News Column

COBIZ FINANCIAL INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 14, 2014

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

Earnings are derived primarily from our net interest income, which is interest income less interest expense, and our noninterest income earned from fee-based business lines and banking service fees, offset by noninterest expense. As the majority of our assets are interest-earning and our liabilities are interest-bearing, changes in interest rates impact our net interest margin, the largest component of our operating revenue (which is defined as net interest income plus noninterest income). We manage our interest-earning assets and interest-bearing liabilities to reduce the impact of interest rate changes on our operating results. We also have focused on reducing our dependency on our net interest margin by increasing our noninterest income. We concentrate on developing an organization with personnel, management systems and products that will allow us to compete effectively and position us for growth. Although we strive to minimize costs that do not impact customer service, we continue to invest in systems and business production personnel to strengthen our future growth prospects. Industry Overview. At the December 2013 meeting, the Federal Open Market Committee (FOMC) kept the target range for federal funds rate at 0-25 basis points noting that a highly accommodative stance of monetary policy will remain appropriate after the economy strengthens to support maximum employment and price stability. The FOMC expects to maintain the target federal funds rate at 0-25 basis points for at least as long as the unemployment rate remains above 6.5%, inflation projections are no more than 0.5% above the FOMCs 2% long-run goal and longer-term inflation expectations continue to be well-anchored. The FOMC also announced that due to cumulative progress toward maximum employment and the improvement in the labor market outlook, it will reduce the purchase of agency mortgage-backed securities to $35 billion per month, down from the 29



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previous pace of $40 billion per month. The FOMC will also reduce the purchase of longer-term Treasury securities from its previous pace of $45 billion per month to $40 billion per month. These actions are intended to pressure longer-term interest rate and support the mortgage market, among other things. The actions by the FOMC have compressed net interest income and net interest margins for the banking industry by maintaining low rates on interest-earning assets. Throughout 2013, margins in the banking industry were pressured downward as higher-yielding legacy assets rolled off and were reinvested in the current low rate environment. Low interest rates, coupled with a competitive lending environment, have proven challenging for the profitability of the banking industry. It is expected that these challenges will continue until interest rates rise. The political landscape has also negatively impacted the industry. According to the Wells Fargo Small Business Index, the number of businesses indicating the government and healthcare as significant challenges increased in 2013. Although the expectation for capital spending increased during 2013, it is significantly lower than the pre-recession pace of 2006-2007. Reduced capital spending has resulted in record levels of deposits and tempered small businesses demand for loans. The high level of liquidity from the amount of deposits has exacerbated the pressure on net interest margins in the banking industry, as banks are challenged to deploy the excess liquidity at profitable spreads. The banking industry continues to be impacted by new legislative and regulatory reform proposals. In July 2013, the Board of Governors of the Federal Reserve Bank, the FDIC, and the Office of the Comptroller of the Currency (OCC) approved the final U.S. version of the Basel III agreement. Basel III replaces the federal banking agencies' general risk-based capital rules, includes a narrower definition of capital and requires higher minimum capital levels. Basel III will be effective for the Company in 2015. In December 2013, the federal banking agencies also adopted final rules implementing a provision of the Dodd-Frank Act known as the Volcker Rule, a complex regulation that prohibits banks from engaging in proprietary trading and investments in certain asset classes. Upon initial issuance, a significant unintended consequence emerged, as banks faced impairments on certain investments that were no longer allowed to be held. While the federal banking agencies issued additional guidance in January 2014 allowing banks to retain certain investments that were originally prohibited by the Volcker Rule, it underscored the complexity of the Rule and the potential ramifications to the industry. The national unemployment rate decreased from 7.9% in December 2012 to 6.7% at December 2013. The unemployment rate has steadily decreased during 2013 and is at the lowest level since October 2008. While decreasing, the unemployment rate still exceeds the maximum target level set by the FOMC. There were 24 bank failures in 2013, the lowest level since 2008. From 2008 to 2012, 465 banks failed and went into receivership with the FDIC, causing estimated losses of $86.6 billion to the Depository Insurance Fund. This compares to only 10 bank failures in the years from 2003 to 2007. The FDIC's "problem list" stood at 515 at September 30, 2013, down from 651 at the end of 2012. In the third quarter of 2013, FDIC-insured commercial banks reported a combined net income of $36 billion, the first year-over-year decline in over four years. The decrease in net income was driven by reduced revenue from mortgage banking and expenses from litigation reserves at certain large banks. Net interest income for the third quarter fell year-over-year, as interest income declined more rapidly than the decline in interest expense. Provision for loan losses continued to fall, as the industry recorded the lowest quarterly loan loss provision since the third quarter of 1999. Company Overview. From December 31, 1995, the first complete fiscal year under the current management team, to December 31, 2013, 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, three fee-based businesses and total assets of $2.8 billion. 30



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The Company has a well-capitalized balance sheet that includes common equity, preferred equity and subordinated debentures. The Company currently has $57.4 million in preferred stock issued to the Treasury in September 2011 through the SBLF program. The SBLF preferred stock has a fixed rate of 1% until 2016, when the rate will increase to 9%. The Company expects to repay the preferred stock to the Treasury when the rate increases to 9%.



As discussed in "Item 1. Business" and Note 2 to the consolidated financial statements, the Company sold its wealth transfer division that focused on high-end life insurance and closed its trust department during the fourth quarter of 2012. The results of operations related to these areas have been reported as discontinued operations. The prior period disclosures in the following table have been adjusted to conform to the new presentation.

Certain key metrics of our operating segments at or for the years ended December 31, 2013, 2012 and 2011 are as follows:

Corporate Commercial Investment Wealth Support Banking Banking



Management Insurance and Other Consolidated (in thousands, except per share data)

2013 Operating revenue(1) $ 112,431$ 2,306$ 5,029$ 11,193$ (4,346 )$ 126,613 Net income (loss) $ 32,134$ (1,019 )$ 259$ 67$ (3,830 )$ 27,611 Diluted income (loss) per common share(2) $ 0.81$ (0.03 )$ 0.01 $ - $ (0.13 )$ 0.66 2012 Operating revenue(1) $ 111,517$ 3,839$ 4,164$ 9,682$ (5,265 )$ 123,937 Net income (loss) $ 31,210$ (318 )$ (717 )$ (312 )$ (5,293 )$ 24,570 Diluted income (loss) per common share(2) $ 0.81$ (0.01 )$ (0.02 )$ (0.01 )$ (0.22 )$ 0.55 2011 Operating revenue(1) $ 111,907$ 7,245$ 4,263$ 9,270$ (5,461 )$ 127,224 Net income (loss) $ 31,393$ 686$ (293 )$ (33 )$ 1,709$ 33,462 Diluted income (loss) per common share(2) $ 0.86$ 0.02$ (0.01 ) $ - $ (0.11 )$ 0.76



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(1) Net interest income plus noninterest income. (2)



The per share impact of preferred stock dividends and earnings allocated to

participating securities are included in Corporate Support and Other.

Noted below are some of the significant financial performance measures and operational results for 2013 and 2012:

2013



Commercial Banking earnings per share were $0.81 in both 2013 and 2012. An improvement in operating revenue and a higher negative loan loss provision in 2013 were mostly offset by higher noninterest expense and higher internal overhead allocations. A decrease in nonperforming assets and classified loans resulted in a negative provision for loan losses of $7.3 million in 2013. Investment Banking lost $0.03 on a per share basis in 2013, an increase from the $0.01 loss per share in 2012, as the number of transactions closed by the segment fell in 2013. Wealth Management contributed $0.01 on a per share basis in 2013, a $0.03 increase over the $0.02 per share loss in 2012. An increase in operating revenue of 20.8% in 2013 contributed to 31



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the improvement. In addition, severance and contract termination costs of $0.5 million recognized during 2012 on discontinued operations did not impact 2013 results.



Insurance broke even in 2013 after losing $0.01 on a per share basis

in 2012 due to an increase in revenue.



Corporate Support and Other lost $0.13 per diluted share in 2013, an improvement over the loss of $0.22 in 2012. The improvement in earnings was due to a reduction in interest expense (as discussed below, the Company redeemed its 9% subordinated notes in 2013) and higher internal management fee allocations. The net interest margin on a tax-equivalent basis declined to 3.88% in 2013 compared to 4.08% in 2012. Although the net interest margin has declined, net interest income has increased due to growth in the loan portfolio. The Company maintained a very favorable funding mix, with total noninterest-bearing demand accounts representing 42.2% of total deposits at December 31, 2013. The Company exceeded the small-business loan growth threshold of 10% required under the SBLF program to achieve the lowest dividend tier on its Series C Preferred Stock. The dividend rate on the Series C Preferred Stock will be fixed at 1% through the end of 2015. In August 2013, the Company redeemed $21.0 million of 9.0% subordinated notes payable. This redemption increased the net interest margin by 0.03% during 2013 and will benefit future years by a larger amount. After redemption, the Company still maintains capital levels above the well-capitalized requirement. On July 10, 2013, the Company announced its plans to enter two new



markets in Colorado and the formation of a private banking division.

The Company received regulatory approval to open bank locations in Fort Collins and Colorado Springs in September 2013. Noninterest expense associated with these initiatives was $1.0 million in 2013. 2012



Commercial Banking earnings per share fell $0.05 to $0.81 in 2012 from

2011, primarily due to the increase in average shares outstanding.

Nonperforming assets decreased to $30.3 million at the end of 2012,

from $45.7 million at the end of 2011. The decrease in nonperforming

assets resulted in a provision for loan loss reversal of $3.5 million

in 2012.



Investment Banking lost $0.01 on a per share basis in 2012, a decrease

from the $0.02 earnings per share in 2011. The number of transactions

closed by the segment fell in 2012, while Investment Banking revenue

in 2011 was at the highest level for the segment since 2004. Wealth Management lost $0.02 on a per share basis in 2012, an increased loss over the $0.01 loss in 2011. As discussed above, the segment sold its wealth planning division and discontinued its trust department. As part of these transactions, the segment incurred severance and contract termination costs of $0.5 million. Insurance lost $0.01 on a per share basis in 2012 after breaking even



in 2011. In 2012, the segment purchased two small books of business to

enhance the employee benefits consulting division and to expand its medical malpractice specialty.



Corporate Support and Other lost $0.22 per diluted share in 2012, an

increased loss over the $0.11 loss in 2011. The increase in the loss

in 2012 is due to the reversal of a deferred tax valuation allowance

of $11.0 million that benefited the segment in 2011, but had no impact in 2012. 32



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During the first quarter of 2012, the Company completed a common stock

offering of 2,100,000 shares at a $6.00 per share price that generated

net proceeds of $11.8 million. At December 31, 2012, the Company grew small business lending sufficient to reduce its future dividend rate on the Series C Preferred Stock issued to Treasury under the SBLF to 1% effective for the second quarter of 2013.



The net interest margin on a tax-equivalent basis declined to 4.08% in

2012 compared to 4.35% in 2011. The Company's net interest margin declined due to the low rate environment. Total noninterest-bearing demand accounts represented 40.4% of total deposits at December 31, 2012. The Company's total risk-based capital ratio was 16.5% at the end of 2012, up from 16.3% at the end of 2011. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this Form 10-K beginning on page F-1. For a discussion of the segments included in our principal activities and for certain financial information for each segment, see "Segments" discussed below and Note 18 to the consolidated financial statements.



Critical Accounting Policies

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



Allowance for Loan Losses

The allowance for loan losses is a critical accounting policy that requires subjective estimates in the preparation of the consolidated financial statements. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In determining the appropriate level of the allowance for loan losses, we analyze the various components of the loan portfolio, including impaired loans, on an individual basis. When analyzing the adequacy, we segment the loan portfolio into components with similar characteristics, such as risk classification, past due status, type of loan, industry or collateral. We have a systematic process to evaluate individual loans and pools of loans within our loan portfolio. We maintain a loan grading system whereby each loan is assigned a grade between 1 and 8, with 1 representing the highest quality credit, 7 representing a loan where collection or liquidation in full is highly questionable and improbable, and 8 representing a loss that has been or will be charged-off. Loans that are graded 5 or lower are categorized as non-classified credits, while loans graded 6 and higher are categorized as classified credits that have a higher risk of loss. Grades are assigned based upon the degree of risk associated with repayment of a loan in the normal course of business pursuant to the original terms. 33



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Differences between the actual credit outcome of a loan and the risk assessment made by the Company could negatively impact the Company's earnings by requiring additional provision for loan losses. As a hypothetical example, if $25.0 million of grade 3, non-classified loans were downgraded as classified at the same historical loss factor of existing classified loans, an additional $2.7 million of provision for loan losses would be required. Conversely, a $25 million decrease in classified loans would result in a $2.7 million reversal of provision for loan losses.



See Note 4 to the consolidated financial statements for further discussion on management's methodology.

Other Real Estate Owned Other Real Estate Owned (OREO) represents properties acquired through foreclosure or physical possession. Write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses. Subsequent to foreclosure, we periodically evaluate the value of OREO held for sale and record a valuation allowance for any subsequent declines in fair value less selling costs. Subsequent declines in value are charged to operations. Fair value is based on our assessment of information available to us at the end of a reporting period and depends upon a number of factors, including our historical experience, economic conditions, and issues specific to individual properties. Our evaluation of these factors involves subjective estimates and judgments that may change. Deferred Taxes The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance may be established. We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. At December 31, 2011, the Company reversed the valuation allowance of $15.6 million it established during the fourth quarter of 2010. See Note 11 to the consolidated financial statements for additional information. A valuation allowance for deferred tax assets may be required in the future if the amounts of taxes recoverable through loss carry backs decline, if we project lower levels of future taxable income, or we project lower levels of tax planning strategies. Such additional valuation allowance would be established through a charge to income tax expense that would adversely affect our operating results.



Share-based Payments

Under ASC Topic 718, Compensation-Stock Compensation (ASC 718), we use the Black-Scholes option valuation model to determine the fair value of our stock options as discussed in Note 14 to the 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, share-based compensation expense, as calculated and recorded under ASC 718, could have been materially impacted. Furthermore, if we use different assumptions in future periods, share-based compensation expense could be materially impacted in future periods. 34



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ASC 718 requires that 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.

Fair Value

The Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), as it applies to financial assets and liabilities effective January 1, 2008. ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Fair value may be used on a recurring basis for certain assets and liabilities such as available for sale securities and derivatives in which fair value is the primary basis of accounting. Similarly, fair value may be used on a nonrecurring basis to evaluate certain assets or liabilities such as impaired loans. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions in accordance with ASC 820 to determine the instrument's fair value. At December 31, 2013, $543.4 million of total assets, consisting of $535.1 million in available for sale securities and $8.3 million in derivative instruments, represented assets recorded at fair value on a recurring basis. At December 31, 2012, $567.2 million of total assets, consisting of $558.2 million in available for sale securities and $9.0 million in derivative instruments, represented assets recorded at fair value on a recurring basis. The Company has $6.0 million of single-issuer TPS classified as Level 3. The fair value of these TPS is determined using broker-dealer quotes and trade data that may not be current. These TPS are classified as Level 3 due to lack of current market data and their illiquid nature. At December 31, 2013 and 2012, $10.4 million and $18.4 million, respectively, of total liabilities represented derivative instruments recorded at fair value on a recurring basis. Assets recorded at fair value on a nonrecurring basis consisted of impaired loans totaling $22.2 million and $16.1 million at December 31, 2013 and 2012, respectively. For additional information on the fair value of certain financial assets and liabilities see Note 17 to the consolidated financial statements. We also have other policies that we consider to be significant accounting policies; however, these policies, which are disclosed in Note 1 of the consolidated financial statements, do not meet the definition of critical accounting policies because they do not generally require us to make estimates or judgments that are difficult or subjective.



Financial Condition

The Company had total assets of $2.8 billion and total liabilities of $2.5 billion at December 31, 2013 compared to total assets of $2.7 billion and total liabilities of $2.4 billion at December 31, 2012. The following sections address the specific components of the balance sheets and significant matters relating to those components at and for the years ended December 31, 2013 and 2012. Lending Activities General. We provide a broad range of lending services, including commercial loans, commercial and residential real estate construction loans, commercial and residential real estate-mortgage loans, 35



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consumer loans, revolving lines of credit, and tax-exempt financing. Our primary lending focus is commercial and real estate lending to small- and medium-sized businesses with annual sales of $5.0 million to $75.0 million, and businesses and individuals with borrowing requirements of $250,000 to $15.0 million. At December 31, 2013, substantially all of our outstanding loans were to customers within Colorado and Arizona. Interest rates charged on loans vary with the degree of risk, maturity, underwriting and servicing costs, principal amount, and extent of other banking relationships with the customer. Interest rates are further subject to competitive pressures, money market rates, availability of funds, and government regulations. See "Net Interest Income" for an analysis of the interest rates on our loans. Credit Procedures and Review. We address credit risk through internal credit policies and procedures, including underwriting criteria, officer and customer lending limits, a multi-layered loan approval process for larger loans, periodic document examination, justification for any exceptions to credit policies, loan review and concentration monitoring. In response to current conditions and heightened default risk due to depressed real estate and collateral values, the Company expanded the resources of the credit and loan review departments to provide for a more proactive identification and management of problem credits. In addition, we provide ongoing loan officer training and review. We have a continuous loan review process designed to promote early identification of credit quality problems, assisted by a dedicated Senior Credit Officer in each geographic market. All loan officers are charged with the responsibility of reviewing, at least on a monthly basis, all past due loans in their respective portfolios. In addition, the credit administration department establishes a watch list of loans to be reviewed by the Board of Directors of the Bank. The loan portfolio is also monitored regularly by a loan review department that reports to the Chief Operations Officer of the Company and submits reports directly to the audit committee of the Board of Directors and the credit administration department.



The Company's credit approval process is as follows:

Internal lending limits for loans extended to a single borrower are established by the Board of Directors of the Bank. Credits equal to the Bank's internal lending limit require two signatures from either the Chairman of the Bank, CEO of the Bank, Chief Credit Officer or a Bank President/Senior Credit Officer. Loan authority of officers is approved by the Bank's Board of Directors, reviewed annually and updated according to the growth of the Bank. The Board of Directors may designate different approval authorities depending on loan grade, loan type, and whether the loan is a new credit or renewal of credit.



The Board of Directors of the Bank designates the approval authority

of the corresponding Market's loan committee. The presence of two of

the following is required for any committee loan approval: Chairman of

the Bank, CEO of the Bank, Chief Credit Officer or a Bank President/Senior Credit Officer. Loan Officers are permitted within a 12-month period to approve up to



$0.2 million in new credit per customer aggregate loan relationship.

In cases where the aggregate credit size exceeds the loan credit officer's individual authority, the Bank President may approve the additional credit. In order to effectively respond to the credit cycle downturn in 2008-2010, the Company made a significant investment in 2009 to establish a Special Assets Group comprised of experienced professionals to efficiently manage nonperforming assets. During 2011-2013, the Company has significantly reduced the number of employees in the Special Assets Group by redeploying them into production roles due to the improvement in asset quality. 36



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

At



December 31,

2013 2012 2011 2010 2009



(in thousands) Amount % Amount % Amount % Amount % Amount % Commercial

$ 824,453 40.3 % $ 729,442 38.8 % $



568,962 36.0 % $ 565,145 35.8 % $ 559,612 32.8 % Real estate-mortgage

900,864 44.0 880,377 46.8



784,491 49.5 783,675 49.7 832,509 48.8 Land acquisition & development

45,470 2.2 53,562 2.8 61,977 3.9 83,871 5.3 152,667 8.9 Real estate-construction 82,482 4.0 67,022 3.6 63,141 4.0 86,862 5.5 144,069 8.4 Consumer 181,056 8.8 149,638 8.0 116,676 7.4 94,607 6.0 76,103 4.5 Other 50,034 2.5 46,391 2.5 42,177 2.7 29,567 1.9 15,906 0.9 Total loans $ 2,084,359 101.8 $ 1,926,432 102.5 $



1,637,424 103.5 $ 1,643,727 104.2 $ 1,780,866 104.3 Less allowance for loan losses

(37,050 ) (1.8 ) (46,866 ) (2.5 )



(55,629 ) (3.5 ) (65,892 ) (4.2 ) (75,116 ) (4.4 )

Net loans held for investment $ 2,047,309 100.0 $ 1,879,566 100.0 $



1,581,795 100.0 $ 1,577,835 100.0 $ 1,705,750 99.9 Loans held for sale

- - - - - - - - 1,820 0.1 Net loans $ 2,047,309 100.0 % $ 1,879,566 100.0 % $ 1,581,795 100.0 % $ 1,577,835 100.0 % $ 1,707,570 100.0 % Gross loans increased $157.9 million and $289.0 million in 2013 and 2012, respectively. Commercial and Consumer loans contributed significantly to the overall loan growth in 2013, increasing $95.0 million and $31.4 million, respectively. The loan growth in 2012 was primarily driven by the Commercial ($160.4 million) and Real estate-mortgage ($95.9 million) loan segments. The Company's focus on growing its Commercial loan segment in 2013 and 2012 was successful, resulting in the Company achieving the lowest dividend rate available for preferred stock issued under the SBLF program. The growth in the Real estate-mortgage loan segment was driven primarily by an $18.6 million increase in Owner-Occupied loans in 2013 and an $82.9 million increase in investor real-estate loans in 2012. Growth in the Consumer loan segment during the last two years was attributed primarily to the jumbo mortgage product. Due to overall market illiquidity and the significant value declines on raw land during 2008-2010, the Company slowed lending activities for the acquisition and future development of land. The decrease in the land acquisition and development loan portfolio contributed significantly to the overall loan portfolio attrition in the earlier years reported in the table above. The Company has been successful in reducing high risk loan concentration levels and growing other loan categories mainly by exploring new niche lending opportunities such as tax exempt financing, jumbo mortgages, asset-based lending, and an expansion of its medical lending practice. Under state law, the aggregate amount of loans we can make to one borrower is generally limited to 15% of our unimpaired capital, surplus, undivided profits and allowance for loan losses. At December 31, 2013, our individual legal lending limit was $48.8 million. The Bank's Board of Directors has established an internal lending limit of $15.0 million for normal credit extensions and $20.0 million for the highest rated 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. At December 31, 2013 and 2012, the outstanding balance of loan participations sold by us was $3.3 million and $9.4 million, respectively. At December 31, 2013 and 2012, we had loan participations purchased from other banks totaling $28.3 million and $18.8 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. 37



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Due to the nature of our business as a commercial banking institution, our lending relationships are typically larger than those of a retail bank. The following table describes the number of relationships and the percentage of the dollar value of the loan portfolio by the size of the credit relationship. At December 31, 2013 2012 2011 Number of % of loan Number of % of loan Number of % of loan Credit Relationships relationships portfolio relationships portfolio relationships portfolio Greater than $6.0 million 54 22.7 % 49 22.0 % 33 16.3 % $3.0 million to $6.0 million 108 22.1 92 19.7 69 17.0 $1.0 million to $3.0 million 345 27.7 334 29.1 305 31.7 $0.5 million to $1.0 million 373 12.9 352 13.1 354 15.5 Less than $0.5 million 4,002 14.6 4,115 16.1 4,231 19.5 4,882 100.0 % 4,942 100.0 % 4,992 100.0 % The majority of the loan relationships exceeding $3.0 million are in our real estate and commercial portfolios. At December 31, 2013, 2012, and 2011, there were no concentrations of loans related to any single industry in excess of 10% of total loans. The Company may be subject to additional regulatory supervisory oversight if its concentration in commercial real estate lending exceeds regulatory parameters. Pursuant to interagency guidance issued by the Federal Reserve and other federal banking agencies, supervisory criteria were put in place to define commercial real estate concentrations as:





Construction, land development and other land loans that represent

100% or more of total risk-based capital; or Commercial real estate loans (as defined in the guidance) that

represent 300% or more of total risk-based capital and the real estate portfolio has increased more than 50% or more during the prior 36 months.



At December 31, 2013 and 2012, the Company's exposure to commercial real estate lending was below the parameters discussed above.

In the ordinary course of business, we enter into various types of transactions that include commitments to extend credit. We apply the same credit standards to these commitments as we apply to our other lending activities and have included these commitments in our lending risk evaluations. Our exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. See Note 15 to the consolidated financial statements for additional discussion on our commitments. Commercial Loans. Commercial loans increased $95.0 million, or 13.0%, from $729.4 million at December 31, 2012 to $824.5 million at December 31, 2013. Commercial lending consists of loans to small and medium-sized businesses in a wide variety of industries. We provide a broad range of commercial loans, including lines of credit for working capital purposes and term loans for the acquisition of equipment and other purposes. Commercial loans are generally collateralized by inventory, accounts receivable, equipment, real estate and other commercial assets, and may be supported by other credit enhancements such as personal guarantees. However, where warranted by the overall financial condition of the borrower, loans may be unsecured and based on the cash flow of the business. Terms of commercial loans generally range from one to five years, and the majority of such loans have floating interest rates. 38



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

At December 31, 2013 2012 2011 % of % of % of Commercial Commercial Commercial



(in thousands) Balance loan portfolio Balance loan portfolio

Balance loan portfolio Manufacturing $ 105,756 12.8 % $ 88,333 12.1 % $ 79,816 14.0 % Finance and insurance 77,024 9.4 77,779 10.7 78,922 13.9 Health care 100,078 12.1 96,561 13.2 56,448 9.9 Real estate services 100,230 12.2 75,487 10.3 74,359 13.1 Construction 51,905 6.3 55,289 7.6 46,508 8.2 Wholesale and retail trade 71,094 8.6 83,156 11.4 89,689 15.8 All other 318,366 38.6 252,837 34.7 143,220 25.1 $ 824,453 100.0 % $ 729,442 100.0 % $ 568,962 100.0 % Real Estate-Mortgage Loans. Real estate mortgage loans increased $20.5 million, or 2.3%, from $880.4 million at December 31, 2012 to $900.9 million at December 31, 2013. 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 U.S. Department of Agriculture (USDA) Rural Development loans. The properties securing the Company's real estate mortgage loan portfolio are located primarily in the states of Colorado and Arizona. At December 31, 2013 and 2012, 67% and 64%, respectively, of the Company's outstanding real estate mortgage loans were in the Colorado market. The following table summarizes the Company's real estate mortgage portfolio, segregated by property type. At December 31, 2013 2012 2011 (in thousands) Balance % Balance % Balance % Residential & commercial owner-occupied $ 452,959 50.3 % $ 434,384 49.3 % $ 421,350 53.7 % Residential & commercial investor 447,905 49.7 445,993 50.7 363,141 46.3 $ 900,864 100.0 % $ 880,377 100.0 % $ 784,491 100.0 % Land Acquisition and Development Loans (Land A&D). Land A&D loans decreased $8.1 million, or 15.1%, from $53.6 million at December 31, 2012 to $45.5 million at December 31, 2013. We have a portfolio of loans for the acquisition and development of land for residential building projects. Land A&D loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the land acquisition and development portfolio are generally located in the states of Colorado and Arizona. At December 31, 2013 and 2012, the majority (over 60%) of the loans were originated in the Colorado market. 39



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Real Estate-Construction Loans. Real estate construction loans increased $15.5 million, or 23.1%, from $67.0 million at December 31, 2012 to $82.5 million at December 31, 2013. 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 (speculative loan), although speculative loans are provided on a more selective basis. Residential construction loans are due upon the sale of the completed project and are generally collateralized by first liens on the real estate and have floating interest rates. In addition, these loans are generally secured by personal guarantees to provide an additional source of repayment. We typically require a permanent financing commitment or prequalification be in place before we make a residential construction loan. Moreover, we generally monitor construction draws monthly and inspect property to ensure that construction is progressing as projected. Our underwriting standards generally require that the principal amount of a speculative loan be no more than 75% of the appraised value of the completed construction project or 80% of pre-sold projects. Values are determined primarily by approved independent appraisers. We also originate loans to finance the construction of multi-family, office, industrial, retail and tax credit projects. These projects are predominantly owned by the user of the property, or are sponsored by financially strong developers who maintain an ongoing banking relationship with us. Our underwriting standards generally require that the principal amount of these loans be no more than 75% of the appraised value. Values are determined primarily by approved independent appraisers. The properties securing the Company's real estate loan portfolio are generally located in the states of Colorado and Arizona. At December 31, 2013 and 2012, the majority (77% and 96%, respectively) of the Company's real estate construction loans outstanding were generated in the Colorado market. Consumer Loans. Consumer loans increased $31.4 million, or 21.0%, from $149.6 million at December 31, 2012 to $181.0 million at December 31, 2013. We provide a broad range of consumer loans to customers, including personal lines of credit, home equity loans and automobile loans. In order to improve customer service, continuity and customer retention, the same loan officer often services the banking relationships of both the business and business owners or management. In 2010, the Company introduced a new product line, jumbo mortgage loans. This residential mortgage financing program offers competitive pricing and terms for the purchase, refinance or permanent financing for non-conforming mortgage loans, which generally exceed $417,000. For primary residences, the standard loan-to-value is 75% for loans up to $2.0 million. The loan-to-value decreases as the size of the loan increases, with a standard loan-to-value of 50% on loans in excess of $3.0 million. In addition, we generally only finance 3/1, 5/1, and 7/1 adjustable-rate mortgage loans as well as 15 year fixed rate loans. In addition we broker 15- and 30-year fixed rate conforming mortgages. Jumbo mortgage loans at December 31, 2013 and 2012, totaled $139.6 million or 77% and $96.5 million or 64%, respectively, of the consumer loan portfolio.



Nonperforming Assets

Our nonperforming assets consist of nonaccrual loans, restructured loans, loans past due 90 days or more, OREO and other repossessed assets. Nonaccrual loans are those loans for which the accrual of interest has been discontinued. Impaired loans are defined as loans for which, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement 40



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(all of which were on a nonaccrual basis). The following table sets forth information with respect to these assets at the dates indicated.

At December 31, (in thousands) 2013 2012 2011 2010 2009 Nonperforming loans: Loans 90 days or more past due and still accruing interest $ 19$ 35$ 212$ 202$ 509 Nonaccrual loans: Commercial 1,330 3,324 3,105 8,722 12,696 Real estate-mortgage 10,504 10,779 9,295 8,446 18,832 Land acquisition & development 1,986 4,655 5,112 9,690 34,033 Real estate-construction - 271 6,985 12,614 9,632 Consumer and other 101 648 2,527 3,060 3,496 Total nonaccrual loans 13,921 19,677 27,024 42,532 78,689 Total nonperforming loans 13,940 19,712 27,236 42,734 79,198 OREO and repossessed assets 5,097 10,577 18,502 25,095 25,318 Total nonperforming assets $ 19,037$ 30,289$ 45,738$ 67,829$ 104,516 Performing renegotiated loans $ 29,683$ 43,321$ 20,633$ 16,488 $ - Allowance for loan losses $ 37,050$ 46,866$ 55,629$ 65,892$ 75,116 Allowance for credit losses - - 35 61 155



Allowance for loan and credit losses $ 37,050$ 46,866$ 55,664$ 65,953$ 75,271

Nonperforming assets to total assets 0.68 % 1.14 % 1.89 %

2.83 % 4.24 % Nonperforming loans to total loans 0.67 % 1.02 % 1.66 % 2.60 % 4.44 % Nonperforming loans and OREO to total loans and OREO 0.91 % 1.56 % 2.76 % 4.06 % 5.78 % Allowance for loan and credit losses to total loans (excluding loans held for sale) 1.78 % 2.43 % 3.40 % 4.01 % 4.23 % Allowance for loan and credit losses to nonperforming loans 265.78 % 237.75 % 204.38 %



154.33 % 97.28 %

Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, the borrower's financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed on nonaccrual status when it becomes 90 days past due. When a loan is placed on nonaccrual status, all accrued and unpaid interest on the loan is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. When the issues relating to a nonaccrual loan are finally resolved, there may ultimately be an actual write-down or charge-off of the principal balance of the loan, which may necessitate additional charges to earnings. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to the borrower, or the reduction of interest or principal, have been granted due to the borrower's weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. Interest income that would have been recorded had nonaccrual loans performed in accordance with their original contract terms during 2013, 2012 and 2011, was $0.6 million, $0.7 million and $0.8 million, respectively. OREO represents real property taken by the Company either through foreclosure or through a deed in lieu thereof from the borrower. Repossessed assets include vehicles and other commercial assets acquired under agreements with delinquent borrowers. Subsequent to acquisition at fair value, repossessed assets and OREO are carried at the lesser of cost or fair market 41



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value, less selling costs. See Note 17 to the consolidated financial statements for additional discussion on the valuation of OREO assets.

Nonperforming assets decreased $11.3 million to $19.0 million at December 31, 2013, from $30.3 million at December 31, 2012. The following table summarizes nonperforming assets by type and market.

2013 2012 Total in NPAs Total in NPAs (in thousands) Colorado Arizona Total category as a % Colorado Arizona Total category as a % Commercial $ 963$ 386$ 1,349$ 824,453 0.16 % $ 1,460$ 1,899$ 3,359$ 729,442 0.46 % Real estate-mortgage 580 9,924 10,504 900,864 1.17 3,105 7,674 10,779 880,377 1.22 Land acquisition & development 1,067 919 1,986 45,470 4.37 1,697 2,958 4,655 53,562 8.69 Real estate-construction - - - 82,482 0.00 271 - 271 67,022 0.40 Consumer 101 - 101 181,056 0.06 202 446 648 149,638 0.43 Other loans - - - 50,034 0.00 - - - 46,391 0.00 OREO and repossessed assets 3,769 1,328 5,097 5,097 NA 8,912 1,665 10,577 10,577 NA Nonperforming assets $ 6,480$ 12,557$ 19,037$ 2,089,456 0.91 % $ 15,647$ 14,642$ 30,289$ 1,937,009 1.56 % All nonaccrual loan categories as well as OREO reflected improvements year-over-year. Commercial and Land A&D nonaccrual loans were the primary contributors to the overall decline in nonperforming loans during 2013. The Company foreclosed on three properties during 2013 while it disposed of seven properties resulting in the Company's OREO portfolio contracting 51.8% from 2012 to $5.1 million at December 31, 2013. At December 31, 2013, approximately 34% or $6.5 million and 66% or $12.5 million of nonperforming assets were concentrated in Colorado and Arizona, respectively. At December 31, 2012, approximately 52% or $15.6 million and 48% or $14.6 million of nonperforming assets were located in Colorado and Arizona, respectively. The Company has dedicated significant resources to the workout and resolution of nonaccrual loans and OREO and continues to closely monitor the financial condition of its clients. In addition to the nonperforming assets described above, the Company had 66 customer relationships considered by management to be potential problem loans with outstanding principal of approximately $22.5 million. A potential problem loan is one as to which management has concerns about the borrower's future performance under the terms of the loan contract. For our protection, management monitors these loans closely. These loans are current as to the principal and interest and, accordingly, are not included in the nonperforming asset categories. However, further deterioration may result in the loan being classified as nonperforming. The level of potential problem loans is factored into the determination of the adequacy of the allowance for loan losses. Analysis of Allowance for Loan and Credit Losses. The allowance for loan losses represents management's recognition of the risks of extending credit and its evaluation of the quality of the loan portfolio. The allowance is maintained to provide for probable credit losses related to specifically identified loans and for probable incurred losses in the loan portfolio at the balance sheet date. The allowance is based on various factors affecting the loan portfolio, including a review of problem loans, business conditions, historical loss experience, evaluation of the quality of the underlying collateral, and holding and disposal costs. The allowance is increased by additional charges to operating income and reduced by loans charged off, net of recoveries. 42



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The allowance for credit losses represents management's recognition of a separate reserve for off-balance sheet loan commitments and letters of credit. While the allowance for loan losses is recorded as a contra-asset to the loan portfolio on the consolidated balance sheets, the allowance for credit losses is recorded in Accrued Interest and Other Liabilities in the accompanying consolidated balance sheets. Although the allowances are presented separately on the consolidated balance sheets, any losses incurred from credit losses would be reported as a charge-off in the allowance for loan losses, since any loss would be recorded after the off-balance sheet commitment had been funded. Due to the relationship of these allowances, as extensions of credit underwritten through a comprehensive 43



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risk analysis, information on both the allowance for loan and credit losses positions is presented in the following table.

For the year ended December 31, (in thousands) 2013 2012 2011 2010 2009 Balance of allowance for loan losses at beginning of period $ 46,866$ 55,629$ 65,892$ 75,116$ 42,851 Charge-offs: Commercial (613 ) (1,122 ) (4,559 ) (8,357 ) (14,991 ) Real estate-mortgage (3,055 ) (2,789 ) (7,064 ) (11,490 ) (8,118 ) Land acquisition & development (794 ) (3,135 ) (1,635 ) (23,077 ) (44,569 ) Real estate-construction (2 ) (867 ) (5,118 ) (6,181 ) (6,732 ) Consumer (122 ) (653 ) (309 ) (1,079 ) (2,081 ) Other (5 ) (34 ) (61 ) (443 ) (86 ) Total charge-offs (4,591 ) (8,600 ) (18,746 ) (50,627 ) (76,577 ) Recoveries: Commercial 1,035 2,021 1,377 2,361 1,989 Real estate-mortgage 1,099 746 1,472 451 75 Land acquisition & development 1,258 1,757 1,216 2,662 776 Real estate-construction 141 3 132 655 131 Consumer 45 43 281 134 36 Other 1 - 3 13 20 Total recoveries 3,579 4,570 4,481 6,276 3,027 Net charge-offs (1,012 ) (4,030 ) (14,265 ) (44,351 ) (73,550 ) Provision for loan losses charged to operations (8,804 ) (4,733 ) 4,002 35,127 105,815 Balance of allowance for loan losses at end of period $ 37,050$ 46,866$ 55,629$ 65,892$ 75,116 Balance of allowance for credit losses at beginning of period $ - $ 35$ 61$ 155$ 259 Provision for credit losses charged to operations - (35 ) (26 ) (94 ) (104 ) Balance of allowance for credit losses at end of period $ - $ - $ 35$ 61$ 155 Total provision for loan and credit losses charged to operations $ (8,804 )$ (4,768 )$ 3,976$ 35,033$ 105,711 Ratio of net charge-offs to average loans 0.05 % 0.23 % 0.86 % 2.62 % 3.78 % Average loans outstanding during the period $ 1,991,251$ 1,743,473$ 1,651,247$ 1,693,546$ 1,948,120 Additions to the allowances for loan and credit losses, which are charged as expenses on our consolidated statements of income, are made periodically to maintain the allowances at the appropriate level, based on our analysis of the potential risk in the loan and commitment portfolios. Loans charged off, net of amounts recovered from previously charged off loans, reduce the allowance for loan losses. The amount of the allowance is a function of the levels of loans outstanding, the level of nonperforming loans, historical loan loss experience, amount of loan losses charged against the reserve 44



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during a given period and current economic conditions. Federal regulatory agencies, as part of their examination process, review our loans and allowance for loan and credit losses. We believe that our allowance for loan and credit losses is adequate to cover anticipated loan and credit losses. However, management may determine a need to increase the allowances for loan and credit losses, or regulators, when reviewing the Bank's loan and commitment portfolio in the future, may request the Bank increase such allowances. Either of these events could adversely affect our earnings. Further, there can be no assurance that actual loan and credit losses will not exceed the allowances for loan and credit losses. The allowance for loan losses consists of three elements: (i) specific reserves determined in accordance with ASC Topic 310-Receivables based on probable losses on specific loans; (ii) general reserves determined in accordance with guidance in ASC Topic 450-Contingencies, based on historical loan loss experience adjusted for other qualitative risk factors both internal and external to the Company; and (iii) unallocated reserves, which is intended to capture potential misclassifications in the loan grading system. The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in actual and expected credit losses. These changes are reflected in both the general and unallocated reserves. The historical loss ratios and estimated risk factors related to segmenting our loan portfolio, which are key considerations in this analysis, are updated quarterly and are weighted more heavily for recent economic conditions. The review of reserve adequacy is performed by executive management and presented to the Audit Committee quarterly for its review and consideration. For additional information on the Company's methodology for estimated the allowance for loan and credit losses, see Note 4 to the consolidated financial statements. The table below provides an allocation of the allowance for loan and credit losses by loan and commitment type; however, allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories: At December 31, 2013 2012 2011 2010 2009 Loans in Loans in Loans in Loans in Loans in category as category as category as category as category as Amount a % of Amount a % of Amount a % of Amount a % of Amount a % of of total gross of total gross of total gross of total gross of total gross (in thousands) allowance loans allowance loans allowance loans allowance loans allowance loans Commercial $ 14,103 39.6 % $ 13,448 37.9 % $ 14,048 34.8 % $ 17,169 34.4 % $ 15,733 31.4 % Real estate-mortgage 14,919 43.2 17,832 45.7 19,889 47.9 17,677 47.7 14,535 46.7 Land acquisition & development 2,526 2.2 9,075 2.8 11,013 3.8 14,938 5.1 30,097 8.6 Real estate-construction 820 3.9 818 3.5 2,746 3.9 6,296 5.3 5,700 8.1 Consumer 2,471 8.7 3,061 7.8 4,837 7.1 3,373 5.8 2,143 4.3 Other 479 2.4 451 2.3 551 2.5 354 1.7 419 0.9 Unallocated 1,732 - 2,181 - 2,545 - 6,085 - 6,489 - Off-balance sheet commitments - - - - 35 - 61 - 155 - Total $ 37,050 100.0 % $ 46,866 100.0 % $ 55,664 100.0 % $ 65,953 100.0 % $ 75,271 100.0 %

We believe that any allocation of the allowance into categories creates an appearance of precision that does not exist. The allocation table should not be interpreted as an indication of the specific amounts, by loan classification, to be charged to the allowance. We believe that the table is a useful device for assessing the adequacy of the allowance as a whole. The allowance is utilized as a single unallocated allowance available for all loans. The Company reversed $8.8 million and $4.7 million in provision for loan losses during the years ended December 31, 2013 and 2012, respectively. The loan loss provision reversal is consistent with the overall reduction in nonperforming assets, charge-offs, and classified loans. The Company recorded 45



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$4.6 million in charge-offs during 2013 compared to $8.6 million in 2012. Although the Company continues to record charge-offs, the Company's credit quality outlook remains favorable as reflected in the continuous decline of nonperforming assets since 2009. The Company's allowance for loan and credit losses to total loans was 1.78% and 2.43% at December 31, 2013 and 2012, respectively. The allowance for loan and credit losses to nonperforming loans increased from 237.8% at December 31, 2012, to 265.8% at December 31, 2013. We believe that our allowance for loan and credit losses is adequate to cover anticipated loan and credit losses. However, due to changes in the factors considered by management in evaluating the adequacy of the allowance for loan and credit losses, it is possible management may determine a need to increase the allowance for loan and credit losses. Such determination could have an adverse effect in the level of future loan and credit loss provisions and the Company's earnings. Investments The investment portfolio is primarily comprised of MBS explicitly (GNMA) and implicitly (FNMA and FHLMC) backed by the U.S. Government, with the majority of the portfolio either maturing or repricing within one to five years. The portfolio does not include any securities exposed to sub-prime mortgage loans. The investment portfolio also includes single-issuer trust preferred securities and corporate debt securities. The corporate debt securities portfolio is mainly comprised of six issuers in the Fortune 100. Over eighty percent of the corporate debt securities portfolio is investment grade. None of the issuing institutions are in default nor have interest payments on the trust preferred securities been deferred. Our investment strategies are reviewed in bi-monthly meetings of the Asset-Liability Management Committee.



Our mortgage-backed securities are typically classified as available for sale. Our goals with respect to the securities portfolio are to:

Maximize safety and soundness; Provide adequate liquidity;



Maximize rate of return within the constraints of applicable liquidity

requirements; and Complement asset/liability management strategies.



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

2013 vs 2012



2012 vs 2011

At December 31, Increase (decrease) Increase (decrease) (in thousands) 2013 2012 2011 Amount % Amount % Mortgage-backed securities $ 333,386$ 359,406$ 420,784$ (26,020 )

(7.2 )% $ (61,378 ) (14.6 )% U.S. government agencies - 3,020 44,205 (3,020 ) (100.0 ) (41,185 ) (93.2 ) Trust preferred securities 95,415 95,240 99,018 175 0.2 (3,778 ) (3.8 ) Corporate debt securities 110,982 105,022 56,817 5,960 5.7 48,205 84.8 Private-label MBS - - 1,990 - - (1,990 ) (100.0 ) Municipal securities 8,616 940 940 7,676 816.6 - - Other investments 8,397 8,037 9,554 360 4.5 (1,517 ) (15.9 ) Total $ 556,796$ 571,665$ 633,308$ (14,869 ) (2.6 )% $ (61,643 ) (9.7 )% 46



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At December 31, 2013, investments represented 19.88% of total assets compared to 21.54% at 2012. Growth in the loan portfolio has allowed the Company to reduce the investment portfolio as a percentage of total assets. Available for sale securities had a net unrealized gain of $8.2 million at December 31, 2013, an $8.6 million decrease from the net unrealized gain of $16.8 million at December 31, 2012. At December 31, 2013, the Company's securities in a temporary unrealized loss position of $3.6 million consisted primarily of mortgage-backed, trust preferred and corporate debt securities. The fair value of these securities is expected to recover as the securities approach their stated maturity or repricing date. Other investments consist primarily of FHLB stock related to maintaining a borrowing base with the FHLB. FHLB stock holdings are largely dependent upon the Company's liquidity position. To the extent the need for wholesale funding increases or decreases, the Company may purchase additional or sell excess FHLB stock, respectively. During 2012, other investments decreased $1.5 million due to net redemptions of FHLB stock. The following table sets forth the book value, maturity and approximate yield of the securities in our investment portfolio at December 31, 2013. Other Investments include stock in the Federal Home Loan Bank and the Federal Reserve Bank, which have no maturity date. These investments have been included in the total column only. Maturity Within 1 year 1 - 5 years 5 - 10 years Over 10 years Total book value (in thousands) Amount Yield %(1) Amount Yield %(1) Amount Yield %(1) Amount Yield %(1) Amount Yield %(1) Mortgage-backed securities $ 1 6.50 % $ 803 5.39 % $ 15,530 4.97 % $ 317,052 2.74 % $ 333,386 2.85 % Trust preferred securities - 0.00 % - 0.00 % - 0.00 % 95,415 5.06 % 95,415 5.06 % Corporate debt securities 7,734 6.51 % 82,139 4.27 % 21,109 4.07 % - 0.00 % 110,982 4.39 % Municipal securities 202 3.63 % 626 4.17 % 5,894 2.16 % 1,894 8.06 % 8,616 3.64 % Other investments - 0.00 % - 0.00 % - 0.00 % 2,172 2.61 % 8,397 3.57 % Total $ 7,937 6.44 % $ 83,568 4.28 % $ 42,533 4.13 % $ 416,533 3.29 % $ 556,796 3.56 %



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(1) Yields have been adjusted to reflect a tax-equivalent basis where applicable. Excluding securities issued by government-sponsored entities, the investment portfolio at December 31, 2013, does not include any single issuer for which the aggregate carrying amount exceeds 10% of the Company's shareholders' equity. 47



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Table of Contents Other Assets The following table sets forth the values of our other miscellaneous assets at the dates indicated. 2013 vs 2012 2012 vs 2011 At December 31, Increase (decrease) Increase (decrease) (in thousands) 2013 2012 2011 Amount % Amount % Intangible assets, net $ 2,798$ 3,573$ 3,399$ (775 ) (21.7 )% $ 174 5.1 % Bank-owned life insurance 43,768 42,473 39,767 1,295 3.0 2,706 6.8 Premises and equipment, net 6,034 7,091 8,388 (1,057 ) (14.9 ) (1,297 ) (15.5 ) Accrued interest receivable 8,770 8,354 8,273 416 5.0 81 1.0 Deferred income taxes, net 26,506 31,561 33,018 (5,055 ) (16.0 ) (1,457 ) (4.4 ) Other real estate owned 5,097 10,577 18,502 (5,480 ) (51.8 ) (7,925 ) (42.8 ) Other 27,585 32,888 37,844 (5,303 ) (16.1 ) (4,956 ) (13.1 ) Total $ 120,558$ 136,517$ 149,191$ (15,959 ) (11.7 )% $ (12,674 ) (8.5 )% Intangible Assets. Intangible assets primarily represent client relationship lists. During 2013, intangible assets were reduced by $0.1 million due to a decrease in the amount of contingent consideration owed under an earnout arrangement. During the latter half of 2012, the Company purchased two insurance books of businesses resulting in a $1.0 million increase in intangible assets. During 2012, a small book of insurance business was sold and a related intangible asset of $0.1 million was removed from the books. During the years ended December 31, 2013 and 2012, the Company recognized $0.7 million of intangible asset amortization from continuing operations. Bank-Owned Life Insurance (BOLI). BOLI increased $1.3 million during 2013 to $43.8 million at December 31, 2013, compared to $42.5 million at the end of 2012. The increase during 2013 relates solely to changes in the cash surrender value of the underlying policies. The increase during 2012 related to additional policy purchases of $1.4 million and growth in the cash surrender value of $1.3 million. Deferred Income Taxes, net. The decrease in net deferred income tax assets during 2013 of $5.0 million was driven primarily by the tax effect of the reduction of the allowance for loan losses of $9.8 million. The decrease of $1.5 million in net deferred income tax assets during 2012 compared to 2011 was also primarily the result of the tax effect of the provision for loan loss reversal of $4.7 million. See Note 11 to the consolidated financial statements for additional discussion of income taxes and deferred tax items. Other Real Estate Owned. OREO decreased during the year ended December 31, 2013, to $5.1 million compared to $10.6 million a year earlier. During 2013, the Company foreclosed on $0.4 million in new properties, sold $5.2 million and recognized valuation adjustments and net losses on sale of $0.7 million. At December 31, 2013, OREO was comprised of eight properties with an average carrying value of $0.2 million excluding the largest property with a value of $3.3 million located in Colorado. An additional valuation adjustment of $2.1 million was recorded during 2013 reducing the carrying value of the largest Colorado property. Approximately 74% of OREO are located in Colorado and 26% in Arizona at December 31, 2013. OREO decreased during the year ended December 31, 2012 to $10.6 million compared to $18.5 million a year earlier. During 2012 the Company foreclosed on $0.4 million in new properties, sold $6.9 million and recognized valuation adjustments and losses on sale of $1.4 million. At December 31, 2012, OREO was comprised of 12 properties with an average carrying value of $0.5 million, excluding the largest property with value of $5.4 million located in Colorado. Approximately 84% of OREO are located in Colorado and 16% in Arizona. 48



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Other Assets. Other assets decreased $5.3 million during 2013 to $27.6 million at December 31, 2013. The decline relates primarily to repayment by the FDIC of the Company's prepaid assessment ($1.0 million), release of restricted cash held with a correspondent bank ($4.5 million), decreases in the fair market value of derivative assets ($1.6 million) and decreases in fees receivable ($2.1 million). Offsetting reductions was an increase in accounts receivable relating to called securities in the process of settlement ($4.5 million).



Other assets decreased $5.0 million during the year ended December 31, 2012. The decline is primarily due to the receipt of $5.1 million in federal tax refunds and amortization of prepaid FDIC insurance deposits.

Deposits

Our primary source of funds has historically been customer deposits. We offer a variety of accounts for depositors, which are designed to attract both short- and long-term deposits. These accounts include certificates of deposit (CDs), money market accounts, savings accounts, checking accounts, and individual retirement accounts. Average noninterest-bearing deposits increased $119.8 million from $759.2 million at December 31, 2012 compared to $879.0 million at December 31, 2013. We believe we receive a large amount of noninterest-bearing deposits because we provide customers the option of paying for treasury management services in cash or by maintaining additional noninterest-bearing account balances. The Company's noninterest-bearing deposits represented over 42% of total deposits at December 31, 2013. The Company began offering interest-bearing demand deposits in 2011 in response to the Dodd-Frank Act repeal of the prohibition of paying interest on demand deposits. Interest-bearing accounts earn interest at rates based on competitive market factors and our desire to increase or decrease certain types of maturities or deposits. At the end of 2012, Dodd-Frank unlimited insurance for noninterest-bearing transaction accounts expired. As a result, funds held in noninterest-bearing deposit accounts no longer receive unlimited deposit insurance coverage by the FDIC. All depositors' accounts, including all non-interest bearing transaction accounts will be insured by the standard maximum deposit insurance amount of $250,000. In response to the expiration of the unlimited FDIC insurance, the Company began offering a new deposit product in 2013 similar to CDARS, discussed below. This new product will provide a way for customers to obtain full FDIC coverage on transaction accounts through a reciprocal deposit network. The Company has not participated in the brokered deposit market in any meaningful way since before 2009 due to the strength of our core deposits. Brokered deposits are considered a wholesale financing source and can be used as an alternative to other short-term borrowings. The Company views its reciprocal Certificate of Deposit Account Registry Service (CDARS) accounts as customer-related deposits. The CDARS program is provided through a third party and designed to provide full FDIC insurance on deposit amounts larger than the stated maximum by exchanging or reciprocating larger depository relationships with other member banks. Depositor funds are broken into smaller amounts and placed with other banks that are members of the network. Each member bank issues CDs in amounts under $250,000, so the entire deposit is eligible for FDIC insurance. CDARS are technically brokered deposits; however, the Company considers the reciprocal deposits placed through the CDARS program as core funding due to the customer relationship that generated the transaction and does not report the balances as brokered sources in its internal or external financial reports. 49



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

For the year ended December 31, 2013 2012 2011 Weighted Weighted Weighted average average average (in thousands) Average balance interest rate % Average balance interest rate % Average balance interest rate % Money market $ 595,922 0.41 % $ 565,513 0.56 % $ 499,499 0.73 % Interest-bearing demand and NOW 375,581 0.23 % 334,986 0.34 % 223,257 0.33 % Savings 13,349 0.06 % 11,185 0.10 % 9,997 0.17 % Eurodollar - 0.00 % - 0.00 % 96,378 0.73 % Certificates of deposit 255,073 0.51 % 284,912 0.65 % 363,134 0.81 % Total interest-bearing deposits 1,239,925 0.37 % 1,196,596 0.51 % 1,192,265 0.67 % Noninterest-bearing demand accounts 878,985 0.00 % 759,162 0.00 % 712,830 0.00 % Total deposits $ 2,118,910 0.22 % $ 1,955,758 0.32 % $ 1,905,095 0.42 % Maturities of CDs of $100,000 and more at December 31, 2013, are as follows: (in thousands) Amount Remaining maturity: Three months or less $ 87,848 Over three months through six months 56,079 Over six months through 12 months 46,776 Over 12 months 23,642 Total $ 214,345 Deposits overall increased $149.8 million or 7.0% and $210.9 million or 11.0% to $2.3 billion and $2.1 million at December 31, 2013 and 2012, respectively. CDs decreased $15.1 million or 5.8% and $44.6 million or 14.6% to $245.3 million and $260.4 million at December 31, 2013 and 2012, respectively. The Company has intentionally priced CDs out of its portfolio due to our excess liquidity and the high cost of these deposits. Declines in CDs since 2009 have been offset by the earlier mentioned increases in noninterest-bearing deposits.



Short-Term Borrowings

Our short-term borrowings include federal funds purchased, securities sold under agreements to repurchase which generally mature within 90 days or less, and advances from the FHLB with original maturities of one year or less. 50



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The following table sets forth information relating to our short-term borrowings during the years ended December 31, 2013, 2012 and 2011. See the Liquidity and Capital Resources section below and Note 8 to the consolidated financial statements for further discussion.

At or for the year ended December 31, (in thousands) 2013 2012 2011 Federal funds purchased Balance at end of period $ - $ - $ - Average balance outstanding for the period 10,249 3,609



1,119

Maximum amount outstanding at any month end during the period 85,287 25,236



17,675

Weighted average interest rate for the period 0.47 % 0.35 % 0.38 % Weighted average interest rate at period end 0.00 % 0.00 % 0.00 % FHLB overnight advances Balance at end of period $ - $ - $ 20,000 Average balance outstanding for the period 33,211 35,826



13,023

Maximum amount outstanding at any month end during the period 91,000 114,086



71,839

Weighted average interest rate for the period 0.19 % 0.31 % 0.25 % Weighted average interest rate at period end 0.00 % 0.00 % 0.26 % Securities sold under agreements to repurchase Balance at end of period $ 138,494$ 127,887$ 127,948 Average balance outstanding for the period 154,502 138,948



156,745

Maximum amount outstanding at any month end during the period 178,703 154,106



166,498

Weighted average interest rate for the period 0.22 % 0.31 % 0.50 % Weighted average interest rate at period end 0.22 % 0.25 %



0.36 %

The following tables contain supplemental information on securities sold under agreements to repurchase during the years ended December 31, 2013, 2012 and 2011. The Company sells securities under agreements to repurchase to our customers (Customer Repurchases) as a way to enhance our customers' interest-earning ability. We do not consider Customer Repurchases to be a wholesale funding source but rather an additional treasury management service provided to our customer base. Customer Repurchases fluctuate on a daily basis as customer deposit balances fluctuate. Average balance for quarter ended (in thousands) March 31, June 30, September 30, December 31, Year 2013 $ 144,737$ 149,203$ 160,514$ 163,284 2012 131,072 125,525 151,222 147,773 2011 156,799 160,832 160,807 148,590 Ending balance for quarter ended (in thousands) March 31, June 30, September 30, December 31, Year 2013 $ 124,882$ 133,402$ 164,188$ 138,494 2012 118,499 127,144 124,836 127,887 2011 157,674 144,843 131,877 127,948 Highest monthly balance for quarter ended (in thousands) March 31, June 30, September 30, December 31, Year 2013 $ 141,140$ 159,512$ 167,712$ 178,703 2012 137,124 135,452 154,106 147,531 2011 158,361 166,498 160,068 151,938 51



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Long-Term Debt

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

At December 31, (in thousands) 2013 2012 Junior subordinated debentures: CoBiz Statutory Trust I $ 20,619$ 20,619 CoBiz Capital Trust II 30,928 30,928 CoBiz Capital Trust III 20,619 20,619 Total junior subordinated debentures $ 72,166$ 72,166 Other long-term debt: Subordinated notes payable $ 0$ 20,984



For a discussion of long-term debt and for certain financial information for each issuance, see Note 9 to the consolidated financial statements.

Results of Operations

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

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During the fourth quarter of 2012, the Company exited its trust and wealth transfer business lines. The table below reports, for all periods presented, the results of operations associated with these business lines as income from discontinued operations, net of tax. 2013 vs 2012 2012 vs 2011 For the year ended December 31, Increase (decrease) Increase (decrease) (in thousands) 2013 2012 2011 Amount % Amount % INCOME STATEMENT DATA Interest income $ 106,127$ 106,128$ 111,264$ (1 ) 0.0 % $ (5,136 ) (4.6 )% Interest expense 10,426 12,750 14,863 (2,324 ) (18.2 ) (2,113 ) (14.2 ) NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 95,701 93,378 96,401 2,323 2.5 (3,023 ) (3.1 ) Provision for loan losses (8,804 ) (4,733 ) 4,002 (4,071 ) (86.0 ) (8,735 ) (218.3 ) NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 104,505 98,111 92,399 6,394 6.5 5,712 6.2 Noninterest income 30,912 30,559 30,823 353 1.2 (264 ) (0.9 ) Noninterest expense 94,628 91,166 95,821 3,462 3.8 (4,655 ) (4.9 ) INCOME BEFORE INCOME TAXES 40,789 37,504 27,401 3,285 8.8 10,103 36.9 Provision (benefit) for income taxes 13,351 13,258 (5,808 ) 93 0.7 19,066 328.3 NET INCOME FROM CONTINUING OPERATIONS 27,438 24,246 33,209 3,192 13.2 (8,963 ) (27.0 ) Income from discontinued operations, net of tax 173 324 253 (151 ) (46.6 ) 71 28.1 NET INCOME $ 27,611$ 24,570$ 33,462$ 3,041

12.4 % $ (8,892 ) (26.6 )% Earnings per common share: Basic-from continuing operations $ 0.66$ 0.54$ 0.75 Diluted-from continuing operations $ 0.66$ 0.54$ 0.75 Basic-from discontinued operations $ - $ 0.01$ 0.01 Diluted-from discontinued operations $ - $ 0.01$ 0.01 Basic $ 0.66$ 0.55$ 0.76 Diluted $ 0.66$ 0.55$ 0.76 Cash dividends declared per common share $ 0.12$ 0.07$ 0.04 Earnings Performance. Net income for the year ended December 31, 2013 increased $3.0 million to $27.6 million from $24.6 million a year earlier. Return on average total assets increased to 1.02% for the year ended December 31, 2013 compared to 0.98% a year earlier. Return on average shareholder's equity improved to 10.29% for the year ended December 31, 2013 from 10.15% from the prior year. The earnings performance improvement during 2013 was due to a negative provision for loan losses and an increase in net interest income partially offset by an increase in noninterest expense. The low interest rate environment continues to exert pressure on the Company's net interest income and in 2013 it limited interest income gains despite the growth in interest earning assets. The overall increase in net interest income was the result of a decline in interest expense resulting from the proactive management of interest-bearing liability costs, including the redemption of $21.0 million of the Company's 9% Subordinated Notes Payable (Notes) during the third quarter of 2013. 53



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The 2012 decline in net income is primarily the result of the $15.6 million deferred income tax asset valuation reversal recorded during the fourth quarter of 2011. The Company reported lower net interest income during 2012 as a result of the low interest rate environment. Noninterest expenses decreased $4.7 million during 2012 primarily as a result of a decline in FDIC assessments and lower losses on OREO and AFS securities.



Earnings per common share on a diluted basis (from continuing operations) for the year ended December 31, 2013, 2012 and 2011, was $0.66, $0.54, and $0.75, respectively.

Net Interest Income. The largest component of our net income is our net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. The majority of our assets are interest-earning and our liabilities are interest-bearing. Accordingly, changes in interest rates may impact our net interest margin. The Federal Open Markets Committee ("FOMC") uses the federal funds rate, which is the interest rate used by banks to lend to each other, to influence interest rates and the national economy. Changes in the federal funds rate have a direct correlation to changes in the prime rate, the underlying index for most of the variable-rate loans issued by the Company. The FOMC has held the target federal funds rate at a range of 0-25 basis points since December 2008. As the Company is asset sensitive, continued low rates will negatively impact the Company's earnings and net interest margin. The following table presents, for the periods indicated, certain information related to our average asset and liability structure and our average yields on assets and average costs of liabilities. Such yields 54



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are derived by dividing income or expense by the average balance of the corresponding assets or liabilities.

For the year ended December 31, 2013 2012 2011 Interest Average Interest Average Interest Average Average earned or yield or Average



earned or yield or Average earned or yield or (in thousands) balance paid cost(3) balance

paid cost(3) balance paid cost(3) Assets Federal funds sold and other $ 26,150$ 117 0.45 % $ 31,575$ 114 0.36 % $ 32,183$ 130 0.40 % Investment securities(1) 567,256 16,963 2.99 % 614,468 19,540 3.18 % 621,346 22,743 3.66 % Loans(1)(2) 1,991,251 91,807 4.61 % 1,743,473 88,381 5.07 % 1,651,247 89,575 5.42 % Allowance for loan losses (44,297 ) (51,627 ) (62,381 ) Total interest earning-assets $ 2,540,360$ 108,887 4.21 % $ 2,337,889$ 108,035 4.51 % $ 2,242,395$ 112,448 4.86 % Noninterest-earning assets 161,851 170,333 161,565 Total assets $ 2,702,211$ 2,508,222$ 2,403,960 Liabilities and Shareholders' Equity Deposits Money market $ 595,922$ 2,434 0.41 % $ 565,513$ 3,152 0.56 % $ 499,499$ 3,641 0.73 % Interest-bearing demand and NOW 375,581 862 0.23 % 334,986 1,153 0.34 % 223,257 727 0.33 % Savings 13,349 8 0.06 % 11,185 11 0.10 % 9,997 17 0.17 % Eurodollar - - 0.00 % - - 0.00 % 96,378 701 0.73 % Certificates of deposit Brokered - - 0.00 % - - 0.00 % 5 - 1.38 % Reciprocal 89,051 349 0.39 % 90,113 446 0.49 % 108,318 664 0.61 % Under $100 28,901 144 0.50 % 31,594 199 0.63 % 37,961 348 0.92 % $100 and over 137,121 819 0.60 % 163,205 1,200 0.74 % 216,850 1,923 0.89 % Total interest-bearing deposits $ 1,239,925$ 4,616 0.37 % $ 1,196,596$ 6,161 0.51 % $ 1,192,265$ 8,021 0.67 % Other borrowings Securities sold under agreements to repurchase 154,502 337 0.22 % 138,948 425 0.31 % 156,745 787 0.50 % Other short-term borrowings 43,460 113 0.26 % 39,435 123 0.31 % 14,142 37 0.26 % Long-term debt 85,216 5,360 6.29 % 93,150 6,041 6.49 % 93,150 6,018 6.46 % Total interest-bearing liabilities $ 1,523,103$ 10,426 0.68 % $ 1,468,129$ 12,750 0.87 % $ 1,456,302$ 14,863 1.02 % Noninterest-bearing demand accounts 878,985 759,162 712,830 Total deposits and interest-bearing liabilities 2,402,088 2,227,291 2,169,132 Other noninterest-bearing liabilities 31,781 38,827 28,635 Total liabilities 2,433,869 2,266,118 2,197,767 Total equity 268,342 242,104 206,193 Total liabilities and equity $ 2,702,211$ 2,508,222$ 2,403,960 Net interest income-taxable equivalent $ 98,461$ 95,285$ 97,585 Net interest spread 3.53 % 3.64 % 3.84 % Net interest margin 3.88 % 4.08 % 4.35 % Ratio of average interest-earning assets to average interest-bearing liabilities 166.79 % 159.24 % 153.98 %



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(1)

Interest earned has been adjusted to reflect tax exempt assets on a fully

tax-equivalent basis.

(2)

Loan fees included in interest income are not material. Nonaccrual loans

are included in average loans outstanding. (3) Yields have been adjusted to reflect a tax-equivalent basis where applicable. 55



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The following table illustrates, for the periods indicated, the changes in the levels of interest income and interest expense attributable to changes in volume or rate. Changes in net interest income due to both volume and rate have been included in the changes due to rate column. 2013 vs 2012 2012 vs 2011 Increase (decrease) Increase (decrease) (in thousands) Volume Rate Total Volume Rate Total Interest-earning assets Federal funds sold and other $ (20 )$ 23$ 3$ (2 )$ (14 )$ (16 ) Investment securities(1) (1,501 ) (1,076 ) (2,577 ) (252 ) (2,951 ) (3,203 ) Loans(1)(2) 12,560 (9,134 ) 3,426 5,003 (6,197 ) (1,194 )



Total interest-earning assets $ 11,039$ (10,187 )$ 852$ 4,749

$ (9,162 )$ (4,413 )

Interest-bearing liabilities Money market deposits $ 169$ (887 )$ (718 )$ 481$ (970 )$ (489 ) Interest-bearing demand and NOW 140 (431 ) (291 ) (337 ) 62 (275 ) Savings deposits 2 (5 ) (3 ) 2 (8 ) (6 ) Certificates of deposit (214 ) (319 ) (533 ) (646 ) (444 ) (1,090 ) Other borrowings Securities sold under agreements to repurchase 48 (136 ) (88 ) (88 ) (274 ) (362 ) Other short-term borrowings 13 (23 ) (10 ) 65 20 85 Long-term debt (515 ) (166 ) (681 ) - 24 24 Total interest-bearing liabilities $ (357 )$ (1,967 )$ (2,324 )$ (523 )$ (1,590 )$ (2,113 ) Net increase (decrease) in net interest income-taxable equivalent $ 11,396$ (8,220 )$ 3,176$ 5,272$ (7,572 )$ (2,300 )



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(1)

Interest earned has been adjusted to reflect tax exempt assets on a fully

tax-equivalent basis.

(2)

Loan fees included in interest income are not material. Nonaccrual loans

are included in average loans outstanding.

Average interest-earning assets increased $202.5 million to $2.54 billion at December 31, 2013. Declines in federal funds sold and other and investment securities of $5.4 million and $47.2 million, respectively, were overshadowed by strong net loan growth of $255.1 million during 2013. However, interest income remained consistent to the prior year and yields on interest-earning assets contracted 30 basis points due to the persistent low interest rate environment. Average interest-earning liabilities increased $55.0 million during the year ended December 31, 2013 while average related cost decreased 19 basis points. The Company benefited from a change in the Company's deposit composition during 2013. The composition of interest-bearing deposits changed significantly during the year, shifting towards lower cost deposit categories from higher cost certificates of deposit. The average cost of interest-bearing liabilities also benefited from the $21.0 million redemption of the Company's 9% Notes. Average interest-earning assets increased for the year ended December 31, 2012, up $95.5 million to $2.34 billion from $2.24 billion in 2011. The primary driver of the 2012 increase in average interest-earning assets was net loan growth of $103.0 million. Despite the growth in interest-earning assets, the average taxable-equivalent yield fell 35 basis points to 4.51% for the year ended December 31, 2012 compared to 4.86% for the prior year. The yield on earning-assets decreased due to the lower yields on loans and investments reflecting the continued low interest rate environment. 56



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Average interest-bearing liabilities increased for the year ended December 31, 2012, up $11.8 million to $1.47 billion compared to $1.46 billion in 2011. The 2012 increase in average interest-bearing liabilities was primarily due to a $25.3 million increase in short-term borrowings, offset by a decline in average repurchase agreements. The average cost of interest-bearing liabilities dropped 15 basis points to 0.87% for the year ended December 31, 2012 compared to 1.02% during the prior year. The decline in the average cost of interest-bearing liabilities is due to the reduction in rates paid on the deposit accounts. In February 2009, the Company executed a series of interest-rate swap transactions designated as cash flow hedges that were effective for interest payments beginning in 2010. The intent of the transactions was to fix the effective interest rate for payments due on the junior subordinated debentures with the objective of reducing the Company's exposure to adverse changes in cash flows relating to payments on its LIBOR-based floating rate debt. During 2013 and 2012, the weighted average interest rate paid (fixed rate) was 5.73% versus a weighted average interest rate received of 2.65% and 2.82%, respectively. The remaining contractual maturities of the swaps vary between two and 11 years. Select critical terms of the cash flow hedges are as follows: Notional Fixed (in thousands) Amount Rate Termination Date Hedged item-Junior subordinated debentures issued by: CoBiz Statutory Trust I $ 20,000 6.04 % March 17, 2015 CoBiz Capital Trust II $ 30,000 5.99 % April 23, 2020 CoBiz Capital Trust III $ 20,000 5.02 % March 30, 2024 Provision and Allowance for Loan and Credit Losses. The following table presents provision for loan and credit losses for the years ended December 31, 2013, 2012 and 2011. For the year ended December 31, (in thousands) 2013 2012 2011 Provision for loan losses $ (8,804 ) $



(4,733 ) $ 4,002 Provision for credit losses (included in other expenses) - (35 ) (26 )

Total provision for loan and credit losses $ (8,804 )$ (4,768 )$ 3,976 The Company booked loan loss provision reversals of $8.8 million and $4.7 million during the years ended December 31, 2013 and 2012, respectively, consistent with overall credit quality improvement as reflected by lower nonperforming asset and classified loan levels. In 2011, the Company recorded a $4.0 million loan loss provision. Nonperforming loans to total loans were 0.68% and 1.14% at December 31, 2013 and 2012, respectively. At December 31, 2011, nonperforming loans to total loans was 1.89%. Classified loans at December 31, 2103 totaled $46.5 million, after consecutive declines of $34.7 million and $48.2 million in 2013 and 2012, respectively. At December 31, 2013, the allowance for loan and credit losses was $37.1 million, or 265.78% of nonperforming loans compared to $46.9 million and 237.75% of nonperforming loans at December 31, 2012. 57



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Noninterest Income. The following table presents noninterest income for the years ended December 31, 2013, 2012, and 2011.

For the year ended 2013 vs 2012 2012 vs 2011 December 31, Increase (decrease) Increase (decrease) NONINTEREST INCOME (in thousands) 2013 2012 2011 Amount % Amount % Deposit service charges $ 5,315$ 4,903$ 4,955$ 412 8.4 % $ (52 ) (1.0 )% Other loan fees 1,950 1,325 1,328 625 47.2 (3 ) (0.2 )



Investment

advisory income 5,077 4,203 4,292 874 20.8 (89 ) (2.1 )



Insurance income 11,199 9,680 9,272 1,519 15.7

408 4.4 Investment banking income 2,302 3,833 7,237 (1,531 ) (39.9 ) (3,404 ) (47.0 ) Other income 5,069 6,615 3,739 (1,546 ) (23.4 ) 2,876 76.9 Total noninterest income $ 30,912$ 30,559$ 30,823$ 353 1.2 % $ (264 ) (0.9 )% Service Charges. Deposit service charges primarily consist of fees earned from our treasury management services. Customers are given the option to pay for these services in cash or by offsetting the fees for these services against an earnings credit that is given for maintaining noninterest-bearing deposits. Fees earned from treasury management services will fluctuate based on the number of customers using the services and from changes in U.S. Treasury rates which are used as a benchmark for the earnings credit rate. Other miscellaneous deposit charges are transactional by nature and may not be consistent period-over-period. As the earnings credit rate decreases, the amount of cash fees paid for service charges increases. Investment Advisory Income. Investment advisory income, increased $0.9 million or 20.8% to $5.1 million for the year ended December 31, 2013. Investment advisory income decreased $0.1 million or 2.1% to $4.2 million for the year ended December 31, 2012. The decrease was primarily due to a decrease in consulting fees not tied to assets under management (AUM).



Revenues from this source are generally a function of the value of AUM. Discretionary assets under management at December 31, 2013 and 2012 were $811.6 million and $743.7 million, respectively.

Insurance Income. Insurance income is derived from two main areas: benefits consulting and P&C. Revenue from benefits consulting and P&C are recurring revenue sources as policies and contracts generally renew or rewrite on an annual or more frequent basis. For the years ended December 31, 2013, 2012, and 2011, revenue earned from the insurance segment was composed of the following: 2013 2012 2011 Benefits consulting 48.9 % 47.0 % 42.8 % Property and casualty 51.1 % 53.0 % 57.2 % 100.0 % 100.0 % 100.0 % In the periods presented in the above table, P&C has been negatively impacted by soft premiums, the rate assessed by the underwriting insurance carriers to our clients. As our revenue is typically derived as percentage of the premium, this has negatively impacted revenue. At the same time, the Company has invested additional resources in its benefits consulting division which has driven revenue in this area higher. The combination of these two factors has caused the shift in the percentage of revenue in the table above. 58



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Investment Banking Income. Investment banking income includes retainer fees which are recognized over the expected term of the engagement and success fees which are recognized when the transaction is completed and collectability of fees is reasonably assured. Investment banking income is transactional by nature and will fluctuate based on the number of clients engaged and transactions successfully closed. During the year ended December 31, 2013, Investment banking income decreased 40% to $2.3 million. The decline was attributed to fewer deals closing in 2013 as compared to the prior year. Additionally, average deal size declined in 2013 as compared to 2012. Investment banking income decreased 47% to $3.8 million during 2012 compared to 2011. The decline was due to fewer closed deals during the period relative to 2011. Other Income. Other income is comprised of changes in the cash surrender value of BOLI, earnings on equity method investments, merchant charges, bankcard fees, customer swap fees, wire transfer fees, foreign exchange fees and safe deposit income. Other income decreased $2.2 million to $4.4 million during the year ended December 31, 2013 compared to 2012. The decrease is due to a decline in income from equity method investments and lower gains on customer interest-rate swaps.



Other income increased $2.9 million during 2012 to $6.6 million compared to 2011. The increase is due to income from equity method investments and fee income earned on the sale of interest-rate swaps to commercial banking clients.

Noninterest Expense. The following table presents noninterest expense for the years ended December 31, 2013, 2012, and 2011.

2013 vs 2012 2012 vs 2011 Increase Increase For the year ended December 31, (decrease) (decrease)

NONINTEREST EXPENSES (in thousands) 2013 2012 2011 Amount % Amount % Salaries and employee benefits $ 61,801$ 57,995$ 58,916$ 3,806 6.6 % $ (921 ) (1.6 )% Stock-based compensation expense 2,739 1,940 1,447 799 41.2 493 34.1 Occupancy expenses, premises and equipment 13,262 13,471 13,219 (209 ) (1.6 ) 252 1.9 Amortization of intangibles 662 724 531 (62 ) (8.6 ) 193 36.3 FDIC and other assessments 1,690 1,782 3,566 (92 ) (5.2 ) (1,784 ) (50.0 ) Other real estate owned and loan workout costs 715 2,326 3,153 (1,611 ) (69.3 ) (827 ) (26.2 ) Net other than temporary impairment losses on securities recognized in earnings - 297 771 (297 ) (100.0 ) (474 ) (61.5 ) Loss on securities, other assets and other real estate owned 683 65 3,145 618 950.8 (3,080 ) (97.9 ) Other 13,076 12,566 11,073 510 4.1 1,493 13.5 Total noninterest expenses $ 94,628$ 91,166$ 95,821$ 3,462 3.8 % $ (4,655 ) (4.9 )% Our efficiency ratio was 74.1% for the year ended December 31, 2013, compared to 74.0% and 73.0% for 2012 and 2011, respectively. The efficiency ratio is a measure of the Company's overhead, measuring the percentage of each dollar of income that is paid in operating expenses. During 2013, the Company was able to successfully grow its interest earning assets and effectively manage the cost of its interest-bearing liabilities largely offsetting negative pressure from the challenging low interest rate environment. However, increases in salaries and employee benefits consistent with the Company's overall improved performance contributed to a higher efficiency ratio in 2013. In 2012, the favorable effect of the decreasing expense trend was negatively impacted by lower net interest income and 59



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noninterest income. The Company maintains its goal of reducing the ratio over the next few years and is committed to exploring cost-reduction strategies although the low rate environment will continue to be a headwind.

Salaries and Employee Benefits. Salaries and employee benefits, excluding share-based compensation, increased $3.8 million or 6.6% during the year ended December 31, 2013. The increase is the result of annual cost of living and merit increases effective in the second quarter of 2013, an increase in variable compensation due to an increase in fee-based income, an increase in incentive compensation, an increase in the employer 401k match, and higher medical expenses. Salaries and employee benefits decreased $0.9 million or 1.6% in the year ended December 31, 2012 compared to 2011. The decrease was largely driven by savings from the termination of the Company's Supplemental Executive Retirement Plan ($0.7 million).



The Company's full-time equivalent employee base at the end of 2013 was 513 compared to 508 in 2012.

Share-Based Compensation. ASC Topic 718 requires recognition of compensation costs associated with the grant-date fair value of awards issued. The Company uses share-based compensation to retain existing employees, recruit new employees and is considered an important part of overall compensation. The Company expects to continue using share-based compensation in the future. In 2012, the Company expanded a program started in 2011 whereby employees are awarded annual grants of restricted stock that generally vest over three years. Occupancy Costs. Occupancy costs consist primarily of rent, utilities, property taxes, insurance, depreciation and information systems maintenance. These costs decreased 1.6% or $0.2 million for the year ended December 31, 2013 compared to a 1.9% or $0.3 million increase during the year ended December 31, 2012. Amortization of Intangibles. Amortization of intangibles in 2013 was comparable to 2012. Amortization during the year ended December 31, 2012 increased by 36.3% or $0.2 million as compared to 2011. In 2012, the Company assessed the useful life of its largest intangible asset and decreased the useful life from 15 years to 10 years. The decrease in the useful life increased annual amortization by $0.2 million. The increase in 2012 was due to the accelerated amortization combined with amortization on two intangibles acquired during 2012. FDIC and Other Assessments. FDIC and other assessments consist of premiums paid by FDIC-insured institutions and by Colorado chartered banks. The assessments by the FDIC and the Colorado Division of Banking are based on statutory and risk classification factors. FDIC and other assessments remained stable in 2013 and decreased $1.8 million during the year ended December 31, 2012. The FDIC assessment calculation and base rates changed in the second quarter of 2011, reducing the Company's cost. Other Real Estate Owned and Loan Workout Costs. Carrying costs and workout expenses of nonperforming loans and OREO decreased 69% or $1.6 million to $0.7 million for the year ended December 31, 2013, following a decline of over 26% in 2012 compared to 2011. These costs are directly correlated to levels of nonperforming assets during these years. In 2013 and 2012, nonperforming asset balances have decreased substantially. Net Other Than Temporary Impairment Losses on Securities. Net other than temporary impairment losses on securities include credit losses recognized on available for sale securities. OTTI of $0.3 million and $0.8 million recognized during 2012 and 2011, respectively, relate to three credit impaired private label mortgage-backed securities. These securities were sold during the fourth quarter of 2012. 60



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Loss on Securities, Other Assets and Other Real Estate Owned. The Company recognized losses on securities, other assets and OREO of $0.7 million, $0.1 million, and $3.1 million for the years ended December 31, 2013, 2012 and 2011, respectively. The loss on securities, other assets and real estate owned were comprised of the following: (Gain) loss for the year ended Increase (decrease) December 31, (in thousands) 2013 2012 2011 2013 vs 2012 2012 vs 2011 Available for sale securities $ (439 )$ (1,079 )$ (510 )$ 640$ (569 ) Loans held for sale - 57 - (57 ) 57 OREO and repossessed assets 708 1,403 2,885 (695 ) (1,482 ) Other 414 (316 ) 770 730 (1,086 ) $ 683$ 65$ 3,145$ 618$ (3,080 )



In 2013 and 2012, the Company recorded net gains of $0.4 million and $1.1 million on security calls and sales, as issuers of higher yielding trust preferred securities called those issuances which are set to lose favorable regulatory capital treatment under Basel III guidelines.

During the years ended December 31, 2013 and 2012, losses on OREO, primarily valuation adjustments, were $0.7 million and $1.1 million, respectively. In 2013, the Company recorded a $2.1 million valuation adjustment on the single, largest property located in Colorado. Offsetting this loss were gains on OREO sales during 2013. In 2011, the Company recognized a $0.5 million gain on the sale of available for sale securities. Losses recognized on OREO and repossessed assets decreased $4.5 million in 2011 compared to 2010 and a loss of $0.7 million was recognized on an Arizona branch closure during the fourth quarter of 2011. Other Operating Expenses. Other operating expenses increased $0.5 million or 4.1% during the year ended December 31, 2013. The increase was primarily due to higher marketing and professional service expenses. Other operating expenses for the year ended December 31, 2012, increased $1.5 million or 13% compared to 2011. The increase is primarily attributed to higher costs associated with the outsourcing of the Company's lockbox product at the end of 2011. These costs were partially offset by lower salary expense due to the elimination of the Company's internal lockbox department. Federal Income Taxes. The effective tax rate for 2013 was 32.7%, a decline from 35.3% in 2012. During 2013, the Company made return-to-provision adjustments and derecognized estimated penalties and interest related to uncertain tax positions settled during the year. These adjustments reduced tax expense by $0.5 million during 2013. An increase in tax-exempt income on loans and municipal investments also reduced the effective tax rate from 2012 to 2013. Income tax expense for the year ended December 31, 2012 increased $19.1 million compared to 2011 in large part because of a deferred tax asset valuation allowance reversal of $15.6 million in 2011. The effective tax rate for 2012 was 35.3%, a decline from 35.7% in 2011 (adjusted for the effect of the valuation allowance reversal). Additionally, the Company recorded higher pre-tax net income of $37.5 million in 2012 compared to $27.4 million in 2011. Permanent differences, primarily arising from changes in the cash surrender value of BOLI and tax-exempt income, are the activities impacting the effective tax rate in each year. Segment Results



The Company reports five operating segments: Commercial Banking, Investment Banking, Wealth Management, Insurance and Corporate Support. Internally, management measures the contribution of

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the fee-based business lines before parent company management fees and overhead allocations. The Company believes this to be a more useful measurement as centralized administration expenses and overhead is generally not impacted by the fee-based business lines, but is most affected by the operations of the Bank. While the Company allocates a portion of the costs related to shared resources to the fee-based segments, we measure their profitability based on a pre-allocation basis as it approximates the operating cash flow generated by the segment. A description of each segment is provided in Note 18 to the consolidated financial statements. Certain financial metrics of each operating segment are presented below. Commercial Banking. 2013 vs 2012 2012 vs 2011 Commercial Banking Increase Increase Year ended December 31, (decrease) (decrease)



(in thousands) 2013 2012 2011 Amount %

Amount % Income Statement Net interest income $ 100,524$ 98,871$ 101,922$ 1,653 1.7 % $ (3,051 ) (3.0 )% Provision for loan losses (7,330 ) (3,546 ) 570 (3,784 ) (106.7 ) (4,116 ) (722.1 ) Noninterest income 11,907 12,646 9,985 (739 ) (5.8 ) 2,661 26.6 Noninterest expense 35,265 32,964 31,643 2,301 7.0 1,321 4.2 Provision for income taxes 30,049 30,284 25,322 (235 ) (0.8 ) 4,962 19.6 Net income before management fees and overhead allocations 54,447 51,815 54,372 2,632 5.1 (2,557 ) (4.7 ) Management fees and overhead allocations, net of tax 22,313 20,605 22,979 1,708



8.3 (2,374 ) (10.3 )

Net income $ 32,134$ 31,210$ 31,393$ 924 3.0 % $ (183 ) (0.6 )% The Commercial Banking segment reported net income of $32.1 million and $31.2 million during the years ended December 31, 2013 and 2012, respectively. Interest income was flat in 2013 compared to the prior year despite a 15% increase in average net loans, due to the persistent low interest rate environment. The yield on interest-earning assets fell 30 basis points while the cost of interest-bearing liabilities fell 19 basis points during 2013. The segment benefited from a $7.3 million loan loss provision reversal in 2013, compared to a reversal of $3.5 million in 2012. Noninterest expense increased $2.3 million for the year ended December 31, 2013 compared to 2012 as a result of higher salary and benefits expense. Salary increased due to merit increases in 2013 and higher bonuses resulting from the improved financial performance. The Commercial Banking segment reported net income $31.2 million during the year ended December 31, 2012, relatively unchanged from 2011. Declines in net interest income were the result of the low interest rate environment with loan volume growth mitigating, in part, the effect of historically low rates. The overall yield on interest-earning assets fell 35 basis points while the cost of interest-bearing liabilities fell 15 basis points during 2012 compared to 2011. Provision for loan loss decreased $4.1 million in 2012 compared to 2011. The Company made early efforts to proactively reserve for problem loans when repayment risks were first identified in 2008 and 2009 and took deliberate action to reduce high risk loan concentrations and improve credit quality. In addition, the risk profile of loan originations since the downturn is lower than older vintage loans which has reduced the overall reserve requirement. Noninterest income increased $2.7 million during 2012 compared to 2011 on higher revenues from equity method investments and customer interest-rate swap fees. Noninterest expense increased $1.3 million during 2012 compared to the prior year, attributed to higher salary and bonus compensation expense offset by lower OREO and problem loan workout expense and net gains on investment security dispositions. Income tax expense in 2012 rose $5.0 million compared to 2011 due to the reversal of a deferred tax asset valuation allowance in the prior year. 62



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Table of Contents Investment Banking. Investment Banking 2013 vs 2012 2012 vs 2011 Year ended December 31, Increase (decrease) Increase (decrease) (in thousands) 2013 2012 2011 Amount % Amount % Income Statement Net interest income $ 4$ 6$ 8$ (2 ) (33.3 )% $ (2 ) (25.0 )% Noninterest income 2,302 3,833 7,237 (1,531 ) (39.9 ) (3,404 ) (47.0 ) Noninterest expense 3,724 4,157 5,901 (433 ) (10.4 ) (1,744 ) (29.6 ) Provision (benefit) for income taxes (554 ) (150 ) 507 (404 ) (269.3 ) (657 ) (129.6 ) Net income (loss) before management fees and overhead allocations (864 ) (168 ) 837 (696 ) (414.3 ) (1,005 ) (120.1 ) Management fees and overhead allocations, net of tax 155 150 151 5 3.3 (1 ) (0.7 ) Net income (loss) $ (1,019 )$ (318 )$ 686$ (701 ) (220.4 )% $ (1,004 ) (146.4 )% The investment banking segment reported a $1.0 million loss in 2013 as a result of a 40% decline in noninterest income. The segment generated lower success fees due to a fewer number of deals closing in 2013. Additionally, the average size of deals closing during 2013 was lower relative to 2012. The Investment banking segment reported a net loss of $0.3 million 2012, a decrease of $1.0 million from 2011. Noninterest income was 47% lower due to fewer closed transactions than in the previous year when deal volume was significantly higher. The decrease in noninterest expense for 2012 compared to 2011 is attributed to lower bonus compensation which is a function of revenue. Revenues for the segment are transactional by nature. The revenue is dependent on the number of successful deal closings and active engagements on retainer together which can cause significant fluctuation in revenues from period to period. Deal volume is greatly influenced by prospective buyers' economic outlook and available capital, sellers' perception of the valuation of their business and market conditions which vary by industry.



Wealth Management.

Wealth Management 2013 vs 2012



2012 vs 2011

Year ended December 31, Increase (decrease) Increase (decrease) (in thousands) 2013 2012 2011 Amount % Amount % Income Statement Net interest income $ (48 )$ (39 )$ (29 )$ (9 ) (23.1 )% $ (10 ) (34.5 )% Noninterest income 5,077 4,203 4,292 874 20.8 (89 ) (2.1 ) Noninterest expense 4,288 4,813 4,428 (525 ) (10.9 ) 385 8.7 Provision (benefit) for income taxes 300 (249 ) (247 ) 549 220.5 (2 ) (0.8 ) Net income (loss) before management fees and overhead allocations 441 (400 ) 82 841 210.3 (482 ) (587.8 ) Income from discontinued operations 173 324 253 (151 ) (46.6 ) 71 28.1 Management fees and overhead allocations, net of tax 355 641 628 (286 ) (44.6 ) 13 2.1 Net income (loss) $ 259$ (717 )$ (293 )$ 976 136.1 % $ (424 ) (144.7 )% 63



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At December 31, 2012, the Company sold substantially all assets comprising the wealth transfer business, a component of the Wealth Management segment. Additionally, the Company transitioned its trust and custodial services business to an unaffiliated third party, effectively exiting that business line at the end of the year. Together, the wealth transfer and trust business constitute discontinued operations and the results of those operations are reported separately from the continuing operations of the segment for all periods presented in the preceding table (see Note 2 to the consolidated financial statements). The Wealth Management segment reported a $0.3 net income for 2013, an improvement of $1.0 million over 2012. Noninterest income increased 21% as a result of an increase in AUM during 2013. Discretionary assets under management at December 31, 2013 and 2012 were $811.6 million and $743.7 million, respectively. Also, the segment was able to successfully implement various cost saving initiatives during 2013 resulting in a $0.5 million decline in noninterest expenses.



Wealth Management reported a net loss from continuing operations before management fees and overhead allocations of $0.4 million for 2012, compared to income of $0.1 million for 2011. Noninterest income decreased 2% while noninterest expense increased 9% due to higher severance and professional service costs. Assets under management were $743.7 million at December 31, 2012.

The revenues from this segment are generally a function of the value of AUM. Fee levels can vary depending on asset mix, which may include equities, fixed income securities and alternative asset classes.



Insurance.

Insurance 2013 vs 2012



2012 vs 2011

Year ended December 31, Increase (decrease) Increase (decrease) (in thousands) 2013 2012 2011 Amount % Amount % Income Statement Net interest income $ (6 )$ 2$ (2 )$ (8 ) (400.0 )% $ 4 200.0 % Noninterest income 11,199 9,680 9,272 1,519 15.7 408 4.4 Noninterest expense 10,212 9,538 9,149 674 7.1 389 4.3 Provision (benefit) for income taxes 465 68 (214 ) 397 583.8 282 131.8 Net income before management fees and overhead allocations 516 76 335 440 578.9 (259 ) (77.3 ) Management fees and overhead allocations, net of tax 449 388 368 61 15.7 20 5.4 Net income (loss) $ 67$ (312 )$ (33 )$ 379 121.5 % $ (279 ) (845.5 )% For the year ended December 31, 2013, the insurance segment generated $0.1 million in net income, an improvement of $0.4 million over the prior year. Noninterest income for the year ended December 31, 2013 increased 16% or $1.5 million from the prior year. P&C revenues contributed 39% or $0.6 million while Employee Benefit revenues contributed the remaining 61% or $0.9 million of the total segment's revenue growth for the year ended December 31, 2013. Segment expenses increased 7.1% or $0.7 million due to variable compensation, which is directly tied to the segment's revenues. The Insurance segment reported a net loss of $0.3 million for the year ended December 31, 2012, compared to a nearly breakeven year in 2011. Noninterest income rose during 2012 largely due to increases in the benefits consulting business of $0.6 million offset in part by revenue declines in the P&C business. The increase in noninterest expense of $0.4 million is attributed to higher professional and service fees. 64



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Corporate Support and Other.

Corporate Support and Other 2013 vs 2012



2012 vs 2011

Year ended December 31, Increase (decrease) Increase (decrease) (in thousands) 2013 2012 2011 Amount % Amount % Income Statement Net interest income $ (4,773 )$ (5,462 )$ (5,498 )$ 689 12.6 % $ 36 0.7 % Provision for loan losses (1,474 ) (1,187 ) 3,432 (287 ) (24.2 ) (4,619 ) (134.6 ) Noninterest income 427 197 37 230 116.8 160 432.4 Noninterest expense 41,139 39,694 44,700 1,445 3.6 (5,006 ) (11.2 ) Benefit for income taxes (16,909 ) (16,695 ) (31,176 ) (214 ) (1.3 ) 14,481 46.4 Net loss before management fees and overhead allocations (27,102 ) (27,077 ) (22,417 ) (25 ) (0.1 ) (4,660 ) (20.8 ) Management fees and overhead allocations, net of tax (23,272 ) (21,784 ) (24,126 ) (1,488 ) (6.8 ) 2,342 9.7 Net income (loss) $ (3,830 )$ (5,293 )$ 1,709$ 1,463 27.6 % $ (7,002 ) (409.7 )% The Corporate Support and Other segment is comprised of activities of the parent company (Parent); non-production, back-office support operations; and eliminating transactions in consolidation. Non-production, back-office operations include human resources, accounting and finance, audit and compliance, information technology, Special Assets Group, and loan and deposit operations. The Company has a process for allocating these support operations back to the production lines based on an internal allocation methodology that is updated annually. For the year ended December 31, 2013, the segment reported a $3.8 million net loss, an improvement of $1.5 million from the prior year. The primary component of net interest income (expense) for the segment during part of 2013 and in prior years was interest expense related to the Company's long-term debt (see Note 9 to the consolidated financial statements). The segment benefited from the $21.0 million redemption of the Company's 9% interest-bearing Notes during the third quarter of 2013, which resulted in an increase in net interest income. The segment reported a net loss of $5.3 million for the year ended December 31, 2012, compared to net income of $1.7 million in 2011. In the first quarter of 2010, interest expense on a portion of variable-rate debt was fixed through the use of interest-rate swaps (see Note 10 to the consolidated financial statements). The provision for loan losses relates to a portfolio of loans purchased by the Parent from the Bank. This portfolio has steadily decreased since the 2009 purchase due to loan repayments and collateral sales. The declining balance of the portfolio and the overall asset quality improvement has contributed to the trend of declining provision for loan losses. Noninterest expense includes salaries and benefits of employees of the Parent and support functions as well as the nonemployee overhead operating costs not directly associated with another segment. During the year ended December 31, 2013, noninterest expenses increased $1.4 million primarily due to higher salaries and benefits resulting from merit increases and increases in variable compensation. During the year ended December 31, 2012, decreases in noninterest expense for the segment of $5.0 million were attributed primarily to lower loan workout expense and OREO losses.



Liquidity and Capital Resources

Liquidity refers to the Company's ability to generate adequate amounts of cash to meet financial obligations to its customers and shareholders in order to fund loans, to respond to deposit outflows and 65



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to cover operating expenses. Maintaining a level of liquid funds through asset/liability management seeks to ensure that these needs are met at a reasonable cost. Liquidity is essential to compensate for fluctuations in the balance sheet and provide funds for growth and normal operating expenditures. Sources of funds include customer deposits, scheduled amortization of loans, loan prepayments, scheduled maturities of investments and cash flows from mortgage-backed securities. Liquidity needs may also be met by deposit growth, converting assets into cash, raising funds in the brokered CD market or borrowing using lines of credit with correspondent banks, the FHLB or the FRB. Longer-term liquidity needs may be met by selling securities available for sale or raising additional capital. Liquidity management is the process by which the Company manages the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost. The objective of liquidity management is to ensure the Company has the ability to satisfy the cash flow requirements of depositors and borrowers and to allow us to sustain our operations. These funding commitments include withdrawals by depositors, credit commitments to borrowers, shareholder dividends, debt payments, expenses of our operations and capital expenditures. Liquidity is monitored and closely managed by the Company's Asset and Liability Committee (ALCO), a group of senior officers from the lending, deposit gathering, finance and treasury areas. ALCO's primary responsibilities are to ensure the necessary level of funds are available for normal operations as well as maintain a contingency funding policy to ensure that liquidity stress events are quickly identified and management plans are in place to respond. This is accomplished through the use of policies which establish limits and require measurements to monitor liquidity trends, including management reporting that identifies the amounts and costs of all available funding sources. The Company's current liquidity position is expected to be more than adequate to fund expected asset growth. Historically, our primary source of funds has been customer deposits. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and unscheduled loan prepayments-which are influenced by fluctuations in the general level of interest rates, returns available on other investments, competition, economic conditions, and other factors-are less predictable. Liquidity from asset categories is provided through cash and interest-bearing deposits with other banks, which totaled $76.0 million at December 31, 2013, compared to $65.9 million at December 31, 2012. Additional asset liquidity sources include principal and interest payments from securities in the Company's investment portfolio and cash flows from its amortizing loan portfolio. Liability liquidity sources include attracting deposits at competitive rates and maintaining wholesale borrowing (short-term borrowings and brokered CDs) credit relationships. The Company's loan to core deposit ratio increased to 91.5% at December 31, 2013, from 90.5% at December 31, 2012. At December 31, 2012, the Company had no outstanding wholesale borrowings. Average wholesale borrowings were $43.5 million during the year ended December 31, 2013. The Company had no brokered deposits during 2013 and core deposits represent 100% of the Company's deposit base at December 31, 2013. The Company uses various forms of short-term borrowings for cash management and liquidity purposes, regularly accessing its federal funds and FHLB lines to manage its daily cash position. At December 31, 2013, the Bank has approved federal funds purchase lines with seven correspondent banks with an aggregate credit line of $175.0 million. The Bank also has a line of credit from the FHLB that is limited by the amount of eligible collateral available to secure it and the Company's investment in FHLB stock. Borrowings under the FHLB line are required to be secured by unpledged securities and qualifying loans. Borrowings may also be used on a longer-term basis to support expanded lending activities and to match the maturity or repricing intervals of assets. 66



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Available funding through correspondent lines and the FHLB at December 31, 2013, totaled $645.7 million or 24.6% of the Company's earning assets. Available funding is comprised of $175.0 million of federal fund lines and $470.7 million in secured FHLB borrowing capacity. The Company had $15.2 million in securities available to be pledged as collateral for additional FHLB borrowings at December 31, 2013. Access to funding through correspondent lines is dependent upon the cash position of the correspondent banks and there may be times when certain lines are not available. In addition, certain lines require a one day rest period after a specified number of consecutive days of accessing the lines. The Company believes it has sufficient borrowing capacity and diversity in correspondent banks to meet its needs. At the holding company level, our primary sources of funds are dividends paid from the Bank and fee-based subsidiaries, management fees assessed to the Bank and the fee-based business lines, proceeds from the issuance of common stock, and other capital markets activity. The main use of this liquidity is the quarterly payment of dividends on our common and preferred stock, quarterly interest payments on the subordinated debentures, payments for mergers and acquisitions activity, and payments for the salaries and benefits for the employees of the holding company. The Company has $57.4 million in preferred stock issued pursuant to the SBLF program that increases to a 9% dividend rate in 2016. The Company expects to redeem the preferred stock at or before the date the dividend rate increases. The approval of the Colorado State Banking Board is required prior to the declaration of any dividend by the Bank if the total of all dividends declared by the Bank in any calendar year exceeds the total of its net profits for that year combined with the retained net profits for the preceding two years. In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 provides that the Bank cannot pay a dividend if it will cause the Bank to be "undercapitalized." At December 31, 2013, the Bank was not otherwise restricted in its ability to pay dividends to the holding company. The Company's ability to pay dividends on its common stock depends upon the availability of dividends from the Bank, earnings from its fee-based businesses, and upon the Company's compliance with the capital adequacy guidelines of the Federal Reserve Board of Governors (see Note 16 to the consolidated financial statements). The holding company has a liquidity policy that requires the maintenance of at least 18 months of liquidity on the balance sheet based on projected cash usages, exclusive of dividends from the Bank. At December 31, 2013, the holding company had a liquidity position that exceeds the policy limit and we believe the Company has the ability to continue paying dividends. Net income from discontinued operations for the year ending December 31, 2013 was $0.2 million and reasonably approximates the cash flows of those operations which are not separately stated in the Company's consolidated statements of cash flows. Discontinued operations are expected to have no impact on the Company's ability to finance its continuing operations or meet its outstanding obligations. The Company believes overall liquidity will not be significantly impacted by discontinued operations. At December 31, 2013, shareholders' equity totaled $281.1 million, an increase of $24.0 million increase from December 31, 2012, driven primarily by net income of $27.6 million. Common surplus increased an additional $4.2 million in relation to stock-based compensation, sales of stock under the employee stock purchase plan and stock option exercises as well as an increase of $3.2 million in AOCI associated with changes in the fair value of derivatives. Shareholder equity increases were offset by declines in AOCI associated with the Company's AFS securities portfolio of $5.3 million and by common and preferred dividends of $4.8 million and $0.9 million, respectively. 67



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We anticipate that our cash and cash equivalents, expected cash flows from continuing operations together with alternative sources of funding are sufficient to meet our anticipated cash requirements for working capital, loan originations, capital expenditures and other obligations for at least the next 12 months. We continually monitor existing and alternative financing sources to support our capital and liquidity needs, including but not limited to, debt issuance, common stock issuance and deposit funding sources. Based on our current financial condition and our results of operations, we believe the Company will be able to sustain its ability to raise adequate capital through one or more of these financing sources. We are subject to minimum risk-based capital limitations as set forth by federal banking regulations at both the consolidated Company level and the Bank level. Under the risk-based capital guidelines, different categories of assets, including certain off-balance sheet items, such as loan commitments in excess of one year and letters of credit, are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a "risk-weighted" asset base. For purposes of the risk-based capital guidelines, total capital is defined as the sum of "Tier 1" and "Tier 2" capital elements, with Tier 2 capital being limited to 100% of Tier 1 capital. Tier 1 capital includes, with certain restrictions, common shareholders' equity, perpetual preferred stock and minority interests in consolidated subsidiaries. Tier 2 capital includes, with certain limitations, perpetual preferred stock not included in Tier 1 capital, certain maturing capital instruments, and the allowance for loan and credit losses. At December 31, 2013, the Bank was well-capitalized with a Tier 1 Capital ratio of 12.3% and Total Capital ratio of 13.5%. The minimum ratios to be considered well-capitalized under the risk-based capital standards are 6% and 10%, respectively. At the holding company level, the Company's Tier 1 Capital ratio at December 31, 2013, was 14.5%, and its Total Capital ratio was 15.7%. In order to comply with the regulatory capital constraints, the Company and its Board of Directors constantly monitor the capital level and its anticipated needs based on the Company's growth. The Company has identified sources of additional capital that could be used if needed, and monitors the costs and benefits of these sources, which include both the public and private markets. In July 2013, the Federal Reserve Board finalized rules, known as Basel III, reforming the regulatory capital framework for banking institutions. The U.S. banking regulatory agencies have implemented the reforms which are designed to endure that banks maintain strong capital positions even in the event of severe economic downturns or unforeseen losses. Basel III contained a provision that preserves the current capital treatment of TPS issued by bank holding companies with less than $15 billion in total assets. The Company has $70.0 million of TPS included in regulatory capital at December 31, 2013 that will be grandfathered under Basel III. The rules for non-advanced approaches banks and financial institutions like the Company will increase both the quantity and quality of required capital beginning January 1, 2015, with full implementation by 2018.



The Company's consolidated financial statements do not reflect various

off-balance sheet commitments that are made in the normal course of business, which may involve some liquidity risk. Off-balance sheet arrangements are discussed in the following Contractual Obligations and



Commitments section. The Company has commitments to extend credit under

lines of credit and stand-by letters of credit. The Company has also

committed to investing in certain partnerships. See the following section

of this report and Note 15 to the consolidated financial statements for additional discussion on these commitments. 68



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Contractual Obligations and Commitments

Summarized below are the Company's contractual obligations (excluding deposit liabilities) to make future payments at December 31, 2013:

After one but within After three Within three but within After (in thousands) one year years five years five years Total Repurchase agreements(1) $ 138,494 $ - $ - $ - $ 138,494 Operating lease obligations 5,426 9,483 5,834 4,166 24,909 Long-term debt obligations(2) 4,065 5,932 5,681 79,903 95,581 Preferred stock, Series C dividend(3) 574 58,513 - - 59,087 Supplemental executive retirement plan 2,399 - - - 2,399 Total contractual obligations $ 150,958$ 73,928$ 11,515$ 84,069$ 320,470



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(1) Interest on these obligations has been excluded due to the short-term nature of the instruments. (2)



Principal repayment of the junior subordinated debentures is assumed to be

at the contractual maturity, currently beyond five years. Interest on the

junior subordinated debentures is calculated at the fixed rate associated

with the applicable hedging instrument through the instrument maturity date

(see Note 10 to the consolidated financial statements) and is reported in

the "due within" categories during which the interest expense is expected

to be incurred. Interest payments on junior subordinated debentures after

maturity of the related fixed interest rate swap hedges are variable and no

estimate of those payments has been included in the preceding table. The

weighted average variable rate applicable to the junior subordinated

debentures as of the date of this report is 2.61% and ranges from 1.70% to

3.19%. (3) Preferred Stock, Series C issued to the Secretary of the Treasury in September 2011 includes dividends payable at 1%, the rate in effect at



December 31, 2013. The preferred shares are shown in the table as being due

in the "After one but within three years" category which assumes the $57.4 million in Series C Preferred Stock will be redeemed in the year prior to the contractual dividend rate step up to 9% effective after December 2015. The contractual amount of the Company's financial instruments with off-balance sheet risk, expiring by period at December 31, 2013, is presented below: After one but After three Within within three but within After (in thousands) one year years five years five years Total Unfunded loan commitments $ 471,532$ 158,870$ 50,092$ 25,631$ 706,125 Standby letters of credit 36,631 6,100 - 1,350 44,081 Commercial letters of credit 2,041 8 - - 2,049 Unfunded commitments for unconsolidated investments 6,607 - - - 6,607 Company guarantees 1,201 - - 555 1,756 Total commitments $ 518,012$ 164,978$ 50,092$ 27,536$ 760,618 The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the liquidity, credit enhancement and financing needs of its customers. These financial instruments include legally binding commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. Credit risk is the principal risk associated with these instruments. The contractual 69



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amounts of these instruments represent the amount of credit risk should the instruments be fully drawn upon and the customer defaults.

To control the credit risk associated with entering into commitments and issuing letters of credit, the Company uses the same credit quality, collateral policies and monitoring controls in making commitments and letters of credit as it does with its lending activities. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Legally binding commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit obligate the Company to meet certain financial obligations of its customers if, under the contractual terms of the agreement, the customers are unable to do so. The financial standby letters of credit issued by the Company are irrevocable. Payment is only guaranteed under these letters of credit upon the borrower's failure to perform its obligations to the beneficiary.



Approximately $57.7 million of total commitments at December 31, 2013, represent commitments to extend credit at fixed rates of interest, which exposes the Company to some degree of interest-rate risk.

The Company has also entered into interest-rate swap agreements under which it is required to either receive or pay cash to a counterparty depending on changes in interest rates. The interest-rate swaps are carried at their fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates at the balance sheet date. Interest-rate swaps recorded on the consolidated balance sheet at December 31, 2013, do not represent amounts that will ultimately be received or paid under the contract and are therefore excluded from the table above.



Effects of Inflation and Changing Prices

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


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