Cobiz Financial (COBZ) 10-Q 2011 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2011.

oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transitions period from                  to                 

Commission File Number   001-15955

CoBiz Financial Inc.

(Exact name of registrant as specified in its charter)

COLORADO	84-0826324
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
821 17th Street
Denver, CO	80202
(Address of principal executive offices)	(Zip Code)

(303) 293-2265

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x   No  o

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

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

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

There were 37,042,416 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding at July 28, 2011.

	PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)
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 6.	Exhibits
SIGNATURES

Part I.  Financial Information

Item 1.  Condensed Consolidated Financial Statements  (unaudited)

CoBiz Financial Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

At June 30, 2011 and December 31, 2010

(unaudited)

	June 30,			December 31,
(in thousands, except share amounts)	2011			2010
Assets
Cash and due from banks	$	35,710		$	15,929
Interest-bearing deposits and federal funds sold	14,323			8,237
Total cash and cash equivalents	50,033			24,166
Investment securities available for sale (cost of $613,807 and $626,023, respectively)	629,211			637,444
Investment securities held to maturity (fair value of $255 and $270, respectively)	248			262
Other investments	7,438			6,962
Total investments	636,897			644,668
Loans, net of allowance for loan losses of $61,920 and $65,892, respectively	1,595,030			1,577,835
Intangible assets, net of amortization of $4,870 and $4,551, respectively	3,718			4,119
Bank-owned life insurance	36,618			36,043
Premises and equipment, net of depreciation of $30,956 and $29,433, respectively	8,422			9,048
Accrued interest receivable	8,157			8,081
Deferred income taxes, net	16,020			16,449
Other real estate owned and reposessed assets, net of valuation allowance of $8,462 and $5,879, respectively	23,748			25,095
Other	39,592			49,584
TOTAL ASSETS	$	2,418,235		$	2,395,088
Liabilities
Deposits
Demand	$	736,692		$	681,534
NOW and money market	713,701			663,572
Savings	10,221			9,144
Eurodollar	94,047			105,793
Certificates of deposits	358,067			429,325
Total deposits	1,912,728			1,889,368
Securities sold under agreements to repurchase	144,843			157,690
Other short-term borrowings	30,000			14,012
Accrued interest and other liabilities	28,377			38,930
Junior subordinated debentures	72,166			72,166
Subordinated notes payable	20,984			20,984
TOTAL LIABILITIES	2,209,098			2,193,150
Commitments and Contingencies
Shareholders’ Equity
Cumulative preferred, $.01 par value; 2,000,000 shares authorized; and 64,450 issued and outstanding ($64,450 liquidation value)	1			1
Common, $.01 par value; 50,000,000 shares authorized; and 37,042,416 and 36,876,658 issued and outstanding, respectively	367			366
Additional paid-in capital	226,679			225,454
Accumulated deficit	(25,982		)	(30,414		)
Accumulated other comprehensive income, net of income tax of $4,949 and $3,882, respectively	8,072			6,331
TOTAL SHAREHOLDERS’ EQUITY	209,137			201,738
Noncontrolling interest	—			200
TOTAL EQUITY	209,137			201,938
TOTAL LIABILITIES AND EQUITY	$	2,418,235		$	2,395,088

See Notes to Condensed Consolidated Financial Statements

CoBiz Financial Inc. and Subsidiaries

Three and six months ended June 30, 2011 and 2010

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

(unaudited)

	Three months ended June 30,					Six months ended June 30,
(in thousands, except per share amounts)	2011		2010			2011		2010
INTEREST INCOME:
Interest and fees on loans	$	22,290	$	23,773		$	44,471	$	47,773
Interest and dividends on investment securities:
Taxable securities	5,789		5,300			11,698		11,048
Nontaxable securities	2		14			7		35
Dividends on securities	58		128			117		259
Federal funds sold and other	38		43			75		62
Total interest income	28,177		29,258			56,368		59,177
INTEREST EXPENSE:
Interest on deposits	2,132		3,283			4,384		6,993
Interest on short-term borrowings and securities sold under agreements to repurchase	213		301			425		608
Interest on subordinated debentures	1,501		1,501			2,984		2,650
Total interest expense	3,846		5,085			7,793		10,251
NET INTEREST INCOME BEFORE PROVISION	24,331		24,173			48,575		48,926
Provision for loan losses	1,982		10,444			3,622		24,264
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	22,349		13,729			44,953		24,662
NONINTEREST INCOME:
Service charges	1,224		1,269			2,463		2,527
Investment advisory and trust income	1,543		1,457			2,969		2,826
Insurance income	3,288		3,529			6,681		6,702
Investment banking income	857		1,789			1,601		2,090
Other income	1,878		1,709			3,108		2,493
Total noninterest income	8,790		9,753			16,822		16,638
NONINTEREST EXPENSE:
Salaries and employee benefits	16,294		15,055			31,441		30,421
Occupancy expenses, premises and equipment	3,322		3,412			6,676		6,846
Amortization of intangibles	159		160			319		321
FDIC and other assessments	934		1,321			2,274		2,561
Other real estate owned and loan workout costs	640		1,943			1,833		3,226
Net other than temporary impairment losses on securities recognized in earnings	137		110			371		309
Loss on securities, other assets and other real estate owned	806		3,938			1,934		5,162
Other	2,961		3,512			5,856		6,878
Total noninterest expense	25,253		29,451			50,704		55,724
INCOME (LOSS) BEFORE INCOME TAXES	5,886		(5,969		)	11,071		(14,424		)
Provision (benefit) for income taxes	2,047		(2,721		)	4,006		(6,157		)
NET INCOME BEFORE NONCONTROLLING INTEREST	3,839		(3,248		)	7,065		(8,267		)
LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST	—		(521		)	—		(199		)
NET INCOME (LOSS)	$	3,839	$	(3,769	)	$	7,065	$	(8,466	)
UNREALIZED APPRECIATION (DEPRECIATION) ON SECURITIES AVAILABLE FOR SALE AND DERIVATIVE INSTRUMENTS , net of tax	370		(1,984		)	1,741		(2,715		)
COMPREHENSIVE INCOME (Loss)	$	4,209	$	(5,753	)	$	8,806	$	(11,181	)
EARNINGS PER SHARE:
Basic	$	0.08	$	(0.13	)	$	0.14	$	(0.28	)
Diluted	$	0.08	$	(0.13	)	$	0.14	$	(0.28	)

See Notes to Condensed Consolidated Financial Statements

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CoBiz Financial Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2011 and 2010

(unaudited)

	For the six months ended June 30,
(in thousands)	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	7,065		$	(8,267	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net amortization on investment securities	1,135			703
Depreciation and amortization	1,864			1,995
Amortization of net loan fees	(179		)	(100		)
Provision for loan and credit losses	3,622			24,264
Stock-based compensation	765			856
Federal Home Loan Bank stock dividend	(5		)	(141		)
Deferred income taxes	(779		)	(364		)
Increase in cash surrender value of bank-owned life insurance	(575		)	(621		)
Excess tax benefit from stock-based compensation	—			(1		)
Supplemental executive retirement plan	66			312
Loss on securities, other assets and other real estate owned	2,305			5,471
Other operating activities, net	(754		)	(310		)
Changes in operating assets and liabilities:
Restricted cash	—			(5,006		)
Accrued interest and other liabilities	(370		)	4,445
Accrued interest receivable	(76		)	(16		)
Other assets	3,094			(4,029		)
Net cash provided by operating activities	17,178			19,191
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of other investments	(1,221		)	(549		)
Proceeds from other investments	1,662			1,959
Purchases of investment securities available for sale	(107,443		)	(168,102		)
Proceeds from sale of investment securities available for sale	3,194			688
Maturities of investment securities available for sale	103,477			149,965
Maturities of investment securities held to maturity	15			24
Restricted cash	7,359			—
Net proceeds from sale of loans, OREO and repossessed assets	5,620			17,497
Loan originations and repayments, net	(27,452		)	35,137
Purchase of premises and equipment	(917		)	(1,705		)
Other investing activities, net	10			1
Net cash provided by (used in) investing activities	(15,696		)	34,915
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market, Eurodollar and savings accounts	94,618			60,555
Net decrease in certificates of deposits	(71,258		)	(62,944		)
Net increase (decrease) in short-term borrowings	15,988			(240		)
Net increase (decrease) in securities sold under agreements to repurchase	(12,847		)	11,829
Proceeds from issuance of common stock, net	245			464
Dividends paid on common stock	(738		)	(734		)
Dividends paid on preferred stock	(1,612		)	(1,611		)
Excess tax benefit from stock-based compensation	—			1
Net distribution to noncontrolling interests	—			(1,160		)
Other financing activities, net	(11		)	—
Net cash provided by financing activities	24,385			6,160
NET INCREASE IN CASH AND CASH EQUIVALENTS	25,867			60,266
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	24,166			47,637
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	50,033		$	107,903

See Notes to Condensed Consolidated Financial Statements

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CoBiz Financial Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.           Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements of CoBiz Financial Inc. (Parent), and its subsidiaries:  CoBiz Bank (Bank); CoBiz Insurance, Inc.; CoBiz GMB, Inc.; Financial Designs Ltd. (FDL); and CoBiz IM, Inc. (CoBiz IM), formerly CoBiz ACMG Inc., 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 nine locations in the Denver metropolitan area; one in Boulder; two near Vail; and seven in the Phoenix metropolitan area. As a state chartered bank, deposits are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (FDIC) and the Bank is subject to supervision, regulation and examination by the Federal Reserve, Colorado Division of Banking and the FDIC. Pursuant to such regulations, the Bank is subject to special restrictions, supervisory requirements and potential enforcement actions. CoBiz IM provides investment management services to institutions and individuals through its subsidiary, CoBiz Investment Management, LLC. FDL provides wealth transfer and related administrative support to individuals, families and employers. CoBiz Insurance, Inc. provides commercial and personal property and casualty insurance brokerage, employee benefits consulting, and risk management consulting services to small and medium-sized businesses and individuals. CoBiz Insurance, Inc. operates in the Denver metropolitan market as CoBiz Insurance — Colorado and in the Phoenix metropolitan market as CoBiz Insurance — Arizona. CoBiz GMB, Inc. provides investment banking services to middle-market companies through its wholly-owned subsidiary, Green Manning & Bunch, Ltd. (GMB).

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

Basis of Presentation —These financial statements and notes thereto should be read in conjunction with, and are qualified in their entirety by, the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the U.S. Securities and Exchange Commission (SEC).

The condensed consolidated 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 six months ended June 30, 2011, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011.

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

The voting interest model is used when the equity investment is sufficient to absorb the expected losses and the equity investment has all of the characteristics of a controlling financial interest. Under the voting interest model, the party with the controlling voting interest consolidates the legal entity.  The VIE model is used when any of the following conditions exist: the equity investment at risk is not sufficient to finance the entity’s activities without additional subordinated financial support; the holders of the equity investment do not have a controlling voting interest; or the holders of the equity investment are not obligated to absorb the expected losses or residual returns of the legal entity. An enterprise is considered to have a controlling financial interest of a VIE if it has both the power to direct the activities that most significantly impact economic performance and the obligation to absorb

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losses, or receive benefits, that are significant to the VIE. An enterprise that has a controlling financial interest is considered the primary beneficiary and must consolidate the VIE.

The Company’s wholly owned trusts, CoBiz Statutory Trust I, CoBiz Capital Trust II and CoBiz Capital Trust III are VIEs for which the Company is not considered the primary beneficiary.  In making this determination, the Company considered its role and economic interest in the trusts, as well as the trusts’ business purpose and capital structure.  Based on the capitalization structure of the Trusts’, the Company is not exposed to loss as the Company’s investments are offset by a corresponding liability.

The Company also has investments in four limited partnerships that are each considered a VIE.  The Company has determined that it is not the primary beneficiary of these partnerships.  Where the Company is not a primary beneficiary of a VIE, but can exert significant influence over the investee, the Company uses the equity method of accounting.  The Company considered all facts and circumstances in its assessment of the activities that most significantly impact the VIE’s economic performance, including its rights and responsibilities and related party interests.  In addition, the Company considered all economic interests in its assessment of the obligation to absorb losses or the right to receive benefits from the VIE. The maximum exposure to loss with these VIEs is the Company’s current investment in addition to its commitments to make future capital contributions. The primary source of loss exposure on these VIEs is credit risk on the underlying investments of the partnerships.  .

The following table summarizes the Company’s assets, liabilities, commitments and loss exposure on VIEs at June 30, 2011:

	At June 30, 2011
(in thousands)	Balance		Balance Sheet Classification
Assets:
Wholly owned trusts	$	2,172	Other investments
Investments in limited partnerships	8,772		Other assets
Liabilities:
Junior subordinated debentures	$	72,166	Junior subordinated debentures
Commitments:
Investments in limited partnerships	$	5,525	Commitments and contingencies
Maximum exposure to loss:
Wholly owned trusts	$	—
Investments in limited partnerships	14,297

Cash and Cash Equivalents — The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include amounts that the Company is required to maintain at the Federal Reserve Bank of Kansas City to meet certain regulatory reserve balance requirements. The following table shows supplemental disclosures of certain cash and noncash items:

	Six months ended June 30,
(in thousands)	2011			2010
Cash paid (received) during the period for:
Interest	$	8,176		$	10,323
Income taxes	3,483			(571		)
Other noncash activities:
Loans transferred to held for sale	$	3,000		$	11,683
Loans transferred to OREO and repossessed assets	3,761			15,977
Financed sales of loans held for sale	—			1,152
Cash transferred (to) or from restricted cash (other assets)	(7,359		)	5,000

Investments — The Company classifies its investment securities as held to maturity, available for sale or trading, according to management’s intent.

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

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

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

The Company separates the amount of other-than-temporary-impairment (OTTI) into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between a security’s amortized cost basis and the discounted present value of expected future cash flows. The amount due to all other factors is recognized in other comprehensive income.

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

Loans held for investment— Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, deferred fees or costs on originated loans, and unamortized premiums or discounts on purchased loans. Interest is accrued and credited to income daily based on the principal balance outstanding. The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal and interest. When a loan is designated as nonaccrual, the current period’s accrued interest receivable is charged against current earnings while any portions relating to prior periods are charged against the allowance for loan losses. Interest payments received on nonaccrual loans are generally applied to the principal balance of the loan. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured and there has been demonstrated performance in accordance with contractual terms.  The Company may elect to continue the accrual of interest when the loan is in the process of collection and the realizable value of collateral is sufficient to cover the principal balance and accrued interest.

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

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

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

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

Impaired loans — Impaired loans, with the exception of groups of smaller-balance homogenous loans that are collectively evaluated for impairment, are defined as loans for which, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays of less than 90 days and monthly payment shortfalls of less than 10% of the contractual payment on a consumer loan generally are not

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classified as impaired if the Company ultimately expects to recover its full investment. The Company determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Loans that are deemed to be impaired are evaluated in accordance with ASC Topic 310-10-35, Receivables — Subsequent Measurement (ASC 310) and ASC Topic 450-20, Loss Contingencies (ASC 450).

Included in impaired loans are troubled debt restructurings.  A troubled debt restructuring is a formal restructure of a loan where the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the loan balance or accrued interest, and extension of the maturity date.  Troubled debt restructurings are evaluated in accordance with ASC Topic 310-10-40, Troubled Debt Restructurings by Creditors. Interest payments on impaired loans are typically applied to principal unless collectability of principal is reasonably assured. Loans that have been modified in a formal restructuring are typically returned to accrual status when there has been a sustained period of performance (generally six months) under the modified terms, the borrower has shown the ability and willingness to repay and the Company expects to collect all amounts due under the modified terms.

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

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

Derivative Instruments — Derivative financial instruments are accounted for at fair value. The Company utilizes interest rate swaps to hedge a portion of its exposure to interest rate changes. These instruments are accounted for as cash flow hedges, as defined by ASC Topic 815, Derivatives and Hedging (ASC 815). The Company also has a derivative program that offers interest-rate caps, floors, swaps and collars to customers of the Bank. The fair value amounts recognized for derivative instruments and the fair value amounts recognized for the right to reclaim or obligation to return cash collateral are offset when represented under a master netting arrangement.

Stock-Based Compensation — Pursuant to ASC Topic 718, Compensation — Stock Compensation (ASC 718), the Company recognizes the fair value of stock-based awards to employees as compensation cost over the requisite service period.

Earnings (Loss) Per Common Share — Basic earnings per share is based on the two-class method prescribed in ASC Topic 260, Earnings Per Share (ASC 260).   The weighted-average number of shares outstanding used to compute diluted earnings per share include the number of additional common shares that would be outstanding if the potential dilutive common shares and common share equivalents had been issued at the beginning of the period.

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

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2.           Recent Accounting Pronouncements

In January 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (ASU 2011-01).  The FASB determined that certain provisions relating to troubled debt restructurings (TDRs) should be deferred until additional guidance and clarification on the definition of TDRs is issued.  In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU 2011-02). ASU 2011-02 amends ASC Topic 310 — Receivables, by clarifying guidance for creditors in determining whether a concession has been granted and whether a debtor is experiencing financial difficulties.  The amendments are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  ASU 2011-02 also makes disclosure requirements deferred under ASU 2011-01 effective for interim and annual periods beginning on or after June 15, 2011.  The Company is evaluating the effect, if any, the adoption of ASU 2011-02 will have on its consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (ASU 2011-03), intended to improve financial reporting of repurchase agreements and refocus the assessment of effective control on a transferor’s contractual rights and obligations rather than practical ability to perform those rights and obligations.  The guidance in ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. The Company is evaluating the effect, if any, the adoption of ASU 2011-03 will have on its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 represents the converged guidance of the FASB and the International Accounting Standards Board (IASB) on fair value measurement.  A variety of measures are included in the update intended to either clarify existing fair value measurement requirements, change particular principles requirements for measuring fair value or for disclosing information about fair value measurements.  For many of requirements, the FASB does not intend to change the application of existing requirements under Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements.  ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and early application is not permitted. The Company is evaluating the impact adoption of ASU 2011-04 will have on its financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05), intended to increase the prominence of items reported in other comprehensive income and to facilitate convergence of accounting guidance in this area with that of the IASB.  The amendments require that all nonowner changes in stockholders’ equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements.  Amendments under ASU 2011-05 for public entities should be applied retrospectively for fiscal years, and interim periods within those years, beginning December 15, 2011.  The Company is evaluating the impact adoption of ASU 2011-04 will have on its financial statements.

3.Earnings (Loss) per Common Share and Dividends Declared per Common Share

Earnings (loss) per common share is calculated based on the two-class method prescribed in ASC 260.  The two-class method is an earnings allocation of undistributed earnings to common stock and securities that participate in dividends with common stock.  The Company’s restricted stock awards are considered participating securities since the recipients receive non-forfeitable dividends on unvested awards.  The impact of participating securities is included in the common shareholder basic earnings per share for the three and six months ended June 30, 2011.  However the effect of including those shares would be anti-dilutive due to the net loss in the three and six month periods ending June 30, 2010, and are therefore not considered in the basic per share calculation.  The weighted average shares outstanding used in the calculation of basic and diluted loss per share are as follows:

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	Three months ended June 30,						Six months ended June 30,
(in thousands, except share amounts)	2011			2010			2011			2010
Net income (loss) attributable to CoBiz Financial Inc.	$	3,839		$	(3,769	)	$	7,065		$	(8,466	)
Preferred stock dividends	(949		)	(940		)	(1,895		)	(1,878		)
Net income (loss) available to common shareholders	$	2,890		$	(4,709	)	$	5,170		$	(10,344	)
Distributed earnings (1)	365			—			731			—
Undistributed earnings (loss)	2,494			(4,709		)	4,391			(10,344		)
Income (loss) allocated to common stock	$	2,859		$	(4,709	)	$	5,122		$	(10,344	)
Weighted average common shares - issued	37,044,131			36,784,597			36,986,402			36,756,486
Average nonvested restricted share awards	(403,963		)	(257,230		)	(356,947		)	(254,479		)
Weighted average common shares outstanding - basic	36,640,168			36,527,367			36,629,455			36,502,007
Effect of dilutive stock awards outstanding	189,211			—			176,622			—
Weighted average common shares outstanding - diluted	36,829,379			36,527,367			36,806,077			36,502,007
Weighted average antidilutive common shares outstanding (2)	3,217,175			3,753,965			3,252,733			3,691,437
Basic earnings per share	$	0.08		$	(0.13	)	$	0.14		$	(0.28	)
Diluted earnings per share	$	0.08		$	(0.13	)	$	0.14		$	(0.28	)
Dividends declared per share	$	0.01		$	0.01		$	0.02		$	0.02

(1) Dividends paid during the three and six months ended June 30, 2010 were not considered distributions of current period earnings.

(2) Shares excluded from the diluted earnings (loss) per share computation due to the antidilutive effect.

4.Comprehensive Income (Loss)

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

	Three months ended June 30,						Six months ended June 30,
(in thousands)	2011			2010			2011			2010
Other comprehensive items:
Unrealized gain on available for sale securities, net of reclassification to operations to operations of $(514) and $241 for the three months ended ended June 30 and $(280) and $448 for the six months ended June 30	$	2,389		$	1,572		$	3,502		$	1,934
Change in OTTI-related component of unrealized gain	177			102			480			190
Unrealized (loss) gain on derivative securities, net of reclassification to operations of $(372) and $(164) for the three months ended June 30 and $(726) and $128 for the six months ended June 30	(1,969		)	(4,874		)	(1,174		)	(6,503		)
Tax benefit (expense) related to items of other comprehensive income	(227		)	1,216			(1,067		)	1,664
Other comprehensive income (loss), net of tax	$	370		$	(1,984	)	$	1,741		$	(2,715	)

5.Investments

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

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	June 30, 2011								December 31, 2010
			Gross		Gross		Estimated				Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair		Amortized		unrealized		unrealized		fair
(in thousands)	cost		gains		losses		value		cost		gains		losses		value
Available for sale securities:
Mortgage-backed securities (MBS)	$	388,936	$	12,472	$	—	$	401,408	$	395,842	$	10,740	$	1,037	$	405,545
U.S. government agencies	73,917		463		20		74,360		80,214		449		44		80,619
Trust preferred securities	99,734		3,114		288		102,560		86,543		2,556		791		88,308
Corporate debt securities	47,195		1,070		33		48,232		58,204		1,425		34		59,595
Private-label MBS	3,699		—		1,375		2,324		4,288		—		1,856		2,432
Municipal securities	326		1		—		327		932		13		—		945
	$	613,807	$	17,120	$	1,716	$	629,211	$	626,023	$	15,183	$	3,762	$	637,444
Held to maturity securities:
Mortgage-backed securities	$	248	$	7	$	—	$	255	$	262	$	8	$	—	$	270

Proceeds from the sale of investment securities available for sale totaled $3.2 million for the three and six months ended June 30, 2011.  Gains on the sale of investment securities totaled $0.5 million for the three and six months ended June 30, 2011.  Proceeds from the sale of investment securities available for sale totaled $0.1 million and $0.7 million for the three and six months ended June 30, 2010, respectively.  Gains and losses on the sale of investment securities for the three and six months ended June 30, 2010 were not material.

The amortized cost and estimated fair value of investments in debt securities at June 30, 2011, by contractual maturity are shown below. Expected maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

	Available for sale				Held to maturity
			Estimated				Estimated
	Amortized		fair		Amortized		fair
(in thousands)	cost		value		cost		value
Due in one year or less	$	7,917	$	8,035	$	—	$	—
Due after one year through five years	111,624		113,010		—		—
Due after five years through ten years	1,897		1,873		—		—
Due after ten years	99,734		102,561		—		—
Mortgage-backed securities	392,635		403,732		248		255
	$	613,807	$	629,211	$	248	$	255

Changes in interest rates and market liquidity may cause adverse fluctuations in the market price of securities resulting in temporary unrealized losses.  At June 30, 2011, the majority of the total unrealized loss of $1.7 million is comprised of private-label mortgage-backed and trust preferred securities.  The Company has recognized other-than-temporary impairments (OTTI) of $2.2 million on these securities, including $0.1 million and $0.4 million recognized during the three and six months ended June 30, 2011, respectively.  The trust preferred securities (TPS) are all single-entity issues that continue to pay their regularly scheduled dividend payments.

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

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

The Company has determined there was no unrecognized OTTI associated with the 22 securities noted within the table below at June 30, 2011.

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	Less than 12 months				12 months or Greater				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in thousands)	value		loss		value		loss		value		loss
U.S. government agencies	$	9,980	$	20	$	—	$	—	$	9,980	$	20
Trust preferred securities	23,589		204		1,326		84		24,915		288
Corporate debt securities	6,863		33		—		—		6,863		33
Private-label MBS	—		—		2,324		1,375		2,324		1,375
Total	$	40,432	$	257	$	3,650	$	1,459	$	44,082	$	1,716

The credit loss component represents the difference between the present value of expected future cash flows and the amortized cost basis of the security. The credit component of OTTI recognized in earnings is presented as an addition in two parts based upon whether the current period is the first time the debt security was credit impaired or if it is additional credit impairment. The credit loss component is reduced if the Company sells, intends to sell or believes it will be required to sell previously credit impaired debt securities. Additionally, the credit loss component is reduced if the Company receives cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security or when the security matures.

The following tables present a roll-forward of the credit loss component of OTTI on securities recognized in earnings during the three and six months ended June 30, 2011 and 2010.

	For the three months ended		For the three months ended		For the six months ended		For the six months ended
(in thousands)	June 30, 2011		June 30, 2010		June 30, 2011		June 30, 2010
Beginning balance	$	2,016	$	1,530	$	1,782	$	1,331
Additions:
Additional credit impairment	137		110		371		309
Ending balance	$	2,153	$	1,640	$	2,153	$	1,640

During the three and six months ended June 30, 2011, the Company recognized credit related OTTI in earnings on two private-label MBS.  In determining the credit loss, the Company estimated expected future cash flows of the security by estimating the expected future cash flows of the underlying collateral and applying those collateral cash flows, together with any credit enhancements such as subordination interests owned by third parties, to the security. The expected future cash flows of the underlying collateral are determined using the remaining contractual cash flows adjusted for future expected credit losses (which consider current and future delinquencies, default rates and loss severities) and prepayments. The expected cash flows of the security are then discounted to arrive at a present value amount.

The following table presents a summary of the significant inputs considered in determining the measurement of the credit loss component recognized in earnings for the private-label mortgage-backed securities during the 6 months ending June 30, 2011.  These inputs are developed by examining the three- and six-month history of actual prepayment speeds, default rates and severity and, in most instances, selecting the worst of these metrics to project losses for the remaining life of each instrument.  The Company validates the information in Bloomberg to the remittance reports provided by the servicing agents.  A range of inputs is provided for securities with multiple impairments during the year.

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	Security #1			Security #2
Prepayment speed (CPR) (1)	9.5-13.6		%	7.0-8.9		%
Default rate (CDR) (2)	7.2-8.9		%	6.8-7.5		%
Severity (3)	49.4-51.6		%	45.9-47.6		%
Credit impairment (in thousands)	$	109		$	262

(1) Estimated prepayments as a percentage of outstanding loans

(2) Estimated default rate as a percentage of oustanding loans

(3) Estimated loss rate on collateral liquidations

Certain characteristics of the loans underlying the private-label mortgage-backed securities are included in the following table.

	Underlying Loan Characteristics
	Security #1			Security #2
Purpose:
Purchase	61.7		%	62.7		%
Equity take out	34.2		%	29.3		%
Refinance	4.0		%	8.0		%
Type:
Single family	66.7		%	56.5		%
2-4 family	8.2		%	6.7		%
Condominium	3.6		%	8.7		%
Planned unit development	21.5		%	27.7		%
Owner occupied	100.0		%	91.3		%
Vacation	0.0		%	0.4		%
Investment	0.0		%	8.3		%
Terms:
30 year amortization	100.0		%	100.0		%
ARM	100.0		%	100.0		%
Geography:
Northern CA	29.4		%	26.3		%
Sourhtern CA	35.6		%	36.8		%
Current Averages:
Loan rate	3.0		%	2.9		%
LTV based on origination value	77.0		%	73.9		%
Loan balance	$	469,000		$	369,700
Age (months)	75			79
FICO at origination	715			715
Delinquent 60+ days	10.6		%	24.1		%
Delinquent 90+ days	10.6		%	23.7		%

Other investments at June 30, 2011 and December 31, 2010, consist of the following:

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	June 30,		December 31,
(in thousands)	2011		2010
Bank stocks — at cost	$	5,266	$	4,790
Investment in statutory trusts — equity method	2,172		2,172
	$	7,438	$	6,962

Bank stocks consist primarily of stock in the FHLB which is part of the Federal Home Loan Bank System (FHLB System).  The purpose of the FHLB investment relates to maintenance of a borrowing base with the FHLB.  As the Company’s liquidity position has improved, the need for a large borrowing base has decreased.  To the extent that the need for wholesale funding increases, the Company may purchase additional FHLB stock in the future.  The Company evaluates impairment in this investment based on the ultimate recoverability of the par value and at June 30, 2011, did not consider the investment to be other than temporarily impaired.

6.Loans

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

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

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

·Land Acquisition and Development Loans — The Company has a portfolio of loans for the acquisition and future development of land for residential building projects, as well as finished lots prepared to enter the construction phase.  Due to overall market illiquidity and the significant value declines on raw land, the Company has ceased new lending activities for the acquisition and future development of land.  The primary risks include the borrower’s inability to pay and the inability of the Company to recover its investment due to a decline in the fair value of the underlying collateral.

·Real Estate Construction Loans— The Company originates loans to finance construction projects involving one- to four-family residences.  Residential construction loans are due upon the sale of the completed project and are generally collateralized by first liens on the real estate and have floating interest rates.  Construction loans are considered to have higher risks due to the ultimate repayment being sensitive to interest rate changes, governmental regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans.  Adverse economic conditions may negatively impact the real estate

13

market which could affect the borrowers’ ability to complete and sell the project.  Additionally, the fair value of the underlying collateral may fluctuate as market conditions change.

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

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

The loan portfolio segments at June 30, 2011 and December 31, 2010 were as follows:

(in thousands)	June 30, 2011			December 31, 2010
Commercial	$	592,544		$	564,882
Real estate - mortgage	773,102			784,009
Land acquisition & development	72,230			83,909
Real estate - construction	76,773			87,116
Consumer	104,967			94,661
Other	37,337			29,388
Loans held for investment	1,656,953			1,643,965
Allowance for loan losses	(61,920		)	(65,892		)
Unearned net loan fees	(3		)	(238		)
Net loans held for investment	$	1,595,030		$	1,577,835

The Company transferred two loans totaling $3.0 million from held for investment to held for sale during the first quarter of 2011.  These loans were sold during the first quarter and no gain or loss resulted from this transaction.   During the three and six months ended June 30, 2011, the Company purchased leases of $8.1 million and $18.1 million, respectively, included in the ‘Other’ loan category, none of which were of deteriorated credit quality.  The Company uses qualifying loans as collateral for advances and a line of credit from the FHLB.  The FHLB line of credit, which had a $30.0 million balance outstanding at June 30, 2011, was collateralized by loans of $592.9 million with a lending value of $304.8 million.

The Company maintains a loan review program independent of the lending function that is designed to reduce and control risk in the lending function. It includes the continuous monitoring of lending activities with respect to underwriting and processing new loans, preventing insider abuse and timely follow-up and corrective action for loans showing signs of deterioration in quality.   The Company also has a systematic process to evaluate individual loans and pools of loans within our loan portfolio. The Company maintains a loan grading system whereby each loan is assigned a grade between 1 and 8, with 1 representing the highest quality credit, 7 representing a nonaccrual loan where collection or liquidation in full is highly questionable and improbable, and 8 representing a loss that has been or will be charged-off.  Grades are assigned based upon the degree of risk associated with repayment of a loan in the normal course of business pursuant to the original terms.  Loans that are graded 5 or lower are categorized as non-classified credits while loans graded 6 and higher are categorized as classified credits.  Loan grade changes are evaluated on a monthly basis.  Loans above a certain dollar amount that are adversely graded are reported to the Problem Loan Committee of the Bank and the Chief Credit Officer along with current financial information, a collateral analysis and an action plan.

The loan portfolio showing total non-classified and classified balances by loan class at June 30, 2011 and December 31, 2010 is summarized below:

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	June 30, 2011
(in thousands)	Non-classified		Classified		Total
Commercial
Manufacturing	$	80,170	$	11,305	$	91,475
Finance and Insurance	73,813		1,167		74,980
Health Care	55,089		179		55,268
Real Estate Services	62,235		16,345		78,580
Construction	52,732		8,857		61,589
Retail Trade	24,917		3,272		28,189
Wholesale Trade	61,253		5,227		66,480
Other	128,196		7,787		135,983
	538,405		54,139		592,544
Real estate - mortgage
Residential & commercial owner-occupied	381,267		36,371		417,638
Residential & commercial investor	323,546		31,918		355,464
	704,813		68,289		773,102
Land Acquisition and development
Commercial	16,126		12,048		28,174
Residential	29,007		8,115		37,122
Other	6,780		154		6,934
	51,913		20,317		72,230
Real estate - construction
Residential & commercial owner-occupied	19,858		—		19,858
Residential & commercial investor	38,131		18,784		56,915
	57,989		18,784		76,773
Consumer	100,628		4,339		104,967
Other	37,281		56		37,337
Unearned net loan fees					(3		)
Total Loans	$	1,491,029	$	165,924	$	1,656,950

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	At December 31, 2010
(in thousands)	Non-classified			Classified		Total
Commercial
Manufacturing	$	72,036		$	14,695	$	86,731
Finance and Insurance	75,258			2,061		77,319
Health Care	70,110			396		70,506
Real Estate Services	63,272			15,948		79,220
Construction	41,125			10,224		51,349
Retail Trade	22,516			4,367		26,883
Wholesale Trade	51,219			2,268		53,487
Other	111,387			8,000		119,387
	506,923			57,959		564,882
Real estate - mortgage
Residential & commercial owner-occupied	403,644			28,261		431,905
Residential & commercial investor	313,157			38,947		352,104
	716,801			67,208		784,009
Land Acquisition and development
Commercial	17,540			10,050		27,590
Residential	33,168			10,613		43,781
Other	8,599			3,939		12,538
	59,307			24,602		83,909
Real estate - construction
Residential & commercial owner-occupied	22,411			—		22,411
Residential & commercial investor	43,939			20,766		64,705
	66,350			20,766		87,116
Consumer	90,239			4,422		94,661
Other	29,388			—		29,388
Unearned net loan fees	(238		)	—		(238		)
Total Loans	$	1,468,770		$	174,957	$	1,643,727

Transactions in the allowance for loan losses by segment for the six months ended June 30, 2011 are summarized below:

(in thousands)	Commercial			Real estate - mortgage			Land acquisition and development			Real estate - construction			Consumer			Other		Unallocated			Total
Balance at December 31, 2010	$	17,169		$	17,677		$	14,938		$	6,296		$	3,373		$	354	$	6,085		$	65,892
Provision	468			4,687			(1,393		)	134			439			125		(838		)	3,622
Charge-offs	(2,354		)	(2,227		)	(1,233		)	(3,285		)	(200		)	—		—			(9,299		)
Recoveries	759			477			378			16			75			—		—			1,705
Balance at June 30, 2011	$	16,042		$	20,614		$	12,690		$	3,161		$	3,687		$	479	$	5,247		$	61,920

The allowance for loan losses (ALL) is established for the purpose of recognizing estimated loan impairments before loan losses on individual loans result in a charge-off.  The ALL reflects probable but unconfirmed loan impairments in the Company’s loan portfolio as of the balance sheet date.

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

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

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For collateral dependent loans that have been specifically identified as impaired, the Company measures fair value based on third-party appraisals, adjusted for estimated costs to sell the property.  Upon impairment, the Company will obtain a new appraisal if one had not been previously obtained in the last 6-12 months.  For credits over $2.0 million, the Company engages an additional third-party appraiser to review the appraisal.  For credits under $2.0 million, the Company’s internal appraisal department reviews the appraisal.  All appraisals are reviewed for reasonableness based on recent sales transactions that may have occurred subsequent to or right at the time of the appraisal.  Based on this analysis the appraised value may be adjusted downward if there is evidence that the appraised value may not be indicative of fair value.  Each appraisal is updated on an annual basis, either through a new appraisal or through the Company’s comprehensive internal review process.

Appraised values are reviewed and monitored internally and fair value is re-assessed at least quarterly or more frequently when events or circumstances occur that indicate a change in fair value.  It has been the Company’s experience that appraisals quickly become outdated due to the volatile real-estate environment.  As such, fair value based on property appraisals may be adjusted to reflect estimated declines in the fair value of properties since the time the last appraisal was performed.

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

·Lending policies and procedures

·National and local economic and business conditions and developments

·Nature and volume of portfolio

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

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

·Credit concentrations

The aforementioned factors enable management to recognize environmental conditions contributing to inherent losses in the portfolio, which have not yet manifested in Migration.  Due to current and recent adverse economic conditions resulting in increased loan loss levels for the Company, management relies more heavily on actual empirical charge-off history.  Management believes Migration history adequately captures a great percentage of estimated losses within the portfolio.

In addition to the allocated reserve for graded loans, a portion of the allowance is determined by segmenting the portfolio into product groupings with similar risk characteristics.  Part of the segmentation involves assigning increased reserve factors to those lending activities deemed higher-risk such as leverage-financings, unsecured loans, certain loans lacking personal guarantees, land acquisition and development loans, and speculative real-estate loans.  This supplemental portion of the allowance includes our judgmental consideration of any additional amounts necessary for subjective factors such as economic uncertainties and excess concentration risks.

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

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

17

performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The following table summarizes the allowance for loan losses on the basis of the Company’s impairment method:

At June 30, 2011 (in thousands)	Commercial		Real estate - mortgage		Land acquisition and development		Real estate - construction		Consumer		Other		Unallocated		Total
Allowance for loan losses	$	16,042	$	20,614	$	12,690	$	3,161	$	3,687	$	479	$	5,247	$	61,920
Individually evaluated for impairment	2,896		6,052		567		954		1,497		—		—		11,966
Collectively evaluated for impairment	13,146		14,562		12,123		2,207		2,190		479		5,247		49,954
Allowance for credit losses	$	61	$	—	$	—	$	—	$	—	$	—	$	—	$	61
Individually evaluated for impairment	61		—		—		—		—		—				61
Loans held for investment	$	592,390	$	772,651	$	72,105	$	76,605	$	104,887	$	38,312	$	—	$	1,656,950
Individually evaluated for impairment	7,112		31,927		6,349		9,178		2,647		—		—		57,213
Collectively evaluated for impairment	585,278		740,724		65,756		67,427		102,240		38,312		—		1,599,737

At December 31, 2010 (in thousands)	Commercial		Real estate - mortgage		Land acquisition and development		Real estate - construction		Consumer		Other		Unallocated		Total
Allowance for loan losses	$	17,169	$	17,677	$	14,938	$	6,296	$	3,373	$	354	$	6,085	$	65,892
Individually evaluated for impairment	3,615		2,402		694		3,755		1,414		—		—		11,880
Collectively evaluated for impairment	13,554		15,275		14,244		2,541		1,959		354		6,085		54,012
Allowance for credit losses	$	61	$	—	$	—	$	—	$	—	$	—	$	—	$	61
Individually evaluated for impairment	61		—		—		—		—		—		—		61
Loans held for investment	$	565,145	$	783,675	$	83,871	$	86,862	$	94,607	$	29,567	$	—	$	1,643,727
Individually evaluated for impairment	8,722		24,934		9,690		12,614		3,060		—		—		59,020
Collectively evaluated for impairment	556,423		758,741		74,181		74,248		91,547		29,567		—		1,584,707

Information on impaired loans at June 30, 2011 and December 31, 2010 is reported in the following table:

	At and for the period ended June 30, 2011
(in thousands)	Recorded investment on impaired loans		Unpaid principal balance		Recorded investment with a related ALL		Recorded investment with no related ALL		Average recorded investment		Related allowance
Commercial
Manufacturing	$	208	$	236	$	—	$	208	$	269	$	—
Finance and insurance	100		100		100		—		520		161
Real estate services	2,493		2,493		1,713		780		2,351		1,286
Construction	1,715		1,769		1,054		661		1,826		672
Retail trade	697		2,283		171		526		1,419		47
Wholesale trade	176		381		—		176		184		—
Other	1,723		2,118		1,338		385		1,495		791
	7,112		9,380		4,376		2,736		8,064		2,957
Real estate - mortgage
Residential & commercial owner-occupied	9,806		11,849		8,297		1,509		9,031		3,075
Residential & commercial investor	5,908		5,908		5,723		185		2,452		1,576
	15,714		17,757		14,020		1,694		11,483		4,651
Land Acquisition and development
Commercial	2,372		3,366		241		2,131		2,402		15
Residential	3,977		11,944		1,152		2,825		4,998		552
	6,349		15,310		1,393		4,956		7,400		567
Real estate - construction
Residential & commercial investor	9,178		13,749		7,547		1,631		9,888		954
Consumer	2,647		2,647		2,647		—		2,651		1,497
Total	$	41,000	$	58,843	$	29,983	$	11,017	$	39,486	$	10,626

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	At and for the year ended December 31, 2010
(in thousands)	Recorded investment on impaired loans		Unpaid principal balance		Recorded investment with a  related ALL		Recorded investment with no related ALL		Average recorded investment		Related allowance		Interest income recognized
Commercial
Manufacturing	$	341	$	570	$	109	$	232	$	639	$	41	$	—
Finance and insurance	608		608		108		500		130		108		—
Health care	—		—		—		—		150		—		18
Real estate services	2,457		2,482		1,702		755		2,324		1,213		—
Construction	1,673		1,727		228		1,445		1,588		154		—
Retail trade	1,669		3,219		1,597		72		2,581		1,067		—
Wholesale trade	221		457		11		210		1,742		6		—
Other	1,753		2,680		1,322		431		2,617		1,026		—
	8,722		11,743		5,077		3,645		11,771		3,615		18
Real estate - mortgage
Residential & commercial owner-occupied	6,865		9,374		2,622		4,243		11,979		733		—
Residential & commercial investor	18,069		19,138		14,024		4,045		10,459		1,669		504
Other	—		—		—		—		787		—		2
	24,934		28,512		16,646		8,288		23,225		2,402		506
Land acquisition and development
Commercial	2,430		3,651		—		2,430		6,913		—		—
Residential	5,684		16,291		1,468		4,216		6,669		694		8
Other	1,576		4,461		—		1,576		3,997		—		—
	9,690		24,403		1,468		8,222		17,579		694		8
Real estate - construction
Residential & commercial Investor	12,614		13,931		11,015		1,599		11,193		3,755		7
Consumer	3,060		3,120		2,423		637		1,284		1,414		—
Total	$	59,020	$	81,709	$	36,629	$	22,391	$	65,052	$	11,880	$	539

For the three and six months ending June 30, 2011, interest income recognized on impaired loans was immaterial.  At June 30, 2011 and December 31, 2010, there were no outstanding commitments on restructured loans.

Additional information on impaired loans is reported in the following table:

	At June 30,		At December 31,
(in thousands)	2011		2010
Nonaccrual loans	$	39,785	$	41,271
Troubled debt restructurings	1,215		1,261
Total impaired loans	41,000		42,532
Loans 90 days or more delinquent and still accruing	360		202
Performing troubled debt restructurings	$	—	$	16,488

During the three and six months ended June 30, 2011, there were no new troubled debt restructurings.  The Company had $0 million and $16.5 million in performing troubled debt restructurings at June 30, 2011 and December 31, 2010, respectively. Performing troubled debt restructurings at December 31, 2010 were comprised of four credit relationships.  The Company still maintains these credit relationships.  However, in accordance with ASC 310-40-50-2, these loans were no longer subject to the disclosure requirements as these loans were in compliance with their modified terms and had a market rate of interest at the time of restructuring.

The Company’s nonaccrual loans by class at June 30, 2011 and December 31, 2010 are reported in the following table:

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	June 30,		December 31,
(in thousands)	2011		2010
Commercial
Manufacturing	$	208	$	341
Finance and insurance	100		608
Real estate services	2,493		2,457
Construction	1,715		1,673
Retail trade	697		1,669
Wholesale trade	176		221
Other	1,723		1,753
Total commercial	7,112		8,722
Real estate - mortgage
Residential & commercial owner-occupied	9,806		6,865
Residential & commercial investor	5,908		1,581
Total real estate - mortgage	15,714		8,446
Land acquisition and development
Commercial	2,372		2,430
Residential	3,977		5,684
Other	—		1,576
Total acquisition and development	6,349		9,690
Real estate - construction
Residential & commercial investor	9,178		12,614
Consumer	2,647		3,060
Total nonaccrual loans	$	41,000	$	42,532

The following tables summarize the aging of the Company’s loan portfolio at June 30, 2011 and December 31, 2010:

	At June 30, 2011
(in thousands)	30 - 59 Days past due		60 - 89 Days past due		90+ Days past due		Total past due		Current		Total loans			Recorded investment in loans 90 days or more past due and accruing
Commercial
Manufacturing	$	—	$	—	$	—	$	—	$	91,475	$	91,475		$	—
Finance and insurance	—		—		100		100		74,880		74,980			—
Health care	—		—		—		—		55,268		55,268			—
Real estate services	66		84		847		997		77,583		78,580			196
Construction	286		—		1,381		1,667		59,922		61,589			24
Retail trade	2		167		526		695		27,494		28,189			—
Wholesale trade	—		—		176		176		66,304		66,480			—
Other	513		599		227		1,339		134,644		135,983			71
	867		850		3,257		4,974		587,570		592,544			291
Real estate - mortgage
Residential & commercial owner-occupied	1,172		1,875		5,833		8,880		408,758		417,638			—
Residential & commercial investor	2,113		—		392		2,505		352,959		355,464			69
	3,285		1,875		6,225		11,385		761,717		773,102			69
Land Acquisition and development
Commercial	—		—		1,343		1,343		26,831		28,174			—
Residential	85		184		3,466		3,735		33,387		37,122			—
Other	—		154		—		154		6,780		6,934			—
	85		338		4,809		5,232		66,998		72,230			—
Real estate - construction
Residential & commercial owner-occupied	—		—		—		—		19,858		19,858			—
Residential & commercial investor	—		377		8,801		9,178		47,737		56,915			—
	—		377		8,801		9,178		67,595		76,773			—
Consumer	87		694		2,456		3,237		101,730		104,967			—
Other	—		55		—		55		37,282		37,337			—
Unearned net loan fees											(3		)	—
Total	$	4,324	$	4,189	$	25,548	$	34,061	$	1,622,892	$	1,656,950		$	360

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	At December 31, 2010
(in thousands)	30 - 59 Days past due		60 - 89 Days past due		90+ Days past due		Total past due		Current			Total loans			Recorded investment in loans 90 days or more past due and accruing
Commercial
Manufacturing	$	—	$	—	$	82	$	82	$	86,649		$	86,731		$	—
Finance and insurance	108		—		500		608		76,711			77,319			—
Health care	—		—		—		—		70,506			70,506			—
Real estate services	540		156		116		812		78,408			79,220			—
Construction	51		58		1,503		1,612		49,737			51,349			50
Retail trade	1,543		890		157		2,590		24,293			26,883			—
Wholesale trade	323		—		227		550		52,937			53,487			17
Other	277		42		723		1,042		118,345			119,387			—
	2,842		1,146		3,308		7,296		557,586			564,882			67
Real estate - mortgage
Residential & commercial owner-occupied	696		—		2,549		3,245		428,660			431,905			—
Residential & commercial investor	301		920		1,242		2,463		349,641			352,104			—
	997		920		3,791		5,708		778,301			784,009			—
Land Acquisition and development
Commercial	—		—		1,358		1,358		26,232			27,590			—
Residential	1,064		342		3,875		5,281		38,500			43,781			135
Other	—		—		1,576		1,576		10,962			12,538			—
	1,064		342		6,809		8,215		75,694			83,909			135
Real estate - construction
Residential & commercial owner-occupied	—		—		—		—		22,411			22,411			—
Residential & commercial investor	2,900		9,449		3,557		15,906		48,799			64,705			—
	2,900		9,449		3,557		15,906		71,210			87,116			—
Consumer	27		6		489		522		94,139			94,661			—
Other	—		—		—		—		29,388			29,388			—
Unearned net loan fees									(238		)	(238		)	—
Total	$	7,830	$	11,863	$	17,954	$	37,647	$	1,606,080		$	1,643,727		$	202

7.Intangible Assets

The Company’s intangible assets and related amortization at the dates indicated consist of the following:

	Customer
	contracts, lists
(in thousands)	and relationships
December 31, 2010	$	4,119
Disposal	(82		)
Amortization	(319		)
June 30, 2011	$	3,718

During the six month period ended June 30, 2011, the Company sold a book of business related to an insurance product line that was no longer being pursued.  Amortization expense on intangible assets for each of the five succeeding years (excluding approximately $0.3 million to be recognized for the remaining six months of fiscal 2011) is estimated in the following table.

(in thousands)
2012	$	638
2013	426
2014	316
2015	300
2016	300

8.Derivatives

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

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

The Company’s objective in using derivatives is to minimize the impact of interest rate fluctuations on the Company’s interest income and to reduce asset sensitivity. To accomplish this objective, the Company uses interest-rate swaps as part of its cash flow hedging strategy. For accounting purposes, these swaps are designated as hedging the overall changes in cash flows related to portfolios of the Company’s Prime-based loans. Specifically, the Company has designated as the hedged transactions the first Prime-based interest payments received by the Company each calendar month during the term of the swaps that, in the aggregate for each period, are interest payments on principal from specified portfolios equal to the notional amount of the swaps.

The Company also 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 to offset the customer contracts.  These customer accommodation interest-rate swap contracts are not designated as hedging instruments.

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

	Asset derivatives					Liability derivatives
		Fair value at					Fair value at
	Balance sheet	June 30,		December 31,		Balance sheet	June 30,		December 31,
(in thousands)	classification	2011		2010		classification	2011		2010
Derivatives designated as hedging :
Instruments under ASC 815 Interest rate swap	Other assets	$	152	$	504	Accrued interest and other liabilities	$	2,534	$	1,712
Derivatives not designated as hedging :
Instruments under ASC 815 Interest rate swap	Other assets	$	5,220	$	4,840	Accrued interest and other liabilities	$	5,565	$	5,106

Cash Flow Hedges of Interest Rate Risk — For hedges of the Company’s variable-rate loan assets, interest-rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount.  For hedges of the Company’s variable-rate borrowings, interest-rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments. In February 2009, the Company executed a series of interest-rate swap transactions designated as cash flow hedges that were effective for interest payments starting in 2010.  The intent of the transactions was to fix the effective interest rate for payments due on its junior subordinated debentures with the objective of reducing the Company’s exposure to adverse changes in cash flows relating to payments on its LIBOR-based floating rate debt.  The swaps have contractual lives ranging between five and 14 years.  Select critical terms of the cash flow hedges are as follows:

Hedged item	Notional		Fixed rate		Termination date
(in thousands)
CoBiz Statutory Trust I	$	20,000	6.04	%	March 17, 2015
CoBiz Capital Trust II	$	30,000	5.99	%	April 23, 2020
CoBiz Capital Trust III	$	20,000	5.02	%	March 30, 2024

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In addition to the cash flow hedges in the table above, the Company has one other interest-rate swap with an aggregate notional amount of $25.0 million designated as cash flow hedges of interest-rate risk at June 30, 2011.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. These derivatives were used to hedge the variable cash inflows associated with existing pools of Prime-based loans, as well as variable cash outflows associated with its junior subordinated debentures.  The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company’s derivatives did not have any hedge ineffectiveness recognized in earnings during the three and six months ended June 30, 2011 and 2010.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income or expense as interest payments are received/made on the Company’s variable-rate assets/liabilities. During the next 12 months, the Company estimates that $0.2 million will be reclassified as an increase to interest income and $2.1 million will be reclassified as an increase to interest expense.

Non-designated Hedges —  Derivatives not designated as hedges are not speculative and result from a service the Company provides to its customers.  The Company executes interest-rate swaps with commercial banking customers to facilitate their respective risk management strategies.  Those interest-rate swaps are simultaneously hedged by offsetting interest-rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.  As the interest-rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.  At June 30, 2011, the Company had 77 interest-rate swaps with an aggregate notional amount of $170.4 million related to this program.  During the three and six months ended June 30, 2011, the Company recognized net losses of $0.1 million related to changes in fair value of these swaps.  During the three and six months ended June 30, 2010, the Company recognized net gains of $0.3 million to changes in fair value of these swaps.  The gains and losses arising from changes in the fair value of these swaps are included in “Other income” in the accompanying condensed consolidated statements of operations.

The table below summarizes gains and losses recognized in OCI in conjunction with our derivatives designated as hedging instruments for the three and six months ended June 30, 2011 and 2010.

	Loss recognized in OCI						Loss recognized in OCI
	(Effective portion)						(Effective portion)
	for the three months ended June 30,						for the six months ended June 30,
(in thousands)	2011			2010			2011			2010
Cash flow hedges:
Interest rate swap	$	(1,969	)	$	(4,874	)	$	(1,174	)	$	(6,503	)

	Loss reclassified from accumulated OCI into earnings						Gain (loss) reclassified from accumulated OCI into earnings
	(Effective portion)						(Effective portion)
	for the three months ended June 30,						for the six months ended June 30,
(in thousands)	2011			2010			2011			2010
Cash flow hedges:
Interest rate swap	$	(372	)	$	(164	)	$	(726	)	$	128

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

At June 30, 2011 the fair value of derivatives in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk, related to these agreements was $8.0 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $14.1 million against its obligations under these agreements.  At June 30, 2011, the Company was not in default with any of its debt covenants.

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9.Long-Term Debt

A summary of the outstanding subordinated debentures at June 30, 2011 is as follows:

(in thousands)	At June 30, 2011		Original Interest Rate	Effective Interest Rate	Maturity date	Earliest call date
Junior subordinated debentures:
CoBiz Statutory Trust I	$	20,619	3-month LIBOR + 2.95%	Fixed 6.04%	September 17, 2033	September 17, 2011
CoBiz Capital Trust II	30,928		3-month LIBOR + 2.60%	Fixed 5.99%	July 23, 2034	July 23, 2011
CoBiz Capital Trust III	20,619		3-month LIBOR + 1.45%	Fixed 5.02%	September 30, 2035	September 30, 2011
Total junior subordinated debentures	$	72,166
Other long-term debt:
Subordinated notes payable	$	20,984	Fixed 9.00%	Fixed 9.00%	August 18, 2018	August 18, 2013

Effective for interest payments beginning in February 2010, the Company fixed the interest rate on its junior subordinated debentures through a series of interest-rate swaps.  For further discussion of the interest-rate swaps and the corresponding terms, see Note 8 to the Condensed Consolidated Financial Statements.

10.Share-Based Compensation Plans

During the three and six months ended June 30, 2011, the Company recognized compensation expense (net of estimated forfeitures) of $0.3 million and $0.8 million, respectively, for share-based compensation awards for which the requisite service was rendered in the period as compared to $0.4 million and $0.9 million for the respective prior year periods. Estimated forfeitures are periodically evaluated based on historical and expected forfeiture behavior.

The Company uses the Black-Scholes model to estimate the fair value of stock options using various interest, dividend, volatility and expected life assumptions. Expected life is evaluated on an ongoing basis using historical and expected exercise behavior assumptions.

The following table summarizes changes in option awards during the six months ended June 30, 2011.

		Weighted average
		exercise
	Shares	price
Outstanding – December 31, 2010	2,659,750	$	12.70
Granted	50,000	6.90
Exercised	250	6.62
Forfeited	164,871	11.42
Outstanding – June 30, 2011	2,544,629	$	12.67
Exercisable – June 30, 2011	2,038,913	$	14.14

The weighted average grant date fair value of options granted during the six months ended June 30, 2011 was $3.14.

The following table summarizes changes in stock awards for the six months ended June 30, 2011.

		Weighted average
		grant date
	Shares	fair value
Unvested – December 31, 2010	261,390	$	6.77
Granted	147,867	6.52
Vested	88,533	6.99
Forfeited	22,341	6.86
Unvested – June 30, 2011	298,383	$	6.58

24

At June 30, 2011, there was $2.7 million of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Company’s equity incentive plans.  The cost is expected to be recognized over a weighted average period of 2.0 years.

11.Segments

The Company’s segments consist of Commercial Banking, Investment Banking, Wealth Management, Insurance and Corporate Support and Other.  The financial information for each business segment reflects that information which is specifically identifiable or which is allocated based on an internal allocation method.  In conjunction with the Company’s strategic initiative to create a focused wealth management offering, the Company changed its operating segments in the third quarter of 2010 to reflect an internal realignment of its wealth management components.  As part of this change, the Investment Advisory and Trust segment that was previously reported has been renamed Wealth Management and a business line has been moved from Insurance into the new Wealth Management segment.  All prior period disclosures have been adjusted to conform to the new presentation.

Results of operations and selected financial information by operating segment are as follows:

	Three months ended June 30, 2011
												Corporate
	Commercial		Investment			Wealth						Support and
(in thousands)	Banking		Banking			Management			Insurance			Other			Consolidated
Income Statement
Total interest income	$	27,964	$	2		$	1		$	—		$	210		$	28,177
Total interest expense	2,387		—			12			1			1,446			3,846
Provision for loan losses	584		—			—			—			1,398			1,982
Noninterest income	3,065		857			2,381			2,450			37			8,790
Noninterest expense	7,526		980			2,388			2,307			12,052			25,253
Management fees and allocations	5,213		36			157			87			(5,493		)	—
Provision (benefit) for income taxes	7,409		(52		)	(14		)	58			(5,354		)	2,047
Net income (loss)	$	7,910	$	(105	)	$	(161	)	$	(3	)	$	(3,802	)	$	3,839

	Six months ended June 30, 2011
											Corporate
	Commercial		Investment			Wealth					Support and
(in thousands)	Banking		Banking			Management			Insurance		Other			Consolidated
Income Statement
Total interest income	$	55,909	$	5		$	2		$	—	$	452		$	56,368
Total interest expense	4,895		—			26			3		2,869			7,793
Provision for loan losses	1,911		—			—			—		1,711			3,622
Noninterest income	5,524		1,601			4,661			4,989		47			16,822
Noninterest expense	15,624		1,873			4,776			4,668		23,763			50,704
Management fees and overhead	11,358		71			308			173		(11,910		)	—
Provision (benefit) for income taxes	14,361		(110		)	(68		)	129		(10,306		)	4,006
Net income (loss)	$	13,284	$	(228	)	$	(379	)	$	16	$	(5,628	)	$	7,065

25

	Three months ended June 30, 2010
												Corporate
	Commercial			Investment		Wealth						Support and
(in thousands)	Banking			Banking		Management			Insurance			Other			Consolidated
Income Statement
Total interest income	$	28,910		$	2	$	—		$	—		$	346		$	29,258
Total interest expense	3,650			—		18			3			1,414			5,085
Provision for loan losses	8,326			—		—			—			2,118			10,444
Noninterest income	2,343			1,789		2,653			2,333			635			9,753
Noninterest expense	11,774			1,179		2,685			2,180			11,633			29,451
Mangement fees and overhead	6,043			41		207			87			(6,378		)	—
Provision (benefit) for income taxes	2,665			245		45			(7		)	(5,669		)	(2,721		)
Net income (loss)	(1,205		)	326		(302		)	70			(2,137		)	(3,248		)
Noncontrolling interest	—			—		—			—			(521		)	(521		)
Net income (loss) after noncontrolling interest	$	(1,205	)	$	326	$	(302	)	$	70		$	(2,658	)	$	(3,769	)

	Six months ended June 30, 2010
													Corporate
	Commercial			Investment			Wealth						Support and
(in thousands)	Banking			Banking			Management			Insurance			Other			Consolidated
Income Statement
Total interest income	$	58,466		$	3		$	—		$	—		$	708		$	59,177
Total interest expense	7,735			—			27			6			2,483			10,251
Provision for loan losses	19,687			—			—			—			4,577			24,264
Noninterest income	4,739			2,090			4,851			4,677			281			16,638
Noninterest expense	20,553			2,155			4,964			4,554			23,498			55,724
Management fees and overhead	12,119			82			377			173			(12,751		)	—
Provision (benefit) for income taxes	5,168			(26		)	(54		)	51			(11,296		)	(6,157		)
Net loss	(2,057		)	(118		)	(463		)	(107		)	(5,522		)	(8,267		)
Noncontrolling interest	—			—			—			—			(199		)	(199		)
Net loss after noncontrolling interest	$	(2,057	)	$	(118	)	$	(463	)	$	(107	)	$	(5,721	)	$	(8,466	)

12.Fair Value Measurements

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

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

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

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

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

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

Available for sale securities — At June 30, 2011, the Company holds, as part of its investment portfolio, available for sale securities reported at fair value consisting of MBS, municipal securities and trust preferred securities.  The fair value of the majority of MBS and municipal securities are determined using widely accepted valuation techniques including matrix pricing and broker-quote based applications.  Inputs include benchmark yields, reported trades, issuer spreads, prepayment speeds and other relevant items.  As a result, the Company

26

has determined that these valuations fall within Level 2 of the fair value hierarchy.  Private-label MBS are valued using broker-dealer quotes.  As the private-label MBS market has become increasingly illiquid, these securities are being valued more often based on modeling techniques rather than observable trades.  Accordingly, the Company has determined the appropriate input level for the private-label MBS is Level 3.  The Company also holds TPS that are recorded at fair values based on unadjusted quoted market prices for identical securities in an active market.  The majority of the TPS are actively traded in the market and as a result, the Company has determined that the valuation of these securities falls within Level 1 of the fair value hierarchy.  The Company also holds a small number of TPS for which unadjusted market prices are not available or the market is not active.  For these securities, broker-dealer quotes or valuations based on similar but not identical securities are used and the Company has determined that these valuations fall within Level 2 of the fair value hierarchy.

During the three and six months ended June 30, 2011, the Company recognized credit related OTTI of $0.1 million and $0.4 million, respectively.  During the three and six months ended June 30, 2010, the Company recognized credit related OTTI of $0.1 million and $0.3 million, respectively, in addition to a $0.1 million OTTI related to a TPS position the Company intended to sell.  Credit related OTTI is reported in “Net other than temporary impairment losses on securities recognized in earnings” and non-credit related OTTI is reported in “Loss on securities, other assets and other real estate owned” in the condensed consolidated statement of operations.

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

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

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.  The Company assessed the impact of the Level 3 inputs on the overall derivative valuations in terms of the significance of the credit valuation adjustments (CVA) in basis points and as a percentage of the overall derivative portfolio valuation and the overall notional value.  The Company’s assessment determined that CVAs were not significant to the overall valuation of the portfolio.  In addition, the significance of CVAs and overall derivative portfolio to the Company’s financial statements was considered.  As a result of the insignificance of the CVAs to the derivative portfolio valuations and the Company’s financial statements, the Company classified the derivative valuations in their entirety in Level 2.

Private equity investments — The valuation of nonpublic private equity investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such assets.  The carrying values of private equity investments are adjusted either upwards or downwards from the transaction price to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through ongoing reviews by management.  A variety of factors are reviewed and monitored to assess positive and negative changes in valuation including, but not limited to, current operating performance and future expectations of the particular investment, industry valuations of comparable public companies, changes in market outlook and the third-party financing environment.  In determining valuation adjustments resulting from the investment review process, emphasis is placed on current company performance and market conditions.  As a result, the Company has determined that private equity investments are classified in Level 3 of the fair value hierarchy.  The value of private equity investments was not material at June 30, 2011.

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

Loans held for sale — Loans held for sale are primarily nonperforming loans that management intends to sell within the next 12 months.  Fair value on these loans is estimated based on price quotes from potential buyers.  There is not an active market with observable prices for these loans and the Company considers the measurements to be Level 3 inputs.

The following tables present the Company’s assets measured at fair value on a recurring basis at June 30, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

			Fair value measurements using:
	Balance at		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(in thousands)	June 30, 2011		(Level 1)		(Level 2)		(Level 3)
Assets
Available for sale securities:
Mortgage-backed securities (MBS)	$	401,408	$	—	$	401,408	$	—
U.S. government agencies	74,360		—		74,360		—
Trust preferred securites (TPS)	102,560		94,532		8,028		—
Corporate debt securities	48,232		—		48,232		—
Private-label MBS	2,324		—		—		2,324
Municipal securities	327		—		327		—
Total available for sale securities	$	629,211	$	94,532	$	532,355	$	2,324
Derivatives:
Cash flow hedge - interest rate swap	$	152	$	—	$	152	$	—
Reverse interest rate swap	5,220		—		5,220		—
Total derivative assets	$	5,372	$	—	$	5,372	$	—
Liabilities
Derivatives:
Cash flow hedge - interest rate swap	$	2,534	$	—	$	2,534	$	—
Reverse interest rate swap	5,565		—		5,565		—
Total derivative liabilities	$	8,099	$	—	$	8,099	$	—

28

			Fair value measurements using:
	Balance at		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(in thousands)	December 31, 2010		(Level 1)		(Level 2)		(Level 3)
Assets
Available for sale securities:
Mortgage-backed securities (MBS)	$	405,545	$	—	$	405,545	$	—
Private-label MBS	2,432		—		—		2,432
U.S. government agencies	80,619		—		80,619		—
Trust preferred securities (TPS)	88,308		79,093		9,215		—
Corporate debt securities	59,595		—		59,595		—
Municipal securities	945		—		945		—
Total available for sale securities	$	637,444	$	79,093	$	555,919	$	2,432
Derivatives:
Cash flow hedge - interest rate swap	$	504	$	—	$	504	$	—
Reverse interest rate swap	4,840		—		4,840		—
Total derivative assets	$	5,344	$	—	$	5,344	$	—
Liabilities
Derivatives:
Cash flow hedge - interest rate swap	$	1,712	$	—	$	1,712	$	—
Reverse interest rate swap	5,106		—		5,106		—
Total derivative liabilities	$	6,818	$	—	$	6,818	$	—

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

	For the three			For the six			For the year
	months ended			months ended			ended
(in thousands)	June 30, 2011			June 30, 2011			December 31, 2010
Beginning balance	$	2,390		$	2,432		$	2,373
Transfers in	—			—			—
Realized loss on OTTI	(137		)	(371		)	(451		)
Paydowns	(152		)	(322		)	(714		)
Net accretion (amortization)	46			105			158
Unrealized gain included in comprehensive income	177			480			1,066
Ending balance	$	2,324		$	2,324		$	2,432

Fair value is used on a nonrecurring basis to evaluate certain financial assets and financial liabilities in specific circumstances.  The following tables present the Company’s assets measured at fair value on a nonrecurring basis at June 30, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

			Fair value measurements using:
	Balance at		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(in thousands)	June 30, 2011		(Level 1)		(Level 2)		(Level 3)
Net impaired loans	$	45,247	$	—	$	—	$	45,247

29

			Fair value measurements using:
	Balance at		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(in thousands)	December 31, 2010		(Level 1)		(Level 2)		(Level 3)
Net impaired loans	$	47,616	$	—	$	—	$	47,616

During the six months ended June 30, 2011, the Company recorded a provision for loan losses of $9.4 million and charged-off $9.3 million of impaired loans.

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

Other real estate owned (OREO) and repossessed assets — OREO represents real property taken by the Company either through foreclosure or through a deed in lieu thereof from the borrower.  The fair value of OREO and repossessed assets are based on appraisals adjusted at management’s discretion to reflect anticipated declines in fair value since the time the appraisal analysis was performed.  It has been the Company’s experience that appraisals quickly become outdated due to the volatile real-estate environment.  Therefore, the inputs used to determine the fair value of OREO and repossessed assets fall within Level 3.

Intangible assets — Intangible assets consist of a non-amortizing trade name that was initially recorded at fair value.  Intangible assets are subject to impairment testing whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  The fair value of intangible assets is based on an income approach using a present value model, considered a Level 3 input by the Company.

The following tables present the Company’s nonfinancial assets measured at fair value on a nonrecurring basis at June 30, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

	Fair value measurements using:
	Balance at		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs		Total loss for the six months ended
(in thousands)	June 30, 2011		(Level 1)		(Level 2)		(Level 3)		June 30, 2011
OREO	$	24,814	$	—	$	—	$	24,814	$	(2,558	)
Repossessed assets	175		—		—		175		—

	Fair value measurements using:
	Balance at		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs		Total gain (loss) for the year ended
(in thousands)	December 31, 2010		(Level 1)		(Level 2)		(Level 3)		December 31, 2010
OREO	$	26,416	$	—	$	—	$	26,416	$	(7,392	)
Tradename	—		—		—		—		(149		)

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

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	At			At
(in thousands)	June 30, 2011			December 31, 2010
OREO recorded at fair value	$	24,814		$	26,416
Estimated selling costs	(1,241		)	(1,321		)
OREO	$	23,573		$	25,095

OREO valuation adjustments and additional gains or losses at the time of sales are recognized in current earnings under the caption “Loss on securities, other assets and other real estate owned.”  Below is a summary of OREO transactions during the six months ended June 30, 2011:

(in thousands)			OREO
At December 31, 2010			$	25,095
Foreclosed loans	6,868
Charge-offs	(3,282	)
Transferred in			3,586
OREO sales			(2,550		)
Net loss on sale and valuation adjustments			(2,558		)
At June 30, 2011			23,573
Estimated selling costs			1,241
OREO recorded at fair value			$	24,814

In accordance with ASC Topic 350, Intangibles — Goodwill and Other, the Company performed an impairment test on a tradename intangible asset during the second quarter of 2010 and concluded that the Company’s decision not to use the tradename in the future was a triggering event for an impairment charge.  As a result an impairment charge of $0.1 million was included in earnings for the three and six months ended June 30, 2010.

The following table includes the estimated fair value of the Company’s financial instruments. The methodologies for estimating the fair value of financial assets and financial liabilities measured at fair value on a recurring and nonrecurring basis are discussed above.  The methodologies for estimating the fair value for other financial assets and financial liabilities are discussed below.  The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts at June 30, 2011 and December 31, 2010.

31

	At June 30, 2011				At December 31, 2010
			Estimated				Estimated
	Carrying		fair		Carrying		fair
(in thousands)	value		value		value		value
Financial assets:
Cash and cash equivalents	$	50,033	$	50,033	$	24,166	$	24,166
Restricted cash	8,526		8,526		15,872		15,872
Investment securities available for sale	629,211		629,211		637,444		637,444
Investment securities held to maturity	248		255		262		270
Other investments	7,438		7,438		6,962		6,962
Loans — net	1,595,030		1,590,710		1,577,835		1,562,844
Accrued interest receivable	8,157		8,157		8,081		8,081
Interest rate swaps	5,372		5,372		5,344		5,344
Bank-owned life insurance	36,618		36,618		36,043		36,043
Financial liabilities:
Deposits	$	1,912,728	$	1,914,148	$	1,889,368	$	1,891,107
Other short-term borrowings	30,000		30,000		14,012		14,012
Securities sold under agreements to repurchase	144,843		143,126		157,690		154,776
Accrued interest payable	561		561		930		930
Junior subordinated debentures	72,166		72,166		72,166		72,166
Subordinated notes payable	20,984		19,709		20,984		18,610
Interest rate swaps	8,099		8,099		6,818		6,818

The estimation methodologies utilized by the Company are summarized as follows:

Cash, cash equivalents and restricted cash — The carrying amount of cash and cash equivalents is a reasonable estimate of fair value.

Other investments — The estimated fair value of other investments approximates their carrying value.

Loans — The fair value of loans is estimated by discounting future contractual cash flows using the estimated market rate that reflects credit and liquidity risk inherent in the loans. In computing the estimate of fair value for all loans, the estimated cash flows and/or carrying value have been reduced by specific and general reserves for loan losses.

Accrued interest receivable/payable — The carrying amount of accrued interest receivable/payable is a reasonable estimate of fair value due to the short-term nature of these amounts.

Bank-owned life insurance — The carrying amount of bank-owned life insurance is based on the cash surrender value of the policies and is a reasonable estimate of fair value.

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

Short-term borrowings — The estimated fair value of short-term borrowings approximates their carrying value, due to their short-term nature.

Securities sold under agreements to repurchase — Estimated fair value is based on discounting cash flows for comparable instruments.

Junior subordinated debentures — The estimated fair value of junior subordinated debentures approximates their carrying value, due to the variable interest rate paid on the debentures.

Subordinated notes payable — The estimated fair value of subordinated notes payable is based on discounting cash flows for comparable instruments.

Commitments to extend credit and standby letters of credit — The Company’s off-balance sheet commitments are funded at current market rates at the date they are drawn upon. It is management’s opinion that the fair value of these commitments would approximate their carrying value, if drawn upon.

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The fair value estimates presented herein are based on pertinent information available to management at June 30, 2011 and December 31, 2010. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

13.            Regulatory Matters

The following table shows capital amounts, ratios and regulatory thresholds at June 30, 2011:

At June 30, 2011	Company			Bank
(in thousands)
Shareholders’ equity (GAAP capital)	$	209,137		$	221,865
Disallowed intangible assets	(3,492		)	—
Unrealized gain on available for sale securities	(9,550		)	(9,550		)
Unrealized (gain) loss on cash flow hedges	1,478			(94		)
Subordinated debentures	67,021			—
Disallowed deferred tax asset	(4,726		)	—
Other deductions	(129		)	—
Tier I regulatory capital	$	259,739		$	212,221
Subordinated notes payable and debentures	$	23,963		$	—
Allowance for loan losses	24,603			24,302
Total risk-based regulatory capital	$	308,305		$	236,523

	Company									Bank
At June 30, 2011	Risk-based						Leverage			Risk-based						Leverage
(in thousands)	Tier I			Total capital			Tier I			Tier I			Total capital			Tier I
Regulatory capital	$	259,739		$	308,305		$	259,739		$	212,221		$	236,523		$	212,221
Well-capitalized requirement	115,856			193,094			119,822			114,507			190,846			117,845
Regulatory capital - excess	$	143,883		$	115,211		$	139,917		$	97,714		$	45,677		$	94,376
Capital ratios	13.4		%	16.0		%	10.8		%	11.1		%	12.4		%	9.0		%
Minimum capital requirement	4.0		%	8.0		%	4.0		%	4.0		%	8.0		%	4.0		%
Well capitalized requirement (1)	6.0		%	10.0		%	5.0		%	6.0		%	10.0		%	5.0		%

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

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

This discussion should be read in conjunction with our condensed 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 the Notes to Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2010. For a discussion of the segments included in our principal activities, see Note 11 to the notes to condensed consolidated 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 professionals, small and medium-sized businesses, and high-net-worth individuals. Our operating segments include: commercial banking, investment banking, wealth management and insurance.

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

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

Industry Overview

The Chairman of the Federal Reserve indicated in his semiannual monetary policy report to the Congress on July 14, 2011 that, while the economy has continued to recover, the pace of the expansion has been modest and lower than expected.  Based on the Federal Open Market Committee (FOMC) members expectation that the pace of economic activity will remain moderate, unemployment will only decline gradually and that inflation will subside, the FOMC elected to maintain the target range for the federal funds rate at 0-25 basis points.  On June 30, 2011, the Federal Reserve completed its second round of planned purchases of $600 billion in longer-term Treasury securities, commonly referred to as a quantitative easing policy.   While no longer purchasing additional securities, the Federal Reserve believes maintaining the existing investment portfolio will continue to lower borrowing costs and ease financial conditions throughout the economy.  Comments made by the Chairman indicate that if the recent economic weakness persists, the Federal Reserve could provide additional policy support by introducing a third round of security purchases or reducing the 25 basis point interest rate paid on bank reserves.

The unemployment rate slightly decreased from 9.4% in December 2010 to 9.2% at June 2011.  However, the unemployment rate increased during the second quarter of 2011, from 8.8% at March 2011. Through June 2011, nonfarm payroll employment gains had fallen below expectations for two consecutive months.  Of the 8.5 million jobs lost during the recession, only 1.75 million have been regained.  The high unemployment rate is one of the primary driving factors that could prolong a weak economy.  Nearly half of the unemployed have been out of work for more than six months, the highest ratio since World War II.

Bank failures have also continued to weigh on the industry and have increased assessment rates for all banks.  During 2009, 140 banks failed and went into receivership with the FDIC, causing estimated losses of $35.6 billion to the Depository Insurance Fund.  In 2010, another 157 banks went into receivership, setting an 18-year high and causing an additional $24.2 billion in losses.  Through July 8, 2011, the FDIC has taken possession of 51 banks, including four banks in Colorado and one bank in Arizona.  The FDIC’s “problem list” stood at 888 at June 30, 2011, up from 702 at the end of 2009 and 252 at the end of 2008.

In the first quarter of 2011, FDIC insured commercial banks reported a combined net income of $29 billion, the highest level in over three years.  Driving the increase in profit was a reduction in loan loss provisions, which have decreased on a year-over-year basis for six consecutive quarters.  Loan generation continued to be weak, as most asset growth during the quarter occurred outside of the loan portfolio.  Weak loan demand has negatively impacted net operating revenue, which declined 3.2% on a year-over-year basis.  However, capital levels continued to improve as the industry average for the regulatory capital ratios rose to an all-time high.

The banking industry and SEC-registered companies continue to be impacted by new legislative and regulatory reform proposals.  On July 14, 2011, the Federal Reserve Board announced the approval of a final rule to repeal Regulation Q, which prohibited the payment of interest on demand deposits by member banks of the Federal Reserve System.  Beginning on July 21, 2011, member banks will be allowed to pay interest on demand deposits as established by the Dodd-Frank Act.

Financial and Operational Highlights

Noted below are some of the Company’s significant financial performance measures and operational results for the first six months of 2011:

·Net income for the three and six months ended June 30, 2011, was $3.8 million and $7.1 million, respectively, compared to a net loss of $3.8 million and $8.5 million for the same periods in 2010.

·Diluted earnings per share for the three and six months ended June 30, 2011, were $0.08 and $0.14, respectively, compared a diluted loss per share of $0.13 and $0.28, for the same periods in 2010.

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·Earnings for the three and six months ended June 30, 2011 were negatively impacted by net losses on securities, other assets, OREO and OTTI of $1.0 million and $2.3 million, respectively.  For the same periods in 2010, net losses of $4.0 million and $5.5 million were recognized.

·Net interest income on a tax-equivalent basis for the three and six months ended June 30, 2011, was $24.6 million and $49.1 million, respectively, compared to $24.3 million and $49.2 million for the same periods in 2010.

·The net interest margin on a tax-equivalent basis was 4.40% and 4.41% for the three and six months ended June 30, 2011, compared to 4.39% and 4.45% for the same periods in 2010.

·Gross loans increased $13.2 million at June 30, 2011 from December 31, 2010.

·Provision for loan and credit losses for the three and six months ended June 30, 2011, was $2.0 million and $3.6 million, respectively, compared to $10.4 million and $24.3 million for the comparable periods in 2010.  The provision for loan losses has decreased as credit quality has improved and the loan portfolio has decreased.

·Net loan charge-offs totaled $7.6 million for the six months ended June 30, 2011, or 0.46% of average loans during the period, compared to 1.8% for the same period in 2010.

·Nonperforming assets decreased to $65.1 million or 2.7% of total assets at June 30, 2011, compared to $67.8 million or 2.8% of total assets at December 31, 2010.

·The allowance for loan and credit losses decreased to 3.7% of total loans at June 30, 2011, compared to 4.0% at December 31, 2010.

·The Company’s total risk-based capital ratio was 16.0% at the end the second quarter of 2011 compared to 15.5% at the end of 2010.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which 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. 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 may be highly uncertain at the time of the estimate. Different estimates we could reasonably have used, or changes in the assumptions that could occur, could have a material effect on our financial condition or results of operations. In addition to the discussion on fair value measurements and deferred taxes below, a description of our critical accounting policies was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2010.

Fair Value Measurements.  The Company measures or monitors certain assets and liabilities on a fair value basis in accordance with GAAP.  ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability.  As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Fair value may be used on a recurring basis for certain assets and liabilities such as available for sale securities and derivatives in which fair value is the primary basis of accounting.  Similarly, fair value may be used on a nonrecurring basis to evaluate certain assets or liabilities such as impaired loans and other real estate owned (OREO).  Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions in accordance with ASC 820 to determine the instrument’s fair value.  At June 30, 2011, 26.2% or $634.6 million of total assets represented assets recorded at fair value on a recurring basis.  At June 30, 2011,

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0.3% or $8.1 million of total liabilities represented liabilities recorded at fair value on a recurring basis.  Assets recorded at fair value on a nonrecurring basis represented $70.2 million or 2.9% of total assets.

At June 30, 2011, the Company holds, as part of its investment portfolio, available for sale securities reported at fair value consisting of MBS, government agencies, municipal securities, and corporate debt securities.  The fair value of the majority of these securities is determined using widely accepted valuation techniques, including matrix pricing and broker-quote based applications, considered Level 2 inputs.  The Company also holds trust preferred securities the majority of which are recorded at fair value based on quoted market prices, considered by the Company Level 1 inputs.  Certain private-label MBS valued using broker-dealer quotes based on proprietary broker models, which are considered by the Company an unobservable input (Level 3), totaled $2.3 million at June 30, 2011.  Investments incorporating Level 3 inputs as part of their valuation represent 0.1% of total assets at the report date.  The Company recognized losses of $0.1 million and $0.4 million on the private-label MBS for the three and six months ended June 30, 2011, respectively.  Unrealized losses on the private-label MBS of $1.4 million were recorded in accumulated other comprehensive income at June 30, 2011.

The Company uses interest-rate swaps as part of its cash flow strategy to manage its interest-rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. To comply with the provisions of ASC 820, credit valuation adjustments are incorporated into the valuation to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs (i.e. estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties).  However, at June 30, 2011 and December 31, 2010, the Company concluded that the impact of the credit valuation adjustments on the overall valuation of its derivative positions is not significant.  Therefore, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Certain collateral-dependent impaired loans are reported at the fair value of the underlying collateral.  Impairment is measured based on the fair value of the collateral, which is typically derived from appraisals taking into consideration prices in observed transactions involving similar assets and similar locations, in accordance with GAAP.  The fair value of other impaired loans is measured using a discounted cash flow analysis.

OREO and repossessed assets represents real property taken by the Bank either through foreclosure or through a deed in lieu thereof from the borrower.  At the time of foreclosure, OREO is measured at fair value, less selling costs, which becomes its new costs basis.  Subsequent to acquisition, OREO is carried at the lower of cost or fair value, less selling costs.  Fair values are based on property appraisals, generally considered a Level 2 input by the Company.  However, where the Company has adjusted an appraisal valuation downward due to its expectation of market conditions, the adjusted value is considered a Level 3 input.

Deferred Tax Assets.  At June 30, 2011, the Company has recorded a net deferred tax asset of $16.0 million which relates primarily to expected future deductions arising in large part from the allowance for loan losses.  Since there is no absolute assurance that these assets will be realized, the Company evaluates its ability to carryback losses, its tax planning strategies and forecasts of future earnings to determine the need for a valuation allowance on these assets.  If current available information raises doubt as to the realization of the deferred tax assets, an additional valuation allowance may be established.

We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income.  These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.  At June 30, 2011, the Company has a valuation allowance of $15.6 million that was established in 2010.  The Company did not increase or decrease the valuation allowance during the first half of 2011.  An additional valuation allowance for deferred tax assets may be required if the amounts of taxes recoverable through loss carry backs decline, if we project lower levels of future taxable income, or we project lower levels of tax planning strategies.  Such additional valuation allowance would be established through a charge to income tax expense that would adversely affect our operating results.

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Financial Condition

Total assets at June 30, 2011 were $2.42 billion, increasing $23.1 million or 1.0% from $2.40 billion at December 31, 2010.  Assets are comprised primarily of loans net of allowance for losses and investment securities, collectively making up over 92% of total assets.  Total liabilities at June 30, 2011 were $2.21 billion, increasing $15.9 million or 0.7% from $2.19 billion at December 31, 2010.  Liabilities are comprised primarily of deposits and securities sold under agreements to repurchase, collectively making up over 93% of total liabilities.  Shareholder equity at June 30, 2011 was $209.1 million, increasing $7.4 million or 3.7% from $201.7 million at December 31, 2010. The following paragraphs discuss changes in the relative mix of certain assets and liability classes and reasons for such changes.

Investments.  The Company manages its investment portfolio to provide interest income and to meet the collateral requirements for public deposits, our customer repurchase program and wholesale borrowings. Investments decreased slightly to 26.3% of total assets at June 30, 2011, from 26.9% at December 31, 2010.

The investment portfolio is primarily comprised of MBS explicitly (GNMA) and implicitly (FNMA and FHLMC) backed by the U.S. Government. The portfolio does not include any securities exposed to sub-prime mortgage loans. The investment portfolio also includes single-issuer trust preferred securities and corporate debt securities. The corporate debt securities portfolio is mainly comprised of six issuers in the Fortune 100.  The entire corporate debt securities portfolio is investment grade with a rating of A- or better.  None of the issuing institutions are in default nor have interest payments on the trust preferred securities been deferred.

Purchases of $107.4 million during the first half of 2011 were primarily comprised of MBS and U.S. government agencies.  Maturities, sales, and paydowns of $106.6 million were attributed to the MBS and agencies portfolio.  The net unrealized gain on available-for-sale securities increased $4.0 million to $15.4 million at June 30, 2011 from $11.4 million at December 31, 2010.  OTTI of $0.1 million and $0.4 million on two private-label MBS was recognized during the three and six months ended June 30, 2011, respectively.  At June 30, 2011, an additional unrealized loss of $1.4 million on private-label MBS was recognized in other comprehensive income. The Company may recognize additional losses on these securities if the underlying credit metrics were to worsen in the future.

										% of
(in thousands)	June 30, 2011				% of		Unrealized			unrealized
AVAILABLE FOR SALE SECURITIES	Amortized cost		Fair value		portfolio		gain (loss)			gain (loss)
Mortgage-backed securities (MBS)	$	388,936	$	401,408	63.7	%	$	12,472		81.0	%
U.S. government agencies	73,917		74,360		11.8	%	443			2.9	%
Trust preferred securities	99,734		102,560		16.3	%	2,826			18.3	%
Corporate debt securities	47,195		48,232		7.7	%	1,037			6.7	%
Private label MBS	3,699		2,324		0.4	%	(1,375		)	(8.9	)%
Municipal securities	326		327		0.1	%	1			0.0	%
Total available for sale securities	$	613,807	$	629,211	100.0	%	$	15,404		100.0	%

The Company also has Other Investments carried at cost with a value of $7.4 million at June 30, 2011, an increase of $0.4 million from $7.0 million at December 31, 2010.  During the six months ended June 30, 2011, the Company had net sales of $0.4 million of FHLB stock.  The Company’s investment is primarily related to a borrowing base maintained with the FHLB that is dependent upon the Company’s liquidity position.  To the extent that the Company’s need for wholesale funding increases, the Company may purchase additional stock in the future.

Loans.  Gross loans held for investment increased $13.2 million or approximately 1% to $1.66 billion at June 30, 2011 compared to December 31, 2010. During the six months ended June 30, 2011, the Company advanced $166.4 million in new credit relationships and an additional $116.8 million on existing lines.  Credit extensions during this period were offset by paydowns and maturities of $260.7 million and gross charge-offs of $9.3 million. Loan generation continues to be a challenge for both the Company and the industry and is the primary focus for the Company.

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(in thousands)	June 30, 2011					December 31, 2010					June 30, 2010
LOANS	Amount			% of Portfolio		Amount			% of Portfolio		Amount			% of Portfolio
Commercial	$	592,390		37.1	%	$	565,145		35.8	%	$	570,928		35.2	%
Real estate - mortgage	772,652			48.5	%	783,675			49.7	%	813,980			50.3	%
Land acquisition & development	72,104			4.5	%	83,871			5.3	%	111,441			6.9	%
Real estate - construction	76,605			4.8	%	86,862			5.5	%	99,519			6.1	%
Consumer	104,887			6.6	%	94,607			6.0	%	72,289			4.5	%
Other	38,312			2.4	%	29,567			1.9	%	19,682			1.2	%
Gross loans	1,656,950			103.9	%	1,643,727			104.2	%	1,687,839			104.2	%
Less allowance for loan losses	(61,920		)	-3.9	%	(65,892		)	-4.2	%	(67,961		)	-4.2	%
Net loans held for investment	1,595,030			100.0	%	1,577,835			100.0	%	1,619,878			100.0	%
Loans held for sale	—			0.0	%	—			0.0	%	189			0.0	%
Total net loans	$	1,595,030		100.0	%	$	1,577,835		100.0	%	$	1,620,067		100.0	%

Growth in gross loans during the six months ended June 30, 2011, was primarily the result of gains of $27.2 million in the commercial segment.  Growth in the consumer and other loan categories, increasing $10.3 million and $8.7 million, respectively, reflect concerted effort to promote newer products such as jumbo mortgages and tax-exempt financing. The real estate — mortgage, land acquisition and development (Land A&D) and construction segments collectively decreased $33.0 million from December 31, 2010.  The decrease in the Land A&D portfolios is the result of ongoing efforts to reduce high-risk loan concentration levels and at June 30, 2011, comprised 4.4% of gross loans compared to 5.1% at December 31, 2010.

The allowance for loan losses decreased $4.0 million during the six months ended June 2011 as a result of net charge-offs of $7.6 million, offset by $3.6 million in provision for loan losses.  See the Provision and Allowance for Loan and Credit Losses section and Note 6 of the Notes to the condensed consolidated financial statements for additional discussion.

Deferred Income Taxes.  Net deferred income taxes decreased $0.4 million to $16.0 million at June 30, 2011, from $16.4 million at December 31, 2010. The decrease was primarily related to an increase in the unrealized gain in the available for sale securities portfolio and the decrease in the allowance for loan and lease losses, offset by the change in fair value of interest-rate swaps and impairment charges on OREO.  The Company established a valuation allowance at December 31, 2010 in the amount of $15.6 million that was not adjusted during the first half of 2011.  An additional valuation allowance for deferred tax assets may be required if the amounts of taxes recoverable through loss carry backs decline, future taxable income levels decrease, or lower levels of tax planning strategies are anticipated.

Other Real Estate Owned and Repossessed Assets.  OREO and repossessed assets decreased $1.4 million to $23.8 million at June 30, 2011 from $25.1 million at December 31, 2010.  During the first six months of 2011, the Company foreclosed on 14 properties with a fair value of $3.6 million; received sales proceeds of $2.6 million; and recognized losses on OREO sales and valuation adjustments of $2.6 million. At June 30, 2011, $10.6 million OREO was in Colorado and $13.0 million was in Arizona.  At June 30, 2011, the Company also has $0.2 million of other repossessed assets.

Other Assets.  Other Assets decreased $10.0 million to $39.6 million at June 30, 2011 from $49.6 million at December 31, 2010.  The change is primarily attributable to the following declines: cash deposits pledged to correspondent banks as collateral for confirming letters of credit ($7.4 million); prepaid expenses, primarily prepaid FDIC insurance assessments ($2.1 million); and taxes receivable ($1.2 million).

Deposits.  Total deposits increased $23.4 million to $1.91 billion at June 30, 2011 from $1.89 billion at December 31, 2010.  Noninterest-bearing demand deposits led growth among all deposit types for the six months ended June 30, 2011, increasing $55.2 million with NOW and money markets increasing an additional $50.1 million during the same period. Offsetting these increases was a $64.9 million decrease in reciprocal CDARS, which is primarily attributed to a single customer relationship.  The CDARS program is provided through a third party and designed to provide full FDIC insurance on deposit amounts larger than the stated maximum by exchanging or reciprocating larger depository relationships with other member banks. Depositor funds are broken into smaller amounts and placed with other banks that are members of the network. Each member bank issues CDs in amounts under $250,000, so the entire deposit is eligible for FDIC insurance. CDARS are technically brokered deposits; however, the Company considers the reciprocal deposits placed through the CDARS program as core funding due to the customer relationship that generated the transaction and does not report the balances as brokered sources in its internal or external financial reports. The Company continues to grow its noninterest-

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bearing deposits which represent 38.5% of total deposits at June 30, 2011, compared to 36.1% at December 31, 2010.

(in thousands)	June 30, 2011					December 31, 2010				June 30, 2010
DEPOSITS AND CUSTOMER REPURCHASE AGREEMENTS	Amount			% of Portfolio		Amount		% of Portfolio		Amount		% of Portfolio
NOW and money market	$	713,701		34.7	%	$	663,572	32.4	%	$	728,336	34.4	%
Savings	10,221			0.5	%	9,144		0.5	%	9,568		0.5	%
Eurodollar	94,047			4.6	%	105,793		5.2	%	108,864		5.1	%
Certificates of deposits under $100,000	37,282			1.8	%	41,845		2.0	%	46,693		2.2	%
Certificates of deposits $100,000 and over	227,968			11.1	%	229,701		11.2	%	309,718		14.6	%
Reciprocal CDARS	92,817			4.5	%	157,679		7.7	%	179,515		8.5	%
Brokered deposits	—			0.0	%	100		0.0	%	698		0.0	%
Total interest-bearing deposits	1,176,036		��	57.2	%	1,207,834		59.0	%	1,383,392		65.3	%
Noninterest-bearing demand deposits	736,692			35.8	%	681,534		33.3	%	583,052		27.5	%
Customer repurchase agreements	144,843			7.0	%	157,690		7.7	%	151,623		7.2	%
Total deposits and customer repurchase agreements	$	2,057,571		100.0	%	$	2,047,058	100.0	%	$	2,118,067	100.0	%

Securities Sold Under Agreements to Repurchase.  Securities sold under agreement to repurchase are transacted with customers as a way to enhance our customers’ interest-earning ability.  The Company does not consider customer repurchase agreements to be a wholesale funding source, but rather an additional treasury management service provided to our customer base. Our customer repurchase agreements are based on an overnight investment sweep that can fluctuate based on our customers’ operating account balances. Securities sold under agreements to repurchase decreased $12.8 million or 8.1% to $144.8 million at June 30, 2011, from $157.7 million at December 31, 2010.

Other Short-Term Borrowings.  Other short-term borrowings normally consist of federal funds purchased and overnight and term borrowings from the Federal Home Loan Bank (FHLB).  Other short-term borrowings are used as part of our liquidity management strategy and fluctuate based on the Company’s cash position. The Company’s wholesale funding needs are largely dependent on core deposit levels which can be volatile in uncertain economic conditions and sensitive to competitive pricing. Significant growth in deposits and a reduction in the loan portfolio since the beginning of 2009 reduced the Company’s need for wholesale borrowings.  At June 30, 2011, there was $30.0 million in short-term borrowings outstanding compared to $14.0 million at December 31, 2010.  If the Company is unable to retain deposits or maintain deposit balances at a level sufficient to fund asset growth, the composition of interest-bearing liabilities will shift toward additional wholesale funds, which historically bear a higher interest cost than core deposits.

Accrued Interest and Other Liabilities.  Accrued interest and other liabilities decreased $10.6 million, or 27.1%, to $28.4 million at June 30, 2011, compared to $38.9 million at December 31, 2010.  The decrease is due to a decline of $12.1 million in liabilities accrued for investment purchases in 2010 and settled in 2011.  Offsetting the decline in part were increases in premiums due to insurance carriers for brokered transactions and the fair market value of derivatives in a liability position of $1.1 million and $1.7 million, respectively, since December 31, 2010.

Results of Operations

Overview

The following table presents the condensed consolidated statements of operations for the three and six months ended June 30, 2011 and 2010.

	Three months ended June 30,										Six months ended June 30,
						Increase/(decrease)										Increase/(decrease)
(in thousands)	2011		2010			Amount			%		2011		2010			Amount			%
INCOME STATEMENT DATA
Interest income	$	28,177	$	29,258		$	(1,081	)	(3.7	)%	$	56,368	$	59,177		$	(2,809	)	(4.7	)%
Interest expense	3,846		5,085			(1,239		)	(24.4	)%	7,793		10,251			(2,458		)	(24.0	)%
NET INTEREST INCOME BEFORE PROVISION	24,331		24,173			158			0.7	%	48,575		48,926			(351		)	(0.7	)%
Provision for loan losses	1,982		10,444			(8,462		)	(81.0	)%	3,622		24,264			(20,642		)	(85.1	)%
NET INTEREST INCOME AFTER PROVISION	22,349		13,729			8,620			62.8	%	44,953		24,662			20,291			82.3	%
Noninterest income	8,790		9,753			(963		)	(9.9	)%	16,822		16,638			184			1.1	%
Noninterest expense	25,253		29,451			(4,198		)	(14.3	)%	50,704		55,724			(5,020		)	(9.0	)%
INCOME (LOSS) BEFORE INCOME TAXES	5,886		(5,969		)	11,855			(198.6	)%	11,071		(14,424		)	25,495			(176.8	)%
Provision (benefit) for income taxes	2,047		(2,721		)	4,768			(175.2	)%	4,006		(6,157		)	10,163			(165.1	)%
NET INCOME (LOSS) BEFORE NONCONTROLLING INTEREST	3,839		(3,248		)	7,087			(218.2	)%	7,065		(8,267		)	15,332			(185.5	)%
Net loss attributable to noncontrolling interest	—		(521		)	521			(100.0	)%	—		(199		)	199			(100.0	)%
NET INCOME (LOSS)	$	3,839	$	(3,769	)	$	7,608		(201.9	)%	$	7,065	$	(8,466	)	$	15,531		(183.5	)%

The annualized return on average assets for the three and six months ended June 30, 2011 was 0.64% and 0.59%, respectively, compared to (0.62)% and (0.70)% for the same prior year periods.  The annualized return on

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average shareholders’ equity for the three and six months ended June 30, 2011 was 7.37% and 6.88%, respectively, compared to (6.70)% and (7.48)% for the same periods in 2010. Improvement in return on average assets and shareholders’ equity during the three and six months ended June 30, 2011 is primarily attributable to a reduction in the provision for loan losses of $8.5 million and $20.6 million, respectively, over the comparable prior year periods.  Also contributing to the improvement in the Company’s return on average assets and shareholders’ equity was a significant decline in noninterest expenses.   Noninterest expenses for the three and six months ended June 30, 2011 declined $4.2 million and $5.0 million, respectively, over the comparable prior year periods primarily due to declines in losses on securities and OREO as well as declines in OREO and loan workout costs.  The Company’s efficiency ratio was 73.40% and 74.01% for the three and six months ended June 30, 2011, respectively, compared to 76.04% and 76.88% for the same periods in 2010.

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

As the majority of our assets are interest-earning and our liabilities are interest-bearing, changes in interest rates may impact our net interest margin. The FOMC uses the federal funds rate, which is the interest rate used by banks to lend to each other, to influence interest rates and the national economy. Changes in the fed funds rate have a direct correlation to changes in the prime rate, the underlying index for most of the variable-rate loans issued by the Company.  The FOMC has held the target federal funds rate at a range of 0-25 basis points since December 2008.

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 on a taxable equivalent basis, and the average rate earned or paid for the three and six months ended June 30, 2011 and 2010.

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	For the three months ended June 30,
	2011							2010
				Interest		Average					Interest		Average
	Average			earned		yield		Average			earned		yield
(in thousands)	balance			or paid		or cost (1)		balance			or paid		or cost (1)
Assets
Federal funds sold and other	$	36,953		$	38	0.41	%	$	25,433		$	43	0.67	%
Investment securities (2)	621,276			5,864		3.78	%	540,887			5,472		4.05	%
Loans (2), (3)	1,648,368			22,584		5.42	%	1,728,237			23,855		5.46	%
Allowance for loan losses	(62,270		)					(73,354		)
Total interest-earning assets	$	2,244,327		$	28,486	4.88	%	$	2,221,203		$	29,370	5.06	%
Noninterest-earning assets	160,339							213,540
Total assets	$	2,404,666						$	2,434,743
Liabilities and Shareholders’ Equity
Deposits
NOW and money market	$	721,222		$	1,181	0.66	%	$	733,826		$	1,259	0.69	%
Savings	9,870			5		0.20	%	9,769			7		0.29	%
Eurodollar	93,224			174		0.74	%	103,447			264		1.01	%
Certificates of deposit
Brokered under $100,000	—			—		0.00	%	1,022			6		2.35	%
Reciprocal CDARS	97,478			144		0.59	%	181,598			439		0.97	%
Under $100,000	38,794			93		0.96	%	48,328			180		1.49	%
$100,000 and over	232,456			535		0.92	%	326,490			1,128		1.39	%
Total interest-bearing deposits	$	1,193,044		$	2,132	0.72	%	$	1,404,480		$	3,283	0.94	%
Other borrowings
Securities sold under agreements to repurchase	160,832			209		0.51	%	139,383			296		0.84	%
Other short-term borrowings	7,795			4		0.20	%	3,845			5		0.51	%
Long term-debt	93,150			1,501		6.37	%	93,150			1,501		6.37	%
Total interest-bearing liabilities	$	1,454,821		$	3,846	1.05	%	$	1,640,858		$	5,085	1.24	%
Noninterest-bearing demand accounts	717,338							548,256
Total deposits and interest-bearing liabilities	2,172,159							2,189,114
Other noninterest-bearing liabilities	26,621							19,297
Total liabilities	2,198,780							2,208,411
Total equity	205,886							226,332
Total liabilities and equity	$	2,404,666						$	2,434,743
Net interest income - taxable equivalent				$	24,640						$	24,285
Net interest spread						3.83	%						3.83	%
Net interest margin						4.40	%						4.39	%
Ratio of average interest-earning assets to average interest-bearing liabilities	154.27		%					135.37		%

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	For the six months ended June 30,
	2011							2010
				Interest		Average					Interest		Average
	Average			earned		yield		Average			earned		yield
(in thousands)	balance			or paid		or cost (1)		balance			or paid		or cost (1)
Assets
Federal funds sold and other	$	38,095		$	75	0.39	%	$	21,341		$	62	0.58	%
Investment securities (2)	625,159			11,855		3.79	%	539,212			11,405		4.23	%
Loans (2), (3)	1,646,834			44,953		5.43	%	1,741,238			47,993		5.48	%
Allowance for loan losses	(64,053		)					(73,839		)
Total interest earning-assets	$	2,246,035		$	56,883	4.89	%	$	2,227,952		$	59,460	5.13	%
Noninterest-earning assets	162,044							204,940
Total assets	$	2,408,079						$	2,432,892
Liabilities and Shareholders’ Equity
Deposits
NOW and money market	$	698,922		$	2,287	0.66	%	$	718,975		$	2,589	0.73	%
Savings	9,618			10		0.21	%	10,086			17		0.34	%
Eurodollar	95,433			356		0.74	%	107,679			526		0.97	%
Certificates of deposit
Brokered under $100,000	10			—		1.37	%	3,305			36		2.20	%
Reciprocal CDARS	123,391			407		0.67	%	177,828			945		1.07	%
Under $100,000	40,035			200		1.01	%	49,758			394		1.60	%
$100,000 and over	230,941			1,124		0.98	%	335,855			2,486		1.49	%
Total interest-bearing deposits	$	1,198,350		$	4,384	0.74	%	$	1,403,486		$	6,993	1.00	%
Other borrowings
Securities sold under agreements to repurchase	158,826			416		0.52	%	135,840			587		0.86	%
Other short-term borrowings	7,032			9		0.25	%	13,659			21		0.31	%
Long-term debt	93,150			2,984		6.37	%	93,150			2,650		5.66	%
Total interest-bearing liabilities	$	1,457,358		$	7,793	1.07	%	$	1,646,135		$	10,251	1.25	%
Noninterest-bearing demand accounts	719,314							540,045
Total deposits and interest-bearing liabilities	2,176,672							2,186,180
Other noninterest-bearing liabilities	24,268							17,626
Total liabilities	2,200,940							2,203,806
Total equity	207,139							229,086
Total liabilities and equity	$	2,408,079						$	2,432,892
Net interest income - taxable equivalent				$	49,090						$	49,209
Net interest spread						3.82	%						3.88	%
Net interest margin						4.41	%						4.45	%
Ratio of average interest-earning assets to average interest-bearing liabilities	154.12		%					135.34		%

(1)Average yield or cost for the three and six months ended June 30, 2011 and 2010 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 are included with average loans outstanding.

Net interest income on a tax-equivalent basis for the three and six months ended June 30, 2011 remained relatively consistent with a fluctuation of $0.4 million and $(0.1) million over the comparable prior-year periods.  Average interest-earning asset balances have increased $23.1 million and $18.1 million for the three and six months ended June 30, 2011, respectively.  Low growth in the loan portfolio during previous quarters has resulted in net loans comprising 70% of average interest-earning assets for the six months ended June 30, 2011 compared to 75% a year earlier.  The Company’s improved liquidity over the past year coupled with weak loan growth has led to higher balances in lower-yielding assets such as investment securities and interest bearing cash deposits and federal funds sold.  Average investment security balances comprised 28% of average interest-earning assets for the six months ended at June 30, 2011 compared to 24% a year earlier.  The Company expects to redeploy its excess liquidity into higher yielding loans in future quarters.  The decline in interest income resulting from the change in the composition of the interest-earning asset balance was partially offset by an overall reduction in interest expense. Declining deposit interest costs were attributed both to changes in deposit composition and rate declines.  Higher yielding CDs and Eurodollar have shifted to noninterest bearing demand deposits and securities sold under agreement to repurchase.  However, rates associated with the junior subordinated debt, which were effectively fixed late in the first quarter of 2010, increased (see Note 8 to the condensed consolidated financial statements). For the three and six months ending June 30, 2011, compared to the same periods in 2010, the yield on average interest-earning assets decreased 18 basis points and 24 basis points to 4.88% and 4.89%, respectively.  Rates on average interest-bearing liabilities for the three and six

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months ended June 30, 2011 decreased approximately 18 basis points to 1.05% and 1.07%, respectively, over the comparable prior year periods.

Noninterest Income

The following table presents noninterest income for the three and six months ended June 30, 2011 and 2010.

	Three months ended June 30,									Six months ended June 30,
					Increase/(decrease)									Increase/(decrease)
(in thousands)	2011		2010		Amount			%		2011		2010		Amount			%
NONINTEREST INCOME
Service charges	$	1,224	$	1,269	$	(45	)	(3.5	)%	$	2,463	$	2,527	$	(64	)	(2.5	)%
Investment advisory and trust income	1,543		1,457		86			5.9	%	2,969		2,826		143			5.1	%
Insurance income	3,288		3,529		(241		)	(6.8	)%	6,681		6,702		(21		)	(0.3	)%
Investment banking income	857		1,789		(932		)	(52.1	)%	1,601		2,090		(489		)	(23.4	)%
Other income	1,878		1,709		169			9.9	%	3,108		2,493		615			24.7	%
Total noninterest income	$	8,790	$	9,753	$	(963	)	(9.9	)%	$	16,822	$	16,638	$	184		1.1	%

Noninterest income includes revenues earned from sources other than interest income.  These sources include:  service charges and fees on deposit accounts; letters 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; and increases in the cash surrender value of bank-owned life insurance.

Service Charges.  Service charges primarily consist of fees earned from our treasury management services.  Customers are given the option to pay for these services in cash or by offsetting the fees for these services against an earnings credit that is given for maintaining noninterest-bearing deposits.  Service charges were slightly lower for the three and six months ended June 30, 2011, compared to the same periods in 2010.

Investment Advisory and Trust Income.  Investment advisory and trust income for the three and six months ended June 30, 2011, showed improvement over the prior year period.  Fees earned are generally based on a percentage of the assets under management (AUM) and market volatility has a direct impact on earnings.

At June 30, 2011, discretionary AUM, comprised primarily of equity securities, increased $114.3 million to $832.7 million compared to $718.4 million one year earlier.  Total AUM (discretionary and custodial assets) was $1.61 billion at June 30, 2011 compared to $1.55 billion at December 31, 2010 and $1.47 billion a year earlier.

Insurance Income.  Insurance income 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. Fees on these products are transactional by nature and fee income can fluctuate from period to period based on the volume and size of transactions that have been closed.  Revenue from benefits consulting and property and casualty is a more recurring revenue source as policies and contracts generally renew or rewrite on an annual or more frequent basis.

For the three and six months ended on June 30, 2011 and 2010, insurance revenues were earned from the following product lines:

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Wealth transfer and executive compensation	23.7	%	31.6	%	23.4	%	28.1	%
Benefits consulting	31.2	%	22.4	%	29.4	%	23.8	%
Property and casualty	43.2	%	43.1	%	45.2	%	45.6	%
Fee income	1.9	%	2.9	%	2.0	%	2.5	%
	100.0	%	100.0	%	100.0	%	100.0	%

Insurance income decreased $0.2 million or 6.8% to $3.3 million during the three months ended June 30, 2011, compared to the same period in 2010.  During the first half of 2011, insurance income remained comparable to prior year.  The decrease for the second quarter of 2011, over the comparable quarter in prior year, is primarily attributable to a decline in commissions earned on the sale of life insurance products.

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Investment Banking Income.  Investment banking income 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 collectability of fees is reasonably assured. Investment banking income is transactional by nature and will fluctuate based on the number of clients engaged and transactions successfully closed. Investment banking income for the three and six months ended June 30, 2011, decreased $0.9 million and $0.5 million, respectively, compared to the same periods in 2010 due to lower retainer fees and success fees.

Other Income.  Other income is comprised of increases in the cash surrender value of bank-owned life insurance, earnings on equity method investments, swap fees, merchant charges, bankcard fees, wire transfer fees, foreign exchange fees and safe deposit income.  Other income increased $0.2 million and $0.6 million for the three and six months ended June 30, 2011, respectively, compared to the same periods in 2010, due primarily to earnings on equity method investments and revenue earned on the sale of interest-rate swaps to commercial banking clients.

Noninterest Expense

The following table presents noninterest expense for the three and six months ended June 30, 2011 and 2010.

	Three months ended June 30,									Six months ended June 30,
					Increase/(decrease)									Increase/(decrease)
(in thousands)	2011		2010		Amount			%		2011		2010		Amount			%
NONINTEREST EXPENSES
Salaries and employee benefits	$	15,953	$	14,618	$	1,335		9.1	%	$	30,676	$	29,565	$	1,111		3.8	%
Share-based compensation expense	341		437		(96		)	(22.0	)%	765		856		(91		)	(10.6	)%
Occupancy expenses, premises and equipment	3,322		3,412		(90		)	(2.6	)%	6,676		6,846		(170		)	(2.5	)%
Amortization of intangibles	159		160		(1		)	(0.6	)%	319		321		(2		)	(0.6	)%
FDIC and other assessments	934		1,321		(387		)	(29.3	)%	2,274		2,561		(287		)	(11.2	)%
Other real estate owned and loan workout costs	640		1,943		(1,303		)	(67.1	)%	1,833		3,226		(1,393		)	(43.2	)%
Net OTTI on securities recognized in earnings	137		110		27			24.5	%	371		309		62			20.1	%
Loss on securities, other assets and OREO	806		3,938		(3,132		)	(79.5	)%	1,934		5,162		(3,228		)	(62.5	)%
Other operating expenses	2,961		3,512		(551		)	(15.7	)%	5,856		6,878		(1,022		)	(14.9	)%
Total noninterest expenses	$	25,253	$	29,451	$	(4,198	)	(14.3	)%	$	50,704	$	55,724	$	(5,020	)	(9.0	)%

Salaries and Employee Benefits.  Salaries and employee benefits increased $1.3 million or 9.1% and $1.1 million or 3.58% during the three and six months ended June 30, 2011, respectively, compared to the same periods in 2010.  The increase is primarily attributable to increases in bonuses and salaries.    Bonus compensation is based on the Company’s overall financial performance as well as performance measures specific to employees and is adjusted throughout the year.  Annual merit increases were effective in April 2011, contributing to the increase in the three months ended June 30, 2011, compared to the same period in 2010.  The Company’s full-time equivalent employees increased slightly to 547 at June 30, 2011 from 544 a year earlier.

Share-based Compensation. The Company uses share-based compensation to recruit new employees  and reward and retain existing employees.  Share-based compensation decreased $0.1 million during the three and six months ended June 30, 2011, respectively, compared to the same periods in 2010.  The decrease was due to the cancellation of share-based awards that did not meet specified performance metrics in the second quarter of 2011.  The Company recognizes compensation costs for the grant-date fair value of awards issued to employees.  The Company expects to continue using share-based compensation in the future.

Occupancy Costs.  Occupancy costs consist primarily of rent, depreciation, utilities, property taxes and insurance.  Occupancy costs decreased $0.1 million and $0.2 million during the three and six months ended June 30, 2011, respectively, compared to the same periods in 2010.  The decrease is attributed primarily to declines in common area management fees on leased facilities.

FDIC and Other Assessments.  FDIC and other assessments consist of premiums paid by FDIC-insured institutions and by Colorado chartered banks.  The assessments are based on statutory and risk classification factors and capital structure.  FDIC and other assessments decreased $0.4 million and $0.3 million for the three and six months ended June 30, 2011, respectively, over the comparable prior year periods.  The FDIC assessments calculation and base rates changed in the second quarter of 2011, reducing the Company’s cost.

OREO and Loan Workout Costs.  For the three and six months ended June 30, 2011, carrying costs and workout expenses of nonperforming loans and OREO decreased $1.3 million or 67.1% and $1.4 million or 43.2%, respectively, compared to the same periods in 2010. The decline in OREO and loan workout costs is consistent with the significant decrease of $19.9 million or 33% in nonaccrual loans over the prior year to $41.0 million at June 30, 2011.

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Net OTTI on Securities Recognized in Earnings.  For debt securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the credit component of OTTI is recognized in earnings.  The credit loss component is the difference between a security’s amortized cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate. The amount due to all other factors is recognized in other comprehensive income.  During the three and six months ended June 30, 2011, the Company recognized $0.1 million and $0.4 million in OTTI, respectively, related to two private-label MBS. At June 30, 2011, an additional unrealized loss of $1.4 million on private-label MBS was recognized in other comprehensive income. The Company may recognize additional losses on these securities if the underlying credit metrics worsen in the future.  Private-label MBS comprise 0.4% of the carrying value of the overall available for sale portfolio.

Loss on Securities, Other Assets, and OREO. The loss on securities, other assets and OREO was comprised of the following:

	Three months ended June 30,										Six months ended June 30,
						Increase/(decrease)										Increase/(decrease)
(in thousands)	2011			2010		Amount			%		2011			2010		Amount			%
OREO	$	1,457		$	3,651	$	(2,194	)	(60.1	)%	$	2,558		$	4,596	$	(2,038	)	(44.3	)%
Investment securities	(651		)	132		(783		)	(593.2	)%	(651		)	139		(790		)	(568.3	)%
Loans held for sale	—			—		—			0.0	%	—			349		(349		)	(100.0	)%
Other	—			155		(155		)	100.0	%	27			78		(51		)	(65.4	)%
	$	806		$	3,938	$	(3,132	)			$	1,934		$	5,162	$	(3,228	)

OREO losses of $1.5 million for the three months ended June 30, 2011, related primarily to a valuation adjustment on a single property comprising 27% of the OREO portfolio.  Remaining year-to-date OREO losses of $1.1 million represent valuation adjustment on two properties in the portfolio.  The Company recognized a $0.6 million gain on investment securities during the three months ended June 30, 2011, related to a tender offer on a corporate bond by the issuer.

Other Operating Expenses.  Other operating expenses consist primarily of business development expenses (meals, entertainment and travel), charitable donations, professional services (auditing, legal, marketing and courier), and provision expense for off-balance sheet commitments. Other operating expenses for the three and six months ended June 30, 2011, decreased $0.6 million and $1.0 million, respectively, compared to the prior year periods.  Legal and professional services expenses are the major contributors to the decline in other operating expenses.

Provision and Allowance for Loan and Credit Losses

The following table presents the provision for loan and credit losses for the three and six months ended June 30, 2011 and 2010:

	Three months ended June 30,				Increase /			Six months ended June 30,				Increase /
(in thousands)	2011		2010		(decrease)			2011		2010		(decrease)
Provision for loan losses	$	1,982	$	10,444	$	(8,462	)	$	3,622	$	24,264	$	(20,642	)
Provison for credit losses (included in other expenses)	—		—		$	—		—		—		—
Total provision for loan and credit losses	$	1,982	$	10,444	$	(8,462	)	$	3,622	$	24,264	$	(20,642	)

The decrease in the provision for loan and credit losses of $8.5 million and $20.6 million for the three and six months ended June 30, 2011, respectively, over the comparable prior year periods is primarily attributable to an improving trend in new problem loans and an overall improvement in asset quality.  The Company’s improvement with respect to asset quality is consistent with overall industry trends.  Loan loss provisions for the first quarter of 2011 for FDIC-insured institutions were less than 50% of provisions a year earlier.  Additionally, the first quarter of 2011 marked the sixth consecutive quarter of loan loss provision declines according to the FDIC.

All loans are continually monitored to identify potential problems with repayment and collateral deficiency.  At June 30, 2011, the allowance for loan and credit losses was 3.74% of total loans, compared to 4.01% at December 31, 2010, and 4.04% at June 30, 2010.  The combination recent improvement of loan performance and proactive provisioning resulted in a higher ratio of allowance for loan and credit losses to nonperforming loans at

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June 30, 2011 (149.86%) and at December 31, 2010 (154.33%) as compared to June 30, 2010 (109.91%).  Though management believes the current allowance provides adequate coverage of potential problems in the loan portfolio as a whole, continued negative economic trends could adversely affect future earnings and asset quality.

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

During the three and six months ended June 30, 2011, the Company had net charge-offs of $2.1 million and $ 7.6 million, respectively, compared to $14.4 million and $31.4 million for the same periods a year earlier.  Approximately 62% of the total year-to-date net charge-offs were generated by Colorado relationships while 38% were generated by Arizona relationships.  The great majority of net charge-offs is concentrated within three categories:  real estate — construction (43%), real estate — mortgage (23%), and commercial (21%). Net charge-offs relating to a single Colorado relationship represented approximately 43% of total net charge-offs year-to-date.

The allowance for credit losses represents management’s recognition of a separate reserve for off-balance sheet loan commitments and letters of credit.  While the allowance for loan losses is recorded as a contra-asset to the loan portfolio on the consolidated balance sheet, the allowance for credit losses is recorded in “Accrued interest and other liabilities” in the accompanying condensed consolidated balance sheet.  Although the allowances are presented separately on the balance sheet, any losses incurred from credit losses would be reported as a charge-off in the allowance for loan losses, since any loss would be recorded after the off-balance sheet commitment had been funded.  Due to the relationship of these allowances as extensions of credit underwritten through a comprehensive risk analysis, information on both the allowance for loan and credit losses positions is presented in the following table.

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	Six months ended			Year ended			Six months ended
(in thousands)	June 30, 2011			December 31, 2010			June 30, 2010
Balance of allowance for loan losses at beginning of period	$	65,892		$	75,116		$	75,116
Charge-offs:
Commercial	2,354			8,357			4,902
Real estate — mortgage	2,227			11,490			6,658
Land acquisition and development	1,233			23,077			18,380
Real estate — construction	3,285			6,181			3,754
Consumer	200			1,079			240
Other	—			443			438
Total charge-offs	9,299			50,627			34,372
Recoveries:
Commercial	759			2,361			778
Real estate — mortgage	477			451			151
Land acquisition and development	378			2,662			1,893
Real estate — construction	16			655			2
Consumer	75			134			118
Other	—			13			11
Total recoveries	1,705			6,276			2,953
Net charge-offs	(7,594		)	(44,351		)	(31,419		)
Provision for loan losses charged to operations	3,622			35,127			24,264
Balance of allowance for loan losses at end of period	$	61,920		$	65,892		$	67,961
Balance of allowance for credit losses at beginning of period	$	61		$	155		$	155
Provision for credit losses charged to operations	—			(94		)	—
Balance of allowance for credit losses at end of period	$	61		$	61		$	155
Total provision for loan and credit losses charged to operations	$	3,622		$	35,033		$	24,264
Ratio of net charge-offs to average loans	0.46		%	2.62		%	1.80		%
Average loans outstanding during the period	$	1,648,368		$	1,693,546		$	1,741,238

Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, past due loans, repossessed assets and OREO.  The following table presents information regarding nonperforming assets as of the dates indicated:

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	At June 30,			At December 31,			At June 30,
(in thousands)	2011			2010			2010
Nonperforming loans:
Loans 90 days or more past due and still accruing interest	$	360		$	202		$	1,060
Nonaccrual loans:
Commercial	7,112			8,722			9,879
Real estate - mortgage	15,714			8,446			24,953
Land acquisition and development	6,349			9,690			16,745
Real estate - construction	9,178			12,614			8,252
Consumer and other	2,647			3,060			1,085
Total nonaccrual loans	41,000			42,532			60,914
Total nonperforming loans	41,360			42,734			61,974
OREO and repossessed assets	23,748			25,095			30,912
Total nonperforming assets	$	65,108		$	67,829		$	92,886
Allowance for loan losses	$	61,920		$	65,892		$	67,961
Allowance for credit losses	61			61			155
Allowance for loan and credit losses	$	61,981		$	65,953		$	68,116
Nonperforming assets to total assets	2.69		%	2.83		%	3.78		%
Nonperforming loans to total loans	2.50		%	2.60		%	3.67		%
Nnonperforming loans and OREO to total loans and OREO	3.87		%	4.06		%	5.40		%
Allowance for Loan and Credit Losses to Total Loans (excluding loans held for sale)	3.74		%	4.01		%	4.04		%
Allowance for loan and credit losses to nonperforming loans	149.86		%	154.33		%	109.91		%

Nonperforming assets of $65.1 million at June 30, 2011 were equally allocated between the Company’s two markets, Colorado and Arizona.  OREO and repossessed assets represent 36% of total nonperforming assets while the remaining 64% is comprised of nonaccrual and 90-day past due and still accruing interest loans.  Nonperforming loans as a percentage of total nonperforming loans are concentrated primarily within the real estate mortgage (38%), construction (22%), and commercial (18%) loan segments.  Nonperforming assets have improved during the last three quarters.  The Company has dedicated significant resources to the workout and resolution of nonaccrual loans and OREO and continues to closely monitor the financial condition of its clients.

Segment Results

Prior to July 1, 2010, the Company reported five operating segments: Commercial Banking, Investment Banking, Investment Advisory and Trust, Insurance and Corporate Support and Other.  In third quarter of 2010 the Company changed its segments, which included renaming Investment Advisory and Trust to Wealth Management.  All prior period disclosures in the following tables have been adjusted to conform to the current presentation.

Certain financial metrics and discussion of the results for the three and six months ended June 30, 2011 and 2010, of each operating segment, are presented below.

COMMERCIAL BANKING	Three months ended June 30,					Increase/(decrease)					Six months ended June 30,					Increase/(decrease)
(in thousands, except other information)	2011		2010			Amount			%		2011		2010			Amount			%
Income Statement
Net interest income	$	25,577	$	25,260		$	317		1.3	%	$	51,014	$	50,731		$	283		.6	%
Provision for loan losses	584		8,326			(7,742		)	(93.0	)%	1,911		19,687			(17,776		)	(90.3	)%
Noninterest income	3,065		2,343			722			30.8	%	5,524		4,739			785			16.6	%
Noninterest expense	7,526		11,774			(4,248		)	(36.1	)%	15,624		20,553			(4,929		)	(24.0	)%
Provision (benefit) for income taxes	7,409		2,665			4,744			178.0	%	14,361		5,168			9,193			177.9	%
Net income (loss) before management fees and overhead	13,123		4,838			8,285			171.2	%	24,642		10,062			— 14,580			144.9	%
Management fees and overhead allocations, net of tax	5,213		6,043			(830		)	(13.7	)%	11,358		12,119			— (761		)	(6.3	)%
Net income (loss)	$	7,910	$	(1,205	)	$	9,115		756.4	%	$	13,284	$	(2,057	)	$	15,341		745.8	%
Other information
Full-time equivalent employees	207.9		209.6								206.9		209.0

Earnings for the Commercial Banking segment during the three and six months ended June 30, 2011, increased $9.1 million and $15.3 million, respectively, compared to the same periods in 2010. The increase is primarily the result of a decrease in provision for loan losses and noninterest expense offset by increased tax provision expense.  The provision decline relates directly to the Company’s early efforts to proactively reserve for problem loans when repayment risks were first identified.  Since 2009, the Company has taken deliberate action to reduce high-risk loan concentrations and improve overall asset quality.  Provision expense has decreased each quarter since peaking in the second quarter of 2009. The decrease in noninterest expense is primarily comprised of OREO and loan workout expenses and losses on securities, other assets and OREO.

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INVESTMENT BANKING	Three months ended June 30,					Increase/(decrease)					Six months ended June 30,						Increase/(decrease)
(in thousands, except other information)	2011			2010		Amount			%		2011			2010			Amount			%
Income Statement
Net interest income	$	2		$	2	$	—		(100.0	)%	$	5		$	3		$	2		66.7	%
Noninterest income	857			1,789		(932		)	(52.1	)%	1,601			2,090			(489		)	(23.4	)%
Noninterest expense	980			1,179		(199		)	(16.9	)%	1,873			2,155			(282		)	(13.1	)%
Provision (benefit) for income taxes	(52		)	245		(297		)	(121.2	)%	(110		)	(26		)	(84		)	(323.1	)%
Net income (loss) before management fees and overhead	(69		)	367		(436		)	(118.8	)%	(157		)	(36		)	(121		)	(336.1	)%
Management fees and overhead allocations, net of tax	36			41		(5		)	(12.2	)%	71			82			(11		)	(13.4	)%
Net income (loss)	$	(105	)	$	326	$	(431	)	(132.2	)%	$	(228	)	$	(118	)	$	(110	)	(93.2	)%
Other information
Full-time equivalent employees	19.9			22.8							19.2			22.5

Earnings for the Investment Banking segment decreased $0.4 million and $0.1 million for the three and six month periods ended June 30, 2011, respectively, compared to the year earlier periods.  The segment closed two transactions during the first half of 2011, while three transactions were closed in 2010.

WEALTH MANAGEMENT	Three months ended June 30,						Increase/(decrease)					Six months ended June 30,						Increase/(decrease)
(in thousands, except other information)	2011			2010			Amount			%		2011			2010			Amount			%
Income Statement
Net interest income	$	(11	)	$	(18	)	$	7		38.9	%	$	(24	)	$	(27	)	$	3		11.1	%
Noninterest income	2,381			2,653			(272		)	(10.3	)%	4,661			4,851			(190		)	(3.9	)%
Noninterest expense	2,388			2,685			(297		)	(11.1	)%	4,776			4,964			(188		)	(3.8	)%
Provision (benefit) for income taxes	(14		)	45			(59		)	(131.1	)%	(68		)	(54		)	(14		)	(25.9	)%
Net income (loss) before management fees and overhead	(4		)	(95		)	91			95.8	%	(71		)	(86		)	15			17.4	%
Management fees and overhead allocations, net of tax	157			207			(50		)	(24.2	)%	308			377			(69		)	(18.3	)%
Net income (loss)	$	(161	)	$	(302	)	$	141		46.7	%	$	(379	)	$	(463	)	$	84		18.1	%
Other information
Full-time equivalent employees	56.6			56.4								56.9			55.6

Net loss for the Wealth Management segment decreased $0.1 million for the three and six month periods ended June 30, 2011, compared to the year earlier periods.  Revenue generated from wealth transfer transactions (typically facilitated through the use of whole life insurance products) and from investment advisory decreased 10.3% and 3.9%, during the three and six months ended June 30, 2011, respectively, compared to the prior year periods.  The decrease in noninterest expense offset the declines in revenue.

Insurance revenues generated by wealth transfer are transactional by nature, with the majority of revenues earned at the time of the sale. Over the past several quarters these revenues have been lower than historical standards due to broader economic uncertainties.  Whole life products generally require large, up-front cash premiums and potential clients have hesitated to make this investment.

Investment advisory revenues are generally a percentage of assets under management (AUM) and provide a revenue stream that can fluctuate with movement in the larger equity markets.

Discretionary AUM at June 30, 2011, increased $114.3 million or 15.9% to $832.7 million compared to $718.4 million a year earlier. Total AUM, including custody and advisory assets, were $1.61 billion and $1.47 billion at June 30, 2011 and 2010, respectively.

INSURANCE	Three months ended June 30,						Increase/(decrease)					Six months ended June 30,						Increase/(decrease)
(in thousands, except other information)	2011			2010			Amount			%		2011			2010			Amount		%
Income Statement
Net interest income	$	(1	)	$	(3	)	$	2		66.7	%	$	(3	)	$	(6	)	$	3	—
Noninterest income	2,450			2,333			117			5.0	%	4,989			4,677			312		6.7	%
Noninterest expense	2,307			2,180			127			5.8	%	4,668			4,554			114		2.5	%
Provision (benefit) for income taxes	58			(7		)	65			928.6	%	129			51			78		152.9	%
Net income (loss) before management fees and overhead	84			157			(73		)	(46.5	)%	189			66			123		186.4	%
Management fees and overhead allocations, net of tax	87			87			—			(100.0	)%	173			173			—		(100.0	)%
Net income (loss)	$	(3	)	$	70		$	(73	)	(104.3	)%	$	16		$	(107	)	$	123	115.0	%
Other information
Full-time equivalent employees	52.9			52.0								52.2			54.2

Earnings for the three months ended June 30, 2011 decreased $0.1 million over the comparable prior year period.  For the six months ended June 30, 2011, earnings increased $0.1 million over the comparable prior year period.  Year-to-date revenue growth was primarily attributed to the employee benefit business.  The employee benefit group upgraded its sales staff in 2010 and as a result is experiencing an increase in new business.

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Employee benefits sales commissions have faced pressure in recent quarters as clients have responded to the economy by reducing headcount and reducing coverage.  P&C commissions have also faced longstanding downward pressure as a soft premium environment persists, and clients have changed limits and their revenues, payrolls and property valuations have declined.

The P&C industry continues to experience a soft premium market and revenue gains are largely dependent on volume growth.  The Employee Benefits business remains attentive to new healthcare legislation and the potential impact on its current and prospective clients.  The Company has a large client base to which it could potentially cross-sell insurance business products.  The Company has focused on refining its internal referral program to maximize its cross-sell opportunities.

CORPORATE SUPPORT	Three months ended June 30,						Increase/(decrease)					Six months ended June 30,						Increase/(decrease)
(in thousands, except other information)	2011			2010			Amount			%		2011			2010			Amount			%
Income Statement
Net interest income	$	(1,236	)	$	(1,068	)	$	(168	)	(15.7	)%	$	(2,417	)	$	(1,775	)	$	(642	)	(36.2	)%
Provision for loan losses	1,398			2,118			(720		)	-34.0	%	1,711			4,577			(2,866		)	-62.6	%
Noninterest income	37			635			(598		)	-94.2	%	47			281			(234		)	-83.3	%
Noninterest expense	12,052			11,633			419			3.6	%	23,763			23,498			265			1.1	%
Benefit for income taxes	(5,354		)	(5,669		)	315			5.6	%	(10,306		)	(11,296		)	990			8.8	%
Net income (loss) before management fees and overhead	(9,295		)	(8,515		)	(780		)	-9.2	%	(17,538		)	(18,273		)	735			4.0	%
Management fees and overhead allocations, net of tax	(5,493		)	(6,378		)	885			13.9	%	(11,910		)	(12,751		)	841			6.6	%
Net income attributable to noncontrolling interest	—			(521		)	521			100.0	%	—			(199		)	199			100.0	%
Net income (loss)	$	(3,802	)	$	(2,658	)	$	(1,144	)	(43.0	)%	$	(5,628	)	$	(5,721	)	$	93		1.6	%
Other information
Full-time equivalent employees	208.6			203.8								209.0			202.4

The Corporate Support and Other segment is composed of activities of the parent company (Parent); non-production, back-office support operations; and eliminating transactions in consolidation.  Non-production, back-office operations include human resources, accounting and finance, information technology, and loan and deposit operations.  The Company has a process for allocating these support operations back to the production lines based on an internal allocation methodology that is updated annually.

Net loss for the Corporate Support and Other segment increased $1.1 million for the three months ended June 30, 2011, compared to the year earlier period.  The net loss for the six months ended June 30, 2011 remained consistent with the comparable prior year period.  The primary component of net interest income (expense) for the segment is interest expense related to the Company’s long-term debt (see Note 9 to the condensed consolidated financial statements).  Late in the first quarter of 2010, interest expense on a portion of variable-rate debt was fixed through the use of interest-rate swaps (see Note 8 to the condensed consolidated financial statements).  The decrease in net interest income is attributable to a decrease in interest income on the loan portfolio the Parent purchased from the Bank in 2009.

The provision for loan losses relates to the non-performing loan portfolio the Parent owns. This portfolio has steadily decreased since the 2009 purchase due to loan repayments and collateral sales.  In addition, asset quality improvement within the portfolio has contributed to the decline in the provision for loan losses.

Noninterest expense includes salaries and benefits of employees of the Parent and support functions as well as the nonemployee overhead operating costs not directly associated with another segment.  Costs during the current periods were stable, as compared to prior periods

Contractual Obligations and Commitments

Summarized below are the Company’s contractual obligations (excluding deposit liabilities) to make future payments at June 30, 2011:

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			After one		After three
	Within		but within		but within		After
(in thousands)	one year		three years		five years		five years		Total
FHLB overnight funds purchased (1)	30,000		—		—		—		30,000
Repurchase agreements (1)	144,843		—		—		—		144,843
Operating lease obligations	5,873		9,935		8,613		6,676		31,097
Long-term debt obligations (2)	6,023		31,371		7,501		115,631		160,526
Preferred Stock, Series B dividend (3)	3,223		69,191		—		—		72,414
Supplemental executive retirement plan	—		—		—		3,232		3,232
Total contractual obligations	$	189,962	$	110,497	$	16,114	$	125,539	$	442,112

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

(2)Principal repayment of the junior subordinated debentures is assumed to be at the contractual maturity and interest has been estimated through the applicable dates.  Principal repayment of the subordinated notes payable is assumed to be at the first available call date in August 2013.  See Note 9 to the Condensed Consolidated Financial Statements for a schedule of specific maturities and possible call dates.  Interest on the junior subordinated debentures is calculated at the fixed rate associated with the applicable hedging instrument through the instrument maturity date then at the currently applicable variable rate through contractual maturity and is reported in the “due within” categories during which the interest expense is expected to be incurred.  Included in long-term debt obligations are estimated interest payments related to subordinated debt (junior and unsecured) of $6.0 million due “Within one year”, $10.4 million due “After one but within three years”, $7.5 million due “After three but within five years” and $43.5 million due “After five years.”  Variable rate interest payments on junior subordinated debentures after maturity of the related fixed interest rate swap hedge are estimates based on current rates and actual payments will differ.

(3)Cumulative Perpetual Preferred Stock (Series B) issued to the US Treasury in December 2008 includes dividends payable at 5% on $64.4 million and is reflected as an obligation in the related “due within” categories.  The preferred shares are shown in the table as being due in the “After three but within five years” category which assumes the $64.4 million in preferred stock will be redeemed in the fourth quarter of 2013 after which time the dividend rate increases to 9%.

The contractual amount of the Company’s financial instruments with off-balance sheet risk at June 30, 2011, is presented below, classified by the type of commitment and the term within which the commitment expires:

			After one		After three
	Within		but within		but within		After
(in thousands)	one year		three years		five years		five years		Total
Unfunded loan commitments	$	360,828	$	122,790	$	18,056	$	3,411	$	505,085
Standby letters of credit	41,486		3,859		3,223		—		48,568
Commercial letters of credit	258		—		—		—		258
Unfunded commitments for unconsolidated investments	5,525		—		—		—		5,525
Company guarantees	1,219		—		—		—		1,219
Total commitments	$	409,316	$	126,649	$	21,279	$	3,411	$	560,655

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 consolidated balance sheet.  Credit risk is the principal risk associated with these instruments.  The contractual amounts of these instruments represent the amount of credit risk should the instruments be fully drawn upon and the customer defaults.

To control the credit risk associated with entering into commitments and issuing letters of credit, the Company uses the same credit quality, collateral policies, and monitoring controls in making commitments and letters of credit as it does with its lending activities.  The Company evaluates each customer’s credit worthiness 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

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letters of credit obligate the Company to meet certain financial obligations of its customers if, under the contractual terms of the agreement, the customers are unable to do so. The financial standby letters of credit issued by the Company are irrevocable.  Payment is only guaranteed under these letters of credit upon the borrower’s failure to perform its obligations to the beneficiary.

Approximately $31.5 million of total loan commitments at June 30, 2011 represent commitments to extend credit at fixed rates of interest, which exposes the Company to some degree of interest-rate risk.

The Company has also entered into interest-rate swap agreements under which it is required to either receive cash or pay cash to a counterparty depending on changes in interest rates.  The interest-rate swaps are carried at fair value on the Condensed Consolidated Balance Sheets 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. The fair value of interest-rate swaps recorded on the balance sheet at June 30, 2011 do not represent the actual amounts that will ultimately be received or paid under the contracts since the fair value is based on estimated future interest rates and are therefore excluded from the table above.

Liquidity and Capital Resources

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

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

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

Liquidity from asset categories is provided through cash and interest-bearing deposits with other banks, which totaled $50.0 million at June 30, 2011, compared to $24.2 million at December 31, 2010. Additional asset liquidity sources include principal and interest payments from securities in the Company’s investment portfolio and cash flows from its amortizing loan portfolio.  Liability liquidity sources include attracting deposits at competitive rates and maintaining wholesale borrowing (short-term borrowings and brokered CDs) credit relationships.

The Company’s loan to core deposit ratio decreased to 86.6% at June 30, 2011, from 87.0% at December 31, 2010, and was in line with the 4-quarter period ending average of 86.1%. This has allowed the Company to maintain low levels of wholesale borrowings which historically bear a higher cost than core deposits. At June 30, 2011, the Company had $30.0 million in outstanding borrowings with the FHLB.  Average wholesale borrowings

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were $7.0 million during the six months ended June 30, 2011, an increase from the 2010 fiscal year average of $4.6 million. The Company has no brokered deposits at June 30, 2011 and core deposits represent 100% of the Company’s deposit base.

The Company uses various forms of short-term borrowings for cash management and liquidity purposes, regularly accessing its federal funds and FHLB lines to manage its daily cash position. At June 30, 2011, the Bank has approved federal funds purchase lines with six correspondent banks with an aggregate credit line of $155.0 million.  The Bank also has a line of credit from the FHLB that is limited by the amount of eligible collateral available to secure it and the Company’s investment in FHLB stock.  Borrowings under the FHLB line are required to be secured by unpledged securities and qualifying loans. Borrowings may also be used on a longer-term basis to support expanded lending activities and to match the maturity or repricing intervals of assets.

Available funding through correspondent lines and the FHLB at June 30, 2011, totaled $426.6 million or 18.4% of the Company’s earning assets.  Available funding is comprised of $155.0 million through the unsecured federal fund lines and $271.6 million in secured FHLB borrowing capacity. The Company had $112.8 million in securities available to be pledged as collateral for additional FHLB borrowings at June 30, 2011.  Access to funding through correspondent lines is dependent upon the cash position of the correspondent banks and there may be times when certain lines are not available.  In addition, certain lines require a one day rest period after a specified number of consecutive days of accessing the lines. Although the Company’s aggregate correspondent credit lines decreased $80.0 million during 2010 due to three lines becoming unavailable in reaction to an overall tightening in the credit markets, it believes it has sufficient borrowing capacity and diversity in correspondent banks to meet its needs.

At the holding company level, our primary sources of funds are dividends paid from the Bank and fee-based subsidiaries, management fees assessed to the Bank and the fee-based 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 and preferred stock, quarterly interest payments on the subordinated debentures and notes payable, 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 Colorado State Banking Board is required prior to the declaration of any dividend by the Bank if the total of all dividends declared by the Bank in any calendar year exceeds the total of its net profits for that year combined with the retained net profits for the preceding two years. In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 provides that the Bank cannot pay a dividend if it will cause the Bank to be “undercapitalized.”  At June 30, 2011, the Bank was restricted in its ability to pay dividends to the holding company as its earnings in the prior two years, net of dividends paid during those years, were negative.  The Company’s ability to pay dividends on its common stock depends upon the availability of dividends from the Bank, earnings from its fee-based businesses, and upon the Company’s compliance with the capital adequacy guidelines of the Federal Reserve Board of Governors (see Note 13 of the notes to the condensed consolidated financial statements).  The holding company has a liquidity policy that requires the maintenance of at least 18 months of liquidity on the balance sheet based on projected cash usages, exclusive of dividends from the Bank.  At June 30, 2011, the holding company had a liquidity position that provides for approximately 2.4 years of liquidity.

At June 30, 2011, shareholders’ equity totaled $209.1 million, a $7.4 million increase from December 31, 2010.  The increase was primarily due to $7.1 million in net income; an increase of $1.7 million in other comprehensive income resulting from net unrealized gains on derivatives and available for sale securities; and $0.9 million in stock-based compensation expense, and employee stock purchase plan activity.  These increases were offset by dividends paid on preferred stock of $1.6 million; and dividends paid on common stock of $0.7 million.

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

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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 credit losses. At June 30, 2011, the Bank was well-capitalized with a Tier 1 Capital ratio of 11.1% and Total Capital ratio of 12.4%. The minimum ratios to be considered well-capitalized under the risk-based capital standards are 6% and 10%, respectively. At the holding company level, the Company’s Tier 1 Capital ratio at June 30, 2011, was 13.4% and its Total Capital ratio 16.0%.  In order to comply with the regulatory capital constraints, the Company and its Board of Directors constantly monitor the capital level and its anticipated needs based on the Company’s growth. The Company has identified sources of additional capital that could be used if needed, and monitors the costs and benefits of these sources, which include both the public and private markets.

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 “would,” “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 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.

·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.

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·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.

·The risks identified under “Risk Factors” in Item 1A. of our annual report on Form 10-K for the year ended December 31, 2010.

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

At June 30, 2011, 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, 2010.

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 at June 30, 2011, the end of the period covered by this report (“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 SEC 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 Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in the SEC’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.

PART II.  OTHER INFORMATION

Item 6.Exhibits

Exhibits and Index of Exhibits.

10.1Employment agreement, dated April 22, 2002, by and between CoBiz Inc. and David Pass.

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

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

32.1Section 1350 Certification of the Chief Executive Officer.

32.2Section 1350 Certification of the Chief Financial Officer.

101Pursuant to Rule 405 of Regulation S-T, the following materials from CoBiz Financial Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statement of Income and Comprehensive Income (Loss), (ii) the Condensed Consolidated Statement of Cash Flows, (iii) the Condensed Consolidated Balance Sheet, and (iv) Notes to the Condensed Consolidated Financial Statements.

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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 FINANCIAL INC.
Date:	July 29, 2011		By:	/s/ Steven Bangert
				Steven Bangert
				Chairman and Chief Executive Officer
Date:	July 29, 2011		By:	/s/ Lyne B. Andrich
				Lyne B. Andrich
				Executive Vice President and Chief Financial Officer

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