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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

FORM 10-K

(Mark One)

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

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

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

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

Common Stock, $0.01 par value
(Title of class)

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

        The aggregate market value of the voting common equity held by non-affiliates of the registrant as of March 8, 2002 computed by reference to the closing price on the Nasdaq National Market was $114,875,556.

        The number of shares outstanding of the registrant's sole class of common stock on March 8, 2002 was 13,149,597.

        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 2002 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K

TABLE OF CONTENTS

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

        This report contains forward-looking statements that describe CoBiz's future plans, strategies and expectations. All forward-looking statements are based on assumptions and involve risks and uncertainties, many of which are beyond our control and which may cause our actual results, performance or achievements to differ materially from the results, performance or achievements contemplated by the forward-looking statements. Such risks and uncertainties include, among other things:

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Competitive pressures among depository and other financial institutions nationally and in our market areas may increase significantly.



•

Adverse changes in the economy or business conditions, either nationally or in our market areas, could increase credit-related losses and expenses.



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Increases in defaults by borrowers and other delinquencies could result in increases in our provision for losses on loans and leases and related expenses.



•

Our inability to manage growth effectively, including the successful expansion of our customer support, administrative infrastructure and internal management systems, could adversely affect our results of operations and prospects.



•

Fluctuations in interest rates and market prices could reduce our net interest margins and asset valuations and increase our expenses.

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The consequences of continued bank acquisitions and mergers in our market areas, resulting in fewer but much larger and financially stronger competitors, could increase competition for financial services to our detriment.



•

Our continued growth will depend in part on our ability to enter new markets successfully and capitalize on other growth opportunities.



•

Changes in legislative or regulatory requirements applicable to us and our subsidiaries could increase costs, limit certain operations and adversely affect results of operations.



•

Changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations may increase our tax expense or adversely affect our customers' businesses.

        In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements in this report. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

Item 1. Business

Overview

        CoBiz Inc. ("CoBiz") is a financial holding company headquartered in Denver, Colorado. We were incorporated in Colorado on February 19, 1980 as Equitable Bancorporation, Inc. Our wholly owned subsidiary American Business Bank, N.A. (the "Bank," previously named Colorado Business Bank, N.A.), is a full-service business banking institution with nine Colorado locations, including six in the Denver metropolitan area, two in Boulder and one in Edwards, just west of Vail, and two Arizona locations serving Phoenix and the surrounding area of Maricopa County. The Bank operates in its Colorado market areas under the name Colorado Business Bank ("CBB") and its Arizona market areas under the name Arizona Business Bank ("ABB"). As of December 31, 2001, we had total assets of $925.4 million, net loans and leases of $674.0 million and deposits of $655.2 million.

        We provide a broad range of banking products and services, including credit, treasury management, investment, deposit and trust products, as well as employee benefits consulting, insurance brokerage and investment banking services, to our targeted customer base of small and medium-sized businesses and high-net-worth individuals. Each of our locations operates as a separate business bank, with significant local decision-making authority. Support functions such as accounting, data processing, bookkeeping, credit administration, loan operations and investment and cash management services are conducted centrally from our downtown Denver office. As a result of this operating approach, we believe we are well positioned to attract and serve our target customers, combining the elements of personalized service found in community banks with sophisticated banking products and services traditionally offered by larger regional banks. For a discussion of the segments included in our principal activities, see Note 15 of Notes to Consolidated Financial Statements.

2001 Acquisitions

        On March 8, 2001, we acquired First Capital Bank of Arizona ("First Capital"), an Arizona state-chartered commercial bank with two locations serving Phoenix and the surrounding area of Maricopa County, Arizona. The acquisition was structured as a merger between First Capital and a wholly-owned subsidiary we formed to participate in the merger. As a result of the merger, First Capital shareholders received shares of our common stock and First Capital became our wholly owned subsidiary. The transaction was accounted for as a pooling of interests. On September 7, 2001, First Capital was merged into the Bank.

        On March 1, 2001, CoBiz completed its acquisition of Milek Insurance Services, Inc ("Milek"). The agency, which was renamed CoBiz Insurance, Inc., provides commercial and personal property and casualty insurance brokerage, as well as risk management consulting services to small and medium-sized businesses and individuals. The shareholders of Milek received 67,145 shares of CoBiz common stock as consideration for the acquisition. This transaction was also accounted for as a pooling of interests.

        On July 10, 2001, CoBiz acquired Green Manning & Bunch, Ltd. ("GMB"), a 13-year-old investment banking firm based in Denver, Colorado. The acquisition of GMB, which is a limited partnership, was completed through a wholly owned subsidiary we formed to consummate the transaction: CoBiz GMB, Inc. In the acquisition, (i) the corporate general partner of GMB was merged into CoBiz GMB, Inc., with the shareholders of the general partner receiving a combination of cash, shares of our common stock and the right to receive future earn-out payments; and (ii) CoBiz GMB, Inc. acquired all of the limited partnership interests of GMB in exchange for cash, shares of CoBiz GMB, Inc. Class B Common Stock (the "CoBiz GMB, Inc. Shares") and the right to receive future earn-out payments. The CoBiz GMB, Inc. Shares represent a 2% interest in CoBiz GMB, Inc. and have no voting rights. After two years, or sooner under certain circumstances, the holders of the CoBiz GMB, Inc. shares have the right to require us to exchange the CoBiz GMB, Inc. shares for shares of our common stock. After three years, or sooner under certain circumstances, we can require the holders of the CoBiz GMB, Inc. shares to exchange such shares for shares of our common stock. The transaction was accounted for as a purchase. Goodwill of $4,976,000 was recorded in connection with the transaction. The contingent consideration resulting from the earn-out payments will be treated as an additional cost of the acquisition and recorded as goodwill.

Business Strategy

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

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

        De novo branching.    We also intend to continue exploring growth opportunities to expand through de novo branching in areas with high concentrations of our target customers in Colorado, Arizona and other western states. We intend to use Colorado Business Bank-Boulder as our model for further de novo branching. Colorado Business Bank-Boulder opened in November 1995 with a staff of three experienced lending officers recruited from the Boulder branch of a large national bank. We began our Boulder operations in a relatively small space in an office building in downtown Boulder, rather than in a traditional, free-standing bank building, thereby substantially decreasing overhead. As a result of the market's acceptance of our business banking model, Colorado Business Bank-Boulder has grown significantly and relocated to a new larger location. In addition, we added a second Boulder location. As of December 31, 2001, our Boulder locations had an aggregate of $144.3 million in loans and $102.4 million in deposits. This strategy has been successful in Colorado and will be utilized in the Arizona market.

        Fee-based business lines.    Although banking remains our core business, we have begun and will likely continue introducing supplemental fee-generating business lines. We began offering trust and estate administration services in March 1998, employee benefits consulting in 2000, and introduced insurance brokerage services in March 2001. The 2001 acquisition of GMB added investment banking services to our product offerings. We believe offering such complementary products allows us to both broaden our relationships with existing customers and attract new customers to our core business. In addition, we believe the fees generated by these services will increase our non-interest income.

        New product lines.    We also will seek to grow through the addition of new product lines. Our product development efforts are focused on providing enhanced credit, treasury management, investment, deposit and trust products to our target customer base. Within the past few years, we have greatly expanded our commercial real estate lending department to allow for the origination of larger and more complex real estate loans.

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

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

        Emphasizing high quality customer service.    We believe our ability to offer high quality customer service provides us with a competitive advantage over many regional banks that operate in our market areas. We emphasize customer service in all aspects of our operations and identify customer service as an integral component of our employee training programs. Moreover, we are constantly exploring methods to make banking an easier and more convenient process for our customers. For example, we offer a courier service to pick up deposits for customers who are not in close proximity to any of the Bank's 11 locations or simply do not have the time to go to the Bank.

        Maintaining asset quality and controlling interest rate risk.    We seek to maintain asset quality through a program that includes regular reviews of loans by responsible loan officers and ongoing monitoring of the loan and lease portfolio by a loan review officer who reports directly to the audit committee of our board of directors. In addition, we added a Senior Credit Officer in the third quarter of 2001 to further enhance our asset quality. As of December 31, 2001, our ratio of nonperforming loans and leases to total loans and leases was 0.33%. In addition, 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 which also mature or re-price over periods of 12 months or less.

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

        Acquisitions.    We intend to continue to explore acquisitions of financial institutions or financial services entities, including opportunities in Colorado, Arizona and other western states.

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

Market Areas Served

        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.

        The Denver metropolitan area enjoyed a 10.4% increase in population from January 1998 to December 2001. This seven-county area is one of the fastest growing regions in the nation, helping to make Colorado the third-fastest growing state in the United States. In addition, Douglas County is the richest in the nation with a median household income of $84,645 in 1998. Along with the rest of the nation, Denver's economy contracted in 2001, witnessing a 2.7% decrease in non-farm employment from January 2001 to December 2001. Although the unemployment rate for Denver had risen to 3.1% by the end of 2001, it remained significantly lower than the national average of 4.7%. Per capita income also decreased, falling 6.29% in 2001. Denver's economy has diversified over the years—with significant representation in technology, communications, manufacturing, tourism, transportation, aerospace, biomedical and financial services—although companies with less than 50 employees continue to make up Denver's single largest employment group.

        Our office in Edwards, Colorado, is located in the rapidly developing resort community of the Vail Valley. We have two locations each in downtown Denver, Boulder and Littleton and one location each in Golden, the Denver Technological Center (DTC) and the Vail Valley. The following is selected additional market data regarding the Colorado markets we serve:

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Downtown Denver and the DTC are the main business centers of metropolitan Denver.



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



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



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



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The area around DTC features a high concentration of office parks and businesses. A large number of high-net-worth individuals live and work in the area.



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

        Our Arizona market is served by a full-service commercial banking location based in Phoenix with one branch office in Surprise, Arizona, a suburb of Phoenix near Sun City. Arizona is the second fastest growing state in the nation, experiencing a population growth rate of 40% between 1990 and 2000 as compared to the national growth rate of 13.1% during the same period. The region's economy also grew, with the Phoenix metropolitan area ranking third in employment growth for the nation. Arizona's economic sectors include trade, manufacturing, mining, agriculture, construction and tourism, with services constituting the largest economic sector. As of January 2002, the unemployment rate was 5.5%. The following is selected additional market data regarding the Arizona markets we serve:

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Our Phoenix bank is located in Maricopa County. More than half of Arizona's population resides in Maricopa County, which includes the cities of Phoenix, Tempe, Mesa, Scottsdale, Glendale, Chandler and Peoria.



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

Lending Activities

        General.    We provide a broad range of commercial and retail lending services, including commercial loans, commercial and residential real estate construction loans, commercial and residential real estate mortgage loans, consumer loans, revolving lines of credit and equipment lease financing, including both operating and direct financing leases. Our primary lending focus is commercial and real estate lending to small and medium-sized businesses with annual sales of $2 million to $50 million and businesses and individuals with borrowing requirements of $200,000 to $4 million. As of December 31, 2001, substantially all of our outstanding loans and leases were to customers within Colorado and Arizona. Interest rates charged on loans vary with the degree of risk, maturity, underwriting and servicing costs, principal amount and extent of other banking relationships with the customer, and are further subject to competitive pressures, money market rates, availability of funds and government regulations. As of December 31, 2001, approximately 75% of our loans and leases were at interest rates that float with our base rate or some other reference rate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for an analysis of the interest rates on our loans.

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

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

        Under federal law, the aggregate amount of loans we may make to one borrower is generally limited to 15% of our unimpaired capital, surplus, undivided profits and allowance for loan and lease losses. As of December 31, 2001, our individual legal lending limit was $12.5 million. Our board of directors has established an internal lending limit of $6.2 million. 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, 2001 and 2000, the outstanding balances of loan participations sold by us were $24.9 million and $18.9 million, respectively. We have retained servicing rights on all loan participations sold. As of December 31, 2001, we had loan participations purchased from other banks totaling $4.6 million. 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.

        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.

        Commercial Loans.    Commercial lending consists of loans to small and medium-sized businesses in a wide variety of industries. The Bank's areas of emphasis in commercial lending include, but are not limited to, loans to wholesalers, manufacturers and business services companies. We provide a broad range of commercial loans, including lines of credit for working capital purposes and term loans for the acquisition of equipment and other purposes. Commercial loans are generally collateralized by inventory, accounts receivable, equipment, real estate and other commercial assets and may be supported by other credit enhancements such as personal guarantees. However, where warranted by the overall financial condition of the borrower, loans may be made on an unsecured basis. Terms of commercial loans generally range from one to five years, and the majority of such loans have floating interest rates.

        Real Estate Mortgage Loans.    Real estate mortgage loans include various types of loans for which we hold real property as collateral. We generally restrict commercial real estate lending activity to owner-occupied properties or to investor properties that are owned by customers with which we have a current banking relationship. We make commercial real estate loans at both fixed and floating interest rates, with maturities generally ranging from five to 15 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 SBA loans 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. We also originate residential mortgage loans on a limited basis as a service to our preferred customers.

        The primary risks of real estate mortgage loans include the borrower's inability to pay, material decreases in the value of the real estate that is being held as collateral and significant increases in interest rates, which may make the real estate mortgage loan unprofitable. We do not actively seek permanent mortgage loans for our own portfolio, but, rather, syndicate such loans to other financial institutions. However, for those permanent mortgage loans that are extended, we attempt to apply conservative loan-to-value ratios and obtain personal guarantees and generally require a strong history of debt servicing capability and fully amortized terms of 15 years or less.

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

        We also originate loans to finance the construction of multi-family, office, industrial 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 65% of the appraised value. Values are determined only by approved independent appraisers.

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

        Consumer Loans.    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.

        Leases.    We provide lease financing as a complement to our other lending services. These leases are structured as either operating or direct financing leases, under which we retain title to the leased assets as security for payment. Only direct financing leases are included in our loan and lease portfolio. Operating leases are reported as investment in operating leases.

Nonperforming Assets

        Our nonperforming assets consist of nonaccrual loans and leases, restructured loans and leases, past due loans and leases and other real estate owned. The following table sets forth information with respect to these assets at the dates indicated.

        Accrual of interest is discontinued on a loan or lease when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that the collection of interest is doubtful. A delinquent loan or lease is generally placed on nonaccrual status when it becomes 90 days past due. When a loan or lease is placed on nonaccrual status, all accrued and unpaid interest on the loan or lease is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan or lease balance until the collection of both principal and interest becomes reasonably certain. When the issues relating to a nonaccrual loan or lease are finally resolved, there may ultimately be an actual write down or charge-off of the principal balance of the loan or lease, which may necessitate additional charges to earnings. Restructured loans and leases are those for which concessions, including the reduction of interest rates below a rate otherwise available to the borrower, or the deferral of interest or principal, have been granted due to the borrower's weakened financial condition. Interest on restructured loans and leases is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. The additional interest income that would have been recognized for the years ended December 31, 2001, 2000 and 1999 if our nonaccrual and restructured loans and leases had been current in accordance with their original terms, and the interest income on nonaccrual and restructured loans and leases actually included in our net income for such periods, was not material. Real estate acquired by foreclosure includes deeds acquired under agreements with delinquent borrowers. Real estate acquired by foreclosure is appraised annually and is carried at the lesser of fair market value less anticipated closing costs or the balance of the related loan. As of December 31, 2001, we did not own any real estate acquired in foreclosure proceedings or under agreements with delinquent borrowers. In addition to the nonperforming assets described above, at December 31, 2001, we had 51 loan and lease relationships considered by management to be potential problem loans or leases, with outstanding principal totaling approximately $8.6 million. A potential problem loan or lease is one as to which management has concerns about the borrower's future performance under the terms of the loan or lease contract. For our protection, management monitors these loans and leases closely. These loans and leases 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 or lease being classified as nonperforming. The level of potential problem loans and leases is factored into the determination of the adequacy of the allowance for loan and lease losses.

        Analysis of Allowance for Loan and Lease Losses.    The allowance for loan and lease losses represents management's recognition of the risks of extending credit and its evaluation of the quality of the loan and lease portfolio. The allowance for loan and lease losses is maintained at a level considered adequate to provide for loan and lease losses, based on various factors affecting the loan and lease portfolio, including a review of problem loans and leases, 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 and leases charged off, net of recoveries. The following table sets forth information regarding changes in our allowance for loan and lease losses for the periods indicated.

        Additions to the allowance for loan and lease losses, which are charged as expenses on our income statement, are made periodically to maintain the allowance at the appropriate level, based on our analysis of the potential risk in the loan and lease portfolio. Loans and leases charged off, net of amounts recovered from such loans and leases, reduce the allowance for loan and lease losses. The amount of the allowance is a function of the levels of loans and leases outstanding, the level of non-performing loans and leases, historical loan and lease loss experience, the amount of loan and lease losses actually charged against the reserve during a given period and current and anticipated economic conditions. At December 31, 2001, the allowance for loan and lease losses equaled 1.30% of total loans and leases. Federal regulatory agencies, as part of their examination process, review our loans and leases and allowance for loan and lease losses. We believe that our allowance for loan and lease losses is adequate to cover anticipated loan and lease losses. However, management may determine a need to increase the allowance for loan and lease losses, or regulators, when reviewing the Bank's loan and lease portfolio in the future, may request the Bank to increase such allowance. Either of these events could adversely affect our earnings. Further, there can be no assurance that our actual loan and lease losses will not exceed the allowance for loan and lease losses.

        The following table sets forth the allowance for loan and lease losses by category to the extent specific allocations have been determined relative to particular categories of loans or leases.