CoBiz Financial's (COBZ) CEO Steve Bangert on Q3 2016 Results - Earnings Call Transcript

| About: CoBiz Financial (COBZ)

CoBiz Financial Inc. (NASDAQ:COBZ)

Q3 2016 Earnings Conference Call

October 21, 2016, 09:00 AM ET

Executives

Lyne Andrich - CFO

Steve Bangert - Chairman and CEO

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

Analysts

Riley Stormont - D.A. Davidson

John Moran - Macquarie Capital

John Rodis - FIG Partners

Fred Cannon - KBW

Alex Morris - Sandler O’Neill Partners

Operator

Good morning. My name is Kayla, and I will be your conference operator today. At this time, I’d like to welcome everyone to the CoBiz Financial Third Quarter 2016 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. At this time, I would like to turn today’s call over to our CFO, Lyne Andrich, Please go ahead.

Lyne Andrich

All right. Thank you and good morning, everyone. Before we do start 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 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 can be found in the Company’s filings with the Securities and Exchange Commission, including our Form 10-Q, 10-K, and other reports and statements we’ve 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, which is available on the Investor Relations page of our website.

All right. I’d like to now introduce Steve Bangert, our Chairman and CEO.

Steve Bangert

Okay. Well thank you, everybody. I appreciate you participating in our earnings call for the third quarter.

As you just heard Lyne Andrich is in the room our CFO as well as Scott Page, the CEO of the Bank and I'll ask both of them give you more detail about what happened during the quarter. You saw last night that we reported diluted EPS of $0.25 versus $0.17 same quarter of last year.

This is really the first quarterly comparison to previous year that is not impacted by the sub debt offering that we had issued in the second quarter of 2015 to refinance the SBL preferred. So it's a pretty clean comparison there.

For the first nine months our EPS was $0.63 versus $0.52 from the first nine months of 2015. It's an interesting quarter, really led by healthy deposit growth, continued asset quality improvement and very strong fee income. You'll notice the loan growth was muted, but I expect Scott to talk about that.

I thought I would also take a minute before I turn over to Lyne or Scott and focus on the progress that we've really made during the first nine months. We often talk about the quarter, but I think especially for our institution with the flows or deposit and loans and fee income to be a little bit lumpy over the years as they even themselves out, sometimes it's better to look at a longer period of time, but then Scott and Lyne will really get more specific about this particular quarter.

I talked about it before, we've a very simple financial goal that we communicated to all of our employees so that they know what our priorities are for 2016 and for the next several years. Internally we've referred to it as [10-84] [ph]. Some of you have heard us mention that initiative.

It makes it easier for employees to understand our priorities and if we're successful with this initiative, we'll be able to continue to grow our operating earnings, primarily measured by pretax pre-provision earnings by double-digit growth. 10% of the 10-84 refers to 10% annual loan and deposit growth.

Really that's at the middle of our target, which is an 8% to 12% band that we set for both of them. If you look at September's period ending numbers alone, deposits were up 7.9% and 8.5% over September of last year. I ask you to look at the averages for both quarters because of activity that might happen during the last two days of quarter, especially with us.

And if you look at the averages, you'll see that the growth for loans was actually 11.5% over third quarter of last year and deposits were 10.5% over third quarter of last year. So we're seeing that the type of growth that we're looking for, we're certainly operating within the band of 8% to 12%. I wouldn't be surprised though if you see us reduce that range from 8% to 12% to 8% to 10% as we head into 2017.

The next number that -- in that initiative is 8% and that's the 8% fee income growth or target that we have and it's perhaps our biggest challenge here at CoBiz. Our previous earnings call, we voiced some frustration with our progress. The third quarter was an outstanding fee quarter for us, led by returns on our mezzanine investments and increased bank fee income.

It's probably best to view that year-to-date fee income growth, which is up 9% for the same period in 2015. So year-over-year I am feeling pretty good about it. Obviously if you just look at the third quarter, it's up even much more than that, but I think that as I said we've a couple lumpy items that flows through there on a quarter-to-quarter basis but are part of our annual fee income.

But I still look at this as being one of our biggest challenges as we head into next year and then we'll continue to be get a lot of focus from management.

Finally our expense management target of 4% or less, so the 4% really is focused on expense management. For those of you that have followed us for a number of years, you know that that is not something that we have spent an awful lot of time on, but over the last three years, we really have.

The first nine months of the year, expenses are running at 9.5% above the 2015 period. This will continue to be a challenge for us as we balance our important growth initiatives with our need to have strong expense management within CoBiz.

So we're not quite there at 4% but we're not, we're getting awfully close. You saw some dramatic improvement and efficiency ratio for the third quarter, but that is just one quarter, but overall we do think that efficiency ratio continues to trend down.

The reason we focus on these financial goal is if we're successful, we'll be able to continue to grow our pretax and pre-provision numbers at double digit growth rates and if you -- looking back at the first nine months, if I adjust for the cost of the sub debt issuance that was in June of 2015, our pretax pre-provision income grew 11.6% over the first nine months of last year.

So we are making some progress. I would certainly like to see something more in 12% to 15% range, but I do think we as a company are making progress. We still have ways to go and like to see that earnings ramp increase as we head into 2017, we're certainly hoping for one or two rate increases over the next year, but we're not planning on it. That's not part of our own projections in that, but if we do get that as many of you know we're very rate sensitive franchise and we will benefit from that.

So I feel very good about our progress thus far. We still have ways to go to get to the level that would like to turn out in that, but I think we're doing it with quality growth and our balance sheet, both are in deposit side and the loan side and we've been very disciplined as we've opened up a couple new niches during the last seven years.

There really hasn't been anything too new in the last couple of years and that really was public finance and we refer to as jumbo mortgages that are larger mortgages for our business owners. Both of those have been very successful for us. They've been another asset class for us, to invest in that we feel very good about the quality of those assets.

We don't typically get the yield, we get on other types of yield but we sleep better at night and they've been also a nice replacement for our investment portfolio that over time over the last five to six years it has moved from 30% of our earning assets down more in the 15% range in that.

So with that I am going to turn it over to Lyne and let Lyne go into the financials.

Lyne Andrich

All right. Thank you, Steve. As Steve mentioned, last night we reported net income available to common shareholders of $10.3 million for the third quarter or $0.25 per share, that translate into pretty healthy ROA for the quarter of 1.18% with an ROE of over 14%.

The quarter was highlighted by great deposit growth, very stable net interest margin, strong fee income and controlled expenses. In addition the asset quality continues to be really solid with low-level to problem loans which drove another negative provision for the quarter.

Just talking to the net interest margin for a second, this is the first quarter as Steve mentioned where the comparative periods all fully reflect the interest expense and the sub debt we issued in mid 2015 making quarterly comparisons more relevant and as you can see, since that time, our net interest margin has been extremely stable, coming in within a few basis points of the third quarter level of 3.74%.

Net interest income of a tax equivalent basis actually increased 8% over the third quarter of 2015. Growth in our net interest income over the prior quarter was a function of double-digit loan growth on average for both loans and deposits as well as improvement in the earning asset mix with loans contributing 85% of our total earning assets.

In addition I would point out that we've seen a lot of continued strong growth in the form of non-interest bearing demand, which increased 18% over the third quarter of 2015 average and today it comprises approximately 43% of our total average deposits.

Just to speak to non-interest income for a second as well fee income was really good in the third quarter but it was driven in large part from income recognized on investments in some SBIC funds that we report under equity method investments.

Our quarterly income from these investments can be lumpy as Steve mentioned. Over the last couple of years, they've averaged around $300,000 to $500,000 a quarter. So you can see for this quarter the $1.3 million we recorded was a pretty strong performance from those funds.

Then lastly, I just want to touch on expenses. Marginally pleased to see the positive operating leverage in the quarter, expenses continue to be well contained and combined with the strength of our revenue this quarter. We saw the efficiency ratio decline to 64.5% in the third quarter.

We continue to be really disciplined in managing our overhead particularly our headcount and overall you saw our compensation decrease $500,000 from the linked quarter. We've also been pretty focused on our facility cost and as business thing, we've never really had an expensive branch network, but we still work hard to find efficiencies in the consolidated offices where we can.

Over the last several years we've closed or consolidated several banking offices going from 22 locations at the end of 2014 to 17 by the end of this year. Also as part of those efficiency measures, we've previously announced that we were relocating our corporate headquarters in Downtown Denver by the end of this year.

During this relocation process, our occupancy expenses have increased as we've paid rent on two locations during this transition, which accounts for the majority of the increase in occupancy expenses we see reported during the quarter. However we do expect monthly rent to revert and decline once we vacate our existing headquarter building and fully migrate over to the new location.

Overall, I believe we're on track to meet our goal of limiting our expenses to 4% or less and continue to drive our efficiency ratio for the full year to somewhere in the mid 60% range. All right, I'll pass it now -- to Scott now.

Scott Page

Thanks Lyne. So as usual, I'll make a few comments and then I can answer questions after the prepared comments.

Like Steve and Lyne, I'm very pleased with the quarter. We had very good deposit growth. Many of you know that's been an intense focus for us and I am also very pleased with our asset quality. Loan growth as you can see ebbs and flows and as Steve said and if you look at that over a yearly basis, but we only had $13 million of net growth during the quarter, on the yield of a very strong quarter in quarter two.

Our year-over-year average growth as Steve said is well about 10% and we remain focused on that 8% to 12% target again as Steve and Lyne both reiterated.

As I've mentioned for many quarters, we are highly focused on growing our deposit base and our efforts are really paying off. We've added many new sizable deposit treasury client and will benefitted from some good seasonal growth during the third quarter which is pretty typical for us.

So as a result, we had point to point growth of $130 million for the quarter and $230 million since the third quarter last year and as Lyne said, our non-interest bearing deposits now are 42%, 43% of our deposit base and the M&A primarily from the operating deposits from C&I and healthcare and nonprofit banking initiatives.

The deposit growth was strong in both dates which is greatly to see Arizona really pick up the pace DDA growth. We will continue to emphasize deposits or the key initiative with our bankers and their incentive compensation programs and in pipeline management.

So moving over to loan growth, it was only as I said, it was $13 million for the quarter. You'll recall that we had a strong quarter in Q2 this year and we said most of Q3 building our pipeline for the fourth quarter. New credit extended and credit advance was lower than expected and lower than the prior quarters.

Pay down and maturities were slightly higher than prior quarters. All this have the effect of dampening some growth for us. That said, we continue to see strong growth out of Arizona, much of which has been driven by our public finance lending activities that Steve mentioned earlier and in that and adjacent markets, for the last four quarters, growth in Arizona has been significantly higher than that in Colorado.

Again much of that have come from the addition of public finance lending and a more focused C&I and real estate lending effort in that state. The strengthening market in Arizona has really helped as well.

Speaking about pipeline, pipelines for all segments of the business are healthy and growing for Q4 and we expect stronger loan growth for the coming quarters. We remain active in public finance in both states and are building niches within that business line.

We are also seeking term commercial and owner occupied real estate opportunities given the economic strength in both our markets and we have plenty of capacity on our balance sheet to grow both loan types. Again we're guiding the 8% to 12% annual growth and kind of the wild card in our loan portfolio is always in the paydowns and line usage and you saw that line usage was only 34%. So who knows when that will change, but for now we're just continuing to grow the pipeline and manage that effectively.

Speaking about one of our competitors, Wells Fargo, they're a big competitor for us in both markets, especially in Colorado. We see great opportunities over the next several quarters to garner our business from that institution as they deal with their public issues and brand problems.

We've really redoubled our efforts to capitalize on efforts on current and future prospect, Many of you have heard us all talk about -- we consider them to be our main competitor. We have since the inception, so we see some opportunities there.

Lyne has comment on Q3 loan growth and I mentioned this on the last quarter's call, our loan portfolio has in short duration Steve mentioned that. We regularly experience normal amortization and maturities of about $1 billion per year which is roughly 34% of the book.

At CoBiz we focus on bringing a new and expanded relationship and we've kept our hold limits per relationship at the same conservative level for a decade. We also don't grow through participations or shared national credit. So it is imperative that we maintain a very robust pipeline at all times. As a result, we spend most of our time and effort on sales management and coaching and I think that's paying off over time.

Both Lyne and Steve mentioned our asset quality. I am very happy with our asset quality. It's really strong and stable. During the quarter, we had few recoveries on a number of legacy credits and I expect that to continue for a few quarters.

Nonperforming assets are very manageable and compare very well to our peers at less than 30 Bps of total assets and improved slightly from last quarter. Classified loan level remain consistent with prior quarters. We remain very comfortable with our loan-loss reserve levels given our good asset quality.

Both of our markets economically are stable and healthy and as we said before, we do expect our levels of classified loans to move up and down as they always do, but right now we aren't seeing anything in the economy or in our portfolio that would concern us or any kind of a systemic change, but feeling pretty good about all that.

So I remain optimistic about the balance of the year and into '17 and I'll turn it over to Steve.

Steve Bangert

Well, why just we open it up for questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Gary Tenner from D.A. Davidson.

Riley Stormont

Hey. Good morning, guys. This is actually Riley on for Gary.

Steve Bangert

Okay Riley.

Riley Stormont

I was just wondering, I might have missed this, but as far as the release to asset quality were there any residual impact in the quarter from the previous charge-offs stemming from the technical school? Is that primarily what drove recoveries in the reverse provision in the quarter?

Steve Bangert

That was part of our recovery. We had a number of credits that we continue to recover on. That was one of them though Riley.

Lyne Andrich

I would say, outside of the provision, the fact that we had a recovery, the rest of the provision is just related to the level of adversely graded credits we have and the characteristics of those. So I don't think it's really driving the negative provision so much this quarter outside of the modest recovery we got on that.

Riley Stormont

But we do continue to get recoveries.

Lyne Andrich

Yes,

Steve Bangert

As we do on several credits. We don't want to overstate that particular credit.

Riley Stormont

That's great. That's great. Do you anticipate any more recoveries relating to that moving forward or is it pretty much wrapped up at this point?

Steve Bangert

I think there are going to be small going forward, it is pretty much wrapped up, but we are still getting some small recovery loans over time.

Scott Page

And there is also some assets, some loans that we've made back in 2007, 2008 that still will have recoveries on them at some point in time and that I am not going to forecast when that will be, but those also could be relatively significant versus the provision expense during that quarter.

Riley Stormont

Okay. Great. Thanks guys.

Operator

Our next question comes from the line of John Moran from Macquarie.

John Moran

Hey, how is it going?

Lyne Andrich

Good morning, John.

John Moran

Hey Lyne, could you just remind us when in '17 and I apologize if I missed this, but when does the dual rent kind of drop out?

Lyne Andrich

Well ideally it will be December of this year or January of next year depending on when the new facility gets delivered and if we can decommission this building in enough time. So right now, we are paying $135,000 a month in double rent and so rent expense and the rent is a little higher in the new building but we maximize the [inaudible] we're taking less square footage. So all else equal, we'll see rent decline $110,000 a month next year.

But I should also warn you, when the new facility goes online, our TI depreciation will go up. So I wouldn't expect to see the full $110,000 savings a month prospectively. I think the way to think about it John is we're still just really focused on managing and minimizing the year-over-year increase in total occupancy cost, which I think we've got a good plan in place to do and there is going to be some other facility, actions we're going to take in next year that might help offset some of the expense and by that I mean we're looking at our branches today and we still think it might be a few that we can consolidate.

So again we're just trying to minimize or reduce the year-over-year impact. So I wouldn't think of that in terms of it declining that much year-over-year. I think overall our goal as Steve mentioned on the call that 4% is really important and really something we have a lot of focus on. So in aggregate all expenses including occupancy which is up 13% to 15% of our total overhead is to keep that contained well within 4%.

John Moran

Okay. That's helpful. The other one that I had was just on the -- circling back on credit here, which has obviously been a good story, but in terms of just overall reserve levels and if I think I’m hearing you right, there is still possibly a little bit of a recovery tailwind here along with some bigger credit [inaudible] results from pre crisis loans.

Is this something where we could see it like continuing to drop. I think we're down now year-to-date almost 30 basis points on reserve to loans, is there a level at which you don’t want to see it go any lower than 110 of loans or something?

Lyne Andrich

That’s a hard question to respond to and we don’t really and we can't really manage to some coverage level. So it's really a function of the classified assets and then the collateral underlying whatever those impaired loans may or may not be at any given time, but I will say, so right now we're just below 120 reserve to loan coverage.

I don’t see -- it might drift a little lower or may be a little higher, but I don’t see it changing dramatically. Some of it will be a function of some of those recoveries we may get. Those are hard to predict. But I don’t see it changing a whole lot from where is at today absent a real change in what we see in our adversely graded credit levels.

Because at this point I think, I feel really good about the levels of nonperforming assets we have, but I don’t think they improve a whole lot from where they are at today. I think that would be unrealistic.

John Moran

Okay. And then in terms of provisioning for incremental production you guys are still at the core commercial bank. Is it fair to say that’s like 30 to 40 basis point is what we ought to be thinking?

Lyne Andrich

Yeah, that's hard to predict. You can model, I’ve modeled 25 basis points on new growth on average, but again it’s a function of what those loans and the characteristics of those loans looks like.

Steve Bangert

Yeah, we have quite a bit different provision expense for construction lending than we do for public finance and then we do for jumbo mortgages and so as Lyne said, it really will have a lot to do it with the composition.

John Moran

Got it. Understood.

Steve Bangert

But you got her number anyway out of her, which [inaudible] give to me.

John Moran

I appreciate that. The last one that I had was just -- it sounds like you guys are seeing some opportunity I think if I heard correctly in CRE, I’m wondering if that’s in both markets and then if you had any commentary just in terms of assets classes here in town, multi-family is still looking frothy and I think office is like the second straight quarter of negative absorption and in any knock on that you’re seeing from Class A being a little bit softer here in Denver in the middle market CRE.

Steve Bangert

Yeah, let me comment on something real quick, this is Scott's question in that, but we as Scott mentioned, we do have a lot of room where those 50% and 100% ratios at the regulators guide you to we're just under 50% and just under 200%.

So, we have a lot of room there. What’s interesting is we have been feeling some inbound calls from some of the community banks as many of them, their numbers are starting to hit them. They are both at 300% or above and they’re looking for somebody to help them out on a going forward basis.

We feel very fortunate that we've got room to expand in that area and I know Scott and his group has been working on that. So I’ll turn it over to you Scott.

Scott Page

That’s a good question. I think we have a lot of opportunity in Phoenix. As you probably know we were out of this business for quite some time and we re-energized that department over the last three or four years and so I still think there is lot of upside to do more CRE in the Phoenix market and we have a lot of upside.

And we do have a lot of balance sheet room to go up in both construction and in term real estate. It is a competitive phase but a lot of our competitors to Steve’s point are falling by the wayside because they've gotten above those regulatory guidelines.

As to your question on multifamily I'll answer it the same way I've answered it for a year now. We have been very, very cautious with Denver multifamily and Scottsdale multifamily for at least six quarters now and we haven’t put out any significant dollars in either market on multifamily.

And then to your question I agree with you, there is kind of negative absorption there is a lot of these energy companies are trying to sublet their space here in the Denver market, but we've never been a player in Denver office lending as for big boys. We don’t do that.

So we’re feeling pretty good about the segments we're in and one other comment I would make that's about our portfolio in general, I think over time, we’ve been really de-risking the portfolio and we feel good about the segments we have and there with public finance Steve mentioned the mortgage Jumbo mortgage portfolio. So overall feel really good about that.

John Moran

Prefect. I appreciate your taking the questions.

Operator

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

John Rodis

Good morning, everyone.

Steve Bangert

Good morning.

John Rodis

Steve, may be just a big picture question for you, could you just talk about the health of the Denver economy today and I guess in light of the slowdown in loan growth for the quarter and then just also your thoughts on I think it’s Prop 69, what would happen if there were to pass, how do you think that would impact the Colorado economy?

Steve Bangert

Yes, the Prop 69, it's losing big in pull right now in that, so I don’t -- John I think that’s off the table in that.

Lyne Andrich

Yes, and Prop 69 in the table here initiative that's the Colorado -- got on the Colorado ballet this year on so…

Steve Bangert

It rallied the business community. It actually rallied dollars out of state that I wanted to make sure that it didn't have here and it would end up other states in that. So yeah, it impacted healthcare and it impacted the cost of doing business and the state and that, but it's a pull. I know its early, but we’re not very far away and it's just getting challenged in the pull. So, overall John, I would say Colorado continues to do real well.

The numbers, the real estate numbers continue to look real good for this market in that and I understand the concern about the third quarter results but that kind of happens with us and then it's not unusual as you know. You've followed us for a while for us to fill up the pipeline, close the pipeline and work on filling up the pipeline again and you wish you could make it more even than it is, but historically it does not work that way for CoBiz.

So the Colorado economy I would still say is healthier than even Arizona. Arizona, the reason we've done so well in Arizona and Arizona is doing well. We have during the recession, really had the opportunity to pick up a lot of quality bankers out of what used to be old Thunderbird as well franchise down there.

And we really have some quality, quality bankers in that market and I am really proud of what they're building down there, because today they look like the Colorado portfolio. That wasn’t the case going into the recession and by that I mean there is 67% C&I owner occupied. There were 40% demand deposits and I think we may be the only Arizona-based bank that’s 40% demand deposits. So I haven’t looked that up but am pretty sure about that.

So I feel pretty good about both market. We’ve been cautious as we've talked about for a while about multifamily lending, specially in the Denver metropolitan area just because there is so much going on. I've often said, I wouldn’t bet against it, but as a banker, we don’t get paid enough to bet on it.

And so we have stayed away from it and have done little bit of multifamily, the other franchise where the light rail is going, if you've been to Denver and ridden the light rail from DIA to Downtown, hopefully the train didn't stop on you and while you did that.

But it's had some early issues much like our luggage, but we really have built out our light rail system throughout the city now and that echoes almost everywhere but yet we really haven’t built those multifamily units in that along the light rail and so we’re participating in some of that but it's very small part of our book.

I don’t see any slowdown. The oil and gas issues I think are kind of behind us. I think most of the consolidation has already taken place and as Scott mentioned that there has been a lot of space that may be some of the oil companies put back on the market to sub lease, there certainly has been consolidation within the oil industry in that and may have put -- slowed down the increase in rents downtown.

Now I don’t know that we can see that rents have gone up or gone down as a result of that but they certainly haven’t gone up with the pace that they had in the previous year. So may be that was good in that.

And what’s interesting is a lot of these new buildings that have been built downtown are being built as campuses or company that are existing here, but happen to have built their original campus out in the suburbs and now no longer get beyond millennials who work for them and so a lot of them are building Downtown campuses in order to attracted millennials that all want to be Downtown.

So it continues to surprise me, would never have guessed this 10 years ago, but it has very, very good feel to it.

Scott Page

No what's interesting is wanted the strongest migration cities in the country, if not the strongest and yet we're absorbing those peoples that are getting jobs that they get here. So that’s been interesting.

The other comment I would add is that we do have a shortage of housing starts in the City, City of Denver, especially on the affordable side. So there is -- there could be some raw opportunities first there. We do have a very good residential construction lending group. So, may be an opportunity for us there.

John Rodis

Okay. Fair enough Steve, I guess just one follow-up to your comment on I guess seeing how the Wells Fargo situation plays out, do you think there would be an opportunity to hire some talents, some bankers and so forth.

Steve Bangert

John, that’s certainly stuff we're going to look at and we know lot of the bankers down there in that and we know the level of frustration in that. I feel for those bankers because I think the world at Wells Fargo and the model we compete as Scott said, it is our competition 50% of time its Wells and 50% of time that’s everybody else.

So, we think the world of Wells they typically have the best customers and so that’s where we wanted to compete in that. We know that a lot of their bankers have been very, very frustrated because they really have spent the last few weeks on just damage controls spending the majority of their time now talking to customers to make sure that everything is fine.

We think that there might be some opportunities especially on the deposit gathering side where we and Wells are probably the two most active banks when it comes to the offer proper market. Here in town we have certainly our fair share for a bank of our size and not for profit activity, we’re very well known to the not-for-profit.

In fact we're getting the state or for large companies next week. So that we think that there might be some opportunities there. Those organizations specifically are just discouraged by negative news coming out of Wells, but we do think that there will be some bankers available and we are having discussions internally.

We want to be careful. We want make sure that we pick up the right ones if we do get the opportunity to pickup bankers in that, but yeah those discussions are going on as we speak.

John Rodis

Okay. And then just final question for me Lyne, the tax rate, it dipped down a little bit in the quarter, what should we be using going forward?

Lyne Andrich

Yeah, so that wasn’t really a function of the fact that we finalized our 2015 return and we do a typical book to return adjustment. The way I look at in perceptively is you should still see our tax rate somewhere between 26% and 27%.

John Rodis

Okay. Thanks guys.

Operator

Our next question comes from the line of Fred Cannon from KBW

Fred Cannon

Great. Thanks and thanks for all the color on many items. I had a few somewhat more specific questions. Lyne on the mezzanine funds gain, outsized gain in this quarter, is that due to mark-to-market on some of the portfolio and that $300 million to $500 million quarterly run rate is more, we can think of as the income that’s run off the portfolio.

Steve Bangert

I want to jump in quick on that Fred, they don’t mark-the-market the portfolio, they will -- they never market up.

Fred Cannon

Okay.

Steve Bangert

Yeah.

Lyne Andrich

And we just hit our quarterly partnership statements and we mark our carrying value to what the partnership statement shows and there -- we’ve got several different active funds today. I think we have four or five active commitments for an aggregate commitment of $11.5 million.

At any given time that fund -- those -- collectively those funds are 45% to 55% drawn. So we got about $5.5 million outright now related to those and they're in various stages of their lifecycles. So some are liquidating and harvesting their portfolios. Some are in the early stages where they're just realizing coupon and income from that portfolio.

So it does change, but generally speaking just based on the blended, I still expect consistently $300,000 to $500,000 on average of income realization from those funds.

Steve Bangert

And to remind everybody, the mezzanine funds are primarily the GMV funds and there is three of them and this is a fund family that we started at CoBiz well over a decade ago. We were the regional investor, the largest investor in the first fund. We recruited the management team. We are not the GP but we do get a little bit of the carried interest from the first transaction.

Putting all of this together, we also have gotten some fee income for rising some capital form in that. They are doing outstanding. They are -- on the third fund, we are not even close to being the largest investor in that.

And they've got bigger banks invested in them so forth. The fund has performed very well and we would anticipate those funds to continue to perform very well, but I just alluded to, I cautioned you to thinking that, that's our quarterly run rate. When you start looking at annual numbers, the annual numbers should come in pretty good.

Fred Cannon

And then is this the business you would like to grow and participate more funds?

Steve Bangert

No it's 2% of our overall assets and maybe it will move up to 3% but that's about it.

Lyne Andrich

That's the regulatory limit. We are close to what we can invest in under the federal reserve caps they have on it. So no I wish we could do more. We get proposed all the time with other funds trying to -- since we are pretty experienced investing in this space, but we don’t have a lot of capacity to invest in more.

Fred Cannon

That's actually great color on that. Thank you. On the loans, the end-of-period C&I loans dipped down just a bit in the quarter, is that -- should we just think of that as that noise that you discussed in terms of end-of-period type of loans in that, if we look on averages and over time, we should still continue to see pretty good C&I growth.

Steve Bangert

Yes Fred, I think that's exactly the way to look at it.

Fred Cannon

Okay. Okay just one other question on the dividend, I believe it's $0.05 this quarter, I think that's the fifth quarter in a row, is there any -- you guys have had a pretty solid performance of I think -- it's only about 20% payout ratio. Obviously this quarter had some maybe not sustainable income, but anyway to think about the dividend going forward, is that under consideration for increase?

Steve Bangert

Well Fred I think it's our second quarter in a row.

Lyne Andrich

Yes. So you will see us stick to that for like generally four quarters and then we revisit it and we do normally target 20% to 25% payout ratio and we will revisit that the next time it's scheduled.

Steve Bangert

As we look at our earnings growth, we look at our asset growth and we are up around 8.5% tangible common now which is probably a high watermark for several years in that -- so we don't, we have room to move that, but as said we probably won't discuss it for another couple of quarters.

Fred Cannon

Okay. Got it. I was looking at -- readjust my model on that.

Steve Bangert

Perfect.

Fred Cannon

All right, great. Thank you.

Steve Bangert

I could say because they don't stock and they always ask.

Fred Cannon

All right, great. Thanks so much. Appreciate all the color.

Operator

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

Alex Morris

Good morning, everybody. It's actually Alex Morris on for Tim.

Steve Bangert

You don’t sound like Tim.

Alex Morris

Just you guys appreciate the color and discussion you gave around the fee income growth targets at the beginning of the call, last quarter you guys spoke to some of the initiatives that you have outstanding with regard to I think the treasury management maybe a little bit of swaps business and wealth management.

Any update you can provide with these business lines and any momentum that I know these are gaining as you move into the fourth quarter?

Scott Page

I feel really good -- we call it private client advisors here and it's the amalgamation of investor management financial planning and private banking and I feel really great about that. Steve talked about some of the -- some of the great staffing we have done in Arizona. We've completely built out our private client advisors group down there and we're seeing that combined with really solid staff, we have really good growth.

So I'm really pleased with the wealth advisory group. The PCA group we call it and the leadership that we have got there. So feel good about that and what was your other question was around the swaps?

Lyne Andrich

We had actually good quarter for swap fees and we're seeing more opportunities.

Scott Page

We have a lot of activity going on right now with our swap desk and our customer base on that and you're right. I assume that's because all discussions about rates increasing and people and all of a sudden, brings corporate businesses to the table and want to talk about lobbying in rates but we have a lot of activity going on right now.

Lyne Andrich

And then lastly on deposit -- on service charges and the largest category there analysis fees, we are actually implemented price increase in the third quarter and we did see -- we're seeing in terms of fees assessed or billed, some nice growth in that area.

It's hard sometimes you don't it always translate to the income statement since we do get so much of our fees are paid in the form of compensating balances and as you saw we had really strong deposit growth and noninterest bearing deposit growth specifically. So that's reflected there in terms of our success in expanding our treasury management relationships.

Scott Page

Yeah and I think all of those initiatives are going well. In the private banking limit you refer to first it's Scott, that we have a very -- we have a great team now both in the Colorado and the Arizona market and that had put some pressure on us to find other places of cut because they had -- we have been increasing the size of our overall effort in the private banking.

But I think today we're fully staffed at this point in time and really wouldn't see any significant new investments in the private banking as we head into 2017.

Alex Morris

That's great. Thanks for elaborating on all that. Just Lyne maybe one touch-up question you guys had I believe is the outsized cost relative to -- related to company-sponsored health insurance plan in the second quarter. Did we -- did the third quarter reflect a more normalized level for that expense?

Lyne Andrich

It did. So I am glad to say that it did -- it's still running higher than it was a year ago, but it's not the same level we saw in the second quarter where we saw some outsized claims kind of hit the plan. So that did come back in line a little bit, which is positive.

Part of it was offset and we had a comment in the press release that because of our performance we did see higher 401(k) matching expense because we have a program here and those are mechanisms that's based on our ROA we match a little higher.

So being on 401(k) match is offset the decline we saw in our medical plan, but I am feeling a little better about the overall trends and the claims in our self insured medical plan at this point.

Alex Morris

That's great. Thanks for answering all my questions.

Operator

And there are no more questions at this time. I'll had the call back over to you presenters.

Steve Bangert

Okay. Well if there aren’t any more questions, I just want to thank everybody for participating in our third quarter conference call. If you have any questions, please give Lyne, Scott or myself a phone call. We're always anxious to talk to you about CoBiz. Thank you for participating.

Operator

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

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