Cobiz Financial (COBZ) 10-Q 2012 Q1 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 March 31, 2012.

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) 312-3400

(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 39,697,318 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding at April 26, 2012.

	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 March 31, 2012 and December 31, 2011

(unaudited)

	March 31,			December 31,
(in thousands, except share amounts)	2012			2011
Assets
Cash and due from banks	$	39,363		$	39,148
Interest-bearing deposits and federal funds sold	12,431			20,062
Total cash and cash equivalents	51,794			59,210
Investment securities available for sale (cost of $617,397 and $613,264, respectively)	632,395			623,522
Investment securities held to maturity (fair value of $232 and $238, respectively)	225			232
Other investments	9,571			9,554
Total investments	642,191			633,308
Loans - net of allowance for loan losses of $52,778 and $55,629, respectively	1,625,669			1,581,795
Intangible assets - net of amortization of $5,349 and $5,189, respectively	3,239			3,399
Bank-owned life insurance	40,087			39,767
Premises and equipment - net of depreciation of $33,173 and $32,320, respectively	8,042			8,388
Accrued interest receivable	8,196			8,273
Deferred income taxes, net	30,013			33,018
Other real estate owned - net of valuation allowance of $7,838 and $7,668, respectively	17,224			18,502
Other	31,834			37,844
TOTAL ASSETS	$	2,458,289		$	2,423,504
Liabilities
Deposits
Noninterest-bearing demand	$	722,982		$	720,813
Interest-bearing demand	115,377			10,385
NOW and money market	768,620			773,826
Savings	10,978			10,631
Eurodollar	—			97,748
Certificates of deposits	286,007			305,003
Total deposits	1,903,964			1,918,406
Securities sold under agreements to repurchase	118,499			127,948
Other short-term borrowings	67,671			20,000
Accrued interest and other liabilities	35,376			43,918
Junior subordinated debentures	72,166			72,166
Subordinated notes payable	20,984			20,984
TOTAL LIABILITIES	2,218,660			2,203,422
Commitments and contingencies
Shareholders’ Equity
Preferred, $.01 par value; 2,000,000 shares authorized; 57,366 issued and outstanding ($57,366 liquidation value)	1			1
Common, $.01 par value; 50,000,000 shares authorized; 39,697,318 and 37,089,753 issued and outstanding, respectively	390			368
Additional paid-in capital	234,583			222,200
Accumulated deficit	(118		)	(3,571		)
Accumulated other comprehensive income, net of income tax of $2,927 and $666, respectively	4,773			1,084
TOTAL SHAREHOLDERS’ EQUITY	239,629			220,082
TOTAL LIABILITIES AND EQUITY	$	2,458,289		$	2,423,504

See Notes to Condensed Consolidated Financial Statements

CoBiz Financial Inc. and Subsidiaries

Three months ended March 31, 2012 and 2011

Condensed Consolidated Statements of Income and Comprehensive Income

(unaudited)

	Three months ended March 31,
(in thousands, except per share amounts)	2012			2011
INTEREST INCOME:
Interest and fees on loans	$	21,180		$	22,181
Interest and dividends on investment securities:
Taxable securities	5,313			5,909
Nontaxable securities	4			5
Dividends on securities	71			59
Interest on federal funds sold and other	26			37
Total interest income	26,594			28,191
INTEREST EXPENSE:
Interest on deposits	1,646			2,252
Interest on short-term borrowings and securities sold under agreements to repurchase	143			212
Interest on subordinated debentures	1,502			1,483
Total interest expense	3,291			3,947
NET INTEREST INCOME BEFORE PROVISION	23,303			24,244
Provision for loan losses	(70		)	1,640
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	23,373			22,604
NONINTEREST INCOME:
Service charges	1,245			1,239
Investment advisory and trust income	1,231			1,426
Insurance income	3,439			3,393
Investment banking income	74			744
Other income	2,222			1,230
Total noninterest income	8,211			8,032
NONINTEREST EXPENSE:
Salaries and employee benefits	16,062			15,147
Occupancy expenses, premises and equipment	3,533			3,354
Amortization of intangibles	160			160
FDIC and other assessments	491			1,340
Other real estate owned and loan workout costs	576			1,193
Net other than temporary impairment losses on securities recognized in earnings	255			234
Loss on securities, other assets and other real estate owned	198			1,128
Other	3,371			2,895
Total noninterest expense	24,646			25,451
INCOME BEFORE INCOME TAXES	6,938			5,185
Provision for income taxes	2,398			1,959
NET INCOME	$	4,540		$	3,226
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gain on securities	2,940			879
Unrealized gain on derivatives	749			492
OTHER COMPREHENSIVE INCOME	3,689			1,371
COMPREHENSIVE INCOME	$	8,229		$	4,597
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	3,823		$	2,280
EARNINGS PER COMMON SHARE:
Basic	$	0.10		$	0.06
Diluted	$	0.10		$	0.06

See Notes to Condensed Consolidated Financial Statements

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CoBiz Financial Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2012 and 2011

(unaudited)

	For the three months ended March 31,
(in thousands)	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,540		$	3,226
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization on investment securities	797			587
Depreciation and amortization	1,020			942
Amortization of net loan fees	(209		)	64
Provision for loan and credit losses	(70		)	1,640
Stock-based compensation	489			424
Federal Home Loan Bank stock dividend	(15		)	(3		)
Deferred income taxes	761			145
Increase in cash surrender value of bank-owned life insurance	(320		)	(299		)
Supplemental executive retirement plan	181			33
Loss on securities, other assets and other real estate owned	453			1,362
Other operating activities, net	(1,609		)	(6		)
Changes in operating assets and liabilities:
Accrued interest and other liabilities	(5,706		)	(2,223		)
Accrued interest receivable	51			(492		)
Other assets	6,425			3,043
Net cash provided by operating activities	6,788			8,443
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of other investments	(2		)	(1,011		)
Proceeds from other investments	108			231
Purchases of investment securities available for sale	(45,787		)	(38,288		)
Maturities of investment securities available for sale	40,130			56,774
Maturities of investment securities held to maturity	7			7
Restricted cash	(2		)	7,354
Net proceeds from sale of loans, OREO and repossessed assets	859			5,050
Loan originations and repayments, net	(43,623		)	(2,544		)
Purchase of premises and equipment	(513		)	(645		)
Other investing activities, net	—			10
Net cash provided by (used in) investing activities	(48,823		)	26,938
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market,
Eurodollar and savings accounts	4,555			94,983
Net decrease in certificates of deposits	(18,997		)	(51,067		)
Net increase (decrease) in short-term borrowings	47,670			(14,012		)
Net decrease in securities sold under agreements to repurchase	(9,449		)	(16		)
Proceeds from issuance of common stock, net	11,953			124
Dividends paid on common stock	(371		)	(368		)
Dividends paid on preferred stock	(717		)	(806		)
Other financing activities, net	(25		)	(5		)
Net cash provided by financing activities	34,619			28,833
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(7,416		)	64,214
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	59,210			24,166
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	51,794		$	88,380

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), 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 six 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 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). FDL provides wealth transfer and related administrative support to individuals, families and employers.  CoBiz IM provides investment management services to institutions and individuals through its subsidiary, CoBiz Investment Management, LLC.

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, 2011, 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 months ended March 31, 2012, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012.

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 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, commitments and loss exposure on VIEs at March 31, 2012:

	At March 31, 2012
(in thousands)	Balance		Balance Sheet Classification
Investments in limited partnerships:
Assets	$	8,800	Other assets
Commitments	6,721		Commitments and contingencies
Maximum exposure to loss	15,521

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:

	Three months ended March 31,
(in thousands)	2012			2011
Cash paid (received) during the period for:
Interest	$	3,341		$	4,211
Income taxes	(5,102		)	—
Other noncash activities:
Trade date accounting for investment securities	43			—
Loans transferred to held for sale	—			3,000
Loans transferred to OREO and repossessed assets	—			1,567

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 (MBS), 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.

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.

Other-than-temporary-impairment (OTTI) on debt securities is separated between the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in

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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 uncollectability 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 collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.

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

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concession to the borrower. The concessions may be granted in various forms, including but not limited to reduction in the stated interest rate, reduction in the loan balance or accrued interest, or extension of the maturity date.  Troubled debt restructurings are evaluated in accordance with ASC Topic 310-10-40, 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.

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 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.

2.Recent Accounting Pronouncements

Recent Accounting Pronouncements — Effective January 2012, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (ASU 2011-03). ASU 2011-03 is 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 was effective for the first interim or annual period beginning on or after December 15, 2011. The adoption of this update did not have a material impact on the consolidated financial statements.

Effective January 2012, the Company adopted 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 the requirements, the FASB does not intend to change the application of existing requirements under Accounting Standards Codification (ASC) Topic 820, Fair Value

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Measurements.  ASU 2011-04 was effective for interim and annual periods beginning after December 15, 2011. The adoption of this update did not have a material impact on the consolidated financial statements.

Effective January 2012, the Company adopted ASU No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05).  ASU 2011-05 is 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 non-owner changes in stockholders’ equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12).  ASU 2011-12 defers the provisions of ASU 2011-05 that require the presentation of reclassification adjustments on the face of both the statement of income and statement of other comprehensive income.  Amendments under ASU 2011-05 that were not deferred under ASU 2011-12 will be applied retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of this update did not have a material impact on the consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The amendments in ASU 2011-11 require the disclosure of information on offsetting and related arrangements for financial and derivative instruments to enable users of its financial statements to understand the effect of those arrangements on its financial position.  Amendments under ASU 2011-11 will be applied retrospectively for fiscal years, and interim periods within those years, beginning after January 1, 2013.  The Company is evaluating the effect, if any, adoption of ASU 2011-11 will have on its consolidated financial statements.

3.Earnings per Common Share and Dividends Declared per Common Share

Earnings per common share is calculated based on the two-class method prescribed in ASC 260, Earnings per Share. The two-class method is an allocation of undistributed earnings to common stock and securities that participate in dividends with common stock. The Company’s restricted stock awards are considered participating securities 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 months ended March 31, 2012 and 2011. The weighted average shares outstanding used in the calculation of basic and diluted loss per share are as follows:

	Three months ended March 31,
(in thousands, except share amounts)	2012			2011
Net income	$	4,540		$	3,226
Preferred stock dividends	(717		)	(946		)
Net income available to common shareholders	$	3,823		$	2,280
Distributed earnings	$	368		$	366
Undistributed earnings	3,416			1,896
Earnings allocated to common stock (1)	$	3,784		$	2,262
Weighted average common shares - issued	37,526,796			36,928,031
Average unvested restricted share awards	(401,736		)	(309,408		)
Weighted average common shares outstanding - basic	37,125,060			36,618,623
Effect of dilutive stock options and awards outstanding	28,457			171,021
Weighted average common shares outstanding - diluted	37,153,517			36,789,644
Weighted average antidilutive common shares outstanding (2)	3,087,063			3,265,380
Basic earnings per share	$	0.10		$	0.06
Diluted earnings per share	$	0.10		$	0.06
Dividends declared per share	$	0.01		$	0.01

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(1)Earnings allocated to common shareholders for basic EPS under the two-class method may differ from earnings allocated for diluted EPS due to the possible use of the treasury method when that method results in greater dilution than when the two-class method is applied.

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

Dividends on Series C Preferred Stock began accruing at 5.0% when issued in conjunction with the Company’s participation in the SBLF during 2011.  The dividend rate can fluctuate between 1% and 5% depending on the change in the level of Qualified Small Business Lending (QSBL) as illustrated in following chart.  At March 31, 2012, the Company had not achieved growth sufficient to reduce the dividend rate and the 5.0% rate will be the effective rate on Series C Preferred Stock dividends through September 30, 2012.

Relative increase in QSBL to Baseline	Dividend Rate
Less than 2.5%	5.0	%
Between 2.5% and 5.0%	4.0	%
Between 5.0% and 7.5%	3.0	%
Between 7.5% and 10.0%	2.0	%
10.0% or more	1.0	%

On March 23, 2012, the Company completed an underwritten public offering of 2,100,000 shares of the Company’s common stock at a price of $6.00 per share. The offering provided net proceeds to the Company of approximately $11.8 million after deducting underwriting discounts and commissions and estimated offering expenses.

4.Comprehensive Income

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

	Three months ended March 31,
(in thousands)	2012			2011
Other comprehensive income items:
Unrealized gain on available for sale securities	$	4,297		$	879
Reclassification for loss to operations	34			234
Change in OTTI-related component of unrealized gain	411			303
Unrealized gain on derivative securities	711			441
Reclassification for loss to operations	497			354
	5,950			2,211
Deferred tax expense:
Unrealized gain on available for sale securities	(1,633		)	(333		)
Reclassification for loss to operations	(13		)	(89		)
Change in OTTI-related component of unrealized gain	(156		)	(115		)
Unrealized gain on derivatives	(270		)	(168		)
Reclassification for loss to operations	(189		)	(135		)
	(2,261		)	(840		)
Other comprehensive income, net of tax	$	3,689		$	1,371

The components of accumulated other comprehensive income are as follows:

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(in thousands)	Available for sale securities		Derivatives designated as hedging instruments			Accumulated other comprehensive income
Balance at December 31, 2011	$	6,359	$	(5,275	)	$	1,084
Current period other comprehensive income	2,940		749			3,689
Balance at March 31, 2012	$	9,299	$	(4,526	)	$	4,773

5.Investments

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

	March 31, 2012								December 31, 2011
			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	$	403,591	$	12,331	$	118	$	415,804	$	408,963	$	11,650	$	61	$	420,552
U.S. government agencies	43,916		196		—		44,112		43,915		290		—		44,205
Trust preferred securities	98,958		3,045		362		101,641		98,997		2,193		2,172		99,018
Corporate debt securities	67,193		1,259		628		67,824		57,317		338		838		56,817
Private-label MBS	2,806		84		820		2,070		3,137		—		1,147		1,990
Municipal securities	933		11		—		944		935		5		—		940
Total	$	617,397	$	16,926	$	1,928	$	632,395	$	613,264	$	14,476	$	4,218	$	623,522
Held to maturity securities:
Mortgage-backed securities	$	225	$	7	$	—	$	232	$	232	$	6	$	—	$	238

The net gain (loss) on securities called or matured was immaterial for the three months ended March 31, 2012 and 2011.

The amortized cost and estimated fair value of investments in debt securities at March 31, 2012, 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	$	7,060	$	7,190	$	—	$	—
Due after one year through five years	98,714		99,407		—		—
Due after five years through ten years	6,267		6,283		—		—
Due after ten years	98,959		101,641		—		—
Mortgage-backed securities	406,397		417,874		225		232
	$	617,397	$	632,395	$	225	$	232

Investment securities with an approximate fair value of $169.1 million and $181.0 million were pledged to secure public deposits of $116.0 million and $102.3 million, at March 31, 2012 and December 31, 2011, respectively.  Securities sold under agreements to repurchase of $118.5 million and $127.9 million at March 31, 2012 and December 31, 2011, respectively, consisted primarily of mortgage-backed securities with an estimated fair value of $125.8 million and $138.8 million, respectively.

Changes in interest rates and market liquidity may cause adverse fluctuations in the market price of securities resulting in temporary unrealized losses.  At March 31, 2012, the majority of the total unrealized loss of $1.9 million is comprised of private-label mortgage-backed and corporate debt securities.  The Company has recognized other-than-temporary impairments (OTTI) of $0.3 million on the private-label MBS for the three months ended March 31, 2012.

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

The Company has determined there was no unrecognized OTTI associated with the 25 and 49 securities noted within the following table at March 31, 2012 and December 31, 2011, respectively.

	Less than 12 months				12 months or greater				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in thousands)	value		loss		value		loss		value		loss
March 31, 2012
Mortgage-backed securities	$	22,265	$	118	$	—	$	—	$	22,265	$	118
Trust preferred securities	23,224		236		1,437		126		24,661		362
Corporate debt securities	10,786		182		4,554		446		15,340		628
Private-label MBS	—		—		1,697		820		1,697		820
Total	$	56,275	$	536	$	7,688	$	1,392	$	63,963	$	1,928

	Less than 12 months				12 months or greater				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in thousands)	value		loss		value		loss		value		loss
December 31, 2011
Mortgage-backed securities	$	31,855	$	61	$	—	$	—	$	31,855	$	61
Trust preferred securities	39,838		2,008		1,246		164		41,084		2,172
Corporate debt securities	25,048		634		4,796		204		29,844		838
Private-label MBS	—		—		1,990		1,147		1,990		1,147
Total	$	96,741	$	2,703	$	8,032	$	1,515	$	104,773	$	4,218

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 table presents a roll-forward of the credit loss component of OTTI on debt securities recognized in earnings during the three months ended March 31, 2012 and 2011.

	For the three months ended March 31,
(in thousands)	2012		2011
Beginning balance	$	2,553	$	1,782
Additions:
Additional credit impairment	255		234
Ending balance	$	2,808	$	2,016

During the three months ended March 31, 2012, the Company recognized OTTI of $0.3 million, all of which was related to OTTI recognized in earnings on one private-label MBS.  During the three months ended March 31, 2011, the Company recognized OTTI of $0.2 million, all of which was related to OTTI recognized 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

11

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.

At March 31, 2012, a net unrealized loss of $0.7 million on private-label MBS was recognized in other comprehensive income.  See Note 4 to the condensed consolidated financial statements for additional information on changes in the OTTI-related unrealized loss recognized in OCI.

The following table presents a summary of the significant inputs considered in determining the measurement of the credit loss component recognized in earnings during the three months ended March 31, 2012, for the impaired private-label MBS.

Inputs	Security #1
Prepayment speed (CPR) (1)	0.4		%
Default rate (CDR) (2)	6.3		%
Severity (3)	50.3		%
Credit Impairment (in thousands)	$	255

(1) Estimated prepayments as a percentage of outstanding loans

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

(3) Estimated loss rate on collateral liquidations

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Certain characteristics of the loans underlying the private-label MBS are included in the following table.

	Underlying Loan Characteristics
	Security #1			Security #2			Security #3
Purpose:
Purchase	62.8		%	62.5		%	66.5		%
Equity take out	33.0		%	30.4		%	8.3		%
Refinance	4.2		%	7.1		%	25.2		%
Type:
Single family	65.3		%	57.9		%	70.4		%
2-4 family	8.5		%	7.0		%	0.5		%
Condominium	3.7		%	7.2		%	28.2		%
Planned unit development	22.5		%	27.4		%	0.7		%
Owner occupied	100.0		%	90.5		%	90.4		%
Vacation	0.0		%	0.5		%	9.6		%
Investment	0.0		%	9.0		%	0.0		%
Terms:
30 year amortization	100.0		%	100.0		%	100.0		%
ARM	100.0		%	100.0		%	100.0		%
Geography:
Northern CA	28.4		%	26.3		%	13.9		%
Southern CA	35.2		%	37.5		%	15.1		%
Current Averages:
Loan rate	3.1		%	3.0		%	3.0		%
LTV based on origination value	76.3		%	73.6		%	67.4		%
Loan balance	$	463,100		$	364,300		$	203,500
Age (months)	84			87			96
FICO at origination	716			716			737
Delinquent 60+ days	10.4		%	17.4		%	7.3		%
Delinquent 90+ days	10.4		%	17.0		%	7.0		%

Other investments at March 31, 2012 and December 31, 2011, consist of the following:

	March 31,		December 31,
(in thousands)	2012		2011
Bank stocks — at cost	$	7,399	$	7,382
Investment in statutory trusts — equity method	2,172		2,172
	$	9,571	$	9,554

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.  FHLB stock holdings are largely dependent upon the Company’s liquidity position.  To the extent the need for wholesale funding increases or decreases, the Company may purchase additional or sell excess FHLB stock, respectively.  The Company evaluates impairment in this investment based on the ultimate recoverability of the par value and at March 31, 2012, 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

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its allowance for loan and credit losses. Classes are a disaggregation of the portfolio segments.  The Company’s loan portfolio segments are:

·Commercial Loans — Commercial loans consist of loans to small and medium-sized businesses in a wide variety of industries.  The Bank’s areas of emphasis in commercial lending include, but are not limited to, loans to wholesalers, manufacturers, 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 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 mortgage loans and automobile loans.   Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of the underlying collateral.

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

The loan portfolio segments at March 31, 2012 and December 31, 2011 were as follows:

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(in thousands)	March 31, 2012			December 31, 2011
Commercial	$	594,889		$	569,032
Real estate - mortgage	806,354			784,874
Land acquisition & development	58,277			62,056
Real estate - construction	57,726			63,491
Consumer	116,921			116,772
Other	44,660			41,300
Loans held for investment	1,678,827			1,637,525
Allowance for loan losses	(52,778		)	(55,629		)
Unearned net loan fees	(380		)	(101		)
Net loans held for investment	$	1,625,669		$	1,581,795

The Company did not have any loans held for sale at March 31, 2012 and December 31, 2011.  During the three months ended March 31, 2011, the Company transferred two loans totaling $3.0 million from held for investment to held for sale.  These loans were sold during the first quarter of 2011 and no gain or loss resulted from this transaction.

The following table provides information about loans purchased, none of which were of deteriorated credit quality:

	For the three months ended March 31,
	2012			2011
(in thousands)	Number of loans	Amount		Number of loans	Amount
Other loans	2	$	840	20	$	9,987

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 $65.0 million balance outstanding at March 31, 2012, was collateralized by loans of $660.4 million with a lending value of $395.0 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 March 31, 2012 and December 31, 2011 is summarized below:

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	At March 31, 2012
(in thousands)	Non-classified		Classified		Total
Commercial
Manufacturing	$	66,980	$	13,490	$	80,470
Finance and insurance	81,328		1,082		82,410
Health care	58,907		343		59,250
Real estate services	71,619		8,610		80,229
Construction	48,148		8,656		56,804
Retail trade	29,358		669		30,027
Wholesale trade	61,370		1,248		62,618
Other	138,725		4,356		143,081
	556,435		38,454		594,889
Real estate - mortgage
Residential & commercial owner-occupied	397,198		32,478		429,676
Residential & commercial investor	355,816		20,862		376,678
	753,014		53,340		806,354
Land acquisition & development
Commercial	13,963		9,679		23,642
Residential	22,621		4,985		27,606
Other	4,973		2,056		7,029
	41,557		16,720		58,277
Real estate - construction
Residential & commercial owner-occupied	15,607		—		15,607
Residential & commercial investor	33,022		9,097		42,119
	48,629		9,097		57,726
Consumer	115,154		1,767		116,921
Other	44,660		—		44,660
Total loans held for investment	$	1,559,449	$	119,378	$	1,678,827
Unearned net loan fees					(380		)
Net loans held for investment					$	1,678,447

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	At December 31, 2011
(in thousands)	Non-classified		Classified		Total
Commercial
Manufacturing	$	64,936	$	14,899	$	79,835
Finance and insurance	77,968		1,106		79,074
Health care	55,885		358		56,243
Real estate services	75,520		10,678		86,198
Construction	40,095		6,343		46,438
Retail trade	27,016		756		27,772
Wholesale trade	58,420		3,681		62,101
Other	126,715		4,656		131,371
	526,555		42,477		569,032
Real estate - mortgage
Residential & commercial owner-occupied	387,453		33,764		421,217
Residential & commercial investor	339,968		23,689		363,657
	727,421		57,453		784,874
Land acquisition & development
Commercial	14,220		10,052		24,272
Residential	25,282		5,347		30,629
Other	7,003		152		7,155
	46,505		15,551		62,056
Real estate - construction
Residential & commercial owner-occupied	16,401		—		16,401
Residential & commercial investor	37,364		9,726		47,090
	53,765		9,726		63,491
Consumer	112,541		4,231		116,772
Other	41,300		—		41,300
Total loans held for investment	$	1,508,087	$	129,438	$	1,637,525
Unearned net loan fees					(101		)
Net loans held for investment					$	1,637,424

Transactions in the allowance for loan losses (ALL) by segment for the three months ended March 31, 2012 and March 31, 2011 are summarized below:

(in thousands)	Commercial			Real estate - mortgage			Land acquisition & development			Real estate - construction			Consumer			Other			Unallocated		Total
Allowance for loan losses at December 31, 2011	$	14,048		$	19,889		$	11,013		$	2,746		$	4,837		$	551		$	2,545	$	55,629
Provision	(1,042		)	412			1,855			(133		)	(1,240		)	34			44		(70		)
Charge-offs	(507		)	(15		)	(2,159		)	—			(621		)	(10		)	—		(3,312		)
Recoveries	66			108			344			—			13			—			—		531
Allowance for loan losses at March 31, 2012	$	12,565		$	20,394		$	11,053		$	2,613		$	2,989		$	575		$	2,589	$	52,778

(in thousands)	Commercial			Real estate - mortgage			Land acquisition & development			Real estate - construction			Consumer			Other		Unallocated			Total
Allowance for loan losses at December 31, 2010	$	17,169		$	17,677		$	14,938		$	6,296		$	3,373		$	354	$	6,085		$	65,892
Provision	(211		)	2,947			(688		)	33			216			134		(791		)	1,640
Charge-offs	(447		)	(1,207		)	(1,173		)	(3,285		)	(182		)	—		—			(6,294		)
Recoveries	137			248			309			—			63			—		—			757
Allowance for loan losses at March 31, 2011	$	16,648		$	19,665		$	13,386		$	3,044		$	3,470		$	488	$	5,294		$	61,995

The allowance for loan losses 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 at 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

17

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

For collateral dependent loans that have been specifically identified as impaired, the Company measures fair value based on third-party appraisals, adjusted for estimated costs to sell the property.  Upon impairment, the Company will obtain a new appraisal if one had not been previously obtained in the last 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.

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

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

The aforementioned factors enable management to recognize environmental conditions contributing to 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 judgmental consideration of any additional amounts necessary for subjective factors such as economic uncertainties and excess concentration risks.

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·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 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 March 31, 2012 (in thousands)	Commercial		Real estate - mortgage		Land acquisition & development		Real estate - construction		Consumer		Other		Unallocated		Total
Allowance for loan losses	$	12,565	$	20,394	$	11,053	$	2,613	$	2,989	$	575	$	2,589	$	52,778
Individually evaluated for impairment	2,121		5,758		2,204		1,399		760		—		—		12,242
Collectively evaluated for impairment	10,444		14,636		8,849		1,214		2,229		575		2,589		40,536
Allowance for credit losses	$	35	$	—	$	—	$	—	$	—	$	—	$	—	$	35
Individually evaluated for impairment	35		—		—		—		—		—		—		35
Loans held for investment	$	594,812	$	805,694	$	58,218	$	57,422	$	116,833	$	45,468	$	—	$	1,678,447
Individually evaluated for impairment	18,668		35,487		8,719		7,447		775		—		—		71,096
Collectively evaluated for impairment	576,144		770,207		49,499		49,975		116,058		45,468		—		1,607,351

At December 31, 2011 (in thousands)	Commercial		Real estate - mortgage		Land acquisition & development		Real estate - construction		Consumer		Other		Unallocated		Total
Allowance for loan losses	$	14,048	$	19,889	$	11,013	$	2,746	$	4,837	$	551	$	2,545	$	55,629
Individually evaluated for impairment	1,905		4,870		2,245		1,259		2,509		—		—		12,788
Collectively evaluated for impairment	12,143		15,019		8,768		1,487		2,328		551		2,545		42,841
Allowance for credit losses	$	35	$	—	$	—	$	—	$	—	$	—	$	—	$	35
Individually evaluated for impairment	35		—		—		—		—		—		—		35
Loans held for investment	$	568,962	$	784,491	$	61,977	$	63,141	$	116,676	$	42,177	$	—	$	1,637,424
Individually evaluated for impairment	10,948		34,811		8,435		6,985		2,527		—		—		63,706
Collectively evaluated for impairment	558,014		749,680		53,542		56,156		114,149		42,177		—		1,573,718

Information on impaired loans at March 31, 2012 and December 31, 2011 is reported in the following table:

	At and for the three months ended March 31, 2012														At March 31, 2011
(in thousands)	Unpaid principal balance		Recorded investment on impaired loans		Recorded investment with a related ALL		Recorded investment with no related ALL		Related allowance		Average recorded investment		Interest income recognized		Average recorded investment
Commercial
Manufacturing	$	5,397	$	5,370	$	5,200	$	170	$	505	$	4,073	$	48	$	307
Finance and insurance	838		838		838		—		198		613		5		605
Real estate services	7,400		7,400		7,400		—		696		5,707		60		2,329
Construction	1,816		1,648		923		725		218		1,511		8		1,851
Retail trade	1,756		478		3		475		3		498		—		1,578
Wholesale trade	757		448		332		116		122		291		—		203
Other	2,896		2,486		1,883		603		414		2,217		14		1,569
	20,860		18,668		16,579		2,089		2,156		14,910		135		8,442
Real estate - mortgage
Residential & commercial owner-occupied	11,230		10,651		9,681		970		3,654		7,827		24		7,980
Residential & commercial investor	8,865		8,865		8,684		181		992		9,081		57		1,937
	20,095		19,516		18,365		1,151		4,646		16,908		81		9,917
Land acquisition & development
Commercial	6,983		6,309		5,118		1,191		1,752		6,340		25		2,417
Residential	2,729		2,410		1,162		1,248		452		3,045		6		5,431
Other	—		—		—		—		—		—		—		1,051
	9,712		8,719		6,280		2,439		2,204		9,385		31		8,899
Real estate - construction
Residential & commercial investor	9,323		7,447		3,809		3,638		1,399		7,605		11		11,232
Consumer	775		775		760		15		760		1,395		—		2,743
Total	$	60,765	$	55,125	$	45,793	$	9,332	$	11,165	$	50,203	$	258	$	41,233

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	At and for the period ended December 31, 2011
(in thousands)	Unpaid principal balance		Recorded investment on  impaired loans		Recorded investment with a related ALL		Recorded investment with no related ALL		Related allowance
Commercial
Manufacturing	$	207	$	179	$	—	$	179	$	—
Finance and insurance	147		147		147		—		97
Health care	—		—		—		—		—
Real estate services	7,907		7,907		7,907		—		1,561
Construction	752		701		27		674		12
Retail trade	2,142		555		156		399		32
Wholesale trade	333		144		14		130		14
Other	1,707		1,315		994		321		224
	13,195		10,948		9,245		1,703		1,940
Real estate - mortgage
Residential & commercial owner-occupied	10,083		9,504		8,456		1,048		2,244
Residential & commercial investor	9,352		9,258		8,392		866		1,200
	19,435		18,762		16,848		1,914		3,444
Land acquisition & development
Commercial	7,075		6,400		5,394		1,006		1,620
Residential	3,314		2,035		1,381		654		625
	10,389		8,435		6,775		1,660		2,245
Real estate - construction
Residential & commercial investor	8,861		6,985		2,452		4,533		1,259
Consumer	2,528		2,527		2,509		18		2,509
Total	$	54,408	$	47,657	$	37,829	$	9,828	$	11,397

Interest income of $0.3 million recognized on impaired loans during the three months ended March 31, 2012 relates primarily to interest earned on troubled debt restructurings that meet the definition of an impaired loan pursuant to ASU 310-10-35-16 and are subject to disclosure requirement under ASU 310-10-50-15.  For the three months ending March 31, 2011, interest income recognized on impaired loans was immaterial.

The Company had troubled debt restructurings of $33.9 million at March 31, 2012 comprised of $27.2 million performing and $6.7 million nonperforming troubled debt restructurings.  At December 31, 2011, the Company had troubled debt restructurings of $29.8 million comprised of $20.6 million performing and $9.2 million nonperforming troubled debt restructurings. The table below summarizes transactions as it relates to troubled debt restructurings during the three months ended March 31, 2012:

(in thousands)	Performing			Nonperforming			Total
Beginning balance at December 31, 2011	$	20,633		$	9,188		$	29,821
New restructurings	10,305			1,157			11,462
Transfers out (1)	—			(4,243		)	(4,243		)
Change in accrual status	(3,163		)	3,163			—
Paydowns	(591		)	(39		)	(630		)
Charge-offs	—			(2,476		)	(2,476		)
Ending balance at March 31, 2012	$	27,184		$	6,750		$	33,934

(1)In accordance with ASC 310-40-50-2, these loans are no longer subject to disclosure requirements as these loans are in compliance with their modified terms and had a market rate of interest at the time of restructuring.

The below table provides information regarding troubled debt restructurings that occurred during the three months ended March 31, 2012:

(in thousands)	Number of contracts	Pre- modification outstanding		Post-modification outstanding recorded investment
Commercial	16	$	9,417	$	8,457
Real estate - mortgage	2	679		677
Land acquisition & development	2	1,126		1,098
Real estate - construction	1	1,078		1,070
Consumer	2	161		160
	23	$	12,461	$	11,462

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Current period troubled debt restructurings resulted primarily from the extension of repayment terms.  The Company did not recognize any charge-offs or losses in conjunction with current period troubled debt restructurings.

Loans modified as troubled debt restructurings within the previous twelve months having a payment default during the three months ended March 31, 2012 are included below:

Troubled debt restructurings that subsequently defaulted (in thousands)	Number of contracts	Recorded investment
Real estate - mortgage
Residential & commercial owner-occupied	2	$	3,163

At March 31, 2012 and December 31, 2011 there were $0.8 million and $0.3 million in outstanding commitments on restructured loans, respectively.

The Company’s nonaccrual loans by class at March 31, 2012 and December 31, 2011 are reported in the following table:

(in thousands)	March 31, 2012		December 31, 2011
Commercial
Manufacturing	$	169	$	179
Finance and insurance	90		93
Real estate services	59		566
Construction	874		701
Retail trade	478		555
Wholesale trade	448		144
Other	1,247		867
Total commercial	3,365		3,105
Real estate - mortgage
Residential & commercial owner-occupied	9,671		5,357
Residential & commercial investor	3,212		3,938
Total real estate - mortgage	12,883		9,295
Land acquisition & development
Commercial	3,033		3,077
Residential	1,508		2,035
Total land acquisition & development	4,541		5,112
Real estate - construction
Residential & commercial investor	6,377		6,985
Consumer	775		2,527
Total nonaccrual loans	$	27,941	$	27,024

The following table summarizes the aging of the Company’s loan portfolio at March 31, 2012.  At March 31, 2012, there were no loans that were 90 days or more past due and still accruing.

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		At March 31, 2012
(in thousands)		30 - 59 Days past due		60 - 89 Days past due		90+ Days past due		Total past due		Current		Total loans
Commercial
Manufacturing		$	3,112	$	1,550	$	—	$	4,662	$	75,808	$	80,470
Finance and insurance		762		—		—		762		81,648		82,410
Health care		—		16		—		16		59,234		59,250
Real estate services		—		—		36		36		80,193		80,229
Construction		469		—		740		1,209		55,595		56,804
Retail trade		—		—		38		38		29,989		30,027
Wholesale trade		99		35		62		196		62,422		62,618
Other		100		—		564		664		142,417		143,081
		4,542		1,601		1,440		7,583		587,306		594,889
Real estate - mortgage
Residential & commercial owner-occupied	��	395		2,082		5,316		7,793		421,883		429,676
Residential & commercial investor		483		787		3,030		4,300		372,378		376,678
		878		2,869		8,346		12,093		794,261		806,354
Land acquisition & development
Commercial		—		—		2,038		2,038		21,604		23,642
Residential		—		—		804		804		26,802		27,606
Other		—		—		—		—		7,029		7,029
		—		—		2,842		2,842		55,435		58,277
Real estate - construction
Residential & commercial owner-occupied		—		—		—		—		15,607		15,607
Residential & commercial investor		—		—		2,739		2,739		39,380		42,119
		—		—		2,739		2,739		54,987		57,726
Consumer		621		12		10		643		116,278		116,921
Other		—		—		—		—		44,660		44,660
Total loans held for investment		$	6,041	$	4,482	$	15,377	$	25,900	$	1,652,927	$	1,678,827
Unearned net loan fees												(380		)
Net loans held for investment												$	1,678,447

7.Derivatives

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

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

The Company’s objective in using derivatives is to minimize the impact of interest rate fluctuations on the Company’s interest expense. To accomplish this objective, the Company uses interest-rate swaps as part of its cash flow hedging strategy. The Company also offers an interest-rate hedge program that includes 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 the classification within the condensed consolidated balance sheets.

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	Asset derivatives						Liability derivatives
		Fair value at						Fair value at
	Balance sheet	March 31,			December 31,		Balance sheet	March 31,		December 31,
(in thousands)	classification	2012			2011		classification	2012		2011
Derivatives designated as hedging :
Instruments under ASC 815 Interest rate swap	Other assets		$	—	$	—	Accrued interest and other liabilities	$	7,300	$	8,508
Derivatives not designated as hedging :
Instruments under ASC 815 Interest rate swap	Other assets		$	7,127	$	7,943	Accrued interest and other liabilities	$	7,644	$	8,720

Cash Flow Hedges of Interest Rate Risk —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
(in thousands)	Notional		Fixed rate		Termination date
CoBiz Statutory Trust I	$	20,000	6.04	%	March 17, 2015
CoBiz Capital Trust II	$	30,000	5.99	%	April 23, 2020
CoBiz Capital Trust III	$	20,000	5.02	%	March 30, 2024

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 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 months ended March 31, 2012 and 2011.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received/made on the Company’s variable-rate liabilities. During the next 12 months, the Company estimates that $2.0 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 March 31, 2012, the Company had 91 interest-rate swaps with an aggregate notional amount of $179.7 million related to this program.  Gains and losses arising from changes in the fair value of these swaps are included in “Other income” in the accompanying condensed consolidated statements of operations and were immaterial for the periods ending March 31, 2012 and 2011.

The table below summarizes gains and losses recognized in OCI in conjunction with our derivatives designated as hedging instruments for the three months ended March 31, 2012 and 2011.

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	Gain recognized in OCI				Loss reclassified from accumulated OCI into earnings
	(Effective portion)				(Effective portion)
	for the three months ended March 31,				for the three months ended March 31,
(in thousands)	2012		2011		2012			2011
Cash flow hedges:
Interest rate swap	$	711	$	795	$	(497	)	$	(354	)

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 March 31, 2012, 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 $15.2 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $33.6 million against its obligations under these agreements.  At March 31, 2012, the Company was not in default with any of its debt covenants.

8.Employee Benefit and Stock Compensation Plans

Stock Options and Awards — During the three months ended March 31, 2012, the Company recognized compensation expense (net of estimated forfeitures) of $0.5 million for share-based compensation awards for which the requisite service was rendered in the period compared to $0.4 million prior year period. 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 three months ended March 31, 2012.

			Weighted average
			exercise
	Shares		price
Outstanding at December 31, 2011	2,421,886		$	12.63
Granted	17,500		6.53
Exercised	(2,667	)	4.94
Forfeited	(63,265	)	9.78
Outstanding at March 31, 2012	2,373,454		$	12.67
Exercisable at March 31, 2012	1,909,133		$	14.13

The weighted average grant date fair value of options granted during the three months ended March 31, 2012 was $3.05.

The following table summarizes changes in stock awards for the three months ended March 31, 2012.

			Weighted average
			grant date
	Shares		fair value
Unvested at December 31, 2011	290,954		$	6.59
Granted	490,407		5.61
Vested	(68,772	)	5.82
Forfeited	(2,700	)	6.52
Unvested at March 31, 2012	709,889		$	5.92

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At March 31, 2012, there was $4.2 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 2.3 years.

Supplemental Executive Retirement Plan — The Company has a Supplemental Executive Retirement Plan (SERP) for five active key executives. The SERP provides for target retirement benefits, as a percentage of pay, beginning at age 60 or after 10 years of service and are paid as a monthly benefit for a 10-year period. The target percentage is 50% of pay based on the executives’ average monthly compensation during any five calendar years during which the executives’ compensation is highest during participation. At March 31, 2012, all participants were fully vested.  At March 31, 2012 and December 31, 2011, the Company had accrued $4.8 million and $4.6 million, respectively, for the expected benefits under the SERP which are included in the consolidated balance sheets under the caption “Accrued interest and other liabilities.”

In 2012, the Company’s Compensation Committee conducted a review of the SERP as part of its ongoing assessment of overall compensation and determined that the SERP was no longer aligned with the Company’s objectives.  On March 22, 2012, the Company terminated the SERP and no additional benefits will accrue to the participants.  With the termination of the SERP, the benefits previously accrued will be distributed to the participants in accordance with the plan provisions, IRS code section 409A and the Pension Benefit Guaranty Corporation requirements.

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

	Three months ended March 31, 2012
												Corporate
	Commercial		Investment			Wealth						Support and
(in thousands)	Banking		Banking			Management			Insurance			Other			Consolidated
Income Statement
Total interest income	$	26,476	$	3		$	—		$	—		$	115		$	26,594
Total interest expense	1,813		—			8			—			1,470			3,291
Provision for loan losses	637		—			—			—			(707		)	(70		)
Noninterest income	3,430		74			2,261			2,410			36			8,211
Noninterest expense	9,648		871			2,384			2,328			9,415			24,646
Management fees and allocations	4,718		40			165			103			(5,026		)	—
Provision (benefit) for income taxes	6,523		(303		)	(44		)	36			(3,814		)	2,398
Net income (loss)	$	6,567	$	(531	)	$	(252	)	$	(57	)	$	(1,187	)	$	4,540

	Three months ended March 31, 2011
											Corporate
	Commercial		Investment			Wealth					Support and
(in thousands)	Banking		Banking			Management			Insurance		Other			Consolidated
Income Statement
Total interest income	$	27,945	$	3		$	1		$	—	$	242		$	28,191
Total interest expense	2,508		—			14			2		1,423			3,947
Provision for loan losses	1,327		—			—			—		313			1,640
Noninterest income	2,459		744			2,280			2,539		10			8,032
Noninterest expense	8,098		893			2,388			2,361		11,711			25,451
Management fees and allocations	6,145		35			151			86		(6,417		)	—
Provision (benefit) for income taxes	6,952		(58		)	(54		)	71		(4,952		)	1,959
Net income (loss)	$	5,374	$	(123	)	$	(218	)	$	19	$	(1,826	)	$	3,226

10.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

25

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.  The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels.  For example, changes in market activity or the addition of new unobservable inputs could, in the Company’s judgment, cause a transfer to either a higher or lower level.  For the three months ended March 31, 2012 and the year ended December 31, 2011, there were no transfers between levels.

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 March 31, 2012, 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.  These are inputs used by a third-party pricing service used by the Company.  To validate the appropriateness of the valuations provided by the third party, the Company regularly updates its understanding of the inputs used and compares valuations to an additional third party source. The Company 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 and is therefore classified as Level 2.  For these securities, broker-dealer quotes, valuations based on similar but not identical securities or the most recent market trade (which may not be current), are used.

During the three months ended March 31, 2012 and 2011, the Company recognized credit related OTTI of $0.3 million and $0.2 million, respectively.  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 as further discussed below.  The fair values of interest-rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted

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expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

Pursuant to guidance in ASC 820, credit valuation adjustments are incorporated into the valuation to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings and thresholds.  The Company has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

The Company uses Level 2 and Level 3 inputs to determine the valuation of its derivatives portfolio.  The valuation of derivative instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs (Level 2 inputs), including interest rate curves and implied volatilities. The estimates of fair value are made using a standardized methodology that nets the discounted expected future cash receipts and cash payments (based on observable market inputs). Level 3 inputs include the credit valuation adjustments which use estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.  At March 31, 2012 and December 31, 2011, the Company assessed the impact of the Level 3 inputs on the overall derivative valuations in terms of the significance of the credit valuation adjustments in basis points and as a percentage of the overall derivative portfolio valuation and the overall notional value.  The Company’s assessment determined that credit valuation adjustments were not significant to the overall valuation of the portfolio.  In addition, the significance of the credit value adjustments and overall derivative portfolio to the Company’s financial statements was considered.  As a result of the insignificance of the credit value adjustments to the derivative portfolio valuations and the Company’s financial statements, the Company classified the derivative valuations in their entirety in Level 2.

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 impaired loans that are not collateral dependent 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.  Since there is not an active market with observable prices for these loans and the Company considers the measurements to be Level 3 inputs.  The Company did not have any loans held for sale at March 31, 2012 or December 31, 2011.

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.

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			Fair value measurements using:
	Balance at		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(in thousands)	March 31, 2012		(Level 1)		(Level 2)		(Level 3)
Assets
Available for sale securities:
Mortgage-backed securities	$	415,804	$	—	$	415,804	$	—
U.S. government agencies	44,112		—		44,112		—
Trust preferred securities	101,641		93,186		8,455		—
Corporate debt securities	67,824		—		67,824		—
Private-label MBS	2,070		—		—		2,070
Municipal securities	944		—		944		—
Total available for sale securities	$	632,395	$	93,186	$	537,139	$	2,070
Derivatives:
Reverse interest rate swap	$	7,127	$	—	$	7,127	$	—
Total derivative assets	$	7,127	$	—	$	7,127	$	—
Liabilities
Derivatives:
Cash flow hedge - interest rate swap	$	7,300	$	—	$	7,300	$	—
Reverse interest rate swap	7,644		—		7,644		—
Total derivative liabilities	$	14,944	$	—	$	14,944	$	—

			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, 2011		(Level 1)		(Level 2)		(Level 3)
Assets
Available for sale securities:
Mortgage-backed securities	$	420,552	$	—	$	420,552	$	—
U.S. government agencies	44,205		—		44,205		—
Trust preferred securities	99,018		90,904		8,114		—
Corporate debt securities	56,817		—		56,817		—
Private-label MBS	1,990		—		—		1,990
Municipal securities	940		—		940		—
Total available for sale securities	$	623,522	$	90,904	$	530,628	$	1,990
Derivatives:
Reverse interest rate swap	$	7,943	$	—	$	7,943	$	—
Total derivative assets	$	7,943	$	—	$	7,943	$	—
Liabilities
Derivatives:
Cash flow hedge - interest rate swap	$	8,508	$	—	$	8,508	$	—
Reverse interest rate swap	8,720		—		8,720		—
Total derivative liabilities	$	17,228	$	—	$	17,228	$	—

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 year
	months ended			ended
(in thousands)	March 31, 2012			December 31, 2011
Beginning balance	$	1,990		$	2,432
Realized loss on OTTI	(255		)	(771		)
Paydowns	(76		)	(545		)
Net accretion	—			165
Unrealized gain included in comprehensive income	411			709
Ending balance	$	2,070		$	1,990

Fair value is used on a nonrecurring basis to evaluate certain financial assets and financial liabilities in specific circumstances.  The following table presents the Company’s assets measured at fair value on a nonrecurring

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basis at the dates specified in the following table, aggregated by the level in the fair value hierarchy within which those measurements fall.

			Fair value measurements using:
			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Impaired loans, net of specific reserve:
At March 31, 2012	$	58,854	$	—	$	—	$	58,854
At December 31, 2011	$	50,883	$	—	$	—	$	50,883

During the three months ended March 31, 2012, the Company recorded a provision for loan losses of $2.2 million on impaired loans and net charge-offs of $2.8 million.

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 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) — OREO represents real property taken by the Company either through foreclosure or through a deed in lieu thereof from the borrower.  The fair value of OREO is based on property appraisals adjusted at management’s discretion to reflect a further decline in the fair value of properties since the time the appraisal analysis was performed.  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. The Company may include within OREO other repossessed assets received as partial satisfaction of a loan.  These assets are not material and do not typically have readily determinable market values and are considered Level 3 inputs.

Intangible assets — 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 March 31, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.

	Fair value measurements using:
			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs		Year to date
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)		loss
OREO and repossessed assets:
At March 31, 2012	$	18,131	$	—	$	—	$	18,131	$	(419	)
At December 31, 2011	$	19,476	$	—	$	—	$	19,476	$	(2,885	)
Intangible assets:
At December 31, 2011	$	—	$	—	$	—	$	—	$	(57	)

In the first quarter of 2011, the Company sold a small insurance book of business and recorded a loss of $0.1 million on the intangible sale.

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

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	At			At
(in thousands)	March 31, 2012			December 31, 2011
OREO recorded at fair value	$	18,131		$	19,476
Estimated selling costs	(907		)	(974		)
OREO	$	17,224		$	18,502

Valuation adjustments on OREO and additional gains or losses at the time OREO is sold 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 three months ended March 31, 2012:

(in thousands)	OREO
At December 31, 2011	$	18,502
OREO sales	(859		)
Net loss on sale and valuation adjustments	(419		)
At March 31, 2012	17,224
Estimated selling costs	907
OREO recorded at fair value	$	18,131

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

(in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
Private-label MBS	$	2,070	Consensus pricing	Broker quotes	16% - 71% of face value
Impaired loans	$	58,854	Property appraisals	1) Management discount for property type and recent market volatility	10% - 30% discount
			Discounted cash flow	1) historical loss probability	2% - 20% discount
				2) Other factors (economic conditions, geographical considerations, prepayments, industry, etc.)	3% - 5% discount
OREO	$	18,131	Property appraisals	Management discount for property type and recent market volatility	10% - 30% discount

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 March 31, 2012 and December 31, 2011.

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	March 31, 2012				December 31, 2011
			Estimated				Estimated
	Carrying		fair		Carrying		fair
(in thousands)	value		value		value		value
Financial assets:
Cash and cash equivalents	$	51,794	$	51,794	$	59,210	$	59,210
Restricted cash	4,537		4,537		4,535		4,535
Investment securities available for sale	632,395		632,395		623,522		623,522
Investment securities held to maturity	225		232		232		238
Other investments	9,571		9,571		9,554		9,554
Loans — net	1,625,669		1,634,889		1,581,795		1,587,352
Accrued interest receivable	8,196		8,196		8,273		8,273
Interest rate swaps	7,127		7,127		7,943		7,943
Bank-owned life insurance	40,087		40,087		39,767		39,767
Financial liabilities:
Deposits	$	1,903,964	$	1,905,004	$	1,918,406	$	1,919,284
Other short-term borrowings	67,671		67,671		20,000		20,000
Securities sold under agreements to repurchase	118,499		121,343		127,948		130,990
Accrued interest payable	471		471		529		529
Junior subordinated debentures	72,166		72,166		72,166		72,166
Subordinated notes payable	20,984		22,310		20,984		22,380
Interest rate swaps	14,944		14,944		17,228		17,228

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

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

Restricted cash — The carrying amount of restricted cash is a reasonable estimate of fair value which is classified as Level 2.

Other investments — The estimated fair value of other investments approximates the carrying value and is classified as Level 2.

Loans — The fair value of loans is estimated by discounting future contractual cash flows using estimated market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  In computing the estimate of fair value for all loans, the estimated cash flows and/or carrying value have been reduced by specific and general reserves for loan losses. The fair value of loans is classified as Level 3 within the fair value hierarchy.

Accrued interest receivable/payable — The fair value of accrued interest receivable/payable approximates the carrying amount due to the short-term nature of these amounts and is classified as Level 2.

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, classified as Level 3.

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

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

Securities sold under agreements to repurchase — Estimated fair value is based on discounting cash flows for comparable instruments and is classified as Level 2.

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

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

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

The fair value estimates presented herein are based on pertinent information available to management at March 31, 2012 and December 31, 2011. 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.

11.Regulatory Matters

The following table shows capital amounts, ratios and regulatory thresholds at March 31, 2012:

At March 31, 2012
(in thousands)	Company			Bank
Shareholders’ equity	$	239,629		$	246,992
Disallowed intangible assets	(3,108		)	—
Unrealized gain on available for sale securities	(9,299		)	(9,299		)
Unrealized loss on cash flow hedges	4,526			—
Subordinated debentures	70,000			—
Disallowed deferred tax asset	(11,142		)	—
Other deductions	(129		)	—
Tier I regulatory capital	$	290,477		$	237,693
Subordinated notes payable	$	20,984		$	—
Allowance for loan losses	24,671			24,354
Total risk-based regulatory capital	$	336,132		$	262,047

	Company									Bank
At March 31, 2012	Risk-based						Leverage			Risk-based						Leverage
(in thousands)	Tier I			Total capital			Tier I			Tier I			Total capital			Tier I
Regulatory capital	$	290,477		$	336,132		$	290,477		$	237,693		$	262,047		$	237,693
Well-capitalized requirement	116,735			194,558			120,523			115,245			192,076			119,000
Regulatory capital - excess	$	173,742		$	141,574		$	169,954		$	122,448		$	69,971		$	118,693
Capital ratios	14.9		%	17.3		%	12.1		%	12.4		%	13.6		%	10.0		%
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.

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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, 2011. For a discussion of the segments included in our principal activities, see Note 9 to the notes to condensed consolidated financial statements.

Executive Summary

CoBiz Financial Inc. is a $2.5 billion financial holding company offering a broad array of financial service products to its target market of professionals, small and medium-sized businesses, and high-net-worth individuals primarily in Arizona and Colorado. 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 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 the net interest margin by increasing our noninterest income from complementary financial service firms that include investment banking, wealth management and insurance brokerage.

Industry Overview

At the March 2012 meeting, the Federal Open Market Committee (FOMC) kept the target range for federal funds rate at 0-25 basis points and anticipates that economic conditions will continue to warrant exceptionally low rates at least through late 2014. The FOMC expects to maintain a highly accommodative stance for monetary policy with moderate growth over coming quarters and a stable longer-term inflation outlook even though near-term inflation may temporarily rise on energy price inceases.The Board of Governors of the Federal Reserve System recent Monetary Policy Report to Congress notes that growth remains quite modest compared with previous economic expansions and a number of economic factors appear likely to continue to restrain the pace of activity into 2012.  Borrowing conditions for smaller businesses continues to be tighter than those for larger firms and demand for credit remained relatively weak. The consensus outlook for economic activity in terms of real GDP change ranges from +2.2% to +2.7% for 2012 and although the pace of expansion is expected to be gradual and restrained, consumers and businesses appear to be somewhat more optimistic in their outlook.

Labor markets have improved in 2012 with the national unemployment rate at 8.2% in March, the lowest level in almost three years, down from respective averages of 9.0% and 9.6% in 2011 and 2010.  The private sector is projected to add an average of 211,000 jobs per month through March 2012, building on employment gains from 2011 that averaged over 150,000 jobs per month.  Recent job gains leave employment levels roughly 5.0 million private-sector jobs short of pre-recession peak levels.

There have been 16 bank failures during 2012 through April 13, below the 26 and 41 failures through this time in 2011 and 2010, respectively.  The FDIC entered into loss-share agreements with seven of the 16 buyers of the closed banks estimating the cost to the deposit insurance fund at 24% of the failed banks’ assets.  There were 140, 157 and 92 bank failures during the years 2009, 2010 and 2011, respectively.  The FDIC’s “problem list” fell for the third consecutive quarter to 813 institutions, remaining well above the 252 problem institutions reported at the end of 2008.

In the fourth quarter of 2011, FDIC insured commercial banks and savings institutions reported a combined net income of over $26 billion, marking the tenth consecutive quarter that industry earnings have improved year over year.  Two-thirds of banks reported higher quarterly net income than a year earlier with earnings driven primarily by falling loss provisions which have now decreased nine consecutive quarters at December 2011 and were at the lowest level in 15 quarters.  Average return on assets (ROA) rose to 0.76% from 0.64% a year earlier for all

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insured institutions.  Average net interest margin was down from 3.76% to 3.60% despite increases in interest-bearing assets as more than a third of asset growth consisted of low-yielding balances with the Federal Reserve. Loan loss trends continue to improve as noncurrent loan balances declined for the seventh consecutive quarter, led by decreases in real estate construction and land development loan classes.  Total loans and leases at insured institutions rose by 1.8% during the fourth quarter of 2011 with Commercial and Industrial (C&I) loans posting gains for a sixth consecutive quarter.  Unlimited deposit insurance coverage, available until the end of 2012 under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), continues to attract new depositors and the FDIC reports that over the last six quarters insured institutions deposits have risen by over $1 trillion.  Significant uncertainty exists in the industry about the outcome and impact to banks upon expiration of the unlimited insurance law at the end of 2012.

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 were 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 quarter of 2012:

·Net income and earnings per share improved for the three months ended March 31, 2012 over the prior year.

INCOME STATEMENT	Three months ended March 31,
(in thousands, except per share amounts)	2012			2011
Net interest income before provision	$	23,303		$	24,244
Provision for loan losses	(70		)	1,640
Noninterest income	8,211			8,032
Net income	4,540			3,226
Diluted earnings per common share	$	0.10		$	0.06
Net interest margin	4.23		%	4.41		%
Return on average assets	0.75		%	0.54		%
Return on average shareholders’ equity	8.12		%	6.38		%

·Credit quality improvements resulted in a net reversal of provision for loan and credit losses for the three months ended March 31, 2012.

·Net interest margin decreased 18 basis points (0.18%) to 4.23% since the prior year quarter primarily due to the low interest rate environment.

BALANCE SHEET AND CREDIT QUALITY	At March 31,			At December 31,
(in thousands)	2012			2011
Total assets	$	2,458,289		$	2,423,504
Total loans	1,678,447			1,637,424
Total deposits	1,903,964			1,918,406
Total shareholders’ equity	239,629			220,082
Allowance for loan losses	$	52,778		$	55,629
Nonperforming assets	45,165			45,738
Allowance for loan and credit losses to total loans	3.15		%	3.40		%
Nonperforming assets to total assets	1.84		%	1.89		%

·The Company completed a common stock offering of 2,100,000 shares at a $6.00 per share price that generated net proceeds of $11.8 million.

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·Gross loans increased $41.0 million at March 31, 2012 from December 31, 2011, the strongest loan growth in last twelve quarters.

·The Bank formed a structured finance group to market asset-based lending under the direction of a senior banker with extensive experience.

·Noninterest-bearing demand deposits increased slightly to $723.0 million at March 31, 2012 and comprise 38.0% of total deposits.

·Other real estate owned (OREO) and repossessed assets decreased 6.9% to $17.2 million during the quarter ended March 31, 2012, with $10.8 million located in Colorado and $6.4 million in Arizona.  Excluding the largest OREO of $6.3 million in Colorado, OREO carrying values average  $0.6 million in Colorado and $0.04 million in Arizona.

·The allowance for loan and credit losses decreased to 3.15% of total loans at March 31, 2012, compared to 3.40% at December 31, 2011.

·The Company’s total risk-based capital ratio was 17.3% at March 31, 2012 compared to 16.3% at the end of 2011 and 15.5% at the prior year quarter end.

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, 2011.

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 March 31, 2012, 26.0% or $639.5 million of total assets represented assets recorded at fair value on a recurring basis.  At March 31, 2012, 0.7% or $14.9 million of total liabilities represented liabilities recorded at fair value on a recurring basis.  Assets recorded at fair value on a nonrecurring basis at March 31, 2012 represented $77.0 million or 3.1% of total assets.

At March 31, 2012, 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

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broker models, which are considered by the Company an unobservable input (Level 3), totaled $2.1 million at March 31, 2012.  Investments incorporating Level 3 inputs as part of their valuation represent less than 0.1% of total assets at the current report date.  The Company recognized losses of $0.3 million on the private-label MBS for the three months ended March 31, 2012.  Unrealized losses on the private-label MBS of $0.7 million were recorded in accumulated other comprehensive income at March 31, 2012.

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 March 31, 2012 and December 31, 2011, 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 and considered a Level 3 input.

OREO and repossessed assets represent 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 cost 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 March 31, 2012, the Company has recorded a deferred tax asset of $30.0 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, a valuation allowance may be established.

Financial Condition

Total assets at March 31, 2012 were $2.46 billion, increasing $34.8 million or 1.4% from $2.42 billion at December 31, 2011.  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 March 31, 2012 were $2.22 billion, increasing $15.2 million or 0.7% from $2.20 billion at December 31, 2011.  Liabilities are comprised primarily of deposits and securities sold under agreements to repurchase, collectively making up over 91% of total liabilities.  Shareholders’ equity at March 31, 2012 was $239.6 million, increasing $19.5 million or 8.9% from $220.1 million at December 31, 2011. During the first quarter of 2012, the Company completed an underwritten public offering of 2,100,000 shares of the Company’s common stock at a price of $6.00 per share.  The net proceeds to the Company, net of underwriting discounts, commissions and selling costs were $11.8 million.  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 remained relatively unchanged at 26.12% of total assets at March 31, 2012, from 26.13% at December 31, 2011.

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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.  Over 65% of the 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.

The net unrealized gain on available for sale securities increased $4.7 million to $15.0 million at March 31, 2012 from $10.3 million at December 31, 2011.  OTTI of $0.3 million on one private-label MBS was recognized during the three months ended March 31, 2012.  At March 31, 2012, an unrealized loss of $0.7 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)	March 31, 2012				% of	Unrealized			unrealized
AVAILABLE FOR SALE SECURITIES	Amortized cost		Fair value		portfolio	gain (loss)			gain (loss)
Mortgage-backed securities	$	403,591	$	415,804	65.8	$	12,213		81.4
U.S. government agencies	43,916		44,112		7.0	196			1.3
Trust preferred securities	98,958		101,641		16.1	2,683			17.9
Corporate debt securities	67,193		67,824		10.7	631			4.2
Private-label MBS	2,806		2,070		0.3	(736		)	(4.9	)
Municipal securities	933		944		0.1	11			0.1
Total available for sale securities	$	617,397	$	632,395	100.0	$	14,998		100.0

Loans.  Gross loans increased $41.0 million or approximately 2.51% to $1.68 billion at March 31, 2012 compared to December 31, 2011. During the three months ended March 31, 2012, the Company advanced $96.3 million in new credit relationships and an additional $72.5 million on existing lines.  Credit extensions during this period were offset by paydowns and maturities of $124.5 million and gross charge-offs of $3.3 million.

(in thousands)	March 31, 2012					December 31, 2011					March 31, 2011
LOANS	Amount			%		Amount			%		Amount			%
Commercial	$	594,812		36.6		$	568,962		36.0		$	562,220		35.7
Real estate - mortgage	805,694			49.6		784,491			49.5		776,801			49.4
Land acquisition & development	58,218			3.5		61,977			3.9		76,120			4.8
Real estate — construction	57,422			3.5		63,141			4.0		85,359			5.4
Consumer	116,833			7.2		116,676			7.4		99,457			6.3
Other	45,468			2.8		42,177			2.7		36,207			2.3
Total loans	$	1,678,447		103.2		$	1,637,424		103.5		$	1,636,164		103.9
Less allowance for loan losses	(52,778		)	(3.2	)	(55,629		)	(3.5	)	(61,995		)	(3.9	)
Total net loans	$	1,625,669		100.0		$	1,581,795		100.0		$	1,574,169		100.0

Growth in gross loans during the three months ended March 31, 2012 was primarily the result of growth of $25.8 million and $21.2 million in the commercial and real estate — mortgage segments, respectively.  Growth in commercial and real estate — mortgage loans was muted by declines in the Land A&D ($3.8 million) and real estate — construction ($5.7 million) loans.  The decrease in the Land A&D portfolio is the result of ongoing efforts to reduce high-risk loan concentration levels.

The allowance for loan losses decreased $2.9 million during the three months ended March 31, 2012 primarily as a result of net charge-offs of $2.8 million.  Reduction in the allowance for loan losses relates primarily to the commercial ($1.5 million) and consumer ($1.8 million) segments. See the Provision and Allowance for Loan and Credit Losses section and Note 6 to the condensed consolidated financial statements for additional discussion.

Deferred Income Taxes.  Deferred income taxes decreased $3.0 million to $30.0 million at March 31, 2012, from $33.0 million at December 31, 2011. The decrease was primarily related to the change in the fair value of our available for sale securities and interest rate swaps.

Other Real Estate Owned and Repossessed Assets.  OREO and repossessed assets decreased $1.3 million to $17.2 million at March 31, 2012 from $18.5 million at December 31, 2011.  During the three months ended March 31, 2012, the Company sold three properties generating proceeds of $0.9 million and a gain of $0.2 million.

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Offsetting the gain recognized on OREO sales were valuation adjustments of $0.6 million on OREO held at March 31, 2012.  At March 31, 2012, $10.8 million OREO was in Colorado and $6.4 million was in Arizona.

Other Assets.  Other Assets decreased $6.0 million to $31.8 million at Mach 31, 2012 from $37.8 million at December 31, 2011.  The change is primarily due to the receipt of the 2010 federal tax refund of $5.1 million that reduced the tax receivable.

Deposits.  Total deposits decreased $14.4 million to $1.90 billion at March 31, 2012 from $1.92 billion at December 31, 2011. Certificates of deposits $100,000 and over are the primary contributor to the $14.4 million decline in total deposits.  The Company’s deposit portfolio composition changed during the first quarter of 2012 as the Company began offering interest-bearing demand deposits in 2011 and eliminated its Eurodollar account product in 2012 in response to the Dodd-Frank Act repeal of the prohibition of paying interest on demand deposits.  Interest-bearing accounts earn interest at rates based on competitive market factors and our desire to increase or decrease certain types of maturities or deposits. Interest-bearing demand deposits comprised 6.1% of total deposits at March 31, 2012 compared to only 0.5% at December 31, 2011.  The Company’s noninterest-bearing deposit levels remained stable at 38.0% at March 31, 2012 from 37.6% at December 31, 2011.

The Company views its reciprocal Certificate of Deposit Account Registry Service® (CDARS) accounts as customer-related accounts.  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.

(in thousands)	March 31, 2012			December 31, 2011			March 31, 2011
DEPOSITS AND CUSTOMER REPURCHASE AGREEMENTS	Amount		% of Portfolio	Amount		% of Portfolio	Amount		% of Portfolio
NOW and money market	$	768,620	38.0	$	773,826	37.8	$	696,114	33.24
Savings	10,978		0.5	10,631		0.50	9,590		0.46
Eurodollar	—		—	97,748		4.80	91,042		4.35
Interest-bearing demand	115,377		5.7	10,385		0.50	—		—
Certificates of deposits under $100,000	32,231		1.6	34,575		1.70	39,860		1.91
Certificates of deposits $100,000 and over	165,798		8.2	180,790		8.80	234,830		11.23
Reciprocal CDARS	87,978		4.4	89,638		4.40	103,568		4.95
Total interest-bearing deposits	1,180,982		58.4	1,197,593		58.50	1,175,004		56.19
Noninterest-bearing demand deposits	722,982		35.7	720,813		35.20	758,280		36.26
Customer repurchase agreements	118,499		5.9	127,948		6.30	157,674		7.54
Total deposits and customer repurchase agreements	$	2,022,463	100.0	$	2,046,354	100.00	$	2,090,958	100.00

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 $9.4 million or 7.4% to $118.5 million at March 31, 2012, from $127.9 million at December 31, 2011.

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. A decline in deposits and growth in the loan portfolio increases the Company’s need for wholesale borrowings.  At March 31, 2012, short-term borrowings were $67.7 million compared to $20.0 million at December 31, 2011.  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 may 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 $8.5 million, or 19.4%, to $35.4 million at March 31, 2012, compared to $43.9 million at December 31, 2011.  The decrease is primarily due

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to a $5.3 million decline in accrued bonuses paid during the first quarter of 2012; a $2.3 million decrease in the fair value of derivatives in a liability position; and a $0.7 million decline in liabilities accrued for investment purchases in 2011 that settled in 2012.

Results of Operations

Overview

The following table presents the condensed consolidated statements of operations for the three months ended March 31, 2012 and 2011.

	For the three months ended March 31,					Increase/(decrease)
(in thousands)	2012			2011		Amount			%
Interest income	$	26,594		$	28,191	$	(1,597	)	(5.7	)
Interest expense	3,291			3,947		(656		)	(16.6	)
NET INTEREST INCOME BEFORE PROVISION	23,303			24,244		(941		)	(3.9	)
Provision for loan losses	(70		)	1,640		(1,710		)	(104.3	)
NET INTEREST INCOME AFTER PROVISION	23,373			22,604		769			3.4
Noninterest income	8,211			8,032		179			2.2
Noninterest expense	24,646			25,451		(805		)	(3.2	)
INCOME BEFORE INCOME TAXES	6,938			5,185		1,753			33.8
Provision for income taxes	2,398			1,959		439			22.4
NET INCOME	$	4,540		$	3,226	$	1,314		40.7

Annualized return on average assets for the three months ended March 31, 2012 and 2011 was 0.75% and 0.54%, respectively.  The annualized return on average shareholders’ equity for the three months ended March 31, 2012 and 2011 was 8.12% and 6.38%, respectively.  Improvement in both earnings metrics during the comparative periods is attributable to reduced provision for loan losses and noninterest expense. The Company’s efficiency ratio was 76.8% and 74.6% for the three months ended March 31, 2012 and 2011, respectively.

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

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 table sets 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 months ended March 31, 2012 and 2011.

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	Three months ended,
	March 31, 2012							March 31, 2011
				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	$	21,276		$	26	0.48	%	$	39,250		$	37	0.38	%
Investment securities (2)	634,960			5,399		3.40	%	629,085			5,991		3.81	%
Loans (2)(3)	1,647,846			21,536		5.17	%	1,645,283			22,369		5.44	%
Allowance for loan losses	(55,454		)					(65,855		)
Total interest-earning assets	$	2,248,628		$	26,961	4.63	%	$	2,247,763		$	28,397	4.89	%
Noninterest-earning assets	176,081							163,767
Total assets	$	2,424,709						$	2,411,530
Liabilities and Shareholders’ Equity
Deposits
NOW and money market	$	766,870		$	988	0.52	%	$	676,374		$	1,106	0.66	%
Interest-bearing demand	102,894			156		0.61	%	—			—		0.00	%
Savings	10,882			3		0.11	%	9,363			5		0.22	%
Eurodollar	—			—		0.00	%	97,667			182		0.75	%
Certificates of deposit
Brokered	—			—		0.00	%	21			—		1.37	%
Reciprocal	89,480			113		0.51	%	149,592			263		0.71	%
Under $100,000	33,360			59		0.71	%	41,291			107		1.05	%
$100,000 and over	167,463			327		0.79	%	229,409			589		1.04	%
Total interest-bearing deposits	$	1,170,949		$	1,646	0.57	%	$	1,203,717		$	2,252	0.76	%
Other borrowings
Securities sold under agreements to repurchase	131,072			107		0.32	%	156,799			207		0.53	%
Other short-term borrowings	49,478			36		0.29	%	6,261			5		0.32	%
Long term-debt	93,150			1,502		6.38	%	93,150			1,483		6.37	%
Total interest-bearing liabilities	$	1,444,649		$	3,291	0.91	%	$	1,459,927		$	3,947	1.09	%
Noninterest-bearing demand accounts	715,758							721,311
Total deposits and interest-bearing liabilities	2,160,407							2,181,238
Other noninterest-bearing liabilities	39,403							24,917
Total liabilities	2,199,810							2,206,155
Total equity	224,899							205,375
Total liabilities and equity	$	2,424,709						$	2,411,530
Net interest income - taxable equivalent				$	23,670						$	24,450
Net interest spread						3.72	%						3.80	%
Net interest margin						4.23	%						4.41	%
Ratio of average interest-earning assets to average interest-bearing liabilities	155.65		%					153.96		%

(1)Average yield or cost for the three months ended March 31, 2012 and 2011 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 taxable equivalent basis for the three months ended March 31, 2012 decreased to $23.7 million from $24.5 million in the year-earlier period.  Average interest-earning assets of $2.25 billion were relatively unchanged from March 31, 2011, with lower yields on the investment securities and loan portfolios putting downward pressure on the net interest margin.  The average net loan portfolio for the three months ended March 31, 2012 and 2011, comprised 71% and 70% of average interest-bearing assets, respectively.  The investment portfolio for the same periods was stable, accounting for 28% of average interest-earning assets.  Including noninterest bearing deposits, the Company’s overall deposit interest cost was 35 basis points (0.35%) and 47 basis points for the three months ended March 31, 2012 and 2011, respectively.  Rates on average interest-bearing liabilities for the three months ended March 31, 2012 decreased 18 basis points to 0.91% from the comparable prior year period, driven by lower CD rates.

Noninterest Income

The following table presents noninterest income for the three months ended March 31, 2012 and 2011.

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	For the three months ended March 31,				Increase/(decrease)
(in thousands)	2012		2011		Amount			%
NONINTEREST INCOME
Service charges	$	1,245	$	1,239	$	6		0.5
Investment advisory and trust income	1,231		1,426		(195		)	(13.7	)
Insurance income	3,439		3,393		46			1.4
Investment banking income	74		744		(670		)	(90.1	)
Other income	2,222		1,230		992			80.7
Total noninterest income	$	8,211	$	8,032	$	179		2.2

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 (P&C); 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 stable during all periods shown in the above table.

Investment Advisory and Trust Income.  Investment advisory and trust income decreased in the current quarter compared to the prior year.  Fees earned are generally based on a percentage of the assets under management (AUM) and market volatility has a direct impact on earnings.  At March 31, 2012, discretionary AUM, comprised primarily of equity securities, decreased $57.7 million to $761.5 million from $819.2 million one year earlier.

Insurance Income.  Insurance income is derived from three main areas: wealth transfer, benefits consulting, and P&C. 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 P&C is a more recurring revenue source as policies and contracts generally renew or rewrite on an annual or more frequent basis.  Insurance income was stable for the three months ended March 31, 2012 compared to the prior year with a revenue increase in the wealth transfer division offsetting a revenue decline in the P&C division.

For the three months ended on March 31, 2012 and 2011, insurance revenues were earned from the following product lines:

	Three months ended March 31,
	2012		2011
Wealth transfer and executive compensation	29.1	%	23.0	%
Benefits consulting	31.6	%	27.6	%
Property and casualty	38.5	%	47.2	%
Fee income	0.8	%	2.2	%
	100.0	%	100.0	%

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 months ended March 31, 2012, decreased from the prior year period as a significant number of active deals closed in the fourth quarter of 2011.

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 $1.0 million for the three months ended March 31, 2012 compared to the same period in 2011, due to revenue gains from equity method investments offset by lower revenue earned on the sale of interest-rate swaps to commercial banking clients.

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Noninterest Expense

The following table presents noninterest expense for the three months ended March 31, 2012 and 2011.

	For the three months ended March 31,				Increase/(decrease)
(in thousands)	2012		2011		Amount			%
NONINTEREST EXPENSE
Salaries and employee benefits	$	15,573	$	14,723	$	850		5.8
Stock-based compensation expense	489		424		65			15.3
Occupancy expenses, premises and equipment	3,533		3,354		179			5.3
Amortization of intangibles	160		160		—			—
FDIC and other assessments	491		1,340		(849		)	(63.4	)
OREO and loan workout costs	576		1,193		(617		)	(51.7	)
Net OTTI on securities recognized in earnings	255		234		21			9.0
Loss on securities, other assets and OREO	198		1,128		(930		)	(82.4	)
Other operating expenses	3,371		2,895		476			16.4
Total noninterest expense	$	24,646	$	25,451	$	(805	)	(3.2	)

Salaries and Employee Benefits.  Salaries and employee benefits increased $0.9 million for the three months ended March 31, 2012 compared to the same period in 2011.  The quarterly increase is primarily due to higher 2012 bonus accruals and vacation expense offset in part by lower claims on the Company’s self-insured plan.  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. The Company’s full-time equivalent employees decreased to 534 at March 31, 2012 from 543 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 increased during the three months ended March 31, 2012 compared to the prior year period due to additional restricted stock issued during the first quarter of 2012.  The Company recognizes compensation costs for the grant-date fair value of awards issued to employees and 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 increased $0.2 million during the three months ended March 31, 2012 compared to the same period in 2011 largely due to depreciation on new software and hardware and system maintenance contract expenses.

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.  FDIC assessment calculations and base rates changed in the second quarter of 2011, resulting in reduced deposit insurance costs.  FDIC and other assessments decreased $0.8 million for the three months ended March 31, 2012 compared to the prior year period.

OREO and Loan Workout Costs.  Carrying costs and workout expenses of nonperforming loans and OREO decreased $0.6 million compared to the same period in 2011. These costs are directly correlated to levels of nonperforming assets during these periods and consistent with the decrease of $18.9 million or 29% in nonperforming assets to $45.2 million at March 31, 2012 from $64.1 million one year earlier.

Net OTTI on Securities Recognized in Earnings.  Net OTTI losses on securities include credit losses recognized on available for sale securities.  OTTI of $0.3 million and $0.2 million recognized during the respective three months ended March 31, 2012 and 2011, relate to private-label MBS that are credit impaired.

Loss on Securities, Other Assets, and OREO. Loss on securities, other assets and OREO recognized for the periods presented were comprised of the following:

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	Three months ended March 31,					Increase/(decrease)
(in thousands)	2012			2011		$			%
OREO and repossessed assets	$	419		$	1,101	$	(682	)	(61.9	)
Investment securities	(221		)	—		(221		)	(100.0	)
Other	—			27		(27		)	(100.0	)
	$	198		$	1,128	$	(930	)	(82.4	)

During the current period the Company recorded charges of $0.6 million as a valuation allowance against its OREO portfolio.  Charges were offset by $0.2 million of gains realized on the sale of OREO.

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 months ended March 31, 2012 increased $0.5 million compared to the prior year period.  The increase is attributed to higher marketing expense and certain banking product service contracts.

Provision and Allowance for Loan and Credit Losses

The following table presents the provision for loan and credit losses for the three months ended March 31, 2012 and 2011:

	Three months ended March 31,					Increase /
(in thousands)	2012			2011		(decrease)
Provision for loan losses	$	(70	)	$	1,640	$	(1,710	)
Provision for credit losses (included in other expenses)	—			—		—
Total provision for loan and credit losses	$	(70	)	$	1,640	$	(1,710	)

The provision for loan and credit losses decreased $1.7 million during the three months ended March 31, 2012 over the comparable prior year period.  This is primarily attributable to an overall improvement in asset quality.

All loans are continually monitored to identify potential problems with repayment and collateral deficiency.  At March 31, 2012, the allowance for loan and credit losses was 3.15% of total loans, compared to 3.40% at December 31, 2011, and 3.79% at March 31, 2011.  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 months ended March 31, 2012, the Company had net charge-offs of $2.8 million compared to $5.5 million for the same period a year earlier.  The declining trend in net charge-offs is consistent with the decrease in quarterly loan loss provision and the continued improvement in asset quality during the same period.

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

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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.

(in thousands)	Three months ended March 31, 2012			Year ended December 31, 2011			Three months ended March 31, 2011
Balance of allowance for loan losses at beginning of period	$	55,629		$	65,892		$	65,892
Charge-offs:
Commercial	(507		)	(4,559		)	(447		)
Real estate — mortgage	(15		)	(7,064		)	(1,207		)
Land acquisition & development	(2,159		)	(1,635		)	(1,173		)
Real estate — construction	—			(5,118		)	(3,285		)
Consumer	(621		)	(309		)	(182		)
Other	(10		)	(61		)	—
Total charge-offs	(3,312		)	(18,746		)	(6,294		)
Recoveries:
Commercial	66			1,377			137
Real estate — mortgage	108			1,472			248
Land acquisition & development	344			1,216			309
Real estate — construction	—			132			—
Consumer	13			281			63
Other	—			3			—
Total recoveries	531			4,481			757
Net charge-offs	(2,781		)	(14,265		)	(5,537		)
Provision for loan losses charged to operations	(70		)	4,002			1,640
Balance of allowance for loan losses at end of period	$	52,778		$	55,629		$	61,995
Balance of allowance for credit losses at beginning of period	$	35		$	61		$	61
Provision for credit losses charged to operations	—			(26		)	—
Balance of allowance for credit losses at end of period	$	35		$	35		$	61
Total provision for loan and credit losses charged to operations	$	(70	)	$	3,976		$	1,640
Ratio of net charge-offs to average loans	0.17		%	0.86		%	0.34		%
Average loans outstanding during the period	$	1,647,846		$	1,651,247		$	1,645,283

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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(in thousands)	At March 31, 2012			At December 31, 2011			At March 31, 2011
Nonperforming loans:
Loans 90 days or more past due and still accruing interest	$	—		$	212		$	1,238
Nonaccrual loans:
Commercial	3,365			3,105			7,990
Real estate - mortgage	12,883			9,295			12,054
Land acquisition & development	4,541			5,112			7,819
Real estate - construction	6,377			6,985			8,829
Consumer and other	775			2,527			2,539
Total nonaccrual loans	27,941			27,024			39,231
Total nonperforming loans	27,941			27,236			40,469
OREO and repossessed assets	17,224			18,502			23,581
Total nonperforming assets	$	45,165		$	45,738		$	64,050
Allowance for loan losses	$	52,778		$	55,629		$	61,995
Allowance for credit losses	35			35			61
Allowance for loan and credit losses	$	52,813		$	55,664		$	62,056
Nonperforming assets to total assets	1.84		%	1.89		%	2.65		%
Nonperforming loans to total loans	1.66		%	1.66		%	2.47		%
Nonperforming loans and OREO to total loans and OREO	2.66		%	2.76		%	3.86		%
Allowance for loan and credit losses to total loans (excluding loans held for sale)	3.15		%	3.40		%	3.79		%
Allowance for loan and credit losses to nonperforming loans	189.02		%	204.38		%	153.34		%

Nonperforming assets of $45.2 million at March 31, 2012 were equally distributed between the Company’s two markets, Colorado and Arizona.  Nonperforming loans of $27.9 million are primarily comprised of real estate — mortgage loans (46%), real estate - construction (23%), and land A&D (16%).  Nonperforming assets have decreased steadily since its peak in the fourth quarter of 2009.  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

Certain financial metrics and discussion of the results for the three months ended March 31, 2012 and 2011, of each operating segment, are presented below.

	Commercial Banking
	Three months ended March 31,				Increase/(decrease)
(in thousands)	2012		2011		Amount			%
Income Statement
Net interest income	$	24,663	$	25,437	$	(774	)	(3.0	)
Provision for loan losses	637		1,327		(690		)	(52.0	)
Noninterest income	3,430		2,459		971			39.5
Noninterest expense	9,648		8,098		1,550			19.1
Provision for income taxes	6,523		6,952		(429		)	(6.2	)
Net income before management fees and overhead	11,285		11,519		(234		)	(2.0	)
Management fees and overhead allocations, net of tax	4,718		6,145		(1,427		)	(23.2	)
Net income	$	6,567	$	5,374	$	1,193		22.2
Other information
Full-time equivalent employees	205.3		206.9

Earnings for the Commercial Banking segment during the three months ended March 31, 2012, grew to $6.6 million, an improvement of over 22% compared to the prior year period.  Net interest income fell as a result of lower yields on the loan and investment portfolios.  Lower provision for loan loss in the current period is directly related to improved asset quality and offset in part lower net interest income.  Noninterest expense increases

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during the quarter were due to higher salary, bonus and employee benefits and occupancy costs offset by year over year expense reductions in FDIC assessments and OREO and loan workout expenses.

	Investment Banking Services
	Three months ended March 31,						Increase/(decrease)
(in thousands)	2012			2011			Amount			%
Income Statement
Net interest income	$	3		$	3		$	—		—
Noninterest income	74			744			(670		)	(90.1	)
Noninterest expense	871			893			(22		)	(2.5	)
Benefit for income taxes	(303		)	(58		)	(245		)	(422.4	)
Net loss before management fees and overhead	(491		)	(88		)	(403		)	(458.0	)
Management fees and overhead allocations, net of tax	40			35			5			14.3
Net loss	$	(531	)	$	(123	)	$	(408	)	(331.7	)
Other information
Full-time equivalent employees	18.6			16.6

Earnings for the Investment Banking segment decreased $0.4 million during the three month period ended March 31, 2012, compared to the year earlier period.  The segment did not close any deals in the current period as a significant portion of active engagements closed in the fourth quarter of 2011.

	Wealth Management
	Three months ended March 31,						Increase/(decrease)
(in thousands)	2012			2011			Amount			%
Income Statement
Net interest income	$	(8	)	$	(13	)	$	5		38.5
Noninterest income	2,261			2,280			(19		)	(0.8	)
Noninterest expense	2,384			2,388			(4		)	(0.2	)
Benefit for income taxes	(44		)	(54		)	10			18.5
Net loss before management fees and overhead	(87		)	(67		)	(20		)	(29.9	)
Management fees and overhead allocations, net of tax	165			151			14			9.3
Net loss	$	(252	)	$	(218	)	$	(34	)	(15.6	)
Other information
Full-time equivalent employees	52.9			55.9

Net loss for the Wealth Management segment was relatively unchanged for the first quarter of 2012 compared to 2011.

Revenue generated from wealth transfer transactions (typically facilitated through the use of whole life insurance products) increased 20% during the three months ended March 31, 2012, compared to the prior year periods. Insurance revenues generated by wealth transfer are transactional by nature, with the majority of revenues earned at the time of the sale. Whole life products generally require large, up-front cash premiums and over the recent past these revenues have been lower than historical standards due to broader economic uncertainties.

Investment advisory revenues are generally a percentage of assets under management (AUM) and provide a revenue stream that can fluctuate with movement in the equity markets.  Discretionary AUM at March 31, 2012 decreased $57.7 million or 7.0% to $761.5 million compared to $819.2 million a year earlier.  Declines in AUM had an adverse impact on noninterest income, offset in part by the wealth transfer revenue increase.

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	Insurance
	Three months ended March 31,						Increase/(decrease)
(in thousands)	2012			2011			Amount			%
Income Statement
Net interest income	$	—		$	(2	)	$	2		100.0
Noninterest income	2,410			2,539			(129		)	(5.1	)
Noninterest expense	2,328			2,361			(33		)	(1.4	)
Provision for income taxes	36			71			(35		)	(49.3	)
Net income before management fees and overhead	46			105			(59		)	(56.2	)
Management fees and overhead allocations, net of tax	103			86			17			19.8
Net income (loss)	$	(57	)	$	19		$	(76	)	(400.0	)
Other information
Full-time equivalent employees	53.6			53.1

Earnings for the three months March 31, 2012 declined year over year due primarily to attrition in the P&C business.  Revenue losses were offset in part by modest increases from the employee benefits brokerage business line.

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.

	Corporate Support
	Three months ended March 31,						Increase/(decrease)
(in thousands)	2012			2011			Amount			%
Income Statement
Net interest income	$	(1,355	)	$	(1,181	)	$	(174	)	(14.7	)
Provision for loan losses	(707		)	313			(1,020		)	(325.9	)
Noninterest income	36			10			26			260.0
Noninterest expense	9,415			11,711			(2,296		)	(19.6	)
Benefit for income taxes	(3,814		)	(4,952		)	1,138			23.0
Net loss before management fees and overhead	(6,213		)	(8,243		)	2,030			24.6
Management fees and overhead allocations, net of tax	(5,026		)	(6,417		)	1,391			21.7
Net loss	$	(1,187	)	$	(1,826	)	$	639		35.0
Other information
Full-time equivalent employees	202.5			210.8

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 decreased $0.6 million for the three months ended March 31, 2012, compared to the year earlier periods.  The primary component of net interest income (expense) for the

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segment is interest expense related to the Company’s long-term debt. The decrease in net interest income is attributable to a decrease in interest income on loans 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 overhead not directly associated with another segment.  Noninterest expense decreased $2.3 million during the three months ended March 31, 2012, primarily as a result of a decrease in loan workout expenses and other legal and professional expenses incurred in conjunction with the loan portfolio owned by the Parent.

Contractual Obligations and Commitments

Summarized below are the Company’s contractual obligations (excluding deposit liabilities) to make future payments at March 31, 2012:

			After one		After three
	Within		but within		but within		After
(in thousands)	one year		three years		five years		five years		Total
Federal funds purchased (1)	$	2,671	$	—	$	—	$	—	$	2,671
FHLB overnight funds purchased (1)	65,000		—		—		—		65,000
Repurchase agreements (1)	118,499		—		—		—		118,499
Operating lease obligations	5,704		10,268		8,050		6,293		30,315
Long-term debt obligations (2)	6,017		29,937		7,196		115,598		158,748
Preferred Stock, Series C dividend (3)	2,868		5,737		59,517		—		68,122
Supplemental executive retirement plan	—		4,798		—				4,798
Total contractual obligations	$	200,759	$	50,740	$	74,763	$	121,891	$	448,153

(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 while principal repayment of the subordinated notes payable is assumed to be its first call date (See Note 8 to the Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2011).  Interest on the junior subordinated debentures is calculated at the fixed rate associated with the applicable hedging instrument through the instrument maturity date (see Note  7 to the condensed consolidated financial statements) and then at the current 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”, $9.0 million due “After one but within three years”, $7.2 million due “After three but within five years” and $43.4 million due “After five years.”  Variable interest rate payments on junior subordinated debentures after maturity of the related fixed interest rate swap hedge and actual interest payments will differ based on actual LIBOR and actual amounts outstanding for the applicable periods.

(3)Series C Preferred Stock issued to U.S. Department of Treasury in September 2011 includes dividends payable at 5% on $57.4 million.  The preferred shares are shown in the table as being due in the “After three but within five years” category which assumes the $57.4 million in preferred stock will be redeemed in the year prior to the contractual dividend rate step up to 9% effective 4.5 years after issuance.

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The contractual amount of the Company’s financial instruments with off-balance sheet risk at March 31, 2012, 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	$	395,821	$	138,586	$	17,847	$	2,504	$	554,758
Standby letters of credit	43,373		2,368		3,223		—		48,964
Commercial letters of credit	420		—		—		—		420
Unfunded commitments for unconsolidated investments	6,721		—		—		—		6,721
Company guarantees	1,412		—		—		—		1,412
Total commitments	$	447,747	$	140,954	$	21,070	$	2,504	$	612,275

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 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 $35.0 million of total loan commitments at March 31, 2012 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 the 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 March 31, 2012 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 or the FRB.  Longer-term liquidity needs may be met by selling securities available for sale or raising additional capital.

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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 $51.8 million at March 31, 2012, compared to $59.2 million at December 31, 2011. 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 increased to 88.2% at March 31, 2012, from 85.4% at December 31, 2011. This has allowed the Company to maintain low levels of wholesale borrowings which historically bear a higher cost than core deposits. At March 31, 2012, the Company had $67.7 million in outstanding wholesale borrowings, up from $20.0 million at December 31, 2011.  Average wholesale borrowings were $49.5 million during the three months ended March 31, 2012, an increase from the 2011 fiscal year average of $14.1 million.

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 March 31, 2012, the Bank has approved federal funds purchase lines with seven correspondent banks with an aggregate credit line of $165.0 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 March 31, 2012, totaled $489.1 million.  Available funding is comprised of $162.3 million through the unsecured federal fund lines and $326.8 million in secured FHLB borrowing capacity. The Company had $115.2 million in securities available to be pledged as collateral for additional FHLB borrowings at March 31, 2012.  Access to funding through correspondent lines is dependent upon the cash position of the correspondent banks and there may be times when certain lines are not available.  In addition, certain lines require a one day rest period after a specified number of consecutive days of accessing the lines. The Company believes it has sufficient borrowing capacity and diversity in correspondent banks to meet its needs.

At the holding company level, our primary sources of funds are dividends paid from the Bank and fee-based subsidiaries, management fees assessed to the Bank and the fee-based 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

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Corporation Improvement Act of 1991 provides that the Bank cannot pay a dividend if it will cause the Bank to be “undercapitalized.”  At March 31, 2012, 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.  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 March 31, 2012, the holding company had a liquidity position that exceeds the policy limit and we believe the Company has the ability to continue paying dividends.

At March 31, 2012, shareholders’ equity totaled $239.6 million, a $19.5 million increase from December 31, 2011.  The increase was primarily due to an underwritten public offering of 2,100,000 shares of the Company’s common stock at a price of $6.00 per share completed during the first quarter of 2012.  The net proceeds to the Company, net of underwriting discounts, commissions and selling costs were $11.8 million.  Also contributing to the increase was a $0.6 million increase in common surplus relating to stock-based compensation, sales of stock under the ESPP plan and stock exercises; an increase of $3.7 million in accumulated other comprehensive income associated with changes in the fair value of derivatives and available for sale securities; and net income of $4.5 million for the three months ended March 31, 2012.  Offsetting these increases were common and preferred dividends of $1.1 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.

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 March 31, 2012, the Bank was well-capitalized with a Tier 1 Capital ratio of 12.4% and Total Capital ratio of 13.6%. 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 March 31, 2012, was 14.9% and its Total Capital ratio 17.3%.  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.

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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.

·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, 2011.

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 March 31, 2012, 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, 2011.

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 March 31, 2012, 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

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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.
	31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
	31.2	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
	32.1	Section 1350 Certification of the Chief Executive Officer.
	32.2	Section 1350 Certification of the Chief Financial Officer.
	101	Pursuant 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 March 31, 2012 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.

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:	April  27, 2012	By:	/s/ Steven Bangert
			Steven Bangert
			Chairman and Chief Executive Officer
Date:	April  27, 2012	By:	/s/ Lyne B. Andrich
			Lyne B. Andrich
			Executive Vice President and Chief Financial Officer

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