Cobiz Financial (COBZ) 10-Q 2005 Q3 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

FORM 10-Q

ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 2005.
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number   000-24445

CoBiz Inc.

(Exact name of registrant as specified in its charter)

COLORADO	84-0826324
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
821 l7th Street
Denver, CO	80202
(Address of principal executive offices)	(Zip Code)
(303)  293-2265
(Registrant’s telephone number, including area code)

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   ý No   o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   ý No   o

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

Yes   o No   ý

There were 22,226,821 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding as of October 31, 2005.

CoBiz Inc.

PART I.  FINANCIAL INFORMATION

Item 1.	Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
SIGNATURES

Item 1.  Financial Statements

CoBiz Inc.

Consolidated Statements of Condition

September 30, 2005 and December 31, 2004

(unaudited)

	September 30, 2005			December 31, 2004
	(dollars in thousands)
Assets
Cash and due from banks	$	46,729		$	32,345
Investments:
Investment securities available for sale (cost of $456,442 and $473,485, respectively)	452,404			472,323
Investment securities held to maturity (fair value of $940 and $1,222, respectively)	929			1,196
Other investments	11,881			11,715
Total investments	465,214			485,234
Loans and leases, net	1,254,051			1,099,633
Goodwill	38,446			37,581
Intangible assets	3,182			3,598
Bank owned life insurance	24,333			15,552
Premises and equipment, net	9,197			8,320
Accrued interest receivable	6,510			5,448
Deferred income taxes	7,032			4,304
Other	9,824			7,546
TOTAL ASSETS	$	1,864,518		$	1,699,561
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Demand	$	433,787		$	355,974
NOW and money market	470,358			463,013
Savings	9,632			10,684
Certificates of deposits	398,681			317,339
Total deposits	1,312,458			1,147,010
Securities sold under agreements to repurchase	195,883			233,221
Other short term borrowings	137,500			112,150
Accrued interest and other liabilities	13,879			13,458
Junior subordinated debentures	72,166			71,637
TOTAL LIABILITIES	1,731,886			1,577,476
Shareholders’ Equity
Cumulative preferred, $.01 par value; 2,000,000 shares authorized; None outstanding
Common, $.01 par value; 50,000,000 shares authorized; 22,224,446 and 21,950,759 issued and outstanding, respectively	222			220
Additional paid-in capital	68,458			65,890
Retained earnings	68,016			56,840
Accumulated other comprehensive (loss) net of income tax of $(2,490) and $(531), respectively	(4,064		)	(865		)
Total shareholders’ equity	$	132,632		$	122,085
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,864,518		$	1,699,561

See Notes to Consolidated Financial Statements

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CoBiz Inc.

Consolidated Statements of Income and Comprehensive Income

(unaudited)

	Three months ended September 30,					Nine Months ended September 30,
	2005			2004		2005			2004
	(in thousands)
INTEREST INCOME:
Interest and fees on loans and leases	$	22,384		$	16,172	$	61,011		$	45,020
Interest and dividends on investment securities:
Taxable securities	4,403			3,561		13,009			9,825
Nontaxable securities	60			50		172			141
Dividends on securities	116			92		345			257
Federal funds sold and other	48			40		166			91
Total interest income	27,011			19,915		74,703			55,334
INTEREST EXPENSE:
Interest on deposits	5,134			2,434		12,392			6,702
Interest on short-term borrowings and FHLB advances	2,582			1,257		6,840			3,326
Interest on junior subordinated debentures	996			881		3,219			2,027
Total interest expense	8,712			4,572		22,451			12,055
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES	18,299			15,343		52,252			43,279
Provision for loan and lease losses	847			1,130		1,942			2,440
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES	17,452			14,213		50,310			40,839
NONINTEREST INCOME:
Service charges	678			688		2,150			2,141
Trust and advisory fees	978			922		2,947			2,718
Insurance revenue	2,389			1,936		7,721			6,460
Investment banking revenues	727			2,805		2,696			3,921
Other income	658			774		1,950			1,702
Gain on sale of other assets and securities	—			84		—			387
Total noninterest income	5,430			7,209		17,464			17,329
NONINTEREST EXPENSE:
Salaries and employee benefits	9,795			9,055		29,141			24,810
Occupancy expenses, premises and equipment	2,814			2,325		8,181			6,828
Amortization of intangibles	137			133		416			395
Other	2,484			2,446		7,679			6,675
Loss on sale of other assets and securities	13			—		139			—
Total noninterest expense	15,243			13,959		45,556			38,708
INCOME BEFORE INCOME TAXES	7,639			7,463		22,218			19,460
Provision for income taxes	2,595			2,657		7,942			7,147
NET INCOME	$	5,044		$	4,806	$	14,276		$	12,313
UNREALIZED (DEPRECIATION) APPRECIATION ON INVESTMENT SECURITIES AVAILABLE FOR SALE AND DERIVATIVE INSTRUMENTS , net of tax	(1,550		)	5,857		(3,199		)	391
COMPREHENSIVE INCOME	$	3,494		$	10,663	$	11,077		$	12,704
EARNINGS PER SHARE:
Basic	$	0.23		$	0.22	$	0.64		$	0.57
Diluted	$	0.22		$	0.21	$	0.62		$	0.55
CASH DIVIDENDS PER SHARE:	$	0.050		$	0.045	$	0.140		$	0.125

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CoBiz Inc.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2005 and 2004

(unaudited)

	2005			2004
	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	14,276		$	12,313
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities	1,575			1,269
Depreciation and amortization	3,120			2,611
Noncash loss on termination of interest-rate hedge	(85		)	—
Tax benefit from stock options	207			503
Write-down of impaired investment security	108			—
Provision for loan and lease losses	1,942			2,440
FHLB stock dividend	(222		)	—
Deferred income taxes	(769		)	(1,132		)
Loss (gain) on sale of equipment and securities	139			(387		)
Increase in cash surrender value of bank owned life insurance	(761		)	(505		)
Changes in operating assets and liabilities
Accrued interest receivable	(1,062		)	(1,286		)
Other assets	(420		)	(926		)
Accrued interest and other liabilities	376			2,166
Net cash provided by operating activities	18,424			17,066
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of other investments	(2,457		)	(1,435		)
Purchase of investment securities available for sale	(105,251		)	(213,503		)
Maturities of investment securities held to maturity	267			276
Maturities of investment securities available for sale	120,991			129,577
Cash paid for earn-outs	(2,033		)	(9,775		)
Purchase of bank owned life insurance	(8,020		)	(4,000		)
Loan and lease originations and repayments, net	(156,360		)	(150,942		)
Purchase of premises and equipment	(2,517		)	(2,300		)
Purchase of intangible asset	—			(441		)
Proceeds from sale of premises and equipment	37			110
Net cash used in investing activities	(155,343		)	(252,433		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market, and savings accounts	84,106			137,292
Net increase (decrease) in certificates of deposit	81,342			15,377
Net (decrease) increase in federal funds purchased	(9,650		)	39,200
Net (decrease) increase in securities sold under agreements to repurchase	(37,338		)	72,490
Advances from the Federal Home Loan Bank	2,100,350			379,000
Repayments of advances from the Federal Home Loan Bank	(2,065,350		)	(433,548		)
Issuance of junior subordinated debentures	20,000			30,000
Redemption of junior subordinated debentures	(20,000		)	—
Cash paid for termination of interest-rate hedge	(75		)	—
Proceeds from exercise of stock options	1,018			1,199
Dividends paid on common stock	(3,100		)	(2,720		)
Net cash provided by financing activities	151,303			238,290
NET INCREASE IN CASH AND CASH EQUIVALENTS	14,384			2,923
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	32,345			34,659
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	46,729		$	37,582

See notes to consolidated financial statements

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CoBiz Inc. and Subsidiaries

Notes to Consolidated Condensed Financial Statements

(unaudited)

1.Consolidated Condensed Financial Statements

The accompanying unaudited consolidated condensed financial statements of CoBiz Inc. (“Parent”), and its wholly owned subsidiaries:  CoBiz ACMG, Inc.; CoBiz Bank, N.A. (“Bank”); CoBiz Insurance, Inc.; Colorado Business Leasing, Inc. (“Leasing”); CoBiz GMB, Inc.; and Financial Designs Ltd. (“FDL”), all collectively referred to as the “Company” or “CoBiz,” conform to accounting principles generally accepted in the United States of America for interim financial information and prevailing practices within the banking industry.  The Bank 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”).

The Bank is a commercial banking institution with eight locations in the Denver, Colorado metropolitan area, two in Boulder, Colorado, one in Edwards, Colorado, and seven in the Phoenix, Arizona metropolitan area.  CoBiz ACMG, Inc. provides investment management services to institutions and individuals through its subsidiary Alexander Capital Management Group, LLC (“ACMG”). FDL provides wealth transfer, employee benefits consulting, insurance brokerage and related administrative support to employers.  CoBiz Insurance, Inc. provides commercial and personal property and casualty insurance brokerage, as well as risk management consulting services to small and medium-sized businesses and individuals.  CoBiz GMB, Inc. provides investment banking services to middle-market companies through its wholly owned subsidiary, Green Manning & Bunch, Ltd. (“GMB”).

All significant intercompany accounts and transactions have been eliminated. These financial statements and notes thereto should be read in conjunction with, and are qualified in their entirety by, our Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission (“SEC”).

The consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normally recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2005.  Certain reclassifications have been made to prior balances to conform to the current year presentation.

Stock Based Compensation

If the fair-value-based method of accounting under SFAS No. 123 had been applied to the Company’s stock based plans, the Company’s net income available for common shareholders and earnings per common share would have been reduced to the pro forma amounts indicated below (assuming that the fair value of options granted during the year is amortized over the vesting period):

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	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
	(dollars in thousands)
Net income, as reported	$	5,044		$	4,806		$	14,276		$	12,313
Less: stock-based compensation determined under the fair value method	(227		)	(138		)	(709		)	(415		)
Pro forma net income	$	4,817		$	4,668		$	13,567		$	11,898
Earnings per share:
As reported - basic	$	0.23		$	0.22		$	0.64		$	0.57
As reported - diluted	$	0.22		$	0.21		$	0.62		$	0.55
Pro forma - basic	$	0.22		$	0.21		$	0.61		$	0.55
Pro forma - diluted	$	0.21		$	0.21		$	0.59		$	0.53

2.Earn-out Arrangements

General – Earn-out payments for the GMB, ACMG and FDL transactions are treated as additional costs of the acquisitions and recorded as goodwill in accordance with EITF 95-08 Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination.  Goodwill arising from these transactions is allocated between the operating segments expected to benefit from the acquisitions.  See Note 6 “Goodwill and Intangible Assets” for the amount of goodwill allocated to each operating segment.

Green Manning and Bunch, Ltd. – On July 10, 2001, the Company acquired GMB, an investment banking firm based in Denver, Colorado.  In the acquisition: (i) the corporate general partner of GMB was merged into CoBiz GMB, Inc., with the shareholders of the general partner receiving a combination of cash, shares of CoBiz common stock, and the right to receive future earn-out payments; and (ii) CoBiz GMB, Inc. acquired all of the limited partnership interests of GMB in exchange for cash, shares of CoBiz GMB, Inc. Class B Common Stock (the “CoBiz GMB, Inc. Shares”), and the right to receive future earn-out payments for the fiscal years 2001 through 2005.  Pursuant to the merger agreement, the earn-out payments for each of the years 2002 through 2005 shall equal a percentage of the excess of GMB’s earnings before interest, taxes, depreciation, and amortization as defined in the GMB merger agreement (“GMB EBITDA”) for the year over a set hurdle rate.  The earn-out payments will be paid in cash to the former owners of GMB in proportion to their respective ownership immediately prior to the acquisition.

The merger agreement does not provide for a minimum earn-out, nor does it cap the total amount that may be paid.  No earn-out payments were required for the years 2001 through 2003 because GMB EBITDA did not exceed the hurdle rate in those years.  For the earn-out period ending December 31, 2004, the Company paid $1,136,000 based on GMB EBITDA of $3,373,000, which was paid in the first quarter of 2005.  The earn-out payment for 2005 will depend on the GMB EBITDA for that year.   Management estimates that the 2005 earn-out payment, which is the final year of the agreement, may range from $0 to $1,100,000.

Alexander Capital Management Group LLC – On April 1, 2003, the Company acquired ACMG, an SEC-registered investment advisory firm based in Denver, Colorado.  The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of ACMG’s operations have been included in the consolidated financial statements since the date of purchase. The acquisition of ACMG was completed through a merger of ACMG into a wholly owned subsidiary that was formed in order to consummate the transaction and then a subsequent contribution of the assets and

5

liabilities of the merged entity into a newly formed limited liability company called Alexander Capital Management Group, LLC.

The aggregate purchase price was $3,131,000, consisting of 160,830 shares of CoBiz Inc. common stock valued at $1,500,000; $1,277,000 in cash; $264,000 in net liabilities assumed; and $90,000 in direct acquisition costs (consisting primarily of external legal fees). Goodwill of $2,916,000, which is not expected to be deductible for tax purposes, was recorded as part of the purchase price allocation. Intangible assets consisting of customer account relationships, employment agreements and non-solicitation agreements totaling $346,000 were also recorded with an average useful life of 14 years.

The terms of the ACMG merger agreement provide for additional earn-out payments for each of the twelve months ended on March 31, 2004, 2005, and 2006 to be paid to the former shareholders of Alexander Capital Management Group, Inc. in proportion to their respective ownership immediately prior to the acquisition.  All earn-out payments shall be made 40% in cash and 60% in CoBiz common stock.

The earn-out payment for the 12 months ended March 31, 2004 was equal to a multiple of ACMG’s earnings before interest, taxes, depreciation, and amortization as defined in the ACMG merger agreement (“ACMG EBITDA”).  The earn-out payments for 2005 and 2006 will be equal to a multiple of the excess, if any, of each year’s ACMG EBITDA over the ACMG EBITDA for the previous year.  During 2004, the Company paid $815,000 for the earn-out period ended on March 31, 2004 based on ACMG EBITDA of $163,000.  The payment consisted of $326,000 in cash and 36,988 shares of CoBiz stock valued at $489,000.  In addition, during 2005 the Company paid $2,242,000 for the earn-out period ended on March 31, 2005, based on ACMG EBITDA of $611,000. The payment consisted of $897,000 in cash and 68,215 shares of CoBiz stock valued at $1,345,000.  An earn-out payment will be due for the period ending March 31, 2006 only if the ACMG EBITDA for that period exceeds $611,000.  At the end of the earn-out period, if the total earn-out payments are less than 2.08 times the total aggregate ACMG EBITDA during the three-year earn-out period, an additional earn-out payment will be made equal to such deficiency.   Management estimates that the 2006 earn-out payment, which is the final year of the agreement, may range from $808,000 to $2,200,000.

In addition to the earn-out, the former shareholders of Alexander Capital Management Group, Inc. were issued 200,000 Profits Interest Units pursuant to a Unitholders’ Agreement, representing a 20% interest in the profits and losses of ACMG in periods following the acquisition (but no interest in the value of ACMG as of the date of the acquisition), which is reflected in the accompanying consolidated statements of condition as a component of “Accrued interest and other liabilities” and is included in “Other” noninterest expense in the consolidated statements of income and comprehensive income.  Unlike the earn-out payments, which are based on a multiple of earnings for a specified period of time, the Profits Interest Units entitle the holders to share in the earnings of ACMG for as long as they are held.   Pursuant to the terms of the Unitholders’ Agreement, under certain circumstances, the Company has the ability to call the Profits Interest Units at a price based on a multiple of the trailing 12 months ACMG EBITDA.  Likewise, the holders of the Profits Interest Units have, under certain circumstances, the ability to put the Profits Interest Units to the Company at a price based on a multiple of the trailing 12 months ACMG EBITDA.

Financial Designs Ltd. – On April 14, 2003, the Company acquired FDL, a provider of wealth transfer and employee benefit services based in Denver, Colorado. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of FDL’s operations have been included in the consolidated financial statements since the date of purchase. The acquisition of FDL was completed through a merger of FDL into CoBiz Connect, Inc., a wholly owned subsidiary of CoBiz that

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had provided employee benefits consulting services since 2000. The surviving corporation continues to use the FDL name.

The aggregate purchase price was $5,406,000, consisting of 333,472 shares of CoBiz common stock valued at $3,210,000; $2,140,000 in cash; and $56,000 in direct acquisition costs (consisting primarily of external legal fees). Goodwill of $3,097,000, which is not expected to be deductible for tax purposes, was recorded as part of the purchase price allocation.  Intangible assets consisting of customer account relationships, employment agreements and non-solicitation agreements totaling $3,045,000 were also recorded with an average useful life of 10 years.

The terms of the FDL merger agreement provide for additional earn-out payments for each of the calendar years 2003 through 2007 to be paid to the former shareholders of FDL in proportion to their respective ownership immediately prior to the acquisition.  The earn-out payments are payable 50% in cash and 50% in CoBiz common stock.

The earn-out payment for the 2003 calendar year was equal to a multiple of FDL’s earnings before interest, taxes, depreciation, and amortization as defined in the FDL merger agreement (“FDL EBITDA”) for 2003.   During 2004, the Company paid $18,898,000 for the 2003 earn-out payment owed to the former shareholders of FDL based on FDL EBITDA of $3,485,000 for 2003, which had previously been accrued in 2003. The payment consisted of $9,449,000 in cash and 813,948 shares of CoBiz common stock valued at $9,449,000.

No earn-out payment was payable for the 2004 calendar year because FDL EBITDA for 2004 of $1,419,000 did not exceed FDL EBITDA for 2003.

The earn-out payments for the 2005 to 2007 calendar years will be calculated on the excess of each calendar year’s FDL EBITDA over a hurdle rate which is equal to the highest previously recognized FDL EBITDA for the 2004 through 2006 calendar years.  The earn-out payments for these calendar years will be based on a range of multiples, dependent on performance.

The merger agreement does not provide for a minimum earn-out, nor does it cap the total amount that may be paid.  Therefore, future earn-outs payments will depend on the financial results of FDL during the earn-out period.  If FDL EBITDA for 2005 were the same as FDL EBITDA for 2004, then no earn-out payment will be due.   Management estimates that total cumulative earn-out payments for 2005 to 2007 may range from $677,000 to $3,500,000.

3.Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.

SFAS 123(R) specifies that the fair value of an employee stock option must be based on an observable market price of an option with the same or similar terms and conditions if one is available or, if an observable market price is not available, the fair value must be estimated using a valuation technique that (1) is applied in a manner consistent with the fair value measurement objective and the other requirements of the Statement, (2) is based on established principles of financial economic theory and generally applied to that field, and (3) reflects all substantive characteristics of the instrument. SFAS 123(R)

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permits entities to use any option-pricing model that meets the fair value objective in the Statement.

In April 2005, the SEC amended Rule 4-01(a) of Regulation S-X regarding the compliance date for SFAS 123(R).  The amendment postpones the effective date for the Company to January 1, 2006.  As of the effective date, the Company will apply the Statement using a modified version of prospective application. Under that transition method, compensation cost is recognized for (1) all awards granted after the required effective date and to awards modified, cancelled, or repurchased after that date and (2) the portion of prior awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated for either recognition or pro forma disclosures under SFAS 123.  Currently, the Company offers several stock option plans and an employee share purchase plan that will be impacted by this Statement. The quantitative impact of this Statement on the Company will depend upon various factors, among them being the Company’s future compensation strategy which is currently being evaluated.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, “TOPIC 14: Share-based payment” (“SAB 107”) which was effective immediately.  SAB 107 addresses the interaction between SFAS 123(R) and certain SEC rules and regulations and provides views regarding the valuation of share-based payment arrangements for public companies.  The Company does not expect the requirements of SAB 107 to have a material impact on its consolidated financial statements.

4.Earnings per Common Share

The weighted average shares outstanding used in the calculation of basic and diluted earnings per share are as follows:

	Three months ended September 30,		Nine months ended September 30,
	2005	2004	2005	2004
Weighted average shares outstanding - basic earnings per share	22,216,672	21,843,028	22,135,110	21,670,171
Effect of dilutive securities	878,408	864,522	946,370	913,510
Weighted average shares outstanding - diluted earnings per share	23,095,080	22,707,550	23,081,480	22,583,681

As of September 30, 2005 and 2004, 244,168 and 783 options, respectively, were excluded from the earnings per share computation solely because their effect was anti-dilutive.

5.Comprehensive Income

Comprehensive income is the total of (1) net income plus (2) all other changes in net assets arising from non-owner sources, which are referred to as other comprehensive income.  Presented below are the changes in other comprehensive income for the periods indicated.

	Three months ended September 30,						Nine Months ended September 30,
	2005			2004			2005			2004
	(in thousands)
Other comprehensive (loss) income, before tax:
Unrealized gain (loss) on available for sale securities arising during the period	$	(1,104	)	$	9,084		$	(2,857	)	$	525
Unrealized gain on derivative securities, net of reclassification to operations of $432	(1,383		)	463			(2,282		)	468
Reclassification adjustment for realized gains arising during the period	(13		)	(84		)	(19		)	(360		)
Tax benefit (expense) related to items of other comprehensive income	950			(3,606		)	1,959			(242		)
Other comprehensive (loss) income, net of tax	$	(1,550	)	$	5,857		$	(3,199	)	$	391

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6.Goodwill and Intangible Assets

A summary of goodwill, adjustments to goodwill and total assets by operating segment as of September 30, 2005, is noted below.  The increase in goodwill is primarily related to the ACMG 2005 earn-out that was paid in the second quarter of 2005.

	Goodwill						Total assets
	December 31, 2004		Acquisitions and adjustments		September 30, 2005		September 30, 2005
	(dollars in thousands)
Colorado Business Bank	$	12,779	$	256	$	13,035	$	1,305,102
Arizona Business Bank	1,661		43		1,704		524,916
Investment banking services	5,232		47		5,279		6,376
Investment advisory and Trust	3,364		519		3,883		5,315
Insurance	14,545		—		14,545		20,073
Corporate support and other	—		—		—		2,736
Total	$	37,581	$	865	$	38,446	$	1,864,518

As of December 31, 2004, and September 30, 2005, the Company’s intangible assets and related accumulated amortization consisted of the following:

	Customer contracts, lists and relationships		Employment and non-solicitation agreements		Total
	(dollars in thousands)
December 31, 2004	$	3,536	$	62	$	3,598
Amortization	404		12		416
September 30, 2005	$	3,132	$	50	$	3,182

9

The Company recorded amortization expense of $416,000 during the nine months ended September 30, 2005, compared to $395,000 in the same period of 2004.  Amortization expense on intangible assets for each of the five succeeding years is estimated as follows (dollars in thousands):

2006	$	473
2007	472
2008	413
2009	364
2010	363
Total	$	2,085

7.Derivatives

Asset/Liability Management Hedges

As part of its overall risk management, the Company pursues various asset and liability management strategies, which may include the use of derivative financial instruments to mitigate the impact of interest fluctuations on the Company’s net interest margin.

In January 2003, the Company entered into an interest-rate swap agreement with a notional amount of $20,000,000.  The swap effectively converted the Company’s fixed-interest-rate obligation under the 10% junior subordinated debentures to a variable-interest-rate obligation, decreasing the asset sensitivity of the Company’s statement of condition by more closely matching our variable-rate assets with variable-rate liabilities.  The swap had the same payment dates, maturity date and call provisions as the related 10% junior subordinated debentures.  In conjunction with the Company’s exercise of its right to call the 10% junior subordinated debentures during the second quarter of 2005, the Company terminated the swap at fair value.  The termination resulted in the Company recognizing a loss totaling $160,000.

The Company has entered into several interest rate swap agreements for the purpose of minimizing the asset-sensitivity of the Company’s financial statements and the impact from interest rate fluctuations.  Under these interest rate swap agreements, the Company receives a fixed rate and pays a variable rate based on the Prime Rate (“Prime”). The swaps qualify as cash flow hedges under SFAS No. 133, as amended, and are designated as hedges of the variability of cash flows the Company receives from certain variable-rate loans indexed to Prime. In accordance with SFAS No. 133, the swap agreements are measured at fair value and reported as an asset or liability on the consolidated balance sheet. The portion of the change in the fair value of the swaps that are deemed effective in hedging the cash flows of the designated assets are recorded in accumulated other comprehensive income and reclassified into interest income when such cash flows occur in the future. Any ineffectiveness resulting from the hedges are recorded as a gain or loss in the consolidated statement of income as part of noninterest income.

Customer Accommodation Derivatives

The Company offers an interest-rate hedge program that includes derivative products such as swaps, caps, floors and collars 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 that are a perfect offset to the customer contracts.

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Derivatives – Summary Information

	September 30,
	2005					2004
	Notional		Estimated fair value			Notional		Estimated fair value
	(dollars in thousands)
Asset/liability management hedges:
Fair value hedge - interest rate swap	$	—	$	—		$	20,000	$	(523	)
Cash flow hedge - interest rate swap	165,000		(2,517		)	60,000		469
Customer accomodation derivative
Interest rate swap	$	1,078	$	30		$	1,114	$	7
Reverse interest rate swap	1,078		(30		)	1,114		(7		)

8.Junior Subordinated Debentures

On June 30, 2005, the Company redeemed all outstanding junior subordinated debentures issued to the Colorado Business Bankshares Capital Trust I.  The redemption amount was $20,620,000 plus $515,000 in accrued and unpaid dividends.

On August 2, 2005, the Company issued an additional $20.6 million of junior subordinated debentures to CoBiz Capital Trust III.  The debentures bear a variable rate of 3-month LIBOR plus 1.45% and have an early call date of September 30, 2010.

A summary of the outstanding junior subordinated debentures at September 30, 2005 is as follows:

	Interest Rate		Junior Subordinated Debentures	Maturity Date	Earliest Call Date
CoBiz Statutory Trust I	3-month LIBOR + 2.95	%	20,619,000	September 17, 2033	September 17, 2008
CoBiz Capital Trust II	3-month LIBOR + 2.60	%	30,928,000	July 23, 2034	July 23, 2009
CoBiz Capital Trust III	3-month LIBOR + 1.45	%	20,619,000	September 30, 2035	September 30, 2010

9.Segments

The Company’s principal areas of activity consist of commercial banking, investment banking, trust and advisory services, insurance and corporate support and other.

The Company distinguishes its commercial banking segments based on geographic markets served. Currently, reportable commercial banking segments are CBB and ABB. CBB is a full-service business bank with eleven Colorado locations, including eight in the Denver metropolitan area, two locations in Boulder and one in Edwards, just west of Vail.  ABB is based in Phoenix, Arizona and has seven locations in the Phoenix metropolitan area.

The Investment Banking segment consists of the operations of GMB, which provides middle-market companies with merger and acquisition advisory services, institutional private placements of debt and equity, and other strategic financial advisory services.

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The Investment Advisory and Trust segment consists of the operations of ACMG and CoBiz Private Asset Management (“PAM”). ACMG is an SEC-registered investment management firm that manages stock and bond portfolios for individuals and institutions. CoBiz Private Asset Management offers wealth management and investment advisory services, fiduciary (trust) services, and estate administration services.

The insurance segment includes the activities of FDL and CoBiz Insurance, Inc. FDL provides employee benefits consulting and brokerage, wealth transfer planning and preservation for high-net-worth individuals, and executive benefits and compensation planning. FDL represents individuals and companies in the acquisition of institutionally priced life insurance products to meet wealth transfer and business needs. Employee benefit services include assisting companies in creating and managing benefit programs such as medical, dental, vision, 401(k), disability, life and cafeteria plans. CoBiz Insurance, Inc. provides commercial and personal property and casualty insurance brokerage, as well as risk management consulting services to individuals and small and medium-sized businesses. The majority of the revenue for both FDL and CoBiz Insurance is derived from insurance product sales and referrals, and are paid by third-party insurance carriers.  Insurance commissions are normally calculated as a percentage of the premium paid by our clients to the insurance carrier, and are paid to us by the insurance carrier for distributing and servicing their insurance products.

Corporate Support and Other consists of activities that are not directly attributable to the other reportable segments. Included in this category are primarily the activities of Leasing, the Parent and centralized bank operations.

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 (in thousands):

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	For the three months ended September 30, 2005
	Colorado Business Bank		Arizona Business Bank		Investment Banking Services			Investment Advisory and Trust		Insurance			Corporate Support and Other			Consolidated
Income Statement
Total interest income	$	19,757	$	7,216	$	4		$	3	$	—		$	31		$	27,011
Total interest expense	6,424		1,293		—			—		—			995			8,712
Net interest income	13,333		5,923		4			3		—			(964		)	18,299
Provision for loan and lease losses	463		434		—			—		—			(50		)	847
Net interest income after provision for loan and lease losses	12,870		5,489		4			3		—			(914		)	17,452
Noninterest income	1,043		293		727			978		2,389			—			5,430
Noninterest expense and minority interest	3,040		2,197		877			867		2,384			5,878			15,243
Income before income taxes	10,873		3,585		(146		)	114		5			(6,792		)	7,639
Provision for income taxes	3,815		1,341		(55		)	46		7			(2,559		)	2,595
Net income before management fees and overhead allocations	$	7,058	$	2,244	$	(91	)	$	68	$	(2	)	$	(4,233	)	$	5,044
Management fees and overhead allocations, net of tax	2,433		731		32			38		61			(3,295		)	—
Net income	$	4,625	$	1,513	$	(123	)	$	30	$	(63	)	$	(938	)	$	5,044
	For the nine months ended September 30, 2005
Income Statement
Total interest income	$	56,008	$	18,539	$	14		$	10	$	19		$	113		$	74,703
Total interest expense	15,923		3,367		—			—		—			3,161			22,451
Net interest income	40,085		15,172		14			10		19			(3,048		)	52,252
Provision for loan and lease losses	1,153		969		—			—		—			(180		)	1,942
Net interest income after provision for loan and lease losses	38,932		14,203		14			10		19			(2,868		)	50,310
Noninterest income	3,204		893		2,696			2,947		7,721			3			17,464
Noninterest expense and minority interest	9,796		6,796		2,471			2,583		6,904			17,006			45,556
Income before income taxes	32,340		8,300		239			374		836			(19,871		)	22,218
Provision for income taxes	11,721		3,076		95			150		336			(7,436		)	7,942
Net income before management fees and overhead allocations	$	20,619	$	5,224	$	144		$	224	$	500		$	(12,435	)	$	14,276
Management fees and overhead allocations, net of tax	6,828		2,058		97			114		185			(9,282		)	—
Net income	$	13,791	$	3,166	$	47		$	110	$	315		$	(3,153	)	$	14,276
	At September 30, 2005
Balance Sheet
Total assets	$	1,305,102	$	524,916	$	6,376		$	5,315	$	20,073		$	2,736		$	1,864,518
Total gross loans and leases	854,627		415,791		—			—		—			73			1,270,491
Total deposits and customer repurchase agreements	1,166,010		290,445		—			880		—			—			1,457,335

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	For the three months ended Setember 30, 2004
	Colorado Business Bank		Arizona Business Bank		Investment Banking Services		Investment Advisory and Trust		Insurance			Corporate Support and Other			Consolidated
Income Statement
Total interest income	$	15,611	$	4,267	$	3	$	3	$	1		$	30		$	19,915
Total interest expense	2,974		753		—		2		—			843			4,572
Net interest income	12,637		3,514		3		1		1			(813		)	15,343
Provision for loan and lease losses	730		400		—		—		—			—			1,130
Net interest income after provision for loan and lease losses	11,907		3,114		3		1		1			(813		)	14,213
Noninterest income	1,188		353		2,805		922		1,936			5			7,209
Noninterest expense and minority interest	3,636		2,001		1,387		775		1,977			4,183			13,959
Income before income taxes	9,459		1,466		1,421		148		(40		)	(4,991		)	7,463
Provision for income taxes	3,459		524		540		59		(10		)	(1,915		)	2,657
Net income before management fees and overhead allocations	$	6,000	$	942	$	881	$	89	$	(30	)	$	(3,076	)	$	4,806
Management fees and overhead allocations, net of tax	1,599		413		33		25		54			(2,124		)	—
Net income	$	4,401	$	529	$	848	$	64	$	(84	)	$	(952	)	$	4,806
	For the nine months ended September 30, 2004
Income Statement
Total interest income	$	43,664	$	11,538	$	5	$	14	$	2		$	111		$	55,334
Total interest expense	7,956		2,134		—		8		—			1,957			12,055
Net interest income	35,708		9,404		5		6		2			(1,846		)	43,279
Provision for loan and lease losses	1,491		949		—		—		—			—			2,440
Net interest income after provision for loan and lease losses	34,217		8,455		5		6		2			(1,846		)	40,839
Noninterest income	3,274		967		3,921		2,718		6,460			(11		)	17,329
Noninterest expense and minority interest	10,462		5,425		2,815		2,296		5,779			11,931			38,708
Income before income taxes	27,029		3,997		1,111		428		683			(13,788		)	19,460
Provision for income taxes	9,995		1,498		425		169		274			(5,214		)	7,147
Net income before management fees and overhead allocations	$	17,034	$	2,499	$	686	$	259	$	409		$	(8,574	)	$	12,313
Management fees and overhead allocations, net of tax	4,794		1,220		90		68		150			(6,322		)	—
Net income	$	12,240	$	1,279	$	596	$	191	$	259		$	(2,252	)	$	12,313
	At September 30, 2004
Balance Sheet
Total assets	$	1,256,151	$	360,560	$	7,504	$	3,865	$	20,488		$	1,806		$	1,650,374
Total gross loans and leases	820,061		273,515		—		—		—			478			1,094,054
Total deposits and customer repurchase agreements	1,036,073		221,121		—		607		—			—			1,257,801

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with our consolidated financial statements and notes thereto included in this Form 10-Q.  Certain terms used in this discussion are defined in the notes to these financial statements.  For a description of our accounting policies, see Note 1 of Notes to Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2004. For a discussion of the segments included in our principal activities, see Note 9 to these financial statements.

Executive Summary

The Company is a financial holding company that offers a broad array of financial service products to its target market of small and medium-sized businesses and high-net-worth individuals.  Our operating segments include our commercial banking franchise, Colorado Business Bank and Arizona Business Bank; Investment Banking Services; Investment Advisory and Trust; and Insurance.

Earnings are derived primarily from our net interest income, which is interest income less interest expense, and our noninterest income earned from our fee-based business lines and banking service fees, offset by noninterest expense.  We have focused on reducing our dependency on our net interest margin by increasing our noninterest income.

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We believe that through the combination of our commercial banking franchise and our fee-based businesses, we are uniquely situated to service our commercial clients throughout their business lifecycle.  We are able to help our customers grow by providing banking services from our bank franchise, capital planning from GMB, and employee and executive benefits packages from FDL.  We can assist in planning for the future with wealth transfer planning and business succession from FDL.  We are able to protect assets with property and casualty insurance from CoBiz Insurance.  We can facilitate exit and retirement strategies with merger and acquisition (“M&A”) services from GMB and investment management services with ACMG.  We are also able to preserve our customers’ wealth with trust and fiduciary services from PAM, investment management services from ACMG and wealth transfer services from FDL.

Our primary strategy is to differentiate ourselves from our competitors by providing our local presidents with substantial decision-making authority and expanding our products to meet the needs of small to medium-sized businesses and high-net-worth individuals. In all areas of our operations, we focus on attracting and retaining the highest quality personnel by maintaining an entrepreneurial culture and decentralized business approach.

In the two main geographic regions in which we operate, Colorado and Arizona, the markets are dominated by out-of-state banks.  We believe this provides us with tremendous opportunity to grow organically.  Our growth initiatives center around the addition of new de novo banks.  During 2004, we opened a bank in Arizona and a bank in Colorado.  In 2005, we have opened two additional Arizona locations.

In March 2005, we announced the hiring of a senior insurance brokerage executive to establish operations in the Phoenix marketplace to offer property and casualty insurance.  We feel that this strategy, similar to our de novo approach in banking, will be a cost-effective way to enter the Arizona market.

Financial Highlights

•Net income for the three and nine months ended September 30, 2005 was $5.0 million and $14.3 million respectively, compared to $4.8 million and $12.3 million for the same periods in 2004.  Diluted earnings per share for the three and nine months ended September 30, 2005 were $0.22 and $0.62, compared to $0.21 and $0.55 for the same periods in 2004.

•Arizona Business Bank contributed a large portion of the Company’s quarterly net income growth, increasing by 186.0%, or $984,000, for the quarter ended September 30, 2005 compared to the same period in 2004.  The growth from Arizona Business Bank was offset by a $971,000 decrease in net income from Investment Banking Services for the same period.

•Gross loans and leases increased 14.2% from December 31, 2004, or 18.7% on an annualized basis.

•Deposits increased 14.4% from December 31, 2004, or 19.3% on an annualized basis.

•Asset quality remained strong, with non-performing assets as a percentage of total assets at 0.04%, compared to 0.08% at December 31, 2004.

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•Investment Banking Services revenue for the three and nine months ended September 30, 2005 was $0.7 million and $2.7 million respectively, compared to $2.8 million and $3.9 million for the same periods in 2004.

•Insurance revenue for the three and nine months ended September 30, 2005 was $2.3 million and $7.7 million respectively, compared to $1.9 million and $6.5 million for the same periods in 2004.

•Investment Advisory and Trust revenue for the three and nine months ended September 30, 2005 was $1.0 million and $3.0 million respectively, compared to $0.9 million and $2.7 million for the same periods in 2004.

•On June 30, 2005 the Company retired $20.6 million in junior subordinated debentures that effectively bore a variable rate of 3-month LIBOR plus 4.23%.  On August 2, 2005, the Company raised another $20.6 million of junior subordinated debentures at a variable rate of 3-month LIBOR plus 1.45%.  The differential in the spread over LIBOR will result in an annual savings of $0.6 million.

Critical Accounting Policies

The Company’s discussion and analysis of its 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 are reasonably likely to occur, would have a material effect on our reported financial condition or results of operations.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is a critical accounting policy that requires subjective estimates in the preparation of the consolidated financial statements.  The allowance for loan and lease losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibilty of loans and leases in light of historical experience, the nature and volume of the loan and lease 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.

We maintain a loan review program independent of the lending function that is designed to reduce and control risk in the lending function. It includes the 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.  We also have a systematic process to evaluate individual loans and pools of loans within our loan and lease 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 non-accrual loan, and 8 representing a loss that 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 above a certain dollar amount that are adversely graded are reported to the Loan Committee and the Chief Credit Officer along with current financial information, a collateral analysis and an action plan.  Individual loans that are deemed to be impaired are

16

evaluated in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114 “Accounting by Creditors for Impairment of a Loan.”

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

•Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.

•Changes in national and local economic and business conditions and developments, including the condition of various market segments.

•Changes in the nature and volume of the portfolio.

•Changes in the experience, ability, and depth of lending management and staff.

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

•The existence and effect of any concentrations of credit, and changes in the level of such concentrations.

•The effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the current portfolio.

Refer to the Provision and Allowance for Loan and Lease Losses section under Results of Operations below for further discussion on management’s methodology.

Recoverability of Goodwill

SFAS No. 142 “Goodwill and Other Intangible Assets,” requires that we evaluate on an annual basis (or whenever events occur which may indicate possible impairment) whether any portion of our recorded goodwill is impaired.  The recoverability of goodwill is a critical accounting policy that requires subjective estimates in the preparation of the consolidated financial statements.  Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount, including goodwill.   If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired.  If the fair value of the reporting unit is less than the carrying amount, goodwill is considered impaired.  We estimate the fair value of our reporting units using market multiples of comparable entities, including recent transactions, or a combination of market multiples and a discounted cash flow methodology.

Determining the fair value of a reporting unit requires a high degree of subjective management assumption. Discounted cash flow valuation models are utilized that incorporate such variables as revenue growth rates, expense trends, discount rates and terminal values. Based upon an evaluation of key data and market factors, management selects from a range the specific variables to be incorporated into the valuation model.

We conducted our annual evaluation of our reporting units as of December 31, 2004.  As discussed in our Annual Report on Form 10-K for the period ending December 31, 2004, the estimated fair value of all reporting units exceeded their carrying values and goodwill impairment was not deemed to exist.   The fair value calculations were also tested for sensitivity to reflect reasonable variations, including keeping all other variables constant and reducing projected revenue growth and projected cost savings.  Using this sensitivity approach, there was no impairment identified in any reporting unit.

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We also have other policies that we consider to be key accounting policies; however, these policies, which are disclosed in Note 1 of Notes to 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.

Financial Condition

Total assets increased by $165.0 million to $1.86 billion as of September 30, 2005, from $1.70 billion as of December 31, 2004.  The increase in total assets is primarily due to growth in net loans which were largely funded by the growth in deposits.

The following table sets forth the balance of loans and leases and deposits as of September 30, 2005,  December 31, 2004 and September 30, 2004 (dollars in thousands):

	September 30, 2005					December 31, 2004					September 30, 2004
	Amount			% of Portfolio		Amount			% of Portfolio		Amount			% of Portfolio
LOANS AND LEASES
Commercial	$	412,121		32.9	%	$	386,954		35.2	%	$	386,444		35.8	%
Real Estate - mortgage	647,614			51.6	%	527,266			47.9	%	516,528			47.8	%
Real Estate - construction	135,585			10.8	%	121,138			11.0	%	115,254			10.7	%
Consumer	63,108			5.0	%	65,792			6.0	%	63,450			5.9	%
Leases	12,063			1.0	%	13,157			1.2	%	12,378			1.1	%
Loans and leases	1,270,491			101.3	%	1,114,307			101.3	%	1,094,054			101.3	%
Less allowance for loan and lease losses	(16,440		)	(1.3	)%	(14,674		)	(1.3	)%	(14,340		)	(1.3	)%
Net loan and leases	$	1,254,051		100.0	%	$	1,099,633		100.0	%	$	1,079,714		100.0	%
	September 30, 2005					December 31, 2004					September 30, 2004
	Amount			% of Portfolio		Amount			% of Portfolio		Amount			% of Portfolio
DEPOSITS AND CUSTOMER REPURCHASE AGREEMENTS
NOW and money market accounts	$	470,358		32.3	%	$	463,013		35.5	%	$	427,021		33.9	%
Savings	9,632			0.7	%	10,684			0.8	%	9,926			0.8	%
Certificates of deposits under $100,000	87,114			6.0	%	76,544			5.9	%	68,839			5.5	%
Certificates of deposits $100,000 and over	311,567			21.4	%	240,795			18.5	%	244,070			19.4	%
Total interest-bearing deposits	878,671			60.3	%	791,036			60.7	%	749,856			59.6	%
Noninterest-bearing demand deposits	433,787			29.8	%	355,974			27.3	%	361,991			28.8	%
Customer repurchase agreements	144,877			9.9	%	156,093			12.0	%	145,954			11.6	%
Total deposits and customer repurchase agreements	$	1,457,335		100.0	%	$	1,303,103		100.0	%	$	1,257,801		100.0	%

Gross loans and leases increased by $156.2 to $1.3 billion as of September 30, 2005, from $1.1 billion as of December 31, 2004.  The increase in loans and leases is primarily due to growth in our real estate portfolio.  The majority of the growth has come from Arizona, which has accounted for 76.5% of the growth since December 31, 2004 as the Arizona banks opened during 2004 and 2005 have continued to increase their market share.

Deposits increased by $165.4 million to $1.3 billion as of September 30, 2005, from $1.1 billion as of December 31, 2004. The increase in deposits was primarily from growth in certificates of deposits, which represented 30% and 28% of total deposits for September 30, 2005, and December 31, 2004, respectively.  Now that interest rates have climbed to higher levels, the Company believes that some customers have become more sensitive to interest rates and have repositioned their balances on deposit from lower interest bearing accounts into certificates of deposits.  However, the Company’s noninterest bearing demand deposits have also grown 22% since December 31, 2004.  This growth is primarily attributed to the Company’s focus on expanding its treasury management services, whereby customers receive an earnings credit for maintaining noninterest bearing deposits that may be used to offset treasury management fees.  Since the Company’s acquisition of ABB in 2001, the Company has successfully introduced its treasury management products to the Arizona market resulting in a ratio of noninterest bearing deposits to total deposits at ABB of 43.0%, up from 11.0% at the time of acquisition.

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Securities sold under agreements to repurchase were $195.9 million at September 30, 2005, and $233.2 million at December 31, 2004.  Securities sold under agreements to repurchase decreased as the Company has shifted its wholesale funding mix from street repurchase agreements to other short term borrowings.  Securities sold under agreement to repurchase are represented by two types, customer repurchase agreements and street repurchase agreements.  Management does not consider customer repurchase agreements to be a wholesale funding source, but rather an additional treasury management service provided to our customer base.  Of the total repurchase agreements outstanding at September 30, 2005 and December 31, 2004, 74% and 67%, respectively, represent repurchase agreements transacted on behalf of our customers.  Our customer repurchase agreements are based on an overnight investment sweep that can fluctuate based on our customers’ operating account balances.

Bank-Owned Life Insurance (“BOLI”) increased by $8.8 million to $24.3 million at September 30, 2005, from $15.6 million at December 31, 2004.  The increase is primarily related to the purchase of $8.0 million of BOLI policies on certain key officers.  Earnings from these policies, by way of increases in their cash surrender value, is intended to offset future costs of employee benefits.

Deferred income taxes increased $2.7 million to $7.0 million at September 30, 2005, from $4.3 million at December 31, 2004.  The increase was primarily related to the $2.0 million tax effect of the unrealized loss on available-for-sale investments and derivative instruments recognized during 2005.

Other Assets increased $2.3 million to $9.8 million at September 30, 2005, from $7.5 million at December 31, 2004.  The increase was related to $2.3 million in capital contributions made to partnerships to which the Company has committed a certain level of investment.  The Company remains obligated to contribute an additional $7.0 million to these partnerships.

Other short term borrowings increased $25.3 million to $137.5 million at September 30, 2005, from $112.2 million at December 31, 2004.  Other short term borrowings consist of fed funds purchased, overnight and term borrowings from the Federal Home Loan Bank (FHLB), and short term borrowings from the U.S. Treasury.  Other short term borrowings and street repurchase agreements are used as part of our liquidity management strategy and can fluctuate based on the Company’s cash position.

Results of Operations

Overview

The following table presents the condensed statements of income for the three and nine months ended September 30, 2005 and 2004.

	Three months ended September 30,									Nine Months ended September 30,
					Increase/(decrease)									Increase/(decrease)
	2005		2004		Amount			%		2005		2004		Amount			%
	(in thousands)
Interest income	$	27,011	$	19,915	$	7,096		35.6	%	$	74,703	$	55,334	$	19,369		35.0	%
Interest expense	8,712		4,572		4,140			90.6	%	22,451		12,055		10,396			86.2	%
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES	18,299		15,343		2,956			19.3	%	52,252		43,279		8,973			20.7	%
Provision for loan and lease losses	847		1,130		(283		)	-25.0	%	1,942		2,440		(498		)	-20.4	%
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES	17,452		14,213		3,239			22.8	%	50,310		40,839		9,471			23.2	%
Noninterest income	5,430		7,209		(1,779		)	-24.7	%	17,464		17,329		135			0.8	%
Noninterest expense and minority interests	15,243		13,959		1,284			9.2	%	45,556		38,708		6,848			17.7	%
INCOME BEFORE INCOME TAXES	7,639		7,463		176			2.4	%	22,218		19,460		2,758			14.2	%
Provision for income taxes	2,595		2,657		(62		)	-2.3	%	7,942		7,147		795			11.1	%
NET INCOME	$	5,044	$	4,806	$	238		5.0	%	$	14,276	$	12,313	$	1,963		15.9	%

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Annualized return on average assets for the three and nine months ended September 30, 2005 was 1.08% and 1.07%, respectively, compared to 1.19% and 1.09% for the same periods in 2004.  Annualized return on average common shareholders’ equity for the three and nine months ended September 30, 2005 was 14.90% and 14.88%, compared to 17.00% and 15.15% for the same periods in 2004.  Although our net income has grown for the three and nine months ended September 30, 2005, compared to the same periods in 2004, the return on average common shareholders’ equity has decreased as equity has grown at a higher rate than our net income.  The growth in equity is impacted not only by our net income, but also by the issuance of stock for stock options and earn-out arrangements as well as fluctuations in the market values of our available-for-sale investments and cash flow hedges.

Net Interest Income

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

As the majority of our assets are interest-earning and our liabilities are interest-bearing, changes in interest rates impact our net interest margin.  We currently maintain a slightly asset-sensitive balance sheet and our net interest margin may be positively impacted if interest rates increase.  Conversely, a decrease in interest rates may negatively impact our net interest margin.  However, rising short-term rates and the flattening of the yield curve may compress interest rate spreads and dampen expansion of the net interest margin as our wholesale borrowing costs increase and our ability to raise lending rates is limited.  In addition, with the improvement in the economies in Colorado and Arizona, we have experienced increased competition in both loan and deposit pricing which may also place downward pressure on our net interest margin.  However, based on the current interest rate environment, we expect our net interest margin to remain stable or modestly expand during the remainder of the year.

We manage our interest-earning assets and interest-bearing liabilities to reduce the impact of interest rate changes on our operating results.  During 2004, we implemented an asset liability strategy to use interest-rate swaps on our prime-based loan portfolio to reduce our overall sensitivity.  As of September 30, 2005, the swaps have a notional value of $165.0 million, compared to $60.0 million as of September 30, 2004.

The following tables set forth the average amounts outstanding for each category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rate earned or paid for the three and nine months ended September 30, 2005 and 2004.

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		For the three months ended September 30,
		2005							2004
		Average Balance			Interest earned or paid		Average yield or cost (1)		Average Balance			Interest earned or paid		Average yield or cost (1)
Assets
Federal funds sold and other		2,750			48		6.83	%	4,177			40		3.75	%
Investment securities (2)		479,920			4,616		3.76	%	442,313			3,733		3.30	%
Loans and leases (2), (3)		1,232,413			22,448		7.13	%	1,057,848			16,236		6.01	%
Allowance for loan and lease losses		(15,979		)	0		0.00	%	(13,794		)	0		0.00	%
Total interest earning assets		1,699,104			27,112		6.24	%	1,490,544			20,009		5.25	%
Noninterest-earning assets
Cash and due from banks		47,869							34,973
Other		98,255							79,075
TOTAL ASSETS		$	1,845,228						$	1,604,592
Liabilities and Shareholders’ Equity
Deposits
NOW and Money Market Deposits		458,639			2,071		1.79	%	416,472			892		0.85	%
Savings Deposits		10,195			11		0.43	%	9,781			10		0.41	%
Certificates of Deposits
Under $100,000		85,301			639		2.97	%	70,638			436		2.46	%
$	100,000 and over	308,218			2,412		3.10	%	225,699			1,097		1.93	%
Total Interest-bearing deposits		862,353			5,133		2.36	%	722,590			2,435		1.34	%
Other Borrowings
Securities and loans sold under agreements to repurchase and federal funds purchased		268,085			1,922		2.81	%	298,578			1,091		1.43	%
FHLB advances		74,266			661		3.48	%	43,022			165		1.50	%
Junior subordinated debentures		64,994			996		6.00	%	71,208			881		4.84	%
Total interest-bearing liabilities		1,269,698			8,712		2.71	%	1,135,398			4,572		1.59	%
Noninterest-bearing demand accounts		429,100							350,405
Total deposits and interest-bearing liabilities		1,698,798							1,485,803
Other noninterest-bearing liabilities		12,089							6,349
TOTAL LIABILITIES		1,710,887							1,492,152
Shareholders’ equity		134,341							112,440
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,845,228						$	1,604,592
Net interest income					$	18,400						$	15,437
Net interest spread							3.53	%						3.66	%
Net interest margin							4.30	%						4.12	%
Ratio of average interest-earning assets to average interest-bearing liabilities		133.82		%					131.28		%

21

		For the nine months ended September 30,
		2005							2004
		Average Balance			Interest earned or paid		Average yield or cost (1)		Average Balance			Interest earned or paid		Average yield or cost (1)
Assets
Federal funds sold and other		3,629			166		6.12	%	2,722			91		4.47	%
Investment securities (2)		485,557			13,633		3.75	%	405,505			10,301		3.39	%
Loans and leases (2), (3)		1,178,780			61,226		6.94	%	1,004,744			45,217		6.01	%
Allowance for loan and lease losses		(15,380		)	0				(13,092		)	0
Total interest earning assets		1,652,586			75,025		6.07	%	1,399,879			55,609		5.31	%
Noninterest-earning assets
Cash and due from banks		40,978							35,137
Other		93,679							73,465
TOTAL ASSETS		$	1,787,243						$	1,508,481
Liabilities and Shareholders’ Equity
Deposits
NOW and Money Market Deposits		451,824			4,837		1.43	%	378,983			2,155		0.76	%
Savings Deposits		10,878			30		0.37	%	9,352			24		0.34	%
Certificates of Deposits
Under $100,000		82,778			1,691		2.73	%	78,935			1,376		2.33	%
$	100,000 and over	280,502			5,834		2.78	%	217,224			3,146		1.93	%
Total Interest-bearing deposits		825,982			12,392		2.01	%	684,494			6,701		1.31	%
Other Borrowings
Securities and loans sold under agreements to repurchase and federal funds purchased		272,950			4,910		2.41	%	262,510			2,634		1.34	%
FHLB advances		83,746			1,930		3.08	%	66,434			693		1.39	%
Junior subordinated debentures		69,346			3,219		6.21	%	55,953			2,027		4.84	%
Total interest-bearing liabilities		1,252,024			22,451		2.40	%	1,069,391			12,055		1.51	%
Noninterest-bearing demand accounts		394,963							319,364
Total deposits and interest-bearing liabilities		1,646,987							1,388,755
Other noninterest-bearing liabilities		12,001							11,138
TOTAL LIABILITIES		1,658,988							1,399,893
Shareholders’ equity		128,255							108,588
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,787,243						$	1,508,481
Net interest income					$	52,574						$	43,554
Net interest spread							3.67	%						3.80	%
Net interest margin							4.25	%						4.16	%
Ratio of average interest-earning assets to average interest-bearing liabilities		131.99		%					130.90		%

(1)Average yield or cost for the three and nine months ended September 30, 2005 and 2004 has been annualized and is not necessarily indicative of results for the entire year.

(2)Yields include adjustments for tax-exempt interest income based on the Company’s effective tax rate.

(3)Loan fees included in interest income are not material.  Nonaccrual loans and leases are included in average loans and leases outstanding.

The increase in interest income on a tax-equivalent basis for the three and nine months ended September 30, 2005 was primarily driven by an increase in the average volume of our interest earning assets.  The volume of our interest earning assets has increased due to the growth in our average loan portfolio of $174.6 million and $174.0 million, for the three and nine months ended September 30, 2005, respectively.  The yield on interest-earning assets has also contributed to the increase, as the average yield has increased 99 basis points and 76 basis points for the three and nine months ended September 30, 2005, respectively.  Since September 30, 2004, the prime rate has increased from 4.75% to 6.75% at the end of September 30, 2005, which has positively impacted net interest income as 53% of our loan portfolio adjusts simultaneously with movements in the prime rate.

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The increase in interest expense is attributed primarily to the rising interest rate environment and to a lesser extent the increased volume of interest-bearing liabilities.  The rates on our deposit portfolio are significantly impacted by changes in the LIBOR rate, in addition to other economic factors.  Since September 2004, LIBOR rates have increased approximately 200 basis points which has contributed to the increase in the cost of our deposit portfolio.  Another significant factor contributing to the increase in interest expense for the nine months ended September 30, 2005 compared to the same period in 2004 was the issuance of $30.9 million in junior subordinated debentures in May 2004.  Interest expense on these debentures has been recognized for the full nine months of 2005 compared to five months in 2004.

Our net interest income is driven almost exclusively by our core banking franchise.  Future increases in net interest income will primarily come by increasing our loan and investment portfolios, offset by the cost of funds from growth in our deposit portfolio and other funding sources.  To facilitate this future growth, we have opened a de novo bank in Arizona during both the first and second quarters of 2005.  Although we have not yet identified additional bank presidents, we foresee adding additional de novo banks in Arizona and Colorado as qualified bank presidents are identified.

Noninterest Income

The following table presents noninterest income for the three and nine months ended September 30, 2005 and 2004 (dollars in thousands):

	Three months ended September 30,									Nine Months ended September 30,
					Increase/(decrease)									Increase/(decrease)
	2005		2004		Amount			%		2005		2004		Amount			%
NONINTEREST INCOME
Deposit service charges	$	678	$	688	$	(10	)	(1	)%	$	2,150	$	2,141	$	9		0	%
Other loan fees	196		222		(26		)	(12	)%	542		540		2			0	%
Trust and advisory income	978		922		56			6	%	2,945		2,716		229			8	%
Insurance revenue	2,389		1,936		453			23	%	7,712		6,453		1,259			20	%
Investment banking revenue	727		2,805		(2,078		)	(74	)%	2,694		3,902		(1,208		)	(31	)%
Other income	462		552		(90		)	(16	)%	1,421		1,190		231			19	%
Gain on sale of other assets and securities	—		84		(84		)	(100	)%	—		387		(387		)	(100	)%
Total noninterest income	$	5,430	$	7,209	$	(1,779	)	(25	)%	$	17,464	$	17,329	$	135		1	%

Noninterest income includes revenues earned from sources other than interest income.  These sources include:  service charges and fees on deposit accounts, letter of credit and ancillary loan fees, income from investment advisory and trust services, income from life insurance and wealth transfer products, benefits brokerage, property and casualty insurance, retainer and success fees from investment banking engagements, increases in the cash surrender value of BOLI, and net gains on sales of investment securities and other assets.

Deposit service charges primarily consist of fees earned from our treasury management services where customers are billed for deposits on analysis.  Total services billed on analysis have increased 28% and 22% for the three and nine months ended September 30, 2005, respectively.  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.  Although the average balance of deposits tied to our treasury management services has increased 19% in 2005 compared to 2004, the earnings credit rate (rate credited to our customers based on deposit balances to offset treasury management charges) has also increased due to an increase in the U.S. Treasury rates which is 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.

The increase in trust and advisory income was primarily attributable to the growth in the market values of ACMG’s assets under management and the addition of new customers.  As of September 30, 2005, ACMG and PAM had a combined $542.5 million in discretionary assets under management, a 17% increase over September 30, 2004, and $143.8 million in non-discretionary assets under management, a 15% increase over September 30, 2004.

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Insurance revenue is derived from three main areas, wealth transfer, benefits consulting and property and casualty.  The majority of fees earned on wealth transfer transactions are earned at the inception of the product offering in the form of commissions.  As the fees on these products are transactional by nature, fee income can fluctuate from period-to-period based on the number of transactions that have been closed.  Revenue from benefits consulting and property and casualty is a more recurring revenue source.  For the three months ended September 30, 2005, revenue earned from wealth transfer, benefits consulting and property and casualty increased by 20%, 14% and 30%, respectively over the same periods in 2004.  For the nine months ended September 30, 2005 wealth transfer increased 15%, benefits consulting increased 25% and property and casualty increased 25% over the same periods in 2004.  The Company has expanded the number of producers in all areas of its insurance operations during 2005 and expects the segment to show continued growth, particularly in the benefits consulting and property and casualty areas.

For the three and nine months ended on September 30, 2005 and 2004, revenue earned from the Insurance segment is comprised of the following:

	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
Wealth transfer and executive compensation	41.20	%	42.34	%	47.41	%	49.22	%
Benefits consulting	28.89	%	31.19	%	26.38	%	25.23	%
Property and casualty	25.55	%	24.18	%	23.67	%	22.60	%
Fee income	4.36	%	2.29	%	2.54	%	2.95	%
	100.00	%	100.00	%	100.00	%	100.00	%

Investment banking revenue includes retainer fees which are recognized over the expected term of the engagement and success fees which are recognized when the transaction is completed and collectibility of fees is reasonably assured.  Investment banking revenue is transactional by nature and will fluctuate based on the number of clients engaged and transactions successfully closed.  The decrease in revenue for the first nine months of 2005 compared to 2004 was due to a high level of activity in 2004 versus 2005.

Other income is comprised of increases in the cash surrender value of BOLI, earnings on equity method investments, merchant charges, bankcard fees, wire transfer fees, foreign exchange fees, and safe deposit income.  The decrease in other income for the quarter ending September 30, 2005 compared to 2004 was caused by a decrease in earnings from our equity method investments.  One of the investment partnerships that we account for under the equity method is in the start-up phase, where they are incurring a high amount of overhead expense relative to their revenue.  For the nine months ending September 30, 2005 compared to 2004, the increase in other income is primarily due to an additional $8.0 million of BOLI that was purchased in January 2005, offset by a decrease in earnings from equity investments.

During 2004, we rebalanced our investment portfolio by selling certain securities, primarily available-for-sale mortgage-backed securities, and purchasing other securities, which resulted in gains on sale.   No such transactions were executed in 2005.

We believe offering such complementary products as discussed above allows us to both broaden our relationships with existing customers and attract new customers to our core business. We believe the fees generated by these services will increase our noninterest income and eventually reduce our

24

dependency on net interest income.  We will continue to explore additional areas where we can grow noninterest income.  Noninterest income as a percentage of operating revenues was 25% for the first nine months of 2005, compared to 29% for the same period in 2004.  The decrease in noninterest income as a percentage of operating revenues is due to net interest income growing at a higher pace.

Noninterest Expense

The following table presents noninterest expense for the three and nine months ended September 30, 2005 and 2004 (in thousands):

	Three months ended September 30,								Nine Months ended September 30,
					Increase/(decrease)								Increase/(decrease)
	2005		2004		Amount		%		2005		2004		Amount		%
NONINTEREST EXPENSES
Salaries and employee benefits	$	9,795	$	9,055	$	740	8	%	$	29,141	$	24,810	$	4,331	17	%
Occupancy expenses, premises and equipment	2,814		2,325		489		21	%	8,181		6,828		1,353		20	%
Amortization of intangibles	137		133		4		3	%	416		395		20		5	%
Other operating expenses	2,484		2,446		38		2	%	7,679		6,675		1,005		15	%
Loss on sale of other assets and securities	13		—		13		100	%	139		—		139		100	%
Total noninterest expenses	$	15,243	$	13,959	$	1,284	9	%	$	45,556	$	38,708	$	6,848	18	%

Salaries and employee benefits for the three and nine months ended September 30, 2005 has increased primarily due to the growth of our full time equivalent employee base.  As of September 30, 2005, the Company employed 431 full time equivalent employees compared to 396 at September 30, 2004.  The annual cost of living and performance raises awarded to employees effective January 1, 2005, has also contributed to the increase.  The growth in full time equivalent employees is due to the addition of new de novo banks, organic growth of existing operations and an investment in the future growth of our Insurance operations by adding to their headcount.  The increases in salaries and employee benefits were also partially caused by the implementation of a supplemental executive retirement plan at the end of 2004 (($262,000 for the full nine month period) and higher health insurance premiums ($295,000 for the full nine month period).

Occupancy costs have increased due to the additions of one Colorado and three Arizona bank locations subsequent to September 30, 2004, as well as the addition of a new operations center.  Beginning in the fourth quarter of 2004, the Company began centralizing its information technology (“IT”) and operational areas in a new leased location.  The move was finalized in the first quarter of 2005 to the new location that includes 24,000 square feet of office and data center space.  This move, as well as an ongoing commitment to providing the highest level of technological service to our customers, has increased rent, depreciation and maintenance expense.

Other operating expenses for the three months ended September 30, 2005, have been relatively level with the same period in 2004.  For the nine months ended September 30, 2005, other operating expenses have increased over the same period in 2004 primarily due to accounting, professional services and operational losses.  The increase in accounting is a result of the Company’s compliance with the Sarbanes-Oxley Act of 2002 and the related increase in audit fees.  Professional services have increased as the Company expands its IT infrastructure.  The operational losses relate primarily to deposit fraud losses incurred by our bank franchise and a loss associated with the termination of an interest-rate hedge.

The loss on sale of other assets and security write-down is related to an other-than-temporary, non-cash, impairment charge relating to the Company’s write-down of its investment in Fannie Mae preferred stock.  The Company recorded the write-down as the fair value had been below cost for an extended period and a recovery in fair value was not assured within a reasonably short period of time.

Overall, the increase in noninterest expense reflects our ongoing investment in personnel, technology and office space needed to accommodate internal growth and the opening of new banks.

25

Provision and Allowance for Loan and Lease Losses

The provision for loan and lease losses was $0.8 million and $1.9 million for the three and nine months ended September 30, 2005, respectively, compared to $1.1 million and $2.4 million for the same periods in 2004.  Key indicators of asset quality have remained favorable, while average outstanding loan amounts have increased.  As of September 30, 2005, the allowance for loan and lease losses amounted to 1.29% of total loans and leases, compared to 1.31% at September 30, 2004.

The following table presents, for the periods indicated, an analysis of the allowance for loan and lease losses and other related data:

	Nine months ended September 30, 2005			Year ended December 31, 2004			Nine months ended September 30, 2004
	(in thousands)
Balance of allowance for loan and lease losses at beginning of period	$	14,674		$	12,403		$	12,403
Charge-offs:
Commercial	(325		)	(414		)	(170		)
Real estate — mortgage	(246		)	(410		)	(410		)
Consumer	(41		)	(88		)	(77		)
Direct financing leases	—			(55		)	(35		)
Total charge-offs	(612		)	(967		)	(692		)
Recoveries:
Commercial	72			83			71
Real estate — mortgage	271			15			11
Consumer	89			34			33
Direct financing leases	4			91			74
Total recoveries	436			223			189
Net charge-offs	(176		)	(744		)	(503		)
Provisions for loan and lease losses charged to operations	1,942			3,015			2,440
Balance of allowance for loan and lease losses at end of period	$	16,440		$	14,674		$	14,340
Ratio of net charge-offs to average loans and leases (1)	(0.02		)%	(0.07		)%	(0.07		)%
Average loans and leases outstanding during the period	$	1,178,780		$	1,029,538		$	1,004,744

(1) The ratios for the nine months ended September 30, 2005 and 2004 have been annualized and are not necessarily indicative of the results for the entire year.

Nonperforming Assets

Nonperforming assets consist of nonaccrual loans and leases, restructured loans and leases, past due loans and leases, repossessed assets, and other real estate owned.  The following table presents information regarding nonperforming assets as of the dates indicated:

26

	At September 30, 2005			At December 31, 2004			At September 30, 2004
	(dollars in thousands)
Nonperforming Loans and Leases
Loans and leases 90 days or more delinquent and still accruing	$	225		$	76		$	—
Nonaccrual loans and leases	480			1,313			1,363
Total nonperforming loans and leases	705			1,389			1,363
Repossessed assets	6			38			40
Total nonperforming assets	$	711		$	1,427		$	1,403
Allowance for loan and lease losses	$	16,440		$	14,674		$	14,340
Ratio of nonperforming assets to total assets	0.04		%	0.08		%	0.09		%
Ratio of nonperforming loans and leases to total loans and leases	0.06		%	0.12		%	0.12		%
Ratio of allowance for loan and lease losses to total loans and leases	1.29		%	1.32		%	1.31		%
Ratio of allowance for loan and lease losses to nonperforming loans and leases	2331.91		%	1056.44		%	1052.09		%

Capital Resources

Our primary source of shareholders’ equity is the retention of our net after-tax earnings and proceeds from the issuance of common stock.  At September 30, 2005, shareholders’ equity totaled $132.6 million, a $10.5 million increase from December 31, 2004.  The increase in shareholders’ equity is primarily due to net income of $14.3 million, $1.3 million from the issuance of common stock in the ACMG earn-out and $1.2 million from the issuance of common stock from option exercises.  These transactions were offset by $3.1 million in dividends paid on our common stock and a $3.2 million decrease in the tax-effected fair value of available-for-sale securities and derivative instruments.

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 “Tier 1” and “Tier 2” capital elements, with Tier 2 capital being limited to 100% of Tier 1 capital.  Tier 1 capital includes, with certain restrictions, common shareholders’ equity, perpetual preferred stock, and minority interests in consolidated subsidiaries.  Tier 2 capital includes, with certain limitations, perpetual preferred stock not included in Tier 1 capital, certain maturing capital instruments, and the allowance for loan and lease losses.  As of September 30, 2005, the Company and the Bank are considered “Well Capitalized” under the regulatory risk based capital guidelines.  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 also monitors the availability, costs and benefits of various sources of additional capital, including both the public and private markets, and believes that additional capital would be available if needed to support its continued growth.

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Contractual Obligations and Commitments

Summarized below are the Company’s contractual obligations (excluding deposit liabilities) to make future payments as of September 30, 2005:

	Within one year		After one but within three years		After three but within five years		After five years		Total
	(dollars in thousands)
Federal funds purchased	$	7,500	$	—	$	—	$	—	$	7,500
TIO funds (1)	15,000		—		—		—		15,000
FHLB overnight funds purchased	35,000		—		—		—		35,000
Repurchase agreements	195,883		—		—		—		195,883
FHLB advances	80,000		—		—		—		80,000
Long-term obligations (2)	—		—		—		72,166		72,166
Operating lease obligations	4,408		8,906		7,314		6,965		27,593
Total contractual obligations	$	337,791	$	8,906	$	7,314	$	79,131	$	433,142

(1)    See Liquidity section below for a discussion of TIO funds

(2)    Long-term obligations are comprised of the junior subordinated debentures.

The Company has employed a strategy to expand its offering of fee-based products through the acquisition of entities that complement its business model.  We will often structure the purchase price of an acquired entity to include an earn-out, which is a contingent payment based on achieving future performance levels. Given the uncertainty of today’s economic climate and the performance challenges it creates for companies, we feel that the use of earn-outs in acquisitions is an effective method to bridge the expectation gap between a buyer’s caution and a seller’s optimism. Earn-outs help to protect buyers from paying a full valuation up-front without the assurance of the acquisition’s performance, while allowing sellers to participate in the full value of the company provided the anticipated performance does occur.  Since the earn-out payments are determined based on the acquired company’s performance during the earn-out period, the total payments to be made are not known at the time of the acquisition.  The Company has committed to make additional earn-out payments to the former shareholders of ACMG, GMB and FDL based on earnings performance.  There were no earn-out payments owed as of September 30, 2005.

The contractual amount of the Company’s financial instruments with off-balance sheet risk expiring by period at September 30, 2005, is presented below:

	Within one year		After one but within three years		After three but within five years		After five years		Total
	(dollars in thousands)
Unfunded loan commitments	$	322,201	$	201,236	$	25,146	$	993	$	549,576
Standby letters of credit	26,637		2,999		5		—		29,641
Commercial letters of credit	6,552		386		4,447		—		11,385
Unfunded commitments for unconsolidated investments	6,963		—		—		—		6,963
Company guarantees	5,240		—		—		—		5,240
Total commitments	$	367,593	$	204,621	$	29,598	$	993	$	602,805

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 in 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.

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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.

The Company has also entered into interest-rate swap agreements under which it is required to either receive cash 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 as of the balance sheet date.  Because the interest-rate swaps recorded on the balance sheet at September 30, 2005 do not represent amounts that will ultimately be received or paid under the contracts, they are excluded from the table above.

Liquidity

Our liquidity management objective is to ensure our ability to satisfy the cash flow requirements of depositors and borrowers and to allow us to sustain our operations. Historically, our primary source of funds has been customer deposits. Scheduled loan and lease repayments are a relatively predictable source of funds, while deposit inflows and unscheduled loan and lease 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 relatively unpredictable.  In addition, the Company has commitments to extend credit under lines of credit and standby letters of credit.  The Company has also committed to investing in certain partnerships. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer-term basis to support expanded lending activities and to match the maturity or repricing intervals of assets.  The Company is required under federal banking regulations to maintain sufficient reserves to fund deposit withdrawals, loan commitments, and expenses.  We monitor our cash position on a daily basis in order to meet these requirements.

We use various forms of short-term borrowings for cash management and liquidity purposes on a limited basis. These forms of borrowings include federal funds purchased, securities sold under agreements to repurchase, the State of Colorado Treasury’s Time Deposit program, and borrowings from the FHLB. The Bank has approved federal funds purchase lines with seven other banks with an aggregate credit line of $162.0 million as well as credit lines based on available collateral sources with three firms to transact repurchase agreements. In addition, the Bank may apply for up to $20.0 million of State of Colorado time deposits. The Bank also has a line of credit from the FHLB that is limited by the amount of eligible collateral available to secure it. Borrowings under the FHLB line are required to be secured by unpledged securities and qualifying loans. At September 30, 2005, we had $221.1 million in

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unpledged securities available to collateralize FHLB borrowings and securities sold under agreements to repurchase.  During the second quarter of 2005, we began participating in the U.S. Treasury’s Term Investment Option (“TIO”) program for Treasury Tax and Loan participants.  The TIO program allows us to obtain additional short-term funds at a rate determined through an auction process that is limited by the amount of eligible collateral available to secure it.

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 business 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 junior subordinated debentures, payments for mergers and acquisitions activity (including potential earn-out payments), and payments for the salaries and benefits for the employees of the holding company.  The approval of the Office of the Comptroller of the Currency 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.” The Company’s ability to pay dividends on its common stock depends upon the availability of dividends from the Bank and earnings from its fee-based businesses, and upon the Company’s compliance with the capital adequacy guidelines of the FRB.

The Company expects that cash provided/used by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results and timing of tax and other payments.  Management believes that the existing cash, cash equivalents and investments in marketable securities, together with any cash generated from operations will be sufficient to meet normal operating requirements including capital expenditures for the next twelve months.  The Company may decide to sell additional equity or debt securities to further enhance our capital position, and the sale of additional equity securities could result in additional dilution to our stockholders.  Loan repayments and scheduled investment maturities may provide additional sources of liquidity, if needed.

Our fixed-rate junior subordinated debentures issued in 2000 became callable at par in June of 2005.  Upon evaluating the current alternatives the Company exercised its right to call the debentures effective June 30, 2005.  The Company also canceled an interest-rate swap on the debentures that had converted the debentures from a fixed-rate into a variable rate based on 3-month LIBOR plus 4.23%.  The Company incurred a one time settlement charge in the amount of $160,000 related to the termination of the swap.  On August 2, 2005 the Company raised $20.6 million via a pooled trust-preferred securities offering to replace the fixed-rate debentures.  The new securities bear interest at a rate based on 3-month LIBOR plus 1.45%.  The difference in spreads between the two issuances will result in an annual savings of approximately $0.6 million.

Net cash provided by operating activities totaled $18.4 million and $17.1 million for the nine months ended September 30, 2005 and 2004, respectively.  The increase is primarily due to an increase in cash received from both net interest income and noninterest income, offset by higher operating expenses.  Our average interest earning-assets increased by $252.7 million from September 30, 2004 to September 30, 2005, while our interest-bearing liabilities only increased by $182.6 million.  In addition, our net interest margin increased to 4.25% for the nine months ended September 30, 2005, from 4.16% as of September 30, 2004.  The net increase in our interest earning-assets and net interest margin helped drive our cash receipts from net interest income.  Our cash receipts from our fee-based business lines have also experienced continued increases.

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Net cash used in investing activities totaled $155.3 million and $252.4 million for the nine months ended September 30, 2005 and 2004, respectively.  The decrease in cash used in investing activities is primarily related to a $98.6 million decrease in cash used in net investment transactions and a $7.7 million decrease in cash paid in earn-out agreements, offset by a $4.0 million net increase in purchases of BOLI and a $5.4 million increase in loan originations.  The Company has reduced its purchases of investments in an attempt to deleverage the balance sheet and to lower the investment portfolio to a target of 25% of total assets.

Net cash provided by financing activities totaled $151.3 million and $238.3 million for the nine months ended September 30, 2005 and 2004, respectively.  The decrease in net cash provided by financing activities is primarily attributed to a $69.1 million net decrease in short-term wholesale funding (federal funds purchased, securities sold under agreements to repurchase and advances from the FHLB) and a net decrease of $30.0 million in proceeds from junior subordinated debentures.  These items were offset by a $12.8 million increase in deposit inflows.  Deposit management continues to be an area of focus for the Company as deposits help to provide a source of funding for loans and investments for Company operations.  During short term periods the Company utilizes FHLB advances or fed funds purchased to meet certain funding requirements.  Funds from these two sources may come at a higher cost thereby placing pressure on the Company’s net interest margin.

Effects of Inflation and Changing Prices

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

Forward Looking Statements

This report contains forward-looking statements that describe CoBiz’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 “will,” “would,” “should,” “could” or “may.” Forward-looking statements speak only as of the date they are made.  Such risks and uncertainties include, among other things:

•Competitive pressures among depository and other financial institutions nationally and in our market areas may increase significantly.

•Adverse changes in the economy or business conditions, either nationally or in our market areas, could increase credit-related losses and expenses and/or limit growth.

•Increases in defaults by borrowers and other delinquencies could result in increases in our provision for losses on loans and leases and related expenses.

•Our inability to manage growth effectively, including the successful expansion of our customer support, administrative infrastructure and internal management systems, could adversely affect our results of operations and prospects.

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•Fluctuations in interest rates and market prices could reduce our net interest margin and asset valuations and increase our expenses.

•The consequences of continued bank acquisitions and mergers in our market areas, resulting in fewer but much larger and financially stronger competitors, could increase competition for financial services to our detriment.

•Our continued growth will depend in part on our ability to enter new markets successfully and capitalize on other growth opportunities.

•Changes in legislative or regulatory requirements applicable to us and our subsidiaries could increase costs, limit certain operations and adversely affect results of operations.

•Changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations may increase our tax expense or adversely affect our customers’ businesses.

In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements 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.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

As of September 30, 2005, there have been no material changes in the quantitative and qualitative information about market risk provided pursuant to Item 305 of Regulation S-K as presented in our Form 10-K for the year ended December 31, 2004.

Item 4.  Controls and Procedures

Evaluation of 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 Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2005 (“Evaluation Date”) pursuant to Exchange Act Rule 13a-15(e).  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission filings.

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control.   During the quarter that ended on the Evaluation Date, there were no changes in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

None

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.  Defaults Upon Senior Securities

None

Item 4.  Submission of Matters to a Vote of Security Holders

None

Item 5.  Other Information

None

Item 6.  Exhibits

Exhibits and Index of Exhibits.

31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32.1	Section 1350 Certification of the Chief Executive Officer.
32.2	Section 1350 Certification of the Chief Financial Officer.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		COBIZ INC.
Date:	November 8, 2005	By	/s/ Steven Bangert
		Steven Bangert, Chief Executive Officer and Chairman
Date:	November 8, 2005	By	/s/ Lyne B. Andrich
		Lyne B. Andrich, Executive Vice President and
		Chief Financial Officer

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