CoBiz Financial's (COBZ) CEO Steven Bangert on Q4 2015 Results - Earnings Call Transcript

| About: CoBiz Financial (COBZ)

CoBiz Financial Inc. (NASDAQ:COBZ)

Q4 2015 Earnings Conference Call

February 12, 2016, 11:00 AM ET

Executives

Steven Bangert - Chairman and CEO

Lyne Andrich - EVP and CFO

Scott Page - CEO, Colorado Business Bank/Arizona Business Bank

Analysts

Joe Morford - RBC Capital Markets

John Rodis - FIG Partners

John Moran - Macquarie Capital

Timothy O’Brien - Sandler O’Neill Partners

Frederick Cannon - Keefe, Bruyette & Woods

Operator

Good morning. My name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the CoBiz Financial Fourth Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.

Chief Financial Officer, Lyne Andrich, you may begin.

Lyne Andrich

All right. Thank you, Kayla, and good morning, everyone. Before we commence with our management's 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 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 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 maybe be found in the company’s filings with the Securities and Exchange Commission, 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 to our investors. Reconciliation of these non-GAAP numbers to GAAP results are included in our earnings release and our 10-K, which is available on the Investor Relations page of our Web site.

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

Steven Bangert

Thanks, Lyne. Welcome everybody to the fourth quarter conference call. I apologize for the delay. This call was supposed to have taken place two weeks ago. You know from correspondence that we’ve sent out previously that the delay was really driven by us trying to get our arms around appropriate provision for a single credit, and I do want to emphasize that.

This credit is a private technical school that’s been significantly impacted by the pressure really brought on by increased government scrutiny on schools that were funded largely with borrowed money by the students through the government guaranteed student loan program. We’ve got very limited exposure to this industry but we felt it was important to deal with this credit. We don’t think this is a healthy industry to be in but this credit really is not impacted by the economy in either state. We’ll spend a little bit of time talking about that. But both Colorado and Arizona continue to be doing very well, as we’re really pleased with Arizona’s contribution this year to bottom line results.

Lyne will also speak briefly about a one-time severance charge that we took. I think that was another important item that we want to do in the fourth quarter, because we believe we had very strong core earnings in 2015 and we wanted to set ourselves up to have a very strong 2016, 2017 and beyond.

What you’ve seen is good core earnings growth in the company. I pay a lot of attention to pre-tax pre-provision growth. As you know, we’ve had a lot of provision release and that release has come down every year, over the last three years. We knew that we would get to a point where there would be a more normalized provision expense. And so it’s been important for us to grow that and really is a relatively simple formula.

We wanted to see 10% loan and deposit growth, which should translate into roughly 10% net interest income growth, fee income growth of 8% to 10% and then be able to retain our operating expenses below 4% growth. And I think for the most part we’ve been able to do that.

We feel pretty confident about our ability to continue to execute that relatively simple plan over the next couple of years. And if that’s the case, I think that will allow us to continue to gain our independence, so this could be very important that we continue down that path.

So, I apologize about this credit but I think it was very important for us to deal with this credit. Scott’s going to spend some more time with it. Unfortunately, this is an operating business, so I’ve asked Scott to limit to what he’s able to say.

We certainly don’t want to impair this school’s ability to continue to do business - management, and investors have been very cooperative working with us. They know that we’re exiting – they’re working with us to exit this particular credit, and we really don’t believe that it will have any further impact on 2016 earnings, which is really more important for us.

So before I turn it over to Lyne and Scott, I want to repeat that I’m really pleased with the growth in the core earnings. Our pre-tax pre-provision earnings for 2015 were up almost 19% over 2014. The double-digit loan growth, double-digit deposit growth is helping to fuel those earnings.

But we’ve also really made significant impacts with our efficiency ratio, and I know Lyne will speak to that. But decisions during the fourth quarter when it comes to this particular credit and the severance expense that I mentioned earlier, I think will set us up for a strong year as we head into 2016.

So with that, I’m going to turn it over to Lyne and Lyne will go over the numbers a little bit in more detail.

Lyne Andrich

All right. Thank you, Steve. As we disclosed in the preliminary release, we were working through that large credit Steve referenced and we needed a little bit more time to complete the collateral valuation analysis. In the preliminary release, we did provide a range of provision estimate of 4.4 million to 6.4 million for the fourth quarter. The final provision came in at the midpoint at 5.4 million, which again was driven by that credit.

On a pre-tax pre-provision core basis, we saw income increase by 1.4 million from the third quarter or 2 million from the prior year quarter. After including the fourth quarter provision of 5.4 million, our fourth quarter net income did come in at 4.4 million or $0.11 per share. For the full year, that meant our provision was 6.4 million and net income available to common shareholders was 25.7 million or $0.62 per diluted share as compared to 28.4 million or $0.70 per diluted share for the year ended December 31, 2014.

I think in looking at the year-over-year comparisons, it’s important to note that until the first quarter of 2015, as Steve mentioned, we were still releasing provisions and we had reversed 4.2 million for the full calendar year of 2014 versus this year’s 6.4 million, so that in itself on a year-over-year comparison contributed the $10.6 million swing in operating results.

A couple of areas just to note in our performance this past period. In 2015, we did grow net interest income by 7.7 million to just about 117.4 million for the full year. The margin for the full year contracted 5 basis points and we ended 2015 on average with a margin of 3.86%. It had contracted a little bit that from there in the third and fourth quarters.

We have a very good year in terms of growing average loans and deposits. Both were increased by approximately 12%, which helped allow us to grow net interest income by 7% while absorbing $1.8 million of interest expense related to the new sub-debt we issued in June of 2015.

For the quarter, our net interest income held relatively steady from the third quarter increasing 1 basis point to 3.73%. We’ve discussed in past calls the impact of prepayment penalties and interest adjustments to our margin. In the current period for the fourth quarter, there wasn’t a significant net amount of these types of items. So the reported NIM of 3.73% in the fourth quarter doesn’t have much noise in it, and is a good kind of run rate.

Regarding the recent Fed hike, as many of you know, we maintained an asset sensitive interest rate profile as our balance sheet is relatively short. Absent any changes or shifts in balance sheet composition, the Fed news in mid-December should benefit our earnings. Our model suggest that for every 25 basis points in Fed rate changes, our NIM increases approximately 3 to 5 basis points on our existing balance sheet.

I can confirm that we did see our NIM come in modestly higher in the month of January reflective of that change. However, balance sheets are never static and so a shift in our loan mix or our deposits can also influence the change in the direction of margin. But right now, we feel pretty good about where the margin came in for the fourth quarter, and where it looks like it’s heading into 2016.

I want to take a moment also to speak to expenses. Overall, I was really pleased with our expense management over this past year. We’ve shared in the past that the key to improving our operating efficiency is to continue to grow our top line revenue at 8% to 10% while holding our expenses under 4%.

I’m glad to say we had some success this past year driving our efficiency ratio from the mid-70s, which is kind of where we started 2014 on a run rate basis, to just over 65% on a run rate basis for the most recent quarter.

Sustaining double-digit balance sheet growth while keeping the expenses down can be a challenge as there is naturally embedded inflation in our expenses given annual cost of living adjustments we see in our salary base of 3% every year, as well as normal escalations in rent and other occupancy-related categories.

As part of our ongoing efficiency measures though, as Steve mentioned, during the fourth quarter, we did take some action and eliminated several positions and as a result incurred a severance charge of about $1 million. Prospectively, on a fully burdened basis, we expect to save about $2.3 million, which will partially offset 1.3 million that we would have expected to see in compensation increases when our merit increases take affect for the second quarter of 2016.

Additionally, the savings we expect to garner from the severances will help allow us to continue to further invest in the company, as we’re always actively recruiting. So I don’t want to suggest that we’ll save 2.3 million prospectively. We know some of that will be offset by the salary increases we’ll see in the second quarter, as well as additional headcount additions that we may have.

After salary and benefits, our next largest spend is facilities related. We recently announced that we will be relocating our corporate offices in downtown Denver. We currently lease approximately 67,000 square feet today in downtown, and that lease was set to expire and re-price upwards in mid-2016.

So this move will not only increase the synergies and collaboration within our teams and elevate the visibility of the CoBiz brand with this new headquarter building but will also improve the efficiency of our space. So we will be reducing our square footage needs by approximately 19,000 square feet with this relocation.

The reduction in rentable square feet will help offset a significant amount of the expected increases we would have had and seen in facility costs when the original lease would have been reset in mid-'16.

In addition, we’ve continually evaluated our branch networks. As a business bank, we don’t have an extensive branch footprint, however, we did recently decide to close two additional locations in the Arizona market, but we don’t believe that will impact our ability to serve clients in that area.

In 2016, the other thing I would just note is that we may incur some additional non-recurring expenses related to these facility initiatives. Our long-term goals and objectives obviously is to minimize the overall increases in occupancy expense, and I think some of these actions we’ve done recently, we’ll be successful at that.

Lastly, I’ll just touch on taxes. Regarding taxes, our tax rate dropped in the fourth quarter but it was really a function of the proportion of taxable to tax-exempt income being skewed by the size of the loan loss provision in the fourth quarter.

Overall, we’ve seen our effective tax rate decline as a result of the growth in our public finance book as well as certain tax strategies we’ve implemented by the insurance captive we’ve discussed in the past. Our tax rate has declined from 34% in 2014 to 27% in 2015. Going forward, I estimate our tax rate to be more in line to a 29% range on an annual basis.

I’ll now pass it over to Scott.

Scott Page

Thanks, Lyne. Good morning, everyone. I’m going to keep my comments brief. I think you’ve all seen the 10-K and the earnings release, but I’ll highlight a few things that I think are important for you to hear. As Steve mentioned, we had the one problem with credit. Other than that, I’m very pleased with the quarter and for the momentum we have going into '16 or into this year.

Loan production was once again very solid for the quarter and across both states. We grew loans 78 million point-to-point in Q4 and it was our second best quarter for the year. What’s really gratifying is Arizona really continues to grow nicely and has for the last two or three years. We grew 31 million in the quarter. Colorado grew 47%. And the good news really is the Bank grew loans over 12% for the year to almost $300 million.

So this has been in my view, from our perspective, pretty impressive because we do pay headwinds every quarter on significant paydowns and payoffs in and around about 40% per year, which is a norm for us these days, especially given the rate and credit environment we’re in.

It was very gratifying to see both states producing at high levels. We have emphasized our relationship sales training and coaching and pipeline management for years and I believe our efforts are being rewarded with some really quality loan growth.

Asset quality remains very solid and compares favorably with our peers. That said, we are dealing with that one large problem credit, Steve reference, I think Lyne talked to as well, the big private technical college. It frankly got sucked down as part of the industry issues, as Steve mentioned, the student loans and expectation of gainful employment. This impacted this customer’s enrollment trends and certainly the cash flow.

I’m not really going to comment much beyond that because we are working hard to maximize our collections in that credit. The school is still open. We’re diligently working with them and trying to get that resolved very quickly.

We have placed a loan on non-performing status and reserved against potential losses. We think we have the proper mark on it, and you saw that reflective, as Lyne said, in our provision expense and it’s in the 10-K as well.

Our non-performing loans and loan loss reserve ratios popped up in the quarter as a result of this particular credit. But once resolved, I expect those ratios to go back and align to what we saw in prior quarters. And that should happen over the next two to three quarter, I would hope.

Just a couple of other comments on our loan portfolio. I feel very good about our asset quality and our credit process. We ended the year on a strong loss recovery position. We will deal with this one particular credit and move on.

Lastly, I’m sure many of you are wondering about our energy exposure at CoBiz given the recent drop in global oil and gas prices. I want to emphasize that we are not an energy lender and we don’t have exposure to the downtown office space market.

Our total energy lending exposure is less than 1% of the total loan portfolio and we only have one loan of any magnitude, and that loan is well secured and guaranteed by a very liquid – personal guarantor. So we’re not in that space and we don’t have any intention of getting into that space.

I will say though that energy is an important part of our economy in Denver but not to the extent it used to be. The state has really diversified well beyond energy. Job growth may slow as this industry retrenches and it may have some affect on the downtown office space in income fees over time. However, we’ve seen the office space market remains strong as non-energy companies continue to migrate to downtown Denver and take this space that’s been vacated by many of these smaller energy companies.

Job growth is continuing and net in-migration remains strong in Denver. The Phoenix market also continues to strengthen. Job growth and in-migration is very strong and unemployment continues to drop in that market. We feel good about both of our primary markets. I feel fortunate that we’re in those markets.

Let me just talk about deposits real quickly, because that’s so important to what we do. It was very strong in Q4 and 2015. For the quarter, deposits grew 34 million point-to-point. And I want to point out to all of you that that’s misleading as our average deposits were up significantly for the quarter increasing by 106 million or 16% annualized. For the year, average deposits increased 288 million or almost 12%.

One very positive item of note is the increase in non-interest earning deposits in the quarter of 53 million. We continue to have success attracting C&I deposits in treasury management clients, which is a major focus of ours. And we’ll continue to focus on that going forward.

Let me turn it back over to Steve.

Steven Bangert

Okay. Those are my comments, so I’m going to just go ahead and open it up for questions at this point in time. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Joe Morford from RBC Capital Markets.

Joe Morford

Thanks. Good morning, everyone.

Steven Bangert

Good morning.

Joe Morford

I think for the first question I might just ask what has been probably the most common question from investors recently and following up, I guess, on Scott’s comments. But from the conversations that you’re having with your clients and the trends you’re seeing in the data, are you seeing any signs that we’re headed into a recession at this point?

Scott Page

Joe, I worry about that daily actually and I don’t think so. We were certainly being very careful about some segments that we feel are a little frothy. We’re being really careful with leverage finance. We’re careful, as I’ve said in prior calls, the multifamily building trends downtown. We’ve seen rents start to drop in downtown Denver and we kind of saw that coming and we’ve been very conservative in lending into that space for the last couple of years frankly. But I still see just a lot of positive things on the horizon for Denver and Phoenix, a lot of it driven by in-migration and job creation in both markets. So, I’m certainly not an expert to talk about what the national economy is going to do but in the two markets that we operate in, I continue to feel okay about.

Steven Bangert

Yes, I would agree with that, Joe. I think when it comes to the operating businesses that we bank, I don’t think that they’re as tuned in to the stock market as maybe our listeners might be and that certainly has some concerns with them, but they don’t live it day and night. In Colorado, they might have had more impact over the oil and gas issues over the last, but that’s really – the market’s already kind of adjusted for that not that there couldn’t be a little bit more to come. But the oil and gas activity up in Weld County, which is by Fort Collins in Greeley, has slowed down dramatically but that took place nine months ago and there really hasn’t been any drilling activity for quite a while now in that. And as Scott mentioned earlier, as oil and gas companies consolidate here and given backspace, it’s been quickly picked up by other companies. An example is Liberty Media, for those of you that know Denver, they have a large – their large international campus is on the south end of Denver. They cannot get the millennials to go down there. They’re taking over a big new building downtown. They’ll stay on their own campus but they needed a place to attract the millennials. And so downtown is really red hot right now. It continues to be. I live in a condo downtown. I’ve looked out yesterday and counted 10 cranes just looking at one direction. So that can be still pretty strong in that. And I’m really – we’ve said it quite a bit over the last couple of years, remember our growth over the last five years, the first three years it was just Colorado. And Arizona for the last two years has been a very strong contributor for us. And lastly, I really felt good about the quality of the growth too, a lot of healthcare activity which we hadn’t seen before. So I don’t think at our levels we’re seeing it at this point in time, but we’re certainly watching it and certainly concerned about the overall world economy and the impact it’s having on the stock market, and we’ll see how that plays out.

Joe Morford

That’s helpful and encouraging too. I guess the other question was Steve as you think about growing pre-tax pre-provision revenues in the year ahead and an important part of that is growing the loan portfolio. How likely is it that we’re going to continue to see this kind of elevated paydown rate around 40% annually? And also related to this, just can you update us on hiring activities and what that might be as a contribution as well in the year ahead?

Scott Page

Well, I’m no longer going to say that those were elevated paydowns anymore. I think that’s the norm, at least from what I can see into the future, Joe, at least for now. And your second question again --

Lyne Andrich

Hiring.

Scott Page

Hiring, we’ve constantly – I mean Steven encourages me constantly to look for talent and we’re doing a much better job of growing our own talent within our company. That’s been a major emphasis for me at least for the last two years and Lyne has joined me on that. So we’re developing some really nice talent internally, we constantly look externally. We’re pretty careful about who we hire, because we want to make sure they’re a great cultural fit with us as well. But we are on the prowl right now for some talent. There always seems to be turmoil with some of the other banks here locally. And what we try to do is pluck a high-performing person out of one of those teams. So we are looking closely at a couple and we have a couple of nice hires coming onboard in Arizona here in the first quarter, and I’m really excited about that. So it’s the key to our model and the key to our success going forward.

Steven Bangert

Yes, as part of the success we’ve had last year and we had mentioned earlier in the year, we had picked up a senior banker at M&I, I guess. As many of you know, M&I was bought by BMO and this was a banker that was near retirement. He actually did retire. A week later came to work for us and was able to bring over a lot of business that he’s been banking over the years, a very big rainmaker, a very senior banker in that market. We just happen to have a lot of them more junior bankers that had moved before him and so he was kind of anxious to join us. And we’re not asking him to manage that portfolio on an ongoing basis but instead do a lot of introductions. We did the same thing here recently up in the Boulder market, hired what I think is the biggest rainmaker in the Boulder market, somebody that we’ve tried. I think John and I have begged her to come to work for us for 15 years now. And she just came on board in the second half of last year and she has been with, I guess it was Bank One at one point in time and now Chase in that. And she will manage a portfolio but she is an outstanding banker in that.

So we’re continuing to find those opportunities in that. And as Scott mentioned, we’ve got some recent wins in the Arizona market. So even though we continue to want to keep our operating expenses at 4% or lower, we are challenging ourselves to find places where we can find new people but that may mean that there needs to be more calling of the herd at CoBiz in that. And one of things I think Scott’s done a really good job with and part of that severance that was in the fourth quarter is a lot of these were senior bankers, great people that were near the end of their career and we just went to them and asked them when they were thinking about retiring and that was 18 months out or two years out. We’ve kind of helped them enter retirement a little bit earlier, but we’re able to turnover those portfolios to a much cheaper younger banker that is more of a portfolio manager that will do a great job of managing those accounts but not necessary a big rainmaker in that but it brings down our overall costs and frees up money for us to go find a rainmaker. So we’re very sensitive to it and I think it’s still a big part of our ability to turn out these 10% plus growth numbers. It will be our ability to attract top talent to the franchise.

Joe Morford

That’s great. Thanks so much, Steve.

Steven Bangert

Thanks, Joe.

Operator

Our next question comes from John Rodis from FIG Partners.

John Rodis

Good morning, everybody.

Steven Bangert

Good morning, John.

John Rodis

Scott, maybe just another question for you just on credit and I think – or Steve you might have said in your prepared remarks that you said you had limited exposure to the education industry. Can you maybe just collaborate a little bit more what you’re other exposure is there?

Scott Page

Our exposure, John, is really limited. We have outside of the one credit that we’ve described, which was by far the biggest of any of those, we have two or three other schools. We’ve taken a very hard look at them. In all three cases, they’re turning out students that are professional – like for example in the nursing space, they get hired very quickly. One of them actually educates at the graduate level, so the students going to school there in many cases don’t even have student loans or they’re self-funded. So we’re not terribly worried about that at all. We do have some other exposure in charter schools, for example, but that’s a totally different space. It’s not a for-profit venture; so with very limited exposure overall in that space and certainly not in the for-profit space.

Steven Bangert

John, all three of those credits that Scott’s referring to are quality schools that are turning out students that are getting jobs and high-paying jobs. And that’s really the key when it all boils down to us. I had some personal exposure with a beauty school one time and that’s one of them that the government went after. You don’t need that many beauticians and they certainly don’t need to have student loans. But nurses, as you know, the country has a shortage on nursing and those kids are all – like 98% of them are getting hired day one and a lot of them are with a minimal amount of student loans. So the other ones, we’re not too concerned about. And even the large one that we are concerned about, parts of their degrees are going to be successful. But unfortunately some of them aren’t. And if a large school with multiple disciplines in it, and I really don’t want to – as I said, we don’t really want to talk too much about it. The other ones are very focused on what they do. And we’re very, very comfortable with it and they are really like $3 million credits.

John Rodis

Individually, they’re 3 million?

Scott Page

Individually, yes.

Steven Bangert

With very limited exposure, John.

John Rodis

And then just as far as credit goes, any other industries or anything that you’re overly – obviously energy and stuff, but any other industries that you’re overly concerned about today?

Scott Page

No, not at all, John. I think one of the things that we have done a good job of especially since '07 is really to diversify our portfolio, very careful with our concentration limits. We’re very grateful that we’re not in the oil and gas space. We’re very mindful of hot spots in some of the real estate markets and we do a lot of the analysis to avoid those or at least not to get overly concentrated in those. So from my chair today, I’m not concerned about any other sector.

John Rodis

Okay. And Lyne maybe just one question for you on the margin. It sounds like – it is fair to assume you could probably keep the margin relatively flat going forward in this environment?

Lyne Andrich

Yes, I think that’s a safe assumption. We saw a few bips of expansion in January but again, composition shift or what happens on deposits could influence that a whole lot. So I think that’s not a bad assumption, John.

John Rodis

Okay. Thanks, guys.

Operator

Our next question comes from John Moran from Macquarie Capital.

John Moran

Hi, there. How’s it going?

Steven Bangert

Good morning, John.

John Moran

Lyne, maybe a quick question on OpEx. And it sounds like there’s a lot of kind of puts and takes, but if I’m thinking about it right, if occupancy is going to be kind of flat but maybe some savings in the back half of this year and then 2 million-ish in cost saves on the salary line that gets offset a little bit by some merits. Is it fair to say that plus/minus a couple of million bucks one way or another, the 99.5 in core that you guys did in 2015, it’d be pretty flat in 2016?

Lyne Andrich

I think what you should probably expect and what we’ve been modeling is our long-term goal is to maintain it and manage it under 4%. My goal this year would be to do at least half of that. So I do think in aggregate you’ll see some increase in expenses, but it should be not at 4%, so ideally anywhere from 2% to 3%. Because, as I mentioned, we will see some of that adapt [ph] savings but it won’t be the full – we won’t realize the full 2.3 million. And in occupancy expenses, long term, our goal is to keep that really well contained but we’ll see some and I can provide probably more clarity or transparency later in the first or second quarter calls. But we will see that increase intermittently this year as we have to transition our headquarter building, so they’ll be some one-time charges related to moving and relocation and frankly we’ll be paying rent in two facilities for two locations for a certain period of that time. But long term, we’re going to maintain that at way below the cost of living adjustments.

John Moran

Okay, got it. And then the other one that I had was on pipeline [indiscernible] do you guys see good growth in one market versus the other or do you kind of have a sense of where business is trending here so far in first quarter?

Scott Page

Well, as I look at the pipelines, John, they look pretty balanced from a – kind of on a pro rata basis. Obviously, Colorado is a lot bigger than Arizona. I’m feeling good about both. I will tell you what I’m really focusing on those to get more broad based production across all of our commercial bankers. We don’t get as much consistent performance across all the bankers. Steve talked to it a little bit, as we’re managing our headcount, trying to bring in more talent. And so we have a lot of effort involved at the management level on coaching to get more of the bankers to hit their goals. We’re fortunate because in both markets what we’re simply trying to do is take market share and we are surrounded by some very large banks, and there’s a lot of opportunities within there, those banks portfolio of customers were actively pursuing. And a key for us is to have great bankers in both markets and we can take market share. But I feel really good about both pipelines to be honest with you. And I think a few years ago, it was all Colorado, as Steve said. Now it’s pretty balanced and we are building a really nice team of bankers in Arizona. So I continue to believe that it will be consistent growth across both markets going forward.

John Moran

Terrific. Thanks very much for taking the questions.

Scott Page

Sure.

Operator

Our next question comes from Tim O’Brien from Sandler O’Neill Partners.

Timothy O’Brien

Good morning.

Steven Bangert

Good morning.

Timothy O’Brien

So first question I have for you is, can you give – it’s good color on the growth outlook overall for the year and on the lending front. How much of a contribution – you guys ended the year with just over 200 million in construction loan footings. Can you give some sense of how that part of your business you see shaping up for '16 kind of given turmoil in the marketplace and such?

Scott Page

Well, I wouldn’t say we have turmoil per se here, Tim. We – pardon me.

Timothy O’Brien

Sorry, Scott. I mean kind of the global markets, maybe that’s going to influence construction investment in '16.

Scott Page

Yes, it’s interesting. What it may do is make people less likely to buy a new home or build a new home, because they don’t feel as confident because of their stock portfolio or whatever in the case may be. Right now, what we’re seeing with our builders and I’m talking the residential builders in both markets, single-family homes in particular, it’s still very robust here. Our builders are having great success, selling through their building projects, so continue to feel good about that. We have been very careful, as I said in prior comments, on the multifamily space. That said, there’s some opportunities that we’re seeing along the light-rail line within the Denver metro area and then we’re seeing some of the areas around Phoenix, the southeast part of the city. So we are seeing some good construction volumes and I expect that to continue. I think we’re dealing with the right clients, which really helps and we are very careful about which parts of each city we want to engage these builders. There’s obviously better markets and lots of great markets. So I’m not terribly worried about it for '16 but I’m keeping a close eye on it, I’ll tell you that.

Timothy O’Brien

Thanks, Scott. And then a question for Lyne. Lyne, can you give the major components of other income this quarter, kind of break that down for us, the 2.3 million and other fee income?

Lyne Andrich

Sure. Most of that came two areas. One was the investments we have in various mezzanine funds or those equity method investments that we have. We had a soft quarter for those kind of fee recognition in third quarter. It was just under 100,000 this quarter. We had about 450,000 of equity method investment income. So that was a part of the increase period-to-period. For the full year, we had 1.3 million in mezz income. If you recall, 2014 we had some adjustments and we didn’t realize a lot of, if any, income off of that. Those investments this year reverted back to what’s more normal for us. So that was part of the linked quarter. The rest of it came from swaps. We had a decent quarter for the sale of interest rate swaps to clients. We had about 135,000 or so of swap fees versus virtually none last quarter. And the other component was the mark-to-market on our swap portfolio that we have. So there was about a $300,000 delta on the mark-to-market positively for swaps. So those were the major changes. Everything else was pretty much consistent with what we’ve seen in prior periods.

Timothy O’Brien

Thanks, Lyne. And then just to confirm; Steve, you said that kind of part of what you’re operating goals are for 2016 in an effort to justify independence, 8% growth in core fee income, was that a number that you guys love to try to deliver?

Lyne Andrich

It’s not that difficult in terms of the model. We need to grow operating revenue at 8% to 10%, so again we’re going to try to grow our assets and loans at 10% plus. Our fee income generally grows from 8% to 10%, so that’s the goal there. And then we need to manage our expenses to something below 4%, which we’re going to try to do better than that in 2016.

Steven Bangert

Tim, I’m really encouraged by how much headway we’ve made on our efficiency ratio. As you know, that’s not really been a large focus of CoBiz over the last 20 years but certainly coming out of the recession and us being asset sensitive, we are in such a low interest rate environment, we’ve recognized that we really had no choice. And I think we’ve done an outstanding job. It’s part of the culture here at CoBiz today. But it’s taken a few years for that to be part of our culture.

Timothy O’Brien

And then last, a quick question, outlook on capital needs for '16, are you pretty comfortable that it’s going to stay – your TCs stays above 8%. Is that something that is important to you guys or how do you feel about that?

Lyne Andrich

Yes, we’ve been kind of targeting or managing 10%, 8% TC ratio and given our current profitability levels and what we see is our asset growth potential, I think that it’s realistic that we’ll continue to see that trend around 8% plus. If it dips a little bit below 8% though, I’m not going to react in any short-term manner to try to build it to 8%. So there’s nothing magical about the 8% per se, except long term I think that gives us – and we’re comfortable and it gives us the cushion we need to operate to.

Timothy O’Brien

Thanks a lot.

Operator

Our next question comes from Fred Cannon from KBW.

Frederick Cannon

Great. Thanks so much. Most of my questions have been answered. Just a couple quick ones. Number one, when you talked about interest rate sensitivity, I was wondering if – and that was great guidance. I was wondering if you could talk about the flattening of the yield curve and how that might affect your net interest margin if it sustained?

Lyne Andrich

Well, it is challenging when you see the flattening of the yield curve, particularly on the shorter end, which is kind of where we’re most sensitive to. So I don’t think it’s going to change our outlook a whole lot since we are really short – our balance sheet is managed really short to begin with. So as we’ve modeled it, I don’t have too much exceptive concerns from that. I actually more worry about more on deposit and deposit re-pricing what the market’s going to do on deposits frankly than the flattening of the yield curve.

Steven Bangert

Yes. Fred, we do have some loans that could price out around five years but that’s a very small part of our portfolio. We’ve often talked about maybe we should be doing more of that, but if you even look at our owner-occupied real estate, I mean of that has refinanced away from us over the last few years because we’re just not willing to go out there. As far as the regulatory guidelines, the 100% and 300% ratios when it comes to real estate concentration, I think we’re at 80% and 200% today. So we have a lot of room there where most of the commercial community banks that I’m watching are now creeping over 300 again, some of them are well beyond 300. So I’m feeling pretty good about where we’re at. But a very few of our loans re-price out – none of them re-price at 10 years. Very few have five, most of them are going to be three-year types re-pricing in that with a large percentage of them pricing off of 30-day LIBOR and prime.

Frederick Cannon

That’s very helpful. Thank you. Also, and I think I calculated similar [indiscernible] the loan to deposit ratio of around 98%. Are you guys comfortable running the Bank with roughly 100% loan deposit ratio?

Scott Page

Yes, we are but that’s going to be upper end of our comfort level on that. We would like to bring that down over time. Deposits don’t come in as easily as loans and deposits are always an issue for us. They have been for 21 years. For 21 years we have figured out a way to fund ourselves, so we’ll continue to focus our attention on it. A lot of what you’ve seen though is over the last two years, we’ve gone from a 28% of earning assets in our investment portfolio to closer to 16% of our earning assets in our investment portfolio and those have been replaced by a lot of our municipal lending activities in that public finance area. For me, that’s kind of the same credit – certainly the same credit qualities of what we see in a lot of bond portfolios, not quite as liquid as selling a municipal bond but municipal bonds aren’t necessary liquid either. I know I’m throwing out a lot. I don’t really pay as much attention to loan deposit ratios as others do, but I think because the industry has been gathering more many deposits, if rates were to ever go up and gosh, I hope they do, we do think that there probably are some deposits that will flow out less at CoBiz and other institutions, because all of our deposits for the most part are tied to a relationship we have with those customers. If you look at our deposit make up where we’re down again, we have been down every year for probably six, seven years as CDs, so there’s almost no CDs on our books today. We can always go back to our customers and bring in CD money. We just at this point are not willing to do that. But if we need to, there’s hundreds of millions of dollars of CD money available to us that was on our books prior to the recession. But as deposits don’t come easy for the industry, we really have chased them off our books where today there’s almost nothing left. And what we have are all going to be 90 days or less.

Frederick Cannon

All right, great color. I appreciate it. Thanks so much.

Operator

There are no more questions at this time.

Steven Bangert

Okay. Well, thank you. I want to thank everybody for participating today. I know it’s a long weekend – not just in New York, it’s a long weekend everywhere. And I know a lot of you will be leaving the office early and if we brought you into the office today, I apologize. But that was awkward for all of us not to have that conference call when we like to, because we do know the anxiety level in the questions dramatically increase when something like that happens, but unfortunately we thought it was necessary.

We do feel great about our 2016 – I feel great about how our 2015 numbers turned out with the exception of a single credit in that. But as I said earlier, it’s important for us to get that behind us. We don’t want to be dealing with that credit as we head into 2016 and especially into 2017. So thank you for participating. If you have any questions, please give any of us a call. Thank you.

Operator

This is the end of today’s call. You may now disconnect. Have a great day.

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