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Executive

Steve Bangert - Chairman & Chief Executive Officer

Jon Lorenz - Vice Chairman

Lyne Andrich - Chief Financial Officer

Analysts

Joe Morford - RBS Capital Market

Ben Crabtree - Stifel Nicolaus

Steve Scinicariello- BlackRock

CoBiz Inc. (COBZ) Q4 2008 Earnings Call February 13, 2009 11:00 AM ET

Operator

Good morning. My name is Brandy and I will be your conference operator today. At this time I would like to welcome everyone to the CoBiz financial fourth quarter conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions)

I would now like to turn the conference over to Mr. Bangert . Please go ahead sir.

Steve Bangert

Thanks Brandy. First of all I’d like to make sure everybody’s aware that I do have Jon Lorenz, the CEO of the Bank, as well as Lyne Andrich, CFO of the holding company in the room, that are both prepared to answer any questions you have. I know Jon has a few things that he’d like to say towards the end here.

I’d like to thank all of you for participating in the conference call. To start off by saying I apologize for the delay. Since we went public in ’98, we have always reported on time and take pride in doing so, but unfortunately the delay as we mentioned in the press release was really we were in the process of completing our third party bank review.

The review was really triggered by a major initiative that we discussed in our annual October strategic client session with our board and in that session we had identified ’09 and 2010 as being important years for us.

I really believe that there’ll be some opportunities out there as consolidations start to take place. I think we are very, very early on in that process, but anyway we decided that at that point in time, we had some preliminary discussions with some potential capital partners and we’ve been doing that and also recently started to explore potential merger candidates, but we’re very early in the process, so I don’t really want to imply that there’s some active discussions going on today.

We have finally taken our time; we believe that patience will pay off. What this does not mean is that we’re opposed to announcing any new capital transaction today. Reference would be the risk transaction and the transactions on hand or at least we’re relatively certain that one or two transactions will happen in a relatively short period of time.

I also don’t want to imply that our fourth quarter position was anyway influenced by the third part review, really as a function of up-going through our normal process here at CoBiz and we were reacting to what we saw as a recent slow down in the Colorado market, that we really haven’t seen up until the fourth quarter of ’08 and I don’t want to overreact to that, because Colorado probably still will be one of the better performing states in the country, but we’re not going to go to the economic slowdown on scales anyway.

We actually had a little bit of job loss in November, prior to that we were still having positive job growth. I think for the year Colorado had a little over 1% job growth, but by November it had slipped to I think it was five-tenth of 1% negative growth and then December came in around 66 basis points of negative growth.

Still much better than what we have experienced in Arizona for the last couple of years, but nevertheless did we want to get out in front of it and I think Colorado will be one of the better performing states, but it is going to have some issues in that.

As we look at the fourth quarter, the loss $8.6 million or $0.38 was really triggered by a $23.5 million provision, an increase in our reserve from $112 million a year ago to $212 million at the end of this year. We really believe that the reserve is necessary.

Also, included in that fourth quarter, was a $2.2 million pre tax loss on valuation adjustments on our OREO portfolio and a $1.2 million impairment charge on a single trust preferred security that we own. For the year there was a small income, but it was very small, around $1.3 million.

On the bright side, I thought our pretax, pre-position number which is a number I continue to monitor very closely, because one of these days we will be coming out of this slowdown, was up around 10% overall. I think it was a little over $45 million, but we are pleased with that.

As we continue to grow our loan portfolio, we had about 10% loan growth for the year, a little under 6% for the quarter, but I do think that we are positioning ourselves very well. When the economic slowdown starts to reverse itself, I think we’ll be well positioned to take advantage of that.

The process continues to be a challenge for us. We’re now starting to see some of our customers pay down the lines of credit with us with their deposit, which really is kind of double whammy for us, that’s something that we experienced in other slowdowns and so I think that’s something that we anticipated.

During the year we did pay down broker deposits from about 8.5% of our overall funding, to 4.1% by the end of the year. On the capital side I think you’ll see that we did get our TARP money. We were the very first bank in Colorado to receive TARP money, even though we weren’t anywhere near to one of the first ones to apply for it; we got that relatively quick, bring our tangible capital ratios now up to 7.6%, risk based capital up to 14.5%, so both of those I think are in a pretty good position today.

As far as our fee based outlook, I’d say it’s going to be a challenging year for us. There are a few bright spots, but it definitely will be a challenging year for us. On the insurance side, really two different segments there, property and casualty; we really have been in our stock market now for three or four years, but that appears to be turning around. The insurance companies themselves are lowering their premiums, which is really where we get our revenue, over the last few years as we’re trying to steel business from each other. Now they’re having their own issues and we’re starting to see premiums go up, so we can hit that, certainly a positive for us.

Employee benefit, which is another line of business we’re in, should be relatively steady during the year. Our biggest concern would be loss of jobs, primarily in Colorado which as I said we haven’t really think too much yet, because really we get paid by the number of lives that we insure.

On the transfer side, they had a pretty good year in ’07 or ’08. We would anticipate that ’09 could be a pretty good year for the well transfer side. Part of what’s driving their income, there’s just really certainty on their state planning side or their state taxed, which should really happen then in an awful lot of certainty over the last few years and maybe whether you like it or not, allowing the bush tax cuts to go away. That could be a positive as it creates some certainty as far as planning is concerned.

Investment advisory trust, certainly a challenging area, because we get paid for the assets that we manage, and as all of you are well aware, I mean the [F&P] was down almost 40% last year and so really the assets under management have shrunk on us during the year. We recently hired an executive from fifth third. He ran the Chicago and the Northern Indiana markets, somebody that we’re really excited about. He has recently joined our franchise and I think will make a significant difference on the direction we are going in that area over the next 12 to 24 months.

Investment banking is very difficult to focus today and that though we have a pipeline of business, we look at the pipeline and we do believe that quite a bit of it will get to the closing table. It’ll just be interesting to see how many new transactions we see come to the table over the next 90 to 120 days.

Overall, we’re expecting ’09 to be a challenging year for us, as it will be for really all financials I think in the country. We still expect Colorado as I said earlier to perform reasonably well, but nevertheless with the slowdown in Colorado, I do think you’ll see some upward pressure on our non-performers during the year.

What I don’t expect with those non-performers that come out of the Colorado market is to see the severe markdown that you saw in the Arizona market. None of them was our franchise, but were some of the more prominent franchises that are operating down. Certainly the declines that we’ve seen in the Arizona over the last 18 to 24 months, we haven’t seen anything near that in Colorado. Colorado has been relatively steady, but I wouldn’t be surprised if there is some small losses, but certainly not to the extent that we experienced in Arizona.

With that I’ll probably turn it over to John and John, why don’t you kind of give us an overview of what you’re looking at?

Jon Lorenz

Thanks Steve. Maybe to comment a little more on the fourth quarter provision; I guess it’s important to point out that we’ve always been an organization that’s impressed upon our bankers the importance of being very proactive in grading of their credits and unfortunately that proactive ness we saw in spades in the fourth quarter, as we did see as Steve mentioned earlier, some pretty widespread deterioration in the Colorado portfolio, which really is the first time we’ve seen any cracks in the Colorado portfolio, really occurred in the fourth quarter.

I think there’s some difference in terms of what drove the provision. If you look at the two states, Arizona is clearly still an issue of severity. We continue to see drops in real estate values and probably I would estimate a 20% to 30% drop in real estate values that occurred just in the fourth quarter, reflective of what was going on in the macro economic climate.

In Colorado I think it’s more what you’re seeing nationally. Every business is feeling stressed today, every business is trying to downsize their businesses, adjust for loss of backlog, loss of revenues and so in Colorado it was mostly a case outside of real estate. As you look at our C&I portfolio where we may have taken credits to a watch status, a special mention status, but generally not to the more severe substandard classifications as it relates to our Colorado C&I portfolio.

That will be a challenge for us as we move through 2009. We’re doing a full portfolio review today focusing on all of our unsecured credits, all of our stock and security secured credits and all credits over $500,000. Number one, to make sure they’re appropriately graded today, but probably more importantly using that as a tool for the bankers to sit down with the business owners and really discuss what actions the business owner is taking to correct and downsize their businesses and make appropriate adjustments.

We’ve always said we’ve been top tier companies in our markets and if most of them have in our C&I portfolio sufficient capital, if they take appropriate corrective steps and we want to make sure that that’s happening, so that we don’t get into the severity, at least the severity of losses within the C&I portfolio, but without question there’s going to continue to be stress as we go through the year.

Just a couple of comments on the non-performers, which also increased significantly; as I mentioned, Arizona is more of a severity issue, we did see an increase in non-performers in Colorado, primarily out of our real estate group and I would say about two thirds of that increase in non-performers in Colorado, roughly $8 million is all in finished houses.

What we’re seeing in Colorado, the market, unlike Arizona where real estate values continue to drop, in Colorado the values are relatively stable, there’s just no velocity, there are very few sales occurring and so what we’ve had within our real estate portfolio here is some of our smaller builders. Similar what we talked about earlier in Arizona, where they’ve been carrying their properties for 12 to 18 to 24 months, paying interest out of pocket and they’ve reached the end of their capacity to do that.

So again, about $8 million of the $12 million increase in real estate non-performers in Colorado are incompleted houses. Again, back to Steve’s point, we don’t see significant losses in those houses based on our carrying values today. We also made some good progress just recently in terms of resolution of some of these more recent problems.

We had about a $1 million house sale; it was a house that we took into OREO in the fourth quarter that sold last week. Our largest OREO property in Arizona is scheduled to close. Next week we’ve restructured a couple of loans of about $1 million each which are now back on performing status, a couple of other properties under letter of intent, we’re also pursuing a couple of note sale.

So one of the frustrations in the fourth quarter is we continue to add the non-performers without seeing much rotation and non-performers falling off. I think in the first quarter you’re probably going to see a continued increase in non-performers, but along with that you’re going to see resolution of some of these problems and a number of the current OREOs getting resolved during the first quarter.

Again, as we look ahead to this year there’s a lot of uncertainty out there. The commercial real estate market in Colorado, I wouldn’t characterize it as strong but stable. Vacancy rates are hovering around 13% in Colorado versus they are escalating in terms of commercial office vacancy in Arizona to about 20%, but Colorado rents are relatively stable and vacancies are.

So we’re not seeing any deterioration of any significance in commercial real estate and commercial real estate in Colorado at this point. So we do think we’re positioned to work through our real estate problems for the most part in Colorado as they develop without taking material losses similar to what we’ve taken on the land and lot portfolio in Arizona up to this point.

With that, I’m just going to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joe Morford - RBC Capital Market.

Joe Morford - RBS Capital Market

I’ve got a few questions. I guess first maybe could you talk a little bit more about this independent credit review in the quarter and just tell what the extent was of that, what did they exactly look at and what were some of the things they found or conclusions and things like that?

Steve Bangert

Joe, I think it’s kind of difficult for us to talk about it. We’ll end up in a review because it’s really done for somebody else and for the investors that we’re talking about, I mean it was really not done for us, but it was a review of the loan portfolio. There were some accounting reviews as well as some legal reviews in that, but it was a process that we went through to the extent that we find another transaction we will go through; with another institution we’ll be going through exactly the same process, so we’re measuring apples versus apples and using probably the same due diligence team.

Joe Morford - RBS Capital Market

Okay, all right. I misunderstood what that was, okay.

Jon Lorenz

Joe, I think in general their approach was more of a stress test on the portfolio. Also in looking at some different forms of burn down analysis, that kind of thing was more their emphasis, but we actually have not even seen the results of that independent loan review, because it was done for the capital group.

Steve Bangert

We had lots of discussions with them Joe, on individual credits and so forth and it was a very worthwhile process for us, but as Jon said, we really don’t even have the actual report.

Joe Morford - RBS Capital Market

Okay and so then the actions you took this quarter with the provisions and stuff was your own use?

Jon Lorenz

That is correct.

Joe Morford - RBS Capital Market

You talked about this quarter seeing some stress on the C&I side in Colorado and you still really don’t have much in the way of the C&I problems in Arizona. Is that more just the nature of your exposures or is the business community still holding up better there or any color on C&I in Arizona?

Jon Lorenz

I think Joe; probably it’s more just because of the relatively small size of the Arizona portfolio in terms of the commercial portfolio there versus what we have in Colorado. I think that it will probably perform over time pretty similar to Colorado. Clearly the overall economic environment is worse down there, but we’re at least at this point not seeing a lot of that translating into significant problems in the C&I portfolio, but we need to continue to watch that as well as Colorado as we’re going through this cycle and through 2009. So I think you probably will see some further increase in problems in the C&I Arizona also.

Joe Morford - RBS Capital Market

Okay and then lastly, just talk a little bit more about the $2.2 million OREO write down this quarter. Was that on a couple of projects or just one and the one that maybe you’re moving out the door?

Jon Lorenz

Yes, that was on one project and actually it’s the one I just mentioned which is our largest OREO that we now have under contract with a closing schedule for mid next week. So, it’s showing at year end as about a $4.5 million OREO property with roughly the $2 million that we took as a reserve against it. We’re selling the property for about $2.6 million; so hopefully if that closes next week as scheduled, that $4.5 million OREO with the reserve that we set up and then the proceeds from sale of about $2.5 million.

I would say also, while values continue to drop in Arizona, we are still seeing activity levels down there with buyers. This is a buyer that had looked at this property in October time frame, we didn’t get anything done. They came back in early January with a little bit lower price in January, but even after fourth quarter events and even though this was residential loss in Arizona, they’re at least at this point, going forward with the purchase of those lots.

So we are still seeing some investor activity continuing in terms of land and lot purchases in Arizona, albeit at lower valuations again after fourth quarter events.

Operator

Your next question comes from Ben Crabtree - Stifel Nicolaus.

Ben Crabtree - Stifel Nicolaus

First of all, I have to apologize; I didn’t get on for the very front end of the call. Did you discuss what was happening in terms of the discussion with the potential equity partners?

Steve Bangert

Yes, we did briefly, Ben. I said we had discussions with a couple of potential equity partners. I think we’re pretty comfortable that if we find a transaction that they’re anxious to invest in it and that’s really what triggered us doing the independent bank review, which cost us I think over a couple of hundred of thousand dollars in expenses so far.

So it’s not something we took lightly, but we are not having any active discussions on them putting the money in, prior to us identifying a transaction. I think if we get far enough along Ben, where it appears like there is numerous proper possibilities and I can see that happening nine months from now or 12 months from now; we might go ahead and bring the capital in prior to a transaction, but as of today I think we’re going to wait and see if we can identify a transaction.

So we’re now looking at what we think are potential transactions for us down the road, trying to get our arms around them, but we’re going to be patient. I don’t know if we’re talking about six months from now or 18 months from now.

Ben Crabtree - Stifel Nicolaus

And so the fact that the incremental equity would be in effect attached to an acquisition would get you by the TARP restriction? Using TARP for acquisitions?

Steve Bangert

Yes, we’re not looking at using the TARP for acquisitions. If we saw a small troubled institution I guess we would look at the TARP as a possibility, but for a transaction of any size, we would use traditional capital.

Ben Crabtree - Stifel Nicolaus

Okay, and then you kind of talked about I guess the disappointing trend in deposits, but some are probably related to loan pay downs in your commercial customers, but just wondering, are there realistic strategies that you could put in place to develop more deposits. Would you try to develop more of a retail deposit base and what are the implications of that in terms of going forward on the margin?

Jon Lorenz

Ben, I think a couple of things on that. One, if we do find an acquisition at some point, I think that would be a component. It would be a bank that hopefully has at least a somewhat similar business model as to focusing on business lending, small business lending, but also one that would probably have more of a retail deposit base and deposit reach than what we have today. So that would be one thing we would be looking at in terms of potential acquisitions.

Short of that, I don’t see us opening up a bunch of physical locations given the obvious cost of that in terms of trying to create more of a retail branch network ourselves, but we are spending a lot of time looking at how can we get more core deposit growth. We’ve had recent discussions with an individual who has a business plan to recruit a team of deposits bankers. I don’t know if we’ll move forward with that or not, but again people that are exclusively focused on deposit generation and he thinks there are some significant opportunities in the Colorado marketplace to achieve that.

I think we will see some pickup as we move through the year from our existing customer base. We analyzed the fourth quarter drop and we had 32 customers, all of whom drew down their balances by more than $1 million in the fourth quarter and just for a variety of reasons, pay down on their line, year end bonuses, some project financing, seasonal cash flow, all kinds of things and in not one of those cases of the 32 customers did we lose that depository relationship; it was just drawn down during the fourth quarter by over $1 million each on those 32.

So I think we are also going to also spend more time looking at our existing customer relationship. Our treasury management group is in the process of doing reviews of our largest relationships to look at where we haven’t captured the full depository relationship of either that business or business owner to try and draw in more deposits out of our current customers.

Ben Crabtree - Stifel Nicolaus

Kind of thinking that true, what do you think the outlook is for the margin?

Jon Lorenz

On that, one thing that’s been beneficial and I think will continue to be beneficial for us as we move through 2009 is, I think we’ve mentioned before in the conference call; we started initiating rate floors well over a year ago and we’ve now put rate floors on about a little under a third of our floating rate portfolio and we are just entering our renewal season for companies that have calendars or fiscal year end on their annual renewable lines of credit.

So I’m hopeful that we can get rate floors in place on certainly over half of the floating rate portfolio and hopefully closer to two thirds of the portfolio. I think that can certainly help with our margin as we move through the year. We looked at the average rate floors we’ve been able to put in; prime is 3.25 today and our overall average rate floor is about 5.4%. So we are getting rate floors at considerably higher than what prime and their floating rate at either prime or prime plus a half would have.

So that I think can be a good cushion and stabilizers, certainly the margin will be negatively impacted by further non-performing during the year, but overall I think we look for a relatively stable net interest margin in ‘09. Steve, do you want to comment on that?

Steve Bangert

No, I believe that’s true, Ben. Most of the new business going on, is going on at wider margins than what historically we’ve been able to do and even though deposits have been a challenge, as Jon mentioned we are having quite a few successes as far as bringing on new businesses and I think you’ll see some pickup as the year progresses on the deposit side.

I don’t think there’s like a bidding war going on for deposits by any means, and so if we were to raise rates 100 basis points in order to attract deposits, I don’t think we’d be very successful at that. So, I really don’t think that that’s an issue.

I do hope that as we look at acquisition possibilities that some of these are going to be, we really want to do with deposit gathering as our primary reason for doing some of these transactions. We think there’ll be an awful lot of opportunities to pick up some relatively cheap deposits as the year progresses and as we head into 2010.

Operator

Your next question comes from Steve Scinicariello- BlackRock.

Steve Scinicariello- BlackRock

Just a quick question with regard to how proactive you guys have been with the provisioning here and some of the trends that you’re seeing, both in Arizona, which is obviously far long hopefully in a credit progression stage of things, and in Colorado where maybe on the earlier side of that, but you don’t see a lot of loss content. I mean is it unreasonable to expect the provisions to be lower in ‘09 versus ‘08?

Steve Bangert

I got to tell you Steve, I wish we could forecast that. My gut feel is yes, but it’s an economy that continues to change all the time on us. I will say I think we got out in front of Colorado much faster than we did Arizona. I think Arizona; we’re playing catch-up most of last year as we were dealing with the Arizona portfolio. We certainly didn’t want to go into ‘09 doing the same thing with Colorado.

Having said that, we watched the world economy ratchet down several levels just since September and to the extent that this is near the bottom, yes, I would think that that’s probably true; I just don’t know if that’s the case. Jon, do you want to comment?

Jon Lorenz

To your point on Arizona, we’ve really been experiencing deterioration in Arizona for over 18 months now. So we’ve taken significant write downs, continue to work through and been working through those problem credits, particularly the real estate land and live credits for over 18 months now. So as values have dropped, we’re starting to get pretty close to zero down there where they can’t drop a heck of a lot more from where they are today.

So I think the key in terms of provision expense for ‘09, as Steve alluded to, is managing the portfolio as best we can in Colorado and if we do that well, then I think the prospects are that we would have lower provision in 2009.

Operator

(Operator Instructions) You have no other audio questions at this time.

Steve Bangert

Okay. Well, thank you Brandy. I’ll just sign off and thank everybody for participating today. If you have any questions, please give Lyne, Jon or myself a phone call, we’d be happy to talk to you more about what’s going on here at CoBiz. I know it is a difficult year for all bank investors and we’re certainly feeling distress here at CoBiz, but I do think that we’re relatively optimistic, that these are very manageable issues that we’ve got at CoBiz today and I’m looking forward to see our progress as we head through ‘09. Thanks again and if you have any questions, please give us a call. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: CoBiz Inc. Q4 2008 Earnings Call Transcript
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