UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

FORM 10-K

(Mark one)

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

 

For the fiscal year ended December 31, 2006.

 

OR

 

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

For the transition period from                           to                              

 

Commission file number 001-15955

 

COBIZ INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:  (303) 293-2265

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

 

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

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Yes o                          No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o                       No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x                           No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
Large Accelerated Filer  o	Accelerated Filer  x	Non-accelerated Filer  o_____

 

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

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant as of June 30, 2006 computed by reference to the closing price on the NASDAQ Global Select Market was $335,190,472.  Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock (as publicly reported by such persons pursuant to Section 13 and Section 16 of the Securities Exchange Act of 1934) have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant’s sole class of common stock on March 5, 2007, was 23,832,862.

Documents incorporated by reference: Portions of the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2007 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

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

 

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A WARNING ABOUT FORWARD-LOOKING STATEMENTS

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

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

PART I

Item 1.  Business

Overview

CoBiz Inc. (“CoBiz” or the “Company”) is a diversified financial holding company headquartered in Denver, Colorado.  Through our subsidiary companies, we combine elements of personalized service found in community banks with sophisticated financial products and services traditionally offered by larger regional banks that we market to our targeted customer base of professionals, high-net-worth individuals and small to mid-sized businesses.  As of December 31, 2006, we had total assets of $2.1 billion, net loans of $1.5 billion, and deposits of $1.5 billion.  We were incorporated in Colorado on February 19, 1980, as Equitable Bancorporation, Inc.  Prior to its initial public offering in June 1998, the Company was acquired by a group of private investors in September 1994 who are still current shareholders.

Our wholly owned subsidiary CoBiz Bank, N.A. (the “Bank”), is a full-service business banking institution serving two markets, Colorado and Arizona.  In Colorado, the Bank operates under the name Colorado Business Bank and has 11 Colorado locations, including eight in the Denver metropolitan area, two in Boulder and one just west of Vail.  In Arizona, the Bank operates under the name Arizona Business Bank and has seven locations serving the Phoenix metropolitan area and the surrounding area of Maricopa County. Each of the Bank’s locations is headed up by a local president with substantial decision-making authority. We focus on attracting and retaining high quality personnel by maintaining an entrepreneurial culture and a decentralized business approach.  We centrally support our bank and fee-based businesses with back office services from our downtown Denver office.

Our banking products are complemented by our fee-based business lines, which we first introduced in 1998 when we began offering trust and estate administration services.  Through a combination of internal growth and acquisitions, our fee-based business lines have grown to include employee benefits brokerage and consulting, insurance brokerage, wealth transfer planning, investment banking and investment management services. We believe offering such complementary products allows us to both broaden our

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relationships with existing customers and attract new customers to our core business. In addition, we believe the fees generated by these services will increase our non-interest income and decrease our dependency on net interest income.

2003 Acquisitions

On April 1, 2003, we acquired Alexander Capital Management Group, Inc., an SEC-registered investment adviser firm based in Denver, Colorado. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of Alexander Capital Management Group, Inc.’s operations have been included in our consolidated financial statements since the date of purchase.  The acquisition of Alexander Capital Management Group, Inc. was completed through a merger of Alexander Capital Management Group, Inc. into a wholly owned subsidiary that was formed in order to consummate the transaction and then a subsequent contribution of the assets and liabilities of the merged entity into a newly formed limited liability company called Alexander Capital Management Group, LLC (“ACMG”).  The former owners of Alexander Capital Management Group, Inc. have retained a 20% profits interest in ACMG.

On April 14, 2003, we acquired Financial Designs Ltd. (“FDL”), a provider of wealth transfer and employee benefit services based in Denver, Colorado. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of FDL’s operations have been included in the consolidated financial statements since the date of purchase.  The acquisition of FDL was completed through a merger of FDL into CoBiz Connect, Inc., a wholly owned subsidiary of CoBiz that has provided employee benefits consulting services since 2000.  The surviving corporation continues to use the FDL name.

Operating Segments

We operate six distinct segments, as follows:

·                  Business Banking in the Colorado market through Colorado Business Bank

·                  Business Banking in the Arizona market through Arizona Business Bank

·                  Investment Banking services

·                  Investment Advisory and Trust

·                  Insurance

·                  Corporate Support and Other

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

 

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For a more complete discussion of the segments included in our principal activities and for certain financial information for each segment, see Note 19 to our Consolidated Financial Statements.

Business Strategy

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

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

The following table details the percentage of deposits held by the Company in Arizona and Colorado, as well as other banks headquartered in our market areas and out-of-state banks as reported by the Federal Deposit Insurance Corporation (“FDIC”) as of June 30, 2006.

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With our core banking franchise and four fee-based businesses, we have a large customer base of commercial and high-net-worth individuals that fit the target profile of each business line.  To facilitate organic growth and cross-referrals between our business lines, we created CoBiz Advisors in 2006 to focus on bringing a concentration of knowledge about each business line to a designated function. The mission of CoBiz Advisors is to unify our company for the benefit of clients and shareholders by serving as an additional resource for internal and external customers in delivering the full suite of the Company’s products and services.

De novo branching.  We also intend to continue exploring growth opportunities to expand through de novo branching in areas with high concentrations of our target customers in Colorado, Arizona and other western states.  This strategy has been successful in Colorado and is being implemented in the Arizona market.  Since the acquisition of the Company by private investors in 1994, we have introduced nine Colorado and five Arizona de novo locations.

Fee-based business lines.  We began offering trust and estate administration services in 1998; employee benefits brokerage and consulting in 2000; property & casualty (“P&C”) insurance brokerage and investment banking services in 2001; and high-end life insurance, wealth transfer planning and investment management services in 2003.  We believe offering such complementary products allows us to both broaden our relationships with existing customers and attract new customers to our core business. In addition, we believe the fees generated by these services will increase our non-interest income and decrease our dependency on net-interest income.  During 2003, we expanded our investment banking presence by opening an office in Arizona.  In 2005, we expanded our P&C line in Arizona through the addition of an experienced producer familiar with the market.  We are also exploring the expansion of our investment management presence in Arizona.  We feel that this strategy, similar to our de novo approach in banking, is a cost-effective way for our fee-based business lines to enter the Arizona market.

Establish strong brand awareness.   In late 2005, we began work to clarify and strengthen the CoBiz brand, focusing on the relationship between each of our business lines, our unique breadth of services and our exceptional reputation in the markets we serve. The project analysis, which was completed in 2006, included extensive customer and market research to help develop a cohesive and comprehensive approach to our internal and external communications efforts while leveraging the power of each subsidiary as part of the larger company.  We expect to continue our branding initiative in 2007, further refining the brand platform, including unifying the look and feel of the CoBiz identity across the franchise.

New product lines.  We also will seek to grow through the addition of new product lines. Our product development efforts are focused on providing enhanced credit, treasury management, investment, insurance, deposit and trust products to our target customer base.

In the past few years, we have:

·                  Greatly expanded our lending capabilities to allow for the origination of larger and more complex real estate loans, leveraged financings and cash flow lending.

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·                  Implemented a number of new deposit products, including Health Savings Accounts, expanded money market accounts, retail lockbox, an online bill pay feature and remote deposit capture for our commercial clients.  We also began offering a new service for large deposit customers that provides deposit insurance in excess of the FDIC limit of $100,000.  The service, Certificate of Deposit Account Registry Service (“CDARS”), matches customer funds in excess of the FDIC limit within a network of participating banks so that all participating banks are holding less than the FDIC limit.

·                  Enhanced our international products to facilitate foreign currency transactions.

·                  Introduced an interest-rate hedge program to our customers.  The interest-rate hedge program allows us to offer derivative products such as swaps, caps, floors and collars to assist our customers in managing their interest-rate risk profile.  In order to eliminate the interest-rate risk associated with offering these products, the Company enters into derivative contracts with third parties that are a perfect offset to the customer contracts.

·                  Created a 401(k) consulting unit within our employee benefits group to further enhance the services provided to our customers.

·                  Formed GMB Business Advisors to focus on investment banking transactions of $2-15 million.  GMB Business Advisors, a sub-set of our investment banking subsidiary, Green Manning & Bunch, Ltd. (“GMB”), represents buyers and sellers on transactions that are smaller than those typically serviced by GMB.

·                  Created CoBiz Select Portfolios, a group of diversified investment portfolios ranging from conservative to aggressive which is managed by ACMG.

Expanding existing banking relationships.  We are normally not a transactional lender and typically require that borrowers enter into a multiple-product banking relationship with us, including deposits and treasury management services, in connection with the receipt of credit from the Bank. We believe that such relationships provide us with the opportunity to introduce our customers to a broader array of the products and services offered by us and generate additional non-interest income.  In addition, we believe this philosophy aids in customer retention.

Capitalizing on the use of technology.  We believe we have been able to distinguish ourselves from traditional community banks operating in our market through the use of technology. Our data-processing system allows us to provide upgraded Internet banking, expanded treasury management products, check and document imaging, as well as a 24-hour voice response system. Other services currently offered by the Bank include controlled disbursement, repurchase agreements and sweep investment accounts.  In addition to providing sophisticated services for our customers, we utilize technology extensively in our internal systems and operational support functions to improve customer service, maximize efficiencies, and provide management with the information and analysis necessary to manage our growth effectively.

Emphasizing high quality customer service.  We believe our ability to offer high quality customer service provides us with a competitive advantage over many regional banks that operate in our market areas. We emphasize customer service in all aspects of our operations and identify customer service as an integral component of our employee training programs. Moreover, we are constantly exploring methods to make banking an easier and more convenient process for our customers. For example, we offer a courier service to pick up deposits for customers who are not in close proximity to any of the Bank’s 18

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locations or simply do not have the time to go to the Bank.  We also offer remote deposit capture, which allows our customers to make deposits electronically from their office utilizing our software solution.

Maintaining asset quality and controlling interest rate risk.  We seek to maintain asset quality through a program that includes regular reviews of loans by responsible loan officers and ongoing monitoring of the loan portfolio by a loan review officer who reports to the President of the Company but submits reports directly to the audit committee of our board of directors.  As of December 31, 2006, our ratio of nonperforming loans to total loans was 0.09%, compared to 0.07% as of December 31, 2005, which is significantly better than industry averages.

We seek to control our exposure to changing interest rates by attempting to maintain an interest-rate profile within a narrow range around an earnings neutral position. An important element of this focus has been to emphasize variable-rate loans and investments funded by deposits that also mature or re-price over periods of 12 months or less.  We have also enhanced our interest-rate risk modeling through the acquisition of a new asset/liability system and use of interest rate swaps in 2004.

Achieving efficiencies and economies of scale through centralized administrative and support operations.  We seek to maximize operational and support efficiencies in a manner consistent with maintaining high quality customer service. We have consolidated various management and administrative functions, including accounting, data processing, bookkeeping, credit administration, loan operations, and investment and treasury management services at our downtown Denver office. We believe this structure allows our business development professionals to focus on customer service and sales strategies directed at each community that we serve.

Acquisitions.  We intend to continue to explore acquisitions of financial institutions or financial service entities, including opportunities in Colorado, Arizona and other western states.  Our approach to expansion is predicated on recruiting key personnel to lead new initiatives.  While we normally consider an array of new locations and product lines as potential expansion initiatives, we will generally proceed only upon identifying quality management personnel with a loyal customer following in the community or experienced in the product line that is the target of the initiative. We believe that, by focusing on individuals who are established in their communities and experienced in offering sophisticated financial products and services, we enhance our market position and add growth opportunities.

Market Areas Served

We operate in two of the fastest growing western markets in the United States — Colorado and Arizona. These markets are currently dominated by a number of large regional and national financial institutions that have acquired locally based banks. The Company’s success is dependent to a significant degree on the economic conditions of these two geographical markets.  Our market areas include the Denver metropolitan area, which is comprised of the counties of Denver, Boulder, Adams, Arapahoe, Douglas, Broomfield and Jefferson; the Vail Valley, in Eagle County; and the Phoenix metropolitan area, which is located principally in Maricopa County.

Colorado.  Denver’s economy has diversified over the years with significant representation in technology, communications, manufacturing, tourism, transportation, aerospace, biomedical and financial services.  The Denver metropolitan area is one of the fastest growing regions in the nation, helping to make Colorado the eighth-fastest growing state in the United States in terms of percentage population growth from July 2005 to July 2006.  The population of the seven-county Denver metropolitan region has grown to approximately 2.6 million with a workforce of 1.4 million as of November 2006.  The region’s population growth rate has consistently outpaced the nation’s rate every decade since the 1950s. The

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state’s unemployment rate as of December 2006 was 3.9%, the lowest level in five years.  The state of Colorado’s population growth is projected to increase by 35% from the year 2000 to the year 2030.

We have two locations each in downtown Denver, Boulder and Littleton, and one location each in Commerce City, the Denver Technological Center (“DTC”), Golden, Louisville and the Vail Valley. The following is selected additional market data regarding the Colorado markets we serve:

·      Downtown Denver and the DTC are the main business centers of metropolitan Denver.  The area around the DTC features a high concentration of office parks and businesses. A large number of high-net-worth individuals live and work in the area.

·      Boulder has one of the highest concentrations of small businesses and affluent individuals in the Rocky Mountain region.

·      The Commerce City location is uniquely situated to serve Denver’s growing northeast communities due to its position adjacent to the Denver International Airport and Interstate 70, eight miles from downtown Denver.

·      The Littleton locations serve a more residential area, including Highlands Ranch, one of the fastest growing communities in the Denver metropolitan area.

·      The western metropolitan area served by the Golden location contains a number of newer industrial and office parks.

·      The Louisville location serves the growing area between Denver and Boulder, with an estimated 1.5 million people within a 20-mile radius.

·      The Vail Valley location is anchored by Vail, a prime mountain resort with a vigorous construction market for high-end primary and second homes.  Construction activity in this area is fueling growth in other commercial businesses supporting the expanding population base in the market.

Arizona. Arizona’s primary economic sectors include trade, manufacturing, mining, agriculture, construction, tourism and services, which is the largest economic sector.  Arizona consistently had one of the highest population growth rates in the nation during the latter half of the twentieth century, including being the fastest growing state in terms of percentage population growth from July 2005 to July 2006.  This population growth has been the primary driver behind the Arizona economy.  Our banks are located in Maricopa County, which is the nation’s fourth-largest county in terms of population size. Approximately 60% of Arizona’s population, or 3.6 million, reside in Maricopa County, with a workforce of 1.9 million.  Through November 2006, the greater Phoenix area saw a 5.2% growth rate in its nonfarm employment base from the prior November, versus 1.3% for the national average during this period.  The December 2006 unemployment rate for the Phoenix metropolitan area was 3.3%.  The state of Arizona’s population growth is projected to increase by 109% from the year 2000 to the year 2030. The following is selected additional market data regarding the Arizona markets we serve:

·      Our Arizona banks are located in Maricopa County. More than half of Arizona’s population resides in Maricopa County, which includes the cities of Phoenix, Mesa, Scottsdale, Surprise, Sun City, Glendale, Chandler, Tempe and Peoria.

·      Our office in East Valley serves the areas of Mesa and Gilbert, Arizona.  The East Valley has over 1.5 million residents and accounts for 42.8% of the Metro Phoenix population.

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·      Our office in Chandler, a suburb of Phoenix, serves a community that has become home to businesses and industries of all sizes.  Chandler is known as the “Silicon Desert” due to its concentration of high-technology jobs.  More than 75% of Chandler’s manufacturing sector  employs high-technology workers, compared to the national average of 15%.

·      Our office in Surprise is strategically located to serve the large population of retired persons living in the suburbs of Phoenix. The customers in this demographic group usually prefer the personal service of a community bank to the more impersonal service of a large financial institution.

·      Our office in Scottsdale is located in one of the most desirable areas within metropolitan Phoenix, from both a residential and employment perspective.  The Scottsdale area continues to experience faster job growth than population growth.

·      Our office in Tempe is located in the center of the Phoenix metropolitan area.  Tempe has the highest concentration of businesses in Arizona, with more than 15% of all Arizona high-tech firms located in the area.

Competition

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

By virtue of their larger capital bases or affiliation with larger multi-bank holding companies, many of our competitors have substantially greater capital resources and lending limits than we do and perform functions we offer only through correspondents. Our business, financial condition, results of operations, and cash flows may be adversely affected by an increase in competition.  Moreover, the Gramm-Leach-Bliley Act has expanded the ability of participants in the banking and thrift industries to engage in other lines of business.  This Act could put us at a competitive disadvantage because we may not have the capital to participate in other lines of business to the same extent as more highly capitalized banks and thrift holding companies.

Please see “Risk Factors — Our business and financial condition may be adversely affected by an increase in competition,” below for additional information.

Employees

At January 31, 2007, we had 485 employees, including 460 full-time equivalent employees.  Employees of the Company enjoy a variety of employee benefit programs, including: stock option plans; an employee stock purchase plan; a 401(k) plan; various comprehensive medical, accident and group life insurance plans, and paid vacations.  No Company employee is covered by a collective bargaining agreement and we believe our relationship with our employees to be excellent.

Supervision and Regulation

CoBiz and the Bank are extensively regulated under federal, Colorado and Arizona law.  These laws and regulations are primarily intended to protect depositors and federal deposit insurance funds, not shareholders of CoBiz.  The following information summarizes certain material statutes and regulations

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

The Holding Company

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

Securities Exchange Act of 1934.  CoBiz has a class of securities registered with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934.  This Act requires the Company to file periodic reports with the SEC, governs the Company’s disclosure in proxy solicitations and directs insider trading transactions.

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

Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended (the “1994 Act”).  The 1994 Act displaces state laws governing interstate bank acquisitions.  Under the 1994 Act, a financial or bank holding company may, subject to some limitations, acquire a bank outside of its home state without regard to local law.  Thus, an out-of-state holding company could acquire the Bank, and we can acquire banks outside of Colorado.

All acquisitions pursuant to the 1994 Act require regulatory approval.  In reviewing applications under the 1994 Act, an applicant’s record under the CRA must be considered, and a determination must be made that the transaction will not result in any violations of federal or state antitrust laws.  In addition, there is a limit of 25% on the amount of deposits in insured depository institutions in both Colorado and Arizona that can be controlled by any bank or bank holding company.

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

Gramm-Leach-Bliley Act of 1999 (the “GLB Act”).  The GLB Act eliminates many of the restrictions placed on the activities of certain qualified financial or bank holding companies.  A “financial holding company” such as CoBiz can expand into a wide variety of financial services, including securities activities, insurance and merchant banking without the prior approval of the FRB.

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Capital Adequacy.  The FRB monitors, on a consolidated basis, the capital adequacy of financial or bank holding companies that have total assets in excess of $150 million by using a combination of risk-based and leverage ratios.  Failure to meet the capital guidelines may result in the application by the FRB of supervisory or enforcement actions.  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 (no more than 25% of Tier 1 capital being comprised of cumulative preferred stock or trust 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 losses (limited to 1.25% of risk-weighted assets).  The regulatory guidelines require a minimum ratio of total capital to risk-weighted assets of 8% (of which at least 4% must be in the form of Tier 1 capital).  The FRB has also implemented a leverage ratio, which is defined to be a company’s Tier 1 capital divided by its average total consolidated assets.  The FRB has established a minimum ratio of 3% for “strong holding companies” as defined by the FRB.  For most other holding companies, the minimum required leverage ratio is 4%, but may be higher based on particular circumstances or risk profile.

The table below sets forth the Company’s ratios of (i) total capital to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets and (iii) Tier 1 leverage ratio.

 

Support of Banks. As discussed below, the Bank is also subject to capital adequacy requirements.  Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”), CoBiz could be required to guarantee the capital restoration plan of the Bank, should the Bank become “undercapitalized” as defined in the FDICIA and the regulations thereunder.  See “— The Bank — Capital Adequacy.”  Our maximum liability under any such guarantee would be the lesser of 5% of the Bank’s total assets at the time it became undercapitalized or the amount necessary to bring the Bank into compliance with the capital plan.  The FRB also has stated that financial or bank holding companies are subject to the “source of strength doctrine,” which requires such holding companies to serve as a source of “financial and managerial” strength to their subsidiary banks.

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

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Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).  The Sarbanes-Oxley Act is intended to address systemic and structural weaknesses of the capital markets in the United States that were perceived to have contributed to recent corporate scandals.  The Sarbanes-Oxley Act also attempts to enhance the responsibility of corporate management by, among other things, (i) requiring the chief executive officer and chief financial officer of public companies to provide certain certifications in their periodic reports regarding the accuracy of the periodic reports filed with the SEC, (ii) prohibiting officers and directors of public companies from fraudulently influencing an accountant engaged in the audit of the company’s financial statements, (iii) requiring chief executive officers and chief financial officers to forfeit certain bonuses in the event of a restatement of financial results, (iv) prohibiting officers and directors found to be unfit from serving in a similar capacity with other public companies, (v) prohibiting officers and directors from trading in the company’s equity securities during pension blackout periods, and (vi) requiring the SEC to issue standards of professional conduct for attorneys representing public companies. In addition, public companies whose securities are listed on a national securities exchange or association must satisfy the following additional requirements: (a) the company’s audit committee must appoint and oversee the company’s auditors; (b) each member of the company’s audit committee must be independent; (c) the company’s audit committee must establish procedures for receiving complaints regarding accounting, internal accounting controls and audit-related matters; (d) the company’s audit committee must have the authority to engage independent advisors; and (e) the company must provide appropriate funding to its audit committee, as determined by the audit committee.   The Sarbanes-Oxley Act also requires the registered public accounting firm that issues the audit report to issue a report on management’s attestation on internal control over financial reporting.

The Bank

General.  The Bank is a national banking association, the deposits of which are insured by the Bank Insurance Fund of the FDIC, and is subject to supervision, regulation and examination by the Office of the Comptroller of the Currency (the “OCC”) and by the FDIC.  Pursuant to such regulations, the Bank is subject to special restrictions, supervisory requirements and potential enforcement actions.  The FRB’s supervisory authority over CoBiz can also affect the Bank.

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

USA Patriot Act of 2001.  The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) is intended to allow the federal government to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money-laundering requirements. Title III of the USA Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Among its provisions, the USA Patriot Act requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country.  In addition, the USA Patriot Act contains a provision encouraging cooperation among

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financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.  Financial institutions must comply with Section 326 of the Act which provides minimum procedures for identification verification of new customers.

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

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

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

Regulation W of the Federal Reserve Act, which became effective on April 1, 2003, addresses the application of Sections 23A and 23B to credit exposure arising out of derivative transactions between an insured institution and its affiliates and intra-day extensions of credit by an insured depository institution to its affiliates. The rule requires institutions to adopt policies and procedures reasonably designed to monitor, manage and control credit exposures arising out of transactions and to clarify that the transactions are subject to Section 23B of the Federal Reserve Act.

Dividend Restrictions.  Dividends paid by the Bank and management fees from the Bank and our fee-based business lines provide substantially all of our cash flow.  The approval of the OCC is required prior to the declaration of any dividend by the Bank if the total of all dividends declared by the Bank in any calendar year exceeds the total of its net profits of that year combined with the retained net profits for the preceding two years.  In addition, the FDICIA provides that the Bank cannot pay a dividend if it will cause the Bank to be “undercapitalized.”  See “— The Bank — Capital Adequacy.”

Examinations.  The OCC periodically examines and evaluates national banks.  Based upon such an evaluation, the examining regulator may revalue the assets of an insured institution and require that it establish specific reserves to compensate for the difference between the value determined by the regulator and the book value of such assets.

Capital Adequacy.  Federal regulations establish minimum requirements for the capital adequacy of depository institutions that are generally the same as those established for bank holding companies.  See “— The Holding Company — Capital Adequacy.”  Banks with capital ratios below the required minimum are subject to certain administrative actions, including the termination of deposit insurance and

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the appointment of a receiver, and may also be subject to significant operating restrictions pursuant to regulations promulgated under the FDICIA.  See “— The Holding Company — Support of Banks.”

The following table sets forth the capital ratios of the Bank: (i) total capital to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets and (iii) Tier 1 leverage ratio.

 

Pursuant to the FDICIA, regulations have been adopted defining five capital levels: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.  Increasingly severe restrictions are placed on a depository institution as its capital level classification declines.  An institution is critically undercapitalized if it has a tangible equity to total assets ratio less than or equal to 2%.  An institution is adequately capitalized if it has a total risk-based capital ratio less than 10%, but greater than or equal to 8%; or a Tier 1 risk-based capital ratio less than 6%, but greater than or equal to 4%; or a leverage ratio less than 5%, but greater than or equal to 4% (3% in certain circumstances).  An institution is well capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater; and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.  Under these regulations, as of December 31, 2006, the Bank was well capitalized, which places no significant restrictions on the Bank’s activities.

On November 15, 2005, the Basel Committee on Banking Supervision updated the status of the revised draft of the New Basel Capital Accord originally issued in January 2001.  The New Accord consists of three pillars that address (1) minimum capital requirements; (2) supervisory review of capital adequacy, which relates to an organization’s capital adequacy and internal assessment processes; and (3) market discipline.  The Company continues to monitor developments of the proposed Accord.  The final rules are not anticipated to be effective until January 2008.

Internal Operating Requirements.  Federal regulations promote the safety and soundness of individual institutions by specifically addressing, among other things: (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; and (6) compensation and benefit standards for management officials.

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

Deposit Insurance Premiums. Under current regulations, FDIC-insured depository institutions that are members of the FDIC pay insurance premiums at rates based on their assessment risk classification, which is determined, in part, based on the institution’s capital ratios and on factors that the FDIC deems relevant to determine the risk of loss to the FDIC.  Assessment rates range from $0 to $0.27 per $100.  This classification for determination of assessment rates may be reviewed semi-annually.  The Bank

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currently does not pay an assessment rate for FDIC deposit insurance. However, all institutions insured by the FDIC Bank Insurance Fund are assessed fees to cover the debt of the Financing Corporation, the successor of the insolvent Federal Savings and Loan Insurance Corporation.

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

Fee-Based Business Lines

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

GMB is registered as a broker/dealer under the Securities Exchange Act of 1934 and is subject to regulation by the SEC and the National Association of Securities Dealers, Inc. (“NASD”). GMB is subject to the SEC’s net capital rule designed to enforce minimum standards regarding the general financial condition and liquidity of a broker/dealer. Under certain circumstances, this rule limits the ability of the Company to make withdrawals of capital and receive dividends from GMB.  GMB’s regulatory net capital consistently exceeded such minimum net capital requirements in fiscal 2006-. The securities industry is one of the most highly regulated in the United States, and failure to comply with related laws and regulations can result in the revocation of broker/dealer licenses, the imposition of censures or fines, and the suspension or expulsion from the securities business of a firm, its officers or employees.

FDL provides wealth transfer planning through the use of life insurance products.  State governments extensively regulate our life insurance activities.  We sell our insurance products throughout the United States and the District of Columbia through licensed insurance producers.  Insurance laws vary from state to state.  Each state has broad powers over licensing, payment of commissions, business practices, policy forms and premium rates.  While the federal government does not directly regulate the marketing of most insurance products, securities, including variable life insurance, are subject to federal securities laws.  We market these financial products through M Holdings Securities, Inc., a registered broker-dealer and a member of the NASD and Securities Investor Protection Corporation.

CoBiz Insurance, acting as an insurance producer, must obtain and keep in force an insurance producer’s license with the State of Colorado.  In order to write insurance in states other than Colorado, they are required to obtain non-resident insurance licenses.  All premiums belonging to insurance carriers and all unearned premiums belonging to customers received by the agency must be treated in a fiduciary capacity.  Insurance producers in Colorado are required to complete 24 hours biennially of continuing education by attending courses approved by the Commissioner of Insurance.

Changing Regulatory Structure

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

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

Monetary Policy

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

Website Availability of Reports Filed with the Securities and Exchange Commission

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

Item 1A.  Risk Factors

Changes in economic conditions may cause us to incur loan losses.

The inability of borrowers to repay loans can erode our earnings and capital.  Our loan portfolio is somewhat less diversified than that of a traditional community bank because it includes a higher concentration of larger commercial and real estate loans.  Substantially all of our loans are to businesses and individuals in the Denver and Phoenix metropolitan areas, and any economic decline in these market areas could result in increased delinquencies, problem assets and foreclosures, reduced collateral value and reduced demand for loans and other products and services and, accordingly, could impact us adversely.

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

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

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

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

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

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

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

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

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

A majority of our loans are secured by real estate. This concentration could hurt our business, including as a result of a downturn in our real estate markets.

A downturn in our real estate markets could hurt our business because a majority of our loans are secured by real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature.  If real estate prices decline, the value of real estate collateral securing our loans could be reduced.  Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans. As of December 31, 2006, approximately 68% of the book value of our loan portfolio consisted of loans collateralized by various types of real estate. Substantially all of our real property collateral is located in Arizona and Colorado. Any such downturn could have a material adverse effect on our business, financial condition and results of operations.

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

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation recently finalized joint supervisory guidance on sound risk management practices for concentrations in commercial real estate lending. The guidance is intended to help ensure that institutions pursuing a significant commercial real estate lending strategy remain healthy and profitable while continuing to serve the credit needs of their communities. The agencies are concerned that rising commercial real estate loan concentrations may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in commercial real estate markets. The guidance reinforces and enhances existing regulations and guidelines for safe and sound real estate lending. The guidance provides supervisory criteria, including numerical indicators to assist in identifying institutions with potentially significant commercial real estate loan concentrations that may warrant

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greater supervisory scrutiny. The guidance does not limit banks’ commercial real estate lending, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. The lending and risk management practices will be taken into account in supervisory evaluation of capital adequacy. Our commercial real estate portfolio as of December 31, 2006 meets the definition of commercial real estate concentration as set forth in the final guidelines. If our risk management practices are found to be deficient, it could result in increased reserves and capital costs.

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

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

We may experience difficulties in managing our growth.

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

In addition, we may acquire financial institutions and related businesses that we believe provide a strategic fit with our business. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately and profitably manage such growth. Acquiring other financial institutions and businesses involves risks commonly associated with acquisitions, including:

·                  potential exposure to unknown or contingent liabilities of financial institutions and other businesses we acquire;

·                  exposure to potential asset quality issues of the acquired banks or businesses;

·                  difficulty and expense of integrating the operations and personnel of banks and businesses we acquire;

·                  potential disruption to our business;

·                  potential diversion of our management’s time and attention; and

·                  the possible loss of key employees and customers of the banks and businesses we acquire.

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

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

Changes in interest rates may affect our profitability.

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

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

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

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

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

By virtue of their larger capital bases or affiliation with larger multibank holding companies, many of our competitors have substantially greater capital resources and lending limits than we have and perform other functions that we offer only through correspondents. Interstate banking and unlimited state-wide branch banking are permitted in Colorado and Arizona. As a result, we have experienced, and expect to

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continue to experience, greater competition in our primary service areas. Our business, financial condition, results of operations and cash flows may be adversely affected by competition, including any increase in competition. Moreover, recently enacted and proposed legislation has focused on expanding the ability of participants in the banking and thrift industries to engage in other lines of business. The enactment of such legislation could put us at a competitive disadvantage because we may not have the capital to participate in other lines of business to the same extent as more highly capitalized financial service holding companies.

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

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

An interruption in or breach in security of our information systems may result in a loss of customer business.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposits, servicing or loan origination systems.  The occurrence of any failures or interruptions could result in a loss of customer business and have a material adverse effect on our consolidated results of operations and consolidated financial condition.

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

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

We are subject to significant government regulation, and any regulatory changes may adversely affect us.

The banking industry is heavily regulated under both federal and state law. These regulations are primarily intended to protect customers, not our creditors or shareholders. As a financial holding company, we are also subject to extensive regulation by the Federal Reserve Board, in addition to other regulatory and self-regulatory organizations. Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of such changes, which could have a material adverse effect on our profitability or financial condition.

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If our internal controls over financial reporting do not comply with the requirements of the Sarbanes-Oxley Act, our business could be adversely affected.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports.  Section 404 also requires our independent registered public accounting firm to attest to and report on management’s assessment of our internal controls over financial reporting.

Our management, including our CEO and CFO, does not expect that our internal controls over financial reporting will prevent all error and all fraud.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been or will be detected.  These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors or mistakes.  Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Although our management has determined and our independent registered public accounting firm has attested that our internal controls over financial reporting were effective as of December 31, 2006, we cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future.  A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal controls as ineffective.  If our internal controls over financial reporting are not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price.

We must evaluate whether any portion of our recorded goodwill is impaired.  Impairment testing may result in a material, non-cash write-down of our goodwill assets and could have a material adverse impact on our results of operations.

As of December 31, 2006, goodwill represented approximately 1.9% of our total assets. We have recorded goodwill because we paid more for some of our businesses than the fair market value of the tangible and separately measurable intangible net assets of those businesses. Under Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets,” we must test our goodwill and other intangible assets with indefinite lives for impairment at least annually (or whenever events occur which may indicate possible impairment).  Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount, including goodwill.  If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired.  If the fair value of the reporting unit is less than the carrying amount, goodwill is considered impaired.  We estimate the fair value of our reporting units using market multiples of comparable entities, including recent transactions, or a combination of market multiples and a discounted cash flow methodology.  Determining the fair value of a reporting unit requires a high degree of subjective management assumption.  Discounted cash

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flow valuation models are utilized that incorporate such variables as revenue growth rates, expense trends, discount rates and terminal values.  Based upon an evaluation of key data and market factors, management selects from a range the specific variables to be incorporated into the valuation model.  Any changes in key assumptions about our business and its prospects, changes in market conditions or other externalities, for impairment testing purposes could result in a non-cash impairment charge and such a charge could have a material adverse effect on our consolidated results of operations.

Our fee-based businesses are subject to quarterly and annual volatility in their revenues and earnings.

Our fee-based businesses have historically experienced, and are likely to continue to experience, quarterly and annual volatility in revenues and earnings.  With respect to our investment banking services segment, Green Manning & Bunch Ltd., the delay in the initiation or the termination of a major new client engagement, or any changes in the anticipated closing date of client transactions can directly affect revenues and earnings for a particular quarter or year.  With respect to our insurance segment, CoBiz Insurance and Financial Designs, Ltd., our revenues and earnings also can experience quarterly and annual volatility, depending on the timing of the initiation or termination of a major new client engagement.  In addition, a substantial portion of the revenues and earnings of our insurance segment are often generated during our fourth quarter as many of their clients seek to finalize their wealth transfer and estate plans by year end.  With respect to our investment advisory business, Alexander Capital Management Group, LLC., our revenues and earnings are dependent exclusively on the value of our assets under management, which in turn are heavily dependent upon general conditions in debt and equity markets.  Any significant volatility in debt or equity markets are likely to directly affect revenues and earnings of Alexander Capital Management Group, LLC. for a particular quarter or year.

Item 1B.  Unresolved Staff Comments

None

Item 2.  Properties

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As of December 31, 2006, we had 11 bank locations in Colorado, seven bank locations in Arizona, four fee-based locations in Colorado and an operations center in Colorado. Our executive offices are located at 821 Seventeenth Street, Denver, Colorado, 80202.  We lease our executive offices, our Northeast office and our Surprise office locations from entities partly owned or controlled by a director of the Company.  See “Certain Relationships and Related Transactions” under Item 13 of Part III.  The terms of these leases expire between 2011 and 2016.  The Company leases all of its facilities.  The following table sets forth specific information on each location.

 

				Lease
Bank Locations		Address		Expiration
Denver		821 Seventeenth Street, Denver, CO 80202		2011
Denver - Operations		717 17th Street, Ste. 400, Denver, CO 80202		2010
Tremont		1275 Tremont Place, Denver, CO 80202		2014
Littleton		101 W. Mineral Avenue, Littleton, CO 80120		2012
Prince		2409 W. Main Street, Littleton, CO 80120		2009
Boulder		2025 Pearl Street, Boulder, CO 80302		2009
Boulder North		2550 N. Broadway, Boulder, CO 80302		2009
West Metro		15710 W. Colfax Avenue, Golden, CO 80401		2011
Northeast		4695 Quebec Street, Denver, CO 80216		2013
Northwest		400 Centennial Parkway, Ste. 100, Louisville, CO 80027		2009
DTC		8400 E. Prentice Avenue, Ste. 150, Englewood, CO 80111		2008
Vail Valley		P.O. Box 2826 Northstar Center, Edwards, CO 81632		2009
Phoenix		2600 N. Central Avenue, Phoenix, AZ 85012		2017
Camelback		3200 E. Camelback RD, Ste. 129, Phoenix, AZ 85018		2012
Chandler		2727 W. Frye Rd, Ste. 100, Chandler, AZ 85224		2010
East Valley		1757 E. Baseline Rd., Ste. 101, Gilbert, AZ 85233		2012
Scottsdale		6929 E. Greenway Parkway, Ste. 150, Scottsdale, AZ 85254		2011
Surprise		12775 W. Bell Road, Surprise, AZ 85374		2016
Tempe		1620 W. Fountainhead Parkway, Ste. 119, Tempe, AZ 85282		2012

 

				Lease
Fee-Based Locations		Address		Expiration
Alexander Capital
Management Group		1099 Eighteenth Street, Ste. 2810, Denver, CO 80202		2012
CoBiz Insurance, Inc.		10901 W. Toller Drive, Littleton, CO 80127		2009
Financial Designs Ltd.		1775 Sherman Street, Ste. 1800, Denver, CO 80203		2013
Green Manning &
Bunch, Ltd.		370 Seventeenth Street, Ste. 3600, Denver, CO 80202		2010

 

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

Item 3.  Legal Proceedings

Periodically and in the ordinary course of business, various claims and lawsuits which are incidental to our business are brought against or by us.  We believe, based on the dollar amount of the claims outstanding at the end of the year, the ultimate liability, if any, resulting from such claims or lawsuits will

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not have a material adverse effect on the business, financial condition or results of operations of the Company.

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

No matter was submitted to a vote of security holders during the fourth quarter of fiscal 2006.

PART II

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

The Common Stock of the Company is traded on the Nasdaq Global Select Market under the symbol “COBZ.” At February 13, 2007, there were approximately 574 shareholders of record of CoBiz Common Stock.

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

								Cash
								Dividends
		High			Low			Declared
2005:
First Quarter		$	22.060		$	18.400		$	0.045
Second Quarter		19.460			16.450			0.045
Third Quarter		20.230			17.510			0.050
Fourth Quarter		19.650			17.000			0.050
2006:
First Quarter		$	20.940		$	18.060		$	0.050
Second Quarter		22.750			19.210			0.050
Third Quarter		23.960			20.760			0.060
Fourth Quarter		23.600			21.740			0.060

 

The timing and amount of future dividends are at the discretion of the board of directors of the Company and will depend upon the consolidated earnings, financial condition, liquidity and capital requirements of the Company and its subsidiaries, the amount of cash dividends paid to the Company by its subsidiaries, applicable government regulations and policies, and other factors considered relevant by the board of directors of the Company.  The board of directors of the Company anticipates it will continue to pay quarterly dividends in amounts determined based on the factors discussed above.  Capital distributions, including dividends, by institutions such as the Bank are subject to restrictions tied to the institution’s earnings.  See “Supervision and Regulation — The Bank — Dividend Restrictions” included under Item 1 of Part I.

The following table compares the cumulative total return on a hypothetical investment of $100 in CoBiz common stock on December 31, 2001 and the closing prices on December 31, 2002, 2003, 2004, 2005 and 2006, with the hypothetical cumulative total return on the Russell 2000 Index and the Nasdaq Bank Index for the comparable period.

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		12/31/2001			12/31/2002			12/31/2003			12/31/2004			12/31/2005			12/31/2006
CoBiz Inc.		$	100.00		$	111.32		$	140.04		$	233.90		$	212.25		$	259.30
Russell 2000 Index		$	100.00		$	79.54		$	117.14		$	138.72		$	145.12		$	171.86
NASDAQ Bank Index		$	100.00		$	106.93		$	142.25		$	161.66		$	158.54		$	180.42

 

 

Item 6.  Selected Financial Data

The following table sets forth selected financial data for the Company for the periods indicated.  During 2003, the Company completed two acquisitions of companies in merger transactions as described in Part I, Item 1.  In addition, data has been restated to give retroactive effect to a three-for-two stock split effectuated on April 26, 2004, where applicable.

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		At or for the year ended December 31,
(in thousands, except per share data)		2006			2005			2004			2003			2002
Statement of income data:
Interest income		$	136,444		$	103,456		$	77,267		$	64,804		$	62,418
Interest expense		57,015			32,481			17,387			14,234			18,347
Net interest income before provision for loan losses		79,429			70,975			59,880			50,570			44,071
Provision for loan losses		1,342			2,465			3,015			2,760			2,590
Net interest income after provision for loan losses		78,087			68,510			56,865			47,810			41,481
Noninterest income		29,965			25,153			27,801			17,004			9,823
Noninterest expense		71,927			62,480			56,809			44,337			33,600
Income before taxes		36,125			31,183			27,857			20,477			17,704
Provision for income taxes		13,299			11,177			10,231			7,447			6,677
Net income		$	22,826		$	20,006		$	17,626		$	13,030		$	11,027
Earnings per share - basic		$	1.01		$	0.90		$	0.81		$	0.64		$	0.56
Earnings per share - diluted		$	0.98		$	0.87		$	0.78		$	0.61		$	0.53
Cash dividends declared per common share		$	0.22		$	0.19		$	0.17		$	0.15		$	0.13
Dividend payout ratio		21.78		%	21.05		%	20.95		%	22.92		%	22.62		%
Balance sheet data:
Total assets		$	2,112,423		$	1,933,056		$	1,699,561		$	1,403,877		$	1,118,649
Total investments		438,894			466,150			485,234			368,218			271,114
Loans		1,544,460			1,332,668			1,114,307			943,615			798,869
Allowance for loan losses		17,871			16,906			14,674			12,403			10,388
Deposits		1,476,337			1,326,952			1,147,010			959,178			856,965
Junior subordinated debentures		72,166			72,166			71,637			40,570			20,000
Common shareholders’ equity		162,675			136,544			122,085			95,664			82,004
Key ratios:
Return on average total assets		1.11		%	1.10		%	1.13		%	1.06		%	1.08		%
Return on average shareholders’ equity		15.45		%	15.42		%	15.84		%	14.52		%	14.57		%
Average equity to average total assets		7.19		%	7.16		%	7.16		%	7.29		%	7.40		%
Net interest margin		4.20		%	4.27		%	4.18		%	4.38		%	4.55		%
Efficiency ratio (1)		64.12		%	64.83		%	65.09		%	65.70		%	62.57		%
Nonperforming assets to total assets		0.06		%	0.05		%	0.08		%	0.11		%	0.22		%
Nonperforming loans to total loans		0.09		%	0.07		%	0.12		%	0.16		%	0.31		%
Allowance for loan losses to total loans		1.19		%	1.27		%	1.32		%	1.31		%	1.30		%
Allowance for loan losses to nonperforming loans		1392.30		%	1863.95		%	1056.44		%	816.52		%	425.39		%
Net (recoveries) charge-offs to average loans		(0.01		%)	0.02		%	0.07		%	0.09		%	0.15		%

(1)             Efficiency ratio is computed by dividing noninterest expense by the sum of net interest income before provision for loan losses and noninterest income, excluding gains on asset sales.

 

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

Executive Summary

The Company is a financial holding company that offers a broad array of financial service products to its target market of small and medium-sized businesses and high-net-worth individuals.  Our operating segments include our commercial banking franchise, Colorado Business Bank and Arizona Business Bank; investment banking services; investment advisory and trust services; and insurance services.

Earnings are derived primarily from our net interest income, which is interest income less interest expense, and our noninterest income earned from our fee-based business lines and banking service fees, offset by noninterest expense.  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 non-interest income).  We manage our interest-earning assets and interest-bearing liabilities to reduce the impact of interest rate changes on our operating results.  We also have focused on reducing our dependency on our net interest margin by increasing our noninterest income.

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Our Company has focused on developing an organization with personnel, management systems and products that will allow us to compete effectively and position us for growth. The cost of this process relative to our size has been high. In addition, we have operated with excess capacity during the start-up phases of various projects. As a result, relatively high levels of non-interest expense have adversely affected our earnings over the past several years.  Salaries and employee benefits comprised most of this overhead category. However, we believe that our compensation levels have allowed us to recruit and retain a highly qualified management team capable of implementing our business strategies. We believe our compensation policies, which include the granting of options to purchase common stock to many employees and the offering of an employee stock purchase plan, have highly motivated our employees and enhanced our ability to maintain customer loyalty and generate earnings. For additional discussion on options granted to employees, see Notes 1 and 14 to our Consolidated Financial Statements.

Industry Overview.  The U.S. commercial banking industry remained strong during 2006 as demand in commercial and industrial (“C&I”) and real estate lending supported asset growth.  However, strong competition within the lending industry tightened spreads over banks’ cost of funds.  The flattening of the yield curve also pressured net interest margins and lowered the overall return on assets.  The interest rate environment also resulted in a decrease in investment portfolios and decreased growth in core deposits.  Investment portfolios decreased due to the interest rate impact on market values and efforts to mitigate interest rate risks.  Deposit growth was challenging as depositors were less inclined to maintain liquid deposits as interest rates have risen over the past few years.  Asset quality for the industry remained strong, as nonperforming assets to total assets hit the lowest level in the past five years as of December 31, 2005.  The trend in asset quality was reflected in the allowance for loan losses as a percentage of total loans, which was also at its lowest point in the past five years as of December 31, 2005.

Company Overview.  From December 31, 1995, the first complete fiscal year under the current management team, to December 31, 2006, our organization has grown from a bank holding company with two bank locations and total assets of $160.4 million to a diversified financial services holding company with 18 bank locations, four fee-based businesses and total assets of $2.1 billion.  Certain key metrics of our operating segments as of December 31, 2006 and 2005 are as follows:

 

		Colorado			Arizona			Investment			Investment						Corporate
		Business			Business			Banking			Advisory &						Support and
		Bank			Bank			Services			Trust Services			Insurance			Other			Consolidated
(in thousands, except per share data)											2006
Net income (loss)		$	18,263		$	7,825		$	543		$	161		$	636		$	(4,602	)	$	22,826
Diluted earnings per share (loss)		$	0.79		$	0.33		$	0.02		$	0.01		$	0.03		$	(0.20	)	$	0.98
Total assets		$	1,410,769		$	660,647		$	9,369		$	6,131		$	22,436		$	3,071		$	2,112,423
											2005
Net income (loss)		$	18,099		$	4,928		$	474		$	176		$	572		$	(4,243	)	$	20,006
Diluted earnings per share (loss)		$	0.79		$	0.21		$	0.02		$	0.01		$	0.02		$	(0.18	)	$	0.87
Total assets		$	1,342,522		$	554,591		$	7,735		$	5,398		$	20,490		$	2,320		$	1,933,056

 

Noted below are some of the significant financial performance measures and operational accomplishments for 2006:

·                  Our commercial banking franchise had strong growth in both net income and earnings per share during 2006 as compared to 2005.  Our loan portfolio, the largest interest-earning asset base of the Company, increased 16% in 2006.  The increase was driven primarily by our Arizona operations, where we continue to experience significant growth and which grew 26% for the year.  The Company opened two de novo banks in Arizona during 2005 that contributed to that market’s increase.  The Colorado bank, which is in a more mature market, saw strong growth as well with an 11% increase for the year.

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·                  Investment Banking Services again contributed $0.02 per diluted share in 2006.  Investment banking revenues are transactional in nature and as a result, the segment’s earnings can be more volatile.  While not a significant source of the Company’s earnings, the segment has been a positive contributor over the last several years.

·                  Investment Advisory and Trust Services, while a less significant part of our overall operations, continues to recognize increases in revenue production and growth in assets under management.  During 2006, the Company implemented a new operational platform to enhance the investment management process.

·                  Our Insurance segment had a slight increase in net income and earnings per share during 2006, primarily due to growth in the wealth transfer business.

·                  Corporate Support and Other had an increase in its net loss and loss per share, primarily due to an increase in interest rates that increased our interest expense on our variable-rate junior subordinated debentures and an increase in salaries and employee benefits.

·                  During the fourth quarter of 2006, the Company restructured a portion of its investment portfolio to enhance its net interest margin and improve future earnings.  Investment securities were sold resulting in a pre-tax charge of $1.7 million, or $0.05 per diluted share.

·                  During the fourth quarter of 2006, the Company began the process of selling additional common stock through a secondary offering that subsequently closed on January 24, 2007.  The Company sold 975,000 shares of common stock at a public offering price of $20.90.  The proceeds will primarily be used to support the growth of the Bank, as well as general corporate purposes.

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

Bank.  The commercial bank segments, the cornerstone of our franchise, had continued success in 2006 growing the balance sheet and earnings.  Loans grew by 16%, deposit and customer repurchase agreements grew by 10% and earnings grew by 13%.  The growth by the Bank was encouraging since 2006 was a challenging year for the Bank and the industry as we faced increased competition and narrowing spreads between our interest-bearing assets and our cost of funds.  While loan demand continued to grow in the double digits, lower-cost deposit accounts (excluding time deposits and customer repurchase agreements) slowed to single digit growth resulting in a loan-to-deposit ratio that exceeded 100% as of December 31, 2006.  As loan growth outpaced deposit growth, our mix of funding shifted to a higher level of wholesale funds that are at a higher interest rate than core deposits.  Asset quality remained exceptional with non-performing loans to total loans at only 9 basis points at the end of 2006, and the Bank realizing net recoveries of $0.2 million for the year.

Fee-Based Business Lines.  The company’s fee-based business lines — investment banking, insurance, and investment advisory and trust — were all accretive for the year.  Our ratio of noninterest income to total operating revenues was 27% for 2006 compared to 26% in 2005.  This is in line with the Company’s ongoing target of 25%.

We believe that through the combination of our commercial banking franchise and our fee-based businesses, we are uniquely situated to service our commercial clients throughout their business lifecycle.

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 We are able to help our customers grow by providing banking services from our bank franchise, capital planning from GMB, and employee and executive benefits packages from FDL.  We can assist in planning for the future with wealth transfer and business succession planning from FDL. We are able to protect assets with P&C insurance from CoBiz Insurance.  We can facilitate exit and retirement strategies with merger and acquisition services from GMB, and investment management services with ACMG.  We are also able to preserve our customers’ wealth with trust and fiduciary services from CoBiz Private Asset Management, investment management services from ACMG, and wealth transfer services from FDL.

Critical Accounting Policies

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

Allowance for Loan Losses

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

We maintain a loan review program independent of the lending function that is designed to reduce and control risk in the lending function. It includes the monitoring of lending activities with respect to underwriting and processing new loans, preventing insider abuse, and timely follow-up and corrective action for loans showing signs of deterioration in quality.  We also have a systematic process to evaluate individual loans and pools of loans within our loan portfolio.  We maintain a loan grading system whereby each loan is assigned a grade between 1 and 8, with 1 representing the highest quality credit, 7 representing a non-accrual loan 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 above a certain dollar amount that are adversely graded are reported to the Loan Committee and the Chief Credit Officer along with current financial information, a collateral analysis and an action plan.  Individual loans that are deemed to be impaired are evaluated in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114 Accounting by Creditors for Impairment of a Loan.

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

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

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

·                  Changes in the nature and volume of the portfolio.

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

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

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

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

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

Recoverability of Goodwill

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

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

We conducted our annual evaluation of our reporting units as of December 31, 2006.  As discussed in Note 6 to our Consolidated Financial Statements, for the period ending December 31, 2006 the estimated fair value of all reporting units exceeded their carrying values and goodwill impairment was not deemed to exist.   The fair value calculations were also tested for sensitivity to reflect reasonable variations, including keeping all other variables constant and reducing projected revenue growth and projected cost savings.  Using this sensitivity approach, there was no impairment identified in any reporting unit.

Share-based Payments

On January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment (“SFAS 123(R)”) using the modified prospective method. Under this method, compensation cost is recognized for (1) all awards granted after the required effective date and to awards modified, cancelled or repurchased after that date and (2) the portion of prior awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated for pro forma disclosures under SFAS No. 123, Accounting for Stock Based Compensation (“SFAS 123”).  Prior to the adoption of SFAS 123(R), we

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applied the intrinsic-value method for our stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”) Accounting for Stock Issued to Employees, which was allowed by SFAS 123 as an alternative to the fair value method recommended by SFAS 123.

SFAS 123(R) requires that the cash retained as a result of the tax deductibility of employee share-based awards be presented as a component of cash flows from financing activities in the consolidated statement of cash flows. In prior periods, this amount was reported as a component of cash flows from operating activities.

Under SFAS 123(R), we use the Black-Scholes option valuation model to determine the fair value of our stock options as discussed in Note 14 to our Consolidated Financial Statements. The Black-Scholes fair value model includes various assumptions, including the expected volatility, expected life, and expected dividend rate of the options. In addition, the Company is required to estimate the amount of options issued that are expected to be forfeited. These assumptions reflect our best estimates, but they involve inherent uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used, stock-based compensation expense, as calculated and recorded under SFAS 123(R), could have been materially impacted. Furthermore, if we use different assumptions in future periods, stock-based compensation expense could be materially impacted in future periods.

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

Recent Accounting Pronouncements

On January 1, 2006, the Company adopted SFAS No. 154, Accounting Changes and Error Corrections Disclosure (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements.  SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle unless it is impracticable. SFAS 154 applies to all voluntary changes in accounting principle. It also applies to changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include explicit transition provisions. For example, the retrospective provision of SFAS 154 does not apply to the adoption of SFAS 123(R) which includes specific transition provisions. The adoption of SFAS 154 did not have a material impact on the consolidated financial statements.

On December 31, 2006 the Company adopted SFAS No. 158 Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”).  SFAS 158 requires an employer to recognize in its statement of financial position an asset for a plan’s over funded status or a liability for a plan’s under funded status, measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions), and recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income and as a separate component of shareholders’ equity.  The adoption of SFAS 158 did not have a material impact on the consolidated financial statements.

On January 1, 2006 the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 04-05, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF 04-05”). The scope of EITF 04-05 relates to limited partnerships or similar entities that are not variable interest entities under

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FIN 46R. The EITF reached a consensus that the general partners in a limited partnership (or similar entity) are presumed to control the entity regardless of the level of their ownership and, accordingly, may be required to consolidate the entity. This is a rebuttable presumption that may be overcome if the partnership agreements provide the limited partners with either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. If it is deemed that the limited partners’ rights overcome the presumption of control by a general partner of the limited partnership, the general partner shall account for its investment in the limited partnership using the equity method of accounting. EITF 04-05 became effective immediately for all arrangements created or modified after June 29, 2005. For all other arrangements, application of EITF 04-05 became effective for the first reporting period in fiscal years beginning after December 15, 2005. The adoption of EITF 04-05 did not have a material impact on the consolidated financial statements.

On December 31, 2006, the Company adopted Securities and Exchange Commission Staff Accounting Bulletin No. 108 Topic 1N, Financial Statements — Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (“SAB 108”).  Prior to SAB 108, Companies would evaluate the materiality of financial statement misstatements using either the current year income statement (“rollover” ) or balance sheet approach (“iron curtain”), with the rollover approach focusing on new misstatements added in the current year, and the iron curtain approach focusing on the cumulative amount of misstatement present in a company’s balance sheet.  Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected.  Under SAB 108 a registrant’s financial statements require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors.  Registrants will not be required to restate prior period financial statements when initially applying SAB 108 if management properly applied its previous approach (i.e. rollover or iron curtain) given that all relevant qualitative factors were considered.  SAB 108 states that, upon initial application, registrants may elect to (a) restate prior periods, or (b) record the cumulative effect of the initial application of SAB 108 in the carrying amounts of assets and liabilities, with the offsetting adjustment made to retained earnings. To the extent that registrants elect to record the cumulative effect of initially applying SAB 108, disclosure of the nature and amount of each individual error being corrected in the cumulative adjustment is required. The disclosure will also include when and how each error being corrected arose and the fact that the errors had previously been considered immaterial. SAB 108 was effective for the fiscal year ending December 31, 2006.  The adoption of SAB 108 did not have a material impact on the consolidated financial statements.

In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, Accounting for Certain Hybrid Financial Instrument-an amendment of SFAS No. 133 and SFAS No.140 (“SFAS 155”). This statement permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. It establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. In addition, SFAS 155 clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133. It also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS 155 amends SFAS 140 to eliminate the prohibition on a qualifying special- purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not expect the implementation of SFAS 155 to have a material impact on its consolidated financial statements.

 

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In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140 (“SFAS 156”). SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into certain servicing contracts. The Statement also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS 156 permits an entity to choose between the amortization and fair value methods for subsequent measurements. At initial adoption, the Statement permits a one-time reclassification of available for sale securities to trading securities by entities with recognized servicing rights. SFAS 156 also requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not expect the implementation of SFAS 156 to have a material impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The Company is evaluating the impact, if any, SFAS 157 will have on its consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes- an Interpretation of SFAS No. 109 (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact, if any, FIN 48 will have on its consolidated financial statements.

In September 2006, the EITF reached a consensus on EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (“EITF 06-4”). The consensus, which has been ratified by the Financial Accounting Standards Board, requires companies to recognize an obligation for the future post-retirement benefits provided to employees in the form of death benefits to be paid to their beneficiaries through split-dollar polices carried in Bank Owned Life Insurance (BOLI). EITF 06-4 is effective for fiscal periods beginning after December 15, 2007. The effects of applying EITF 06-4 are to be recognized through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, or (b) a change in accounting principle through retrospective application to all prior periods. The Company is currently evaluating the impact EITF 04-6 will have on its consolidated financial statements, as the Company has issued endorsement split-dollar life-insurance arrangements.

In September 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF 06-5, Accounting for Purchases of Life Insurance — Determining the Amount That Could be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance (“EITF 06-5”). The consensus, which has been ratified by the Financial Accounting Standards Board, addresses various issues in determining the amount that could be realized under an insurance contract. EITF 06-5 is effective for fiscal periods beginning after December 15, 2006. The effects of applying EITF 06-5 are to be recognized through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, or (b) a change in accounting principle through retrospective application to all prior periods. Upon adoption, the Company estimates that a

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cumulative effect adjustment of approximately $134,000 will be charged to retained earnings to reduce the amount that can be realized on insurance contracts.

Financial Condition

The acquisitions of ACMG and FDL were accounted for as purchases and the assets, liabilities, income and expenses of the acquired entities are included in the Company’s financial statements only for periods following the closing of the acquisitions. For a additional information on the operations of our segments, see the segment information in Note 19 to our Consolidated Financial Statements.

Lending Activities

General.  We provide a broad range of commercial and retail lending services, including commercial loans, commercial and residential real estate construction loans, commercial and residential real estate mortgage loans, consumer loans, revolving lines of credit, and equipment lease financing. Our primary lending focus is commercial and real estate lending to small and medium-sized businesses with annual sales of $5.0 million to $75.0 million, and businesses and individuals with borrowing requirements of $250,000 to $10.0 million.  As of December 31, 2006, substantially all of our outstanding loans were to customers within Colorado and Arizona.  Interest rates charged on loans vary with the degree of risk, maturity, underwriting and servicing costs, principal amount, and extent of other banking relationships with the customer, and are further subject to competitive pressures, money market rates, availability of funds, and government regulations.  See “Net Interest Income” for an analysis of the interest rates on our loans.

Credit Procedures and Review.  We address credit risk through internal credit policies and procedures, including underwriting criteria, officer and customer lending limits, a multi-layered loan approval process for larger loans, periodic document examination, justification for any exceptions to credit policies, loan review and concentration monitoring. In addition, we provide ongoing loan officer training and review. We have a continuous loan review process designed to promote early identification of credit quality problems, assisted by a dedicated Chief Credit Officer.  All loan officers are charged with the responsibility of reviewing, no less frequently than monthly, all past due loans in their respective portfolios. In addition, each of the loan officers establishes a watch list of loans to be reviewed by the boards of directors of the Bank and CoBiz. The loan portfolio is also monitored regularly by a loan review officer who reports to the President of the Company but submits reports directly to the audit committee of the boards of directors.

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

		At December 31,
		2006					2005					2004					2003					2002
(in thousands)		Amount			%		Amount			%		Amount			%		Amount			%		Amount			%
Commercial		$	482,309		31.6		$	421,497		32.0		$	386,954		35.2		$	308,174		33.1		$	254,389		32.3
Real estate — mortgage		698,951			45.8		682,503			51.9		527,266			47.9		454,865			48.8		366,841			46.5
Real estate — construction		292,952			19.2		150,680			11.5		121,138			11.0		109,326			11.7		114,753			14.6
Consumer		57,990			3.8		65,932			5.0		65,792			6.0		61,049			6.6		50,853			6.4
Other		12,258			0.8		12,056			0.9		13,157			1.2		10,201			1.1		12,033			1.5
Loans		$	1,544,460		101.2		$	1,332,668		101.3		$	1,114,307		101.3		$	943,615		101.3		$	798,869		101.3
Less: allowance for loan losses		(17,871		)	(1.2	)	(16,906		)	(1.3	)	(14,674		)	(1.3	)	(12,403		)	(1.3	)	(10,388		)	(1.3	)
Net loans		$	1,526,589		100.0		$	1,315,762		100.0		$	1,099,633		100.0		$	931,212		100.0		$	788,481		100.0

 

Our continued penetration into the Arizona market and the addition of new senior-level bankers in both Colorado and Arizona have allowed our loan portfolio (net) to increase by $210.8 million in 2006 and $216.1 million in 2005.  The overall growth in the loan portfolio during 2006 and 2005 was comprised

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primarily of $158.7 million and $184.8 million in real estate loans (mortgage and construction), respectively and $60.8 million and $34.5 million in commercial loans, respectively.

Under federal law, the aggregate amount of loans we can make to one borrower is generally limited to 15% of our unimpaired capital, surplus, undivided profits and allowance for loan losses. As of December 31, 2006, our individual legal lending limit was $29.4 million. Our board of directors has established an internal lending limit of $12.0 million for normal credit extensions and $18.0 million for the highest rated credit types. To accommodate customers whose financing needs exceed our internal lending limits and to address portfolio concentration concerns, we sell loan participations to outside participants. As of December 31, 2006 and 2005, the outstanding balances of loan participations sold by us were $53.3 million and $43.8 million, respectively. We have retained servicing rights on all loan participations sold.  As of December 31, 2006 and 2005, we had loan participations purchased from other banks totaling $37.3 million and $26.9 million, respectively.  We use the same analysis in deciding whether or not to purchase a participation in a loan as we would in deciding whether to originate the same loan.

Due to the nature of our business as a commercial banking institution, our lending relationships are typically larger than those of a retail bank.  The following table describes the number of relationships and the percentage of the dollar value of the loan portfolio by the size of the credit relationship.  The majority of the loan relationships exceeding $3.0 million are in our real estate and construction portfolios.

		2006				2005				2004
		Number of		% of		Number of		% of		Number of		% of
Credit Relationships		Relationships		Loan Portfolio		Relationships		Loan Portfolio		Relationships		Loan Portfolio
Greater than $6.0 million		14		7.27	%	15		8.10	%	9		6.00	%
$3.0 million to $6.0 million		78		20.34	%	52		15.50	%	44		15.80	%
$1.0 million to $3.0 million		320		34.44	%	287		35.10	%	231		33.50	%
$0.5 million to $1.0 million		378		17.44	%	334		17.60	%	294		18.60	%
Less than $0.5 million		4,900		20.51	%	4,918		23.70	%	4,791		26.10	%
		5,690		100.00	%	5,606		100.00	%	5,369		100.00	%

 

In the ordinary course of business, we enter into various types of transactions that include commitments to extend credit. We apply the same credit standards to these commitments as we apply to our other lending activities and have included these commitments in our lending risk evaluations. Our exposure to credit loss under commitments to extend credit is represented by the amount of these commitments.  See Note 15 to our Consolidated Financial Statements for additional discussion on our commitments.

Commercial Loans. Commercial lending consists 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. We provide a broad range of commercial loans, including lines of credit for working capital purposes and term loans for the acquisition of equipment and other purposes. Commercial loans are generally collateralized by inventory, accounts receivable, equipment, real estate and other commercial assets and may be supported by other credit enhancements such as personal guarantees. However, where warranted by the overall financial condition of the borrower, loans may be unsecured and based on the cash flow of the business. Terms of commercial loans generally range from one to five years, and the majority of such loans have floating interest rates.

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

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		2006					2005
					% of Commercial					% of Commercial
Commercial Loans by NAICS Code (in thousands)		Balance			Loan Portfolio		Balance			Loan Portfolio
Construction		$	76,101		15.78	%	$	70,449		16.71	%
Wholesale trade		58,601			12.15	%	39,000			9.25	%
Health Care		56,762			11.77	%	52,903			12.55	%
Real estate		53,602			11.11	%	47,495			11.27	%
Manufacturing		43,832			9.09	%	40,978			9.72	%
Finance and Insurance		38,742			8.03	%	46,762			11.09	%
Services		32,813			6.80	%	23,608			5.60	%
All other		121,856			25.27	%	100,304			23.81	%
		$	482,309		100.00	%	$	421,497		100.00	%

 

Real Estate Mortgage Loans.  Real estate mortgage loans include various types of loans for which we hold real property as collateral. We generally restrict commercial real estate lending activity to owner-occupied properties or to investor properties that are owned by customers with which we have a current banking relationship. We make commercial real estate loans at both fixed and floating interest rates, with maturities generally ranging from five to 20 years. The Bank’s underwriting standards generally require that a commercial real estate loan not exceed 75% of the appraised value of the property securing the loan. In addition, we originate Small Business Administration 504 loans (“SBA”) on owner-occupied properties with maturities of up to 25 years in which the SBA allows for financing of up to 90% of the project cost and takes a security position that is subordinated to us, as well as US Department of Agriculture (“USDA”) Rural Development loans.  As of December 31, 2006, approximately 0.9% of our outstanding loans were guaranteed by the SBA and 1.3% were guaranteed by the USDA.  We also originate residential mortgage loans on a limited basis as an accomodation to our preferred customers.

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. We do not actively seek residential mortgage loans for our own portfolio, but, rather, syndicate such loans to other financial institutions. However, for those residential mortgage loans that are extended, we attempt to apply conservative loan-to-value ratios and obtain personal guarantees and generally require a strong history of debt servicing capability and fully amortized terms of 20 years or less.

The following tables summarize the Company’s real estate portfolio, segregated by property type and the geographical regions in which we operate.

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		2006					2005					2004
					% of Real Estate					% of Real Estate					% of Real Estate
Real Estate by Type (in thousands)		Balance			Loan Portfolio		Balance			Loan Portfolio		Balance			Loan Portfolio
Commercial owner		284,695			40.73	%	$	281,293		41.21	%	$	236,086		44.78	%
Commercial investor		206,467			29.54	%	184,676			27.06	%	155,460			29.48	%
Residential owner		31,943			4.57	%	19,464			2.85	%	21,021			3.99	%
Residential investor		46,700			6.68	%	45,759			6.70	%	37,326			7.08	%
Land acquisition		129,146			18.48	%	151,311			22.18	%	77,373			14.67	%
		$	698,951		100.00	%	$	682,503		100.00	%	$	527,266		100.00	%

 

		2006				2005				2004
		Number of		% of Real Estate		Number of		% of Real Estate		Number of		% of Real Estate
Geographic Area		Relationships		Loan Portfolio		Relationships		Loan Portfolio		Relationships		Loan Portfolio
COLORADO
Denver		136		10.12	%	139		11.40	%	137		13.26	%
Boulder		146		10.76	%	146		10.29	%	144		11.42	%
Eagle		102		4.99	%	92		7.34	%	74		10.99	%
Arapahoe		128		7.34	%	114		7.60	%	114		10.43	%
Jefferson		113		6.00	%	120		7.89	%	117		10.19	%
Adams		79		5.84	%	68		7.66	%	50		5.24	%
Douglas		42		2.66	%	36		3.12	%	37		4.33	%
Larimer		22		1.35	%	12		0.89	%	15		1.55	%
Weld		19		1.79	%	12		1.59	%	9		1.04	%
All others		81		6.02	%	46		3.41	%	37		1.77	%
Subtotal Colorado		868		56.87	%	785		61.19	%	734		70.22	%
ARIZONA
Maricopa		409		35.56	%	295		30.95	%	210		24.17	%
Mojave		2		0.11	%	7		0.81	%	6		0.99	%
Navajo		9		0.63	%	9		0.73	%	6		0.90	%
Pima		7		1.32	%	7		1.67	%	4		0.84	%
All others		80		5.51	%	35		4.65	%	25		2.88	%
Subtotal Arizona		507		43.13	%	353		38.81	%	251		29.78	%
Total		1,375		100.00	%	1,138		100.00	%	985		100.00	%

 

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

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

We selectively provide loans for the acquisition and development of land for residential building projects by financially strong developers who maintain an ongoing banking relationship with us. For this category of loans, our underwriting standards generally require that the principal amount of these loans be no more than 65% of the appraised value. Values are determined primarily by approved independent appraisers.

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