CoBiz Financial Inc (COBZ) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.19.13 | About: CoBiz Financial (COBZ)

CoBiz Financial Inc (NASDAQ:COBZ)

Q2 2013 Earnings Call

July 19, 2013 11:00 am ET

Executives

Lyne B. Andrich - Chief Financial Officer, Executive Vice President and Director of Cobiz Insurance Inc

Steven Bangert - Chairman, Chief Executive Officer, Chairman of Executive Committee, Chairman of Cobiz Bank NA, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd, Director of Colorado Business Leasing Inc, Director of Cobiz Insurance Inc and Director of Alexander Capital Management Group LLC

Jonathan C. Lorenz - Chief Executive Officer of Colorado Business Bank and Chief Executive Officer of Arizona Business Bank

Analysts

Joe Morford - RBC Capital Markets, LLC, Research Division

Brian James Zabora - Keefe, Bruyette, & Woods, Inc., Research Division

Timothy O'Brien - Sandler O'Neill + Partners, L.P., Research Division

John Lawrence Rodis - FIG Partners, LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome, everyone to the CoBiz Financial Second Quarter 2013 Earnings Call. [Operator Instructions] I would now like to time the call over to Ms. Lyne Andrich, Chief Financial Officer for CoBiz Financial. Please go ahead.

Lyne B. Andrich

All right. Good morning, everyone, and thank you for joining us. Before we commence with management comments today, though, I do need to remind everyone of certain Safe Harbor disclosures.

Certain of the matters we discuss in this presentation may contain future -- forward-looking statements for the purposes of federal securities laws and, as such, may involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements of CoBiz to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional information concerning factors that could cause our actual results to be materially different than those in the forward-looking statements can be found on our -- or with the filings with the SEC, including forms 10-Q, 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Also on today's call, our speakers may reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of these non-GAAP numbers to GAAP results are included in our earnings release, which is available on the Investor Relations website.

I would now like to introduce Mr. Steve Bangert, Chairman and CEO of CoBiz.

Steven Bangert

Okay. Thanks, Lyne. Welcome, everybody. Appreciate you listen to our second conference -- second quarter conference call. I have Lyne Andrich, who just spoke, and the CFO will be in the room and will also be talking later; as well as Jon Lorenz, the CEO of the bank.

Last night, we reported earnings of $0.18 versus $0.14, same quarter last year. I guess, I would phrase the quarter as just a really solid quarter for us, and that I think, it sets us up really well to have a good second half of the year and that just the momentum coming from all directions right now -- just about all directions. We'll talk about that. But, really, I think, strong loan growth continues to be very important to us. We had about 19% annualized loan growth during the quarter. You remember we had a fantastic fourth quarter of last year, kind of cleaned out the pipeline.

So we're flat during the first quarter, but it's nice to see the momentum picking up again. I think we expected that, but it's always nice to see. Puts our loans over $2 billion today. Our focus really is to continue to focus on growing our net interest income. We had some success doing that this quarter. It's going to continue to be a challenge. We saw the net interest margin came down -- came in a little bit on us during the quarter. We continue to find it a very competitive market out there, but have certainly found plenty of opportunities to book quality assets in that, and so I'm feeling really good about where we're at.

Most of the growth if not all the growth has come out of the Colorado market. I still believe that Arizona, at some point -- and I know Jon will probably speak to that -- will start to be a bigger contributor for us when it comes to loan growth. There is a certainly economic activity picking up down in the Arizona market, long term. I love that market. And I just -- I think that, that's just kind of -- will be just an additional win to our back when that market starts to contribute like the rest of the franchise in that.

I will tell you when it comes to the Arizona market though, we had -- you'll see when -- as we talk about fee-based businesses, our wealth management group has had a great quarter. And most of that has come out of the Arizona market, so even though we haven't had the loan growth, we have had some great growth in the wealth management side coming out of Arizona. So we'll continue to pedal as fast as we can on the loan side in that and see if we can offset any further net interest margin compression. And I do think looking at the pipeline of activity that we have that things look pretty good for the second half of the year, but once again, Jon, will go into that.

So besides loan growth, which I'd really think was the highlight -- one of our other primary focuses is to grow our assets under management and our fee income operating margins and -- but we're starting to see that now. Our net interest income was 26.5% of our operating income for the quarter. Really, all categories, when you look at noninterest income, were up over the previous quarter. They were up over the same quarter last year. I'm expecting even stronger fee income coming out of our fee-based businesses in the second half of the year. So I think we're really in a really good situation right now.

I think our AUM growth at wealth management group was up about 20% during the first 6 months of the year. And we're not a typical wealth management platform like some of you may be more familiar with. I mean, a lot of our customers are having distributions on a quarterly basis and living off of that, and we also have, probably -- 40% of the money is invested in fixed income area in that. So we don't normally get a tremendous bump on the market when the equity markets are up, or let's say, during the first half of the year. We did get some contribution, but the majority of it came from new customers. And I think right now, the franchise is operating as well as it ever had, as far as referring to business back and forth of that. So I'm feeling very good about that.

I'm also comfortable that when I say fee income will be up in the second half of the year, we should see some of the strong investment banking activities in the second half of the year. Right now, we have the most engaged transactions that, I think, that they've ever had. We're going to have that our investment banking firm. So that should set us up well for the second half of the year as well as heading into next year.

So -- and then the last and very important initiative has been expense management. You'll see that while that's continued to be something that I think we've done very, very well over the last year. I mean, it's really led by a reduction in our credit costs, as our credit profile continues to improve and that our efficiency ratio was down to 71% from 74% same quarter last year.

So overall, great momentum in the franchise right now, and that -- as Jon will talk about, I'm sure it's very, very competitive out there, really, in all of the various businesses lines that we operate in. But we're getting more than our fair share, especially in the Colorado market. I think that's what gave us the confidence that you saw in our earlier press release this quarter that we are moving into the Fort Collins market, as well as the Colorado Springs market. We have also started the private banking initiative within the franchise, it really will move into both markets. So we thought it's a time to make some -- to invest in our future.

And we've hired some very, very quality people that we're excited to have part of the franchise. It's just, as I said, the momentum feels pretty good right now in that, and -- well, hopefully, that momentum continues into 2014, but I think we're set up really well for the second half of 2013.

With that, I'll turn it over to Lyne, to do a deeper dive into the numbers.

Lyne B. Andrich

All right. Thank you, Steve. As Steve said, we're really pleased with our results this quarter, and certainly a nice increase in net income available to common shareholders. It was up 31%.

The quarter was highlighted by loan growth that allowed us to hold our net interest income steady, good fee income and expense management. We saw another quarter of negative provision, which reflects the continued improvement we're seeing in our problem loan levels. And overall, the quarter we posted, an ROA of 1.09% and a return on tangible common equity of 13.9%.

Looking at our top line revenue from net interest income on a tax equivalent basis, it's about $24 million. That's about flat with last year and up from the first quarter, which was mainly due to day count. As Steve mentioned, we had really strong loan growth in the quarter and average loans increased by $54 million. But while we saw the improvement in the earning asset mix, our NIM did contract by 9 basis points on a linked quarter. Most of the compression was due to our loan yields, which came in 12 basis points from the second quarter -- or previous in the first quarter of this year.

On the liability side, the customer funding declined by $20 million, about $21 million from the prior linked quarter end. It was down $30 million on average. However, the mix continues to improve with non-interest-bearing demand increasing from the prior quarter end, as well as on average. Our DDA on deposit ratio increased over 40% of total deposits as of the end of the second quarter, helping to bring our average cost of deposits down to 22 basis points.

Looking at credit metrics. Both the nonperforming loans and classified loans decreased during the quarter. And due to the improvement we're seeing in our overall problem asset levels, our allowance methodology did calculate another provision reversal this quarter of $1.1 million.

During the quarter, we also charged off about $600,000 in net loans or about 3 basis points of average loans. So as a result, we did see our allowance at quarter end decrease to $43.2 million, which still is about 2.14% of total loans and a pretty healthy coverage of our nonperforming loans at 169%.

Noninterest income to total operating income, as Steve mentioned, was 26%, almost 27% for the quarter. And I was really pleased to hold that up. We've historically had a target of maintaining fee income to operating revenues of 25% plus. And with the exit of a couple of segments last year, that was going to continue to be a challenge, and those were fee generators for us. But I was really pleased to see that we could still maintain those levels. We saw nice increases in noninterest income during the quarter across all of our operating segments. The bank is seeing good traction in treasury management sales, and you can see the progress they are making reflected in our deposit service charge income. Investment advisory fees, as Steve mentioned, has benefited not only from the market appreciation, but more importantly, by the new asset inflows.

On the insurance side, we continue to see momentum in our insurance brokerage fees, particularly with their work employee benefits arm. And while investment banking had relatively muted income for the period, it was up, and it reflects the number of deals we have under LOI, as well as the fact that the number of engagements we have today are more able to collect retainer fees on, and you can see that in this quarter's numbers.

And then, lastly, I'll just point out that in the other income category, you did see us benefit this period, but that was primarily attributable to a change in the fair value on our interest rate swap portfolio, so the ship-to-market rates helped us on that side, too, and we recorded an income of about $550,000 on that.

Looking in noninterest expenses. Really glad to see most of our overhead lines being held flat or being managed down. The increase in the fee income, I just spoke to, as well as the controlled interest -- noninterest expenses. That didn't lead to an improvement in our efficiency ratio to about just over 71%. The decline in noninterest expenses were both from the linked quarter and over a prior year basis. You did see compensation expense kind of tick up during that period, but that was primarily due to our annual cost-of-living adjustments and merit increases that we do in the beginning of the second quarter each year.

Overall, our total headcount hasn't changed much. Our FTEs as of the end of June were about 502, and that compares to 503 at the end of the year and 500 in June of 2012, so you could see, we can still manage to hold our headcount relatively steady.

And then lastly, I'd just point out that you continue to see that we continue to report net gains on this disposition and sale of OREO, as well as our investment portfolio.

And then I'll speak to capital for a second. Total shareholders increased about -- or pardon me, total shareholders equity increased about $3.2 million during the quarter to $266.7 million. And that was after absorbing a decline in our other comprehensive income of about $3.6 million. And given what I've seen some other banks report and the hits they've taken on the March in their investment securities, I felt pretty good about that. So at the end, it brought our TCE ratio down to about 7.5%.

The other thing that I'd like to comment on, just looking at our SBLF program. I think we announced previously that we had achieved the amount of qualified loan growth necessary for that 1% dividend tier on the fourth quarter of last year, and we are now seeing it in our -- in this quarter's preferred dividend rate. If you look, the second quarter dividend rates for dividends was that, that 1% rate which was about $143,000 for us and compared to the same quarter a year ago, that was $700,000 a quarter. So it's certainly a nice benefit there from the SBLF program.

And then lastly, I'd just point out again, on the Board of Directors, we did declare another $0.03 cash dividend to our common stockholders for the third quarter.

With that, I'll turn it over to Jon Lorenz.

Jonathan C. Lorenz

Thanks, Lyne. Well, I think, certainly, at the bank level, loan growth was the highlight of what was really an all-around good quarter for both the bank and the overall company. We are seeing a lot of credit opportunities. I don't think it's becoming any less competitive. Pricing is still a real issue in the marketplace. But we did have new credit extended in the quarter of about $150 million, which was double that of what we generated in the first quarter. So I think as Steve said, we are getting our fair share.

We did expect the resumption of loan growth in Colorado after a flat Q1, but the magnitude of the growth -- I think, certainly, exceeded our expectations in terms of the growth coming out of Colorado, which is where all the growth did come from in the quarter. Colorado market continues to gain the momentum. Economy continues to strengthen. I think we're probably looking at close to 3% job growth in Colorado, which will probably right near the top of the country.

Arizona did generate close to the same amount of new loans as in the first quarter. But they continue to fight pay downs, and pay downs were almost double that of the first quarter, which led to a small reduction in their portfolio in the quarter. We did get a slight uptick of about 2% in line utilization but a 40% utilization, that still remains at very low levels, and the uptick in the quarter, I think, certainly does an indicated trend. But we're hopefully -- hopeful over time, over the next 12 to 18 months, we'll start to see more line usage occurring.

Most of the growth in the quarter came in our C&I book. We continue to successfully grow our C&I book, and it was about $71 million of growth during the quarter. And C&I now represents about 40% of our overall loan portfolio. So we're -- not only are we're showing good growth numbers, I think we're showing growth where we desire that growth to be and with the C&I and the deposit treasury opportunities, as well as fee income.

The outlook for -- I think is for continued loan growth in the second half. As you recall, and as Steve mentioned, with the really strong fourth quarter, we emptied that out a lot of the pipeline moving into this year in the first quarter. I think that happened to some degree in the second quarter, given $90-plus million that we booked in Colorado. But if you think, we're a little stronger going into the third quarter, and we're seeing a lot of activity and opportunities in the marketplace, so I think you will see continued growth as we move through the second half of the year.

Steve mentioned our 2 new bank locations that we're proposing, Fort Collins and Colorado Springs, are 2 front-range cities outside of the Metropolitan Denver area that we've long targeted as attractive markets for CoBiz. We just haven't found the right bankers to move into those markets, and we think we now have accomplished that. We'll now be able to officially service, really, the full length of the I-25 corridor, which is where almost all of the significant economic development growth is occurring in Colorado.

Colorado Springs to the south of Denver is the second largest city in the state, with a population of about 440,000 people. It does have a heavy military presence but also is attracting companies related to the military, particularly, aerospace and electronics industry.

Colorado Springs is also a regional health care center for Southern Colorado. And as you know, health care has always been a real misfocus of our bank. Health care is also a primary driver of the Fort Collins economy in terms of Northern Colorado. And while Fort Collins does have a smaller population of about 150,000, it's consistently ranked as one of the most entrepreneurial and small business-friendly cities in the whole country. Very highly educated workforce, the home to Colorado State University, and a lot of activity going on in that city right now. There's about $2 billion in construction-related activity. Their plans are underway in Fort Collins.

More important than -- just a demographic for those 2 cities is that as I said, we do believe we've hired very strong bankers to lead both markets. Tim Stack will be present in the Colorado Springs market, and has been -- was currently employee of CoBiz. He's been joined by a longtime, very well-respected banker in the Springs [indiscernible] Banking down there very deep ties into the business community, and we think that's going to be a great team for the Colorado Springs market.

Doug Woods, who will lead the Fort Collins bank is a highly experienced C&I banker, who really we've known for many years, probably over 10 years. And I've talked to Doug a number of times over that period. And finally, everything clicked, and we're moving forward with Doug with our new Fort Collins bank.

A third initiative is the formation of a private banking group, and this group will be closely aligned with our wealth management group. Really, we'll focused on helping develop and grow assets under management. We've got a very strong leader again there, 2 we think who has broad experiences as a private banker and as a manager of people that lead this group, Joanne Field and Scott Page, who's our Colorado Market President. She ran private banking for Scott when he was at Vectra Bank, locally. So again, a very well-known person to our organization. So with the experience level that these people provide, their broad-based contacts in Colorado Springs and Fort Collins and also in private banking and high net worth area, we really think these are people that can have a pretty immediate impact for us from all 3 of these initiatives going forward.

At the bank level, we had help in the new bank for a while, but we certainly see both of those markets that we're moving into as $100 million asset-plus markets pretty quickly, which is usually where we set our threshold as we've opened banks in the past, and we've historically hit that. So we're actively working now for locations for both of those banks, then we'll quickly seek regulatory approval at that point.

And if I also mention that in addition, the initiatives which is our primary focus, we are continuing to find high-quality bankers who are interested in working for CoBiz in the marketplace. I think CoBiz continues to have a very strong reputation amongst bankers, as well as in our business communities and in human capital has always been the key to our success. So we'll continue to be opportunistic in hiring top bankers, who we feel can have an immediate impact for us.

And then one final point I thought I'd make as well, we talk a lot about loan growth. Our performance is not being driven solely by loan growth. I think our relationship banking focus continues to drive our deposit side in terms of noninterest deposit growth, growth in our treasury revenues. And as you're seeing, particularly, in the second quarter, growth throughout of all of our fee businesses. So I think you'll continue to see solid contribution from fee income sources over the balance of this year and into 2014, as well as, hopefully, continue longer.

Steven Bangert

I'll just open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from the line of Joe Morford with RBC Capital Markets.

Joe Morford - RBC Capital Markets, LLC, Research Division

I guess, I was going to ask about kind of the paydown activity, which remains elevated. And I guess you touched on a lot of it. It sounds like it's coming in from Arizona. Just trying to get a better handle on when you might see that slow? And is it the kind of activity where people are pinning down and refinancing elsewhere? Or is it -- they're just customers paying down debt? Or what's kind of some of the dynamic behind this? And trying to get a handle of when it may slow?

Steven Bangert

I think, Joe, one thing is that in terms of where our problem assets were, there's still a higher concentration or has been while we're coming and have come down significantly in Arizona versus Colorado. So I think part of it that you're seeing in both states, but Arizona, in particular, is that we continue to make good progress on moving problem assets out of the bank. And I think we're finding more receptivity on some of those assets that we don't think needs our criteria anymore but other banks are finding attractive enough to take on. So I do think though, and as you look at our asset quality numbers, that is starting to -- and has been winding down in terms of how much of that activity out of the problem pool will occur. But there's still some additional there, but I think it will be a lesser impact in the second half of the year and going forward into 2014. And we are finding Arizona to be, probably, a more aggressive market right now than Colorado. I think we're starting to see more opportunities in Colorado. Still, it's a little less intense from a competitive standpoint, both pricing and structure, where we are seeing some pretty loose structure in Arizona right now. So we've chosen to -- we have let a couple of opportunities go out the door because of structure, and let other banks in that market were willing to do. So again, I don't think that's a long-term proposition. I think as Arizona continues to improve economically, which ends clearly on the track, companies are going to restore their balance sheets, they're going to look healthier, they're going to show more in common, and we'll see more opportunities in Arizona as we have in Colorado.

Joe Morford - RBC Capital Markets, LLC, Research Division

And you talked about the pricing. Loan yields were down 13 basis points or so sequentially. Did you -- so you consider that outsized? Or we -- should we see that kind of continued pace of decline, given the competitive environment?

Steven Bangert

I think it's -- I'd hate to forecast that right now. I think it's certain as a little more than what we expected in the current quarter. Part of it is -- we're not really seeing yields come in on the C&I portfolio. It's probably been more in the real estate portfolio, and we are finding some really high-quality opportunities there, but pricing is pretty skinny. But we feel given the quality opportunities, that they're good assets and relationships for us to book. So I wouldn't think going forward it's going to be the magnitude you saw in the second quarter. But I think as we continue to book new assets at a lower yield, then our existing portfolio, there probably will still be some reduction in loan yields going forward, but hopefully because we're booking good quality asset.

Joe Morford - RBC Capital Markets, LLC, Research Division

Right. And then just lastly, Jon, the mix of deposits continues to improve, but given the loan growth that you're seeing, the actual overall levels of deposit isn't keeping up, is that a concern to you at all as this loan or deposit ratio gets up to 100%? I know you have access to the customer repose and FHLB funding and other things, but just curious about your thoughts on deposit growth.

Jonathan C. Lorenz

I don't think I'd say concerned, Joe, but I do think we're going to -- as it brings back times a few years ago where as a business bank, we've always had to focus really hard on growing our deposit base to fund our balance sheet of commercial loans. So I think we are back at that point again, where it's just going to require more focus on our part, pursuing the more deposit-rich niches more aggressively. But up to this point, where you've looked at where -- as you've said, we've continued to grow our non-interest-bearing portfolio -- it's our interest-bearing liabilities deposits that has runoff, and that really has been primarily by intent up to this point, because we just haven't been willing to bid aggressively, particularly, on CDs, and we've just allowed a lot of that to go out the door. I do think that we're at a point today, and if we're foreseeing prospects for good loan growth continuing into the future, we're just going to have to work harder on the deposit side. And I do think with some fairly minor pricing adjustments, we can attract a good portion of deposits back into the bank.

Operator

[Operator Instructions] Our next question is from the line of Brian Zabora with KBW.

Brian James Zabora - Keefe, Bruyette, & Woods, Inc., Research Division

Question on your initiatives with the 2 new branches and the new unit? Maybe quantify it, or if you can quantify how much the expenses could be related to those initiatives?

Steven Bangert

Lyne? We'll let Lyne do that.

Lyne B. Andrich

Right. Yes. And so we haven't done new initiatives like this in a while. So looking at our model, I think you -- we've talked about this in the past, we kind of -- we don't have a traditional branch model here, and that we don't have a lot of little $20 million, $25 million branches, so these are more significant. That said, we kind of staff them with 3 senior bankers and 3 support staff, and we try to manage the facility aspect of it, and we've leased the facilities and are usually 4,000 to 5,000 square feet. Generally speaking, as we look at this in today's rate environment, we're expecting to reach breakeven on each one of these branches. We may achieve about $32 million to $33 million in net loans. So their impacts to our financial results is really going to be dependent on how quickly they kind of get to those levels. That said, it will take them a while to kind of hit breakeven. And I think in the year earlier announcement, we mentioned that we believe they'll be accretive in 2015 just based off of our historical track record and how quickly we can bring some of these branches on board. So I know I'm not answering your direct question in terms of the expense load, but we're going to try to manage that down and get them to profitability as soon as possible.

Brian James Zabora - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then on the securities book, could you give us -- remind us how much you might have in trust prefers left? And what the activity was, as far as how much was called during the quarter?

Jonathan C. Lorenz

Yes. It was kind of a normal quarter for us, Brian. We had paydowns and calls, I think, it was around $50 million. And that's been kind of consistent for the last 4 quarters. I think we've probably averaged about $50 million per quarter. So on a portfolio of about $550 million, you can see that about 40% of that turns over within the year. And the TruPS portfolio continue -- actually, is sitting today at around $100 million, so we really haven't lost any side. We've continued to reinvest, but we've lost a little bit of yield on it. A year ago, it was about a 7.25%. Today, it's a little over 6% in that portfolio. We are expecting continued call out of that portfolio. We'll see how much -- how successful we are on reinvesting. I think we've surprised ourselves all year long. We've been able to find alternative investments as these big things get called away. But I would say, of that $50 million, it looks like it's about $20 million of calls in the quarter and the rest of it will be prepays in our mortgage-backed securities?

Brian James Zabora - Keefe, Bruyette, & Woods, Inc., Research Division

Yes. And then just lastly, sorry if I missed this. The insurance revenue, the strong increase this quarter, was there any seasonality through that in this quarter?

Lyne B. Andrich

Yes, I mean, there's -- I wouldn't say it was really seasonality. But we had a couple of -- say it's about couple of hundred thousand dollars of income reflected in this quarter's that will not be recurring in nature. They were one-time policies that were placed, and we had a nice little pickup at some contingency-type bonus income for the carriers. But -- so that was part of the results this period. But even excluding that, there's still things and good momentum and period-over-period growth.

Operator

[Operator Instructions] Our next question is from the line of Tim O'Brien from Sandler O'Neill & Partners.

Timothy O'Brien - Sandler O'Neill + Partners, L.P., Research Division

My question is, Jon -- directed towards Jon. Jon, do you know what that average yield was on new credit extended in the quarter?

Jonathan C. Lorenz

I think, Tim, it was around 4.5%. Well, so our current portfolio, I mean, compare that to the current portfolio yield. And, clearly, if we're in that range, and we were booking the new credits, it's continuing to pull down our overall yield.

Timothy O'Brien - Sandler O'Neill + Partners, L.P., Research Division

Are there floors on any of the commercial in that new credit-extended portfolio?

Jonathan C. Lorenz

We're still trying to get floors, but I think, certainly, less so and lower floors when we are putting them in. So one of the things that is impacting too is competitively, and that's an area that we've seen that at a time when banks should really be putting floors in place of instilling that discipline, we're seeing a lot of them not doing that. And so we are seeing floors, in more cases, not go away, but where there's pressure reduce the force. So that is an impact on our yields.

Timothy O'Brien - Sandler O'Neill + Partners, L.P., Research Division

And of that -- and of the $149 million, how much of that is C&I?

Jonathan C. Lorenz

Of the growth?

Timothy O'Brien - Sandler O'Neill + Partners, L.P., Research Division

Yes. The $149 million in new credit extended?

Jonathan C. Lorenz

So overall, C&I growth was $71 million, so I think if you translate that just to new credit extended, I'd say probably 2/3 of that was C&I-related on the new credit-extended.

Timothy O'Brien - Sandler O'Neill + Partners, L.P., Research Division

And of that, were you guys able to impose floors on a decent proportion of it?

Jonathan C. Lorenz

Maybe -- and I'm really guessing at this, and I probably shouldn't -- if I had to just guess, I'd say maybe a 1/4 to 1/3, Tim, but that is a guess. Before, we were doing -- we were getting floors on 2/3 to 3/4.

Steven Bangert

Where I was going to go with it, Tim, I mean, cause I -- I'm not as close to it as Jon, but I assume read everything that goes to the loan committee. And the floors are disappearing. I think they are for the industry. And a year from now, I don't know, how much we'll have left, as far as floors.

Timothy O'Brien - Sandler O'Neill + Partners, L.P., Research Division

So all that leads to this question. Do you see scenarios other than an increase in prime, which is going to put the average yield of new originations at the yield of the existing book? Are there other scenarios that you see could play out in the marketplace kind of based on what your perspectives, what you're seeing that could get that, the new production up to where your current book is yielding?

Steven Bangert

Well, that could be as heavily C&I wherein as it is right now. And that, I'm okay with that. I think Jon's okay with that. We do -- that's why the non -- why you guys see the demand deposits. I know that seems like it's going to be temporary -- some of it will be, but some of it's going to be permanent because we have booked tremendous amount of C&I type activity. That's our lowest yielding -- other than jumbo mortgages, that's our lowest-yielding asset class that we're active. And then it's the largest part of our balance sheet. And that what I would tell you on the real estate side, and I'll it over to Jon pretty quick, because this is really his responsibility. But on the real estate side, the quality of deals that we're doing today are significantly better than what they were -- what we are doing 5, 6 years ago. But having said that, the margins on them, I think, are 100 basis points inside of what we were doing before.

Jonathan C. Lorenz

Yes, that's about right.

Steven Bangert

And I'm not very hopeful that we're -- other than a rate increase that we're going to be able to be originating mortgage -- or originating loans at a this current yield portfolio. But, hopefully, with these -- all these C&I activities, that's why we're getting the fee income. These are the businesses that we're doing other activities with and so forth. These are the core businesses that CoBiz is really set up to service in that. So I'm glad with where the growth has come. It's just, it's a little painful in the short-term.

Lyne B. Andrich

And the shift will help a little bit. And that's up until this point. C&I has been driving most of the growth. As Steve mentioned, it's lowest-yielding class we have, as we see more impact from real estate and, particularly, construction that should help offset it. I don't know if it'll keep it flat. I don't think so. I think it's reasonable to expect continued pressure on yields in general, but the magnitude's harder to quantify.

Jonathan C. Lorenz

And, Tim, just to give a little more detail as to the C&I. I think we're doing a better job today than we ever had of building profit around our loan yields, around just the loan asset in terms of our treasury products, which are very solid. We talked about increasing demand deposits and just fee income that we're driving into all of our fee-based businesses. So there's definitely a focus here. And every new credit that comes in, I can assure you, the discussion is okay what is the spending price here, where the other income opportunity is going to come from with that particular company or borrower. And I think either you're seeing that in the results. So you may be seeing the yield come in, but we are building income into those relationships we think is going to be very beneficial in the long term.

Timothy O'Brien - Sandler O'Neill + Partners, L.P., Research Division

Given how -- given the nature of your business and how important commercial lending is to it, Steve, has it -- or have -- in the past, historically, has new product, has new extensions always come at a discount to what you get on the existing book? Can you characterize that? Or -- just out of curiosity.

Steven Bangert

No, I think in a normal working environment, it's probably consistent with our normal book in that. But under this rate environment, that's just not the case and because C&I becomes a bigger and bigger part of our book today -- and as Lyne mentioned, that could probably change. I mean we do. Construction activity is ridiculously low right now at CoBiz as far as receivables outstanding. We are anticipating, start to see an increase in the receivables on the construction side. I don't have that number in front of me, but it's probably under $70 million. And it was -- that was a $250 million book a few years ago in that. Can it be a $250 million book? Yes, I think it probably could, but probably not in the next 12 to 18 months. But over the next several years, I think it probably could go back to that. And those are higher-yielding assets for us in that. So we're not panicking. We're holding our net interest income and actually starting to grow it a little bit now, but it's because of loan growth in that. And I think that's going to continue. I think the franchise is, by far, operating and executing today better than it ever has. And you mentioned prime. It's interesting, it's probably more of our homes today are tied with LIBOR in that almost every deal that comes through loan committee of any size is tied to LIBOR, which is when rates start to increase. LIBOR is going to start to increase much faster than prime. We switched really from prime to some primary index to fairly pricing everything off the LIBOR curve now for 5 or 6 years. And that's -- also everything is priced off of LIBOR today.

Operator

Our next question is from the line of John Rodis with FIG Partners.

John Lawrence Rodis - FIG Partners, LLC, Research Division

Steve, just a follow-up on your comment to some of Tim's questions. About what percent of your portfolio today is tied to LIBOR?

Steven Bangert

Well, actually, Lyne, would -- we'll probably break it down. But all the fixed rate loans are tied to the LIBOR curve. So I'll start with that. But then, Lyne, won't you kind of talk about the variable rate loans?

Lyne B. Andrich

Yes. And I think -- and you can look in our K&C, the breakout, in terms of what we consider variable rate. About 1/3 of our variable rate loans are actually tied to -- they've got 5 years, 7-year resets, so those are repriced. But they reprice a year or greater. Of that remaining book that we report, that reprices within a year, it's almost evenly distributed now. Half of it's LIBOR-based, and half of it is prime-based. A couple of years ago, I would say, it's like maybe 80%, 20% and that's, as Steve mentioned, that suggested all the new activity we've put on is really more LIBOR-based. And some of it's because it's related to our specialty finance or our new niche lending items or lines like mortgage is obviously all tied to LIBOR. And the structured finance area's more LIBOR-based. So part of it is just the niches that we're going to focus on relative to our historical book. And part of it is just the market, in general, I think in Denver, it's becoming more common in terms of an index pricing of a LIBOR. I think they'd picked up a journal sometime in the last couple of years.

Steven Bangert

If Wells Fargo -- as Jon always says, we'll do whatever Well do.

Jonathan C. Lorenz

As our primary competitor, Well ties most of its loan to prime. Our LIBOR -- we tie most of our loans to LIBOR.

John Lawrence Rodis - FIG Partners, LLC, Research Division

Got it. And just another follow-up on the discussion on floors on loans. What percent of the portfolio would you say today has floors in it, I guess?

Lyne B. Andrich

I'm guessing it's around 40%, 45% of the portfolio, because as Steve mentioned, 1 year ago, 2 years ago, it was 55%, but now it was...

Steven Bangert

Of the floating rate.

Lyne B. Andrich

Of the floating rate, correct, entire portfolio, not new originations but the entire portfolio.

John Lawrence Rodis - FIG Partners, LLC, Research Division

Okay. So what -- I guess, where I'm going with that in mind is..

Lyne B. Andrich

And the industry has come down obviously. The floor on average has gone down as well, so...

John Lawrence Rodis - FIG Partners, LLC, Research Division

Sure. So in a rising rate environment, if rates were going to go up 50, 100 basis point, how much movement would you need before you start to see a benefit in the margin, I guess?

Steven Bangert

Well, since a lot of them are not tied to the floor, a lot of them are going to start moving up right away in that. I can't tell you the last time I looked at what the floor was, because we were told...

Jonathan C. Lorenz

Yes. Because one part we were holding around 4.5% as our floor. I would guess today, at best, we're at 4% probably, a little under 4%. So it's not going to be a lot of rate movement, 4% in that.

Steven Bangert

300 over LIBOR, tied. So that kind of gives you an idea. So maybe those loans should be priced closer to 3%. Today should be at 3.25% to 3.375%. And the floor has got it kept on at 4%.

Jonathan C. Lorenz

Yes. and 3.375% to 4%, so it won't require much to start benefiting even on the floor, John.

John Lawrence Rodis - FIG Partners, LLC, Research Division

Okay, super. And just back on the discussion on the 2 new branches. Lyne, I think you said that, typically, you'll have, I guess, 6 FTEs, 3 senior and 3 support staff. I guess you hired the 2. Are you -- you have 1 existing person, and then hired 1 person for the 2 new banks. When should we sort of start modeling in the support staff and other senior bankers? Is that third quarter? Fourth quarter?

Lyne B. Andrich

Well, hopefully -- it will depend on how fast Jon is here, but, hopefully, you'll start -- I think you will see some impact in the third quarter. And, hopefully, by fourth quarter, we should probably have most of the expenses ramped up. And as you know, that means some of the asset generation will lag at some. We'll start hopefully seeing that by fourth quarter and first quarter. So there, you will see an impact in the next couple of quarters of in these new initiatives.

Operator

[Operator Instructions] Our next question is a follow-up from on the line of Tim O'Brien with Sandler O'Neill & Partners.

Timothy O'Brien - Sandler O'Neill + Partners, L.P., Research Division

Just -- I have you guys down for paying off some senior sub debt, possibly, this quarter. Is that still a possibility, or is that on track?

Lyne B. Andrich

Yes, I think we're pretty, at this point, confident that we'll redeem. We've got about $21 million, 9% sub debt at the holding company. It's callable mid-August. And we are very likely to do that.

Timothy O'Brien - Sandler O'Neill + Partners, L.P., Research Division

All right. And then, Lyne, did you say your headcount -- FTE headcount was flat with last quarter?

Lyne B. Andrich

About -- it was around 500. And I forget, maybe 502 last quarter, but, yes.

Timothy O'Brien - Sandler O'Neill + Partners, L.P., Research Division

And you -- that reflects also the hiring that you did?

Lyne B. Andrich

Actually, it does. Now, some of them aren't actually on payroll yet, but they've committed to it, and they started in July. So you'll see our headcount creep up in the third quarter.

Operator

Thank you. And at this time, I'm showing that we have no further questions in queue.

Steven Bangert

Okay. Well, thank you. I think you can tell that it's one of our call that we're pretty optimistic, feeling good about where we're at right now. And that it's nice to be in a growth mode. And looking forward to the second half of the year, and I think 2014, 2015 look pretty bright for CoBiz. If you have any questions, please give Jon, Lyne or myself a call, and we'll be happy to talk to you. Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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