You're trying to upload an image with more than 2mb of compressed pixel data. Uncompressed it becomes something like 12mb. An image is uncompressed to raw bytes during processing. You can improve this performance by using ImageMagick instead of GD2 (slow and bad performance).
With Joomla, CB, and anything else installed you are likely using at least half of your 128mb memory limit. Possibly more depending on what else is installed. Add in processing of the image and it's possible to hit that limit pretty quickly.
Part of this issue is due to how the Imagine library handles thumbnails though. I've added a bug ticket to look into it further and see if some of the memory usage can be reduced.
For now only things I can suggest is accept smaller images only, increase memory limit, reduce memory usage globally on your site (uninstall stuff), or try using ImageMagick.
Please note however that no matter what the larger the image the more memory it will take to process. Also to keep in mind it's not exactly the filesize that's the issue, but often the dimensions of the image. For example a 3000x3000 image has a lot of pixel data.
forge.joomlapolis.com/issues/5919