CoBiz Financial's (COBZ) CEO Rory Read on Q2 2014 Results - Earnings Call Transcript

Jul.18.14 | About: CoBiz Financial (COBZ)

CoBiz Financial Inc (NASDAQ:COBZ)

Q2 2014 Earnings Conference Call

July 18, 2014 11:30 AM ET

Executives

Steve Bangert - Chairman and CEO

Lyne Andrich - CFO

Jon Lorenz - Chairman

Analysts

Joe Morford - RBC Capital Markets

Brian Zabora - KBW

Gary Tenner - D.A. Davidson

John Rodis - FIG Partners

Tim O'Brien - Standard & Poor’s

Operator

Good morning. My name is Felicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the CoBiz Financial Second Quarter 2014 Earnings Call. (Operator Instructions) Thank you.

I would now like to turn the call over to Ms. Lyne Andrich, Chief Financial Officer for CoBiz Financial, please go ahead.

Lyne Andrich

Thank you, and good morning, everyone. Before we commence with management comments today, I do need to remind everyone of our Safe Harbor disclosures.

Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws and, as such, may involve known and unknown risks, uncertainties and other factors, which may cause the 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 actual results to be materially different than those in the forward-looking statements can be found on the Company’s filings with the SEC, including forms 10-K, 10-Q 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 our investors. Reconciliations of these non-GAAP numbers to GAAP results are included in our earnings release, which is also available on the Investor Relations page of our website.

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

Steve Bangert

Thanks Lyne. Welcome everybody to our second quarter conference call, I’ll try to be brief with my comments and let Lyne talk about the financials a little bit before the Q&A. Jon Lorenz, the chairman of the bank is here also, we’ll share some color on what he’s seeing in really both of our markets right now. Like you saw that we reported $0.21 earnings per share versus $0.18 same quarter last year. That compares to $0.13 in previous quarter, obviously we’re very pleased with that, the earnings did include a $0.02 per mean investment that was tendered during the quarter but still $0.19 adjusted for the gain on that sale. We also announced an increase in our dividend from $0.035 to $0.04 so we were just overall very pleased with the quality of this quarter’s results. Again the strong loan growth and a stabilized interest, net interest margin now is allowing us to experience some significant growth in our net interest income which is up $1.5 million this quarter on a tax adjusted basis. This growth was near the good re-income that we saw focus on expense management and booking and minimal asset quality issues resulted in a strong second quarter that set us up really well for the second half of the year. I’m very pleased with the diversification of the loan growth. I mean not only did we see growth in those markets but we really saw across almost all asset classes everyone in the franchise is participating today. We’ve shown good loan growth over the previous two years but we’ve not had as much as large a percentage participation from all of our franchisees we’re experiencing today. This should allow us to take to double digit loan growth for the foreseeable future and I think it also allows to be a little bit more selective or the loans that we’re booking. Our challenge has really been deposit gathering. As in our previous year deposit growth was difficult in the first half of the year. This is a reflection really on our business model where we were banking primarily all businesses, the business owners, attend to dividend and pay our taxes here in the first five months. We have already [indiscernible] inflow of deposits since May 31 and expect that to continue to the end of the year, you will have obviously in the previous years that that has been the case, I assume that will happen again this year. But we certainly can’t take this for granted and we are continuing to refocus our attention on deposit gathering activities through the remainder of the year and this will be a primary focus for the franchise. Looking at the pipeline, loan activity I would anticipate that you will see a good second half of year come down to CoBiz and that our challenge will be deposit gathering but let’s say in the past, we’ll find a way to meet that challenge I’m sure within this franchisee. Then we have a lot of availability and outside funding that we really haven’t have to, so although that the challenge is the challenge I think more willing and able to meet. With that I’m going to turn it over to Lyne and let Lyne talk about the financials.

Lyne Andrich

Thank you, Steve. You know Steve mentioned lot of feel good about in this quarter’s earnings, either with those security gains that we had, I think our core operating results are really strong. If you look at net interest income on a tax equivalent basis we reported $27.3 million, Steve mentioned a $1.5 million increase in a linked quarter basis, our net interest margin did expand during the period by 2 basis points and was 14 basis point increase over the prior year period. Earning asset yields improved modestly about 2 basis points during the quarter and it was really a function of improved asset mix as the yield on our average loans were actually stable when compared to the prior linked quarter.

Overall, our average loans as a percentage of our average earning assets increased to 80.1% during the second quarter from 78.7% on the linked quarter. So, that’s really what drove the earning asset yield improvement. Looking at liability cost, our average interest bearing liability decreased 5 basis points from the first quarter of this year to 52 basis points and part of this is a lower depository rate. It was also a function of mix as well, so if you look at provision for the period, you noticed we did record another negative provision during the period of about $900,000 during the second quarter, really a function of improvement in our credit quality metrics.

After realizing net recoveries in the first quarter of 441,000, the Company had net charge-offs in the second quarter of about 740,000, so it bought our year-to-date charge-offs to a pretty nominal level of $299,000. With the negative allowance and adjust for the quarter, the allowance did decrease to 33.9 million. The decrease coupled with the really strong loan growth that we saw drove the allowance to loan ratio down to 1.48% which we still feel pretty comfortable with and it provides a really healthy coverage of our non-performing loans of just under 425%. So, we feel really good on the credit side. Looking at fee income, fee income growth continued to be positive. We continue to see good momentum in building recurring fee based revenue streams.

As a reminder, we did record in the first quarter this year a negative $1.3 million valuation adjustment on mezz fund that we have that we account for as an equity method investment, so that reduced our first quarter non-interest income. During the second quarter, the mezz fund income was much more normalized and about a 140,000, so that account for, part of the downturn that we saw from first quarter to second quarter, but even normalizing for that mezz fund write-down that we took in the first quarter, fee income continue to show pretty good improvement period-over-period and iBanking in particular had a really good quarter. Non-interest expenses, just looking at those quickly, they were $23.2 million for the quarter. It did include a net gain of $1.6 million on OREO and the investment securities that Steve referenced.

Excluding gains and losses, our core NIE was 24.9 million for the quarter which is about 550,000 increase over the first quarter run rate. Compensation expense excluding our equity based compensation cost increased about a $100,000 in the first quarter. Overall, the expected seasonal decreases and payroll taxes and vacation expense will realized but they’re offset by some higher variable compensation and bonus expense given the strong results we had in the second quarter. And in total, full time equivalent as of the end of June, were 525 compared to 502 as of June 2013 with most of that investment coming on production side that we discussed in the past. Stock based compensation, just to touch on that quickly. In the first quarter, I think we kind of mentioned that it was elevated due to some cliff-testing some certain awards. And you kind of saw that drop back down to a normalized run rate in the second quarter.

Occupancy expenses increased from the first quarter and that reflects the impact of those new banks that we announced last year that finally came online and had their official opening in the second quarter. So, now we see the full impact of those new initiatives coming on-board. However, we recently relocated iBanking group as well as consolidated certain cash fold activity we had into an existing bank. And so those savings that we are going to get from those facility restructures, we will see those in future periods and that will be about a 125,000 a quarter. So, that will almost offset the investments we made in the new banking initiatives that we did. So, you should see occupancy cost being equal kind of go back down in future quarters.

And lastly just to note that in the category, other operating expenses in our NIE table, you can kind of see that pop-up a little bit. We did have $345,000 legal settlement in the third quarter, so that category should also decline going forward and become more normalized. So, at the end given the good revenue growth we had for the period as well as manage core expenses, our efficiency ratio on a tax equivalency basis reported for the quarter was 68.5%. On a trailing 12 month basis which is how we have always looked at it just because of some of the lumpiness in our earnings, our core efficiency ratio is actually close to about 72.8% which is higher than we would like it to be but we have been making progress and we continue to see that drive down where you continue to see improvement in operating leverage.

With that I will turn it over to John.

Jon Lorenz

Thanks, Lyne. Well as been pointed out already, I think loan growth is clearly the highlight for the quarter and again we’re particularly pleased to see and it was very broad based growth with C&I and owner occupied of 7% over Q1 and 13% over the prior year. And we kind of wondered about the owner occupied real estate portfolio given that interest rates have been so low, it’s an opportune time for business owners to purchase real estate, but a lot them have been just hasn’t introduced. So given the economy and the slow recovery I think we certainly saw in the second quarter nice increase and really a commitment on the part of business owners to start moving in the position of trading out for buying new real estate. So that piece was particularly gratifying. I think you’ve seen that portfolio growing again. Strong growth in the construction portfolio of 18%, again we’re coming out of a fairly base there so we’re showing some percentage increases. But some nice growth and we think some very good quality growth in the construction portfolio in the second quarter.

And as well a diversification among asset classes, we got good contributions during the quarter from Arizona in terms of loan growth which was about $60 million of our second quarter loan growth coming out of Arizona and about $82 million out of Colorado for the quarter. And Colorado did have some fairly outside pay downs during the quarter; you saw that pay down maturity line tick up, but even despite that good contribution from Colorado during the quarter also.

And it really is as Steve mentioned, all of our bank locations; as you know, we’ve added quite a few new bankers in the last 12 to 18 months and it generally takes about that long for them to really become productive and start to actually move business into their portfolios and we’re starting to see that happen from the new bankers that we’ve brought into the franchise over the last 12 to 18 months also.

We are seeing some good activity in our two new bank locations. As we said last quarter it’s probably going to be latter part of this and in the next year before we really start seeing the numbers happen, but certainly a lot of good activity and particularly in our four columns location where I think were being very well received in that market and a lot of calls being made.

You’ve probably noticed that we have the first, got a nice bump or increase in our line utilization in many quarters, in the second quarter from 38.7% up to 41.5% utilization. Much of that or certainly a good portion of that is starting to come from draws under our construction line which are included, but even just breaking off the C&I utilization by itself, C&I utilization was up 2% to almost 40% in the quarter, so it’s again pretty broad-based increase in utilization.

And beyond just the line utilization, as I talked with the bankers throughout franchiser having more and more discussions with their customers with the business owners and business owners really seem to be positioned now this year moving into next year to start making more capital expenditures more discussions about lines or equipment financing, as well as additional lines of credit or increasing the lines of credit, as I mentioned earlier, real estate purchases. So I think the capital expenditure piece really seems to be coming into play with our customer base and I think we’ll see more loan requests coming from our existing customers as we move forward this year and into next year.

On the deposit side, while we did have a decrease of about $58 million in our core customer funding, we’re actually pretty pleased with that number. It was up nicely as just off from the prior year quarter by 8.5%, but also non-interest bearing component of our overall deposit growth was up about $23 million from the first quarter. So the mix and composition of the portfolio continues to be good. And we really do have a pretty significant -- or have had a pretty significant seasonal component where our deposits do tend to be down in the first half early in the year as there are lots of distributions from our professional businesses or bonuses and then taxes in the second quarter and then we rebuild in the second half. And we did see, while we were down for the second quarter, a nice uptick in deposits in the month of June which was ahead of June last year and that deposit growth is continued into July. So we’re hopeful we will see that same seasonal action that we’ve seen in the past in terms of deposit growth in the second half of the year.

If you look at the overall economies in both states, Arizona does seem to be tempering a little bit in terms of economic growth, certainly real estate residential home prices which have been escalating at very rapid rate have now moved into more of a flat position year-over-year. And I that's probably good and that Arizona does tend to be a market that does get overheated as the economy improves. And I think we are still seeing job growth down there, so we still feel very good about Arizona and continued economic growth, but I think we’ll probably see that at a tempered pace at least for the balance of this year. But most forecasters probably revised down a little bit job growth in 2014 are expecting a further uptick in job growth in 2015.

So again, I think pretty solid overall economy in Arizona. Colorado still looks extremely good. They just announced GDP numbers in June for 2013. GDP in Colorado grew 3.8% that was double, but the national growth rate of 1.9% that was just announced Colorado in 2013 was the fourth fastest growing state in terms of population. Last year, job growth numbers for Colorado recently have been revised up for internal about 61,000 new jobs to 68,000. So, just again as we’ve said in previous quarter, Colorado does seem to be really operating on all cylinders and very good broad based economic growth continuing to occur.

As we look ahead the loan pipeline continues to be strong, obviously we haven’t seen some of that out in the second quarter with the very strong growth, but we had a meeting with all of our producers throughout the company, bank and otherwise yesterday. And I think a very positive vibe from that group in terms of the level of activity, more request from existing customers. So I think, we feel good as Steve said that we will show double digit growth in the balance of this year, probably not at a pace we experienced in Q2 but I think continue to see solid growth.

And Steve said the challenge for second half of the year and into 2015 is deposit growth, we had number there are lot of discussion yesterday with the banking group on the importance of deposits. I think they clearly get it. We’ve got a number of large deposit opportunities in the pipeline right now. So we do think we can grow our core base in the second half and hopefully as I mentioned earlier we’ll see that seasonal build up occurring to some degree in the second half also. So we think that’s manageable issue for us, but clearly one that is getting a lot of retention right now. Steve you want to add (ph)?

Steven Bangert

Yes. We’ll just open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Joe Morford with RBC Capital Markets.

Joe Morford - RBC Capital Markets

I guess the first question was just on Arizona. The growth seemed to tick up a bit earlier than expected. I was just curious, a little more color on where that's been coming from in that market? And just how is the pipeline looking down in Arizona?

Steven Bangert

You know Joe, we’re, it’s really similar to Colorado and we’re seeing, and try more sale it’s in the CNI side in Arizona which is what we like to see. But we’re still not seeing much real-estate growth occurring, I think you’ll see more of that in the coming quarters but really most of what we’re seeing is CNI which is what we like them to focus. And I think that as we’ve upgraded the team and Arizona as I mentioned it is general and taking Arizona I think we’ve got a good core through for bankers down there that is starting to have some impact. So while as I mentioned we’re seeing growth tempering a little down there. I think we’re very well positioned in that market, lot of good calling effort going on, and some good production from new bankers that we’ve just brought into the franchise. So I think we’ll see good growth hopefully continue from that market in the balance of the year. I would still add though I think you can count on Colorado probably being the primary growth driver.

Joe Morford - RBC Capital Markets

Sure. And are there some construction lines down there too that should be funding? Or can you talk about real estate?

Steven Bangert

Kind of March we’ve done, we put it an investor real-estate loan down there fairly sizeable one of our 12 million in the second quarter. I think there will be some construction opportunities, but particularly residential construction has slowed down a bit down there. So I think probably most of the near term growth on the real-estate side that we’ve seen in Arizona would owned or occupied and investor real-estate and not as much on construction, I think you’ll see construction still primarily coming out of Colorado.

Joe Morford - RBC Capital Markets

Okay, that's helpful. The other question was just if you can talk about a little bit more about the types of things you see or initiatives you have to help chin up the deposit growth, other than the seasonal stuff; some of the actions you may pursue to help things there a little bit.

Jon Lorenz

Well, I think one things is as I mentioned is just a lot more focus and every email that goes out the meeting yesterday we’re just really impressing on the bankers the importance of the deposit growth. We’re trying to supplement that with identifying and continuing to identify some deposit which niches and then really get bankers focused on those particular and edges, there’s a lot of deposits out there in the oil and gas business. We really haven’t pursued that. Generally, the loans are too big for us, but there are some deposit opportunities. So that's the piece. And then we’ve created a little conduct for core deposits with all the bankers that will go through the balance of this year with some nice rewards in terms of trips and that kind of things. So I think it really is just creating the awareness and developing the focus.

And as Steve said, we’ve got a lot of alternative funding sources available to us on a short-term basis, so I think it’s a very manageable thing, but it is something that's going to require a lot of effort and attention.

Yes. And part of we’ve also been doing is reminding the bankers to go back to all these new customers we booked in the last 6 to 9 months and start gathering those deposits to make sure [indiscernible].

Jon Lorenz

[Multiple Speakers] typically on the relationship the loan comes first and then deposit start moving those over after the loan gets booked. And that -- and sometimes you have to go back and remind the bankers that deposits are supposed to be a little sooner than that.

Lyne Andrich

And the only other thing I would add is that we also changed banker incentives and weighted deposits more than loans, so that's often a very effective way of motivating the behavior you want so.

Steve Bangert

Probably the best way.

Operator

And your next question comes from the line of Brian Zabora with KBW.

Brian Zabora - KBW

I just followed up on the deposit side. Is there a loan-to-deposit ratio that you maybe don't want to cross or that you may dial back the loan growth and become a little bit more -- as you indicated, a little bit more selective on the credits?

Steve Bangert

Yes. I mean we’re not real strict in terms of loan deposit ratio, but I, we’ll probably did this slightly a little bit 110%, but we do have quite a bit of liquidity available, I mean hundreds of millions of dollars there are sources connected to. In the short-term Brain I think we’re comfortable if that number was to compete a little while, but probably loan during the second half of the year I would have imagined that deposits will stay up with loans potentially exceed loans during the second half of the year.

If history repeats itself that will happen, but we are comfortable going above 100%, but we still wanted to stay at levels dramatically above 100% for an extended period of time and as I said, 110% kind of turns on a lot of alarms around here. I don’t know we will probably just get a little bit more aggressive on the deposit pricing side to which we haven’t been at all.

Jon Lorenz

We see most of our deposit run off that has been essential setting our CD portfolio, customers’ CD portfolio and we are, as everybody is seeing we’ve had nice growth in non-interest bearing. And so we’re really focused on retaining the operating accounts of the business, the money market of the business, but we’ve led some of that CD money drift elsewhere just because we haven’t been willing to pay the price for it, if needed we can bring I think a fair amount of that CD money back into the bank if we increase our pricing on the CDs.

Brian Zabora - KBW

Great. And then on investment banking, a strong quarter in the second quarter, could you talk about the pipeline? And should we expect to have another fourth quarter-weighted year? Or maybe there's more [multiple speakers] --?

Steve Bangert

That's hard for me to tell on that too. Brian what I would say is that the pipeline a little bit, revenue in the pipeline looks pretty good, I’m kind of disappointed by the lumpiness in the pipeline, but that could correct itself for the next 60 days and by that I mean my preference is to have smaller transactions rather than a few bigger ones. But I would imagine investment banking as you know is difficult to forecast, but we have the potential to have a decent second half of the year.

Brian Zabora - KBW

Okay. And just lastly, could you remind us how much do you have as far as TruPS in the securities book? And what you may see going forward, if you continue to have maybe redemptions or calls, the potential level of gains going forward?

Steve Bangert

Brian there is $70 million in there now and it’s about half fixed and half floating. And so the floating I really don’t anticipate that being cold. And I would say if at all the fixed would have been cold, we all anticipate it we’d be for 18 months be cold and it’s still on the books. So there is still another $35 million or so of fixed. And I would imagine over the next 18 months we’ll see a lot of that go.

We actually have been consciously trying to replace that with some of our tax exempt lending, as well as investments is a good alternative to replace those higher yielding assets. So it’s difficult to tell when that's going to be cold, but I would imagine that $35 million over the next 18 months will disappear and that's probably because the yields are around 6% maybe slightly under 6%.

Operator

Your next question comes from the line of Gary Tenner with D.A. Davidson.

Gary Tenner - D.A. Davidson

Just a question on the new markets. From your comments, it doesn't sound like there was much contribution, but I was wondering if you could quantify any loan production in those markets in the second quarter?

Steve Bangert

We don’t comment on out other bank locations and I think we’ll certainly talk in generalities in terms of growth and activity level but I don’t think we want to isolate Gary that any one of our locations including the new locations specifically in terms of dollar loan growth but we’ll try and give you good insight into that each quarter.

Jon Lorenz

I know I sound John Starks in that question.

Steve Bangert

But I really, I think that’s a good practice and we’re not sorry I’m talking about individual locations, we only talk about two individual states and where the production comes from but Fort Collins is coming out of the gates faster than Colorado Springs as we would say but both of them we think will be looking good by the end of the year based on bygone activity.

Gary Tenner - D.A. Davidson

Okay, fair enough. And Lyne, you've made the comment or some commentary around the efficiency ratio and then kind of liking that to come down. Obviously, you made some investments the last year-plus in, presumably, the decline in efficiency ratio kind of more for revenue growth than anything else. But is there a goal or at least a kind of intermediate or long-term goal on the efficiency ratio?

Lyne Andrich

We haven’t really stated publicly a goal to per se; except that I do think in the near term on a run rate basis ’14 early ’15 we should be able to drive the efficiency ratio below 70%, given like as you mentioned the revenue growth that we’re seeing. Because it’s not going to be a function of expense cutting, it’s going to be managing our expenses and holding them flat to the best of our ability while we’re finally seeing the realization of some top line income expansion so just those two dynamics should drive that lower than, on a run rate basis it’s under 70 by the end of this year early next year.

Gary Tenner - D.A. Davidson

Okay. And then just one last question. On the insurance business, was there anything in particular in last year's second quarter that was unusual, or where the fees just higher on kind of the 2012 results versus the impact this year on 2013 results?

Lyne Andrich

Yes, I mean actually insurance, continued insurance from good momentum and growth, period over period, last year the same quarter we actually did have some kind of one time income that came in, some of it was related to contingency or bonus income we get from our carrier partners took space of the success we’ve had in sales volumes that was a little outsized so that we benefited from that as well as we had a couple of larger tail qualities and non recurring policy that we reported in the second quarter of last year. So excluding that we’re still seeing some decent growth in insurance probably just below 10% in terms of total revenue.

Operator

Your next question comes from the line of John Rodis with FIG Partners.

John Rodis - FIG Partners

Nice quarter. Steve, just to maybe follow-up on your comments on investment banking, was just curious how many deals did you close this quarter?

Steve Bangert

I really don’t want to get into that because I know that individual customers can figure out, what percentages that they were and so forth.

John Rodis - FIG Partners

Okay. Fair enough. I guess a question maybe for you, Lyne, on the margin. Sort of with the need to maybe raise deposits, do you still think you can keep the margin sort of around this current range? Or sort of what are your thoughts there?

Lyne Andrich

Yes, that’s a great question because you know at this point if we successful in generating deposits in the same mix that we have historically we should be able to maintain our margin, it should be relatively stable, by stable I mean it might go down a few basis points it might go up a few basis points but I don’t think we’re see a lot more near term pressure unless we do need to get more aggressive and that will be a function then having really loan growth if we have to get really aggressive and start attracting the money that historically we haven’t been very active in, I still think that, that’ll help sustain the margin until we have a little bit of room to deleverage in terms of reduce our investment portfolio still, you know it’s still 20% of our average earning assets and certainly we can find a little bit of our loan growth out of the investment portfolio still, so I think all those things kind of speak to the fact we should have a relatively stable margin going forward.

John Rodis - FIG Partners

Okay, thanks. And then ne other question. Or I just wanted to make sure I heard you correctly on expenses. I think you said as far as occupancy expense, did -- it sounded like you were implying that they should probably go down about $125,000 from the current quarter. Is that correct?

Lyne Andrich

Yes, all else being equal so right now you saw that occupancy expense kind of increased in the second quarter as we had those two new banks and open up and we started seeing there was rent expenses and really some costs start hitting our P&L. The consolidation I referenced earlier in kind of closed one of our cash fall areas and we relocated our investment banking arm, those expense savings won’t be realized until probably the second, mid part of the third quarter.

Jon Lorenz

And all those activities are relocated in the existing space so we work from five locations downtown that we’re building that we were in three but we did not take on any more space.

Lyne Andrich

So prospectively, the expense savings from that will be [Indiscernible]. Now, we might see expenses rise modestly because there inflation in our CAM charges and certainly we have other IT related expenses in that that have a natural inflationary kind of component. But generally speaking the biggest component is obviously rent in our facilities and those we kind of manage this year.

John Rodis - FIG Partners

Okay. And then I think you also mentioned in the other line item, you said there was a $345,000 legal settlement in the second quarter? Is that correct?

Lyne Andrich

That’s right and just to point that out because in that line item, the quarter-over-quarter increase seemed a little outside although 340,000 isn’t really significant for company our size but we did have a claim typical in the normal course that we evaluated our position as to whether or not we wanted to depended or whether or not we thought it is more cost effective to settle. We opt to just a settle and turn off the clock on the attorneys and that charge was reflected in the second quarter.

John Rodis - FIG Partners

Okay. So, all things equal that other line item is probably closer to the 4 million or the first level quarter I guess.

Lyne Andrich

Absolutely.

Operator

(Operator Instructions). And your next question comes from the line of Tim O'Brien with Standard & Poor’s.

Tim O'Brien - Standard & Poor’s

Yes, I haven't made that change yet. No, most of my questions have been asked, but I just thought maybe I'd ask you guys about -- I don't know, growth initiatives way out there. Do you guys have any ideas or thoughts about maybe doing something, adding an office or something in either Arizona or Colorado? And by the same token, are there any other adjustments that -- opportunities to make the existing platform -- branch platform or space platform you have, more efficient?

Steve Bangert

I think we run out all of the cost that we can find out of our existing phase and we work really hard at it. I mean we challenge ourselves and we say we are going to do these really three new initiatives and we have two markets and have opened up a private bank at the same time. And there was some cost with that but we try to find places where we could take out cost. I think we have done a pretty good job with that. I don’t really see any new initiatives other than we will continue to look for bankers. We think we said in the last quarter we have a lot of capacity. We have the capacity to go to $3.5 billion without adding a single banker having said that this week we had a new banker join us in Arizona which I think is going to be great and banker that any bank can call up there, we would love to have that guy and he is a senior banker which will be a great hire, he is a great hire for us and just recently started.

So, even though we are not actively looking for people, we continue to interview but I think they will fit within our existing platforms. I don’t see any new initiatives other than people but even that will be very, very selective on the going forward basis. As I said we have a lot of capacity right now and I really like to take advantage of that. John, talking about Arizona and how the economy has hit pause in the Arizona market and it really has and that’s probably a good thing. But the quality of people that we have in Arizona today is just exceptional. I sat him up, I am sure a lot of banks would say that but I think ours is good as anybody if not better and they will do extremely well down there.

So I feel we add lot of people, I think it’s time to let that start to follow to the bottom-line now. If you remember what you see in our net interest income, there was a positive net interest income as we came out of that recession. We have grown our loans but we have loosened margin now the margin has stabilized and loan growth is going to the bottom-line, we certainly have 90%, $1.5 million, $2 million a quarter that will be pretty meaningful as we head into next year.

Tim O'Brien - Standard & Poor’s

And then I guess last question. Is there any other kind of incremental, maybe slight shift or adjustment in thinking regarding capital needs and strategy, capital management strategy? Or is it steady as she goes from where we were last quarter?

Steve Bangert

I think I am on streak too, as far as I concerned it’s steady as it goes. Our tangible capital target is around 8%, I am comfortable that can be down below 8%, comfortable with going to a few basis points above 8% but that’s now the number that we think is a very efficient use of capital specially with the quality of our loan portfolio of the reserves that we have got setup today. Lyne, from cash flow viewpoint you feel pretty comfortable today.

Lyne Andrich

You may have noticed that we actually announced a small increase in our common dividend this quarter as well. So, we have gone through and looked at the analysis and again given our credit profile, our risk profile and currently the organic capital we are generating from income, we feel currently the composition and the amount of capital we have right now is real sufficient and support us going forward.

Operator

And there are no further questions at this time.

Steven Bangert

Okay. Well, thank you everybody for joining second quarter conference call. As always if you have any other questions please give myself, Lyne or John the call, we are always happy to talk to you. As you can see we are very pleased with the second quarter, hopefully you are, hopefully we got a good news for you as we head into the second half of the year. The momentum for franchise today feels as good as it has in six or seven years. So, thank you and we look forward to the next conference call.

Operator

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

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