain restrictions, noncumulative perpetual preferred stock, certain grandfathered regulatory capital instruments and minority interests in consolidated subsidiaries. Tier 2 capital includes, with certain limitations, perpetual preferred stock not included in Tier 1 capital, subordinated debt, certain maturing capital instruments, and the allowance for loan and credit losses.

Beginning in 2016, the CCB requirement became effective for banking organizations.  The CCB is designed to establish a capital range above minimum requirements to insulate banks from periods of stress and discourage unacceptable practices that may shift certain risks from an organization’s shareholders to its depositors.  When the capital buffer is breached, an organization’s ability to pay dividends, execute share repurchases and make discretionary bonus payments may be limited to varying degrees depending on the severity of the breach.  When fully phased-in in 2019, the CCB adds a 2.5% capital requirement above existing regulatory minimum ratios.  At December  31, 2016, the Bank and Holding Company maintained capital buffers in excess of the fully phased-in requirements and were not subject to additional constraints on distributions, share repurchases or discretionary bonus payments beyond existing limits.  At December  31, 2016, the Bank was well-capitalized with all capital ratios exceeding the well-capitalized requirement.

See Note 17 – Regulatory Matters for additional capital ratio disclosure.  In order to comply with the regulatory capital constraints, the Company and its Board of Directors constantly monitor the capital level and its anticipated needs based on the Company’s growth. The Company has identified sources of additional capital that could be used if needed, and monitors the costs and benefits of these sources, which include both the public and private markets.

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In July 2013, the Federal Reserve Board finalized rules, known as Basel III, reforming the regulatory capital framework for banking institutions.  The U.S. banking regulatory agencies have implemented the reforms which are designed to ensure that banks maintain strong capital positions even in the event of severe economic downturns or unforeseen losses.  Basel III contains a provision that preserves the current capital treatment of TPS issued by bank holding companies with less than $15 billion in total assets.  The Company has $70.0 million of TPS included in regulatory capital at December 31, 2016 that are grandfathered under Basel III.  The rules for non-advanced approaches banks and financial institutions like the Company have increased both the quantity and quality of required capital beginning January 1, 2015, with full implementation by 2018.  The Company believes it will continue to be well-capitalized under the Basel III requirements through the phase-in period.

The Company’s consolidated financial statements do not reflect various off-balance sheet commitments that are made in the normal course of business, which may involve some liquidity risk.  Off-balance sheet arrangements are discussed in the following Contractual Obligations and Commitments section.  The Company has commitments to extend credit under lines of credit and stand-by letters of credit. The Company has also committed to investing in certain partnerships.  See the following section of this report and Note 16 to the consolidated financial statements for additional discussion on these commitments.

Contractual Obligations and Commitments

Summarized below are the Company’s contractual obligations (excluding deposit liabilities) to make future payments at December 31, 2016:  

			After one but		After three
	Within		within three		but within		After
(in thousands)	one year		years		five years		five years		Total
FHLB overnight funds purchased (1)	$	106,230	$	-	$	-	$	-	$	106,230
Repurchase agreements (1)		27,639		-		-		-		27,639
Operating lease obligations		5,123		8,751		5,383		14,094		33,351
Long-term debt obligations (2)(3)		7,274		14,547		11,467		146,590		179,878
Total contractual obligations	$	146,266	$	23,298	$	16,850	$	160,684	$	347,098

(1) Interest on these obligations has been excluded due to the short-term nature of the instruments.

(2) Principal repayment of the junior subordinated debentures is assumed to be at the contractual maturity, currently beyond five years.  Interest on the junior subordinated debentures is calculated at the fixed-rate associated with the applicable hedging instrument through the instrument maturity date (see Note 10 - Derivatives) and is reported in the “due within” categories during which the interest expense is expected to be incurred.  Interest payments on junior subordinated debentures after maturity of the related fixed interest rate swap hedges are variable and no estimate of those payments has been included in the preceding table.  The weighted average variable-rate applicable to the junior subordinated debentures as of the date of this report is 3.32% and ranges from 2.45% to 3.94%. 

(3) Principal repayment of the Notes issued in June 2015 is assumed to be at the contractual maturity, currently beyond five years. Interest on the Notes is calculated at an annual fixed-rate of 5.625% through June 2025 and is reported in the “due within” categories during which the interest expense is expected to be incurred. From June 25, 2025 to maturity on June 25, 2030, the Notes will bear interest at a floating rate equal to 3-month LIBOR plus 317 basis points. No estimate of interest payments during the floating rate period is included in the preceding table.

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The contractual amount of the Company's financial instruments with off-balance sheet risk, expiring by period at December 31, 2016, is presented below:

			After one but		After three
	Within		within three		but within		After
(in thousands)	one year		years		five years		five years		Total
Unfunded loan commitments	$	667,214	$	230,219	$	37,202	$	17,287	$	951,922
Standby letters of credit		23,160		3,228		33		110		26,531
Commercial letters of credit		100		-		-		-		100
Unfunded commitments for unconsolidated investments		6,664		-		-		-		6,664
Company guarantees		2,372		-		-		755		3,127
Total commitments	$	699,510	$	233,447	$	37,235	$	18,152	$	988,344

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the liquidity, credit enhancement and financing needs of its customers. These financial instruments include legally binding commitments to 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 on the balance sheet. Credit risk is the principal risk associated with these instruments. The contractual amounts of these instruments represent the amount of credit risk should the instruments be fully drawn upon and the customer defaults.

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

Legally binding commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit obligate the Company to meet certain financial obligations of its customers if, under the contractual terms of the agreement, the customers are unable to do so. The financial standby letters of credit issued by the Company are irrevocable. Payment is only guaranteed under these letters of credit upon the borrower’s failure to perform its obligations to the beneficiary.

Approximately $70.6 million of total commitments at December 31, 2016 represent commitments to extend credit at fixed-rates of interest, which exposes the Company to some degree of interest rate risk.

The Company has also entered into interest-rate swap agreements under which it is required to either receive or pay cash to a counterparty depending on changes in interest rates. The interest-rate swaps are carried at their fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates at the balance sheet date. Interest-rate swaps recorded on the consolidated balance sheet at December 31, 2016, do not represent amounts that will ultimately be received or paid under the contract and are therefore excluded from the table above.

Effects of Inflation and Changing Prices

The primary impact of inflation on our operations is increased operating costs. Unlike most retail or manufacturing companies, virtually all of the assets and liabilities of a financial institution such as the Company are monetary in nature. As a result, the impact of interest rates on a financial institution's performance is generally greater than the impact of inflation. Although interest rates do not necessarily move in the same direction, or to the same extent, as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. Over short periods of time, interest rates may not move in the same direction, or at the same magnitude, as inflation.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Asset/Liability Management

Asset/liability management is concerned with the timing and magnitude of repricing assets compared to liabilities. It is our objective to generate stable growth in net interest income and to attempt to control risks associated with interest rate movements. In general, our strategy is to reduce the impact of changes in interest rates on net interest income by maintaining a favorable match between the maturities or repricing dates of our interest-earning assets and interest-bearing liabilities. We adjust interest sensitivity during the year through changes in the mix of assets and liabilities. Our asset and liability management strategy is formulated and monitored by ALCO, in accordance with policies approved by the Board of Directors of the Bank. This committee meets regularly to review, among other things, the sensitivity of our assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activity, and maturities of investments and borrowings.  ALCO also approves and establishes pricing and funding decisions with respect to our overall asset and liability composition. The committee reviews our liquidity, cash flow flexibility, maturities of investments, deposits and borrowings, deposit activity, current market conditions, and general levels of interest rates. To effectively measure and manage interest rate risk, we use simulation analysis to determine the impact of changes in interest rates on net interest income under various interest rate scenarios. From these simulations, interest rate risk is quantified and appropriate strategies are developed and implemented.

The following table presents an analysis of the interest rate sensitivity inherent in our net interest income for the next 12 months and market value of equity. The interest rate scenario presented in the table includes interest rates at December 31, 2016, as adjusted by rate changes upward of up to 300 basis points ramped over a 12-month period.  Due to the current interest rate environment, the FOMC has a 50-75 basis point target federal funds rate at December 31, 2016, with prime set at 300 basis points above the FOMC target.  Accordingly, the downward movement analysis was limited to a 100 basis point change.  The market value sensitivity analysis presented includes assumptions that (i) the composition of our interest rate sensitive assets and liabilities existing at December 31, 2016 will remain constant; and (ii) that changes in market rates are parallel and instantaneous across the yield curve regardless of duration or repricing characteristics of specific assets or liabilities. Further, the analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. Accordingly, this analysis is not intended to and does not provide a precise forecast of the effect actual changes in market rates will have on us.

	Change in interest rates in basis points
	- 200	- 100		0		+ 100		+ 200		+ 300
Impact on:
Net interest income	n/a	(2.3)	%	-	%	2.4	%	4.3	%	6.3	%
Market value of equity	n/a	(16.7)	%	-	%	12.4	%	22.0	%	29.3	%

Our results of operations depend significantly on net interest income. Like most financial institutions, our interest income and cost of funds are affected by general economic conditions and by competition in the marketplace. Rising and falling interest rate environments can have various impacts on net interest income, depending on the interest rate profile (i.e., the difference between the repricing of interest-earning assets and interest-bearing liabilities), the relative changes in interest rates that occur when various assets and liabilities reprice, unscheduled repayments of loans and investments, early withdrawals of deposits, and other factors. As a general rule, banks with positive interest rate gaps are more likely to be susceptible to declines in net interest income in periods of falling interest rates, while banks with negative interest rate gaps are more likely to experience declines in net interest income in periods of rising interest rates. At December 31, 2016, our cumulative interest rate gap was a positive 39.9%. Therefore, assuming no change in our gap position, a rise in interest rates is likely to result in increased net interest income, while a decline in interest rates is likely to result in decreased net interest income. This is a point-in-time position that is continually changing and is not indicative of our position at any other time. While the gap position is a useful tool in measuring interest rate risk and contributes toward effective asset and liability management, shortcomings are inherent in gap analysis since certain assets and liabilities may not move proportionally as interest rates change.

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Consequently, in addition to gap analysis, we use the simulation model discussed above to test the interest rate sensitivity of net interest income and the balance sheet.  

The following table sets forth the estimated maturity or repricing, and the resulting interest rate gap, of our interest-earning assets and interest-bearing liabilities at December 31, 2016. All amounts in the table are based on contractual repricing schedules, as adjusted for interest-rate hedges. Actual prepayment and withdrawal experience may vary significantly from the assumptions reflected in the table. For information on the fair value of our interest-earning assets and interest-bearing liabilities see Note 18 – Fair Value Measurements. 

	Estimated maturity or repricing at December 31, 2016
				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	$	26,717		$	-		$	-		$	-		$	26,717
Fixed-rate loans, gross		23,745			97,918			618,334			573,732			1,313,729
Floating-rate loans, gross		875,643			57,327			531,905			155,501			1,620,376
Investment securities held to maturity and available for sale		182,579			55,400			93,357			167,686			499,022
Total interest-earning assets	$	1,108,684		$	210,645		$	1,243,596		$	896,919		$	3,459,844
Interest-bearing liabilities:
Interest-bearing demand	$	8,096		$	24,287		$	80,618		$	601,061		$	714,062
Money market		3,686			11,059			772,899			74,212			861,856
Savings		90			270			151			19,050			19,561
Time deposits under $100		7,892			11,929			3,540			71			23,432
Time deposits $100 and over		48,517			67,180			12,712			-			128,409
Securities sold under agreements to repurchase		27,639			-			-			-			27,639
Other short-term borrowings		106,230			-			-			-			106,230
Subordinated notes payable		-			-			-			59,111			59,111
Subordinated debentures		-			-			-			72,166			72,166
Total interest-bearing liabilities	$	202,150		$	114,725		$	869,920		$	825,671		$	2,012,466
Interest rate gap	$	906,534		$	95,920		$	373,676		$	71,248		$	1,447,378
Cumulative interest rate gap	$	906,534		$	1,002,454		$	1,376,130		$	1,447,378
Cumulative interest rate gap to total assets		24.97	%		27.61	%		37.91	%		39.87	%

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

The following table presents, at December 31, 2016, loans by maturity or repricing in each major category of our portfolio. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments. Loan renewals are evaluated in the same manner as new credit applications.

	At December 31, 2016
	Less than		One to		Over
(in thousands)	one year		five years		five years		Total
Commercial	$	478,938	$	416,636	$	322,158	$	1,217,732
Real estate - mortgage		359,682		564,360		247,081		1,171,123
Construction & land		139,448		33,527		1,476		174,451
Consumer		75,939		109,611		81,463		267,013
Other		626		26,105		77,055		103,786
Total loans	$	1,054,633	$	1,150,239	$	729,233	$	2,934,105

Of the $1.88 billion of loans with maturities or repricing of one year or more, approximately $1.19 billion were fixed-rate loans and $687.4 million were variable-rate loans at December 31, 2016.

61

To augment our asset and liability management strategy, we use interest-rate swaps on our loan portfolio with the overall goal of minimizing the impact of interest rate fluctuations on our net interest margin. Interest-rate swaps involve the exchange of fixed-rate and variable-rate interest payment obligations without the exchange of the underlying notional amounts.

Under the interest-rate swap agreements, we receive a fixed-rate and pay a variable-rate based on LIBOR. The swaps qualify as cash flow hedges under ASC Topic 815, Derivatives and Hedging (ASC 815), and are designated as hedges of the variability of cash flows we received from certain of our LIBOR-based loans. In accordance with ASC 815, these swap agreements are measured at fair value and reported as assets or liabilities on the consolidated balance sheets. The portion of the change in the fair value of the swaps that is deemed effective in hedging the cash flows of the designated assets is recorded in AOCI, net of tax effects, and reclassified to interest income when such cash flows occur in the future. Any ineffectiveness resulting from the hedges is recorded as a gain or loss in the consolidated statements of income as a part of noninterest income.

Information on outstanding interest rate swaps at December 31, 2016 is as follows:

Swap Effective Date	Maturity date	Fixed-rate		Notional		Fair market value
(in thousands)
November 1, 2016	November 1, 2021	1.12	%	$	50,000	$	(1,570)
November 1, 2016	November 1, 2023	1.29	%		50,000		(2,324)
Total				$	100,000	$	(3,894)

Since 2009, the Company has managed a series of interest-rate swap transactions designated as cash flow hedges.  The intent of the transactions was to fix the effective interest rate of payments due on its junior subordinated debentures with the objective of reducing the Company’s exposure to adverse changes in cash flows relating to payments on its LIBOR-based floating-rate debt.  The swap agreements in effect at December 31, 2016, have a total notional value of $70.0 million, fix the interest rates between 5.0% and 6.0% and mature over varying lengths of time from four to eight years.

The Company has initiated certain interest-rate swap transactions designated as fair value hedges under ASC 815.  The objective of these transactions is to exchange interest payments received on fixed-rate loans for variable-rate payments.  At December 31, 2016, the notional value of these swaps was $62.4 million.

During the years ended December 31, 2016, 2015 and 2014, net interest income decreased $2.1 million, $2.0 million and $2.0 million, respectively, from settlement of the interest-rate swaps.

The Company has initiated foreign exchange forward contracts to mitigate exposure to foreign exchange rate risk on foreign currency holdings.  Foreign currencies held include the British pound;  Euro;  Swiss franc;  Mexican peso;  Japanese yen;  and Australian, New Zealand and Canadian dollars.  At December 31, 2016, the aggregate notional value of the foreign currency forwards was $4.5 million and all contracts settle within three months or less of date of this report.  The effect of foreign currency forwards on noninterest income was immaterial for the years ending December 31, 2016, 2015 and 2014. 

Item 8. Financial Statements and Supplementary Data

Reference is made to our consolidated financial statements, the reports thereon, and the notes thereto beginning at page F-1 of this Form 10-K, which financial statements, reports, notes and data are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

62

Item 9A. Controls and Procedures

Disclosure Controls and Procedures.  The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s CEO and the Company’s CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures at the end of the period covered by this report pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s CEO and CFO concluded the Company’s disclosure controls and procedures are effective in ensuring that information relating to the Company, including its consolidated subsidiaries, required to be disclosed in reports that it files under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms;  and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting.  During the fourth quarter of 2016, no change in the Company’s internal control over financial reporting was identified in connection with this evaluation that has materially affected or is reasonably likely to materially affect internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm are set forth in our consolidated financial statements and the reports thereon beginning at page F-1.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information concerning the Company’s directors and officers called for by this item will be included in the Company’s definitive Proxy Statement prepared in connection with the 2017 Annual Meeting of Shareholders (the 2017 Proxy Statement) and is incorporated herein by reference. Information regarding audit committee financial experts and the audit committee will be included in our 2017 Proxy Statement and is hereby incorporated by reference. Information regarding disclosure of compliance with Section 16(a) of the Exchange Act will also be included in our 2017 Proxy Statement and is hereby incorporated by reference.

The Company has adopted a Code of Conduct and Ethics (Code of Conduct) that applies to the Company’s officers, directors and employees, including the Company’s principal executive officer, principal financial officer, principal accounting officer or controller (collectively Company Associates), or persons performing similar functions. The Company has posted the Code of Conduct and will post any changes in or waivers of the Code of Conduct applicable to any Company Associate on its website at www.cobizfinancial.com.  

Item 11. Executive Compensation

Information concerning the compensation of Company executives called for by this item will be included in the Company’s 2017 Proxy Statement and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Certain information required by this Item 12 is included under “Securities Authorized for Issuance under Equity Compensation Plans” in Part II, Item 5 of this Annual Report on Form 10-K. The other information required by this Item is incorporated herein by reference to the 2017 Proxy Statement.

63

Item 13. Certain Relationships and Related Transactions and Director Independence

Information concerning certain relationships and transactions between CoBiz and its affiliates called for by this item will be included in the Company’s 2017 Proxy Statement and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information required by this Item will be included in the Company’s 2017 Proxy Statement and is incorporated herein by reference.

64

PART IV

Item 15. Exhibits and Financial Statement Schedules

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

Management’s Report on Internal Control Over Financial Reporting;

Reports of Independent Registered Public Accounting Firm;

Consolidated Balance Sheets at December 31, 2016 and 2015;

Consolidated Statements of Income for the Years Ended December 31, 2016, 2015 and 2014;

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014;

Consolidated Statements of Equity for the Years Ended December 31, 2016, 2015 and 2014;

Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014;

Notes to Consolidated Financial Statements at and for the Years Ended December 31, 2016, 2015 and 2014.

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

(3)  Exhibits and Index of Exhibits:

Incorporated by Reference
Exhibit Number	Exhibit Description	Filed Herewith	Form	File No.	Exhibit	Filing Date
3.1	Amended and Restated Articles of Incorporation of the Registrant.		SB-2	333-50037	3.1	4/14/1998
3.2	Amendment to Articles of Incorporation.		8-K	001-15955	3.2	3/23/2001
3.3	Amendment to Articles of Incorporation.		10-Q	001-15955	3.3	8/14/2002
3.4	Amendment to Articles of Incorporation.		DEF 14A	001-15955		4/14/2005
3.5	Amended and Restated Bylaws of the Registrant.		8-K	001-15955	3	12/18/2006
3.6	Amendment to Articles of Incorporation.		10-Q	001-15955	3.7	8/9/2007
3.7	Amendment to Articles of Incorporation.		8-K	001-15955	3.1	12/23/2008
3.8	Amendment to Articles of Incorporation.		8-K	001-15955	3.1	9/9/2011
3.9	Amendment to Articles of Incorporation		DEF 14A	001-15955		4/4/2014
4.1	Form of the Warrant to Purchase 895,968 shares of Common Stock originally issued December 19, 2008 to the United States Department of the Treasury (original warrant holder) and subsequently transferred on November 23, 2011 to CSS LLC.		10-K	001-15955	4.5	3/8/2012
4.2	Form of Subordinated Indenture, to be dated as of June 25, 2015.		8-K	001-15955	4.1	6/25/2015

65

4.3		Form of First Supplemental Indenture, to be dated as of June 25, 2015.		8-K	001-15955	4.2	6/25/2015
10.1	†	Employment Agreement, dated at January 3, 1998, by and between Colorado Business Bankshares, Inc. and Richard J. Dalton.		SB-2	333-50037	10.10	4/14/1998
10.2	†	Employment Agreement, dated August 12, 2003, by and between CoBiz Inc. and Lyne B. Andrich.		10-Q	001-15955	10.14	11/13/2003
10.3		Lease Agreement between Dorit, LLC and Colorado Business Bank, N.A.  dated March 31, 2003.		10-K	001-15955	10.17	3/12/2004
10.4	†	Employment Agreement, dated November 19, 2004, by and between CoBiz Inc. and Steven Bangert.		8-K	001-15955	10.1	11/24/2004
10.5	†	Indemnification Agreements dated December 19, 2006 between CoBiz Inc. and each the following directors and executive officers of the Corporation: Lyne B. Andrich, Steven Bangert, Michael B. Burgamy, Richard J. Dalton, Evan Makovsky, Robert B. Ostertag, Noel N. Rothman, Timothy J. Travis, Mary Beth Vitale and Mary White.		8-K	001-15955	10	12/20/2006
10.6	†	Employment Agreement, dated August 7, 2006, by and between CoBiz Inc. and Troy R. Dumlao.		10-Q	001-15955	10.20	8/9/2006
10.7	†	Amendments dated March 16, 2006 to the Employment Agreements between CoBiz Inc. and each of Steven Bangert, Richard J. Dalton, Lyne B. Andrich and Robert B. Ostertag.		8-K	001-15955	99	3/20/2006
10.8	†	Indemnification Agreement dated March 5, 2007 between CoBiz Inc. and Troy R. Dumlao.		10-K	001-15955	10.22	3/15/2007
10.9	†	Form of Indemnification Agreement dated January 16, 2009 between CoBiz Financial Inc. and Directors Douglas L. Polson and Mary Rhinehart, and on October 27, 2011 for Bruce Schroffel.		8-K	001-15955	10.1	1/20/2009
10.10	†	Form of Amended and Restated Executive Split Dollar Life Insurance Plan and Agreements, dated December 31, 2007 between CoBiz Financial Inc. and each of Steven Bangert, Richard J. Dalton, Lyne B. Andrich and Robert B. Ostertag.		10-K	001-15955	10.21	3/17/2008
10.11		Second and Third Amendments to Lease Agreement between Kesef, LLC and Colorado Business Bankshares, Inc. dated August 1, 2000.		8-K	001-15955	10.1 & 10.2	4/4/2008
10.12	†	Employment agreement, dated April 22, 2002, by and between CoBiz Inc. and David Pass.		10-Q	001-15955	10.1	7/29/2011
10.13	†	Employment agreement, dated June 23, 2009, by and between CoBiz Bank and Scott Page.		10-K	001-15955	10.29	3/8/2012
10.14	†	Incentive Compensation Plan for named executive officers.		8-K	001-15955	N/A	6/12/2012
10.15	†	Form of employment agreement, dated February 13, 2014, between CoBiz Financial Inc., and Chris Huss and Sue Hermann.		10-K	001-15955	10.23	2/14/2014
10.16	†	Amended and Restated 2005 Equity Incentive Plan		DEF 14A	001-15955		4/4/2014
10.17	†	CoBiz Financial Inc. Employee Stock Purchase Plan and Amendments		DEF 14A	001-15955		4/4/2014
10.18		Revolving credit agreement, dated June 19, 2015, between CoBiz Financial Inc. and U.S. Bank N.A.		8-K	001-15955		6/19/2015
10.19		Lease Agreement between Renshan L.P. and CoBiz Financial Inc. dated January 21, 2016.		10-K	001-15955	10.23	2/12/2016
10.20		First Amendment to Amended and Restated Credit Agreement dated June 8, 2016 between CoBiz Financial Inc., and U.S. Bank National Association.		10-Q	001-15955	10.1	7/29/2016
10.21	†	Amendment to the Amended and Restated 2005 Equity Incentive Plan		10-Q	001-15955	10.1	10/28/2016
14		Code of Conduct and Ethics.		10-K	001-15955	14	2/14/2014
21		List of subsidiaries.	X

66

23	Consent of Independent Registered Public Accounting firm (Crowe Horwath LLP).	X
31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.	X
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.	X
32.1	Section 1350 Certification of the Chief Executive Officer.	X
32.2	Section 1350 Certification of the Chief Financial Officer.	X
101.INS	XBRL Instance Document.	X
101.SCH	XBRL Taxonomy Extension Schema Document.	X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.	X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.	X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.	X
101.PRE	XBRL Taxonomy Presentation Linkbase Document.	X

 

† Management contract or compensatory plan or arrangement.

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

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

Item 16. Form 10-K Summary

None.

67

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated:  February 21, 2017	CoBiz Financial Inc.
	By:  /s/ Steven Bangert
	Steven Bangert
	Chief Executive Officer and Chairman of the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature:	Title:	Date:
/s/  Steven Bangert	Chairman of the Board and	February 21, 2017
Steven Bangert	Chief Executive Officer
/s/  Lyne B. Andrich	Executive Vice President and	February 21, 2017
Lyne B. Andrich	Chief Financial Officer
/s/  Troy R. Dumlao	Chief Accounting Officer	February 21, 2017
Troy R. Dumlao
/s/  Michael B. Burgamy	Director	February 21, 2017
Michael B. Burgamy
/s/  Evan Makovsky	Director	February 21, 2017
Evan Makovsky
/s/  Richard L.  Monfort	Director	February 21, 2017
Richard L. Monfort
/s/  Douglas L. Polson	Director	February 21, 2017
Douglas L. Polson
/s/  Mary K. Rhinehart	Director	February 21, 2017
Mary K. Rhinehart
/s/  Noel N. Rothman	Director	February 21, 2017
Noel N. Rothman
/s/ Bruce H. Schroffel	Director	February 21, 2017
Bruce H. Schroffel
/s/  Timothy J. Travis	Director	February 21, 2017
Timothy J. Travis
/s/  Mary Beth Vitale	Director	February 21, 2017
Mary Beth Vitale
/s/  Mary M. White	Director	February 21, 2017
Mary M. White

68

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Management’s Report on Internal Control Over Financial Reporting	F-2
Reports of Independent Registered Public Accounting Firm	F-3
Consolidated Balance Sheets at December 31, 2016 and 2015	F-5
Consolidated Statements of Income for the Years Ended December 31, 2016, 2015 and 2014	F-6
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014	F-7
Consolidated Statements of Equity for the Years Ended December 31, 2016, 2015 and 2014	F-8
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014	F-9
Notes to Consolidated Financial Statements at and for the Years Ended December 31, 2016, 2015 and 2014	F-10

F-1

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management’s Report on Internal Control over Financial Reporting

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

As of December 31, 2016, management assessed the effectiveness of the Company’s internal control over financial reporting based on the framework established in the 2013Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2016, is effective.

Crowe Horwath LLP, the independent registered public accounting firm that audited the 2016 consolidated financial statements included in this annual report on Form 10-K, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting at December 31, 2016, which is included herein.

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

CoBiz Financial Inc.

Denver, Colorado

We have audited CoBiz Financial Inc. and Subsidiaries (the “Company”) internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of income, comprehensive income, equity, and cash flows of CoBiz Financial Inc. and Subsidiaries and our report dated February 21, 2017 expressed an unqualified opinion on those financial statements.

/s/ Crowe Horwath LLP

Sherman Oaks, California

February 21, 2017

F-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

CoBiz Financial Inc.

Denver, Colorado

We have audited the accompanying consolidated balance sheets of CoBiz Financial Inc. and Subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2016.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2017 expressed an unqualified opinion thereon.

/s/ Crowe Horwath LLP

Sherman Oaks, California

February 21, 2017

F-4

COBIZ FINANCIAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AT DECEMBER 31, 2016 AND 2015

(in thousands, except share amounts)	2016		2015
Assets
Cash and due from banks	$	69,333	$	48,665
Interest-bearing deposits and federal funds sold		26,717		18,647
Total cash and cash equivalents		96,050		67,312
Investment securities available for sale (cost of $130,308 and $150,905, respectively)		132,981		153,685
Investment securities held to maturity (fair value of $363,178 and $345,576, respectively)		366,041		346,666
Other investments		11,365		12,461
Total investments		510,387		512,812
Loans - net of allowance for loan losses of $33,293 and $40,686, respectively		2,900,812		2,658,519
Intangible assets - net of amortization of $7,104 and $6,504, respectively		1,326		1,926
Bank-owned life insurance		53,674		49,373
Premises and equipment - net of depreciation of $38,269 and $39,504, respectively		11,019		6,122
Accrued interest receivable		12,223		10,362
Deferred income taxes, net		19,901		22,221
Other real estate owned - net of valuation allowance of $8,666 and $8,666, respectively		5,079		5,079
Other		19,842		18,041
TOTAL ASSETS	$	3,630,313	$	3,351,767
Liabilities
Deposits
Noninterest-bearing demand	$	1,282,463	$	1,180,335
Interest-bearing demand		714,062		585,524
Money market		861,856		804,777
Savings		19,561		18,078
Certificates of deposits		151,841		152,998
Total deposits		3,029,783		2,741,712
Securities sold under agreements to repurchase		27,639		47,459
Other short-term borrowings		106,230		132,000
Accrued interest and other liabilities		33,074		25,863
Subordinated notes payable - net of unamortized discount and issuance costs of $889 and $969, respectively		59,111		59,031
Junior subordinated debentures		72,166		72,166
TOTAL LIABILITIES		3,328,003		3,078,231
Commitments and contingencies - see note 16
Shareholders' Equity
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding		-		-
Common stock, $.01 par value; 100,000,000 shares authorized;  41,555,208 and 41,122,119 issued and outstanding, respectively		411		406
Additional paid-in capital		197,758		192,768
Retained earnings		103,575		77,079
Accumulated other comprehensive income (AOCI), net of income tax of $348 and $2,013, respectively		566		3,283
TOTAL SHAREHOLDERS' EQUITY		302,310		273,536
TOTAL LIABILITIES AND EQUITY	$	3,630,313	$	3,351,767

See Notes to Consolidated Financial Statements

F-5

COBIZ FINANCIAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(in thousands, except per share amounts)	2016		2015		2014
INTEREST INCOME:
Interest and fees on loans	$	114,612	$	107,622	$	98,627
Interest and dividends on investment securities:
Taxable securities		11,713		12,487		14,810
Nontaxable securities		730		609		271
Dividends on securities		561		432		507
Interest on federal funds sold and other		166		116		102
Total interest income		127,782		121,266		114,317
INTEREST EXPENSE:
Interest on deposits		3,854		3,640		3,866
Interest on short-term borrowings and securities sold under agreements to repurchase		494		214		441
Interest on subordinated debentures and notes payable		7,383		5,736		4,122
Total interest expense		11,731		9,590		8,429
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		116,051		111,676		105,888
Provision for loan losses		(2,101)		6,420		(4,155)
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		118,152		105,256		110,043
NONINTEREST INCOME:
Service charges		6,059		5,862		5,598
Investment advisory income		5,714		5,832		5,736
Insurance income		12,568		12,047		11,150
Other income		9,819		6,926		5,425
Total noninterest income		34,160		30,667		27,909
NONINTEREST EXPENSE:
Salaries and employee benefits		71,471		69,526		66,008
Occupancy expenses, premises and equipment		14,966		13,079		13,100
Amortization of intangibles		600		600		597
FDIC and other assessments		1,692		1,813		1,737
Other real estate owned and loan workout costs		512		388		1,066
Net gain on securities, other assets and other real estate owned		(121)		(369)		(2,597)
Other expense		16,111		15,140		14,225
Total noninterest expense		105,231		100,177		94,136
INCOME BEFORE INCOME TAXES		47,081		35,746		43,816
Provision for income taxes		12,182		9,606		15,018
NET INCOME FROM CONTINUING OPERATIONS		34,899		26,140		28,798
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations		-		(113)		338
Provision (benefit) for income taxes		-		(42)		129
Net income (loss) from discontinued operations		-		(71)		209
NET INCOME	$	34,899	$	26,069	$	29,007
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	34,899	$	25,749	$	28,433
EARNINGS PER COMMON SHARE:
Basic - Continuing	$	0.84	$	0.63	$	0.69
Diluted - Continuing	$	0.84	$	0.62	$	0.69
Basic - Discontinued	$	-	$	0.00	$	0.01
Diluted - Discontinued	$	-	$	0.00	$	0.01
Basic	$	0.84	$	0.63	$	0.70
Diluted	$	0.84	$	0.62	$	0.70

See Notes to Consolidated Financial Statements

F-6

COBIZ FINANCIAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(in thousands)	2016		2015		2014
Net income	$	34,899	$	26,069	$	29,007
Other comprehensive income (loss) items:
Available for sale securities:
Net unrealized gain (loss)		(13)		358		4,491
Reclassification to operations		(94)		(318)		(1,154)
Net unrealized holding gains transferred to held to maturity		-		(8,821)		-
		(107)		(8,781)		3,337
Held to maturity securities:
Net unrealized gain on securities transferred		-		8,821		-
Reclassification to operations		(1,831)		(1,904)		-
		(1,831)		6,917		-
Cash flow hedges:
Net unrealized loss		(3,504)		(905)		(2,067)
Reclassification to operations		1,060		1,082		1,310
		(2,444)		177		(757)
Total other comprehensive income (loss) items	$	(4,382)	$	(1,687)	$	2,580
Income tax provision:
Available for sale securities:
Net unrealized gain (loss)	$	(5)	$	136	$	1,708
Reclassification to operations		(36)		(121)		(439)
Net unrealized holding gains transferred to held to maturity		-		(3,352)		-
		(41)		(3,337)		1,269
Held to maturity securities:
Net unrealized gain on securities transferred		-		3,352		-
Reclassification to operations		(696)		(724)		-
		(696)		2,628		-
Cash flow hedges:
Net unrealized loss		(1,332)		(344)		(785)
Reclassification to operations		404		411		498
		(928)		67		(287)
Total income tax (provision) benefit	$	(1,665)	$	(642)	$	982
Other comprehensive income (loss), net of tax		(2,717)		(1,045)		1,598
Comprehensive income	$	32,182	$	25,024	$	30,605

See Notes to Consolidated Financial Statements

F-7

COBIZ FINANCIAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2016,  2015 AND 2014

	Preferred Stock			Common Stock
	Shares						Additional				Accumulated other
	issued			Shares			paid-In		Retained		comprehensive
(in thousands, except share amounts)	(redeemed)	Amount		issued	Amount		capital		earnings		income		Total
BALANCE - December 31, 2013	57,366	$	1	40,368,008	$	397	$	240,660	$	37,297	$	2,730	$	281,085
Options exercised	-		-	154,091		4		1,112		-		-		1,116
Employee stock purchase plan	-		-	43,449		1		453		-		-		454
Shares withheld in net settlement of restricted stock	-		-	(92,340)		(1)		(409)		(635)		-		(1,045)
Restricted stock awards, net of forfeitures	-		-	297,182		-		-		-		-		-
Stock-based compensation expense	-		-	-		-		3,141		-		-		3,141
Tax benefit from stock-based compensation	-		-	-		-		63		-		-		63
Dividends paid-common ($0.15 per share)	-		-	-		-		-		(6,076)		-		(6,076)
Dividends paid/accumulated-preferred stock (1.0% on $1,000 per share liquidation value)	-		-	-		-		-		(574)		-		(574)
Other comprehensive income, net of income taxes of $(982)	-		-	-		-		-		-		1,598		1,598
Net income	-		-	-		-		-		29,007		-		29,007
BALANCE - December 31, 2014	57,366		1	40,770,390		401		245,020		59,019		4,328		308,769
Options exercised	-		-	166,589		5		1,270		-		-		1,275
Employee stock purchase plan	-		-	39,309		1		457		-		-		458
Shares withheld in net settlement of restricted stock	-		-	(103,763)		(1)		(470)		(736)		-		(1,207)
Restricted stock awards, net of forfeitures	-		-	249,594		-		-		-		-		-
Stock-based compensation expense	-		-	-		-		3,324		-		-		3,324
Tax benefit from stock-based compensation	-		-	-		-		532		-		-		532
Redemption of preferred stock	(57,366)		(1)	-		-		(57,365)		-		-		(57,366)
Dividends paid-common ($0.17 per share)	-		-	-		-		-		(6,953)		-		(6,953)
Dividends paid/accumulated-preferred stock (1.0% on $1,000 per share liquidation value)	-		-	-		-		-		(320)		-		(320)
Other comprehensive loss, net of income taxes of $642	-		-	-		-		-		-		(1,045)		(1,045)
Net income	-		-	-		-		-		26,069		-		26,069
BALANCE - December 31, 2015	-		-	41,122,119		406		192,768		77,079		3,283		273,536
Options exercised	-		-	216,268		2		1,678		-		-		1,680
Employee stock purchase plan	-		-	36,813		1		437		-		-		438
Shares withheld in net settlement of restricted stock	-		-	(77,855)		(1)		(359)		(531)		-		(891)
Restricted stock awards, net of forfeitures	-		-	257,863		3		(3)		-		-		-
Stock-based compensation expense	-		-	-		-		3,213		-		-		3,213
Cumulative effect of adopting of ASU 2016-09	-		-	-		-		24		(14)		-		10
Dividends paid-common ($0.19 per share)	-		-	-		-		-		(7,858)		-		(7,858)
Other comprehensive loss, net of income taxes of $1,665	-		-	-		-		-		-		(2,717)		(2,717)
Net income	-		-	-		-		-		34,899		-		34,899
BALANCE - December 31, 2016	-	$	-	41,555,208	$	411	$	197,758	$	103,575	$	566	$	302,310

See Notes to Consolidated Financial Statements

F-8

COBIZ FINANCIAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

	For the year ended December 31,
(in thousands)	2016		2015		2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	34,899	$	26,069	$	29,007
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		4,446		4,112		3,309
Provision for loan losses		(2,101)		6,420		(4,155)
Stock-based compensation		3,213		3,324		3,141
Deferred income taxes		3,985		(1,572)		5,519
Bank-owned life insurance		(1,367)		(1,334)		(1,271)
Net gain on securities, other assets and other real estate owned		(121)		(369)		(2,618)
Other operating activities, net		(869)		(1,761)		(893)
Changes in operating assets and liabilities:
Other assets		(2,959)		(529)		(1,393)
Other liabilities		4,416		(237)		(3,375)
Net cash provided by operating activities		43,542		34,123		27,271
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of other investments		(15,720)		(13,765)		(20,859)
Proceeds from other investments		19,152		14,428		19,456
Purchase of investment securities available for sale		(6,962)		(28,049)		(13,053)
Purchase of investment securities held to maturity		(89,016)		(108,052)		-
Proceeds from sale of investment securities available for sale		-		-		11,590
Maturity, call and principal payments on investment securities available for sale		27,322		36,919		83,515
Maturity, call and principal payment on investment securities held to maturity		66,830		68,960		34
Acquisition of client relationships		-		(75)		(250)
Purchase of bank-owned life insurance		(3,195)		-		(3,335)
Net proceeds from sale of loans, OREO and repossessed assets		60		2,499		12,392
Loan originations and repayments, net		(240,092)		(291,573)		(326,658)
Purchase of premises and equipment		(9,381)		(1,547)		(4,226)
Other investing activities, net		348		-		(1,976)
Net cash used in investing activities		(250,654)		(320,255)		(243,370)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, money market and savings accounts		289,228		307,430		247,564
Net decrease in certificates of deposits		(1,157)		(58,009)		(34,310)
Net increase (decrease) in short-term borrowings		(25,770)		19,531		112,469
Net decrease in securities sold under agreements to repurchase		(19,820)		(2,517)		(88,518)
Net proceeds from issuance of subordinated notes payable		-		59,250		-
Proceeds from issuance of common stock		2,118		1,733		1,570
Taxes paid in net settlement of restricted stock		(891)		(1,207)		(1,045)
Redemption of preferred stock		-		(57,366)		-
Dividends paid on common stock		(7,858)		(6,953)		(6,076)
Dividends paid on preferred stock		-		(463)		(574)
Other financing activities, net		-		450		556
Net cash provided by financing activities		235,850		261,879		231,636
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		28,738		(24,253)		15,537
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		67,312		91,565		76,028
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	96,050	$	67,312	$	91,565

See Notes to Consolidated Financial Statements

F-9

COBIZ FINANCIAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AT AND FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

1. Nature of Operations and Significant Accounting Policies

CoBiz Financial Inc. (Parent) is a financial holding company headquartered in Denver, Colorado which provides a broad range of banking and related services through its wholly owned subsidiaries: CoBiz Bank (Bank); CoBiz Insurance, Inc.; and CoBiz IM, Inc. (CoBiz IM); all collectively referred to as the “Company” or “CoBiz.”  The operations of the Company comprise predominantly the Bank, which operates in its Colorado market areas under the name Colorado Business Bank (CBB) and in its Arizona market areas under the name Arizona Business Bank (ABB).

Organization - The Bank is a commercial banking institution with seven (excluding one branch closed in January 2017) locations in the Denver metropolitan area; one in Boulder; one near Vail; one in Colorado Springs; one in Fort Collins; and four in the Phoenix metropolitan area.  As a state chartered bank, deposits are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (the FDIC) and the Bank is subject to supervision, regulation and examination by the Federal Reserve System (Federal Reserve), Colorado Division of Banking and the FDIC. Pursuant to such regulations, the Bank is subject to special restrictions, supervisory requirements and potential enforcement actions. CoBiz Insurance, Inc. provides commercial and personal property and casualty (P&C) insurance brokerage, and risk management consulting services to small and medium-sized businesses and individuals; and employee benefits consulting, insurance brokerage and related administrative support to employers. CoBiz IM provides wealth planning and investment management to institutions and individuals through its SEC-registered investment advisor subsidiary, CoBiz Wealth, LLC.  CoBiz GMB, Inc. provided investment banking services to middle-market companies through its wholly-owned subsidiary, Green Manning & Bunch, Ltd. (GMB), until its discontinuation on March 31, 2015. The operating results of GMB have been retrospectively presented as discontinued operations for all periods presented.  See Note 2 – Discontinued Operations for additional information on the discontinued operations of GMB. 

Use of Estimates – The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) and, where applicable, prevailing practices within the financial services industry. In preparing the consolidated financial statements, the Company is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ significantly from those estimates. 

Reclassifications – Certain reclassifications have been made to prior years’ consolidated financial statements and related notes to conform to current year presentation including: the effects of discontinued operations and the aggregation of certain line items in the consolidated statements of cash flows.  Refer to Note 2 – Discontinued Operations for additional information. 

The following is a summary of certain of the Company’s significant accounting and reporting policies.

Basis of Presentation — The consolidated financial statements include entities in which the Parent has a controlling financial interest.  These entities include; the Bank; CoBiz Insurance, Inc.; and CoBiz IM.  Intercompany balances and transactions are eliminated in consolidation.  The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (VIE).

The voting interest model is used when the equity investment is sufficient to absorb the expected losses and the equity investment has all of the characteristics of a controlling financial interest. Under the voting interest model, the party with the controlling voting interest consolidates the legal entity.  The VIE model is used when any of the following conditions exist: the equity investment at risk is not sufficient to finance the entity’s activities without additional subordinated financial support; the holders of the equity investment do not have a controlling voting interest; or the holders of the equity investment are not obligated to absorb the expected

F-10

losses or residual returns of the legal entity. An enterprise is considered to have a controlling financial interest of a VIE if it has both the power to direct the activities that most significantly impact economic performance and the obligation to absorb losses, or receive benefits, that are significant to the VIE. An enterprise that has a controlling financial interest is considered the primary beneficiary and must consolidate the VIE.  The Company was not the primary beneficiary of a VIE at December 31, 2016 or December 31, 2015.

Cash and Cash Equivalents — The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include amounts that the Company is required to maintain at the Federal Reserve Bank of Kansas City (Federal Reserve Bank) to meet certain regulatory reserve balance requirements.  At December 31, 2016 and 2015, the Company had reserve requirements of $24.3 million and $18.2 million, respectively.  The following table shows supplemental disclosures of certain cash and noncash items:

	For the year ended December 31,
(in thousands)	2016		2015		2014
Cash paid during the period for:
Interest	$	11,826	$	9,256	$	8,295
Income taxes, net		8,950		9,919		11,061
Other noncash activities:
Loans transferred to held for sale		60		1,628		7,087
Loans transferred to OREO		-		-		2,660
Trade date accounting for investment securities		1,553		795		-
Available for sale securities transferred to held to maturity		-		288,598		-

Investments — The Company classifies its investment securities as held to maturity, available for sale or trading, according to management’s intent.  Investment security transactions are recorded on a trade date basis.  At December 31, 2016 and 2015, the Company had no trading securities.

Available for sale securities consist of bonds, notes and debentures (including corporate debt and TPS) not classified as held to maturity securities and are reported at fair value as determined by quoted market prices. Unrealized holding gains and losses, net of tax, are reported as a net amount in AOCI until realized.

Investment securities held to maturity consist of residential mortgage-backed securities (MBS), bonds, notes, debentures for which the Company has the positive intent and ability to hold to maturity and are reported at cost, adjusted for amortization or accretion of premiums and discounts.

Premiums and discounts, adjusted for prepayments as applicable, are recognized in interest income. Other than temporary declines in the fair value of individual investment securities held to maturity and available for sale are charged against earnings. Gains and losses on disposal of investment securities are determined using the specific identification method.

Other-than-temporary-impairment (OTTI) on debt securities is separated between the amount that is credit related (credit loss component) and the amount due to all other factors.  The credit loss component is recognized in earnings and is the difference between a security’s amortized cost basis and the discounted present value of expected future cash flows. The amount due to all other factors is recognized in other comprehensive income (loss) (OCI).  See Note 3 – Investments.

Bank Stocks — Federal Home Loan Bank of Topeka (FHLB), Federal Reserve Bank and other correspondent bank stocks are accounted for under the cost method.  See Note 3 – Investments.

Loans Held for Investment— Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, deferred fees and costs on originated loans, and unamortized premiums or discounts on purchased loans. Interest is accrued and credited to income daily based on the principal balance outstanding. The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal and interest. When a loan is designated as nonaccrual, the current period’s accrued

F-11

interest receivable is charged against current earnings while any portions relating to prior periods are charged against the allowance for loan losses. Interest payments received on nonaccrual loans are generally applied to the principal balance of the loan. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured and there has been demonstrated performance in accordance with contractual terms.  The Company may elect to continue the accrual of interest when the loan is in the process of collection and the realizable value of collateral is sufficient to cover the principal balance and accrued interest.

Loans Held for Sale — Loans held for sale include loans the Company has demonstrated the ability and intent to sell.  Loans held for sale are primarily nonperforming loans.  Loans held for sale are carried at the lower of cost or fair value and are evaluated on a loan-by-loan basis.

Impaired Loans — Impaired loans, with the exception of groups of smaller-balance homogenous loans that are collectively evaluated for impairment, are defined as loans for which, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays of less than 90 days and monthly payment shortfalls of less than 10% of the contractual payment on a consumer loan generally are not classified as impaired if the Company ultimately expects to recover its full investment. The Company determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Loans that are deemed to be impaired are evaluated in accordance with Accounting Standards Codification (ASC) Topic 310-10-35, Receivables – Subsequent Measurement (ASC 310) and ASC Topic 450-20, Loss Contingencies (ASC 450).

Included in impaired loans are troubled debt restructurings.  A troubled debt restructuring is a formal restructure of a loan where the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including but not limited to reduction in the stated interest rate, reduction in the loan balance or accrued interest, or extension of the maturity date.  Troubled debt restructurings are evaluated in accordance with ASC Topic 310-40, Troubled Debt Restructurings by Creditors. Interest payments on impaired loans are typically applied to principal unless collectability of principal is reasonably assured. Loans that have been modified in a formal restructuring are typically returned to accrual status when there has been a sustained period of performance (generally six months) under the modified terms, the borrower has shown the ability and willingness to repay and the Company expects to collect all amounts due under the modified terms.

Loan Origination Fees and Costs — Loan fees and certain costs of originating loans are deferred and the net amount is amortized over the contractual life of the related loans in accordance with ASC Topic 310-20, Nonrefundable Fees and Other Costs.

Allowance for Loan Losses — The allowance for loan losses (ALL) is established as losses are estimated to have occurred through a provision for loan losses charged against earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The ALL is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.

F-12

Allowance for Credit Losses — The allowance for credit losses is established as losses are estimated to have occurred through a provision for credit losses charged to earnings. The allowance for credit losses represents management’s recognition of a separate reserve for off-balance sheet loan commitments and letters of credit. While the allowance for loan losses is recorded as a contra-asset to the loan portfolio on the consolidated balance sheets, the allowance for credit losses is recorded under the caption “Accrued interest and other liabilities”. Although the allowances are presented separately on the balance sheets, any losses incurred from credit losses would be reported as a charge-off in the allowance for loan losses, as any loss would be recorded after the off-balance sheet commitment had been funded.  See Note 4 – Loans.

Intangible Assets — Intangible assets, primarily consisting of customer contracts and relationships, are being amortized by the straight-line method over 10 to 15 years.  See Note 6 – Intangible Assets.

Bank-Owned Life Insurance (BOLI) – The Bank invested in BOLI policies to fund certain future employee benefit costs and are recorded at net realizable value.  Changes in the amount that could be realized, including death benefits in excess of the carrying amount, are recorded in the consolidated statements of income under the caption “Other Income.”

Premises and Equipment – Premises and equipment are stated at cost less accumulated depreciation and amortization, which is calculated using the straight-line method over the estimated useful lives of generally three to ten years.  Leasehold improvements are capitalized and amortized using the straight-line method over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter.  The Company reviews the carrying value of property and equipment for indications of impairment in accordance with ASC Topic 360-10-35, Impairment or Disposal of Long-Lived Assets.  See Note 5 – Premises and Equipment.

Other Assets – Included in other assets are certain investments (Funds), where the Company has the ability to exercise significant influence or has ownership between 20% and 50% that are accounted for under the equity method.  The Funds are equity method investments licensed as Small Business Investment Companies that invest primarily in subordinated debt securities.  In certain circumstances, the Funds may also receive warrants or other equity positions as part of their investments.  There were no significant transactions between the Company and the Funds for the years ended December 31, 2016, 2015, and 2014.  The Company recognized income (loss) from the Funds of $2.5 million, $1.3 million, and $(0.1) million for the years ended December 31, 2016, 2015, and 2014, respectively, which is included in “Other Income” in the consolidated statements of income.

Repossessed Assets – Assets acquired through repossession are held for sale and initially recorded at estimated fair value at the date of repossession.  Subsequent to repossession, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell.  Repossessed assets are reported in the consolidated balance sheets under the caption “Other Assets.”  There were no repossessed assets at December 31, 2016 and 2015.

Other Real Estate Owned (OREO) – OREO held for sale acquired through foreclosure, physical possession or in settlement of debt is valued at estimated fair value, less estimated costs to sell, at the date of receipt.  Subsequent to foreclosure, OREO is carried at the lower of carrying amount or fair value less costs to sell.  Subsequent declines in value are charged to operations.  Activity in the valuation allowance on OREO for the years ended December 31, 2016, 2015, and 2014 is as follows:

	For the year ended December 31,
(in thousands)	2016		2015		2014
Beginning balance	$	8,666	$	8,760	$	8,674
Additions		-		33		398
Deductions due to sales		-		(127)		(312)
Ending balance	$	8,666	$	8,666	$	8,760

Securities Sold Under Agreements to Repurchase – The Company sells certain securities under agreements to repurchase with its customers.  The agreements transacted with its customers are utilized as

F-13

an overnight investment product.  These agreements are treated as secured borrowings, where the agreements are reflected as a liability of the Company and the securities underlying the agreements are reflected as a Company asset in accordance with ASC Topic 860, Transfers and Servicing.  See Note 8 – Borrowed Funds.

Derivative Instruments — Derivative financial instruments are accounted for at fair value. The Company utilizes interest rate swaps to hedge a portion of its exposure to interest rate changes. These instruments are accounted for as cash flow hedges, as defined by ASC Topic 815, Derivatives and Hedging (ASC 815). The Company also uses interest rate swaps to hedge against adverse changes in fair value on fixed-rate loans.  These instruments are accounted for as fair value hedges in accordance with ASC 815.  The net cash flows from the cash flow and fair value hedges are classified in operating activities within the consolidated statements of cash flows with the hedged items.  The Company also offers an interest rate hedge program that includes various derivative products, including swaps, to customers of the Bank. The fair value amounts recognized for derivative instruments and the fair value amounts recognized for the right to reclaim or obligation to return cash collateral are not offset when represented under a master netting arrangement.  The Company also uses foreign currency forward contracts (FX forwards) giving it the right to sell underlying currencies at specified future dates and predetermined prices in order to mitigate foreign exchange risk associated with long positions.  FX forwards are carried at fair value with changes in value recognized in current earnings as the contracts are not designated as hedging instruments.  See Note 10 – Derivatives.

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

Investment Advisory Income – Fees earned from providing investment advisory services are based on the market value of assets under management and are collected at the end of each quarter. 

Insurance Income  –Insurance income includes commissions on the sale of life and property and casualty insurance policies, and other employee benefit products earned as an agent for unaffiliated insurance underwriters.  Property and casualty income is primarily recognized upon policy origination and renewal dates.  Benefits brokerage income is recognized on a monthly basis as the customer pays their insurance premiums.

Income (loss) From Discontinued Operations, Net of Income Taxes – Income (loss) from discontinued operations, net of income taxes for the years ended December 31, 2016, 2015 and 2014 includes the closure of GMB, which is discussed in Note 2 – Discontinued Operations.

Income Taxes – A deferred income tax liability or asset is recognized for temporary differences which exist in the recognition of certain income and expense items for financial statement reporting purposes in periods different than for tax reporting purposes.  The provision for income taxes is based on the amount of current and deferred income taxes payable or refundable at the date of the financial statements as measured by the provisions of current tax laws.  A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.  The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, taxes paid in prior carryback years, projected future taxable income and tax planning strategies in its assessment of a valuation allowance.  See Note 11 – Income Taxes.

Stock-Based Compensation — Pursuant to ASC Topic 718, Compensation – Stock Compensation (ASC 718), the Company recognizes the fair value of stock-based awards to employees as compensation cost over the requisite service period.  See Note 15 – Employee Benefit and Stock Compensation Plans. 

Earnings Per Common Share — Basic and diluted earnings per share is based on the two-class method prescribed in ASC Topic 260, Earnings Per Share (ASC 260).  The weighted-average number of shares outstanding used to compute diluted earnings per share include the number of additional common shares that

F-14

would be outstanding if the potential dilutive common shares and common share equivalents had been issued at the beginning of the period.  See Note 14 – Earnings per Common Share.

Segment Information - The Company has disclosed separately the results of operations relating to its segments in Note 19 – Segments. 

Fair Value Measurements — The Company measures financial assets, financial liabilities, nonfinancial assets and nonfinancial liabilities pursuant to ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820).  ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  See Note 18 - Fair Value Measurements.

Recent Accounting Pronouncements — In May 2014, the FASB issued ASU No. 2014-9 (ASU 2014-09), Revenue from Contracts with Customers. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer, as well as enhanced disclosure requirements. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 to fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08 which clarified the revenue recognition implementation guidance on principal versus agent considerations and is effective during the same period as ASU 2014-09. In April 2016, the FASB issued ASU 2016-10 which clarified the revenue recognition guidance regarding the identification of performance obligations and the licensing implementation and is effective during the same period as ASU 2014-09. In May 2016, the FASB issued ASU 2016-12 which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. ASU 2016-12 is effective during the same period as ASU 2014-09. The Company is currently evaluating the effects of these ASUs on its financial statements and disclosures, if any.  Preliminarily, the Company expects these ASUs to have more of an impact on the Fee-Based Lines segment than Commercial Banking segment, which generates the majority of the Company’s revenue.  The Company has conducted its initial assessment and is currently evaluating contracts to assess and quantify accounting methodology changes resulting from the adoption of ASU 2014-09.  Revenue from the Fee-Based Lines segment includes property and casualty brokerage income, employee benefit brokerage income and investment advisory income which totaled $18.3 million in 2016.  While the timing of revenue recognition from these sources may change, the Company does not expect a material impact to its financial statements.

In August 2014, the FASB issued ASU 2014-15 (ASU 2014-15), Presentation of Financial statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern.  ASU 2014-15 contains amendments intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures.  Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures.  ASU 2014-15 provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes.  ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods beginning thereafter.  The adoption of ASU 2014-15 did not have an impact on the financial statements.

In February 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standard Update (ASU) 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 is intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about lease arrangements.  For public business entities, this ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018.  The Company is currently evaluating the effects of ASU 2016-02 on its financial statements and disclosures by taking inventory of all existing lease arrangements.  Preliminarily, the Company expects the primary impact of ASU 2016-02 will relate to its office locations, the majority of which are designated as operating leases.  The Company has future operating lease obligations for its locations of $33.4 million that are being evaluated as potential lease assets and liabilities, as defined in ASU 2016-02.

F-15

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09).  ASU 2016-09 includes provisions intended to simplify various aspects related to accounting for and presentation of share-based payments in the financial statements.  The areas for simplification include income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, and early adoption is permitted for financial statements that have not been previously issued.  The Company early adopted the provisions of ASU 2016-09 during the quarter ended March 31, 2016.  The cumulative effect adjustment from the modified retrospective transition of the income tax consequences, forfeitures and the classification of awards did not have a material effect on the Company’s financial statements or disclosures.  Changes to the statement of cash flows have been applied prospectively beginning in the first quarter of 2016.  See Note 15 - Employee Benefit and Stock Compensation Plans. 

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13).  The objective of ASU 2016-13 is to provide financial statement users with decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit.  ASU 2016-13 includes provisions that require financial assets measured at amortized cost (such as loans and held to maturity (HTM) debt securities) to be presented at the net amount expected to be collected.  This will be accomplished through recognition of an estimate of all current expected credit losses.  The estimate will include forecasted information for the timeframe that an entity is able to develop reasonable and supportable forecasts.  This is a change from the current practice of recognizing incurred losses based on the probable initial recognition threshold under current GAAP.  In addition, credit losses on available for sale (AFS) debt securities will be recorded through an allowance for credit losses rather than as a write-down.  Under ASU 2016-13, an entity will be able to record reversals of credit losses in current period income when the estimate of credit losses declines, whereas current GAAP prohibits reflecting those improvements in current period earnings.

ASU 2016-13 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019, and early adoption is permitted for fiscal years, including interim periods, beginning after December 15, 2018.  ASU 2016-13 will be applied through a cumulative effect adjustment to retained earnings (modified-retrospective approach), except for debt securities for which an other-than-temporary impairment had been recognized before the effective date.  A prospective transition approach is required for these debt securities.  The Company is currently evaluating the effects of ASU 2016-13 on its financial statements and disclosures, and expects ASU 2016-13 to add complexity and costs to its current credit loss evaluation process.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), regarding how certain cash receipts and cash payments are presented and classified in the statements of cash flows.  ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.  The amendments of ASU 2016-13 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Amendments in this ASU should be applied using a retrospective transition method to each period presented.  The Company is evaluating the effects ASU 2016-15 will have on its financial statements and disclosures, and does not expect these effects to be material.

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (ASU 2016-20).  The amendments in ASU 2016-20 affect certain aspects of the guidance issued in ASU 2014-06 including loan guarantee fees, contract costs, provisions for losses on construction-type and production-type contracts, disclosure of remaining performance obligations, contract modifications, contract asset vs. receivable, refund liability, advertising costs, fixed odds wagering contracts in the casino industry, and costs capitalized for advisors to private funds and public funds.  The effective date of these amendments are at the same date that ASU 2014-09, which is discussed above, is effective.

F-16

2. Discontinued Operations

During the first quarter of 2015, the Company ceased operations of GMB due to increasing regulatory compliance costs and in order to focus on activities that provide recurring revenue.  The net carrying value of the assets and liabilities of GMB was $0.8 million and were transferred to the parent Company at the end of the first quarter of 2015.  The results of operations for GMB have been retrospectively presented as discontinued operations in all periods presented.

The table below presents the results of the discontinued operations of GMB for the years ended December 31, 2015 and 2014.  Net income (loss) before income taxes approximates total cash flows from operating activities of the discontinued operations.  Cash flows from investing activities were not material.

(in thousands)	2015		2014
Noninterest income	$	623	$	4,166
Noninterest expense		736		3,828
Income (loss) before income taxes		(113)		338
Provision (benefit) for income taxes		(42)		129
Net income (loss) from discontinued operations	$	(71)	$	209

3. Investments

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

	December 31, 2016								December 31, 2015
			Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Fair		Amortized		unrealized		unrealized		Fair
(in thousands)	cost		gains		losses		value		cost		gains		losses		value
Available for sale securities (AFS):
Trust preferred securities	$	36,450	$	1,707	$	533	$	37,624	$	44,845	$	1,684	$	446	$	46,083
Corporate debt securities		90,593		1,505		21		92,077		102,273		1,632		169		103,736
Municipal securities		3,265		33		18		3,280		3,787		99		20		3,866
Total AFS	$	130,308	$	3,245	$	572	$	132,981	$	150,905	$	3,415	$	635	$	153,685
Held to maturity securities (HTM):
Mortgage-backed securities	$	319,978	$	186	$	2,531	$	317,633	$	312,658	$	99	$	2,059	$	310,698
Trust preferred securities		10,620		522		267		10,875		10,524		816		85		11,255
Municipal securities		35,443		10		783		34,670		23,484		151		12		23,623
Total HTM	$	366,041	$	718	$	3,581	$	363,178	$	346,666	$	1,066	$	2,156	$	345,576

During the first quarter of 2015, the Company transferred MBS and municipal securities with a book value of $279.8 million and fair value of $288.6 million from AFS to HTM.  There were no security transfers between the AFS and HTM categories in 2016.  The Company believes the HTM category is more consistent with the Company’s intent for these securities.  Transfers of securities from AFS to HTM were made at fair value at the time of transfer.  The unamortized portion of the $8.8 million unrealized holding gain at the time of transfer is retained in AOCI and in the carrying value of HTM securities.  Accordingly, the balance of HTM securities in the “Amortized cost” column in the table above includes net unamortized unrealized gains of $5.1 million and $6.9 million at December 31, 2016 and 2015, respectively.  Such amounts are amortized over the remaining life of the securities. 

Proceeds from the sale of investments and the gain (loss) recognized on securities sold or called are summarized as follows:

	For the year ended December 31,
(in thousands)	2016		2015		2014
Proceeds	$	-	$	-	$	11,590
Gains		100		343		1,242
Losses		(6)		(25)		(88)

F-17

The amortized cost and estimated fair value of investments in debt securities at December 31, 2016, by contractual maturity are shown below.  Expected maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

	Available for sale				Held to maturity
	Amortized		Fair		Amortized		Fair
(in thousands)	cost		value		cost		value
Due in one year or less	$	35,094	$	35,335	$	874	$	872
Due after one year through five years		44,852		45,715		23,497		23,194
Due after five years through ten years		13,912		14,306		2,575		2,564
Due after ten years		36,450		37,625		19,117		18,915
Mortgage-backed securities		-		-		319,978		317,633
	$	130,308	$	132,981	$	366,041	$	363,178

Investment securities with a fair value of $143.6 million and $157.3 million were pledged to secure public deposits of $95.8 million and $113.6 million at December 31, 2016 and 2015, respectively.

Changes in interest rates and market liquidity may cause adverse fluctuations in the market price of securities resulting in temporary unrealized losses.  In reviewing the realizable value of its securities in a loss position, the Company considered the following factors: (1) the length of time and extent to which the market had been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) investment downgrades by rating agencies; and (4) whether it is more likely than not that the Company will have to sell the security before a recovery in value.  When it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the security, and the fair value of the investment security is less than its amortized cost, an other-than-temporary impairment is recognized in earnings. 

For debt securities that are considered other-than temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, OTTI is recognized.  OTTI is separated into the amount that is credit related (credit loss component) and the amount due to all other factors.  The credit loss component is recognized in earnings and is the difference between a security’s amortized cost basis and the discounted present value of expected future cash flows.  The amount due to all other factors is recognized in OCI.   

There were 165 and 168 securities in the tables below at December 31, 2016 and 2015, respectively, in an unrealized loss position.

	December 31, 2016
	Less than 12 months				12 months or greater				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in thousands)	value		loss		value		loss		value		loss
AFS
Trust preferred securities	$	14,979	$	526	$	995	$	7	$	15,974	$	533
Corporate debt securities		14,482		21		-		-		14,482		21
Municipal securities		1,214		18		-		-		1,214		18
Total AFS	$	30,675	$	565	$	995	$	7	$	31,670	$	572
HTM
Mortgage-backed securities	$	217,604	$	2,107	$	52,332	$	424	$	269,936	$	2,531
Trust preferred securities		4,175		94		700		173		4,875		267
Municipal securities		30,207		783		-		-		30,207		783
Total HTM	$	251,986	$	2,984	$	53,032	$	597	$	305,018	$	3,581

F-18

	December 31, 2015
	Less than 12 months				12 months or greater				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in thousands)	value		loss		value		loss		value		loss
AFS
Trust preferred securities	$	15,294	$	439	$	995	$	7	$	16,289	$	446
Corporate debt securities		33,591		169		-		-		33,591		169
Municipal securities		431		20		-		-		431		20
Total AFS	$	49,316	$	628	$	995	$	7	$	50,311	$	635
HTM
Mortgage-backed securities	$	281,547	$	2,059	$	-	$	-	$	281,547	$	2,059
Trust preferred securities		-		-		780		85		780		85
Municipal securities		2,604		12		-		-		2,604		12
Total HTM	$	284,151	$	2,071	$	780	$	85	$	284,931	$	2,156

There was no OTTI recognized in earnings during the years ended December 31, 2016, 2015 and 2014.

Other investments at December 31, 2016 and 2015, consist of the following:

	December 31,
(in thousands)	2016		2015
Bank stocks — at cost	$	9,192	$	10,289
Investment in statutory trusts — equity method		2,173		2,172
	$	11,365	$	12,461

Bank stocks consist primarily of stock in the FHLB which is part of the Federal Home Loan Bank System.  The purpose of the FHLB investment relates to maintenance of a borrowing base with the FHLB.  FHLB stock holdings are largely dependent upon the Company’s liquidity position.  To the extent the need for wholesale funding increases or decreases, the Company may purchase additional or sell excess FHLB stock, respectively.  The Company evaluates impairment in this investment based on the ultimate recoverability of the par value and at December 31, 2016 and 2015, did not consider the investment to be other-than-temporarily impaired.

4. Loans

The following disclosure reports the Company’s loan portfolio segments and classes.  Segments are groupings of similar loans at a level which the Company has adopted systematic methods of documentation for determining its allowance for loan and credit losses. Classes are a disaggregation of the portfolio segments.  The Company’s loan portfolio segments are:

· Commercial loans – Commercial loans consist of loans to small and medium-sized businesses in a wide variety of industries.  The Bank’s areas of emphasis in commercial lending include, but are not limited to, loans to wholesalers, manufacturers, municipalities, and construction and business services companies.  Commercial loans are generally collateralized by inventory, accounts receivable, equipment, real estate and other commercial assets, and may be supported by other credit enhancements such as personal guarantees.  Risk arises primarily due to a difference between expected and actual cash flows of the borrowers.  However, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans.  The fair value of the collateral securing these loans may fluctuate as market conditions change.  In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrowers’ ability to collect amounts due from its customers.   

· Real estate - mortgage loans– Real estate mortgage loans include various types of loans for which the Company holds real property as collateral.  Commercial real estate lending activity is typically

F-19

restricted to owner-occupied properties or to investor properties that are owned by customers with a current banking relationship.  The primary risks of real estate mortgage loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral and significant increases in interest rates, which may make the real estate mortgage loan unprofitable.  Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.  

· Construction & land – The Company originates loans to finance construction projects including one- to four-family residences, multifamily residences, commercial office, senior housing, and industrial projects.  Residential construction loans are due upon the sale of the completed project and are generally collateralized by first liens on the real estate and have floating interest rates.  Construction loans are considered to have higher risks due to construction completion and timing risk, and the ultimate repayment being sensitive to interest rate changes, governmental regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans.  Adverse economic conditions may negatively impact the real estate market which could affect the borrowers’ ability to complete and sell the project.  Additionally, the fair value of the underlying collateral may fluctuate as market conditions change.  The Company also originates loans for the acquisition and future development of land for residential building projects, as well as finished lots prepared to enter the construction phase.  The primary risks include the borrower’s inability to pay and the inability of the Company to recover its investment due to a decline in the fair value of the underlying collateral.

· Consumer loans–The Company provides a broad range of consumer loans to customers, including personal lines of credit, home equity loans, residential mortgage loans and automobile loans.  Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of the underlying collateral.

· Other loans–Other loans include lending products, such as taxable and tax-exempt leasing, not defined as commercial, real estate, acquisition and development, construction, or consumer loans.

The loan portfolio segments at December 31, 2016 and 2015 were as follows:

	December 31,
(in thousands)	2016		2015
Commercial	$	1,217,001	$	1,174,570
Real estate - mortgage		1,171,596		1,017,072
Construction & land		175,738		202,011
Consumer		266,947		253,240
Other		103,616		52,616
Loans held for investment		2,934,898		2,699,509
Allowance for loan losses		(33,293)		(40,686)
Unearned net loan fees		(793)		(304)
Total net loans	$	2,900,812	$	2,658,519

The Company routinely acquires participating interests in loans originated by other banks.

At December 31, 2016 and 2015, overdraft demand deposits totaling $0.6 million and $0.2 million, respectively, were reclassified from deposits to loans. 

The Company maintains a loan review program independent of the lending function that is designed to reduce and control risk in lending. It includes the continuous monitoring of lending activities with respect to underwriting and processing new loans, preventing insider abuse and timely follow-up and corrective action for loans showing signs of deterioration in quality.  The Company also has a systematic process to evaluate individual loans and pools of loans within our loan portfolio. The Company maintains a loan grading system whereby each loan is assigned a grade between 1 and 8, with 1 representing the highest quality credit, 7 representing a nonaccrual loan where collection or liquidation in full is highly questionable and improbable,

F-20

and 8 representing a loss that has been or will be charged-off.  Grades are assigned based upon the degree of risk associated with repayment of a loan in the normal course of business pursuant to the original terms.  Loans that are graded 5 or lower are categorized as non-classified credits while loans graded 6 and higher are categorized as classified credits.  Loan grade changes are evaluated on a monthly basis.  Loans above a certain dollar amount that are adversely graded are reported to the Special Assets Group manager and the Chief Credit Officer along with current financial information, a collateral analysis and an action plan.

F-21

The loan portfolio showing total non-classified and classified balances by loan class at December 31, 2016 and 2015 is summarized below:

	At December 31, 2016
(in thousands)	Non-classified		Classified		Total
Commercial
Manufacturing	$	96,465	$	153	$	96,618
Finance and insurance		49,764		587		50,351
Health care		153,468		555		154,023
Real estate services		125,531		513		126,044
Construction		55,471		3,247		58,718
Public administration		254,861		1,136		255,997
Other		437,219		38,031		475,250
		1,172,779		44,222		1,217,001
Real estate - mortgage
Residential & commercial owner-occupied		469,027		6,496		475,523
Residential & commercial investor		695,170		903		696,073
		1,164,197		7,399		1,171,596
Construction & land		172,816		2,922		175,738
Consumer		265,307		1,640		266,947
Other		101,894		1,722		103,616
Total loans held for investment	$	2,876,993	$	57,905	$	2,934,898
Unearned net loan fees						(793)
Net loans held for investment					$	2,934,105

	At December 31, 2015
(in thousands)	Non-classified		Classified		Total
Commercial
Manufacturing	$	132,083	$	2,967	$	135,050
Finance and insurance		64,243		36		64,279
Health care		126,049		462		126,511
Real estate services		117,283		1,580		118,863
Construction		56,581		1,325		57,906
Public administration		211,373		9,739		221,112
Other		425,233		25,616		450,849
		1,132,845		41,725		1,174,570
Real estate - mortgage
Residential & commercial owner-occupied		431,805		5,050		436,855
Residential & commercial investor		577,835		1,057		578,892
Other		1,325		-		1,325
		1,010,965		6,107		1,017,072
Construction & land		201,984		27		202,011
Consumer		252,869		371		253,240
Other		49,768		2,848		52,616
Total loans held for investment	$	2,648,431	$	51,078	$	2,699,509
Unearned net loan fees						(304)
Net loans held for investment					$	2,699,205

F-22

Transactions in the ALL by segment for the years ended December 31, 2016 and 2015 are summarized below:

	For the year ended
	December 31,
(in thousands)	2016		2015
Allowance for loan losses, beginning of period
Commercial	$	24,215	$	14,614
Real estate - mortgage		10,372		12,463
Construction & land		2,111		2,316
Consumer		2,592		2,329
Other		643		488
Unallocated		753		555
Total		40,686		32,765
Provision
Commercial	$	(2,334)	$	9,950
Real estate - mortgage		1,072		(3,017)
Construction & land		(1,279)		(1,253)
Consumer		216		374
Other		302		168
Unallocated		(78)		198
Total		(2,101)		6,420
Charge-offs
Commercial	$	(7,767)	$	(588)
Real estate - mortgage		-		(186)
Construction & land		-		(107)
Consumer		(37)		(130)
Other		-		(285)
Total		(7,804)		(1,296)
Recoveries
Commercial	$	1,284	$	239
Real estate - mortgage		31		1,112
Construction & land		1,165		1,155
Consumer		32		19
Other		-		272
Total		2,512		2,797
Allowance for loan losses, end of period
Commercial	$	15,398	$	24,215
Real estate - mortgage		11,475		10,372
Construction & land		1,997		2,111
Consumer		2,803		2,592
Other		945		643
Unallocated		675		753
Total	$	33,293	$	40,686

F-23

The Company estimates the ALL in accordance with ASC 310 for purposes of evaluating loan impairment on a loan-by-loan basis and ASC 450 for purposes of collectively evaluating loan impairment by grouping loans with common risk characteristics (i.e. risk classification, past-due status, type of loan, and collateral).  The ALL is comprised of the following components:

· Specific Reserves – The Company continuously evaluates its reserve for loan losses to maintain an adequate level to absorb loan losses incurred in the loan portfolio. Reserves on loans identified as impaired, including troubled debt restructurings, are based on discounted expected cash flows using the loan’s initial effective interest rate, the observable market value of the loan or the fair value of the collateral for certain collateral-dependent loans. The fair value of the collateral is determined in accordance with ASC 820. Loans are considered to be impaired in accordance with the provisions of ASC 310, when it is probable that all amounts due in accordance with the contractual terms will not be collected. Factors contributing to the determination of specific reserves include the financial condition of the borrower, changes in the value of pledged collateral and general economic conditions.  Troubled debt restructurings meet the definition of an impaired loan under ASC 310 and therefore, troubled debt restructurings are subject to impairment evaluation on a loan-by-loan basis.

For collateral dependent loans that have been specifically identified as impaired, the Company measures fair value based on third-party appraisals, adjusted for estimated costs to sell the property.  Upon impairment, the Company will obtain a new appraisal if one had not been previously obtained in the last 12 months.  For credits over $2.0 million, the Company engages an additional third-party appraiser to review the appraisal.  For credits under $2.0 million, the Company’s internal appraisal department reviews the appraisal.  All appraisals are reviewed for adherence to regulations and mathematical accuracy reasonableness based on recent sales transactions that may have occurred subsequent to or right at the time of the appraisal.  Based on this analysis the appraised value may be adjusted downward if there is evidence that the appraised value may not be indicative of fair value.  Each appraisal is updated on an annual basis, either through a new appraisal or through the Company’s comprehensive internal review process.

Values are reviewed and monitored internally and fair value is re-assessed at least quarterly or more frequently when events or circumstances occur that indicate a change in fair value.   

· General Reserves – General reserves are considered part of the allocated portion of the allowance. The Company uses a comprehensive loan grading process for our loan portfolios. Based on this process, a loss factor is assigned to each pool of graded loans.  A combination of loss experience and external loss data is used in determining the appropriate loss factor.  This estimate represents the probable incurred losses within the portfolio. In evaluating the adequacy of the ALL, management considers historical losses (Migration), as well as other factors including changes in:

· Lending policies and procedures

· National and local economic and business conditions and developments

· Nature and volume of portfolio

· Trends of the volume and severity of past-due and classified loans

· Trends in the volume of nonaccrual loans, troubled debt restructurings, and other loan modifications

· Credit concentrations

Troubled debt restructurings have a direct impact on the allowance to the extent a loss has been recognized in relation to the loan modified.  This is consistent with the Company’s consideration of Migration in determining general reserves.

The aforementioned factors enable management to recognize environmental conditions contributing to incurred losses in the portfolio, which have not yet manifested in Migration.  Management believes Migration history adequately captures a great percentage of probable incurred losses within the portfolio.

F-24

In addition to the allocated reserve for graded loans, a portion of the allowance is determined by segmenting the portfolio into product groupings with similar risk characteristics.  Part of the segmentation involves assigning increased reserve factors to those lending activities deemed higher-risk such as leverage-financings, unsecured loans, certain loans lacking personal guarantees, senior housing, speculative residential construction and multifamily loans.   

· Unallocated Reserves – The unallocated reserve, which is judgmentally determined, is maintained to recognize the imprecision in estimating and measuring loss when evaluating reserves for individual loans or pools of loans.  The unallocated reserve consists of a missed grade component that is intended to capture the inherent risk that certain loans may be assigned an incorrect loan grade.

In assessing the reasonableness of management’s assumptions, consideration is given to select peer ratios, industry standards and directional consistency of the ALL.  Ratio analysis highlights divergent trends in the relationship of the ALL to nonaccrual loans, to total loans and to historical charge-offs.  Although these comparisons can be helpful as a supplement to assess reasonableness of management assumptions, they are not, by themselves, sufficient basis for determining the adequacy of the ALL.  While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The following tables summarize loans held for investment and the ALL on the basis of the impairment method at December 31, 2016 and 2015:

	At December 31, 2016								At December 31, 2015
	Individually								Individually
	evaluated for				Collectively evaluated for				evaluated for				Collectively evaluated for
	impairment				impairment				impairment				impairment
	Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance
	held for		for loan		held for		for loan		held for		for loan		held for		for loan
(in thousands)	investment		losses		investment		losses		investment		losses		investment		losses
Commercial	$	20,279	$	2,220	$	1,197,453	$	13,178	$	33,927	$	10,975	$	1,141,452	$	13,240
Real estate - mortgage		3,758		147		1,167,365		11,328		6,521		320		1,009,747		10,052
Construction & land		1,919		109		172,532		1,888		2,610		192		198,671		1,919
Consumer		294		98		266,719		2,705		855		56		252,462		2,536
Other		-		-		103,786		945		-		-		52,960		643
Unallocated		-		-		-		675		-		-		-		753
Total	$	26,250	$	2,574	$	2,907,855	$	30,719	$	43,913	$	11,543	$	2,655,292	$	29,143

F-25

Information on impaired loans at December 31, 2016 and 2015 is reported in the following tables:

	At December 31, 2016
					Recorded		Recorded
			Recorded		investment		investment
	Unpaid		investment		with a		with no
	principal		in impaired		related		related		Related
(in thousands)	balance		loans		allowance		allowance		allowance
Commercial
Manufacturing	$	2,095	$	2,072	$	2,071	$	1	$	114
Finance and insurance		25		25		25		-		25
Healthcare		189		189		189		-		11
Real estate services		6,268		6,268		6,268		-		350
Construction		2,166		2,166		1,932		234		149
Other		10,716		9,559		9,066		493		1,571
		21,459		20,279		19,551		728		2,220
Real estate - mortgage
Residential & commercial owner-occupied		1,391		1,391		1,122		269		64
Residential & commercial investor		2,367		2,367		2,367		-		83
		3,758		3,758		3,489		269		147
Construction & land		1,919		1,919		1,919		-		109
Consumer		294		294		195		99		98
Total	$	27,430	$	26,250	$	25,154	$	1,096	$	2,574

	At December 31, 2015
					Recorded		Recorded
			Recorded		investment		investment
	Unpaid		investment		with a		with no
	principal		in impaired		related		related		Related
(in thousands)	balance		loans		allowance		allowance		allowance
Commercial
Manufacturing	$	5,002	$	4,795	$	4,795	$	-	$	476
Finance and insurance		36		36		36		-		36
Healthcare		125		125		125		-		9
Real estate services		7,638		7,638		7,638		-		559
Construction		1,906		1,874		1,874		-		309
Other		20,847		19,459		19,451		8		9,586
		35,554		33,927		33,919		8		10,975
Real estate - mortgage
Residential & commercial owner-occupied		1,790		1,790		1,479		311		185
Residential & commercial investor		4,731		4,731		4,731		-		135
		6,521		6,521		6,210		311		320
Construction & land		2,643		2,610		2,583		27		192
Consumer		855		855		746		109		56
Total	$	45,573	$	43,913	$	43,458	$	455	$	11,543

F-26

	For the year ended December 31,
	2016				2015				2014
	Average				Average				Average
	recorded				recorded				recorded
	investment		Interest		investment		Interest		investment		Interest
	in impaired		income		in impaired		income		in impaired		income
(in thousands)	loans		recognized		loans		recognized		loans		recognized
Commercial
Manufacturing	$	3,383	$	234	$	5,643	$	306	$	4,244	$	299
Finance and insurance		30		-		164		24		307		13
Healthcare		194		12		33		11		205		13
Real estate services		6,996		261		8,006		283		6,416		281
Construction		1,873		140		1,666		106		1,604		158
Other		12,804		619		7,507		1,034		3,807		349
		25,280		1,266		23,019		1,764		16,583		1,113
Real estate - mortgage
Residential & commercial owner-occupied		1,777		114		1,762		130		4,102		176
Residential & commercial investor		3,722		127		5,104		182		7,062		247
		5,499		241		6,866		312		11,164		423
Construction & land		2,336		93		2,935		104		5,957		166
Consumer		448		19		1,444		202		1,362		93
Other		-		-		26		11		51		1
Total	$	33,563	$	1,619	$	34,290	$	2,393	$	35,117	$	1,796

Interest income recognized on impaired loans noted in the table above, primarily represents interest earned on troubled debt restructurings that meet the definition of an impaired loan and are subject to disclosure.  Interest income disclosed represents income recognized during the year ended December 31, 2016, 2015, and 2014 on impaired loans, regardless of when the loans became impaired.  Interest income recognized on impaired loans using the cash-basis method of accounting during the years ended December 31, 2016, 2015 and 2014 was immaterial. 

Interest income that would have been recorded had nonaccrual loans performed in accordance with their original contract terms during 2016,  2015, and 2014 was $0.1 million, $0.2 million, and $0.3 million, respectively.

The table below summarizes transactions as it relates to troubled debt restructurings for the year ended December 31, 2016:  

(in thousands)	Performing		Nonperforming		Total
Beginning balance at December 31, 2015	$	28,196	$	13,837	$	42,033
New restructurings		8,563		3,266		11,829
Change in accrual status		(912)		912		-
Paydowns		(12,235)		(7,883)		(20,118)
Net charge-offs		-		(7,591)		(7,591)
Ending balance at December 31, 2016	$	23,612	$	2,541	$	26,153

The below table provides information regarding troubled debt restructurings that occurred during years ended December 31, 2016, 2015 and 2014.  Pre-modification outstanding recorded investment reflects the Company’s recorded investment immediately before the modification.  Post-modification outstanding recorded

F-27

investment represents the Company’s recorded investment at the end of the reporting period.  The tables below do not include loans restructured and paid-off during the periods presented.

	For the year ended December 31, 2016						For the year ended December 31, 2015
			Pre-modification		Post-modification				Pre-modification		Post-modification
			outstanding		outstanding				outstanding		outstanding
	Number of		recorded		recorded		Number of		recorded		recorded
($ in thousands)	contracts		investment		investment		contracts		investment		investment
Commercial
Manufacturing		1	$	50	$	22		2	$	491	$	437
Health care		1		100		100		1		200		125
Construction		4		1,995		1,844		3		1,738		1,029
Other		9		7,388		5,275		15		19,809		15,975
		15		9,533		7,241		21		22,238		17,566
Real estate - mortgage
Residential & commercial owner-occupied		-		-		-		1		1,000		1,000
Consumer		1		77		72		1		148		130
Total		16	$	9,610	$	7,313		23	$	23,386	$	18,696

	For the year ended December 31, 2014
			Pre-modification		Post-modification
			outstanding		outstanding
	Number of		recorded		recorded
($ in thousands)	contracts		investment		investment
Commercial
Manufacturing		3	$	1,611	$	1,318
Real estate services		4		1,171		1,024
Construction		5		2,784		1,478
Other		8		2,092		1,454
		20		7,658		5,274
Real estate - mortgage
Residential & commercial owner-occupied		1		29		28
Construction & land		1		121		95
Consumer		1		93		89
Other		1		91		84
Total		24	$	7,992	$	5,570

Troubled debt restructurings during the years ended December 31, 2016, 2015 and 2014, resulted primarily from the extension of repayment terms and interest rate reductions.  For the year ended December 31, 2016, the Company charged-off $1.1 million in loans restructured during the year.  For the year ended December 31, 2015, the Company did not charge-off any troubled debt restructurings modified during 2015.  For the year ended December 31, 2014, the Company charged-off $0.4 million in troubled debt restructurings modified during 2014.

Loans modified as troubled debt restructurings within the previous 12 months having a payment default during the years ended December 31, 2016 and 2015 were immaterial. 

At December 31, 2016 and 2015 there were $1.6 million and $1.7 million in outstanding commitments on restructured loans, respectively. 

F-28

The Company’s recorded investment on nonaccrual loans by class at December 31, 2016 and 2015 is reported in the following table:

	At December 31,
(in thousands)	2016		2015
Commercial
Manufacturing	$	2	$	1,045
Finance and insurance		25		36
Real estate services		-		91
Construction		234		451
Other		1,941		13,486
Total commercial		2,202		15,109
Real estate - mortgage
Residential & commercial owner-occupied		269		499
Total real estate - mortgage		269		499
Construction & land		-		27
Consumer		167		82
Total nonaccrual loans	$	2,638	$	15,717

The following tables summarize the aging of the Company’s loan portfolio at December 31, 2016 and 2015:

	At December 31, 2016
													Recorded
													investment
													in loans
	30 - 59		60 - 89										90 days or more
	Days past		Days past		90+ Days		Total past						past due and
(in thousands)	due		due		past due		due		Current		Total loans		accruing
Commercial
Manufacturing	$	-	$	-	$	-	$	-	$	96,618	$	96,618	$	-
Finance and insurance		456		-		25		481		49,870		50,351		-
Health care		500		-		-		500		153,523		154,023		-
Real estate services		-		-		-		-		126,044		126,044		-
Construction		260		-		-		260		58,458		58,718		-
Public administration		-		-		-		-		255,997		255,997		-
Other		2,941		200		-		3,141		472,109		475,250		-
		4,157		200		25		4,382		1,212,619		1,217,001		-
Real estate - mortgage
Residential & commercial owner-occupied		204		161		-		365		475,158		475,523		-
Residential & commercial investor		-		225		-		225		695,848		696,073		-
		204		386		-		590		1,171,006		1,171,596		-
Construction & land		-		-		657		657		175,081		175,738		657
Consumer		4		63		75		142		266,805		266,947		-
Other		-		-		-		-		103,616		103,616		-
Total loans held for investment	$	4,365	$	649	$	757	$	5,771	$	2,929,127	$	2,934,898	$	657
Unearned net loan fees												(793)
Net loans held for investment											$	2,934,105

F-29

	At December 31, 2015
													Recorded
													investment
													in loans
	30 - 59		60 - 89										90 days or more
	Days past		Days past		90+ Days		Total past						past due and
(in thousands)	due		due		past due		due		Current		Total loans		accruing
Commercial
Manufacturing	$	24	$	-	$	-	$	24	$	135,026	$	135,050	$	-
Finance and insurance		-		-		-		-		64,279		64,279		-
Health care		323		-		-		323		126,188		126,511		-
Real estate services		183		-		-		183		118,680		118,863		-
Construction		-		-		-		-		57,906		57,906		-
Public administration		-		-		-		-		221,112		221,112		-
Other		173		185		2,125		2,483		448,366		450,849		-
		703		185		2,125		3,013		1,171,557		1,174,570		-
Real estate - mortgage
Residential & commercial owner-occupied		-		317		-		317		436,538		436,855		-
Residential & commercial investor		-		-		-		-		578,892		578,892		-
Other		-		-		-		-		1,325		1,325		-
		-		317		-		317		1,016,755		1,017,072		-
Construction & land		156		-		-		156		201,855		202,011		-
Consumer		-		89		505		594		252,646		253,240		505
Other		-		-		-		-		52,616		52,616		-
Total loans held for investment	$	859	$	591	$	2,630	$	4,080	$	2,695,429	$	2,699,509	$	505
Unearned net loan fees												(304)
Net loans held for investment											$	2,699,205

In the ordinary course of business, the Company makes various direct and indirect loans to officers and directors of the Company.  Activity with respect to officer and director loans is as follows for the years ended December 31, 2016 and 2015. 

(in thousands)	2016		2015
Balance - beginning of year	$	34,301	$	25,522
New loan and advances		48,110		35,916
Principal paydowns and payoffs		(47,416)		(27,137)
Balance - end of year	$	34,995	$	34,301

F-30

5.  Premises and Equipment

The major classes of premises and equipment at December 31, 2016 and 2015, are summarized as follows:

(in thousands)	2016		2015
Land	$	230	$	230
Buildings		230		230
Leasehold improvements		10,425		10,422
Furniture, fixtures, and equipment		38,403		34,744
Premises and equipment, gross		49,288		45,626
Accumulated depreciation		(38,269)		(39,504)
Premises and equipment, net	$	11,019	$	6,122

The Company recorded depreciation expense related to premises and equipment of $2.9 million during the year ended December 31, 2016, and $2.7 million during the years ended December 31, 2015 and 2014.

6.  Intangible Assets

At December 31, 2016 and 2015, the Company’s intangible assets and related amortization consisted of the following:

	Customer
	contracts, lists
(in thousands)	and relationships
At December 31, 2014	$	2,526
Amortization		(600)
At December 31, 2015		1,926
Amortization		(600)
At December 31, 2016	$	1,326

The Company recorded amortization expense of $0.6 million for the years ended December 31, 2016, 2015 and 2014.  Amortization expense on intangible assets for each of the five succeeding years is in the following table.

(in thousands)
2017	$	600
2018		206
2019		201
2020		136
2021		91
Total	$	1,234

7.  Deposits

In the ordinary course of business, the Company takes various deposits from employees, officers and directors of the Company.  Related party deposits totaled $80.2 million and $95.4 million at December 31, 2016 and 2015, respectively.

The composition of the certificates of deposit portfolio at December 31, 2016 and 2015, is as follows:

	At December 31,
(in thousands)	2016		2015
Less than $100	$	23,432	$	22,476
$100 and more		128,409		130,522
	$	151,841	$	152,998

F-31

Related interest expense for the years ended December 31, 2016, 2015 and 2014, is as follows:

	For the year ended December 31,
(in thousands)	2016		2015		2014
Less than $100	$	321	$	92	$	125
$100 and more		291		647		892
	$	612	$	739	$	1,017

Maturities of certificates of deposit of $100,000 and more at December 31, 2016, are as follows:

(in thousands)	Amount
Remaining maturity:
Three months or less	$	48,517
Over three months through six months		35,472
Over six months through 12 months		31,709
2018		7,627
2019		2,475
2020		1,874
2021		735
Total	$	128,409

The aggregate amount of certificates of deposit in denominations that meet or exceed the $250,000 FDIC insurance limit was $55.7 million and $57.1 million at December 31, 2016 and 2015, respectively.

The Company participates in the Certificate of Deposit Account Registry Service (CDARS) and Insured Cash Sweep (ICS) programs provided through a third party.  These programs are designed to provide full FDIC insurance on accounts placed through a reciprocal exchange with other banks participating in the programs.  The Company had $44.2 million and $37.2 million of reciprocal time deposits through the CDARS program outstanding at the end of 2016 and 2015, respectively.  The Company had $283.6 million and $199.5 million of reciprocal demand deposits through the ICS program outstanding at the end of 2016 and 2015, respectively.

8.  Borrowed Funds

Securities sold under agreements to repurchase at December 31, 2016 and 2015 are summarized as follows:

	At December 31,
(in thousands)	2016		2015
Securities sold under agreements to repurchase (principally mortgage-backed securities with an estimated fair value of $28,192 and $49,882 in 2016 and 2015, respectively	$	27,639	$	47,459

The Company enters into sales of securities under agreements to repurchase.  The amounts received under these agreements represent short-term borrowings and are reflected as a liability in the consolidated balance sheets.  The securities underlying these agreements are included in investment securities in the consolidated balance sheets.  The Company has no control over the market value of the securities, which fluctuates due to market conditions.  However, the Company is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price.  The Company manages this risk by maintaining an unpledged securities portfolio that it believes is sufficient to cover a decline in the market value of the securities sold under agreements to repurchase. 

Securities sold under agreements to repurchase averaged $46.0 million and $57.3 million during 2016 and 2015, respectively.  The maximum amounts outstanding at any month-end during 2016 and 2015 were $71.0 million and $68.6 million, respectively.  At December 31, 2016 and 2015, the weighted‑average interest rate was 0.07% and 0.06%, respectively.  All securities sold under agreements to repurchase had a maturity date of less than three months. 

F-32

The Company has a revolving Line of Credit (LOC) agreement with an aggregate principal sum of up to $20.0 million bearing interest at 1-month LIBOR plus 225 basis points (2.25%).  The Company pays a quarterly commitment fee of 0.35% per annum on the unused portion of the LOC.  The LOC matures in May 2017, at which time any outstanding amounts are due and payable.  The LOC is used for general corporate purposes and backup liquidity.  Although the credit facility is unsecured, the Company has agreed not to sell, pledge or transfer any part of its right, title or interest in the Bank.  At December 31, 2016 and 2015, there was no amount outstanding on the revolving LOC.

The Company has a line of credit with the FHLB with a rolling one-year term that matures every July with automatic renewals unless canceled.  There was $106.2 million and $132.0 million outstanding on the FHLB line of credit at December 31, 2016 and 2015.  The average FHLB line of credit balance was $82.8 million and $61.1 million during 2016 and 2015, respectively.  The line of credit is collateralized by either qualifying loans or investment securities not otherwise pledged as collateral.  At December 31, 2016, the FHLB line of credit was collateralized by loans of $861.0 million with a lending value of $598.5 million.  At December 31, 2015, the FHLB line of credit was collateralized by loans of $867.4 million with a lending value of $591.2 million.  The variable-rate on the line of credit was 0.72% and 0.48% at December 31, 2016 and 2015, respectively.

The Company has approved federal fund purchase lines with eight banks with an aggregate credit line of $170.0 million.  No amounts were outstanding on the federal funds purchase lines at the end of either 2016 or 2015.  The average balance of federal funds purchased was $2.0 million and $1.3 million during 2016 and 2015, respectively.

9.  Long-Term Debt

Outstanding subordinated debentures and notes payable at December 31, 2016 and 2015, are summarized as follows:

	At December 31,
(in thousands)	2016		2015		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, 2017
CoBiz Capital Trust II		30,928		30,928	3-month LIBOR + 2.60%	July 23, 2034	January 23, 2017
CoBiz Capital Trust III		20,619		20,619	3-month LIBOR + 1.45%	September 30, 2035	March 30, 2017
Total junior subordinated debentures	$	72,166	$	72,166
Other long-term debt:
Subordinated notes payable ($60,000 face amount)	$	59,111	$	59,031	Fixed 5.625%	June 25, 2030	June 25, 2025

Effective for interest payments beginning in February 2010, the Company fixed the interest rate on its junior subordinated debentures through a series of interest rate swaps.  For further discussion of the interest rate swaps and the corresponding terms, see Note 10 - Derivatives.

In September 2003, the Company created a wholly owned trust, CoBiz Statutory Trust I, formed under the laws of the State of Connecticut (the Statutory Trust). The Statutory Trust issued $20.0 million of trust preferred securities bearing an interest rate based on a spread above three-month LIBOR. Simultaneously with the issuance, the Company purchased a minority interest in the Statutory Trust for $0.6 million. The Statutory Trust invested the proceeds thereof in $20.6 million of junior subordinated debentures of CoBiz that also bear an interest rate based on a spread above three‑month LIBOR. The securities and junior subordinated debentures provide cumulative distributions at a floating rate that is reset each quarter on March 17, June 17, September 17 and December 17. The junior subordinated debentures will mature and the capital securities must be redeemed on September 17, 2033, which may be shortened to any quarterly distribution date, if certain conditions are met (including the Company having received prior approval from the

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Federal Reserve and any other required regulatory approvals) and notice is given at least 30 and not more than 60 days prior to the redemption date.

In May 2004, the Company created a wholly owned trust, CoBiz Capital Trust II, formed under the laws of the State of Delaware (the Capital Trust II). The Capital Trust II issued $30.0 million of trust preferred securities bearing an interest rate based on a spread above three-month LIBOR. Simultaneously with the issuance, the Company purchased a minority interest in the Capital Trust II for $0.9 million. The Capital Trust II invested the proceeds thereof in $30.9 million of junior subordinated debentures of CoBiz that also bear an interest rate based on a spread above three-month LIBOR. The securities and junior subordinated debentures provide cumulative distributions at a floating rate that is reset each quarter on January 23, April 23, July 23 and October 23. The junior subordinated debentures will mature and the capital securities must be redeemed no later than July 23, 2034, if certain conditions are met (including the Company having received prior approval from the Federal Reserve and any other required regulatory approvals).

In August 2005, the Company created a wholly owned trust, CoBiz Capital Trust III, formed under the laws of the State of Delaware (the Capital Trust III). The Capital Trust III issued $20.0 million of trust preferred securities bearing an interest rate based on a spread above three-month LIBOR. Simultaneously with the issuance, the Company purchased a minority interest in the Capital Trust III for $0.6 million. The Capital Trust III invested the proceeds thereof in $20.6 million of junior subordinated debentures of CoBiz that also bear an interest rate based on a spread above three‑month LIBOR. The securities and junior subordinated debentures provide cumulative distributions at a floating rate that is reset each quarter on March 30, June 30, September 30 and December 30. The junior subordinated debentures will mature and the capital securities must be redeemed no later than September 30, 2035, if certain conditions are met (including the Company having received prior approval from the Federal Reserve and any other required regulatory approvals).

The Company records the distributions of the junior subordinated debentures in interest expense on the consolidated statements of income. All of the outstanding junior subordinated debentures may be prepaid if certain events occur, including a change in tax status or regulatory capital treatment of trust preferred securities. In each case, redemption will be made at par, plus the accrued and unpaid distributions thereon through the redemption date.

The Basel III capital rules contain a provision that preserves the current capital treatment of trust preferred securities issued by bank holding companies with less than $15 billion in total assets.  Although the accounts of the Statutory Trust, Capital Trust II and Capital Trust III are not included in the Company’s consolidated financial statements, $70.0 million in trust preferred securities issued by the trusts are included in Common equity Tier 1 capital for regulatory purposes as grandfathered under Basel III.  See Note 17 – Regulatory Matters.    

In June 2015, the Company completed an offering of $60.0 million of unsecured 5.625% Fixed-to-Floating Rate Subordinated Notes (Notes) due on June 25, 2030.  The Notes bear a 5.625% annual fixed-rate through June 25, 2025 and thereafter an annual floating rate equal to three-month LIBOR plus 317 basis points (3.17%).  The Notes contain a call option that allows the Company to repay the Notes prior to their contractual maturity.  The call option is available on June 25, 2025 and quarterly thereafter at 100% of the principal amount.  Proceeds, net of an original discount and debt issuance costs of $1.1 million, were $58.9 million.  Debt issuance costs incurred in conjunction with the offering were $0.3 million.  The Notes have an effective interest rate of 5.85%.  The Company has adopted ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30), that requires debt issuance costs to be reported as a direct deduction from the face of the note and not as a deferred charge.  The discount and related debt issuance costs will be amortized into interest expense using the interest method over a 10-year term to the first call date. 

10.Derivatives

ASC 815 contains the authoritative guidance on accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities.   As required by ASC 815, the Company records all derivatives on the consolidated balance sheets at fair value. 

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The Company is exposed to certain risks arising from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and unknown cash amounts, the value of which are determined by interest rates.  The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable-rate loan assets and variable-rate borrowings.  The Company also enters into derivative financial instruments to protect against adverse changes in fair value on fixed-rate loans. 

The Company’s objective in using derivatives is to minimize the impact of interest rate fluctuations on the Company’s net interest income. To accomplish this objective, the Company uses interest-rate swaps as part of its cash flow hedging strategy. The Company also offers an interest rate hedge program that includes various derivative products, including swaps, to assist its customers in managing their interest rate risk profile. In order to eliminate the interest-rate risk associated with offering these products, the Company enters into derivative contracts with third parties to offset the customer contracts.  These customer accommodation interest rate swap contracts are not designated as hedging instruments.

The Company has also expanded its product offering by adding international banking products, which exposes the Company to foreign exchange risk.  The Company utilizes foreign exchange forward contracts to manage the risk associated with fluctuation in foreign exchange rates.  

The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.  Also, the Company has agreements with certain of its derivative counterparties that contain a provision where if the Bank fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

At December 31, 2016, the fair value of derivatives in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk, related to these agreements was $9.5 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $9.7 million against its obligations under these agreements.  At December 31, 2016, the Company was not in default with any of its debt or capitalization covenants.

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The table below presents the fair value of the Company’s derivative financial instruments as well as the classification within the consolidated balance sheets.

	Asset derivatives					Liability derivatives
		Fair value at December 31,					Fair value at December 31,
	Balance sheet					Balance sheet
(in thousands)	classification	2016		2015		classification	2016		2015
Derivatives designated as hedging instruments under ASC 815:
Cash flow hedge interest rate swap	Other assets	$	-	$	578	Accrued interest and other liabilities	$	7,639	$	4,981
Fair value hedge interest rate swap	Other assets		476		117	Accrued interest and other liabilities		845		1,574
Derivatives not designated as hedging instruments under ASC 815:
Interest rate swap	Other assets	$	2,755	$	3,092	Accrued interest and other liabilities	$	2,736	$	3,275
Foreign exchange forward contracts	Other assets		52		109	Accrued interest and other liabilities		5		59

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The tables below include information about financial instruments and collateral that are eligible for offset. 

	At December 31, 2016
	Gross		Gross				Gross amounts not offset
	amounts of		amounts				Financial				Net
(in thousands)	recognized assets		offset		Net amounts		Instruments		Collateral		Amount
Derivatives designated as hedges(1)	$	476	$	-	$	476	$	(476)	$	-	$	-
Derivatives not designated as hedges(1)		2,807		-		2,807		(967)		-		1,840
Total	$	3,283	$	-	$	3,283	$	(1,443)	$	-	$	1,840

	At December 31, 2016
	Gross		Gross				Gross amounts not offset
	amounts of		amounts				Financial				Net
(in thousands)	recognized liabilities		offset		Net amounts		Instruments		Collateral		Amount
Derivatives designated as hedges(2)	$	(8,484)	$	-	$	(8,484)	$	476	$	8,008	$	-
Derivatives not designated as hedges(2)		(2,741)		-		(2,741)		967		1,668		(106)
Securities sold under agreements to repurchase(3)		(27,639)		-		(27,639)		-		27,639		-
Total	$	(38,864)	$	-	$	(38,864)	$	1,443	$	37,315	$	(106)

	At December 31, 2015
	Gross		Gross				Gross amounts not offset
	amounts of		amounts				Financial				Net
(in thousands)	recognized assets		offset		Net amounts		Instruments		Collateral		Amount
Derivatives designated as hedges(1)	$	695	$	-	$	695	$	(316)	$	-	$	379
Derivatives not designated as hedges(1)		3,201		-		3,201		(88)		-		3,113
Total	$	3,896	$	-	$	3,896	$	(404)	$	-	$	3,492

	At December 31, 2015
	Gross		Gross				Gross amounts not offset
	amounts of		amounts				Financial				Net
(in thousands)	recognized liabilities		offset		Net amounts		Instruments		Collateral		Amount
Derivatives designated as hedges(2)	$	(6,555)	$	-	$	(6,555)	$	316	$	6,239	$	-
Derivatives not designated as hedges(2)		(3,334)		-		(3,334)		88		2,935		(311)
Securities sold under agreements to repurchase(3)		(47,459)		-		(47,459)		-		47,459		-
Total	$	(57,348)	$	-	$	(57,348)	$	404	$	56,633	$	(311)

(1) Included in other assets

(2) Included in accrued interest and other liabilities

(3) Separately stated in consolidated balance sheets

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Cash Flow Hedges of Interest Rate Risk — For hedges of the Company’s variable-rate loan assets, interest-rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. 

During the first quarter of 2016, the Company terminated five interest rate swaps with a notional value of $75.0 million that had fixed the interest rate on a portion of its 1-month LIBOR loan portfolio.  Upon termination, the Company had an unrealized gain of $1.3 million in AOCI.  The unrealized gain will continue to be reported in AOCI, and will be reclassified to interest income over a period of three years.  In October 2016, the Company entered into two interest rate swaps to hedge the risk of changes in cash flow on its LIBOR-based loan portfolio.  The interest rate swaps have a weighted average term of six years and have a combined notional value of $100.0 million.  The Company will pay a variable rate based on 1-month LIBOR and receive a weighted average fixed-rate of 1.23%.

For hedges of the Company’s variable-rate borrowings, interest-rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments.  The Company has executed a series of interest-rate swap transactions in order to fix the effective interest rate for payments due on its junior subordinated debentures with the objective of reducing the Company’s exposure to adverse changes in cash flows relating to payments on its LIBOR-based floating rate debt.  Select critical terms of the cash flow hedges are as follows:

(in thousands)	Notional		Fixed-rate		Termination date
Hedged item - Junior subordinated debentures issued by:
CoBiz Statutory Trust I	$	20,000	4.99	%	March 17, 2022
CoBiz Capital Trust II	$	30,000	5.99	%	April 23, 2020
CoBiz Capital Trust III	$	20,000	5.02	%	March 30, 2024

Based on the Company’s ongoing assessments (including at inception of the hedging relationship), it is probable that there will be sufficient variable interest payments through the maturity date of the swaps.  The Company also monitors the risk of counterparty default on an ongoing basis.  The Company uses a regression analysis and the “Hypothetical Derivative” method described in ASC 815 for both prospective and retrospective assessments of hedge effectiveness on a quarterly basis.  The Company also uses the Hypothetical Derivative methodology to measure hedge ineffectiveness each period.  The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in AOCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company’s derivatives did not  have any hedge ineffectiveness recognized in earnings during the years ended December 31, 2016, 2015 and 2014.

Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are received/paid on the Company’s variable-rate assets.  Payments received/paid on variable-rate liabilities will be reclassified to interest expense. During the next 12 months, the Company estimates that $0.8 million and $1.3 million will be reclassified as an increase to interest income and interest expense, respectively.

Fair Value Hedges of Fixed-Rate Assets – The Company is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in benchmark interest rates based on LIBOR.  The Company uses interest rate swaps to manage its exposure to changes in fair value on certain fixed-rate loans.  Interest rate swaps designated as fair value hedges involve the receipt of variable-rate payments from a counterparty in exchange for the Company’s fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount.  Certain interest-rate swaps met the criteria to qualify for the shortcut method of accounting.  Under the shortcut method of accounting no ineffectiveness is assumed.  For interest-rate swaps not accounted for under the shortcut method, the Company performs ongoing retrospective and prospective effectiveness assessments (including at inception) using a regression analysis to compare periodic changes in fair value of the swaps to periodic changes in fair value of the fixed-rate loans attributable to changes in the benchmark interest rate.  At December 31, 2016, the Company had interest rate swaps with a notional amount of $55.4 million used to hedge the change in the fair value of ten commercial loans.  At

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December 31, 2015, the Company had interest rate swaps with a notional amount of $55.1 million used to hedge the change in the fair value of nine commercial loans.  For derivatives that are designated and qualify as fair value hedges that are not accounted for under the shortcut method, the gain or loss on the derivative as well as the gain or loss on the hedged item attributable to the hedged risk are recognized in earnings.  The net amount recognized in noninterest expense during the years ended December 31, 2016, 2015 and 2014 representing hedge ineffectiveness was immaterial. 

Non-designated Hedges — Derivatives not designated as hedges are not speculative and primarily result from a service the Company provides to its customers.  The Company executes interest-rate swaps with commercial banking customers to facilitate their respective risk management strategies.  Those interest-rate swaps are simultaneously hedged by offsetting interest-rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.  As the interest-rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.   At December 31, 2016, the Company had 96 interest-rate swaps with an aggregate notional amount of $247.6 million related to this program.  Gains and losses arising from changes in the fair value of these swaps are included in “Other income” in the consolidated statement of operations.  During the years ending December 31, 2016, 2015 and 2014, the Company recorded immaterial gains and losses.

The Company’s product offerings also include international banking products that create foreign currency exchange-rate risk exposure.  At December 31, 2016, the Company’s foreign currency held include the British pound; Euro; Swiss franc; Mexican peso; Japanese yen;  and Australian, Canadian and New Zealand dollars.  In order to economically reduce the risk associated with the fluctuation of foreign exchange rates, the Company utilizes short-term foreign exchange forward contracts to lock in exchange rates so the gain or loss on the forward contracts approximately offsets the transaction gain or loss.  These contracts are not designated as hedging instruments.  Ineffectiveness in the economic hedging relationship may occur as the foreign currency holdings are revalued based upon changes in the currency’s spot rate, while the forward contracts are revalued using the currency’s forward rates.  Forward contracts in gain positions are recorded at fair value in ‘other’ assets, while contracts in loss positions are recorded in ‘other’ liabilities in the consolidated balance sheets.  Net changes in the fair value of the forward contracts are recognized through earnings, and are included in “Other income” in the consolidated statement of operations.  At December 31, 2016, the Company had entered into forward contracts with a notional amount of $4.5 million that mature in the first half of 2016.  During the years ending December 31, 2016, 2015 and 2014, the Company recorded immaterial gains and losses.

11. Income Taxes

The components of consolidated income tax expense (benefit) for the years ended December 31, 2016, 2015 and 2014 are as follows:

	For the year ended December 31,
(in thousands)	2016		2015		2014
Current tax provision:
Federal tax	$	6,823	$	11,346	$	9,590
State tax		1,374		668		(109)
Total current tax provision		8,197		12,014		9,481
Deferred tax provision (benefit):
Federal tax		3,532		(2,793)		3,375
State tax		453		(248)		513
Net operating loss carryforward		-		633		1,649
Total deferred tax provision (benefit)		3,985		(2,408)		5,537
Provision for income taxes	$	12,182	$	9,606	$	15,018
Provision (benefit) related to discontinued operations	$	-	$	(42)	$	129

The primary component of deferred tax expense during 2016 was attributable to timing differences in the allowance for loan and credit losses.  At December 31, 2016, the Company did not have any net operating

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loss carryforwards from any tax jurisdiction.  The deferred tax provision (benefit) relating to discontinued operations includes deferred tax expense of $0.8 million and $0.0 million for the years ended December 31, 2015, and 2014, respectively. 

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

The Company conducted an analysis to assess the need of a valuation allowance at December 31, 2016, 2015 and 2014.  As part of this assessment, all available evidence, including both positive and negative, was considered to determine whether based on the weight of such evidence, a valuation allowance for deferred tax assets was needed.  In accordance with ASC Topic 740-10, Income Taxes (ASC 740), a valuation allowance is deemed to be needed when, based on the weight of the available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of a deferred tax asset will not be realized.  The future realization of the tax benefit depends on the existence of sufficient taxable income within the carryback and carryforward periods.

At December 31, 2016 and 2015, the Company was in a positive three-year cumulative income position, had availability in its carryback years to absorb potential deferred income tax asset reversals and had financial forecasts of pre-tax income that were sufficient to absorb the deferred income tax assets.  Accordingly, the Company determined that a valuation allowance was not warranted at December 31, 2016 and 2015.

In the first quarter of 2016, the Company adopted ASU 2016-09, which requires the Company to recognize all excess tax benefits or tax deficiencies through the income statement as income tax expense/benefit. Upon exercise or vesting of a share-based award, an excess tax benefit will be recognized if the tax deduction exceeds the compensation cost that was previously recorded for financial statement purposes.  Under previous GAAP, any excess tax benefits were recognized in additional paid-in capital to offset current-period and subsequent-period tax deficiencies.  A tax benefit of $0.3 million was recorded during the year ended December 31, 2016 as a result of share awards vested/exercised during the year.

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The net change in deferred taxes related to investment securities available for sale and cash flow hedges is included in other comprehensive income. The temporary differences, tax effected, which give rise to the Company’s net deferred tax assets at December 31, 2016 and 2015 are as follows:

	At December 31,
(in thousands)	2016		2015
Deferred tax assets:
Allowance for loan and credit losses	$	12,625	$	15,460
Intangible assets		1,403		1,490
Other real estate owned		3,276		3,293
Deferred loan fees		185		295
Other accrued liabilities		1,709		1,268
Stock-based compensation		971		1,186
Interest on nonaccrual loans		216		436
Employee bonus		2,271		2,083
Other		710		1,147
Total deferred tax assets	$	23,366	$	26,658
Deferred tax liabilities:
Deferred initial direct loan costs	$	(1,602)	$	(1,923)
Property, plant and equipment		(1,106)		-
Prepaid assets		(356)		(391)
FHLB stock dividends		(53)		(110)
Investment securities and derivatives		(348)		(2,013)
Total deferred tax liabilities	$	(3,465)	$	(4,437)
Net deferred tax assets	$	19,901	$	22,221

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense for the years ended December 31, 2016, 2015 and 2014 is shown below:

	For the year ended December 31,
(in thousands)	2016		2015		2014
Computed at the statutory rate (35%)	$	16,479	$	12,511	$	15,325
Increase (decrease) resulting from:
State income taxes - net of federal income tax effect		1,241		919		1,336
Tax exempt income		(5,505)		(4,130)		(2,838)
Nondeductible compensation		88		88		496
Meals and entertainment		198		227		233
Excess tax benefit on stock compensation		(291)		-		-
Other - net		(28)		(9)		466
Actual tax provision	$	12,182	$	9,606	$	15,018

ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. At December 31, 2016 and 2015 the Company did not have any unrecognized benefits. 

Penalties and interest are classified as income tax expense when incurred. There were no interest and penalties accrued during the year ended December 31, 2016 and 2015.   

The Company files income tax returns in the U.S. federal jurisdiction and in several state jurisdictions.

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The following are the major tax jurisdictions in which the Company and its affiliates operate and the earliest tax year subject to examination:

Jurisdiction	Tax year
United States	2013
Colorado	2012
Arizona	2012

12. Shareholders’ Equity

Common Stock – At December 31, 2016 and 2015, the Company has reserved the following shares of its authorized but unissued common stock for possible future issuance in connection with the following:

	At December 31,
	2016	2015
Exercise of outstanding stock options	285,999	461,050
Exercise of outstanding stock warrants	895,968	895,968
Future granting of option and stock awards	2,421,120	2,642,346
Future stock purchases through ESPP	197,066	233,879
	3,800,153	4,233,243

Preferred Stock, Series C — On September 7, 2011, the Company amended its Articles of Incorporation to establish the Senior Non-Cumulative Perpetual Preferred Stock, Series C (Series C Preferred Stock) and fix the powers; preferences;  and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions, of the shares of Series C Preferred Stock.

On September 8, 2011, the Company entered into and consummated the transactions contemplated by a Securities Purchase Agreement (Purchase Agreement) with the U.S. Secretary of the Treasury (Treasury) under the Small Business Lending Fund (SBLF), a $30 billion fund established under the Small Business Jobs Act of 2010 that was designed to encourage lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. Pursuant to the Purchase Agreement, the Company issued and sold to the Treasury, for an aggregate purchase price of $57.4 million, 57,366 shares of the Company’s Series C Preferred Stock, par value $0.01 per share, having a liquidation value of $1,000 per share.

On July 22, 2015, all Series C Preferred Stock was redeemed at the liquidation value of $1,000 per share plus accrued dividends with an aggregate payment of $57.4 million. 

Warrant — The Company issued a warrant on December 19, 2008 as part of the Company’s participation in the TARP Capital Purchase program.  The warrant has a 10-year term and allows for the purchase of 895,968 shares of the Company’s common stock at an exercise price of $10.79 per share.

Dividends — The Company’s ability to pay dividends to its shareholders is generally dependent upon the payment of dividends by the Bank to the Parent.  The Bank cannot pay dividends to the extent it would be deemed undercapitalized by the FDIC after making such dividend.  At December 31, 2016, the Bank was not otherwise restricted in its ability to pay a dividend to the Parent as its earnings in the current and prior two years, net of dividends paid during those years, was positive.

Dividends on the Company’s capital stock (common and preferred stock, if any) are prohibited under the terms of the junior subordinated debenture agreements (see Note 9 – Long-Term Debt) if the Company is in continuous default on its payment obligations to the capital trusts, has elected to defer interest payments on the debentures or extends the interest payment period.  At December 31, 2016, the Company was not in default on any of the junior subordinated debenture issuances.

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Dividends declared per common share for the years ended December 31, 2016, 2015 and 2014 were $0.19,  $0.17 and $0.15, respectively.  Dividends on the Series C Preferred Stock for the years ended December 31, 2015 and 2014 were $0.3 million and $0.6 million, respectively.

13. Accumulated Other Comprehensive Income (Loss) Reclassifications

The following table provides information on reclassifications out of accumulated comprehensive income:

	Year ended December 31,
AOCI component (in thousands)	2016		2015		2014		Affected line item in the consolidated statements of income
Available for sale securities:
Realized gain	$	94	$	318	$	1,154	Net (gain) loss on securities, other assets and OREO
Tax provision		(36)		(121)		(439)	Provision for income taxes
Subtotal		58		197		715
Held to maturity securities:
Amortization of net unrealized gain on HTM securities		1,831		1,904		-	Interest on taxable / nontaxable securities
Tax provision		(696)		(724)		-	Provision for income taxes
Subtotal		1,135		1,180		-
Cash flow hedges:
Loans		630		927		905	Interest and fees on loans
Debt		(1,690)		(2,009)		(2,215)	Interest expense on subordinated debentures
Realized loss		(1,060)		(1,082)		(1,310)
Tax benefit		404		411		498	Provision for income taxes
Subtotal		(656)		(671)		(812)
Total reclassifications for the period	$	537	$	706	$	(97)

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Accumulated other comprehensive income (in thousands)	Available for sale securities		Held to maturity securities		Cash flow hedges		Total
Balance at December 31, 2013	$	5,100	$	-	$	(2,370)	$	2,730
Other comprehensive income items		2,783		-		(1,282)		1,501
Reclassifications		(715)		-		812		97
Other comprehensive income (loss), net of tax		2,068		-		(470)		1,598
Balance at December 31, 2014		7,168		-		(2,840)		4,328
Other comprehensive income items		222		-		(561)		(339)
Reclassifications		(197)		(1,180)		671		(706)
Transfers		(5,469)		5,469		-		-
Other comprehensive income (loss), net of tax		(5,444)		4,289		110		(1,045)
Balance at December 31, 2015		1,724		4,289		(2,730)		3,283
Other comprehensive income items		(8)		-		(2,172)		(2,180)
Reclassifications		(58)		(1,135)		656		(537)
Other comprehensive loss, net of tax		(66)		(1,135)		(1,516)		(2,717)
Balance at December 31, 2016	$	1,658	$	3,154	$	(4,246)	$	566

14. Earnings per Common Share

Earnings per common share is calculated based on the two-class method prescribed in ASC 260, Earnings per Share.  The two-class method is an allocation of undistributed earnings to common stock and securities that participate in dividends with common stock.  The Company’s restricted stock awards are considered participating securities as the unvested awards have non-forfeitable rights to dividends, paid or unpaid, on unvested awards.  The impact of participating securities is included in the common shareholder basic earnings per share for all periods presented as the Company had positive earnings in those periods. 

Income available to common shareholders together with weighted average shares outstanding used in the calculation of basic and diluted earnings per common share are as follows: 

	Year ended December 31,
(in thousands, except share amounts)	2016		2015		2014
Net income from continuing operations	$	34,899	$	26,140	$	28,798
Net income (loss) from discontinued operations		-		(71)		209
Net income		34,899		26,069		29,007
Preferred stock dividends		-		(320)		(574)
Net income available to common shareholders		34,899		25,749		28,433
Dividends and undistributed earnings allocated to participating securities		(397)		(331)		(434)
Earnings allocated to common shares (1)	$	34,502	$	25,418	$	27,999
Weighted average common shares - issued		41,379,894		40,991,762		40,616,022
Average unvested restricted share awards		(470,414)		(522,238)		(609,276)
Weighted average common shares outstanding - basic		40,909,480		40,469,524		40,006,746
Effect of dilutive stock options, awards and warrants outstanding		215,433		255,524		205,847
Weighted average common shares outstanding - diluted		41,124,913		40,725,048		40,212,593
Weighted average antidilutive securities outstanding (2)		125,022		154,714		676,248
Earnings per common share:
Basic - continuing	$	0.84	$	0.63	$	0.69
Diluted - continuing	$	0.84	$	0.62	$	0.69
Basic - discontinued	$	-	$	0.00	$	0.01
Diluted - discontinued	$	-	$	0.00	$	0.01
Basic	$	0.84	$	0.63	$	0.70
Diluted	$	0.84	$	0.62	$	0.70

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(1)	Earnings allocated to common shareholders for basic EPS under the two-class method may differ from earnings allocated for diluted EPS when use of the treasury method results in greater dilution than the two-class method.
(2)	Antidilutive shares excluded from the diluted earnings per share computation.

15.Employee Benefit and Stock Compensation Plans

Stock Options and Awards — The Company has adopted an equity plan to reward and provide long-term incentives for directors and key employees of the Company. The term of all options issued may not exceed 10 years. The Company issues options and awards with a service vesting requirement, which is typically a  three-year period.  The Company issues new shares upon exercise of a stock option award.

The 2005 Equity Incentive Plan (the 2005 Plan) originally authorized the issuance 1,250,000 shares of common stock.  The 2005 Plan was amended at the May 15, 2008 Annual Shareholders Meeting to increase the authorized shares available under the plan to 2,750,000 shares of common stock and shares available for restricted stock awards was increased by 250,000 shares to 500,000 shares. The 2005 Plan was further amended at the May 20, 2010 Annual Shareholders Meeting to increase the authorized shares available under the plan to 3,750,000 shares of common stock and shares available for restricted stock awards was increased by 1,500,000 shares to 2,000,000 shares. The 2005 Plan was amended at the May 15, 2014 Annual Shareholders Meeting to increase the authorized shares available to 5,250,000 and remove the restriction on the number of restricted stock awards.  Under the 2005 Plan, the Compensation Committee of the Company 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 stock on the date of grant; and the manner and times at which the options shall be exercisable. Shares available for grant under the 2005 Plan at December 31, 2016, totaled 2,421,120.

During 2016,  2015 and 2014, the Company recognized compensation expense from continuing operations of $3.2 million, $3.3 million and $3.1 million, respectively, for stock-based compensation awards for which the requisite service was rendered during the year. Pursuant to the adoption of ASU 2016-09 in 2016, the Company has elected to recognize forfeitures as they occur.  The Company recognized an income tax benefit of $1.2 million on compensation expense for 2016,  2015 and 2014.  In addition, the Company recognized excess tax benefits of $0.3 million as a reduction to income tax in 2016.

ASC 718 requires the Company to select a valuation technique that meets the measurement criteria set forth in the standard. Valuation techniques that meet the criteria for estimating the fair values of employee stock options include a lattice model and a closed-form model (for example, the Black-Scholes formula). The Company uses the Black-Scholes option pricing model (Black-Scholes) to estimate the fair value of stock options.  Restricted stock award fair values are based on the closing price of the Company stock on the award date.

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The fair value of each option grant is estimated on the date of grant using the Black-Scholes. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at the time of grant. The expected term of options granted is based on the options’ vesting schedule and the Company’s historical exercise patterns for different employee groups and represents the period of time that options granted are expected to be outstanding. Expected volatilities are based on the historical volatility of the Company’s stock and vesting period of the option to be issued. The dividend yield is determined by annualizing the dividend rate as a percentage of the Company’s stock price. The following weighted-average assumptions were used for grants issued during the years ended December 31, 2016, 2015 and 2014:

	2016						2015						2014
			Range						Range						Range
	Weighted						Weighted						Weighted
	average		Low		High		average		Low		High		average		Low		High
Risk-free interest rate	1.38	%	0.87	%	1.99	%	1.38	%	0.99	%	1.84	%	1.38	%	0.79	%	1.82	%
Expected dividend yield	1.47	%	1.27	%	1.66	%	1.36	%	1.25	%	1.41	%	1.27	%	1.05	%	1.49	%
Expected volatility	28.61	%	25.92	%	34.27	%	33.15	%	25.90	%	37.65	%	40.34	%	29.38	%	52.50	%
Expected life (years)	3.9						4.0						3.9

The following table summarizes changes in stock option awards for the year ended December 31, 2016:

	2016
		Weighted average
Stock Option Awards	Shares	exercise price
Outstanding - beginning of year	461,050	$	8.87
Granted	57,233		11.95
Exercised	(216,268)		7.77
Forfeited	(16,016)		6.67
Outstanding - end of year	285,999	$	10.45
Exercisable - end of year	178,521	$	9.56

There were 285,999 options vested or expected to vest with a weighted average price of $10.45 at December 31, 2016. The weighted-average remaining terms at December 31, 2016 for options outstanding, vested or expected to vest and options exercisable at the end of the period were 4.0,  4.0 and 2.9 years, respectively. The aggregate intrinsic value for options outstanding, vested or expected to vest, and options exercisable at December 31, 2016 was $1.8 million, $1.8 million and $1.3 million, respectively. The weighted average grant date fair value of options granted during the years ended December 31, 2016, 2015 and 2014 was $2.77,  $2.57 and $3.06, respectively. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $1.1 million, $0.8 million and $0.7 million, respectively.

The following table summarizes the Company’s outstanding stock options:

	Options outstanding				Options exercisable
		Weighted		Weighted		Weighted
		average		average		average
	Number	exercise		remaining	Number	exercise
Range of exercise price	outstanding	price		life (years)	exercisable	price
$6.00  -  $7.54	78,834	$	7.14	1.2	78,834	$	7.14
$7.57  -  $11.07	58,516		10.18	4.4	32,850		9.78
$11.08  -  $12.06	58,750		11.50	4.8	32,918		11.46
$12.10  -  $12.65	57,820		12.46	5.8	13,669		12.40
$12.70  -  $15.20	32,079		13.50	5.7	20,250		13.61
	285,999	$	10.45	4.0	178,521	$	9.56

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The following table summarizes changes in restricted stock awards for the year ended December 31, 2016:

	2016
		Weighted average
		grant date
Restricted Stock Awards	Shares	fair value
Unvested - beginning of year	500,034	$	10.85
Granted	282,750		11.54
Vested	(290,694)		10.43
Forfeited	(24,887)		11.45
Unvested - end of year	467,203	$	11.50
Fair value of vested shares (in thousands)		$	3,344

The weighted average grant date fair value of restricted stock awards granted during the years ended December 31, 2016, 2015 and 2014, was $11.54,  $11.52 and $11.33, respectively.  The fair value of restricted stock amounts vested during the years ended December 31, 2016, 2015 and 2014 was $3.3 million, $4.5 million and $3.9 million, respectively. 

At December 31, 2016, there was $3.4 million of total unrecognized compensation cost related to unvested share-based compensation awards granted under the 2005 Plan. The cost is expected to be recognized over a weighted-average period of 1.8 years.

Employee Stock Purchase Plan (ESPP) — The ESPP was established in January 2000 and is administered by the Compensation Committee of the Company.  At the 2014 Annual Shareholders Meeting, shareholders of the Company approved an amendment to the ESPP, increasing the number of shares of common stock available for awards under the plan by 200,000.  Employees may elect to have a percentage of their payroll deducted and applied to the purchase of Common Stock at a discount. In addition, the Company may make a matching contribution up to 50% of an employee’s deduction toward the purchase of additional Common Stock. No matching contribution was made for the years presented in the table below. 

	For the year ended December 31,
	2016	2015	2014
Available ESPP shares - beginning of year	233,879	273,188	116,637
Plan amendment increasing available shares	-	-	200,000
Purchases	(36,813)	(39,309)	(43,449)
Available ESPP shares - end of year	197,066	233,879	273,188

Employee 401(k) Plan — The Company has a defined contribution plan covering substantially all its employees. Employees may contribute up to the maximum allowed by the Internal Revenue Service.  The Company may also make discretionary contributions within the limits of the 401(k) Plan and Internal Revenue Service limitations.  The Company matched 4.5%,  3.0% and 4.5% of eligible compensation for the years ended December 31, 2016 2015 and 2014.  Employer contributions charged to expense for the years ended December 31, 2016, 2015 and 2014 were $1.8 million, $1.3 million and $1.5 million, respectively, and are included in the consolidated statements of income under the caption “Salaries and employee benefits.” 

16. Commitments and Contingencies

Lease Commitments — The Company has various operating lease agreements for office space. Generally, leases are subject to rent escalation provisions in subsequent years and have renewal options at the end of the initial lease terms.  Leasehold improvements are amortized over the useful life of the improvements or the lease term if shorter.  Rent expense (excluding ancillary charges for common area expense, maintenance, etc.) for the years ended December 31, 2016, 2015 and 2014, was $5.8 million, $4.9 million and $5.1 million, respectively.  The Company entered into sublease agreements for two leased locations and at December 31, 2016, future minimum sublease payments to be received are $1.1 million. 

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A director holds interests in a bank location currently leased by the Company and interests in the building where the Company leased its former corporate offices.  Rent payments under the related party leases were $2.1 million for the years ended December 31, 2016, 2015 and 2014, and the Company was current on these lease obligations at all times.  Future contractual obligations of $0.2 million will be paid to entities controlled by the director and are included in the table below of future minimum lease payments under all non-cancelable operating leases.

Year ending December 31,
(in thousands)	Amount
2017	$	5,123
2018		5,021
2019		3,730
2020		3,190
2021		2,193
Thereafter		14,094
Total	$	33,351

In January 2016, the Company entered into a new lease for facilities at 1401 Lawrence Street, Denver, Colorado.  The leased space became the primary executive offices for the Company and includes approximately 44,000 square feet space of office space and 4,000 square feet of ground level retail space for a banking facility.  The Company took possession of the space on June 1, 2016 and commenced operations from that location in November 2016.  The lease term is for 12 years with first year base rent of $1.5 million escalating 2% annually.  The lease is cancelable after nine years subject to a termination fee of up to $1.6 million. 

Financial Instruments With Off-Balance Sheet Risk — In the normal course of business the Company has entered into financial instruments which are not reflected in the accompanying consolidated financial statements:

	At December 31,
(in thousands)	2016		2015
Commitments to originate commercial or real estate construction loans and unused lines of credit granted to customers	$	887,627	$	855,484
Commitments to originate consumer loans — personal lines of credit and equity lines	$	41,376	$	35,446
Overdraft protection plans	$	22,919	$	17,127
Letters of credit	$	26,631	$	30,313
Unfunded commitments for unconsolidated investments	$	6,664	$	6,351
Company guarantees	$	3,127	$	2,950

Commitments to Originate — The Company makes contractual commitments to extend credit and provide standby letters of credit which are binding agreements to lend money to its customers at predetermined interest ratesfor a specific period of time. These commitments are not held for sale. The credit risk involved in issuing these financial instruments is essentially the same as that involved in granting on-balance sheet financial instruments. As such, the Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument is represented by the contractual amounts of those instruments. However, the Company applies the same credit policies, standards, and ongoing reassessments in making commitments and conditional obligations as it does for loans. In addition, the amount and type of collateral obtained, if deemed necessary upon extension of a loan commitment or standby letter of credit, is essentially the same as the collateral requirements provided for loans. Additional risk associated with providing these commitments arises when they are drawn upon, such as the demands on liquidity the Company would experience if a significant portion were drawn down at the same time. However, this is considered unlikely, as many commitments expire without being drawn upon and therefore do not necessarily represent future cash requirements.

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

Letters of Credit — The Company provides standby and commercial letters of credit during the normal course of business. Standby letters of credit guarantee performance of a customer to a third party while commercial letters of credit guarantee payments on behalf of our customers.

Unfunded Commitments for Unconsolidated Investments — The Company has committed to purchase up to $11.5 million in limited partnership interests of four entities, of which $6.7 million was unfunded at December 31, 2016. Certain shareholders and directors also have interests in some of these entities.

Company Guarantees — The Company guarantees, to the issuing merchant banks, the credit card debt transactions for certain customers.  The Company also provides guarantees to the FHLB for certain forgivable loans used to support affordable housing in our market areas.

Federal Reserve Bank Stock — The fair value of the Federal Reserve Bank stock approximates its carrying value, which is based on the redemption provisions of the Federal Reserve Bank.  At December 31, 2016, the Company held 81,924 shares of Federal Reserve Bank stock with a fair value of $4.1 million(subscription value of $50).  This investment represents 50% of the par value due to the Federal Reserve Bank to become a member bank and the stock cannot be sold, traded, or pledged as collateral for loans.  Although the probability is remote, the remaining 50% or $4.1 million due to the Federal Reserve Bank may be callable at its discretion.

Employment Contracts — Certain officers of the Company have entered into employment agreements providing for salaries and fringe benefits. In addition, severance is provided in the event of termination for other than cause, and under certain changes in control, a payment is required. 

Indemnification Agreements — The Company is subject to certain indemnification obligations in conjunction with agreements signed with officers and directors of the Company.  The indemnification agreements require the Company to indemnify against judgments, fines, penalties and amounts paid in settlements incurred in connection with civil or criminal action or proceedings, as it relates to their services to the Company.  To the extent the Company maintains an insurance policy or policies providing directors’ and officers’ liability insurance, the Indemnitee will be covered to the maximum extent of the coverage available for any director or officer of the Company.  However, certain indemnification payments may not be covered under the Company’s directors’ and officers’ insurance coverage.  The rights of the Indemnitee under the indemnification agreement are in addition to any rights the Indemnitee may have under the Company’s articles of incorporation or bylaws.  While the likelihood is remote, payments under these indemnification agreements could materially affect net income in a particular quarter or annual period.

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

17. Regulatory Matters

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can trigger certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial condition and results of operations.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Company and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors.

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Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of regulatory capital (as defined in the regulations) to risk-weighted assets and of regulatory capital to average assets.  At December 31, 2016 and 2015, management believes the Company and Bank meet all capital adequacy requirements to which they are subject.

In January 2015, the Company implemented the Basel III capital rules adopted by the federal banking agencies in 2014.  Basel III imposed higher minimum capital requirements, created a new Common Equity Tier 1 capital requirement, established a Capital Conservation Buffer (CCB) and changed the risk-weighting guidelines for various assets types.  The CCB, which became effective in 2016, is designed to establish a capital range above minimum requirements to insulate banks from periods of stress and impose constraints on dividends, share repurchases and discretionary bonus payments when capital levels fall below prescribed levels. The minimum CCB in 2016 is 0.625% and increases 0.625% annually through 2019 to 2.5%. 

At December 31, 2016, the most recent notification from the Federal Reserve categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action.  To be categorized as well-capitalized the Bank must maintain minimum total risk-based, Common Equity Tier 1 risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.  There are no conditions or events that management believes have changed the Bank’s categories. 

The following tables present amounts at December 31, 2016 and 2015 under the Basel III guidelines. 

	At December 31, 2016				Capitalized ratio
	Bank		Company				Minimum ratio plus
(in thousands)	Ratios		Ratios		Well(1)		fully phased-in CCB
Common equity tier 1 capital	11.9	%	9.8	%	6.5	%	7.0	%
Tier 1 capital	11.9	%	11.6	%	8.0	%	8.5	%
Total capital	12.9	%	14.5	%	10.0	%	10.5	%
Tier 1 leverage	10.4	%	10.2	%	5.0	%	4.0	%

	At December 31, 2015				Capitalized ratio
	Bank		Company				Minimum ratio plus
(in thousands)	Ratios		Ratios		Well(1)		fully phased-in CCB
Common equity tier 1 capital	10.9	%	8.8	%	6.5	%	7.0	%
Tier 1 capital	10.9	%	10.5	%	8.0	%	8.5	%
Total capital	12.1	%	13.7	%	10.0	%	10.5	%
Tier 1 leverage	10.1	%	9.8	%	5.0	%	4.0	%

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

18.Fair Value Measurements

ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability.  As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

· Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

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· Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals.

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

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.  The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels.  For example, changes in market activity or the addition of new unobservable inputs could, in the Company’s judgment, cause a transfer to either a higher or lower level. 

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

Available for Sale Securities – At December 31, 2016, the Company holds, as part of its investment portfolio, available for sale securities reported at fair value consisting of municipal securities, corporate debt securities, and TPS.  The fair value of the majority of municipal securities are determined using widely accepted valuation techniques including matrix pricing and broker-quote based applications.  Inputs include benchmark yields, reported trades, issuer spreads, prepayment speeds and other relevant items.  As a result, the Company has determined that these valuations fall within Level 2 of the fair value hierarchy.  The Company also holds TPS that are recorded at fair value based on unadjusted quoted market prices for identical securities in an active market.  The majority of the TPS are actively traded in the market and as a result, the Company has determined that the valuation of these securities falls within Level 1 of the fair value hierarchy.  The Company holds certain TPS and corporate debt securities for which unadjusted market prices are not available or the market is not active and are therefore classified as Level 2 or 3.  In the second quarter of 2016, the Company transferred a TPS from Level 2 to Level 3 due to the lack of recent market activity.  The Company uses broker-dealer quotes, valuations based on similar but not identical securities, or the most recent market trade (which may not be current) to price these securities.  Unrealized gains on TPS Level 3 transfers and total net unrealized gains recognized in AOCI at December 31, 2016 and 2015 were immaterial.   

Derivative Financial Instruments – The Company uses interest-rate swaps as part of its cash flow strategy to manage its interest-rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques as discussed further below.  The fair values of interest-rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. 

Pursuant to guidance in ASC 820, credit valuation adjustments are incorporated into the valuation to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings and thresholds.

The Company uses Level 2 and Level 3 inputs to determine the valuation of its derivatives portfolio.  The valuation of derivative instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs (Level 2 inputs), including interest rate curves and implied volatilities. The estimates of fair value are made using a standardized methodology that nets the discounted expected future cash receipts and cash

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payments (based on observable market inputs). Level 3 inputs include the credit valuation adjustments which use estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties.  At December 31, 2016 and 2015, the Company assessed the impact of the Level 3 inputs on the overall derivative valuations in terms of the significance of the credit valuation adjustments in basis points and as a percentage of the overall derivative portfolio valuation and the overall notional value.  The Company’s assessment determined that credit valuation adjustments were not significant to the overall valuation of the portfolio.  In addition, the significance of the credit value adjustments and overall derivative portfolio to the Company’s financial statements was considered.  As a result of the insignificance of the credit value adjustments to the derivative portfolio valuations and the Company’s financial statements, the Company classified the derivative valuations in their entirety in Level 2.

The Company uses foreign exchange forward contracts to mitigate exchange-rate risk arising from the Company’s foreign currency holdings to support its international banking product offering.  Fair value measurements of these assets or liabilities are priced based on spot and forward foreign currency rates and the credit worthiness of the contract counterparty.  These contracts are classified in Level 2.

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2016 and 2015, aggregated by the level in the fair value hierarchy within which those measurements fall.

			Fair value measurements using:
			Quoted prices in		Significant other		Significant
			active markets for		observable		unobservable
	Balance at		identical assets		inputs		inputs
(in thousands)	December 31, 2016		(Level 1)		(Level 2)		(Level 3)
Assets
Available for sale securities:
Trust preferred securities	$	37,624	$	4,283	$	23,893	$	9,448
Corporate debt securities		92,077		-		92,077		-
Municipal securities		3,280		-		3,280		-
Total available for sale securities	$	132,981	$	4,283	$	119,250	$	9,448
Derivatives:
Fair value hedge	$	476	$	-	$	476	$	-
Non-designated hedges		2,755		-		2,755		-
Foreign exchange forward contracts		52		-		52		-
Total derivative assets	$	3,283	$	-	$	3,283	$	-
Liabilities
Derivatives:
Cash flow hedge	$	7,639	$	-	$	7,639	$	-
Fair value hedge		845		-		845		-
Non-designated hedges		2,736		-		2,736		-
Foreign exchange forward contracts		5		-		5		-
Total derivative liabilities	$	11,225	$	-	$	11,225	$	-

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			Fair value measurements using:
			Quoted prices in		Significant other		Significant
			active markets for		observable		unobservable
	Balance at		identical assets		inputs		inputs
(in thousands)	December 31, 2015		(Level 1)		(Level 2)		(Level 3)
Assets
Available for sale securities:
Trust preferred securities	$	46,083	$	13,090	$	27,183	$	5,810
Corporate debt securities		103,736		-		103,736		-
Municipal securities		3,866		-		3,866		-
Total available for sale securities	$	153,685	$	13,090	$	134,785	$	5,810
Derivatives:
Cash flow hedge	$	578	$	-	$	578	$	-
Fair value hedge		117		-		117		-
Non-designated hedges		3,092		-		3,092		-
Foreign exchange forward contracts		109		-		109		-
Total derivative assets	$	3,896	$	-	$	3,896	$	-
Liabilities
Derivatives:
Cash flow hedge	$	4,981	$	-	$	4,981	$	-
Fair value hedge		1,574		-		1,574		-
Non-designated hedges		3,275		-		3,275		-
Foreign exchange forward contracts		59		-		59		-
Total derivative liabilities	$	9,889	$	-	$	9,889	$	-

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

	For the year ended December 31,
(in thousands)	2016		2015
Beginning balance	$	5,810	$	6,754
Transfers and purchases		3,276		-
Net accretion		89		60
Sales / calls / maturities		-		(985)
Unrealized gain (loss) included in comprehensive income		273		(19)
Ending balance	$	9,448	$	5,810

Assets and liabilities measured on a nonrecurring basis

Fair value is used on a nonrecurring basis to evaluate certain financial assets and financial liabilities in specific circumstances.  Similarly, fair value is used on a nonrecurring basis for nonfinancial assets and nonfinancial liabilities such as foreclosed assets, other real estate owned, intangible assets, nonfinancial assets and liabilities evaluated in a goodwill impairment analysis and other nonfinancial assets measured at fair value for purposes of assessing impairment.  A description of the valuation methodologies used for financial and nonfinancial assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy, is set forth below.

Impaired Loans – Certain collateral-dependent impaired loans are reported at the fair value of the underlying collateral.  Impairment is measured based on the fair value of the collateral, which is typically derived from appraisals that take into consideration prices in observed transactions involving similar assets and similar locations.  Each appraisal is updated on an annual basis, either through a new appraisal, a new evaluation, or through the Company’s comprehensive internal review process. Appraised values are reviewed and monitored internally and fair value is assessed at least quarterly or more frequently when circumstances occur that indicate a change in fair value has occurred.  The Company classified these impaired loans as Level 3.

Other Real Estate Owned (OREO) – OREO represents real property taken by the Company either through foreclosure or through a deed in lieu thereof from the borrower.  The fair value of OREO is based on property

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appraisals adjusted at management’s discretion to reflect a further decline in the fair value of properties since the time the appraisal analysis was performed.  The inputs used to determine the fair value of OREO fall within Level 3. The Company may include within OREO other repossessed assets received as partial satisfaction of a loan.  Other repossessed assets are not material and do not typically have readily determinable market values and are considered Level 3 inputs.

The following tables present the Company’s nonfinancial assets measured at fair value on a nonrecurring basis at December 31, 2016 and 2015, aggregated by the level in the fair value hierarchy within which those measurements fall.

			Fair value measurements using:
			Quotedprices in		Significant other		Significant
			active markets for		observable		unobservable
			identical assets		inputs		inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
At December 31, 2016
Impaired loans	$	1,425	$	-	$	-	$	1,425
OREO	$	5,351	$	-	$	-	$	5,351
At December 31, 2015
Impaired loans	$	6,296	$	-	$	-	$	6,296
OREO	$	5,351	$	-	$	-	$	5,351

Gains and losses, which include the provision for losses on impaired loans, recorded in relation to assets and liabilities measured on a nonrecurring basis are presented below:

	Gain (loss) for the year ended
	December 31,
(in thousands)	2016		2015		2014
Impaired loans	$	2,831	$	(5,980)	$	(353)
OREO		-		69		1,459

In accordance with ASC 310, the fair value of OREO recorded as an asset is reduced by estimated selling costs.  The following table is a reconciliation of the fair value measurement of OREO disclosed pursuant to ASC 820 to the amount recorded on the condensed consolidated balance sheet:

	At December 31,
(in thousands)	2016		2015
OREO recorded at fair value	$	5,351	$	5,351
Estimated selling costs		(272)		(272)
OREO	$	5,079	$	5,079

Valuation adjustments on OREO and additional gains or losses at the time OREO is sold are recognized in current earnings under the caption “Net gain on securities, other assets and other real estate owned.”  Below is a summary of OREO transactions for the years ended December 31, 2016 and 2015

(in thousands)	2016		2015
Beginning OREO balance	$	5,079	$	5,819
Additions		-		-
Sales		-		(809)
Net gain on sale and valuation adjustments		-		69
Ending OREO balance	$	5,079	$	5,079

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The following table provides information describing the valuation processes used to determine recurring and nonrecurring fair value measurements categorized within Level 3 of the fair value hierarchy.

	At December 31, 2016
	Fair Value					Weighted
Category	(in thousands)		Valuation Technique		Unobservable Input	Average	Range
Trust preferred securities	$	9,448	Market approach		Discount to carrying value using broker quotes or observable prices on similar securities	13%	1% to 28%
Impaired loans:
Commercial	$	1,057	Sales comparison	(1)	Management discount for asset type	59%	0% - 76%
Real estate - mortgage		269	Sales comparison	(2)	Sales comparison adjustments	18%	NA
Consumer		99	Sales comparison	(2)	Sales comparison adjustments	(1)%	(11)% - 10%
Total impaired loans	$	1,425
OREO:
Commercial	$	190	Property appraisals	(2)	Management discount for property type	0%	0%
Construction & land		5,161	Property appraisals	(2)	Management discount for property type	17%	NA
Total OREO	$	5,351

	At December 31, 2015
	Fair Value					Weighted
Category	(in thousands)		Valuation Technique		Unobservable Input	Average	Range
Trust preferred securities	$	5,810	Market approach		Discount to carrying value using broker quotes or observable prices on similar securities	15%	1% to 18%
Impaired loans:
Commercial	$	5,006	Sales comparison	(1)	Management discount for asset type	47%	0% to 81%
Commercial		667	Sales comparison	(2)	Sales comparison adjustments	(32)%	NA
Real estate - mortgage		487	Sales comparison	(2)	Sales comparison adjustments	12%	(15)% to 17%
Construction & land		27	Sales comparison	(2)	Sales comparison adjustments	(24)%	NA
Consumer		109	Sales comparison	(2)	Sales comparison adjustments	11%	(2)% to 14%
Total impaired loans	$	6,296
OREO:
Commercial	$	190	Property appraisals	(2)	Management discount for property type	0%	0%
Construction & land		5,161	Property appraisals	(2)	Management discount for property type	17%	NA
Total OREO	$	5,351

(1) Discount represents management discounts applied to market valuation of various business assets, including accounts receivable and inventory. 

(2) The fair value of OREO and collateral-dependent impaired loans is based on third-party property appraisals.  The majority of the appraisals utilize at least two valuation approaches or a combination of approaches including a market approach, where prices and other relevant information generated by market transactions involving similar or comparable properties are used to determine fair value.  Appraisals may include an ‘as is’ and ‘upon completion’ valuation scenarios.  Adjustments are routinely made in the appraisal process by third-party appraisers to adjust for differences between the comparable sales and income data.  Adjustments also result from the consideration of relevant economic and demographic factors with the potential to affect property values.  Also, prospective values are based on the market conditions which exist at the date of inspection combined with informed forecasts based on current trends in supply and demand for the property types under appraisal.  Positive adjustments

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disclosed in this table represent increases to the sales comparison and negative adjustment represent decreases.

The following table includes the estimated fair value of the Company’s financial instruments. The methodologies for estimating the fair value of financial assets and financial liabilities measured at fair value on a recurring and nonrecurring basis are discussed above.  The methodologies for estimating the fair value for other financial assets and financial liabilities are discussed below.  The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts at December 31, 2016 and 2015.

	December 31, 2016				December 31, 2015
	Carrying		Estimated		Carrying		Estimated
(in thousands)	value		fair value		value		fair value
Financial assets:
Cash and cash equivalents	$	96,050	$	96,050	$	67,312	$	67,312
Investment securities available for sale		132,981		132,981		153,685		153,685
Investment securities held to maturity		366,041		363,178		346,666		345,576
Other investments		11,365		11,365		12,461		12,461
Loans — net		2,900,812		2,868,091		2,658,519		2,647,448
Accrued interest receivable		12,223		12,223		10,362		10,362
Derivatives		3,283		3,283		3,896		3,896
Financial liabilities:
Deposits	$	3,029,783	$	3,029,226	$	2,741,712	$	2,741,366
Securities sold under agreements to repurchase		27,639		26,101		47,459		45,474
Short-term borrowings		106,230		106,230		132,000		132,000
Accrued interest payable		1,038		1,038		1,134		1,134
Subordinated notes payable		59,111		58,681		59,031		59,080
Junior subordinated debentures		72,166		72,166		72,166		72,166
Derivatives		11,225		11,225		9,889		9,889

The fair value estimation methodologies utilized by the Company for financial instruments and the classification level within the fair value hierarchy that those instruments fall are summarized as follows:

Cash and Cash Equivalents — The carrying amount of cash and cash equivalents is a reasonable estimate of fair value which is classified as Level 2.

Other Investments — Included in this category are the Company’s investment in the FHLB and other equity method investments.  Due to restrictions on transferability, it is not practical to estimate fair value on the FHLB investment which is reported at carrying value.  The fair value of other equity method investments approximates fair value and is classified as Level 2. 

Loans — The fair value of loans is estimated by discounting future contractual cash flows using estimated market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  In computing the estimate of fair value for all loans, the estimated cash flows and/or carrying value have been reduced by specific and general reserves for loan losses. The fair value of loans disclosed in the table above, which is not the exit price, is classified as Level 3 within the fair value hierarchy.

Accrued Interest Receivable/Payable — The fair value of accrued interest receivable/payable approximates the carrying amount due to the short-term nature of these amounts and is classified in the same level hierarchy as the underlying assets/liabilities. 

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Deposits — The fair value of certificates of deposit is estimated by discounting the expected life using an index of the U.S. Treasury curve. Non-maturity deposits are reflected at their carrying value for purposes of estimating fair value. The fair value of all deposits is classified as Level 2.

Securities Sold Under Agreements to Repurchase — Estimated fair value is based on discounting cash flows and is classified as Level 2.

Short-Term Borrowings — The estimated fair value of short-term borrowings approximates their carrying value, due to their short-term nature and is classified as Level 2.

Subordinated Notes Payable — The estimated fair value of subordinated notes payable is based on discounting cash flows for comparable instruments and is classified as Level 3.

Junior Subordinated Debentures — The estimated fair value of junior subordinated debentures approximates their carrying value, due to the variable interest rate paid on the debentures and is classified as Level 2.

Commitments to Extend Credit and Standby Letters of Credit — The Company’s off-balance sheet commitments are funded at current market rates at the date they are drawn upon. It is management’s opinion that the fair value of these commitments would approximate their carrying value, if drawn upon, and are classified as Level 3.

The fair value estimates presented herein are based on pertinent information available to management at December 31, 2016 and 2015. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

19.Segments

The Company’s segments consist of Commercial Banking, Fee-Based Lines and Corporate Support and Other. 

The Commercial Banking segment consists of the operations of CoBiz Bank, a full-service business banking institution.  Services provided include commercial, real estate, and private banking as well as treasury management, interest-rate hedging, and depository products.

The Fee-Based Lines segment consists of businesses offering products and services that are financial in nature and for which revenues are based on a percentage of an underlying basis such as managed assets or paid premiums.  Activities in this segment include investment advisory through CoBiz Wealth, LLC and insurance brokerage through CoBiz Insurance, Inc.  CoBiz Wealth, LLC provides investment management advisory services to affluent individuals, families and businesses.  CoBiz Insurance, Inc. offers property and casualty (P&C) and employee benefit group insurance (EB) broker agency to small to mid-sized employers, commercial enterprises and individual lines to their owners. 

As discussed in Note 2 – Discontinued Operations, the Company ceased the operations of GMB in the first quarter of 2015.  The results of GMB’s operations are reported within the Fee-Based Lines segment as discontinued operations for all periods presented. 

The Corporate Support and Other segment consist of activities that are not directly attributable to the other reportable segments and include centralized bank operations and the activities of the Parent. 

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The financial information for each business segment reflects that information which is specifically identifiable or which is allocated based on an internal allocation method.  Results of operations and selected financial information by operating segment are as follows:

	For the year ended December 31, 2016
					Corporate
	Commercial		Fee-Based		Support and
(in thousands)	Banking		Lines		Other		Consolidated
Income Statement
Total interest income	$	127,403	$	2	$	377	$	127,782
Total interest expense		4,427		25		7,279		11,731
Provision for loan losses		(1,816)		-		(285)		(2,101)
Noninterest income		14,050		18,282		1,828		34,160
Noninterest expense		38,159		17,422		49,650		105,231
Management fees and allocations		27,912		1,673		(29,585)		-
Provision (benefit) for income taxes		32,606		372		(20,796)		12,182
Net income (loss)	$	40,165	$	(1,208)	$	(4,058)	$	34,899
Depreciation and amortization	$	2,613	$	807	$	112	$	3,532
Identifiable assets at December 31, 2016	$	3,593,528	$	11,053	$	25,732	$	3,630,313

	For the year ended December 31, 2015
					Corporate
	Commercial		Fee-Based		Support and
(in thousands)	Banking		Lines		Other		Consolidated
Income Statement
Total interest income	$	119,896	$	2	$	1,368	$	121,266
Total interest expense		3,947		44		5,599		9,590
Provision for loan losses		6,837		-		(417)		6,420
Noninterest income		11,427		17,879		1,361		30,667
Noninterest expense		37,849		16,331		45,997		100,177
Management fees and allocations		25,225		1,334		(26,559)		-
Provision (benefit) for income taxes		27,679		643		(18,716)		9,606
Net income (loss) from continuing operations		29,786		(471)		(3,175)		26,140
Loss from discontinued operations, net of tax		-		(71)		-		(71)
Net income (loss)	$	29,786	$	(542)	$	(3,175)	$	26,069
Depreciation and amortization	$	2,430	$	792	$	33	$	3,255
Identifiable assets at December 31, 2015	$	3,317,977	$	10,554	$	23,236	$	3,351,767

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	For the year ended December 31, 2014
					Corporate
	Commercial		Fee-Based		Support and
(in thousands)	Banking		Lines		Other		Consolidated
Income Statement
Total interest income	$	113,888	$	6	$	423	$	114,317
Total interest expense		4,394		41		3,994		8,429
Provision for loan losses		(3,346)		-		(809)		(4,155)
Noninterest income		9,940		16,886		1,083		27,909
Noninterest expense		35,602		15,140		43,394		94,136
Management fees and allocations		23,988		1,115		(25,103)		-
Provision (benefit) for income taxes		30,926		690		(16,598)		15,018
Net income (loss) from continuing operations		32,264		(94)		(3,372)		28,798
Income from discontinued operations, net of tax		-		209		-		209
Net income (loss)	$	32,264	$	115	$	(3,372)	$	29,007
Depreciation and amortization	$	2,316	$	949	$	21	$	3,286
Identifiable assets at December 31, 2014	$	3,025,107	$	14,979	$	22,080	$	3,062,166

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 equity method of accounting.

Condensed Balance Sheets	At December 31,
(in thousands)	2016		2015
Assets:
Cash on deposit at subsidiary bank	$	16,588	$	20,105
Investment in bank subsidiary		377,104		347,076
Investment in non-bank subsidiaries		25,792		26,500
Accounts receivable from bank subsidiary		7,916		7,048
Accounts receivable from non-bank subsidiaries		1,398		534
Other		17,350		14,248
Total assets	$	446,148	$	415,511
Liabilities and shareholders' equity:
Liabilities:
Accounts payable to bank subsidiary	$	3,902	$	4,931
Accounts payable to non-bank subsidiaries		4,306		3,857
Subordinated notes payable		59,111		59,031
Junior subordinated debentures		72,166		72,166
Other liabilities		4,353		1,990
Total liabilities		143,838		141,975
Shareholders' equity		302,310		273,536
Total liabilities and shareholders' equity	$	446,148	$	415,511

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Condensed Statements of Income	For the years ended December 31,
(in thousands)	2016		2015		2014
Income:
Management fees	$	3,908	$	3,872	$	4,397
Dividends from bank subsidiary		8,861		8,221		8,116
Dividends from non-bank subsidiaries		1,070		2,962		1,898
Interest income		171		195		181
Other income		1,847		1,380		1,102
Total income		15,857		16,630		15,694
Expense:
Salaries and employee benefits		4,147		4,518		4,408
Interest expense		7,383		5,737		4,122
Other expense		2,260		2,614		2,203
Total expense		13,790		12,869		10,733
Income before income taxes		2,067		3,761		4,961
Benefit for income taxes		(2,898)		(2,751)		(1,402)
Net income before equity in undistributed
earnings of subsidiaries		4,965		6,512		6,363
Equity in undistributed earnings of subsidiaries		29,934		19,557		22,644
Net income	$	34,899	$	26,069	$	29,007

Condensed Statements of Cash Flows	For the years ended December 31,
(in thousands)	2016		2015		2014
Cash flows from operating activities:
Net income	$	34,899	$	26,069	$	29,007
Equity in undistributed earnings of subsidiaries		(29,934)		(19,557)		(22,644)
Stock-based compensation		631		620		584
Change in other assets and liabilities		2,509		(7,480)		2,205
Net cash provided by (used in) operating activities		8,105		(348)		9,152
Cash flows from investing activities:
Net advances (to) from subsidiaries		(2,162)		1,095		(3,372)
Other		(2,829)		(27)		(31)
Net cash provided by (used in) investing activities		(4,991)		1,068		(3,403)
Cash flows from financing activities:
Proceeds from issuance of common stock, net		2,118		1,733		1,570
Taxes paid in net settlement of restricted stock		(891)		(1,207)		(1,045)
Proceeds from issuance of notes payable		-		59,250		-
Redemption of preferred stock		-		(57,366)		-
Dividends paid on common stock		(7,858)		(6,953)		(6,076)
Dividends paid on preferred stock		-		(463)		(574)
Other		-		(104)		129
Net cash used in financing activities		(6,631)		(5,110)		(5,996)
Net decrease in cash and cash equivalents		(3,517)		(4,390)		(247)
Cash and cash equivalents - beginning of year		20,105		24,495		24,742
Cash and cash equivalents - end of year	$	16,588	$	20,105	$	24,495

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21. Supplemental Financial Data

Other income and Other expense as shown in the consolidated statements of income is detailed in the following schedules to the extent the components exceed one percent of the aggregate of total interest income and other income.

Other noninterest income	Year ended December 31,
(in thousands)	2016		2015		2014
Loan fees	$	2,853	$	1,787	$	1,965
Other customer service fees		2,704		2,497		2,170
Bank-owned life insurance		1,367		1,334		1,594
Other investments		2,477		1,312		(56)
Derivative valuation		281		(24)		(320)
Other		137		20		72
Total	$	9,819	$	6,926	$	5,425

Other noninterest expense	Year ended December 31,
(in thousands)	2016		2015		2014
Marketing and business development	$	2,879	$	2,799	$	2,945
Service contracts		5,281		4,545		3,880
Professional fees		2,917		2,818		2,316
Office supplies and delivery		1,357		1,461		1,540
Other		3,677		3,517		3,544
Total	$	16,111	$	15,140	$	14,225

22. Selected Quarterly Financial Data (Unaudited)

The table below sets forth unaudited financial information for each quarter of the last two years.  Certain reclassifications have been made to prior period amounts to conform to current year presentation.  See Note 2 – Discontinued Operations for additional information.  Earnings per common share as noted below have not been separated between continuing and discontinued operations, as disclosed in Note 14 – Earnings per Common Share.

	2016								2015
(in thousands)	Q4		Q3(1)		Q2		Q1		Q4(2)		Q3		Q2		Q1
Interest income	$	32,779	$	32,308	$	31,500	$	31,195	$	31,081	$	30,177	$	30,044	$	29,964
Interest expense		2,891		2,907		2,967		2,966		2,845		2,810		1,972		1,963
Net interest income		29,888		29,401		28,533		28,229		28,236		27,367		28,072		28,001
Income before income taxes		11,825		13,812		11,729		9,715		5,114		9,291		10,596		10,745
Net income from continuing operations		8,733		10,269		8,532		7,365		4,400		6,954		7,383		7,403
Loss from discontinued operations, net of tax		-		-		-		-		-		-		-		(71)
Net income		8,733		10,269		8,532		7,365		4,400		6,954		7,383		7,332
Basic earnings per share(3)	$	0.21	$	0.25	$	0.21	$	0.18	$	0.11	$	0.17	$	0.17	$	0.18
Diluted earnings per share(3)	$	0.21	$	0.25	$	0.21	$	0.18	$	0.11	$	0.17	$	0.17	$	0.18

(1) Net income for the third quarter of 2016 benefited from noninterest income of $1.4 million on other investments and a $1.2 million provision for loan loss reversal.

(2) Net income for the fourth quarter of 2015 includes the impact of a $5.4 million provision for loan loss.  See Note 4 – Loans for additional information.

(3) Due to rounding, the sum of the quarterly earnings per share amounts may not equal earnings per share for the year as disclosed elsewhere in this report.

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