10-K 1 a2218314z10-k.htm 10-K

Use these links to rapidly review the document
TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark one)    

ý

 

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

For the fiscal year ended December 31, 2013.

o

 

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

For the transition period from                        to                       

Commission file number 001-15955

COBIZ FINANCIAL INC.
(Exact name of registrant as specified in its charter)

COLORADO
(State or other jurisdiction of
incorporation or organization)
  84-0826324
(I.R.S. Employer
Identification No.)

821 17th St., Denver, CO
(Address of principal executive offices)

 

80202
(Zip Code)

         Registrant's telephone number, including area code: (303) 312-3400

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

Title of each class   Name of each exchange on which registered
Common Stock, $0.01 par value   The NASDAQ Stock Market LLC

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

         Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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

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

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

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

         The aggregate market value of the voting common equity held by non-affiliates of the registrant at June 30, 2013, computed by reference to the closing price on the NASDAQ Global Select Market was $208,675,795. Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock (as publicly reported by such persons pursuant to Section 13 and Section 16 of the Securities Exchange Act of 1934) have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

         The number of shares outstanding of the registrant's sole class of common stock as of February 7, 2014, was 40,394,941.

         Documents incorporated by reference: Portions of the registrant's proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant's 2014 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

   


Table of Contents


TABLE OF CONTENTS

PART I

       

Item 1.

 

Business

    3  

Item 1A.

 

Risk Factors

    17  

Item 1B.

 

Unresolved Staff Comments

    24  

Item 2.

 

Properties

    24  

Item 3.

 

Legal Proceedings

    25  

Item 4.

 

Mine Safety Disclosures

    25  

PART II

   
 
 

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters And Issuer Purchases of Equity Securities

    26  

Item 6.

 

Selected Financial Data

    28  

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    29  

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    70  

Item 8.

 

Financial Statements and Supplementary Data

    74  

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    74  

Item 9A.

 

Controls and Procedures

    74  

Item 9B.

 

Other Information

    74  

PART III

   
 
 

Item 10.

 

Directors, Executive Officers and Corporate Governance

    74  

Item 11.

 

Executive Compensation

    75  

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    75  

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

    75  

Item 14.

 

Principal Accounting Fees and Services

    75  

PART IV

   
 
 

Item 15.

 

Exhibits and Financial Statement Schedules

    75  

SIGNATURES

   
80
 

Index to Consolidated Financial Statements

   
F-1
 

2


Table of Contents


A WARNING ABOUT FORWARD-LOOKING STATEMENTS

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

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

PART I

Item 1.    Business

Overview

        CoBiz Financial Inc. (CoBiz or the Company) is a diversified financial services company headquartered in Denver, CO. Through our subsidiary companies, we combine elements of personalized service found in community banks with sophisticated financial products and services traditionally offered by larger regional banks that we market to our targeted customer base of professionals, high-net-worth individuals and small to mid-sized businesses. At December 31, 2013, we had total assets of $2.8 billion, net loans of $2.0 billion and deposits of $2.3 billion. We were incorporated in Colorado on February 19, 1980.

        Our wholly owned subsidiary CoBiz Bank (the Bank) is a full-service business banking institution serving two markets, Colorado and Arizona. In Colorado, the Bank operates under the name Colorado Business Bank and has 12 locations, including ten in the Denver metropolitan area, one in Boulder and one in the Vail area. In Arizona, the Bank operates under the name Arizona Business Bank and has six locations serving the Phoenix metropolitan area and the surrounding area of Maricopa County. Each of the Bank's locations is led by a local president with substantial decision-making authority. We focus on attracting and retaining high-quality personnel by maintaining an entrepreneurial culture and a decentralized business approach. We centrally support our bank and fee-based businesses with back-office services from our downtown Denver offices.

        Our banking products are complemented by our fee-based business lines. Through a combination of internal growth and acquisitions, our fee-based business lines have grown to include employee benefits brokerage and consulting, insurance brokerage, investment banking and wealth management services. We believe offering such complementary products allows us to both broaden our relationships with existing customers and attract new customers to our core business.

Segments

        In 2012 the Company made the decision to close its trust department and sell its wealth transfer business. The operations of the wealth transfer division and the trust department have been reported as discontinued operations throughout this report (all within the Wealth Management segment).

        We operate five distinct segments, as follows:

    Commercial Banking

3


Table of Contents

    Investment Banking

    Wealth Management

    Insurance

    Corporate Support and Other

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

Commercial Banking through:  

Commercial banking

Colorado Business Bank  

Real estate banking

Arizona Business Bank  

Private banking

   

Interest-rate hedging

   

Depository products

   

Treasury management

Investment Banking through:

 

Merger and acquisition advisory services

Green Manning & Bunch, Ltd.  

Institutional private placements of debt and equity

   

Strategic financial advisory services

Wealth Management through:

 

Customized client investment policy

CoBiz Investment Management, LLC  

Proprietary bond and equity offerings

   

Tailored asset allocation strategies

   

Financial planning

   

Carefully vetted investment options utilizing external managers

   

Investment management

Insurance through:

 

Employee benefits and retirement planning

CoBiz Insurance, Inc.  

Individual benefits

CoBiz Insurance—Employee Benefits, Inc.  

Commercial lines

   

Professional lines

   

Private client

   

Risk management services

        For a complete discussion of the segments included in our principal activities and certain financial information for each segment, see Note 18 to the consolidated financial statements.

Mission Statement

        Our mission is to serve the complete financial needs of successful businesses, business owners, professionals and high-net worth individuals. We create thoughtful, integrated, comprehensive solutions tailored to each customer's needs, thereby freeing them to succeed personally and professionally. Our long-term goal is to be recognized as the premier financial services provider to the business community in the markets we serve, creating engaged employees, longer term customer relationships and superior shareholder value.

        Our core values are:

    Focus on the customer

    Place people at the core

    Act with integrity

4


Table of Contents

    Give back to the community

    Create sustained shareholder value

    Have fun and be well

Business Strategy

        Our primary strategy is to differentiate ourselves from our competitors by providing our local presidents with substantial decision-making authority in developing their respective markets, and expanding our products and services to build long-term relationships that meet the needs of small to mid-sized businesses, business owners and professionals in high-growth Western markets. In all areas of our operations, we focus on attracting and retaining the highest-quality personnel by maintaining an environment which allows our employees to effectively respond to customer needs and manage those relationships. In order to realize our strategic objectives, we are pursuing the following strategies:

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

        The following table details the Company's market share of deposits in Colorado and Arizona, as well as other banks headquartered in our market areas and out-of-state banks as reported by the Federal Deposit Insurance Corporation (FDIC) and SNL Financial at June 30, 2013 and 2012.

 
  June 30, 2013   June 30, 2012  
Market share
  Colorado %   Arizona %   Colorado %   Arizona %  

CoBiz Bank

    1.55 %   0.47 %   1.58 %   0.49 %

Other in-state banks

    33.38     9.56     35.05     10.13  

Out-of-state banks

    65.07     89.97     63.37     89.38  
                   

Total

    100.00 %   100.00 %   100.00 %   100.00 %
                   
                   

Deposit market share rank

    12th     17th     13th     17th  

        The following table details the Company's deposit market share by Metropolitan Statistical Area (MSA):

 
  June 30, 2013   June 30, 2012  
MSA
  Deposit Market
Share Rank
  Market
Share %
  Deposit Market
Share Rank
  Market
Share %
 

Denver-Aurora-Broomfield, CO

    9th     2.13     8th     2.25  

Boulder, CO

    10th     3.47     10th     2.97  

Edwards, CO

    8th     2.16     9th     2.28  

Phoenix-Mesa-Glendale, AZ

    16th     0.65     15th     0.68  

5


Table of Contents

        Loan portfolio growth and diversification.    We have emphasized expanding our overall loan products in recent years in order to diversify and grow the loan portfolio. In recent years, we have introduced jumbo mortgage lending, public financing, Small Business Administration lending, structured-finance lending and a niche focused on healthcare lending. The addition of these products has enabled the Bank to continue to grow its loan portfolio in a competitive and challenging environment.

        Establishing strong brand awareness.    We have developed a cohesive and comprehensive approach to our internal and external communications efforts to leverage the power of each subsidiary as part of the larger company. Our brand platform has unified the look and feel of the CoBiz identity across the Company. With a target market that is similar across subsidiaries, our strong brand awareness helps generate cross-sell opportunities while strengthening client relationships.

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

        Maintaining asset quality.    We seek to maintain asset quality through a program that includes regular reviews of loans and ongoing monitoring of the loan portfolio by a loan review department that reports to the Chief Operations Officer of the Company but submits reports directly to the audit committee of our Board of Directors. At December 31, 2013, our ratio of nonperforming loans to total loans was 0.67%, compared to 1.02% at December 31, 2012.

        Controlling interest rate risk.    We seek to control our exposure to changing interest rates by attempting to maintain an interest rate profile within a narrow range around an earnings neutral position. An important element of this focus has been to emphasize variable-rate loans and investments funded by deposits that also mature or reprice over periods of 12 months or less. We have also incorporated interest rate floors in many of our variable rate loans to set a higher initial rate in this low rate environment. We actively monitor our interest rate profile in regular meetings of our Asset-Liability Management Committee.

        Focus on cost efficiencies.    We have heavily invested in our current infrastructure in order to efficiently process and record transactions across all of our business units. As we move forward, we plan to maintain a focus on expense management.

        Expansion.    We intend to continue to explore acquisitions of financial institutions or financial service entities within our market areas. However, the focus of our approach to expansion is predicated on recruiting key personnel to lead new initiatives. While we normally consider an array of new locations and product lines as potential expansion initiatives, we will generally proceed only upon identifying quality management personnel with a loyal customer following in the community or experienced in the product line that is the target of the initiative. We believe focusing on individuals who are established in their communities and experienced in offering sophisticated financial products and services will enhance our market position and add growth opportunities. In 2013 we announced the entrance into two new markets in Colorado, Fort Collins and Colorado Springs. Bank locations in these markets are expected to open in early 2014.

Market Areas Served

        We operate in two western markets in the United States—Colorado and Arizona. These markets are currently dominated by a number of large regional and national financial institutions. The

6


Table of Contents

Company's success is dependent to a significant degree on the economic conditions of these two geographical markets.

        Our market areas include the Denver metropolitan area, which is comprised of the counties of Denver, Boulder, Adams, Arapahoe, Douglas, Broomfield and Jefferson; the Vail Valley, in Eagle County; and the Phoenix metropolitan area, which is located principally in Maricopa County.

        Colorado.    Denver's economy has diversified over the years with significant representation in various industries. In 2013, Colorado was rated the 2nd best state for entrepreneurship and innovation and the 2nd best state to start a business. Colorado was the fourth-fastest growing state in the United States in terms of percentage population growth from April 2010 to July 2013. We have three locations in downtown Denver, two in Littleton, and one location each in Boulder, Commerce City, Cherry Creek, the Denver Technological Center (DTC), Golden, Louisville and the Vail Valley.

        Arizona.    Arizona consistently had one of the highest population growth rates in the nation during the latter half of the 20th century, including being the second fastest-growing state in terms of percentage population growth from 2000 to 2010 and the seventh-fastest growing state from April 2010 to July 2013. Our banks are located in Maricopa County, one of the nation's largest counties in terms of population size.

        Market Snapshot.    The following table contains selected data for the markets we serve.

Colorado Snapshot   Arizona Snapshot

Demographics

 

Demographics

Colorado population: 5.3 million

 

Arizona population: 6.6 million

Metropolitan Denver population: 2.6 million

 

Metropolitan Phoenix population: 4.3 million

Population projected to increase 35% to 5.8 million as measured from 2000 to 2030

 

Population projected to increase 109% to 10.7 million as measured from 2000 to 2030

Median household income 2012: $57,255

 

Median household income 2012: $47,044

Projected household income change from from 2011 to 2016: 19.06%

 

Projected household income change from from 2011 to 2016: 16.28%

Median home price for Metropolitan Denver at September 30, 2013: $252,935

 

Median home price for Metropolitan Phoenix at September 30, 2013: $170,547


Significant Industries

 

Significant Industries

Technology

 

Services

Communications

 

Trade

Manufacturing

 

Manufacturing

Tourism

 

Mining

Transportation

 

Agriculture

Aerospace

 

Construction

Biomedical/Healthcare

 

Tourism

Financial Services

   

Economic Outlook

 

Economic Outlook

Preliminary unemployment rate at December 2013 was 6.2%, down from 7.5% in December 2012 (national average of 6.7%)

 

Preliminary unemployment rate at December 2013 was 7.6%, down from 7.9% in December 2012 (national average of 6.7%)

State with the 10th highest job growth between November 2012 and November 2013

 

State with the 11th highest job growth between November 2012 and November 2013

7


Table of Contents

Competition

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

        Please see "Risk Factors" below for additional information.

Employees

        We had 513 employees at December 31, 2013. Employees of the Company are entitled to participate in a variety of employee benefit programs, including: equity plans; an employee stock purchase plan; a 401(k) plan; various comprehensive medical, accident and group life insurance plans; and paid vacations. No Company employee is covered by a collective bargaining agreement and we believe our relationship with our employees to be excellent.

Supervision and Regulation

        CoBiz and the Bank are extensively regulated under federal, Colorado and Arizona law. These laws and regulations are primarily intended to protect depositors, borrowers and federal deposit insurance funds, not shareholders of CoBiz. The following information summarizes certain material statutes and regulations affecting CoBiz and the Bank, and is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws, regulations or regulatory policies may have a material adverse effect on the business, financial condition, results of operations and cash flows of CoBiz and the Bank. We are unable to predict the nature or extent of the effects that fiscal or monetary policies, economic controls, or new federal or state legislation may have on our business and earnings in the future.

The Holding Company

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

        Securities Exchange Act of 1934.    CoBiz has a class of securities registered with the Securities Exchange Commission (SEC) under the Securities Exchange Act of 1934 (the Exchange Act). The Exchange Act requires the Company to file periodic reports with the SEC, governs the Company's disclosure in proxy solicitations and regulates insider trading transactions. The Company is listed on The NASDAQ Global Select Market (NASDAQ) and is subject to the rules of the NASDAQ.

        Emergency Economic Stabilization Act of 2008 (EESA).    Deteriorating market conditions in 2008 led to the issuance of the EESA that was signed into law on October 3, 2008. The EESA authorized the Troubled Asset Relief Plan (TARP) with an objective to ease the downturn in the credit cycle. The TARP provided up to $700 billion to the Department of the Treasury (Treasury) to buy mortgages and other troubled assets, to provide guarantees and to inject capital into financial institutions. As part of the $700 billion TARP, the Treasury established a Capital Purchase Program (CPP), which allows the Treasury to purchase up to $250 billion of senior preferred shares issued by U.S. financial institutions.

        On December 19, 2008, the Company entered into an agreement with the Treasury pursuant to the CPP to issue shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series B, par value $0.01 per share, having a liquidation preference of $1,000 per share (the Series B Preferred Stock) for an aggregate purchase price of $64.5 million. The Company also issued a warrant with a

8


Table of Contents

10-year term to acquire 895,968 shares of its common stock at an exercise price of $10.79. On September 8, 2011, the Company redeemed all $64.5 million of Series B Preferred Stock from the Treasury, concurrent with the issuance of preferred stock under the Small Business Lending Fund discussed below. On November 17, 2011 the Treasury sold the warrant issued by the Company to a third party in a private auction. The warrant will continue to be outstanding under the terms originally issued to the Treasury.

        Small Business Lending Fund (SBLF).    Enacted as part of the Small Business Jobs Act, the SBLF was a $30 billion fund that encouraged lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. Qualifying institutions were eligible to sell Tier 1-qualifiying preferred stock to the Treasury. The dividend rate on the preferred stock was initially a maximum of 5%.

        The SBLF was available to participants in the CPP as a method to refinance preferred stock issued through that program. On September 8, 2011, the Company entered into an agreement under the SBLF, pursuant to which the Company issued and sold to the Treasury, for an aggregate purchase price of $57.4 million, 57,366 shares of the Company's Senior Non-Cumulative Perpetual Preferred Stock, Series C (Series C Preferred Stock), par value $0.01 per share, having a liquidation value of $1,000 per share. The proceeds from the issuance of the Series C Preferred Stock, along with other available funds, were used to redeem the Series B Preferred Stock issued through the CPP. The dividend rate varied from 1% to 5% until it was fixed at 1% on September 30, 2013. The dividend rate increases to 9% in 2016.

        Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).    On July 21, 2010, President Obama signed into law the Dodd-Frank Act. The Dodd-Frank Act comprehensively reforms the regulation of financial institutions, products and services. Many of the provisions of the Dodd-Frank Act have been the subject of proposed and final rules by the SEC, FDIC and Federal Reserve. However, the full impact of the Dodd-Frank Act on our business and operations will not be known until all regulations implementing the statute are written and adopted. In December 2013, a provision of the Dodd-Frank Act known as the Volcker Rule was finalized by the federal banking agencies. The Volcker Rule prohibits banks and their affiliates from engaging in proprietary trading and prohibits investment in hedge funds and private equity funds. The Company is evaluating the impact of the Volcker Rule on its business and operations. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.

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

        Gramm-Leach-Bliley Act of 1999 (the GLB Act).    The GLB Act eliminates many of the restrictions placed on the activities of certain qualified financial or bank holding companies. A "financial holding company" such as CoBiz can expand into a wide variety of financial services, including securities activities, insurance and merchant banking without the prior approval of the FRB, provided that certain conditions are met, including a requirement that all subsidiary depository institutions be "well-capitalized."

9


Table of Contents

        Dividend Restrictions.    Dividends on the Company's capital stock (common and preferred stock) are prohibited under the terms of the junior subordinated debenture agreements (see Note 9 to the consolidated financial statements) if the Company is in continuous default on its payment obligations to the capital trusts, has elected to defer interest payments on the debentures or extends the interest payment period. At December 31, 2013, the Company was not in default, had not elected to defer interest payments and had not extended the interest payment period on any of the subordinated debt issuances.

        Pursuant to the terms of the agreement executed in the issuance of the Series C Preferred Stock, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its common stock will be subject to restrictions in the event that the Company fails to declare and pay full dividends on the Series C Preferred Stock. In addition, the Company may declare and pay dividends on its common stock or any other stock junior to the Series C Preferred Stock, or repurchase shares of any such stock, only if after payment of such dividends or repurchase of such shares the Company's Tier 1 Capital would be at least 90% of the Signing Date Tier 1 Capital, as set forth in the Articles of Amendment establishing the Series C Preferred Stock.

        Capital Adequacy.    The FRB monitors, on a consolidated basis, the capital adequacy of financial or bank holding companies that have total assets in excess of $500 million by using a combination of risk-based and leverage ratios. Failure to meet the capital guidelines may result in the application by the FRB of supervisory or enforcement actions. Under the risk-based capital guidelines, different categories of assets, including certain off-balance sheet items, such as loan commitments in excess of one year and letters of credit, are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a "risk-weighted" asset base. For purposes of the risk-based capital guidelines, total capital is defined as the sum of "Tier 1" and "Tier 2" capital elements, with Tier 2 capital being limited to 100% of Tier 1 capital. Tier 1 capital includes, with certain restrictions, common shareholders' equity, perpetual preferred stock (no more than 25% of Tier 1 capital being comprised of cumulative preferred stock or trust preferred stock) and noncontrolling interests in consolidated subsidiaries. Tier 2 capital includes, with certain limitations, perpetual preferred stock not included in Tier 1 capital, certain maturing capital instruments and the allowance for loan losses (limited to 1.25% of risk-weighted assets). The regulatory guidelines require a minimum ratio of total capital to risk-weighted assets of 8% (of which at least 4% must be in the form of Tier 1 capital). The FRB has also implemented a leverage ratio, which is defined to be a company's Tier 1 capital divided by its average total consolidated assets. The FRB has established a minimum ratio of 3% for "strong holding companies" as defined by the FRB. For most other holding companies, the minimum required leverage ratio is 4%, but may be higher based on particular circumstances or risk profile.

        For regulatory capital purposes, the Series C Preferred Stock is treated as an unrestricted core capital element included in Tier 1 Capital.

        The table below sets forth the capital ratios of the Company:

 
  At December 31, 2013  
Ratio
  Actual %   Minimum
Required %
 

Total capital to risk-weighted assets

    15.7     8.0  

Tier I capital to risk-weighted assets

    14.5     4.0  

Tier I leverage ratio

    12.4     4.0  

        On July 2, 2013, the Federal Reserve Board approved a final rule to implement the Basel III regulatory capital reforms and certain changes required by the Dodd-Frank Wall Street Reform and

10


Table of Contents

Consumer Protection Act. The rule becomes effective for large banks subject to the "advanced approaches" risk-based capital rules on January 1, 2014. "Non-advanced approaches" banks will implement the final rule beginning January 1, 2015, the implementation date for the Company. The final rule minimizes the impact on smaller, less complex financial institutions. Key highlights of the final rule for non-advanced approaches banks such as the Company include:

    A provision of a one-time opt-out from the recognition of AOCI unrealized gains and losses in regulatory capital. This will reduce potential volatility in regulatory capital ratios.

    The residential mortgage risk-weighting approach in the notice of proposed rulemaking was removed in the final rule. Institutions will continue to use the existing risk-weighting approach.

    Institutions with less than $15 billion in assets will be allowed to include certain non-qualifying capital instruments in regulatory capital that were issued prior to May 19, 2010. The Company's $70.0 million of trust preferred securities issued by its wholly-owned trusts will continue to be included in regulatory capital.

    Inclusion of a number of deductions and adjustments from regulatory capital. These include, for example, deferred tax assets dependent upon future taxable income, and investments in equity issued by nonconsolidated financial entities above certain thresholds. The Company estimates that application of the new requirements would result in significant deductions from regulatory capital due to the Company's investment in bank trust preferred and subordinated debt securities. However, these deductions will be phased in over a three-year period beginning in 2015, which will allow the Company to mitigate the impact of the deduction through a reduction in the impacted securities portfolio through calls, maturities and sales.

    An increase in the risk-weighting for certain assets, which will result in a higher capital requirement.

    Overall, minimum requirements will increase for both the quantity and quality of capital held by institutions.

        Basel III not only increases most of the required minimum regulatory capital ratios, it also introduces a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer. Basel III has maintained the general structure of the current prompt corrective action thresholds while incorporating the increased requirements, including the Common Equity Tier 1 Capital ratio. The prompt corrective action thresholds for "well-capitalized" organizations imply a cushion of 2% over the minimum capital ratios, which is slightly lower than a 2.5% capital conservation buffer required under Basel III. In order to be a "well-capitalized" financial holding company or depository institution under Basel III, an institution must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; a Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a leverage ratio of 5% or more. Institutions must also maintain a capital conservation buffer consisting of Common Equity Tier 1 Capital.

        Future rulemaking and regulatory changes on capital requirements may impact the Company as it continues to grow and evaluate mergers and acquisitions (M&A) activity.

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

11


Table of Contents

of "financial and managerial" strength to their subsidiary banks and to not conduct operations in an unsafe or unsound manner.

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

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

The Bank

        General.    The Bank is a state-chartered banking institution, the deposits of which are insured by the Deposit Insurance Fund (DIF) of the FDIC, and is subject to supervision, regulation and examination by the Colorado Division of Banking, the FRB and the FDIC. Pursuant to such regulations, the Bank is subject to special restrictions, supervisory requirements and potential enforcement actions. The FRB's supervisory authority over CoBiz can also affect the Bank.

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

        USA Patriot Act of 2001.    The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA Patriot Act) is intended to allow the federal government to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money-laundering requirements.

12


Table of Contents

        Among its provisions, the USA Patriot Act requires each financial institution to: (i) establish an anti-money-laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, the USA Patriot Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. Financial institutions must comply with Section 326 of the Act which provides minimum procedures for identification verification of new customers. On March 9, 2006, the USA Patriot Improvement and Reauthorization Act of 2005 (Reauthorization Act of 2005) was signed by the President to extend and modify the original Act. The Reauthorization Act of 2005 makes permanent 14 of the original provisions of the USA Patriot Act that had been set to expire.

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

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

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

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

        Anti-Tying Restrictions.    Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by a holding company or its affiliates.

        Dividend Restrictions.    Dividends paid by the Bank and management fees from the Bank and our fee-based business lines provide substantially all of the Company's cash flow. The approval of the Colorado Division of Banking is required prior to the declaration of any dividend by the Bank if the

13


Table of Contents

total of all dividends declared by the Bank in any calendar year exceeds the total of its net profits of that year combined with the retained net profits for the preceding two years. In addition, the FDICIA provides that the Bank cannot pay a dividend if it will cause the Bank to be "undercapitalized."

        Capital Adequacy.    Federal regulations establish minimum requirements for the capital adequacy of depository institutions that are generally the same as those established for bank holding companies. See "The Holding Company—Capital Adequacy." Banks with capital ratios below the required minimum are subject to certain administrative actions, including the termination of deposit insurance and the appointment of a receiver, and may also be subject to significant operating restrictions pursuant to regulations promulgated under the FDICIA. See "The Holding Company—Support of Banks."

        The following table sets forth the capital ratios of the Bank:

 
  At December 31, 2013  
Ratio
  Actual %   Minimum
Required %
 

Total capital to risk-weighted assets

    13.5     8.0  

Tier I capital to risk-weighted assets

    12.3     4.0  

Tier I leverage ratio

    10.5     4.0  

        Pursuant to the FDICIA, regulations have been adopted defining five capital levels: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Increasingly severe restrictions are placed on a depository institution as its capital level classification declines. An institution is critically undercapitalized if it has a tangible equity to total assets ratio less than or equal to 2%. An institution is adequately capitalized if it has a total risk-based capital ratio less than 10%, but greater than or equal to 8%; or a Tier 1 risk-based capital ratio less than 6%, but greater than or equal to 4%; or a leverage ratio less than 5%, but greater than or equal to 4% (3% in certain circumstances). An institution is well-capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater; and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. Under these regulations, at December 31, 2013, the Bank was well-capitalized, which places no significant restrictions on the Bank's activities. See "The Holding Company—Capital Adequacy" for a discussion of changes to the capital levels required under Basel III.

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

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

        Brokered Deposits.    Well-capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are generally not permitted to accept brokered deposits.

        Real Estate Lending Evaluations.    Federal regulators have adopted uniform standards for the evaluation of loans secured by real estate or made to finance improvements to real estate. The Bank is required to establish and maintain written internal real estate lending policies consistent with safe and

14


Table of Contents

sound banking practices. The Company has established loan-to-value ratio limitations on real estate loans, which are more stringent than the loan-to-value limitations established by regulatory guidelines.

        Deposit Insurance Premiums.    Under current regulations, FDIC-insured depository institutions that are members of the FDIC pay insurance premiums at rates based on their assessment risk classification, which is determined, in part, based on the institution's capital ratios and factors that the FDIC deems relevant to determine the risk of loss to the FDIC.

        On February 7, 2011, the FDIC finalized new rules for an assessment calculation as required by the Dodd-Frank Act. The final rules change the assessment base from deposits to average daily consolidated assets less average monthly tangible equity (which is defined as Tier 1 Capital) and also changes the base assessment rates. The final rules took effect April 1, 2011. Under the new assessments, the base assessment rate for a Risk Category I institution is 5 to 9 basis points and the base assessment rates for Risk Categories II—IV range from 14 to 35 basis points. The amount an institution is assessed is based upon statutory factors that includes the degree of risk the institution poses to the insurance fund and may be reviewed semi-annually. A change in our risk category would negatively impact our assessment rates.

        Additionally, all institutions insured by the FDIC Bank Insurance Fund are assessed fees to cover the debt of the Financing Corporation, the successor of the insolvent Federal Savings and Loan Insurance Corporation. The current assessment rate effective for the first quarter of 2014 is 0.155 basis points (0.62 basis points annually). The assessment rate is adjusted quarterly.

        Federal Home Loan Bank Membership.    The Bank is a member of the Federal Home Loan Bank of Topeka (FHLB). Each member of the FHLB is required to maintain a minimum investment in capital stock. The Board of Directors of the FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Board. Because the extent of any obligation to increase our investment in the FHLB depends entirely upon the occurrence of a future event, potential future payments to the FHLB are not determinable.

Fee-Based Business Lines

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

        Green Manning & Bunch, Ltd. (GMB), our investment banking subsidiary, is registered as a broker-dealer under the Exchange Act and is subject to regulation by the SEC and the Financial Industry Regulatory Authority (FINRA). GMB is subject to the SEC's net capital rule designed to enforce minimum standards regarding the general financial condition and liquidity of a broker-dealer. Under certain circumstances, this rule limits the ability of the Company to make withdrawals of capital and receive dividends from GMB. GMB's regulatory net capital consistently exceeded such minimum net capital requirements in fiscal 2013. The securities industry is one of the most highly regulated in the United States, and failure to comply with related laws and regulations can result in the revocation

15


Table of Contents

of broker-dealer licenses; the imposition of censures or fines; and the suspension or expulsion from the securities business of a firm, its officers or employees.

        CoBiz Insurance Inc., acting as an insurance producer, must obtain and keep in force an insurance producer's license with the State of Arizona and Colorado. In order to write insurance in other states, they are required to obtain non-resident insurance licenses. All premiums belonging to insurance carriers and all unearned premiums belonging to customers received by the agency must be treated in a fiduciary capacity.

Changing Regulatory Structure

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

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

Monetary Policy

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

Website Availability of Reports Filed with the SEC

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

16


Table of Contents


Item 1A.    Risk Factors

Our business may be adversely affected by the highly regulated environment in which we operate.

        We are subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors' funds, FDIC funds, customers and the banking system as a whole, rather than stockholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things.

        As a financial holding company, we are subject to regulation and supervision primarily by the Federal Reserve. The Bank, as a Colorado-chartered bank, is subject to regulation and supervision by the Colorado Division of Banking. We undergo periodic examinations by these regulators, which have extensive discretion and authority to prevent or remedy unsafe or unsound practices or violations of law by banks and financial service holding companies.

        The primary federal and state banking laws and regulations that affect us are described in this report under the section captioned "Supervision and Regulation." These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time. Such changes, including changes regarding interpretations and implementation, could affect us in substantial and unpredictable ways and could have a material adverse effect on our business, financial condition and results of operations. Further, such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with applicable laws, regulations or policies could result in sanctions by regulatory agencies, civil monetary penalties, and/or damage to our reputation, which could have a material adverse effect on our business, financial condition and results of operations. The policies of the Federal Reserve also have a significant impact on us. Among other things, the Federal Reserve's monetary policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits, and can also affect the value of financial instruments we hold and the ability of borrowers to repay their loans, which could have a material adverse effect on our business, financial condition and results of operations.

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

        The policies of the Federal Reserve have a significant impact on us. Among other things, the Federal Reserve's monetary policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold and the ability of borrowers to repay their loans, which could have a material adverse effect on us.

Conditions in the financial services markets may adversely affect the business and results of operations of the Company.

        The ability of our borrowers to pay interest and repay principal, which affects our financial performance, is highly dependent on the business environment of the overall economy and the business markets in which we operate. In recent years, the financial services industry has been adversely impacted by unfavorable economic and market conditions. Many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers including other financial institutions. The Company has historically used federal funds purchased as a short-term liquidity source and, while the Company continues to actively use this source, credit tightening in the market could reduce funding lines available to the Company. Market turmoil and tightening of credit may lead to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of general business activity.

17


Table of Contents

Weakness in the economy and in the real estate market, including specific weakness within the markets where our banks do business, may adversely affect us.

        In general, all of our business segments were negatively impacted by market conditions in 2009-2011. During that period, there was a downturn in the real estate market, a slow-down in construction and an oversupply of real estate for sale. While the overall economy and the business of the Company has stabilized, any additional softening in our real estate markets could hurt our business as a majority of our loans are secured by real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature.

        Substantially all of our real property collateral is located in Arizona and Colorado. Declines in real estate prices would reduce the value of real estate collateral securing our loans. Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be further diminished, and we would be more likely to suffer losses on defaulted loans.

        Our Insurance segment's revenues have been adversely affected by a continued soft premium market for property and casualty insurance; volatility in the broader equity market has negatively impacted Wealth Management earnings; and Investment Banking transactions have been curtailed due to market uncertainty and valuation issues.

        Weakness in the economy and real estate markets could have a material adverse effect on our business, financial condition, results of operations and cash flows and on the market for our common stock.

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

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

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

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

18


Table of Contents

real estate market or the economy or changes in government regulation. If the cash flow from the property is reduced, the borrower's ability to repay the loan and the value of the security for the loan may be impaired.

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

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

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

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

An interruption in or breach in security of our information systems, including the occurrence of a cyber incident or a deficiency in our cybersecurity may result in a loss of customer business or damage to our brand image.

        We rely heavily on communications, information systems (both internal and provided by third parties) and the internet to conduct our business. Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal, regulatory and internal standards and specifications. In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and confidential information, such as the personal information of our customers and clients. These risks may increase in the future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications.

        While we have policies and procedures designed to prevent or limit the effect of a possible failure, interruption or breach of our information systems, there can be no assurance that such action will not

19


Table of Contents

occur or, if any does occur, that it will be adequately addressed. For example, although we maintain commercially reasonable measures to ensure the cybersecurity of our information systems, other financial service institutions and companies have reported breaches in the security of their websites or other systems. In addition, several U.S. financial institutions have recently experienced significant distributed denial-of-service attacks, some of which involved sophisticated and targeted attacks intended to disable or degrade service, or sabotage systems. Other potential attacks have attempted to obtain unauthorized access to confidential information or destroy data, often through the introduction of computer viruses or malware, cyber-attacks and other means. To date, none of these efforts has had a material effect on our business or operations. Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments. Those same parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients. We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or proprietary information. An interception , misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third party could result in legal liability, remediation costs, regulatory action and reputational harm.

We could experience an unexpected inability to obtain needed liquidity.

        Liquidity measures the ability to meet current and future cash flow needs as they become due. Our liquidity position reflects our ability to meet loan requests, accommodate deposit outflows, service principal and interest repayments on debt and to fund our strategic initiatives. Our ability to meet current financial obligations is a function of our balance sheet structure, ability to liquidate assets and access to alternative sources of funds. We seek to ensure that our funding needs are met by maintaining an appropriate level of liquidity through asset and liability management. If we become unable to obtain funds when needed, it could have a material adverse effect on our business, financial condition and results of operations.

We may not realize our deferred income tax assets. In addition, our built in losses could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.

        The Company may experience negative or unforeseen tax consequences. We review the probability of the realization of our net deferred tax assets each period based on forecasts of taxable income. This review uses historical results, projected future operating results based upon approved business plans, eligible carryforward and carryback periods, tax-planning opportunities and other relevant considerations. Adverse changes in the profitability and financial outlook in the U.S. and our industry may require the creation of an additional valuation allowance to reduce our net deferred tax assets. Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on the Company's results of operations and financial condition.

        In addition, the benefit of our built-in losses would be reduced if we experience an "ownership change," as determined under Internal Revenue Code Section 382 (Section 382). A Section 382 ownership change occurs if a stockholder or a group of stockholders who are deemed to own at least 5% of our common stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. If an ownership change occurs, Section 382 would impose an annual limit on the amount of built-in losses we can use to reduce our taxable income equal to the product of the total value of our outstanding equity immediately prior to the ownership change (reduced by certain items specified in Section 382) and the federal long-term tax-exempt interest rate in effect for the month of the ownership change. A number of complex rules apply to calculating this annual limit.

20


Table of Contents

        While the complexity of Section 382's provisions and the limited knowledge any public company has about the ownership of its publicly traded stock make it difficult to determine whether an ownership change has occurred, we currently believe that an ownership change has not occurred. However, if an ownership change were to occur, the annual limit Section 382 may impose could result in a limitation of the annual deductibility of our built-in losses.

The need to account for assets at market prices may adversely affect our results of operations.

        We report certain assets, including investments and securities, at fair value. Generally, for assets that are reported at fair value we use quoted market prices or valuation models that utilize market data inputs to estimate fair value. Because we carry these assets on our books at their fair value, we may incur losses even if the assets in question present minimal credit risk. We may be required to recognize other-than-temporary impairments in future periods with respect to securities in our portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of the securities and our estimation of the anticipated recovery period.

The Company may be adversely affected by the soundness of other financial institutions.

        Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, the Company's credit risk may be exacerbated when the collateral held by the Company cannot be realized or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse effect on the Company's financial condition and results of operations.

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

        The Office of the Comptroller of the Currency (OCC), the FRB and the FDIC finalized joint supervisory guidance in 2006 on sound risk management practices for concentrations in commercial real estate lending. The guidance is intended to help ensure that institutions pursuing a significant commercial real estate lending strategy remain healthy and profitable while continuing to serve the credit needs of their communities. The agencies are concerned that rising commercial real estate loan concentrations may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in commercial real estate markets. The guidance reinforces and enhances existing regulations and guidelines for safe and sound real estate lending. The guidance provides supervisory criteria, including numerical indicators to assist in identifying institutions with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny. The guidance does not limit banks' commercial real estate lending, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. Lending and risk management practices of the Company will be taken into account in supervisory evaluation of capital adequacy. Our commercial real estate portfolio at December 31, 2013, did not meet the definition of commercial real estate concentration as set forth in the final guidelines. If the Company is considered to have a concentration in the future and our risk management practices are found to be deficient, it could result in increased reserves and capital costs.

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

        In certain situations, under various federal, state and local environmental laws, ordinances and regulations as well as the common law, a current or previous owner or operator of real property may

21


Table of Contents

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

Changes in interest rates may affect our profitability.

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

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

        Our fee-based businesses have historically experienced, and are likely to continue to experience, quarterly and annual volatility in revenues and earnings. With respect to our investment banking services segment, GMB, the delay in the initiation or the termination of a major new client engagement, or any changes in the anticipated closing date of client transactions can directly affect revenues and earnings for a particular quarter or year. With respect to our insurance segment, CoBiz Insurance Inc. and CoBiz Insurance-Employee Benefits, our revenues and earnings also can experience quarterly and annual volatility, depending on the timing of the initiation or termination of a major new client engagement. With respect to our investment advisory business, our revenues and earnings are dependent on the value of our assets under management, which in turn are heavily dependent upon general conditions in debt and equity markets. Any significant volatility in debt or equity markets are likely to directly affect revenues and earnings of CIM for a particular quarter or year.

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

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

22


Table of Contents

could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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

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

        By virtue of their larger capital bases or affiliation with larger multibank holding companies, many of our competitors have substantially greater capital resources and lending limits than we have and perform other functions that we offer only through correspondents. Interstate banking and unlimited state-wide branch banking are permitted in Colorado and Arizona. As a result, we have experienced, and expect to continue to experience, greater competition in our primary service areas. Our business, financial condition, results of operations and cash flows may be adversely affected by competition, including any increase in competition. Moreover, recently enacted and proposed legislation has focused on expanding the ability of participants in the banking and thrift industries to engage in other lines of business. The enactment of such legislation could put us at a competitive disadvantage because we may not have the capital to participate in other lines of business to the same extent as more highly capitalized financial service holding companies.

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

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

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

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

23


Table of Contents

We are subject to restrictions on the ability to pay dividends to and repurchase shares of common stock because of our participation in the SBLF.

        Under the terms of the securities purchase agreement between us and the Treasury in connection with the SBLF transaction, our ability to pay dividends on or repurchase our common stock is subject to a limit requiring us generally not to reduce our Tier 1 capital from the level on the SBLF closing date by more than 10%. If we fail to pay an SBLF dividend, there are further restrictions on our ability to pay dividends on or repurchase our common stock. In addition, if the Company's qualified small business lending does not increase over its initial baseline, the dividend rate on the Series C Preferred Stock may increase.

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

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

Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        At December 31, 2013, we had 12 bank locations, three fee-based locations and an operations center in Colorado and six bank locations and a fee-based location in Arizona. Our executive offices are located at 821 17th St., Denver, Colorado, 80202. We lease our executive offices and our Northeast office from entities partly owned or controlled by a director of the Company. See "Certain Relationships and Related Transactions and Director Independence" under Item 13 of Part III and Note 15 to the consolidated financial statements. The terms of these leases expire between 2014 and 2022. The Company leases all of its facilities with the exception of the Prince branch in Littleton,

24


Table of Contents

Colorado which the Company purchased during 2010. The following table sets forth specific information on each location.

Bank Locations
  Address   Lease
Expiration

Colorado:

       

Prince

  2409 W. Main St., Littleton, CO 80120   Owned

Northwest

  400 Centennial Pkwy., Ste. 100, Louisville, CO 80027   2014

Tremont

  1275 Tremont Pl., Denver, CO 80204   2014

Vail Valley

  56 Edwards Village Blvd., Ste. 130, Edwards, CO 81632   2014

West Metro

  15710 W. Colfax Ave., Golden, CO 80401   2015

Denver

  821 17th St., Denver, CO 80202   2016

Cherry Creek

  301 University Blvd., Stes. 100 & 200, Denver, CO 80206   2017

Private Banking

  1099 18th St., Ste. 3000, Denver, CO 80202   2018

Northeast

  4695 Quebec St., Denver, CO 80216   2019

Boulder

  2025 Pearl St., Boulder, CO 80302   2019

Denver Operations Center

  717 17th St., Ste. 400, Denver, CO 80202   2020

DTC

  4582 S. Ulster Street, Ste. 100, Denver, CO 80237   2020

Littleton

  1600 West Mineral, Littleton, CO 80120   2022

Arizona:

       

Chandler

  2727 W. Frye Rd., Ste. 100, Chandler, AZ 85224   2014

East Valley

  1757 E. Baseline Rd., Ste. 101, Gilbert, AZ 85233   2017

Phoenix

  2600 N. Central Ave., Ste. 2000, Phoenix, AZ 85004   2017

Scottsdale

  6909 E. Greenway Pkwy., Ste. 150, Scottsdale, AZ 85254   2018

Scottsdale Fashion Square

  7150 E. Camelback Rd., Ste. 100, Scottsdale, AZ 85251   2018

Tempe

  1620 W. Fountainhead Pkwy., Ste. 119, Tempe, AZ 85282   2018

 

Fee-Based Locations
  Address   Lease
Expiration

CoBiz Insurance Inc.:

       

Colorado

  821 17th St., Denver, CO 80202   2016

Arizona

  2600 N. Central Ave., Ste. 1950, Phoenix, AZ 85004   2017

CoBiz Investment Management, LLC

 

1099 18th St., Ste. 3000, Denver, CO 80202

 

2018

Green Manning & Bunch, Ltd. 

 

1515 Wynkoop St., Ste. 800, Denver, CO 80202

 

2020

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

Item 3.    Legal Proceedings

        Periodically and in the ordinary course of business, various claims and lawsuits which are incidental to our business are brought against or by us. We believe, based on the dollar amount of the claims outstanding at the end of the year, the ultimate liability, if any, resulting from such claims or lawsuits will not have a material adverse effect on the business, financial condition, results of operations or cash flows of the Company.

Item 4.    Mine Safety Disclosures

        None.

25


Table of Contents

PART II

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

Market for Registrant's Common Equity

        The common stock of the Company is traded on the NASDAQ Global Select Market under the symbol "COBZ." At February 7, 2014, there were approximately 490 shareholders of record of CoBiz common stock.

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

 
  High   Low   Cash
Dividends
Declared
 

2012:

                   

First Quarter

  $ 7.32   $ 5.22   $ 0.01  

Second Quarter

    7.10     5.77     0.02  

Third Quarter

    7.37     6.16     0.02  

Fourth Quarter

    7.50     6.35     0.02  

2013:

                   

First Quarter

  $ 8.65   $ 7.27   $ 0.03  

Second Quarter

    9.34     7.50     0.03  

Third Quarter

    11.00     8.30     0.03  

Fourth Quarter

    12.24     9.19     0.03  

        On January 16, 2014, the Board of Directors approved the increase of its quarterly dividend for the first quarter of 2014 to $0.035 per share. The timing and amount of future dividends declared by the Board of Directors of the Company will depend upon the consolidated earnings, financial condition, liquidity and capital requirements of the Company and its subsidiaries, the amount of cash dividends paid to the Company by its subsidiaries, applicable government regulations and policies, and other factors considered relevant by the Board of Directors of the Company. The Company is subject to certain covenants pursuant to the issuance of its junior subordinated debentures and Series C Preferred Stock as described in Note 12 to the consolidated financial statements that could limit our ability to pay dividends.

        Pursuant to the terms of the securities purchase agreement executed in the issuance of the Series C Preferred Stock in connection with the SBLF program, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its common stock will be subject to restrictions in the event that the Company fails to declare and pay full dividends on the Series C Preferred Stock. At December 31, 2013, the Company has paid all required dividends under the purchase agreement when due.

        Capital distributions, including dividends, by institutions such as the Bank are subject to restrictions tied to the institution's earnings. See "Supervision and Regulation—"The Bank" and "The Holding Company"—Dividend Restrictions" included under Item 1 of Part I.

        The following table compares the cumulative total return on a hypothetical investment of $100 in CoBiz common stock on December 31, 2008 and the closing prices on each of the five years in the period ended December 31, 2013, with the hypothetical cumulative total return on the Russell 2000 Index and the SNL U.S. Bank NASDAQ Index for the comparable period.

26


Table of Contents

GRAPHIC

 
  12/31/2008   12/31/2009   12/31/2010   12/31/2011   12/31/2012   12/31/2013  

CoBiz Financial Inc. 

  $ 100.00   $ 49.75   $ 64.13   $ 61.26   $ 80.15   $ 130.04  

Russell 2000 Index

  $ 100.00   $ 127.17   $ 161.32   $ 154.59   $ 179.69   $ 249.42  

SNL U.S. Bank NASDAQ

  $ 100.00   $ 81.12   $ 95.71   $ 84.92   $ 101.22   $ 145.48  

        The table below summarizes shares acquired and amounts paid in net settlement of restricted stock awards:

Period
  Total number
of shares
  Average price
paid per share
 

July 1 - July 31, 2013

    34,035   $ 8.38  

August 1 - August 31, 2013

    184   $ 10.06  

September 1 - September 30, 2013

    1,037   $ 9.11  

27


Table of Contents

Item 6.    Selected Financial Data

        The following table sets forth selected financial data for the Company for the periods indicated. In the fourth quarter of 2012, the Company made the decision to close its trust department and sell its wealth transfer business. Both of these lines of business were part of the Company's Wealth Management segment. The results of operations and earnings per share for trust and wealth transfer have been reported as discontinued operations retrospectively for all periods presented in the following table.

 
  At or for the year ended December 31,  
(in thousands, except per share data)
  2013   2012   2011   2010   2009  

Statement of income data:

                               

Interest income

  $ 106,127   $ 106,128   $ 111,264   $ 115,979   $ 129,450  

Interest expense

    10,426     12,750     14,863     19,148     26,066  
                       

Net interest income before provision for loan losses

    95,701     93,378     96,401     96,831     103,384  

Provision for loan losses

    (8,804 )   (4,733 )   4,002     35,127     105,815  
                       

Net interest income (loss) after provision for loan losses

    104,505     98,111     92,399     61,704     (2,431 )

Noninterest income

    30,912     30,559     30,823     29,517     23,512  

Noninterest expense

    94,628     91,166     95,821     103,345     113,522  
                       

Income (loss) before taxes

    40,789     37,504     27,401     (12,124 )   (92,441 )

Provision (benefit) for income taxes

    13,351     13,258     (5,808 )   10,158     (32,522 )
                       

Net income (loss) before noncontrolling interest

  $ 27,438   $ 24,246   $ 33,209   $ (22,282 ) $ (59,919 )

Less: net (income) loss attributable to noncontrolling interest

                (209 )   314  
                       

Net income (loss) from continuing operations

    27,438     24,246     33,209     (22,491 )   (59,605 )

Discontinued operations, net of tax

    173     324     253     (146 )   (23,436 )
                       

Net income (loss)

  $ 27,611   $ 24,570   $ 33,462   $ (22,637 ) $ (83,041 )
                       
                       

Basic earnings (loss) per common share from continuing operations

  $ 0.66   $ 0.54   $ 0.75   $ (0.72 ) $ (2.18 )

Diluted earnings (loss) per common share from continuing operations

  $ 0.66   $ 0.54   $ 0.75   $ (0.72 ) $ (2.18 )
                       

Basic earnings (loss) per common share from discontinued operations

  $   $ 0.01   $ 0.01   $   $ (0.80 )

Diluted earnings (loss) per common share from discontinued operations

  $   $ 0.01   $ 0.01   $   $ (0.80 )
                       

Basic earnings (loss) per common share

  $ 0.66   $ 0.55   $ 0.76   $ (0.72 ) $ (2.98 )

Diluted earnings (loss) per common share

  $ 0.66   $ 0.55   $ 0.76   $ (0.72 ) $ (2.98 )
                       

Cash dividends declared per common share

  $ 0.12   $ 0.07   $ 0.04   $ 0.04   $ 0.10  

Dividend payout ratio

    18.18 %   12.73 %   5.26 %   NM     NM  

Balance sheet data:

                               

Total assets

  $ 2,800,691   $ 2,653,641   $ 2,423,504   $ 2,395,088   $ 2,466,015  

Total investments

    556,796     571,665     633,308     644,668     545,980  

Loans

    2,084,359     1,926,432     1,637,424     1,643,727     1,780,866  

Allowance for loan losses

    37,050     46,866     55,629     65,892     75,116  

Loans held for sale

                    1,820  

Deposits

    2,279,037     2,129,260     1,918,406     1,889,368     1,968,833  

Junior subordinated debentures

    72,166     72,166     72,166     72,166     72,166  

Subordinated notes payable

        20,984     20,984     20,984     20,984  

Shareholders' equity

    281,085     257,051     220,082     201,738     230,451  

Key ratios:

                               

Return on average total assets

    1.02 %   0.98 %   1.39 %   (0.93 )%   (3.25 )%

Pre-tax, pre-provision return on assets (PTPP ROA)(1)

    1.32 %   1.42 %   1.53 %   1.29 %   1.65 %

Return on average shareholders' equity

    10.29 %   10.15 %   16.23 %   (10.17 )%   (35.23 )%

Average shareholders' equity to average total assets

    9.93 %   9.65 %   8.58 %   9.15 %   9.22 %

Net interest margin

    3.88 %   4.08 %   4.35 %   4.37 %   4.38 %

Efficiency ratio(2)

    74.06 %   74.00 %   73.01 %   76.49 %   68.27 %

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 %

Allowance for loan and credit losses to total loans

    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 %

Net charge-offs to average loans

    0.05 %   0.23 %   0.86 %   2.62 %   3.78 %

28


Table of Contents


(1)
Pre-tax pre-provision earnings (PTPP) is a non-GAAP measure and is calculated as total revenue less noninterest expense (excluding impairment and valuation losses). The Company believes that PTPP is a useful financial measure that enables investors and others to assess the Company's ability to generate capital to cover credit losses and is a reflection of earnings generated by the core business. The following is a reconciliation of PTPP to its most comparable GAAP measure.

 
  At and for the year ended December 31,  
(in thousands)
  2013   2012   2011   2010   2009  

Net income—GAAP

  $ 27,611   $ 24,570   $ 33,462   $ (22,637 ) $ (83,041 )

Adjusted for:

                               

Taxable equivalent adjustment

    2,760     1,907     1,184     501     726  

Provision (benefit) for income taxes

    13,437     13,429     (5,654 )   10,028     (32,859 )

Provision for loan and credit losses

    (8,804 )   (4,768 )   3,976     35,033     105,711  

Net other than temporary impairment losses on securities recognized in earnings

        297     771     451     922  

Loss on securities, other assets and other real estate owned

    683     65     3,145     7,977     4,677  

Goodwill impairment

                    46,160  
                       

Pre-tax, pre-provision earnings

  $ 35,687   $ 35,500   $ 36,884   $ 31,353   $ 42,296  
                       
                       

Average assets

 
$

2,702,211
 
$

2,508,222
 
$

2,403,960
 
$

2,434,002
 
$

2,556,706
 

PTPP ROA

    1.32 %   1.42 %   1.53 %   1.29 %   1.65 %
(2)
Efficiency ratio is computed by dividing noninterest expense by the sum of net interest income before provision for loan losses and noninterest income, excluding gains and losses on asset sales and valuation adjustments.

NM—Not Meaningful

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

        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


Table of Contents

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


Table of Contents

        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:

 
  Commercial
Banking
  Investment
Banking
  Wealth
Management
  Insurance   Corporate
Support
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  

(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


Table of Contents

      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


Table of Contents

    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


Table of Contents

        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


Table of Contents

        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


Table of Contents

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


Table of Contents

        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


Table of Contents

        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  
Credit Relationships
  Number of
relationships
  % of loan
portfolio
  Number of
relationships
  % of loan
portfolio
  Number of
relationships
  % of loan
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


Table of Contents

        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  
(in thousands)
  Balance   % of
Commercial
loan portfolio
  Balance   % of
Commercial
loan portfolio
  Balance   % of
Commercial
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


Table of Contents

        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


Table of Contents

(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


Table of Contents

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  
(in thousands)
  Colorado   Arizona   Total   Total in
category
  NPAs
as a %
  Colorado   Arizona   Total   Total in
category
  NPAs
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


Table of Contents

        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


Table of Contents

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


Table of Contents

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  
(in thousands)
  Amount
of
allowance
  Loans in
category as
a % of
total gross
loans
  Amount
of
allowance
  Loans in
category as
a % of
total gross
loans
  Amount
of
allowance
  Loans in
category as
a % of
total gross
loans
  Amount
of
allowance
  Loans in
category as
a % of
total gross
loans
  Amount
of
allowance
  Loans in
category as
a % of
total gross
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


Table of Contents

$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


Table of Contents

        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 %
                                                     
                                                     

(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


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


Table of Contents

        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


Table of Contents

        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  
(in thousands)
  Average balance   Weighted average interest rate %   Average balance   Weighted average interest rate %   Average balance   Weighted average 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


Table of Contents

        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


Table of Contents

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