| COBIZ INC Item 1A Risk Factors Changes in economic conditions may cause us to incur loan losses |
| The inability of borrowers to repay loans can erode our earnings and capital |
| Our loan portfolio is somewhat less diversified than that of a traditional community bank because it includes a higher concentration of larger commercial loans |
| Substantially all of our loans are to businesses and individuals in the Denver and Phoenix metropolitan areas, and any economic decline in these market areas could impact us adversely |
| 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 |
| We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for potential losses based on a number of factors |
| If our assumptions are wrong, our allowance for loan losses may not be sufficient to cover our losses, thereby having an adverse effect on our operating results, and may cause us to increase the allowance in the future |
| In addition, although our level of delinquencies historically has been low, we have been increasing and expect to continue to increase the number and amount of loans we originate, and we cannot assure you that we will not experience an increase in delinquencies and losses as these loans continue to age, particularly if the favorable economic conditions in Colorado and Arizona reverse |
| The actual amount of future provisions for loan losses cannot now be determined and may exceed the amounts of past provisions |
| Additions to our allowance for loan losses would decrease our net income |
| Our business is 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 |
| Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans generally is 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 18 ______________________________________________________________________ secured by commercial real estate often depend upon the successful operation and management of the properties, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation |
| 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 |
| Our commercial loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower |
| Most often, this collateral is accounts receivable, inventory, equipment or real estate |
| In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers |
| Other collateral securing loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business |
| Our construction loans are based upon estimates of costs to construct and value associated with the completed project |
| These estimates may be inaccurate |
| Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately 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 |
| A downturn in our real estate markets could hurt our business |
| A downturn in our real estate markets could hurt our business because many of our loans are secured by real estate |
| Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature |
| If real estate prices decline, the value of real estate collateral securing our loans could be reduced |
| Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans |
| As of December 31, 2005, approximately 51prca of the book value of our loan portfolio consisted of loans collateralized by various types of real estate |
| Substantially all of our real property collateral is located in 19 ______________________________________________________________________ Arizona and Colorado |
| Any such downturn could have a material adverse effect on our business, financial condition and results of operations |
| We may experience difficulties in managing our growth |
| As part of our strategy, we may expand into additional communities or attempt to strengthen our position in our current markets by undertaking additional de novo branch openings or new bank formations |
| We believe it may take up to eighteen months for new banking facilities to first achieve operational profitability due to the impact of overhead expenses, and the start-up phase of generating loans and deposits |
| To the extent that we undertake growth initiatives, we are likely to continue to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets |
| In addition, we may acquire financial institutions and related businesses that we believe provide a strategic fit with our business |
| To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately and profitably manage such growth |
| Acquiring other financial institutions and businesses involves risks commonly associated with acquisitions, including: • potential exposure to unknown or contingent liabilities of financial institutions and other businesses we acquire; • exposure to potential asset quality issues of the acquired banks or businesses; • difficulty and expense of integrating the operations and personnel of banks and businesses we acquire; • potential disruption to our business; • potential diversion of our management’s time and attention; and • the possible loss of key employees and customers of the banks and businesses we acquire |
| We rely heavily on our management, and the loss of any of our senior officers may adversely affect our operations |
| Consistent with our policy of focusing growth initiatives on the recruitment of qualified personnel, we are highly dependent on the continued services of a small number of our executive officers and key employees |
| The loss of the services of any of these individuals could adversely affect our business, financial condition, results of operations and cash flows |
| The failure to recruit and retain key personnel could have a material adverse effect on our business, financial condition, results of operations and cash flows |
| Changes in interest rates may affect our profitability |
| Our profitability, is in part, a function of the spread between the interest earned on investments and loans and the interest paid on deposits and other interest-bearing liabilities |
| Our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates |
| At any given time, our assets and liabilities will be such that they are affected differently by a change in interest rates |
| As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable-and fixed-rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity |
| We have traditionally managed our assets and liabilities in such a way that we have a positive interest rate gap |
| Our business and financial condition may be adversely affected by an increase in competition |
| The banking business in the Denver and Phoenix metropolitan areas is highly competitive and is currently dominated by a number of large regional financial institutions |
| In addition to these regional banks, there are a number of smaller commercial banks that operate in these areas |
| We compete for loans and deposits with banks, savings and loan associations, finance companies, credit unions, and mortgage bankers |
| In addition to traditional financial institutions, we also compete for loans with brokerage and investment banking companies, and governmental agencies that make available low-cost or guaranteed loans to certain borrowers |
| Particularly in times of high interest rates, we also face significant competition for deposits from sellers of short-term money market securities as well as 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 an increase in competition |
| Moreover, recently enacted and proposed legislation has focused on expanding the ability of participants in the banking and thrift industries to engage in other lines of business |
| The enactment of such legislation could put us at a competitive disadvantage because we may not have the capital to participate in other lines of business to the same extent as more highly capitalized financial service holding companies |
| We continually encounter technological change, and we may have fewer resources than our competitors to continue to invest in technological improvements |
| The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services |
| In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs |
| Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations |
| Many of our competitors have substantially greater resources to invest in technological improvements |
| We cannot assure you that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers |
| An interruption in or breach in security of our information systems may result in a loss of customer business |
| We rely heavily on communications and information systems to conduct our business |
| Any failure or interruptions or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposits, servicing or loan origination systems |
| The occurrence of any failures or interruptions could result in a loss of customer business and have a material adverse effect on our results of operations and financial condition |
| 21 ______________________________________________________________________ We may be required to make capital contributions to the bank if it becomes undercapitalized |
| Under federal law, a bank holding company may be required to guarantee a capital plan filed by an undercapitalized bank subsidiary with its primary regulator |
| If the subsidiary defaults under the plan, the holding company may be required to contribute to the capital of the subsidiary bank in an amount equal to the lesser of 5prca of the bank’s assets at the time it became undercapitalized or the amount necessary to bring the bank into compliance with applicable capital standards |
| Therefore, it is possible that we will be required to contribute capital to our subsidiary bank or any other bank that we may acquire in the event that such bank becomes undercapitalized |
| If we are required to make such capital contribution at a time when we have other significant capital needs, our business, financial condition, results of operations and cash flows could be adversely affected |
| We are subject to significant government regulation, and any regulatory changes may adversely affect us |
| The banking industry is heavily regulated under both federal and state law |
| These regulations are primarily intended to protect customers, not our creditors or stockholders |
| As a financial holding company, we are also subject to extensive regulation by the Federal Reserve Board, in addition to other regulatory and self-regulatory organizations |
| Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of such changes, which could have a material adverse effect on our profitability or financial condition |
| If our internal controls over financial reporting do not comply with the requirements of the Sarbanes-Oxley Act, our business could be adversely affected |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports |
| Section 404 also requires our independent registered public accounting firm to attest to and report on management’s assessment of our internal controls over financial reporting |
| Our management, including our CEO and CFO, does not expect that our internal controls over financial reporting will prevent all error and all fraud |
| A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met |
| Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs |
| Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been or will be detected |
| These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake |
| Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls |
| The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions |
| Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures |
| Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected |
| Although our management has determined and our independent registered public accounting firm has attested that our internal controls over financial reporting were effective as of December 31, 2005, we cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future |
| A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal controls as ineffective |
| If our internal controls over financial reporting are not 22 ______________________________________________________________________ considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price |
| We must evaluate whether any portion of our recorded goodwill is impaired |
| Impairment testing may result in a material, non-cash write-down of our goodwill assets and could have a material adverse impact on our results of operations |
| As of December 31, 2005, goodwill represented approximately 2dtta0prca of our total assets |
| We have recorded goodwill because we paid more for some of our businesses than the fair market value of the tangible and separately measurable intangible net assets of those businesses |
| Under Statement of Financial Accounting Standard Nodtta 142, “Goodwill and Other Intangible Assets,” we must test our goodwill and other intangible assets with indefinite lives for impairment at least annually (or whenever events occur which may indicate possible impairment) |
| Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount, including goodwill |
| If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired |
| We estimate the fair value of our reporting units using market multiples of comparable entities, including recent transactions, or a combination of market multiples and a discounted cash flow methodology |
| Determining the fair value of a reporting unit requires a high degree of subjective management assumption |
| Discounted cash flow valuation models are utilized that incorporate such variables as revenue growth rates, expense trends, discount rates and terminal values |
| Based upon an evaluation of key data and market factors, management selects from a range the specific variables to be incorporated into the valuation model |
| Any changes in key assumptions about our business and its prospects, changes in market conditions or other externalities, for impairment testing purposes could result in a non-cash impairment charge and such a charge could have a material adverse effect on our consolidated results of operations |
| Our fee based businesses are subject to quarterly and annual volatility in their revenues and earnings |
| Our fee based businesses have historically experienced, and are likely to continue to experience, quarterly and annual volatility in revenues and earnings |
| With respect to our investment banking services segment, 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 and FDL, our revenues and earnings also can experience quarterly and annual volatility, depending on the timing of the initiation or termination of a major new client engagement |
| In addition, a substantial portion of the revenues and earnings of our insurance segment are often generated during our fourth quarter as many of their clients seek to finalize their wealth transfer and estate plans by year end |
| With respect to our investment advisory business, ACMG, our revenues and earnings are dependent exclusively on the value of our assets under management, which in turn are heavily dependent upon general conditions in debt and equity markets |
| Any significant volatility in debt or equity markets are likely to directly affect revenues and earnings of ACMG for a particular quarter or year |