This discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Form 10-Q. Certain terms used in this discussion are defined in the notes to these financial statements. For a description of our accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2008. For a discussion of the segments included in our principal activities, see Note 10 to the Notes of the Condensed Consolidated Financial Statements.

Executive Summary

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, investment advisory and trust 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.

Our Company has focused on developing an organization with personnel, management systems and products that will allow us to compete effectively and position us for growth. The cost of this process relative to our size has been high. In addition, we have operated with excess capacity during the start-up phases of various projects due to our commitment to technology and expansion of our fee-based businesses. As a result, relatively high levels of noninterest expense have adversely affected our earnings over the past several years. Salaries and employee benefits comprised most of this overhead category. However, we believe that our compensation levels have allowed us to recruit and retain a highly qualified management team capable of implementing our business

strategies. We believe our compensation policies, which include the granting of stock-based compensation to many employees and the offering of an employee stock purchase plan, have highly motivated our employees and enhanced our ability to maintain customer loyalty and generate earnings. For additional discussion on stock-based compensation, see Notes 1 and 14 to the Condensed Consolidated Financial Statements.

Industry Overview

The impact of decreased values in real estate related assets, a downturn in the financial markets and a significant tightening in the credit market that plagued the U.S. commercial banking industry in 2008 have continued into the first quarter of 2009. During 2008, 25 banks failed and went into receivership with the FDIC compared to 10 bank failures in the previous five years. Between January and April 2009, 23 banks have already gone into receivership. The FDIC reported that nearly one out of three FDIC-insured institutions reported a net loss in the fourth quarter of 2008, that the industry as a whole reported its first net loss since 1990 and the average net interest margin fell to a 20-year low. The Senior Loan Officer Opinion Survey on Bank Lending Practices conducted by the FRB found that 85% of domestic banks responding to the survey had tightened their lending standards on medium-to-large commercial and industrial (C&I) loans during the fourth quarter of 2008. The survey also found that 98% of domestic respondents had increased the spread on loan rates over their cost of funds for medium-to-large loans in the fourth quarter of 2008. During this period, loan loss provisions at FDIC-insured institutions reached a 20-year high and absorbed one-third of the industry's operating revenue, while quarterly earnings for the industry fell below $30 billion for the first time since 2003.

To stimulate the lagging economy, President Barack Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA) into law on February 17, 2009. Included in the ARRA are investments targeted to save or create jobs including, among other things: a $55.5 billion Making Work Pay tax credit that is intended to provide a tax credit to approximately 95% of working families; $144.0 billion in state and local fiscal relief; $111.0 billion in infrastructure and science and $81.0 billion in protecting the vulnerable. The targeted mission of the ARRA is to:

† Create or save more than 3.5 million jobs over the next two years;

† Take a big step toward computerizing Americans' health records, reducing medical errors, and saving billions in health care costs;

† Revive the renewable energy industry and provide the capital over the next three years to eventually double domestic renewable energy capacity;

† Undertake the largest weatherization program in history by modernizing 75 percent of federal building space and more than one million homes;

† Increase college affordability for seven million students by funding the shortfall in Pell Grants, increasing the maximum award level by $500, and providing a new higher education tax cut to nearly four million students;

† As part of the $150 billion investment in new infrastructure, enact the largest increase in funding of our nation's roads, bridges, and mass transit systems since the creation of the national highway system in the 1950s;

† Provide an $800 Making Work Pay tax credit for 129 million working households, and cut taxes for the families of millions of children through an expansion of the Child Tax Credit;

† Require unprecedented levels of transparency, oversight, and accountability.

Financial and Operational Highlights

Noted below are some of the significant financial performance measures and operational results for the first quarter of 2009:

† Net loss for the three months ended March 31, 2009, was $46.9 million, compared to $1.6 million in net income for the same period in 2008.

† Diluted earnings (loss) per share for the three months ended March 31, 2009, were $(2.07), compared to $0.07 for the same period in 2008.

† Net interest income on a tax-equivalent basis for the three months ended March 31, 2009 increased to $26.8 million, compared to $22.1 million for the same period in 2008.

† The net interest margin on a tax-equivalent basis was 4.38% for the three months ended March 31, 2009, compared to 3.99% for the same period in 2008.

† Gross loans decreased $11.8 million from December 31, 2008, or (2.4)% on an annualized basis.

† Provision for loan and credit losses for the three months ended March 31, 2009, was $33.9 million, compared to $5.0 million for the comparable period in 2008.

† Net loan charge-offs totaled $13.2 million for the three months ended March 31, 2009, or 2.7% annualized of average loans during the period, compared to 0.38% annualized for the same period in 2008.

† Nonperforming assets increased to $52.5 million or 2.00% of total assets at March 31, 2009, compared to $47.0 million or 1.75% of total assets at December 31, 2008.

† Allowance for loan and credit losses increased to 3.16% of total loans at March 31, 2009, compared to 2.12% for the same period in 2008.

† Earnings for the first quarter of 2009 were negatively impacted by a $1.3 million loss related to OTTI on three investment securities.

† The Company's total risk-based capital ratio decreased to 13.9% at March 31, 2009 from 14.5% at the end of 2008.

† The Company recorded a goodwill impairment charge of $33.7 million for the three months ended March 31, 2009.

† The Company was in default on two financial covenants required by its $30.0 million line of credit during the first quarter of 2009.

† In February 2009, the Company executed three interest-rate swap transactions designated as cash flow hedges that are effective for interest payments starting in 2010. The transactions fix the interest rate payments due on its junior subordinated debentures and reduce the Company's exposure to adverse changes in cash flows relating to payments on its LIBOR-based floating rate debt.

† In March 2009, the Company closed one of its bank locations in Boulder, Colorado and moved the employees and customers to its other Boulder bank.

Critical Accounting Policies

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In making those critical accounting estimates, we are required to make assumptions about matters that may be highly uncertain at the time of the estimate. Different estimates we could reasonably have used, or changes in the assumptions that could occur, could have a material effect on our financial condition or results of operations. In addition to the discussion on SFAS 157 below, a description of our critical accounting policies was provided in the Management's Discussion and Analysis of Financial Condition and Results of Operation section of our Annual Report on Form 10-K for the year ended December 31, 2008.

The Company measures or monitors certain assets and liabilities on a fair value basis in accordance with SFAS 157. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Fair value may be used on a recurring basis for certain assets and liabilities such as available for sale securities and derivatives in which fair value is the primary basis of accounting. Similarly, fair value may be used on a nonrecurring basis to evaluate certain assets or liabilities such as impaired loans and other real estate owned. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions in accordance with SFAS 157 to determine the instrument's fair value. At March 31, 2009, 17.9% or $475.6 million of total assets, represented assets recorded at fair value on a recurring basis. At March 31, 2009, 0.3% or $8.2 million of total liabilities represented liabilities recorded at fair value on a recurring basis. Assets (financial and nonfinancial) recorded at fair value on a nonrecurring basis represented $61.0 million, or 2.3% of total assets.

At March 31, 2009, the Company holds, as part of its investment portfolio, available for sale securities reported at fair value consisting of MBS, obligations of states and political subdivisions, and trust preferred securities. The fair value of the majority of MBS and obligations of states and political subdivisions are determined using widely accepted valuation techniques, including matrix pricing and broker-quote based applications, considered Level 2 inputs. The Company also holds trust preferred securities that are recorded at fair value based on quoted market prices, considered by the Company Level 1 inputs. The fair value of available for sale securities at March 31, 2009, using Level 1 and 2 inputs was $463.8 million. Certain private label MBS valued using broker-dealer quotes based on proprietary broker models, which are considered by the Company an unobservable input (Level 3), totaled $3.0 million at March 31, 2009. At March 31, 2009, investments incorporating Level 3 inputs as part of their valuation represent 0.11% of total assets. The Company recognized a loss of $0.4 million on the private label MBS for the three months ended March 31, 2009. Unrealized losses of $4.2 million were recorded in other comprehensive income relating to private label MBS for the three months ended March 31, 2009.

Currently, the Company uses interest rate swaps as part of its cash flow strategy to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. To comply with the provisions of SFAS 157, credit valuation adjustments are incorporated into the valuation to appropriately reflect both the Company's own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs (i.e. estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties). However, at March 31, 2009, the Company has concluded that the impact of the credit valuation adjustments on the overall valuation of its derivative positions is not significant. Therefore, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Certain collateral-dependent impaired loans are reported at the fair value of the underlying collateral. Impairment is measured based on the fair value of the collateral, which is typically derived from appraisals that take into consideration prices in observed transactions involving similar assets and similar locations, in accordance with SFAS 114. The fair value of other impaired loans is measured using a discounted cash flow analysis.

OREO represents real property taken by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. OREO is measured at the lower of cost or fair value, less selling costs. Fair value of OREO is based on property appraisals, considered a Level 2 input by the Company.

Financial Condition

Total assets at March 31, 2009 were $2.6 billion, a decrease of $60.4 million or 2.2% from December 31, 2008, due primarily to a decrease in the loan portfolio and a goodwill impairment of $33.7 million. During the first quarter of 2009, higher level of loan pay downs and maturities and an increase in the allowance for loan losses of $20.5 million from December 31, 2008 exceeded new credit extensions of $59.4 million and loan advances of $112.13 million. Due to a significant decline in the market capitalization of the Company during the current quarter, an analysis of the fair value of the reporting units was performed which indicated that goodwill was impaired.

Investments. The Company manages its investment portfolio to provide interest income and to meet the collateral requirements for public deposits, our customer repurchase program and wholesale borrowings. Investments decreased by $17.2 million from $500.4 million at December 31, 2008, to $483.2 million at March 31, 2009. The decrease in investments is attributable to a Federal Home Loan Bank (FHLB) stock sale of $7.9 million, $19.9 million of maturities, $1.3 million in OTTI offset by purchases of $9.0 million. Purchases consisted of two corporate debt securities issued by publicly traded Companies. Maturing investments were largely high-grade government-backed mortgage-backed securities (MBS). Additionally, net unrealized losses on available-for-sale securities decreased by $2.6 million to $0.1 million during the first quarter of 2009.

Investments comprised 18.2% of total assets at March 31, 2009, a slight decrease from 18.6% at December 31, 2008. Our investment portfolio is mainly comprised of mortgage-backed securities, including MBS fully backed by U.S. government agencies with a net book value of $410.9 million, and a market value of $420.9 million; non-agency, private-label MBS with a net book value of $7.1 million and a market value of $3.0 million. The portfolio does not hold any securities exposed to sub-prime mortgage loans. Our investment portfolio also includes $23.7 million of single-issue, public trust preferred securities issued by 15 financial institutions and $22.4 million of corporate debt securities issued by five publicly traded companies. None of these institutions are in default nor have they deferred interest payments on the trust preferred securities. The fair value of these securities was $40.3 million at March 31, 2009.

Loans. Gross loans held for investment decreased slightly by $14.9 million or 0.7% to $2.0 billion at March 31, 2009.

                                               March 31, 2009            December 31, 3008           March 31, 2008
                                                           % of                       % of                       % of
(in thousands, except per share amounts)     Amount      Portfolio      Amount      Portfolio      Amount      Portfolio
LOANS
Commercial                                 $   630,567        32.2 %  $   648,968        32.6 %  $   572,008        30.9 %
Real Estate - mortgage                       1,039,957        53.2 %    1,017,444        51.2 %      907,962        49.0 %
Real Estate - construction                     250,767        12.8 %      266,928        13.4 %      308,756        16.7 %
Consumer                                        83,405         4.3 %       86,701         4.4 %       73,078         3.9 %
Other                                           11,654         0.6 %       11,212         0.6 %       13,480         0.7 %
Gross loans                                  2,016,350       103.1 %    2,031,253       102.2 %    1,875,284       101.3 %
Less allowance for loan losses                 (63,361 )      (3.2 )%     (42,851 )      (2.2 )%     (23,340 )      (1.3 )%
Net loans held for investment                1,952,989        99.9 %    1,988,402       100.0 %    1,851,944       100.0 %
Loans held for sale                              3,100         0.1 %            -         0.0 %            -         0.0 %
Total net loans                            $ 1,956,089       100.0 %  $ 1,988,402       100.0 %  $ 1,851,944       100.0 %

Loans Held for Sale. At March 31, 2009, the Company transferred $3.1 million from loans to loans held for sale due to management's intention to sell specific loans in the portfolio.

Goodwill. Goodwill decreased by $33.7 million to $12.5 million at March 31, 2009, from $46.2 million at December 31, 2008. The decrease was the result of an analysis of the Company's reporting units that indicated that the carrying value of goodwill exceeded its implied value.

Deferred Income Taxes. Deferred income taxes increased $9.2 million to $26.1 million at March 31, 2009, from $16.9 million at December 31, 2008. The increase was primarily related to the $7.8 million tax effect of the provision for loan and credit losses (net of charge-offs and recoveries).

Other Assets. Other Assets increased by $1.9 million to $34.6 million at March 31, 2009, from $32.7 million at December 31, 2008. Contributing to the increase was a $2.9 million increase in OREO, offset by $1.0 million decrease in other miscellaneous assets.

Deposits. Total deposits increased by $37.5 million to $1.68 billion at March 31, 2009 from $1.64 billion at December 31, 2008. Certificates of deposits growth of $71.8 million during the quarter was offset by a $45.3 million decrease in NOW and money market accounts. Core deposit growth continues to be a challenge due to competition from other banks and financial service providers as well as current economic conditions.

                                                    March 31, 2009            December 31, 3008             March 31, 2008
                                                                % of                        % of                        % of
                                                 Amount       Portfolio      Amount       Portfolio      Amount       Portfolio
DEPOSITS AND CUSTOMER REPURCHASE AGREEMENTS
NOW and money market                           $   520,605         28.8 %  $   565,948         31.9 %  $   697,965         36.1 %
Savings                                              9,560          0.5 %        9,274          0.5 %       11,699          0.6 %
Eurodollar                                         100,249          5.6 %       88,025          5.0 %       96,069          5.0 %
Certificates of deposits under $100,000             59,835          3.3 %       76,559          4.3 %       99,650          5.2 %
Certificates of deposits $100,000 and over         311,348         17.3 %      287,039         16.2 %      328,820         17.0 %
Reciprocal CDARS                                   108,961          6.0 %       91,844          5.2 %       14,625          0.8 %
Brokered deposits                                  113,800          6.3 %       66,611          3.8 %      101,703          5.3 %
Total interest-bearing deposits                  1,224,358         67.8 %    1,185,300         66.9 %    1,350,531         69.9 %
Noninterest-bearing demand deposits                452,124         25.0 %      453,731         25.6 %      430,875         22.3 %
Customer repurchase agreements                     129,195          7.2 %      133,478          7.5 %      151,680          7.8 %
Total deposits and customer repurchase
agreements                                     $ 1,805,677        100.0 %  $ 1,772,509        100.0 %  $ 1,933,086        100.0 %

Securities Sold Under Agreements to Repurchase. Securities sold under agreement to repurchase are transacted with customers as a way to enhance our customers' interest-earning ability. Management does not consider customer repurchase agreements to be a wholesale funding source, but rather an additional treasury management service provided to our customer base. Our customer repurchase agreements are based on an overnight investment sweep that can fluctuate based on our customers' operating account balances. Securities sold under agreements to repurchase decreased $4.3. million since December 31, 2008, partially due to the migration of funds to the Eurodollar sweep product that offers a higher interest rate.

Other Short-Term Borrowings. Other short-term borrowings decreased by $44.3 million to $498.8 million at March 31, 2009, from $543.1 million at December 31, 2008. Other short-term borrowings consist of federal funds purchased, overnight and term borrowings from the Federal Home Loan Bank (FHLB), advances on a revolving line of credit and short-term borrowings from the U.S. Treasury. The decrease in other short-term borrowings is primarily due to the increase of $37.5 million in deposits and the $17.2 million decrease in investments in the first quarter of 2009. Other short-term borrowings are used as part of our liquidity management strategy and fluctuate based on the Company's cash position. The Company's wholesale funding needs are largely dependent on core deposit levels, which have proven to be volatile due to increased competition and uncertain economic conditions. If we are unable to maintain deposit balances at a level sufficient to fund our asset growth, our composition of interest-bearing liabilities will shift toward additional wholesale funds, which typically have a higher interest cost than our core deposits.

Results of Operations



Overview


The following table presents the condensed statements of income for the three
months ended March 31, 2009 and 2008.



                                               Three months ended
                                            March 31,      March 31,       Increase/(decrease)
(in thousands)                                2009           2008           Amount          %
Interest income                            $    33,534    $    37,397    $     (3,863 )    -10.3 %
Interest expense                                 6,955         15,419          (8,464 )    -54.9 %
NET INTEREST INCOME BEFORE PROVISION            26,579         21,978           4,601       20.9 %
Provision for loan losses                       33,747          5,031          28,716      570.8 %
NET INTEREST INCOME (LOSS) AFTER
PROVISION                                       (7,168 )       16,947         (24,115 )   -142.3 %
Noninterest income                               6,121          7,691          (1,570 )    -20.4 %
Noninterest expense                             57,328         21,905          35,423      161.7 %
INCOME (LOSS) BEFORE INCOME TAXES              (58,375 )        2,733         (61,108 )  -2235.9 %
Provision (benefit) for income taxes           (10,928 )          870         (11,798 )  -1356.1 %
NET INCOME (LOSS)                              (47,447 )        1,863         (49,310 )  -2646.8 %
Noncontrolling interest                            498           (268 )           766     -285.8 %
NET INCOME (LOSS) ATTRIBUTABLE TO COBIZ
FINANCIAL                                  $   (46,949 )  $     1,595    $    (48,544 )  -3043.5 %

The annualized return on average assets for the three months ended March 31, 2009 and 2008 was (7.08)% and 0.27%, respectively. Annualized return on average common shareholders' equity for the three months ended March 31, 2009 and 2008 was (74.24)% and 3.29%, respectively. The decrease in our return on average assets and common shareholders' equity is primarily attributable to the provision for loan and credit losses of $33.9 million for the three months ended March 31, 2009 compared to $5.0 million for the year earlier period and the

goodwill impairment of $33.7 million recorded in the first quarter of 2009. For the three months ended March 31, 2009, the efficiency ratio decreased to 67.09% compared to 74.33% for the three months ended March 31, 2008.

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